papagenos.com: strategies for a growing concern

Papa Geno‟s Herb Farm Strategies – p. 1

PAPAGENOS.COM: STRATEGIES FOR A GROWING CONCERN

*Picture of Gene Gage’s business layout in Roca, Nebraska

Papa Geno‟s Herb Farm Strategies – p. 2 PAPAGENOS.COM: STRATEGIES FOR A GROWING CONCERN Gene Gage, entrepreneur, President and CEO of Papa Geno‟s Herb Farm in Roca, Nebraska, leaned forward in one of the desk chairs in Papa Geno‟s office area, pulled his gray hair more tightly into his ponytail, and picked up his pipe. Gene looked again at the two documents on his desk. The first was a just-competed strategic plan for his business. The development of the strategic plan began when Gene and co-owner, Sharon Rose, COO, recognized that the rapid growth of Heartland Associates, Inc. (a Nebraska „C‟ Corporation, doing business as Papa Geno‟s Herb Farm) had reached a critical point for their expanding e-commerce organization. They knew that a plan was needed to chart the future for the company and to be used for raising capital. Reflecting on the final document, Gene thought, “Our strategic plan is different from most others in that it is not designed to sell more product, achieve a greater market share, or improve the P/L statement. I have, in essence, already sold the product; now I must figure out the best way to produce and deliver it. I am in the enviable position of not needing to actually sell anything for several years.” As he reviewed his strategic plan once more, he was convinced that Papa Geno‟s was at a critical moment of opportunity. The second document was a purchase contract. He had just returned from a meeting with a realtor and his attorney. He had made an offer to purchase another piece of farm property in Martell, Nebraska, just a few minutes from Roca. It would a significant investment. Gene felt strongly that now was the time to commit to the future. Garden.com provided the path. PAPA GENO’S HERB FARM The sign on South 14th Street in Roca, Nebraska, reads „Papa Geno‟s Herb Farm‟ and identifies the location of a seemingly small business, specializing in herb plant production. Beyond the sign, a tree-lined, stone lane leads to the Farm where five greenhouses, a barn, an office building, and family residence are located and where, for the first time visitor, "seeing is believing." Papa Geno‟s Herb Farm is a unique e-commerce venture where the marvels of agricultural niche production combine with sophisticated computer technology in America‟s heartland. The hightech, Internet-driven environment at Papa Geno‟s revolves around a product mix of live herb plants, scented geraniums, vegetable seedlings and crafted herb-derived goods. These items are marketed and distributed to home gardeners throughout the United States. Orders increased by more than 500% between 1998 and 2000, and are projected to increase by at least 300% by 2003. Papa Geno‟s Herb Farm grows more than 300 varieties of herb plants and 125 varieties of scented geraniums. Recently gourmet and heirloom vegetable seedlings were added to the product lineup. Papa Geno‟s was the first company to successfully ship large quantities of tender annual herb plants and vegetable seedlings to home gardeners. In its six-year operating history, Papa Geno‟s has established a reputation as an expert grower of live herbs and scented geraniums. In addition to this specialized herb cultivar and scented geranium products and production expertise, Gene has developed expertise in live plant distribution that is recognized throughout the gardening business. In fact, Gene was featured twice in INC magazine*. It was this outstanding reputation that attracted Garden.com to Papa Geno's. *

INC., August, 1999: 71-78 and June, 2000: 127-131.

Papa Geno‟s Herb Farm Strategies – p. 3 The Beginning While Papa Geno‟s growth in the e-commerce world is very impressive, it was not an overnight success story. Papa Geno‟s Herb Farm is organized around the leadership of Gene Gage and Sharon Rose, who have been business partners since 1986. Gene‟s interest in farming and valueadded agricultural products can be traced back to his western Nebraska roots. But, the herb experience began in New York City while Gene was pursuing his Ph.D. in European History, where he began growing herbs as a hobby for flavoring low-sodium foods. Gene‟s business career began as a retail store manager at the age of 18. For nearly 40 years Gene has served in executive management positions in education, non-profit organizations, private business and consulting throughout the U.S. In addition, he has been involved in the start-up of three small businesses, one of which is Papa Geno‟s Herb Farm. Before identifying the niche on-line market for fresh herbs and scented geraniums, Gene attempted to sell herbs on a wholesale and retail basis and, as the saying goes, the „third time was a charm.‟ Gene started the Papa Geno‟s operations in 1993, with Sharon Rose providing behind the scene assistance. Sharon came on board full time in 1996, and since that time, she and Gene have led the development and rapid expansion of the Papa Geno‟s Herb Farm business. Sharon Rose, who also comes from a Nebraska agricultural background, has been managing the day-to-day business operations of the company since 1997. Sharon has had extensive experience in the real estate and insurance industries. She has managed small offices and retail stores as well, and her bookkeeping background enables her to keep close tabs on Papa Geno‟s cash flow. During Papa Geno‟s start-up, a marketing strategy using catalogs and gardening magazines to rapidly expand the customer base was implemented. In 1996, the company successfully ventured further into direct marketing using e-mail and a retail website. Even though Gene realized how technology and the Internet would revolutionize business, Papa Geno‟s customers‟ needs were kept foremost in the operation. According to Gene, “E-tailing is still retailing, and if we can‟t provide our customers with a pleasant shopping experience we‟re going to lose them to the website down the virtual street.” Papa Geno‟s became one of the first marketers in the e-commerce gardening business when the Papa Geno‟s website went live in 1996. This website enabled Papa Geno‟s quickly to become the leader in marketing live herb plants and scented geraniums via the Internet. Internet visibility was greatly expanded through the strategic partnership established with Garden.com, the on-line destination integrating gardening-related commerce, content and community. Current Business Papa Geno‟s has significant experience in the systems necessary to meet the unique requirements of shipping large volumes of live plants. These systems combine efficiencies obtained from both state-of-the-art ordering and shipping technologies (Gene has written proprietary software to print shipping labels directly from web orders), as well as the production, packaging (Gene also developed the highly specialized and award-winning container used to ship Papa Geno‟s live plants) and distribution processes required to successfully manage a growing shipping operation. During the 2000 peak-shipping season, Papa Geno‟s workforce of eight full-time and seven parttime staff shipped 180,000 live plants. Gene remarks, “We are continually refining procedures

Papa Geno‟s Herb Farm Strategies – p. 4 to increase our operating efficiency. As one example, we have at least doubled our order-filling efficiency in the past year, via a combination of technology and reorganization of products and procedures. We are now able to do at least four times as many orders per person per hour as two years ago.” During the non-peak season, the workforce includes four or five full-time staff and four or five part-time staff. Although not often highlighted, the management of Papa Geno‟s regards its employees as its principle asset. Gene believes that great service and the quality of the plants shipped are of paramount importance in a consumer-driven business like Papa Geno‟s. It is people, therefore, not technology, which ensures that service levels and quality are maintained. Gene adds, “The “Midwestern work ethic” is not a myth, and when combined with the moderate salary levels in Nebraska, the family-friendly employment policies of Papa Geno‟s and the unusual organizational structure, we are probably as productive as any grower in America. Papa Geno‟s pay scale is 15-20% higher than that for similar positions at similar businesses in this area, and we offer benefits to our full-time employees that no other local nursery or garden center does. We do not hire temporary labor and, in the long run, we believe that investing in people is the best investment we can make.” The success and stellar reputation of Papa Geno‟s Herb Farm prompted Garden.com, leader in the garden e-commerce market, to court Papa Geno‟s to become a strategic partner and its sole supplier for herb plants, scented geraniums and vegetable seedlings. Gene felt that this alliance would position the company for rapid growth and all the challenges growth presents. Garden.com and Papa Geno‟s shared a fundamental conviction that the Internet would ultimately enable and benefit the consumer more than it would benefit the business community. GARDEN.COM Garden.com’s History As reported by PR Newswire Association (2), Garden.com was the leading online destination for home gardeners. Through three Web sites, Garden.com, virtualgarden.com and hortmag.com, Garden.com provided consumers a one-stop-shop resource through which they could access a wide variety of gardening information and services, purchase gardening and garden-related products, and interact with an online gardening community. The company's core online property, www.garden.com, offered gardeners an unsurpassed collection of over 20,000 highquality gardening supplies and garden-inspired gifts, seasonally inspired magazine content, professional advice, and garden design software. Headquartered in Austin, Texas, Garden.com had offices in California and Iowa (See Exhibit 1 for additional information on Garden.com). In their review of the company, Hoovers, Inc. (3) provided this overview of the history of Garden.com: “Cliff Sharples, his wife Lisa, and their friend Jamie O'Neill quit their jobs at Austin, Texas-based Trilogy Software in 1995. They brainstormed for the perfect Internet business, living off O'Neill's credit card until forming Garden Escape in late 1995. The trio, none of whom were avid gardeners, decided on selling garden supplies because that market was unconsolidated. They bought the garden.com Web address for $ 2,500 from an Arizona software company and solicited the help of venture capitalists. Andy Martin, also of Trilogy Software, was hired in January 1996. He created software to help Garden Escape collect proprietary

Papa Geno‟s Herb Farm Strategies – p. 5 information about its customers for personalized service. The site went online in March 1996. In March 1998, the company formed a joint venture with Horticulture Magazine, forming hortmag.com, which links expert gardeners with the company's products. Also that year Garden Escape bought Time Inc.'s Virtual Garden Web site. The company changed its name to Garden.com in 1999 and started publishing Garden Escape Magazine, in which products mentioned in stories are offered for sale.” (Exhibit 2 provides financial statements for Garden.com.) A “Category Killer” Garden.com was the “first Internet company to address America‟s most popular hobby, gardening” (12). By 1999, the company had raised $49.2 million and announced its Initial Public Offering (IPO) of common stock. The founders of Garden.com based their decision to build a gardening Internet company on a range of research findings. A major reason was that gardening was described as a highly fragmented market on the supply chain and retail level and no participant in the $43 billion gardening industry had more than 1% of the market (4). Other reasons included the finding that there were few national gardening brands and gardening was recognized as a regional and not a local phenomenon. Gardeners were also reported to be affluent and willing to pay varying prices for the same item – based on the gardener‟s perception of quality and amount of expert advice being provided (12). Both gardeners and companies were comfortable buying and selling plants through the mail for quite some time (4). Garden.com‟s strategy involves exclusive arrangements with more than 60 of the best suppliers for quality gardening and gardening-related products. The design of Garden.com is directed toward meeting the customer‟s varied one-stop shopping needs. On-line customer sales are processed through a proprietary extranet connection between the suppliers and Garden.com, with streamlined distribution integrated through FedEx (4, 12). Each of the suppliers drop-ships their products to customers ordering through Garden.com. Garden.com passes as the agent for a constellation of hard-working small businesses with roots in their respective communities (12). But unlike those businesses, Garden.com is a “category killer” in the making (12). This description is supported in "A Survey of e-commerce Shopping Around the Web," where it was reported that some features of the Web point in favor of the specialist, or “category killer” (1). Presented were numerous specialist websites that have established powerful niches, with Garden.com identified as having grabbed much of the gardening space (1). THE INTERNET GARDENING MARKET “Enjoyment of the outdoors” as well as “aesthetic pleasure” are the principle reasons why people choose gardening as a hobby (8). But, in today‟s time-pressed society, customers want products and services that make gardening faster, easier and more convenient. The need to make gardening as effortless as possible is illustrated by the 61% of gardeners with three or fewer hours per week to spend caring for their lawns and gardens (8). The “gardening industry” covers a broad array of products, which include seeds, live plants, trees, shrubs, gardening supplies, lawn care and insect-control products and outdoor living

Papa Geno‟s Herb Farm Strategies – p. 6 accessories. According to the National Gardening Association‟s 1998-1999 Survey, conducted by Gallup Poll (5), 67 million households in the U.S. were involved in one or more types of indoor and outdoor lawn and garden activities in 1998 and that 7% of all U.S. households (7 million) participated in herb gardening in 1998. The average total amount spent on lawn and garden activities by participating U.S. households was $452.00, up from $385.00 in 1997. Total 1998 lawn and garden sales were $30.2 billion – 13% greater than 1997 sales. In addition, the 1999 National Gardening Survey reported the following (5). Between 1993 and 1998, households purchases of herb transplants increased by 103% (3.4 million to 6.9 million). Herb gardening purchases in 1994 totaled $112 million and $146 million in 1998, with a 1998 average expenditure of $23.00. Eight million, or 12%, of all U.S. gardening households purchased gardening products by mail in 1998. Twenty-four percent of all U.S. households, or 25 million households, were involved with vegetable gardening during 1998. Vegetable gardening purchases moved from $1.48 billion in 1994 to $2.0 billion in 1998 for a 35% increase. Average annual vegetable gardening purchases in 1998 were $84.00. Gardening product purchases through the expanding Internet were not included in the survey results. Internet Gardener Demographics Consumers in today‟s fast-paced society are constantly seeking both convenience and time savings in all aspects of their lives, and the Internet is playing an increasingly important role in meeting those challenges. The 93 million Americans reported to have been online in 1999 evidence this, which translates to 34% of all U.S. households (9). By 2002, 65% of all Americans will be online (9). As the number of Americans online rapidly grows, so does the number of Internet shoppers. A 1999 study (7) showed that shopping produced the most dramatic increase among Internet activities. Forty-two percent of Internet consumers reported that they regularly or occasionally made an online purchase, compared to 31% in a 1998 study (7). This increase in purchases can be tied to approximately 50% more women shopping online – 37% in 1999 compared to 24% in 1998 (7). Forrester Research reported an estimated 17 million U.S. households shopping online by the end of 1999, with retail online sales reaching $20.2 billion (4). This e-commerce activity is expected to grow to an estimated 49 million U.S. households spending $184 billion online by 2004 (4). In 1999, 58% of new Internet users in the U.S. were women, compared to 44% in 1998, and 53% of these women Internet users made an online purchase in 1999, up from 33% in 1998 (10). If the number of women Internet users continues to grow, by 2002, women will lead men in Internet access 60% to 40% (10). The fact that women control approximately 80% of family purchase decisions (7) clearly indicates that women are a driving force in Internet retailing growth. The revenue strength of Papa Geno‟s comes from a customer base of 90% women. The typical Papa Geno‟s customers are college-educated, 42 year-old females, married with 1.5 children, who hold professional or semi-professional jobs and have a family income of $95,000. These women have limited time for any hobby, but rate gardening as their number one interest outside family and job.

Papa Geno‟s Herb Farm Strategies – p. 7 STRATEGIC PARTNERSHIP BETWEEN PAPA GENO’S AND GARDEN.COM Strategic alliances are becoming critical to corporate survival. Nowhere does this appear to be more vivid than on the World Wide Web. In fact, some analysts report that this is the beginning of the end of vertical integration and rise of a collaborative model called “virtual integration”(6). Reflecting on his decision to align himself with Garden.com, Gene observed: “Early on in our experience with Internet marketing, Papa Geno‟s management realized that we alone did not have the resources to have a significant impact in this burgeoning market. After considering many options, we decided in the Spring of 1997 to enter an exclusive strategic relationship with Garden.com. That decision has proved to be a wise one. Not only has Garden.com produced hundreds of thousands of dollars in orders for Papa Geno‟s, it has also provided us with substantial working capital and long term purchasing agreements totaling millions of dollars. It has also already invested at least a million dollars to provide us with the technology and systems we needed to compete effectively in e-commerce, to create content for our products, and to market and advertise Papa Geno‟s products.” Similar to Papa Geno‟s, 70% of Garden.com‟s customers are women. When comparing demographics between Garden.com and Papa Geno's, Garden.com‟s customers report both slightly greater family income and slightly higher educational levels. The interests of Garden.com‟s customers were the same as Papa Geno‟s. Gene notes, “We have identified the love women have for gardening as a hobby and yet recognize and appreciate their desire to save time. Because of this, the e-commerce opportunities created through Papa Geno‟s and Garden.com meet our customers‟ current and projected gardening needs and participation in online shopping.” In today‟s e-commerce environment, Papa Geno‟s and Garden.com are based on the winning combination of gardening, the Internet and a strong customer base of women. This positioning results in a market with a huge potential for upward growth. Garden.com indicated to Gene that it would spend $20 million in each of the next two years on marketing and advertising. While it is impossible to identify exactly how much of that will be devoted to Papa Geno‟s products, Gene acknowledges that Papa Geno‟s will get full benefit from the general brand building expenditures, as well as specific resources allocated to target its products on- and off-line. In addition, Gene recognizes the benefits of the alliance, stating, “Discounting the general brand-building expenditures, it is no exaggeration to state that Garden.com will spend millions of dollars in the next three years directly in support of Papa Geno‟s and its products.” Papa Geno‟s has been, and will continue to be, the beneficiary of millions of dollars of technology investment by Garden.com. Gene explains, “In the near future, for example, we will install our first satellite communications system and anticipate being fully connected via satellite, not land lines. The use of the Internet and other advanced communication technologies by Papa Geno‟s have enabled us to offer complete and efficient online ordering and fulfillment systems. Both Papa Geno‟s and Garden.com were among the very first to develop direct e-mail marketing strategies.” Gene, however, regards seasonality and order size as the most critical challenges to overcome in the alliance. Gene notes, “I recognized early on in our experience as direct-to-the-customer shippers that average order size is a huge factor in limiting or increasing profitability. In our own direct marketing efforts we have successfully increased our minimum order and average

Papa Geno‟s Herb Farm Strategies – p. 8 order size in the past three years. However, because of constraints internal to Garden.com, we have been unable to enforce the same minimum order requirements on orders originating with Garden.com -- with predictable effects on productivity and profitability. We have in place a compromise for FY2000, but a long-term solution has eluded us thus far. We continue to work on it, but this issue has threatened, and will continue to threaten, the Papa Geno‟s/Garden.com relationship.” Distribution of Papa Geno‟s products is uniquely positioned to use both FedEx and UPS both of whom provide the shipping boxes to Papa Geno‟s at no cost. This places Papa Geno‟s in an interesting position as FedEx and UPS compete for expanding home deliveries resulting from expanding Internet sales. Gene notes, “At present, we use FedEx exclusively to ship orders originating from Garden.com, and a mixture of FedEx and expedited UPS to ship the rest of our products. Obviously, in the event that one of these carriers experiences a work stoppage, we could be adversely affected. Garden.com shipments are much more at risk in this situation than are our own shipments, since Garden.com now ships exclusively with FedEx, and does not presently have the capability of switching to UPS. Garden.com is of course aware of this threat, and is presently developing the capability of using both UPS and FedEx.” As important as the direct and indirect dollar investment is to Papa Geno‟s, of equal importance are the less quantifiable aspects of this relationship. Gene believes that Garden.com and its strategic partners are creating a new paradigm in business relationships, and the usual dominance games and power plays simply do not occur. When Papa Geno‟s experiences technical difficulties, for example, Garden.com will assign to it whatever expertise needed for as long as it is needed, including putting someone on a plane to deliver personal support. When business advice is called for, Garden.com supplies it freely, and when they need data or horticultural information from Papa Geno‟s, or simply another point of view on an issue, Gene provides it without hesitation. There is regular contact on several levels and across a wide range of topics. According to Gene, the Papa Geno‟s/Garden.com “„Strategic partnership‟ is not just another buzzword; it accurately describes a business relationship where we each depend upon the other to achieve a shared set of goals and objectives.” PAPA GENO’S CURRENT BUSINESS Other Partners In addition to the partnership with Garden.com, Papa Geno‟s sells through Papa Geno‟s own website (15% of total sales), publishes a biannual catalog where customers can order through Papa Geno‟s website or use catalog procedures (14% of total sales), arranges drop shipments to larger resellers (8% of total sales), and sells directly from the farm site (2% of total sales). Papa Geno‟s has supplied several Meredith Corporation magazines since 1996. The stories of Papa Geno‟s live plants and garden products come alive on the pages of many magazines, among them Better Homes & Gardens, Country Home, Country Gardens, Midwest Living, Garden Escape and Traditional Home. Orders for Papa Geno‟s products can be placed through each of these magazines and deliveries are drop shipped by Papa Geno‟s. This effective marketing channel provides exposure to approximately 15 million subscribers, in addition to those who purchase the magazines at newsstands and other places (10).

Papa Geno‟s Herb Farm Strategies – p. 9 Papa Geno‟s has also established relationships with some of the leading seed and plant catalog operations in America. Recent and current catalog customers include Shepherd‟s Garden Seeds, Gardener‟s Supply Company, Gardener‟s Eden, Smith & Hawken and Jung‟s Seeds. Gene observes that “As a byproduct of exposure in these national magazines and catalogs, Papa Geno‟s has a positive and growing reputation as the supplier of choice in the niche market for herb plants, scented geraniums and vegetable seedlings. This benefits both Garden.com and Papa Geno‟s, as customers trust the products selected and return for repeat purchases.” Competitors Papa Geno‟s primary competitors for the live plant business have traditionally been the local Mom-and-Pop retail nursery businesses, and Gene believes that 99% of those have neither the desire nor the capability of competing at a national level. Gene notes, “The second largest grouping of competitors is the direct mail marketing sector, no single member of which accounts for more that 1% of the market. To date, no direct mail marketer of core gardening products has successfully made the transition to significant Internet marketer.” It is possible that an Amazon.com-type business could enter the gardening market at some point, but no credible Internet competition to the Papa Geno‟s/Garden.com partnership has emerged as yet. As explained by Gene, “Established companies (like MarthaStewart.com), which have lately entered the Internet gardening sector, have apparently been unable to develop the necessary partnerships with live plant suppliers, and are not offering comprehensive selections of herbs, scented geraniums or vegetable seedlings.” Suppliers As in any business, Papa Geno‟s is dependent upon suppliers to provide materials necessary to grow and ship its products, and failure of these suppliers could pose significant problems for its operations. Suppliers fall into three groups: Live goods – Seeds and plant plugs are sourced from approximately ten different specialty growers in the United States and Canada. Papa Geno‟s is totally dependent on one supplier for about 5% of the plugs; the other 95% can be obtained from more than one source. While there may be difficulty from time to time sourcing a particular species or cultivar, Gene does not anticipate any long range or broad scale shortages from live goods suppliers. Greenhouse supplies – Papa Geno‟s presently buys these products from two regional supply houses, the product lines of which overlap to a large degree. It attempts to divide its business between the two houses to assure availability. Papa Geno‟s has never been shut down because of a supply shortage, nor does it anticipate that situation. These suppliers are somewhat aware of Papa Geno‟s growth curve, and are attempting to keep key items in stock. The necessity of occasionally purchasing these supplies in large quantities impacts Papa Geno‟s cash flow. Shipping supplies – Papa Geno‟s is fortunate to be in an area with several suppliers of virtually everything it needs to operate a substantial shipping operation. It regularly solicits bids from competing businesses for large ticket items like cardboard shipping boxes, and has recently changed the major vendor of those products. Since it ships everything via UPS or FedEx and has tailored its shipping to use cartons provided by the two companies, it is highly unlikely that the company will ever be shut down for lack of shipping boxes. The necessity of occasionally purchasing these supplies in large quantities obviously impacts cash flow.

Papa Geno‟s Herb Farm Strategies – p. 10 Gene has definite feelings about future supplier relationships, as noted in his comments, “Suppliers‟ ability and willingness to deal with Papa Geno‟s electronically, as opposed to traditional pen and paper methods, will determine which suppliers remain suppliers and which do not. If they do not come to understand that they are part of a totally new supply chain, or if they choose not to participate in that supply chain, new suppliers will be identified.” PAPA GENO'S FINANCIALS Financially, Papa Geno's believes that it has managed its money reasonably well during the initial entry and expansion of the business. It has experienced no critical issues directly related to financial matters. The following tables are summaries of financial statements prepared by Jeffrey, Friehauf & Love, CPAs, LLP, accountants for Papa Geno's. Table 1 - Income Statement FY1996 FY1997 FY1998 FY1999 4 Year Total 4 Year Ave Total Income (net) $105,103 $160,701 Cost of goods sold $14,692 $47,084 (including shipping) Gross Profit $90,411 $113,617 Operating Expenses $50,695 $115,927

$149,031 $235,061 $59,137 $56,494

$649,896 $177,407

$162,474 $44,352

$89,894 $178,567 $92,280 $90,005

$472,489 $348,907

$118,122 $87,227

According to Gene, “Prior to FY1996, we had experienced small operating losses in 1993 and 1994 (our first two years of operation) and net operating income of about $8,000 in 1995. The small losses in FY97 and FY98 can be tied to our decision to become an Internet marketer. In late 1997, we spent about $20,000 (with no offsetting revenue) to create an Internet presence, and in 1998 the drop in revenues is totally attributable to our decision not to accept business that could conflict with our desire to establish a strong relationship with Garden.com. In essence – we turned down at least $100,000 in magazine and catalog business to focus on building our capability to meet Garden.com‟s needs.” Table 2 - Balance Sheet FY1996 Current Assets Prop & Equip Total Assets Current Liabilities Common Stock Retained Earnings

$45,861 $10,436 $56,297 $18,592 $1,000 $36,704

FY1997 $85,694 $8,624 $94,318 $57,693 $1,000 $35,625

FY1998 $58,617 $6,562 $65,179 $34,171 $1,000 $30,008

FY1999 $178,771 $66,241 $245,012 $134,402 $1,000 $109,610

The following table presents forecasts for fiscal years 2001 – 2003 for Papa Geno‟s as a whole. Papa Geno‟s management prepared these projections after extensive consultation with senior management at Garden.com. Garden.com has developed a sophisticated proprietary forecasting model, which they have allowed Papa Geno‟s management to use in the preparation of these forecasts. That said, Gene recognizes that forecasting in the world

Papa Geno‟s Herb Farm Strategies – p. 11 of e-commerce is still an iffy business, and there are several things that could happen to alter these forecasts over time. Table 3 – Income Statement Projections FY2001 FY2002 FY2003 3-Year Total Total Income (net) $1,120,000 $1,575,000 $1,880,000 $4,575,000 Cost of goods sold $302,400 $409,500 $470,000 $1,181,900 Gross Profit $817,600 $1,165,500 $1,410,000 $3,393,100 Operating Expenses $504,000 $693,000 $808,400 $2,005,400 Net Operating income $313,600 $472,500 $601,600 $1,387,700 Gene notes, “A highly unusual aspect of the strategic partnership of Garden.com and Papa Geno‟s is that Garden.com is willing and able to “put its money where its mouth is.” Specifically, Garden.com backs up its projections with a combination of long-term guarantees, purchase orders and prepayment agreements, for Papa Geno‟s. In short, they are sharing a substantial portion of Papa Geno‟s risk, and providing a substantial portion of our working capital on a year-to-year basis.” Table 4 - Garden.com Purchases Projections FY 2001 FY 2002 Low $909,563 $1,136,953 Midline $1,047,375 $1,466,325 High $1,192,538 $1,967,687

FY 2003 $1,250,648 $1,759,590 $2,557,993

The senior management at Garden.com believes that the projections that are labeled “High” are the most likely. The “Low” projections depict minimal growth on the part of Garden.com, and the “Midline” projections depict what Garden.com‟s Director of Product Management and Gene Gage jointly believe to be a conservative but very realistic forecast. Table 5 – Garden.com’s Projected Financial Commitments to Papa Geno’s FY 2001 FY 2002 FY 2003 Projected Purchases $1,047,375 $1,466,325 $1,759,590 Purchase orders (80% of proj) $837,900 $1,173,060 $1,407,672 Prepayment (50% of P/Os) $418,950 $586,530 $703,836 Guaranteed purchases $500,000 $500,000 $500,000

3 Years $4,273,290 $3,418,632 $1,709,316 $1,500,000

Table 5 presents the financial commitments that Garden.com has made to help Papa Geno‟s scale to the necessary level by FY03. Garden.com‟s commitments and “Guarantees” across the bottom are “hard” commitments. If projected purchases for FY01-FY03 increase or decrease the Purchase Order and Prepayment commitments will increase or decrease accordingly. The guaranteed $1,500,000 is intended as a safety net and credit enhancement. Table 6 presents Gene‟s estimates of Papa Geno‟s needs for the next three years.

Papa Geno‟s Herb Farm Strategies – p. 12 Table 6 - Infrastructure and Personnel Needs FY2002 FY2003 FY2004 Orders/ Shipping Data No of plants/Spring Season Number of orders/Spring Orders Per Week/Peak No. Shipping Stations/Peak No. Sorting Stations/Peak Order Workstations Tot # Work Stations People Executive Leadership Managers Staff - Peak periods FTE/ Peak period

250,000 350,000 420,000 78,000 106,000 124,000 5,300 7,400 8,900 5.0 6.0 8.0 9.0 12.0 16.0 2.0 2.0 3.0 16.0 20.0 27.0 3 6 22 31

3 8 26 37

3 9 30 42

CONCLUSION From his office, Gene looks down the hill towards the barn where Sharon and the rest of his team are busy filling orders. Gene reflects that Papa Geno‟s offers a comfortable combination, which moves between the high tech world of computers and the Internet and the safe and peaceful environment of plants and the earth. This juxtaposition of the age-old profession of farming and the new-age profession of computer technology results in a magical culture for all at Papa Geno's. With this in mind, he begins to consider the concerns of the academics with Jo. Gene is well aware of the fact that Garden.com is the primary customer for Papa Geno‟s Herb Farm. In FY99, Garden.com had approximately 52% of Papa Geno‟s market and is projected to reach between 85% and 90% by FY2004. He also knows, however, that Papa Geno‟s serves as the exclusive supplier and drop-shipper for herb plants, scented geraniums, vegetable seedlings and crafted herb products for Garden.com‟s customers. He recognizes that the heavy concentration of Garden.com in Papa Geno‟s market share places Papa Geno‟s operations at risk if changes should occur in Garden.com‟s organizational structure or ownership. These possible changes could include reorganization of the management team at Garden.com, Garden.com Board of Director directives related to the operating strategy of the organization and possible merger or sale of Garden.com. Speaking to no one in particular, Gene says confidently, “I‟m in daily contact with Garden.com personnel at the operational level, and in weekly contact at the management level. I do not believe we will be surprised by any significant negative developments at Garden.com. In addition, Garden.com and Papa Geno‟s Herb Farm have created long-term agreements that will buffer the effects of possible negative developments at Garden.com. Short of the total and unanticipated failure of Garden.com, Papa Geno‟s will not suffer devastating losses from possible changes at Garden.com.” As he reviewed his projections for Papa Geno‟s for the next three years, he wondered, “Will one additional farm be enough?”

Papa Geno‟s Herb Farm Strategies – p. 13 References 1.

“A Survey of e-commerce – Shopping Around the Web.” The Economist, February 26, 2000.

2.

“Garden .com Announces Third Quarter Financial Results; Company Triples Revenue; Gross Margin Tops 30%.” April 20, 2000: PR Newswire Association, Inc.

3.

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Papa Geno‟s Herb Farm Strategies – p. 14 Exhibit 1 – Background Information on Garden.com Garden.com Announces Third Quarter Financial Results; Company Triples Revenue; Gross Margin Tops 30%* Garden.com (Nasdaq: GDEN) (www.garden.com), a leading online retailer of gardening products, information and services today announced financial results for its third quarter of fiscal 2000, ended March 31, 2000. Revenue for the quarter reached $3.2 million, an increase of 236% over revenue of $939,000 for the same quarter in fiscal year 1999. Garden.com achieved a significant increase in revenues due to its targeted customer acquisition programs; expanded product offerings; increase in advertising revenues; and improved overall customer experience. Gross margin increased to 30.3% during the third quarter, compared to a gross margin of 17.9% for the same quarter of the previous year. The company attributes the significant increase in blended gross margin to product cost improvements associated with increased order volume; increased efficiencies in order fulfillment enabled by TRELLIS, Garden.com's proprietary virtual supply chain system; and an increase in advertising sales as a percent of total revenue. The company reported a third quarter net loss of $11.4 million, or a $0.65 loss per share, compared to a net loss of $5.4 million, or a $5.00 net loss per share, for the same period in the prior year. Key Metrics Garden.com's cumulative membership increased to 1,070,000, an increase of approximately 130% over 471,000 for the same quarter in fiscal year 1999. Cumulative customer accounts reached 183,000 as of March 31, 2000, an increase of 205% over the number of customer accounts in the same quarter of the previous year. Repeat customer orders represented 42% of orders during the third quarter, up from 38.4% in the same quarter of the previous year. Garden.com's cumulative page views increased 77% to 49.3 million over cumulative page views for Q3 fiscal year 1999.

*

Source: PR Newswire Association, Inc., Austin, Texas, Copyright, April 20, 2000 (2)

Papa Geno‟s Herb Farm Strategies – p. 15 Industry Recognition 2000 Webby Award Nomination -- Garden.com is one of only five sites nominated for the Living" category, in what worldwide media refers to as "the Oscars of the Web." Presented by the International Academy of Digital Arts & Sciences, awards are given to Web sites that exemplify overall excellence in all areas. Retail Network Innovation Award -- Garden.com was honored in the Web-based commerce category for TRELLIS, its groundbreaking virtual supply chain system that enables Garden.com to seamlessly integrate its supplier network and create a "virtual warehouse" of more than 20,000 products. Established by 3Com, the Retail Network Innovation Awards recognize the innovative use of networked technology to create competitive advantage and foster consumer benefit. Resource Marketing E-Commerce Watch(TM) -- Garden.com received a top rating for the second consecutive quarter by this comprehensive e-commerce business benchmark research of 50 leading e-retail sites. Notable Magazine Launch of the Year -- Garden Escape, Garden.com's new concept magazine, was named "Notable Magazine Launch of the Year" by the Library Journal and will be highlighted in its May issue. Commerce Cubed Award -- eRetailNews announced Garden.com as one of the first recipients of the Commerce Cubed, or C3 awards, recognizing Internet retailing sites with a strong commitment to customer retention.

Papa Geno‟s Herb Farm Strategies – p. 16 Exhibit 2 – Garden.com Financial Statements GARDEN.COM FINANCIAL STATEMENTS (3) Annual Report- Consol. Inc. Acct., Yrs. End. Jun. 30; Thou. $ Revenues.....................………………………… Cost of revenues..........………………………... Gross profit..................………………………... Marketing and sales expense………………….. Technology, content and product development. General and administrative expense......……... Depreciation and amortization……………….. Amortization of deferred compensation……… Restructuring and other activities.............…… Interest income..............……………………... Interest expense..................………………….. Net income..............………………………..... Share earns. basic.....……………………….... Average shares (Thou.).....…………………... Operating Income As Calculated.....………....

6/30/2000 15,502 11,621 3,881 26,654 6,918 7,052 2,107 1,136 888 2,158 7 (38,723) ($ 2.74) 14,149 (36,743)

6/30/1999 5,394 4,540 854 13,305 3,167 2,941 610 674 -804 20 (19,059) ($ 20.48) 1,063 (18,559)

Consol. Bal. Sheet Jun. 30: Thou. $ 6/30/2000

6/30/1999

ASSETS Cash and cash equivalents..............……...... Investments...............................…………… Prepaid advertising...........................……… Other prepaid expenses and current assets… Inventory....................................…………... Total current assets........................…………. Property and equipment.......................…….. TOTAL ASSETS.................................……..

9,047 18,612 1,869 2,143 898 32,569 11,843 42,495

15,340 3,710 988 1,086 522 21,646 3,487 25,222

LIABILITIES Accounts payable...........................………... Accrued expenses and other liabilities......... Unearned revenue..............................……… Current portion of long-term debt................. Total current liabilities.....................……….. Long-term debt...................................……… Total long term debt............................……... Redeemable convertible preferred stock..... Warrants ..................................…………

4,282 3,057 187 20 7,546 -----

2,052 956 188 127 3,323 20 20 48,215 24

6/30/1998 1,339 1,108 231 2,411 1,188 1,218 219 73 -227 33 (4,684) ($4.68) 1,001 (4,586)

Papa Geno‟s Herb Farm Strategies – p. 17 6/30/2000

6/30/1999

STOCKHOLDERS' EQUITY Common Stock--$ 0.01 par value................…….. Additional paid-in capital..............…………….. Deferred stock compensation.............…………. Retained deficit.....................………………….. Total stockholders' equity..................…………...

177 104,499 (1,169) (68,558) 34,949

12 5,768 (2,305) (29,835) (26,360)

TOTAL LIABILITIES...........................……….. Net Working Capital.......................…………….. Capital Expenditures.......................……………. Equity per Share.............................…………….. Depr. and Amort. Reserve.....................………... Common Shares (Thou.).......................…………

42,495 25,023 8,349 $ 1.97 2,697 17,737

25,222 18,323 2,577 -828 1,157

FINANCIAL RATIOS Ratio year end Quick ratio Current ratio Total curr. liabs/net worth (%) Total curr. liabs/inventory (%) Total liabs/net worth (%) Fixed assets/net worth (%) Net sales/inventory Total assets/net sales (%) Net sales/net work. cptl. Accts. payable/net sales (%) Return on sales (%) Return on assets (%) Return on net worth (%)

06/00 1.1 4.3 21.6 840.3 21.6 33.9 17.3 274.1 0.620 27.6 -249.8 -91.1 -110.8

06/99 4.6 6.5 15.2 636.6 235.7 15.9 10.3 467.6 0.294 38.0 -353.3 -75.6 -87.1