-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GaNiskAWNqwKXeYHUXv4njPAyUqUTmI0WzHb0Ty5SIuV732rn06dj3NMzTos40rF smSz/uasYHmckXJAZ33dsQ== 0000890566-98-000747.txt : 19980428 0000890566-98-000747.hdr.sgml : 19980428 ACCESSION NUMBER: 0000890566-98-000747 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980125 FILED AS OF DATE: 19980427 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GARDEN RIDGE CORP CENTRAL INDEX KEY: 0000923408 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 133671679 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13077 FILM NUMBER: 98602057 BUSINESS ADDRESS: STREET 1: 19411 ATRIUM PL STREET 2: STE 170 CITY: HOUSTON STATE: TX ZIP: 77084 BUSINESS PHONE: 7135797901 MAIL ADDRESS: STREET 1: 19411 ATRIUM PLACE SUITE 170 STREET 2: 19411 ATRIUM PLACE SUITE 170 CITY: HOUSTON STATE: TX ZIP: 77084 10-K 1 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 25, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM .......... TO ........... COMMISSION FILE NUMBER 0-24442 GARDEN RIDGE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3671679 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 19411 ATRIUM PLACE, SUITE 170 HOUSTON, TEXAS 77084 (ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) (281) 579-7901 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $0.01 par value 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 the registrant's knowledge, in the Proxy Statement or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. The aggregate market value of the outstanding Common Stock of the registrant held by non-affiliates of the registrant as of April 20, 1998, based on the closing sale price of the Common Stock on the Nasdaq National Market on said date, was $366,777,506. There were 18,001,350 shares of Common Stock of the registrant outstanding as of April 20, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement issued in connection with the 1998 Annual Meeting of Stockholders are incorporated into Part III of this Report. PART I ITEM 1. BUSINESS Garden Ridge is a rapidly growing megastore retailer offering dominant assortments of products related to its central merchandise theme of decorative home accessories, seasonal products and crafts. The Company's ten complementary product categories are: o floral (silk and dried flowers) o party supplies o housewares o pottery o seasonal o crafts o pictures and frames o home accents o candles o baskets The Company's strategy of clustering dominant assortments of merchandise from related categories in a single retail location differentiates Garden Ridge from traditional single category superstores. The Company believes that combining these related product categories in one store creates significant cross-merchandising opportunities which fulfill, at a single destination, most product requirements for the customer seeking decorative home accessories, seasonal products and crafts. Garden Ridge uses an everyday low pricing strategy and emphasizes customer service in its stores. The Company currently operates 21 megastores in ten states in the southern United States. Garden Ridge began as a single location near San Antonio, Texas in 1979. In 1988, the founder sold the Company, which then consisted of three stores. Shortly thereafter, changes in merchandise strategy, excessive leverage and a failed expansion plan caused poor financial performance. The present management team was recruited in June 1990 and refocused the Company's merchandise strategy, instituted tighter cost controls, improved management information systems and developed the current megastore format and expansion strategy. MERCHANDISING PRODUCT CATEGORIES. Garden Ridge offers dominant assortments of merchandise (aggregating at least 80,000 stock keeping units ("SKUs")) in ten related categories. FLORAL. The Company believes that it stocks one of the largest assortments of silk and dried floral merchandise in the United States. Floral is the Company's largest product category, representing over 20% of sales in fiscal 1998. The assortment of silk stems, dried flowers, silk and dried floral arrangements, silk bushes, artificial trees, ribbons and supplies attracts both retail and commercial customers such as professional floral designers. Customers shop in this department for value-priced basic items as well as the newest seasonal and promotional items. Additionally, the Company's floral arranging staff makes standard and custom arrangements. HOUSEWARES. This department offers a broad assortment of competitively priced basic items as well as specialty items. The assortment focuses on both highly identifiable branded product lines and defined product groupings such as kitchen gadgets, pantry and closet supplies, glassware, kitchen linens, canning supplies, bakeware, cookware, enamelware, serveware and dinnerware. Management believes the Company's stores offer one of the broadest assortments of Rubbermaid(TM) products in the United States. SEASONAL. These products are for the Christmas, Thanksgiving, Halloween and Easter holidays. Some of the major items within this category are artificial Christmas trees, ornaments, greenery, lights, outdoor decor (such as nativity scenes, wire sculptures and lighted displays) and costumes. PICTURES AND FRAMES. The Company offers over 4,000 items in this category, of which 50% are framed art items in a wide assortment of themes from many different manufacturers. Low "value" prices on basic items are supplemented by special purchases on assorted framed prints to further increase customer traffic. Picture frames are offered in a variety of sizes and materials. The Company also offers custom framing to its customers. 2 CANDLES. The candle department carries a vast selection of basic and decorative candles, scented candles, unique candle holders and potpourri. Garden Ridge carries branded as well as private label items. This product category has over 4,000 SKUs. PARTY SUPPLIES. Garden Ridge carries an extensive assortment of party supplies including paper plates and napkins, plastic cutlery, ribbons and wrap, gourmet party foods, party favors and novelty gifts, balloons, pinatas and greeting cards. The stores also feature a large assortment of wedding decorations and other wedding related supplies. POTTERY. This category includes a wide range of decorative clay, ceramic and plastic pottery, as well as lawn art, concrete sculptures, wind chimes and bird baths. The Company sources pottery and related items domestically as well as from Italy, the Dominican Republic, Mexico and other countries. CRAFTS. The crafts department includes wearable arts (T-shirts, paints and iron-on transfers), children's crafts, needlework kits, unfinished woods, paints, glues and stains and instructional books. The craft department sells primarily branded product lines. Craft classes taught by outside instructors are held in the stores on a regular basis. HOME ACCENTS. This category includes a range of distinctive decorative items such as oriental ceramics, statuary items, vases, accent furniture pieces, porcelain products, metal decorative items and tabletop decor. BASKETS. The Company offers an extensive selection of natural woven baskets and other related wicker and rattan products. This department offers an estimated 3,000 SKUs, including products such as door mats, tiki torches and decorative products. The Company sources these products from around the world, including products from China, Thailand, the Philippines, Indonesia, India and Haiti. Direct import purchases are made to ensure low costs and unique assortments. OTHER. In addition to the above ten categories, Garden Ridge carries other categories of products, such as nursery and tropical plants and decorator pillows, and has a snack bar with seating area. MANAGEMENT INFORMATION SYSTEMS The Company believes that its management information system is an important factor in allowing the Company to support its rapid growth and enhance its competitive industry position. The Company has invested over $8 million in this system, which provides integration of store, merchandising, distribution, and financial systems. Merchandise is bar coded, enabling management to control inventory and pricing by SKU, manage assortment within a category and produce desired gross margins and inventory turnover. Sales are updated daily in the merchandise reporting systems by polling all sales information from each store's point-of-sale ("POS") terminals. The Company's POS systems consists of registers providing price look-up and scanning of bar-coded tickets. Through automated nightly two-way electronic communication with each store, sales information and store initiated transfers are uploaded to the host system and price changes are downloaded through the POS devices. This technology allows the Company to provide price discounts at both the store level and the SKU level rather than at the category level as is the case with some of its competitors. The nightly communication with the stores also enables the Company to receive store transfer and physical inventory details and send electronic mail. Information obtained from such daily polling results in automatic merchandise replenishment in response to specific SKU requirements of each store. The Company also evaluates information obtained through daily reporting to implement merchandising decisions. On a daily basis the Company monitors sales and cost of goods sold by SKU, based on the average cost of actual SKUs sold and gross margin by store and department. MARKETING AND ADVERTISING The Company budgets an amount equivalent to approximately 4-5% of its annual sales to spend on its advertising through television, radio, newspapers, newspaper inserts, the yellow pages and billboards. Management believes television is an efficient medium for reaching the Company's target audience and visually demonstrating the stores' size and product selection. To reinforce its television advertising schedule, the Company distributes eight-to-twelve page product inserts on a select zip code basis. The inserts are theme driven by seasonal promotion and feature top-selling items in each merchandise department. The inserts feature actual prices in order to reinforce the everyday low price policy. 3 The Company also uses radio and newspaper advertisements prior to extended holiday weekends. The Company advertises in the yellow pages and through billboards, which are primarily intended to call attention to and give customers directions to the stores. The Company's major vendors provide cooperative advertising funding to Garden Ridge. PRODUCT SOURCING AND DISTRIBUTION The Company purchases all of its inventory through its central purchasing system. Management believes this strategy allows the Company to take advantage of volume purchase discounts and improve controls over inventory and product mix. The Company purchases its merchandise from over 800 suppliers and no supplier represents over 3% of total purchases. In fiscal 1998, approximately 80% of the Company's merchandise was purchased from domestic suppliers (including distributors that import goods) and the remaining 20% was imported from foreign manufacturers or their agents, principally in the Far East (Hong Kong, China, Taiwan and Thailand). Garden Ridge purchases overseas products on a free-on-board (FOB) shipping point basis, meaning the Company takes possession of the goods when they are shipped by the manufacturer. The Company insures its overseas purchases at their retail value. Garden Ridge has the majority of its domestic products shipped directly to its stores, thereby reducing freight and handling charges. From 1994 to 1996 the Company maintained a warehouse arrangement with a third party located in Dallas, Texas, which received, stored, and distributed the Company's imported and private label merchandise. In May 1996, the company leased a 280,000 square foot warehouse in Dallas and transitioned from the third party warehouse into the leased Company warehouse. The third party operator provided labor at the leased Company warehouse until March 1997. The Company now employs the labor at its Dallas distribution center and believes this will result in a most cost effective means of distributing its imported products. As is customary in the industry, the Company does not have long-term or exclusive contracts with any suppliers. The Company believes that alternate sources of merchandise for all product categories are readily available at comparable prices. Goods manufactured in the Far East generally require long lead times and are ordered three to nine months in advance of delivery. All purchases are made in United States dollars. ASSOCIATES As of April 20, 1998, Garden Ridge employed approximately 3,125 associates, equal to approximately 2,085 full-time equivalent associates, of whom 87% were hourly sales associates. The majority of Garden Ridge's store personnel earn slightly above minimum wage. Based on the level of transactions experienced at different times of the day, week and year, store labor is planned so as to serve customers effectively during peak periods while minimizing overall labor costs. The Company's associates are not represented by any union and management believes that labor relations are good. Due to the level of temporary help the Company employs, such as college students during summer and Christmas vacation, employee turnover is approximately 99% per annum for stores open more than one year. COMPETITION The presence in the Company's markets of department stores, mass merchandisers and specialty retailers (including superstores), which carry merchandise similar to that of Garden Ridge makes these markets very competitive. The Company believes that its stores compete on the basis of price, depth and breadth of merchandise assortment, customer service and convenience. Management believes that the Company's merchandise selection, everyday low prices, marketing strategies and the size and location of its stores distinguish the Company from its competitors. Management believes that department stores do not pose significant competition for the Company because, although they carry some housewares, candles, pictures and frames and other merchandise in common with Garden Ridge, their product offerings are limited in comparison to Garden Ridge, are generally at higher price points and are targeted to a more upscale consumer. While mass merchandisers carry several of Garden Ridge's product lines, they generally lack the breadth of selection to be specific destination locations for those merchandise categories. However, to the extent that mass merchandisers carry particular items in common with the Company, they provide price competition. 4 In general, the specialty retailers in Garden Ridge's markets do not carry all of the Company's product categories. Their stores are much smaller, ranging from approximately 10,000 to 30,000 square feet of selling space. Management believes that Garden Ridge generally carries a much broader selection of merchandise than these stores. In addition, Garden Ridge buyers regularly shop these stores to ensure that Garden Ridge's prices are competitive. See "Merchandising." TRADEMARKS The Company owns the following federally registered servicemarks for its retail services: "Garden Ridge," "Garden Ridge Pottery World Imports" (with design), "Shopping Fun in the Giant Economy Size!" and "Do It Up Big!." The Company also owns a federal trademark registration for "Garden Ridge Pottery and World Imports," which is used on certain products sold at the Company's stores, and has filed a federal servicemark application for "The Home Decor Marketplace". The Company believes that certain of its marks are valuable and intends to defend and maintain such marks and the related registrations. However, in the event the Company ceases to use a particular mark, the Company may permit any registration as to such mark to lapse. The Company is not aware of any pending claims of infringement or other challenges to the Company's right to use its marks in the United States. 5 ITEM 2. PROPERTIES The Company currently operates 21 stores and has six stores scheduled to open in the following locations: Approximate Fiscal Square Feet Year Of Selling CITY STORE NAME Space OPENED ------------- CURRENT STORES: San Antonio, Texas Schertz 207,000 1980 Houston, Texas Katy 219,000 1987 Houston, Texas Airtex 207,000 1987 Houston, Texas Meadows 129,000 1993 Austin, Texas Austin 125,000 1995 Dallas/Ft. Worth, Texas Plano 125,000 1995 North Richland Dallas/Ft. Worth, Texas Hills 125,000 1995 Louisville, Kentucky Louisville 125,000 1996 Memphis, Tennessee Memphis 125,000 1996 Dallas/Ft. Worth, Texas Mesquite 125,000 1996 Oklahoma City, Oklahoma Oklahoma City 125,000 1996 Charlotte, North Carolina Pineville 125,000 1997 Jacksonville, Florida Jacksonville 125,000 1997 Tulsa, Oklahoma Tulsa 125,000 1997 Houston, Texas Webster 135,000 1997 St. Louis, Missouri St. Louis 125,000 1997 Greenville, South Carolina Greenville 125,000 1997 Richmond, Virginia Richmond 125,000 1997 Atlanta, Georgia Kennesaw 125,000 1998 Atlanta, Georgia Norcross 125000 1998 Dallas/Ft. Worth, Texas Lewisville 106,000 1998 STORES SCHEDULED TO OPEN: O'Fallon, Illionis O'Fallon 125,000 (1) Atlanta, Georgia Stockbridge 125,000 (1) Dallas/Ft. Worth, Texas Ft. Worth 106,000 (1) Nashville, Tennessee Nashville 106,000 (1) Lexington, Kentucky Lexington 106,000 (1) Columbus, Ohio Columbus 106,000 (1) - ------------------ (1) Scheduled to open in fiscal 1999. The Company's three original stores (the Schertz Store, Katy Store and Airtex Store) are larger than the Company's current megastore format. All stores opened subsequent to these three stores are in the megastore format with at least 100,000 square feet of selling space. The Company's corporate offices are located at the Katy Store. All of the Company's 21 existing stores are leased. The Company intends to lease stores or arrange with third parties to build-to-suit stores for lease by the Company. Certain leases provide for fixed minimum rentals and provide for contingent rental payments based on various specified percentages of sales above minimum levels. The leases carry varying terms expiring between 2004 and 2019, excluding options to extend. All stores and store sites are located adjacent to interstate or other major highways. 6 ITEM 3. LEGAL PROCEEDINGS The Company is involved in various legal proceedings incidental to the conduct of its business. The Company currently is not engaged in any legal proceeding that is expected to have a material adverse effect on the Company's results of operations or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON STOCK PRICE RANGE AND DIVIDEND POLICY The Common Stock of the Company is traded in the over-the-counter market and is quoted on the Nasdaq National Market under the symbol "GRDG." The following table sets forth on a per share basis, for the periods indicated, the high and low sale prices of the Common Stock as reported by the Nasdaq National Market. These price quotations reflect inter-dealer prices, without adjustment for retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. PRICE RANGE --------------------- HIGH LOW --------- -------- Year Ended January 26, 1997 First Quarter....................... 28 16 1/4 Second Quarter...................... 30 1/4 17 1/4 Third Quarter....................... 19 8 1/2 Fourth Quarter...................... 10 8 Year Ended January 25, 1998 First Quarter....................... 9 15/16 6 1/4 Second Quarter...................... 14 3/4 7 3/4 Third Quarter....................... 15 7/8 11 3/4 Fourth Quarter...................... 16 1/2 13 1/8 All prices reflect the 2-for-1 common stock split effective in June 1996. On April 20, 1998, the last sale price of the Common Stock as reported on the Nasdaq National Market was $20 3/8 per share. As of April 20, 1998, there were approximately 5,000 holders of record of Common Stock. The Company has never paid cash dividends on its Common Stock and the Company does not intend to pay cash dividends at any time in the foreseeable future. The Company expects that earnings will be retained for the continued growth and development of the Company's business. Future dividends, if any, will depend upon the Company's earnings, financial condition, cash requirements, compliance with covenants in agreements to which the Company is or may be subject, future prospects and other factors deemed relevant by the Company's Board of Directors. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 7 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF STORES) The following table sets forth consolidated financial data of Garden Ridge Corporation and subsidiaries as of and for the fiscal years ended January 30, 1994, January 29, 1995, January 28, 1996, January 26, 1997 and January 25, 1998 derived from the financial statements audited by Arthur Andersen LLP.
FISCAL YEAR ENDED JANUARY ------------------------- 1994 1995 1996 1997 1998 -------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Sales ......................... $ 64,014 $ 100,002 $ 148,087 $ 225,315 $ 304,732 Cost of Sales ................. 39,989 61,938 92,328 144,054 195,290 -------- --------- --------- --------- --------- Gross profit ............... 24,025 38,064 55,759 81,261 109,442 Operating expenses: Store operating ............ 15,513 24,146 37,318 60,320 80,912 General and administrative . 3,263 4,287 5,157 6,672 10,280 Amortization of intangibles and deferred charges .... 617 621 612 717 735 Preopening costs ........... -- 1,017 1,395 2,368 1,122 -------- --------- --------- --------- --------- Total operating expenses ...... 19,393 30,071 44,482 70,077 93,049 -------- --------- --------- --------- --------- Income from operations ..... 4,632 7,993 11,277 11,184 16,393 Interest expense .............. (1,146) (1,859) (744) (67) (59) Interest income ............... -- 459 735 1,538 ,478 Income before income taxes, and cumulative effects of accounting changes ...... 3,486 6,593 11,268 12,655 17,812 Income taxes .................. 1,352 2,441 4,390 4,619 6,379 -------- --------- --------- --------- --------- Income before cumulative effects of accounting changes ................. 2,134 4,152 6,878 8,036 11,433 Accounting changes (1) ........ 439 -- -- -- -- -------- --------- --------- --------- --------- Net income ................. 2,573 4,152 6,878 8,036 11,433 Preferred stock dividends ..... (516) (562) (153) -- -- -------- --------- --------- --------- --------- Net income available to common stockholders ..... $ 2,057 $ 3,590 $ 6,725 $ 8,036 $ 11,433 ======== ========= ========= ========= =========
8
FISCAL YEAR ENDED JANUARY -------------------------------------------------- 1994 1995 1996 1997 1998 ------- -------- -------- -------- ------- PER SHARE DATA: Selected income per common and common equivalent share: Income before extraordinary item and cumulative effects of accounting changes ............................ $ 0.23 $ 0.41 $ 0.47 $ 0.45 $ 0.62 Net income .................................................... $ 0.28 $ 0.41 $ 0.47 $ 0.45 $ 0.62 Net income available to common stockholders, basic ............ $ 0.23 $ 0.40 $ 0.51 $ 0.47 $ 0.64 Net income available to common stockholders, diluted .......... $ 0.22 $ 0.36 $ 0.46 $ 0.45 $ 0.62 Weighted average number of common shares and equivalents outstanding, basic ............................... 9,054 8,978 13,083 17,158 17,904 Weighted average number of common shares and equivalents outstanding (2), diluted ......................... 9,316 10,096 14,515 17,925 18,473
JANUARY 30, JANUARY 29, JANUARY 28, JANUARY 26, JANUARY 25, 1994 1995 1996 1997 1998 ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA: Working capital .............................. $13,447 $12,168 $23,076 $ 63,277 $ 77,527 Total assets ................................. 32,364 43,992 73,326 137,382 160,212 Long-term debt obligations ................... 15,212 16,730 300 200 100 Redeemable 8% cumulative preferred stock ................................... 6,783 7,345 -- -- -- Common stockholders' equity .................. 4,428 7,922 55,531 113,763 125,953
- ------------- (1)Represents the cumulative effect of a change in accounting for income taxes in fiscal 1994. (2)Computed based on the weighted average number of shares of Common Stock and common stock equivalents, which consist of warrants and options outstanding during the period presented. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth for the periods indicated income statement data expressed as a percentage of sales.
FISCAL YEAR ENDED JANUARY ------------------------------------ 1996 1997 1998 -------- -------- ---------- Sales.............................................................. 100.0% 100.0% 100.0% Cost of Sales...................................................... 62.3 63.9 64.0 -------- -------- ---------- Gross profit......................................... 37.7 36.1 36.0 Operating expenses: Store operating..................................... 25.2 26.8 26.6 General and administrative........................... 3.5 3.0 3.4 Amortization of intangibles and deferred charges..... 0.4 0.3 0.2 Preopening costs..................................... 1.0 1.0 0.4 -------- -------- ---------- Income from operations................... 7.6 5.0 5.4 Interest expense................................................... (0.5) --- --- Interest income.................................................... 0.5 0.6 0.5 Income taxes....................................................... (3.0) (2.0) (2.1) ======== ======== ========== Net income.................. 4.6% 3.6% 3.8% ======== ======== ==========
FISCAL 1998 COMPARED TO FISCAL 1997 Sales in fiscal 1998 increased $79.4 million, or 35.2%, to $304.7 million from $225.3 million in fiscal 1997. This increase was attributable to (i) the opening of three new stores (which contributed $31.2 million in incremental sales), (ii) the inclusion of a full year sales for the seven stores opened in fiscal 1997, and (iii) a comparable store sales increase of 10.0%. Gross profit as a percentage of sales decreased to 36.0% in fiscal 1998 as compared to 36.1% in fiscal 1997 as a result of increased domestic freight costs and buying expense offset by higher product margins. Store operating expenses increased $20.6 million, or 34.1%, in fiscal 1998 to $80.9 million from $60.3 million in fiscal 1997. Store operating expenses as a percentage of sales was 26.6% for fiscal 1998 and 26.8% for fiscal 1997. The increased store operating expenses associated with the addition of three new stores and the inclusion of a full year of operating expenses for the seven stores opened in fiscal 1997 were offset by the sales increase allowing store operating expenses to decline as a percentage of sales. General and administrative expenses increased $3.6 million, or 54.1%, in fiscal 1998 to $10.3 million from $6.7 million in fiscal 1997. This increase was primarily a result of increased corporate payroll expense reflecting personnel additions to support the Company's expansion program. General and administrative expenses as a percentage of sales increased to 3.4% of sales in fiscal 1998 from 3.0% in fiscal 1997. Amortization of intangibles and deferred charges in fiscal 1998 which consisted of net assets and deferred loan costs (see Note 3 of the Notes to Consolidated Financial Statements) increased to $735,000, from $717,000 in fiscal 1997. As a percentage of sales, amortization of intangibles and deferred charges decreased to 0.2% of sales in fiscal 1998 from 0.3% in fiscal 1997. Preopening costs of $1.1 million in fiscal 1998 consisted of all labor, operating and advertising charges incurred prior to opening the three new stores in fiscal 1998. The Company opened seven new stores in fiscal 1997. The Company's policy is to expense all preopening costs in the month a store commences operations. Income from operations increased 0.4% to $16.4 million, or 5.4% of sales, as compared to 5.0% of sales in fiscal 1997. 10 Interest income in fiscal 1998 was $1.5 million, or 0.5% of sales as compared to $1.5 million, or 0.6% of sales in fiscal 1997. Income taxes in fiscal 1998 were $6.4 million, representing an effective tax rate of 35.8%, as compared to $4.6 million, or an effective tax rate of 36.5% in fiscal 1997. The Company's lower effective tax rate is attributable to the Company's geographic expansion resulting in a lower effective state tax rate. Net income in fiscal 1998 was $11.4 million, or 3.8% of sales, as compared to $8.0 million, or 3.6% of sales, in fiscal 1997. FISCAL 1997 COMPARED TO FISCAL 1996 Sales in fiscal 1997 increased $77.2 million, or 52.1%, to $225.3 million from $148.1 million in fiscal 1996. This increase was attributable to (i) the opening of seven new stores (which contributed $61.8 million in incremental sales), (ii) the inclusion of a full year sales for the four stores opened in fiscal 1996 and (iii) a comparable store sales decrease of 0.9%. Gross profit as a percentage of sales decreased to 36.1% in fiscal 1997 as compared to 37.7% in fiscal 1996 principally as a result of higher inventory shrinkage and damage. The remaining reduction was due to higher buying and occupancy costs as a percentage of sales. Store operating expenses increased $23.0 million, or 61.6%, in fiscal 1997 to $60.3 million from $37.3 million in fiscal 1996. Store operating expenses as a percentage of sales was 26.8% for fiscal 1997 and 25.2% for fiscal 1996. These increases resulted primarily from the addition of seven new stores and the inclusion of a full year of operating expenses for the four stores opened in fiscal 1996. General and administrative expenses increased $1.5 million or 29.4%, in fiscal 1997 to $6.7 million from $5.2 million in fiscal 1996. This increase was primarily a result of corporate personnel additions and recruiting costs to support the Company's ongoing expansion strategy. General and administrative expenses as a percentage of sales decreased in fiscal 1997 to 3.0% from 3.5% in fiscal 1996, reflecting the higher level of sales in fiscal 1997. Amortization of intangibles and deferred charges in fiscal 1997 increased to $717,000, from $612,000 in fiscal 1996 as a result of an asset purchase for a Houston store. As a percentage of sales, amortization of intangibles and deferred charges decreased to 0.3% of sales in fiscal 1997 from 0.4% in fiscal 1996. Preopening costs of $2.4 million in fiscal 1997 consisted of all labor, operating and advertising charges incurred prior to the opening of seven new stores in fiscal 1997. The Company opened four stores in fiscal 1996. Income from operations decreased 0.1% to $11.2 million, or 5.0% of sales, as compared to $11.3 million, or 7.6% of sales in fiscal 1996. This decrease in operating income resulted from decreases in gross profit margins and higher store costs. Interest income in fiscal 1997 increased to $1.5 million from $0.7 million due to the investment of proceeds from the Company's secondary common stock offering. Income taxes in fiscal 1997 were $4.6 million, representing an effective tax rate of 36.5%, as compared to $4.4 million, or an effective rate of 39.0% in fiscal 1996. The Company's lower effective tax rate is attributable to the Company's geographic expansion resulting in a lower effective state tax rate. Net income in fiscal 1997 was $8.0 million, or 3.6% of sales, as compared to $6.9 million, or 4.6% of sales, in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES In May 1995, the Company completed an initial public offering of Common Stock pursuant to which the Company sold 5,800,000 shares of Common Stock at the price of $7.50 per share (including 780,000 shares sold pursuant to the exercise of the underwriters' over-allotment option). Net proceeds of the initial public offering, after deducting the underwriting discount and expenses, 11 were approximately $39.5 million. Proceeds of the initial public offering were used as follows: (i) $7.5 million to redeem all of the Company's preferred stock, including the payment of accrued dividends, (ii) $15.0 million to repay the Company's fixed rate and floating rate subordinated notes, and (iii) $6.0 million to repay the Company's lines of credit. The remaining proceeds of approximately $11.0 million were retained by the Company to fund expansion and for general working capital requirements. The Company completed a secondary public offering of its common stock on April 30, 1996 pursuant to which the Company sold 2,000,000 shares of Common Stock at the price of $25.88 per share (including 420,000 shares sold pursuant to the exercise of the underwriters' over-allotment option). Net proceeds of the secondary offering, after deducting the underwriting discount and expenses were approximately $48.7 million. Proceeds were retained to fund expansion and for general working capital purposes. Garden Ridge's primary sources of working capital are cash flow from operations and borrowings under its Line of Credit. The Company had working capital of $23.1 million, $63.3 million and $77.5 million at the end of fiscal 1996, 1997 and 1998, respectively. The principal uses of working capital are to purchase inventory and finance the expansion of the Company's operations. The Company currently has a $15 million unsecured Line of Credit with NationsBank of Texas, N.A. The Company has no outstanding borrowings under the credit agreement which expires June 30, 1998. The Company is currently negotiating a two year extension to the Line of Credit. Garden Ridge's primary capital requirements are for the opening of new stores. The Company estimates the total cash required to open a leased store, including store fixtures, equipment, inventory and preopening expenses, to be approximately $3.0 million, including approximately $1.5 million in initial inventory (net of approximately $500,000 of vendor financing). An additional $6.0 to $9.0 million (depending on real estate costs) would be required for the Company to construct a store. Management believes it will be able to lease stores or arrange with third parties to build-to-suit stores for lease by the Company, although there can be no assurance that it will be able to do so. The Company anticipates opening six additional stores by fiscal year end. In fiscal 2000, the Company anticipates opening eight additional stores. The Company estimates the total cash required to open the six additional stores in fiscal 1999 will be approximately $18.0 million and to open the eight additional stores in fiscal 2000 will be approximately $24.0 million, assuming all of the stores are leased. The Company believes cash generated from operations, availability under its Line of Credit, traditional funding sources and financing provided by the Company's vendors will be adequate to fund its anticipated capital requirements for expansion through at least the end of fiscal 2000. YEAR 2000 The Company is currently assessing the impact of "Year 2000" related issues on its operational and financial computer systems. The Company has not yet determined the operational impact, if any, which may result in the future. Therefore, the Company is unable to determine the potential impact, if any, on its results of operations or financial condition. OTHER MATTERS The Company experiences seasonal fluctuations in its business. The highest sales period for the Company is generally the fourth fiscal quarter. This period, which includes the Christmas selling season, accounted for approximately 34%, 34% and 35% of the Company's sales for stores open the entire fiscal year, and approximately 80%, 80% and 84% of the Company's income from operations (including income from stores not open for the entire fiscal year) in fiscal 1996, 1997 and 1998, respectively. The Company also experiences lower gross margins in January due to clearance sales. Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on sales or results of operations. DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS In its disclosure herein, the Company has included certain statements (other than statements of historical fact) that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used herein, words such as "anticipate," "expects," "believes," "intends" or "estimates" and similar expressions are intended to identify forward-looking statements. It is important to note that the Company's 12 actual results could differ materially from those projected by such forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable and such forward-looking statements are based on the best data available at the time this Form 10-K is filed with the Securities and Exchange Commission, no assurance can be given that such expectations will prove correct. Factors that could cause the Company's results to differ materially from the results discussed in such forward-looking statements include, but are not limited to, the following: customer demands and trends and the Company's responses and reactions to them, competitive factors and pricing pressures, the availability of real estate, and the ability of the Company to implement its business strategy. All such forward-looking statements in this Form 10-K are expressly qualified in their entirety by the cautionary statements in this paragraph. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Filed herein as pages 18 through 30. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III In accordance with paragraph (3) of General Instruction G to Form 10-K, Part III of this Report is omitted because the Registrant will file with the Securities and Exchange Commission, not later than 120 days after January 25, 1998, a definitive proxy statement pursuant to Regulation 14A involving the election of directors. Reference is made to the sections of such proxy statement entitled "Common Stock Outstanding and Principal Holders Thereof," "Proposal No. 1 -- Election of Directors" and "Certain Transactions," which sections of such proxy statement are incorporated herein. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) FINANCIAL STATEMENTS: PAGE NO. IN THE ANNUAL REPORT -------- Report of Independent Public Accountants.............................. 17 Consolidated Balance Sheets as of January 26, 1997 and January 25, 1998........................................................... 18 Consolidated Statements of Operations for the Fifty-Two Week Periods Ended January 28, 1996, January 26, 1997 and January 25, 1998................................................... 19 Consolidated Statements of Preferred Stock and Common Stockholders' Equity for the Fifty-Two Week Periods Ended January 28, 1996, January 26, 1997 and January 25, 1998............ 20 Consolidated Statements of Cash Flows for the Fifty-Two Week Periods Ended January 28, 1996, January 26, 1997 and January 25, 1998........................................................... 21 Notes to Consolidated Financial Statements............................ 22 (2) FINANCIAL STATEMENT SCHEDULE: None. 13 (3) EXHIBITS Exhibit NUMBER IDENTIFICATION OF EXHIBITS ------ -------------------------- *3.1 -- Restated Certificate of Incorporation effective May 16, 1995 (filed as Exhibit 3.5 to the Registration Statement on Form S-1 (No. 33-90748) (the "1995 Form S-1"), and incorporated herein by reference) *3.2 -- Bylaws (filed as Exhibit 3.4 to the 1995 Form S-1, and incorporated herein by reference) *3.3 -- Form of Amendment No. 1 to the Bylaws effective May 16, 1995 (filed as Exhibit 3.6 to the 1995 Form S-1, and incorporated herein by reference) *4.1 -- Specimen Common Stock Certificate (filed as Exhibit 4.1 to the 1995 Form S-1, and incorporated herein by reference) *10.1 -- Amended and Restated 1992 Stock Option Plan (filed as Exhibit 10.1 to the 1995 Form S-1, and incorporated herein by reference) 10.2 -- Amended and Restated 1994 Stock Option Plan *10.3 -- Second Amended and Restated Credit Agreement dated October 26, 1995 between NationsBank of Texas, N.A. and the Company (filed as Exhibit 10.3 to the Form 10-K for the fiscal year ended January 28, 1996, and incorporated herein by reference) *10.4 -- Amendment No. 1 dated as of November 15, 1996, between NationsBank of Texas, N.A. and the Company (filed as Exhibit 10.4 to the Form 10-K for the fiscal year ended January 26, 1997, and incorporated herein by reference) *10.7 -- Demand Registration Rights Agreement dated May 16, 1995 by and among the Company and the parties named therein (filed as Exhibit 10.24 to the 1995 Form S-1, and incorporated herein by reference) *10.9 -- Advisory Agreement dated July 16, 1996 between the Company and Three Cities Research, Inc. (filed as Exhibit 10.9 to Form 10-K for the fiscal year ended January 26, 1997, and incorporated herein by reference) 21.1 -- Subsidiaries of the Company 23.1 -- Consent of Arthur Andersen LLP 27.1 -- Financial Data Schedule - ------------------ * Incorporated by reference (b) REPORTS ON FORM 8-K: None. 14 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. GARDEN RIDGE CORPORATION By: /s/ JANE L. ARBUTHNOT ------------------------------- JANE L. ARBUTHNOT Chief Financial Officer Date: April 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ ARMAND SHAPIRO Chairman of the Board and April 27, 1998 - -------------------------- Chief Executive Officer ARMAND SHAPIRO (Principal Executive Officer) /s/ JANE L. ARBUTHNOT Chief Financial Officer and April 27, 1998 - -------------------------- Secretary (Principal JANE L. ARBUTHNOT Financial and Accounting Officer) /s/ TERRY S. BOYCE Director April 27, 1998 - -------------------------- TERRY S. BOYCE /s/ ALYSON HENNING Director April 27, 1998 - -------------------------- ALYSON HENNING /s/ NOLAN LEHMANN Director April 27, 1998 - -------------------------- NOLAN LEHMANN /s/ IRA NEIMARK Director April 27, 1998 - -------------------------- IRA NEIMARK /s/ RONALD RASHKOW Director April 27, 1998 - -------------------------- RONALD RASHKOW /s/ SAM J. SUSSER Director April 27, 1998 - -------------------------- SAM J. SUSSER /s/ H. WHITNEY WAGNER Director April 27, 1998 - -------------------------- H. WHITNEY WAGNER 15 GARDEN RIDGE CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Report of Independent Public Accountants................................. 17 Consolidated Balance Sheets as of January 26, 1997 and January 25, 1998................................................................... 18 Consolidated Statements of Operations for the Fifty-Two Week Periods Ended January 28, 1995, January 28, 1996 and January 26, 1997.......... 19 Consolidated Statements of Preferred Stock and Common Stockholders' Equity for the Fifty-Two Week Periods Ended January 29, 1995, January 28, 1996 and January 26, 1997.................................. 20 Consolidated Statements of Cash Flows for the Fifty-Two Week Periods Ended January 29, 1995, January 28, 1996 and January 26, 1997.......... 21 Notes to Consolidated Financial Statements............................... 22 16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Garden Ridge Corporation: We have audited the accompanying consolidated balance sheets of Garden Ridge Corporation, a Delaware corporation, and subsidiaries (the Company) as of January 26, 1997, and January 25, 1998, and the related consolidated statements of operations, preferred stock and common stockholders' equity and cash flows for the fifty-two week periods ended January 28, 1996, January 26, 1997, and January 25, 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 26, 1997, and January 25, 1998, and the results of their operations and their cash flows for the fifty-two week periods ended January 28, 1996, January 26, 1997, and January 25, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 10, 1998 17 GARDEN RIDGE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 26, JANUARY 25, ASSETS 1997 1998 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents ...................................... $ 32,494 $ 44,586 Marketable securities .......................................... 5,168 3,150 Accounts receivable ............................................ 1,725 1,785 Inventories .................................................... 43,617 57,773 Deferred income taxes .......................................... 480 1,225 Prepaid expenses ............................................... 2,950 2,492 Deposits ....................................................... 225 80 --------- --------- Total current assets ...................................... 86,659 111,091 PROPERTY AND EQUIPMENT, at cost: Land held for sale/leaseback ................................... 5,976 241 Leasehold improvements ......................................... 16,660 18,830 Furniture and fixtures ......................................... 11,327 13,832 Equipment ...................................................... 18,015 24,741 --------- --------- Total property and equipment ............................. 51,978 57,644 Less - Accumulated depreciation and amortization ............... (11,620) (17,977) --------- --------- Net property and equipment ............................... 40,358 39,667 OTHER ASSETS: Intangibles and deferred charges, net .......................... 10,189 9,454 Other .......................................................... 176 -- ========= ========= Total assets ............................................. $ 137,382 $ 160,212 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ............................................... $ 15,011 $ 17,448 Accrued liabilities ............................................ 4,377 8,529 Federal income taxes payable ................................... 3,994 7,587 --------- --------- Total current liabilities ................................ 23,382 33,564 LONG-TERM DEBT, net ................................................. 200 100 DEFERRED INCOME TAXES ............................................... 37 595 COMMITMENTS AND CONTINGENCIES COMMON STOCKHOLDERS' EQUITY: Common stock, $0.1 par value; 20,000,000 and 40,000,000 shares authorized, 18,187,716 and 18,314,116 shares issued, and 17,830,764 and 17,991,890 shares outstanding in 1997 and 1998, respectively .................................. 182 183 Paid-in capital ................................................... 92,542 93,293 Retained earnings ................................................. 21,079 32,512 Less - Treasury stock, 356,952 and 322,226 shares at cost ......... (40) (35) --------- --------- Total common stockholders' equity ....................... 113,763 125,953 --------- --------- Total liabilities and common stockholders' equity ....... $ 137,382 $ 160,212 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 18 GARDEN RIDGE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FIFTY-TWO WEEK PERIODS ENDED ------------------------------------- JANUARY JANUARY JANUARY 28, 26, 25, 1996 1997 1998 ------------ ------------ ------------ SALES ............................................................ $ 148,087 $ 225,315 $ 304,732 COST OF SALES .................................................... 92,328 144,054 195,290 ------------ ------------ ------------ Gross profit ............................................... 55,759 81,261 109,442. OPERATING EXPENSES: Store operating .............................................. 37,318 60,320 80,912. General and administrative ................................... 5,157 6,672 10,280 Amortization of intangibles and deferred charges ............. 612 717 735 Preopening costs ............................................. 1,395 2,368 1,122 ------------ ------------ ------------ Total operating expenses .................................. 44,482 70,077 93,049 ------------ ------------ ------------ Income from operations .................................... 11,277 11,184 16,393 INTEREST EXPENSE ................................................. (744) (67) (59) INTEREST INCOME .................................................. 735 1,538 1,478 ------------ ------------ ------------ Income before income taxes ................................ 11,268. 12,655 17,812 INCOME TAXES ..................................................... 4,390 4,619 6,379 ------------ ------------ ------------ Net income ................................................ 6,878 8,036 11,433 PREFERRED STOCK DIVIDENDS ........................................ (153) -- -- ============ ============ ============ Net income available to common stockholders ............... $ 6,725 $ 8,036 $ 11,433 ============ ============ ============ INCOME PER COMMON AND COMMON EQUIVALENT SHARE: Net income available to common stockholders, basic ....... $ .51 $ .47 $ .64 ------------ ------------ ------------ Net income available to common stockholders, diluted ..... $ .46 $ .45 $ .62 ------------ ------------ ------------ WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC ...................................................... 13,083,454 17,157,742 17,904,447 ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED .................................................... 14,515,240 17,924,980 18,472,759 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 19 GARDEN RIDGE CORPORATION CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
REDEEMABLE 8% CUMULATIVE PREFERRED STOCK COMMON STOCK ($.01 PAR ($.01 PAR VALUE) VALUE) ------------------- --------------- PAID-IN RETAINED TREASURY SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK ------ ------ ------ ------ ------- -------- ----- BALANCE AT JANUARY 29, 1995 .............. 1,000 $ 7,345 9,451 $ 94 $ 1,606 $ 6,318 $(96) Initial public offering, net of $960 of offering cost .......... -- -- 5,800 58 39,437 -- -- Exercise of warrants ................ -- -- 306 4 1,019 -- -- Exercise of stock options ........... -- -- 248 2 329 -- -- Exercise of employee options ........ -- -- -- -- 19 -- 16 Cumulative dividends on preferred stock ($.153 per share) ............................ -- 153 -- -- -- (153) -- Redemption of preferred stock ............................. (1,000) (7,498) -- -- -- -- -- Net income .......................... -- -- -- -- -- 6,878 -- ------ ------- ------ ---- ------- -------- ---- BALANCE AT JANUARY 28, 1996 .............. -- -- 15,805 158 42,410 13,043 (80) Secondary public offering, net of $3,019 of offering cost ....... -- -- 2,000 20 48,721 -- -- Exercise of warrants ................ -- -- 382 4 1,346 -- -- Exercise of employee options ........ -- -- -- -- 65 -- 40 Net income .......................... -- -- -- -- -- 8,036 -- ------ ------- ------ ---- ------- -------- ---- BALANCE AT JANUARY 26, 1997 .............. -- -- 18,187 182 92,542 21,079 (40) Exercise of warrants ................ -- -- 112 1 477 -- -- Exercise of employee options ........ -- -- -- -- 108 -- 5 Employee stock purchase plan ........ -- -- 15 -- 166 -- -- Net income .......................... -- -- -- -- -- 11,433 -- ------ ------- ------ ---- ------- -------- ---- BALANCE AT JANUARY 25, 1998 .............. -- $ -- 18,314 $183 $93,293 $ 32,512 $(35) ====== ======= ====== ==== ======= ======== ====
The accompanying notes are an integral part of these consolidated financial statements. 20 GARDEN RIDGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FIFTY-TWO WEEK PERIODS ENDED ----------------------------------------- JANUARY 28, JANUARY 26, JANUARY 25, 1996 1997 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................. $ 6,878 $ 8,036 $ 11,433 -------- -------- -------- Adjustments to reconcile net income to net cash provided by (used in) operating activities -- Depreciation and amortization of property and equipment .............. 2,501 4,797 6,629 Amortization of intangibles and deferred charges ..................... 612 717 735 Deferred income tax (benefit) provision .............................. (121) 268 (187) (Increase) decrease in assets - Marketable securities ................................................ -- (5,168) 2,018 Accounts receivable .................................................. (576) (819) (60) Notes receivable ..................................................... 1,619 2,582 -- Inventories .......................................................... (11,284) (15,767) (14,156) Prepaid expenses ..................................................... 169 (1,836) 458 Deposits and other ................................................... 1,210 (263) 321 Intangibles and deferred charges ..................................... (2,449) (15) -- Increase in liabilities - Accounts payable ..................................................... 2,564 4,448 2,437 Accrued liabilities .................................................. 1,277 822 4,152 Federal income taxes payable ......................................... 1,659 617 3,593 -------- -------- -------- Total adjustments .................................................. (2,819) (9,617) 5,940 -------- -------- -------- Net cash provided by (used in) operating activities ................ 4,059 (1,581) 17,373 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ................................................... (13,188) (18,067) (11,673) Sale (purchase) of land held for sale/leaseback ........................ -- (5,498) 5,735 -------- -------- Net cash used in investing activities ................................ (13,188) (23,565) (5,938) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit agreement ............................ 4,625 -- -- Payments on revolving credit agreement ................................. (6,275) -- -- Payments on term loan .................................................. (80) -- -- Payments on subordinated notes payable ................................. (15,000) -- -- Payments on notes payable .............................................. (100) (100) (100) Sale of common and preferred stock, net of offering costs .............. 39,495 48,741 -- Common stock reissued from treasury .................................... 16 40 5 Redemption of preferred stock and cumulative dividends ................. (7,498) -- -- Proceeds from exercise of stock options and warrants ................... 1,373 1,415 752 -------- -------- -------- Net cash provided by financing activities ............................ 16,556 50,096 657 -------- -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS ................................ 7,427 24,950 12,092 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................... 117 7,544 32,494 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 7,544 $ 32,494 $ 44,586 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for -- Interest............................................................. $ 755 $ 67 $ 59 Income taxes ......................................................... 2,692 3,010 2,775
The accompanying notes are an integral part of these consolidated financial statements. 21 GARDEN RIDGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND CONSOLIDATION: The consolidated financial statements include the accounts of Garden Ridge Corporation (a Delaware corporation) and its wholly owned subsidiaries (the Company or Garden Ridge). Significant intercompany accounts and transactions are eliminated in consolidation. The Company operates 21 retail megastores in ten states, primarily in Texas and the southeastern United States, which sell a broad assortment of decorative home accessories, seasonal products and crafts. The Company's business is seasonal, with its highest sales levels occurring in its fourth fiscal quarter. This period, which includes the Christmas selling season, accounted for approximately 34 percent, 34 percent and 35 percent of the Company's sales for stores open the entire fiscal year, and approximately 80 percent, 80 percent and 84 percent of the Company's income from operations (including income from stores not open for the entire fiscal year) in fiscal 1996, 1997 and 1998, respectively. A significant adverse trend in sales for the fourth fiscal quarter would have a material adverse effect on the Company's results of operations for the full year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires the use of certain estimates by management in determining the Company's assets, liabilities, revenues and expenses. Actual results could differ from those estimates. FISCAL YEAR The fiscal year of the Company ends on the last Sunday in January of each calendar year, resulting in either a 52- or 53-week fiscal year. RECLASSIFICATION Certain reclassifications have been made to the fiscal 1996 and 1997 financial statements to conform with the fiscal 1998 presentation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. MARKETABLE SECURITIES The Company accounts for marketable securities in accordance with Statement of Financial Accounting Standard (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". All of the Company's marketable securities are classified as held to maturity securities. At January 25, 1998, the carrying value approximated fair value. INVENTORIES Inventories are stated at the lower of cost or market, determined by the weighted average cost method. 22 GARDEN RIDGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are determined using the straight-line method for financial reporting purposes. The amortization of leasehold improvements is based on the shorter of the term of the respective lease or the estimated useful life of the related improvement. Depreciation of all other tangible assets is based on the estimated useful life of the respective asset, which is five years for substantially all assets. Expenditures for major renewals and betterments are capitalized while maintenance and repairs are expensed. When property is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated statements of operations. INTANGIBLES AND DEFERRED CHARGES Excess cost over net assets acquired is amortized on a straight-line basis over 20 years. Deferred loan costs are amortized on the effective interest method over the term of the loan. Management continually evaluates the realization of its intangible assets based upon projected income from operations over the lives of such assets. Management believes all such assets are fully realizable. However, in the event of any impairment, such intangibles would be charged to expense and reflected as a direct write-down in the balance sheet in the period such impairment is deemed to have occurred. COST OF SALES Included in cost of sales are cost of merchandise sold, occupancy and buying costs. PREOPENING COSTS The Company capitalizes certain direct costs incurred in conjunction with site selection for future store locations and with the commencement of each store's operations. Amounts capitalized are expensed in the month the store commences operations. As of January 26, 1997, and January 25, 1998 there were no such preopening costs that needed to be expensed. Included in prepaid expenses in the accompanying consolidated balance sheets as of January 26, 1997, and January 25, 1998, were $1,473,000 and $1,400,000, respectively, related to capitalizable costs incurred in conjunction with the opening of new stores, most of which will be recorded to property and equipment when the stores are completed. STOCK SPLIT In conjunction with the Company's initial public offering of its common stock on May 16, 1995, the Company's board of directors approved a 4.5-for-1 stock split. On June 28, 1996, the Company's board of directors approved a 2-for-1 stock split. The impact of both stock splits has been reflected in the Company's accompanying consolidated financial statements and notes thereto. REALIZATION OF LONG-LIVED ASSETS SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS No. 121 on January 29, 1996, did not materially impact the Company's results of operations. 23 GARDEN RIDGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INTANGIBLES AND DEFERRED CHARGES: Intangible assets and deferred charges consists of the following at January 26, 1997, and January 25, 1998 (in thousands): JANUARY JANUARY 26, 25, 1997 1998 ---------- ----------- Cost in excess of net assets acquired... $ 11,708 $ 11,708 Deferred loan costs..................... 849 849 Noncompetition agreement................ 500 500 ---------- ----------- 13,057 13,057 Less - Accumulated amortization......... 2,868 3,603 ========== =========== $ 10,189 $ 9,454 ========== =========== The Company entered into an asset purchase agreement in December 1995 whereby the Company paid $2.3 million to acquire store fixtures, equipment and goodwill associated with a store in Houston, Texas and entered into a noncompetition agreement with the seller for $500,000. As of January 26, 1997 and January 25, 1998, the noncompetition agreement has an outstanding liability of $300,000 and $200,000, respectively, which is to be paid in annual increments of $100,000. Accordingly, $200,000 and $100,000 of this liability is included in long term debt in the consolidated balance sheets at January 26, 1997 and January 25, 1998, respectively. 4. DEBT: Long term debt included term loans which were payable through October 1996, with interest payable monthly at 7.9% through 16.8%. The unpaid balance was paid in full in November 1996. The Company has a line-of-credit agreement, as amended (Line of Credit), which provides for a commitment not to exceed the greater of $15.0 million or the Company's borrowing base, as defined, reduced by the aggregate amount of outstanding letters of credit and bears interest at the prime rate or, at the Company's option, LIBOR plus either 1.75 percent or 2.25 percent depending upon certain financial conditions. The Line of Credit extends through June 30, 1998. The Company is required to pay an annual commitment fee of 0.375 percent per annum on the unused portion of the Line of Credit. During fiscal years 1997 and 1998 the Company made no borrowings under the Line of Credit and at January 25, 1998, there was approximately $15.0 million of available borrowings. Restrictions under the Line of Credit and term loans include, among other things, limits on capital expenditures, annual store openings, incurrence of additional indebtedness and mergers or consolidations and certain financial covenants. 5. FEDERAL INCOME TAXES: INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". This standard provides the method for determining the appropriate asset and liability for deferred taxes which are computed by applying applicable tax rates to temporary (timing) differences. Therefore, expenses recorded for financial statement purposes before they are deducted for tax purposes create temporary differences which give rise to deferred tax assets. Expenses deductible for tax purposes before they are recognized in the financial statements create temporary differences which give rise to deferred tax liabilities. The Company and its subsidiaries file a consolidated tax return. Deferred income taxes are provided in recognition of timing differences in reporting certain transactions for financial reporting and income tax reporting purposes. 24 GARDEN RIDGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision (benefit) for income taxes is as follows (in thousands): FOR THE FIFTY-TWO WEEK PERIODS ENDED ------------------------------------- JANUARY JANUARY JANUARY 28, 26, 25, 1996 1997 1998 ----------- ----------- ----------- Current.................... $4,511 $4,351 $6,566 Deferred................... (121) 268 (187) =========== =========== =========== $4,390 $4,619 $6,379 =========== =========== =========== The primary reasons for the difference between income taxes computed by applying the statutory federal income tax rate and the provision for income taxes in the financial statements are as follows: FOR THE FIFTY-TWO WEEK PERIODS ENDED ------------------------------------- JANUARY JANUARY JANUARY 28, 26, 25, 1996 1997 1998 ----------- ----------- ----------- Statutory federal rate......... 35% 35% 35% State taxes and expenses not deductible for tax purposes.... 4 2 1 =========== =========== =========== 39% 37% 36% =========== =========== =========== The significant components of the deferred tax assets and liabilities are as follows (in thousands): JANUARY JANUARY 26, 25, 1997 1998 ------ ------ Deferred tax assets - Inventory .................................. $ 759 $1,030 Deferred rent .............................. 280 451 Accruals ................................... 125 556 Other ...................................... 23 60 ------ ------ Total deferred tax assets ................ 1,187 2,097 Deferred tax liabilities - Depreciation ............................... 106 873 Prepaid expenses ........................... 405 361 Other ...................................... 233 233 ------ ------ Total deferred tax liabilities ........... 744 1,467 ------ ------ Net deferred tax assets ...................... $ 443 $ 630 ====== ====== A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Management of the Company believes the net deferred tax assets will be utilized in full based on the nature of the assets and the Company's estimates of the timing of reversals of temporary differences and on the expected generation of taxable income before such reversals. 25 GARDEN RIDGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY: In May 1995, the Company completed an initial public offering of common stock pursuant to which the Company sold 5,800,000 shares of common stock at the price of $7.50 per share (the IPO). Net proceeds of the IPO were approximately $39.5 million. Net proceeds of the IPO were used as follows: (i) $7.5 million to redeem all of the Company's Preferred Shares, including payment of the accrued dividends, (ii) $15.0 million to repay the Company's Floating Rate Notes and (iii) $6.0 million to repay the Company's lines of credit. The Company completed a secondary public offering of its common stock on April 30, 1996 (the Secondary Offering), pursuant to which the Company sold 2,000,000 shares of common stock at the price of $25.88 per share (including 420,000 shares sold pursuant to the exercise of the underwriters' over-allotment option). Net proceeds of the Secondary Offering, after deducting the underwriting discount and expenses were approximately $48.7 million. Proceeds were retained to fund expansion and for general working capital purposes. Although there are no shares of preferred stock outstanding and the Company has no present plans to issue any shares of preferred stock, the Amended and Restated Certificate of Incorporation authorizes the Board, without further action of the stockholders of the Company, to issue up to 2,500,000 shares of preferred stock at $.01 par value 7. EARNINGS PER SHARE The Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share" in February 1997. Implementation of SFAS No. 128 is required for periods ending after December 15, 1997. SFAS No. 128 requires dual presentation of earnings per share (EPS); basic EPS and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For purposes of this calculation outstanding stock options are considered common stock equivalents. The following table summarizes the basic EPS and diluted EPS computations for fiscal 1996, 1997 and 1998:
JANUARY JANUARY JANUARY 28, 26, 25, 1996 1997 1998 ------- ------- ------- (In thousands, except per share data) Basic earnings per share: Net income available to common stockholders ..... $ 6,725 $ 8,036 $11,433 ------- ------- ------- Weighted average number of common shares ........ 13,083 17,158 17,904 ======= ======= ======= Basic earnings per share ........................ $ 0.51 $ 0.47 $ 0.64 ======= ======= ======= Diluted earnings per share: Net income available to common stockholders ..... $ 6,725 $ 8,036 $11,433 ------- ------- ------- Weighted average number of common shares ........ 13,083 17,158 17,904 Stock options and other ......................... 1,432 767 569 ------- ------- ------- Adjusted weighted average number of common shares 14,515 17,925 18,473 ------- ------- ------- Diluted earnings per share ........................... $ 0.46 $ 0.45 $ 0.62 ======= ======= =======
26 GARDEN RIDGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. STOCK OPTIONS AND WARRANTS: Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock-Based Compensation", and has been determined as if the Company has accounted for its stock options under the fair value method as provided therein. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for options issued in fiscal 1997 and fiscal 1998, respectively: risk-free interest rate of 6.6 percent and 6.5 percent; expected lives of eight years and seven years; expected volatility of 43 percent and 27 percent; and no expected dividends. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Set forth below is a summary of the Company's net income and earnings per share as reported and pro forma as if the fair value based method of accounting defined in SFAS No. 123 had been applied. The pro forma information is not meant to be representative of the effects of reported net income for future years because, as provided by SFAS No. 123, only the effects of awards granted after January 30, 1995, are considered in the pro forma calculation. JANUARY 26, 1997 JANUARY 25, 1998 ------------------- ------------------- AS PRO AS PRO REPORTED FORMA REPORTED FORMA -------- ----- -------- ----- Net income (in thousands)...... $8,036 $7,763 $11,433 $11,131 Earnings per share............. $ 0.45 $ 0.43 $ 0.62 $ 0.60 In August 1992, the Company adopted the 1992 stock option plan, as amended (the 1992 Plan), which expired upon the public offering of the Company's common stock in May 1995. The 1992 Plan permitted the Company to grant incentive and nonqualified stock options to purchase 1,130,822 shares of the Company's common stock to key executives and employees. The exercise price of incentive stock options is not less than the fair value of the shares at the date of grant, and the exercise price of nonqualified stock options is determined by the compensation committee of the Company's board of directors, subject to certain restrictions. Options presently outstanding vest at the rate of 33-1/3 percent per year beginning one year after the date of grant and expire 10 years from the date of grant. A summary of stock option activity under the 1992 Plan follows: WEIGHTED OPTIONS AVERAGE OUTSTANDING EXERCISE PRICE ---------- --------------- Balance at January 29, 1995.................. 1,070,972 $0.89 Exercised............................ (145,894) $0.24 Canceled............................. (1,950) $2.22 ---------- Balance at January 28, 1996.................. 923,128 $0.99 Exercised............................ (336,962) $0.16 Canceled............................. (3,974) $2.84 ---------- Balance at January 26, 1997.................. 582,192 $1.48 Exercised............................ (32,776) $3.16 Canceled............................. (976) $2.22 ========== Balance at January 25, 1998.................. 548,440 $1.37 ========== At January 25, 1998, there were no shares reserved for future stock option grants under the 1992 Plan and options to acquire 548,440 shares were exercisable under the 1992 Plan. 27 GARDEN RIDGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In April 1994, the Company adopted the 1994 Stock Option Plan (the 1994 Plan). The 1994 Plan permits the Company to grant incentive and nonqualified stock options to purchase 519,176 shares of the Company's common stock to key executives and employees. The exercise price of incentive stock options will not be less than the fair value of the shares at the date of grant and the exercise price of nonqualified stock options will be determined by the compensation committee of the Company's board of directors, subject to certain restrictions. The vesting and terms of each stock option will be determined by the compensation committee, subject to certain limitations. The 1994 Plan expires 10 years after its effective date. A summary of stock option activity under the 1994 Plan follows: WEIGHTED OPTIONS AVERAGE OUTSTANDING EXERCISE PRICE ---------- --------------- Balance at January 29, 1995.................. 67,500 $ 2.33 Granted.............................. 32,724 $ 6.65 Canceled............................. (2,924) $ 3.33 ---------- Balance at January 28, 1996.................. 97,300 $ 3.28 Granted.............................. 160,000 $ 13.43 Exercised............................ (21,198) $ 2.39 Canceled............................. (4,000) $ 16.44 ---------- Balance at January 26, 1997.................. 232,102 $ 10.39 Granted.............................. 176,000 $ 12.05 Exercised............................ (1,950) $ 3.33 Canceled............................. (25,000) $ 10.78 ========== Balance at January 25, 1998.................. 381,152 $ 9.66 ========== At January 25, 1998, there were 114,876 shares reserved for future stock option grants and 172,571 shares were exercisable under the 1994 Plan. The exercise price of the options outstanding under the 1992 Plan and 1994 Plan at January 25, 1998 range from $0.11 to $3.33 and $2.33 to $18.75, respectively. The weighted average contractual life of options outstanding at January 25, 1998 was five years and six years, respectively for both the 1992 Plan and 1994 Plan. The weighted average fair value of options granted in fiscal 1997 and 1998 was $8.84 and $5.29 under the 1994 Plan. In fiscal 1994, the Company issued warrants to purchase 450,000 shares of common stock to certain investors and a warrant to purchase 194,400 shares of common stock to the Lessor in connection with a lease agreement for retail space. Both of the warrants were exercisable at a price of $3.33 per share. The Lessor exercised his warrants in May 1995. The remaining unexercised warrants issued to the investors were exercised in full during fiscal year 1998. During fiscal 1996, the Company issued warrants to purchase 135,000 shares of common stock to outside parties for $5.00 per share. The outside parties exercised 45,000 shares in April 1996, and 90,000 shares in May 1997. No value was assigned to these warrants in the accompanying consolidated financial statements as their value as of the valuation date was deemed to be DE MINIMIS. The Non-Employee Directors Stock Option Plan adopted in fiscal 1997 permits the issuance of up to 70,000 shares of common stock to directors who are not employees of the Company. Under this plan 5,000 options to purchase shares of common stock at the fair market value on the date of grant are granted to each non-employee director annually. As of January 26,1997, and January 25, 1998 options for 25,000 and 57,500 shares, respectively, had been granted to non-employee directors under this Plan. 28 GARDEN RIDGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. EMPLOYEE STOCK PURCHASE PLAN: In May 1996, the stockholders approved the Employee Stock Purchase Plan and reserved 100,000 shares of common stock for issuance thereunder. The plan permits full-time employees who meet certain requirements to purchase common stock through payroll deductions (which cannot exceed 10% of each employee's compensation) at 85% of the fair market value at the end of each calendar quarter. The Plan became effective on January 1, 1997. 10. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases its retail facilities pursuant to noncancelable operating leases that expire at various dates through 2019. A number of the leases have renewal options for various periods of time at the option of the Company. Total rental expense included in the accompanying consolidated financial statements for the period ended January 28, 1996, January 26, 1997, and January 25, 1998, is $7,260,000, $12,530,000 and $17,054,000, respectively. The Company is responsible for taxes, utilities, insurance and repairs and maintenance of each of the retail properties. Certain leases require the payment of contingent rentals based on a specified percentage of a store's gross sales, as defined and subject to certain limitations. To date, no contingent rent amounts have been paid. Future minimum rentals required under the operating leases are as follows (in thousands): Fiscal year ending --- 1999.................................... $ 17,830 2000.................................... 17,212 2001.................................... 17,524 2002.................................... 17,090 2003.................................... 16,836 Thereafter.............................. 199,995 ========== $286,487 ========== INSURANCE The Company is fully insured for claims over certain deductible amounts. The insurance provides for payment of accidental death and medical claims of employees as specified within the policies. Historically, the Company has not incurred any significant losses on workers' compensation or employee medical insurance claims, and management believes the Company's reserves are sufficient to cover the Company's liabilities for claims incurred. LITIGATION The Company is involved in various legal proceedings incidental to the conduct of its business. The Company currently is not engaged in any legal proceedings that are expected to have a material adverse effect on the Company's results of operations or financial position. 11. RELATED-PARTY TRANSACTIONS: EMPLOYMENT AGREEMENT On July 16, 1992, the Company entered into an employment agreement, as amended, with an officer and stockholder of the Company. The employment agreement, as amended, expired on July 15, 1997. 29 GARDEN RIDGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FINANCIAL ADVISORY CONSULTING AGREEMENTS In July 1996, the Company entered into a five-year financial advisory agreement with a stockholder. The agreement provides for an annual fee of $50,000 and reimbursement of out-of-pocket expenses. OTHER In fiscal 1996, 1997, and 1998, the Company paid approximately $778,382, $996,024 and $455,484, respectively, to a supplier for the design, construction and installation of its signs. The owner of the supplier is the spouse of an officer of the Company. Two officers of the Company were minority stockholders of a long distance telephone service provider, which provided long distance services to the Company. In fiscal 1996, the Company paid approximately $80,000 for this company's service. During fiscal year 1997 and 1998, the Company obtained no services from the long distance telephone service provider. The Company believes the foregoing transactions were on terms at least as favorable to the Company as those which could have been obtained elsewhere. 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
FISCAL QUARTER ENDED -------------------------------------------- APRIL JULY OCTOBER JANUARY 28, 28, 27, 26, 1996 1996 1996 1997 --------- -------- -------- -------- (In thousands, except per share data) Sales ............................................. $39,220 $45,116 $55,631 $85,348 Gross profit ...................................... 14,123 16,221 20,511 30,406 Income from operations ............................ 865 588 740 8,991 Net income ........................................ 586 679 670 6,101 Net income per common share, diluted .............. $ .03 $ .04 $ .04 $ .33 Weighted average shares outstanding, diluted ...... 16,405 18,457 18,426 18,358
FISCAL QUARTER ENDED --------------------------------------- APRIL JULY OCTOBER JANUARY 27, 27, 26, 25, 1997 1997 1997 1998 -------- ------- ------- -------- (In thousands, except per share data) Sales ............................................. $59,493 $63,634 $71,122 $110,483 Gross profit ...................................... 20,600 21,203 26,360 41,279 Income from operations ............................ 355 799 1,492 13,747 Net income ........................................ 470 682 1,043 9,238 Net income per common share, diluted .............. $ .03 $ .04 $ .06 $ .50 Weighted average shares outstanding, diluted ...... 18,355 18,473 18,521 18,548
30 EX-10.2 2 EXHIBIT 10.2 GARDEN RIDGE CORPORATION AMENDED AND RESTATED 1994 STOCK OPTION PLAN Effective June 3, 1997 ARTICLE I --------- PURPOSE The purpose of this Amended and Restated 1994 Stock Option Plan (the "Plan") of Garden Ridge Corporation, a Delaware corporation (the "Company"), is to secure for the Company and its stockholders the benefits arising from stock ownership by selected executive employees and other key employees of the Company or its subsidiaries as the Board of Directors of the Company (the "Board"), or a Committee constituted for such purpose, may from time to time determine. The Plan will provide a means whereby (i) such employees may purchase shares of the common stock, $0.01 par value per share (the "Common Stock"), of the Company pursuant to stock options which will qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) such employees may purchase shares of the Common Stock of the Company pursuant to "non-incentive" or "non-qualified" stock options. ARTICLE II ---------- ADMINISTRATION The Plan shall be administered by the Stock Option Committee (the "Committee"), which shall at all times consist of not less than two members of the Board, and all members of the Committee shall be "disinterested persons" within the meaning of Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "1934 Act"). All members of the Committee shall be selected by (and serve at the pleasure of) the Board. Subject to the express provisions of the Plan and the policies of each stock exchange on which any of the Company's stock may at any time be traded, the Committee shall have plenary authority, in its discretion, to recommend to the Board the individuals within the class set forth in ARTICLE IV to whom, and the time and price per share at which, stock options shall be granted, the number of shares to be subject to each stock option and the other terms and provisions of their respective Agreements (as defined herein), which need not be identical. In making such recommendations and determinations, the Committee may take into account the nature of the services rendered by the respective employees, their present and potential contributions to the Company's success and such other factors as the Committee in its discretion shall deem relevant. Subject to the express provisions of the Plan, the Committee shall have authority (i) to construe and interpret the Plan, (ii) to define the terms used therein, (iii) to prescribe, amend and rescind rules and regulations relating to the Plan, (iv) to recommend to the Board the terms and provisions of the respective stock options, (v) to approve and determine the duration of leaves of absence which may be granted to participants without constituting a termination of their employment for the purposes of the Plan, and (vi) to make all other determinations necessary or advisable for the administration of the Plan. All determinations and interpretations made by the Committee shall be binding and conclusive on all participants in the Plan and their legal representatives and beneficiaries. The Committee shall hold meetings at such times and places as it may determine. Acts by the majority of the Committee or acts reduced to or approved in writing by a majority of the members of the Committee shall be the valid acts of the Committee. From time to time, the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause), and appoint new members in substitution therefore, or fill vacancies however caused, subject to the requirements that the members of the Committee shall be "disinterested persons" as described above and that there always be at least two members of the Committee. No member of the Committee shall be liable for any action, failure to act, determination or interpretation made in good faith with respect to the Plan or any transaction under the Plan. ARTICLE III ----------- SHARES SUBJECT TO PLAN AND DURATION OF PLAN Under the Plan, the Board may, but only upon recommendation of the Committee, grant to eligible persons incentive stock options (as defined in the Code) and/or non-qualified stock options, to purchase up to but not exceeding an aggregate amount of 519,176 shares of the Company's Common Stock (subject to adjustment as provided in ARTICLE X). Shares subject to stock options under the Plan may be either authorized and unissued shares or issued shares that have been acquired by the Company and held in its treasury, in the discretion of the Board. When stock options have been granted under the Plan and have lapsed unexercised or partially unexercised or have been surrendered for cancellation by the optionee thereof, the unexercised shares which were subject thereto may be reoptioned under the Plan. No stock options shall be granted after April 2004. ARTICLE IV ---------- ELIGIBILITY AND PARTICIPATION To the fullest extent permitted by applicable laws, all executive employees and other key employees of the Company or of any subsidiary corporation (as defined in Section 424(f) of the Code) shall be eligible for selection to fully participate in the Plan; provided, however, that no member of the Committee shall be entitled to receive a stock option under this Plan while serving as a member of the Committee. Directors of the Company who are not regular employees of the Company are not eligible to participate in the Plan. An individual who has been granted an option may, if such individual is otherwise eligible, be granted an additional option or options if the Board or the Committee shall so determine, subject to the other provisions of the Plan. ARTICLE V --------- TERMS AND CONDITIONS OF STOCK OPTIONS Each stock option granted under the Plan shall be evidenced by a stock option agreement (the "Agreement"), the form of which shall have been approved by the Committee. The Agreement shall be executed by the Company and the optionee and shall set forth the terms and conditions of the stock option, which terms and conditions shall include, but not be limited to the following: (a) OPTION PRICE. The option price shall be determined by the Committee, but shall not in any event be less than the par value of the Common Stock. (b) TERM OF STOCK OPTION. The term of the stock option shall be selected by the Committee, but in no event shall such term exceed ten years from the grant thereof. Each stock option shall be subject to earlier termination as hereinafter provided. (c) TRANSFERABILITY. The stock options granted hereunder shall not be transferable other than by will or operation of the laws of descent and distribution or pursuant to a qualified domestic relations order, as defined in the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the rules thereunder. During the lifetime of the optionee, stock options granted hereunder shall be exercisable only by the optionee, the optionee's guardian or legal representative. (d) VESTING. The Committee shall have complete discretion in determining when stock options granted hereunder are to vest; provided, however, that the sale of shares of Common Stock issued upon the exercise of a stock option by any person subject to Section 16 of the 1934 Act shall not be allowed until at least six months after the grant of the stock option. Such determination for each stock option is to be made prior to or at the time that stock option is granted and shall be set forth in each Agreement. (e) TERMINATION OF EMPLOYMENT. In the event of an optionee's termination of employment with the Company for any reason other than death, all stock options shall terminate to the extent they were not exercisable at the date of the optionee's termination, but to the extent they were then exercisable by the optionee, the optionee shall be entitled to exercise such options for a period of 30 days from the date of the optionee's termination. Upon the termination of an optionee's employment by reason of death, the optionee's stock options shall terminate to the extent they were not exercisable at the date of the optionee's death, but to the extent they were then exercisable by the optionee, the optionee's estate or the beneficiaries thereof shall be entitled to exercise such options for a period of one year from the date of the optionee's death but not thereafter. Notwithstanding any other provisions of this subparagraph (e), no stock option shall be exercised after the expiration of ten years from the date such stock option is granted. (f) OTHER CONDITIONS. At its sole discretion, the Committee may impose other conditions upon the stock options granted hereunder, so long as those conditions do not conflict with any other provisions of the Plan. Such conditions may include, by way of illustration, but not by way of limitation, percentage limitations upon the exercisability of stock options granted hereunder. ARTICLE VI ---------- INCENTIVE STOCK OPTIONS The Committee, in recommending and granting stock options hereunder, shall have the discretion to determine that certain stock options shall be incentive stock options, as defined in Section 422 of the Code, while other stock options shall be non-qualified stock options. Neither the members of the Committee, the members of the Board nor the Company shall be under any obligation or incur any liability to any person by reason of the determination by the Committee or the Board whether a stock option granted under the Plan shall be an incentive stock option or a non-qualified stock option. The provisions of this ARTICLE VI shall be applicable to all incentive stock options at any time granted or outstanding under the Plan. All incentive stock options granted or outstanding under the Plan shall be granted and held subject to and in compliance with terms and conditions previously set forth in ARTICLES II, III, IV AND V hereof and, in addition, subject to and in compliance with the following further terms and conditions: (a) The per share option price of all incentive stock options shall not be less than 100% of the Fair Market Value (as defined below) of one share of the Company's Common Stock at the time the stock option is granted (notwithstanding any provision of ARTICLE V hereof to the contrary); (b) No incentive stock option shall be granted to any person who, at the time of the grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary corporation of the Company; provided, however, that this ownership limitation will be waived if at the time the option is granted the per share option price is at least 110% of the Fair Market Value of one share of the Company's Common Stock and such stock option by its terms is not exercisable after the expiration of five years from the date such option is granted; (c) An incentive stock option shall not be transferable other than by will or the laws of descent and distribution, and shall be exercisable during the lifetime of the optionee, only by the optionee; and (d) The aggregate Fair Market Value of all shares of Common Stock (determined at the time of the grant of the stock option) with respect to which incentive stock options are exercisable for the first time by any optionee during any one calendar year shall not exceed $100,000. ARTICLE VII ----------- EXERCISE OF STOCK OPTIONS Each stock option granted hereunder may be exercised in such installments during the period prior to its expiration date as the Committee shall determine; provided that, unless otherwise determined by the Committee, if the optionee shall not in any given installment period purchase all of the shares which the optionee is entitled to purchase in such installment period, then the optionee's right to purchase any shares not purchased in such installment period shall continue until the expiration date or sooner termination of the optionee's stock option. The purchase price of the shares of Common Stock acquired upon exercise of a stock option shall be paid in full at the time of exercise in cash or by certified or cashier's check payable to the order of the Company, or, upon receipt of all required regulatory approvals, if any, by delivery of shares of Common Stock of the Company already owned by, and in the possession of, the stock option holder having a Fair Market Value equal to such stock option price, or any combination thereof. Shares of Common Stock used to satisfy the exercise price of a stock option shall be valued at their Fair Market Value determined as of the close of business on the date such stock option is exercised, or if such date is not a business day, on the business day immediately preceding the date of exercise. Deliveries of cash, shares and notices to the Company shall be directed to the Secretary of the Company. No stock option granted hereunder shall be exercisable unless the Plan and all shares issuable on the exercise thereof have been registered under the Securities Act of 1933, as amended (the "1933 Act"), and all other applicable securities laws, and there is available for delivery a prospectus meeting the requirements of Section 10 of the 1933 Act, or the Company shall have first received assurance that registration under the 1933 Act and all other applicable securities laws is not required in connection with such issuance. At the time of exercise, if the shares with respect to which the stock option is being exercised have not been registered under the 1933 Act and all other applicable securities laws, the Company may require the optionee to provide the Company whatever written assurance counsel for the Company may require that the shares are being acquired for investment and not with a view to the distribution thereof, and that the shares will not be disposed of without the written opinion of counsel acceptable to the Company that registration under the 1933 Act and all other applicable securities laws is not required. Share certificates issued to the optionee upon exercise of the stock option shall bear a legend to the foregoing effect to the extent counsel for the Company deems it advisable. ARTICLE VIII ------------ FAIR MARKET VALUE OF COMMON STOCK For purposes of the Plan, the term "Fair Market Value" on any date shall mean (i) if the Common Stock is not listed or admitted to trade on a national securities exchange and if bid and asked prices for the Common Stock are not furnished through NASDAQ or a similar organization as described below, the value established by the Committee, in its sole discretion, for purposes of the Plan; (ii) if the Common Stock is listed or admitted to trade on a national securities exchange or national market system, the closing price of the Common Stock, as published in THE WALL STREET JOURNAL, so listed or admitted to trade on such date or, if there is no trading of the Common Stock on such date, then the closing price of the Common Stock on the next preceding date on which there was trading in such shares; or (iii) if the Common Stock is not listed or admitted to trade on a national securities exchange or national market system, the mean between the bid and asked price for the Common Stock on such date, as furnished by the National Association of Securities Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting such information. In addition to the above rules, Fair Market Value shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse. ARTICLE IX ---------- WITHHOLDING TAX Upon (i) the disposition by an employee or other person of shares of Common Stock acquired pursuant to the exercise of an incentive stock option granted pursuant to the Plan within two years of the granting of the incentive stock option or within one year after exercise of the incentive stock option, or (ii) the exercise of "non-incentive" or "non-qualified" options, the Company shall have the right to require such employee or such other person to pay the Company the amount of any taxes (including but not limited to any federal, state and local income taxes, old-age, survivors, and disability insurance premiums and taxes, medicare taxes, FICA taxes and any other withholding taxes) which the Company may be required to withhold with respect to such shares. ARTICLE X --------- ADJUSTMENTS (a) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any required action by the Company's directors and stockholders, the number of shares provided for in each outstanding stock option and the price per share thereof, and the number of shares provided for in the Plan, shall be proportionately adjusted for any increase or decrease in the number of issued shares of the Company's Common Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend (but only on the Common Stock), a stock split, a reverse stock split, or any other increase or decrease in the number of such shares effected without receipt of consideration by the Company, and shall also be proportionately adjusted in the event of a spin-off, spin-out, or other distribution of assets to stockholders of the Company, to the extent necessary to prevent dilution of the interests of grantees pursuant to the Plan or of the other stockholders of the Company, as applicable. If the Company shall engage in a merger, consolidation, reorganization or recapitalization, each outstanding stock option (or if such transaction involves less than all of the shares of the Company's Common Stock, then a number of stock options proportionate to the number of such involved shares), shall become exercisable for the securities and other consideration to which a holder of the number of shares of the Company's Common Stock subject to each such stock option would have been entitled to receive in any such merger, consolidation, reorganization or recapitalization. (b) SIGNIFICANT EVENT. In the event of a potential merger or consolidation involving the Company regardless of whether the Company is the surviving entity of such merger or consolidation, a potential liquidation or dissolution of the Company, a potential sale or other disposition by the Company of all or substantially all of its assets, a potential sale or other disposition by the stockholders of the Company of all or substantially all of the outstanding Common Stock to one purchaser, or an underwritten public offering of the Common Stock of the Company (any such merger, consolidation, liquidation, dissolution, sale or offering being referred to herein as a "Significant Event"), then the Company, upon obtaining approval of the Board, may (but shall not be required to) waive any and all restrictions on the vesting of optionees' rights under stock options granted pursuant to the Plan by providing written notice thereof to the optionees. If the Company, upon obtaining approval of the Board, elects to waive any such vesting restrictions, the optionees' rights under their respective stock options shall vest in accordance with the terms of such waiver, subject to the actual occurrence of the Significant Event. In consideration for any such waiver of vesting restrictions by the Company, the Company shall have the option (the "Termination Option") to require all optionees to exercise their vested (determined after taking into account any waiver of vesting restrictions) but unexercised stock options upon the occurrence of the Significant Event, by providing written notice to all optionees at least 10 days before the occurrence of the Significant Event. Any exercise by an optionee in these circumstances may be conditioned upon the occurrence of the Significant Event. If the Company exercises the Termination Option under this paragraph (b), upon the actual occurrence of the Significant Event, each stock option that is vested (determined after taking into account any waiver of vesting restrictions) but unexercised as of such date shall terminate. If the potential Significant Event does not in fact occur for any reason, then any waiver by the Company of the vesting restrictions and any exercise by the Company of the Termination Option under this paragraph (b) shall have no effect, and the optionee's rights will be vested only to the extent that they would be vested if no restrictions on vesting had been waived by the Company herein. (c) CHANGE OF PAR VALUE. In the event of a change in the Company's Common Stock which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be Common Stock within the meaning of the Plan. (d) MISCELLANEOUS. The adjustments provided for in this Article shall be made by the Committee whose determination in that respect shall be final, binding and conclusive. Except as hereinbefore expressly provided in this Article, the holder of a stock option shall not be entitled to the privilege of stock ownership as to any shares of Common Stock or other stock not actually issued and delivered to the holder. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect and no adjustment by reason thereof shall be made with respect to the number or price of shares of the Company's Common Stock subject to any stock option. The grant of a stock option pursuant to the Plan shall not affect in any way the right or power of the Company to, among other things, make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve or liquidate or sell or transfer all or any part of its business or assets. ARTICLE XI ---------- PRIVILEGES OF STOCK OWNERSHIP No person entitled to exercise any stock option granted under the Plan shall have any of the rights or privileges of a stockholder of the Company in respect of any shares of stock issuable upon exercise of such stock option until certificates representing such shares shall have been issued and delivered. Upon exercise of a stock option, the person exercising the stock option shall be entitled to one stock certificate evidencing the shares acquired upon such exercise. ARTICLE XII ----------- CONTINUATION OF EMPLOYMENT Nothing contained in the Plan (or in any stock option granted pursuant to the Plan) shall confer upon any employee any right to continue in the employ of the Company or any subsidiary corporation or constitute any contract or agreement of employment or interfere in any way with the right of the Company or any subsidiary corporation to reduce any person's compensation from the rate in existence at the time of the granting of a stock option or to terminate such person's employment. Nothing contained herein or in any Agreement shall affect any other contractual rights of an employee. ARTICLE XIII ------------ AMENDMENT OR DISCONTINUANCE The Board or the Committee may at any time and from time to time amend, rescind, suspend or terminate the Plan, as it shall deem advisable, provided that the Plan may not be amended more than once every six months, other than to comport with changes in the Code, ERISA, or the rules thereunder. In addition to Board approval of any amendment to the Plan, if the Board or Committee further determines on advice of counsel that it is necessary or desirable to obtain stockholder approval of any amendment to the Plan in order to comply with Rule 16b-3 of the General Rules and Regulations under the 1934 Act, or any successor rule, as it shall read as of the time of amendment, or for any other reason, then the effectiveness of any such amendment may be conditioned upon its approval by the affirmative votes of the holders of a majority of the outstanding voting stock of the Company (voting as a single class) present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the state or other jurisdiction in which the Company is incorporated. No change may be made in, and no amendment, rescission, suspension or termination of the Plan shall have an effect on, stock options previously granted under the Plan which may impair or alter the rights or obligations of the holders thereof, except that any change may be made in stock options previously granted with the consent of the optionees. ARTICLE XIV ----------- EFFECTIVE DATE OF PLAN; STOCKHOLDER APPROVAL The Plan shall be effective as of March 6, 1996, the date on which it received the approval of a majority of the disinterested members of the Board. However, the Plan and all stock options granted under the Plan shall be void if the Plan is not approved by the stockholders within twelve (12) months from the date the Plan is approved by the Board. The Plan shall be deemed approved by the holders of the outstanding voting stock of the Company by the affirmative votes of the holders of a majority of the outstanding voting stock of the Company present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the state or other jurisdiction in which the Company is incorporated. No stock option granted under the Plan shall be exercisable in whole or in part unless and until such stockholder approval is obtained. EX-21.1 3 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY NAME STATE OF ---- ORGANIZATION ------------ Garden Ridge Management, Inc. Delaware Garden Ridge Investment, Inc. Delaware Garden Ridge Finance Corporation Delaware Garden Ridge, L.P. Delaware EX-23.1 4 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Form S-8 Registration Statement File No. 33-95064, and Form S-8 Registration Statement File No. 333-13785. ARTHUR ANDERSEN LLP Houston, Texas April 27, 1998 EX-27.1 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITEM 8., FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-25-1998 JAN-25-1998 44,586 3,150 1,785 0 57,773 111,091 57,644 (17,977) 160,212 33,564 0 0 0 183 125,770 160,212 304,732 304,732 195,290 93,049 0 0 (1,419) 17,812 6,379 11,433 0 0 0 11,433 .64 .62
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