<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<CAPTION>
<S> <C> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
WORLD OF SCIENCE, INC.
(Name of Registrant as Specified in its Charter)
WORLD OF SCIENCE, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction
applies: Common Stock, par value $.01 per share ("World
of Science Common Stock")
(2) Aggregate number of securities to which transaction
applies: 4,736,105 shares
<PAGE>
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: The amount
on which the filing fee of $1,089.30 is calculated was
determined pursuant to Rule 0-11(c) of the Securities
Exchange Act, as amended, by multiplying 1/50th of 1% by
an amount equal to the product of (x) $1.15, the cash
merger consideration per share, and (y) 4,736,105, the
number of shares of World of Science Common Stock issued
and outstanding.
(4) Proposed maximum aggregate value of transaction:
$5,446,521.
(5) Total fee paid : $1,089.30
[X] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
Registration Statement number, or the Form or Schedule and the date
of its filing.
(1) Amount Previously Paid: ____________________________
(2) Form, Schedule or Registration Statement No.: ______
(3) Filing Party: ______________________________________
(4) Date Filed: ________________________________________
<PAGE>
WORLD OF SCIENCE, INC.
900 Jefferson Road, Building Four
Rochester, New York 14623
To the stockholders of World of Science, Inc.
A MERGER PROPOSAL - YOUR VOTE IS VERY IMPORTANT
You are cordially invited to attend a special meeting of stockholders of
World of Science, Inc., to be held at 11:00 a.m., local time, on Friday,
September 8, 2000, at the principal offices of World of Science at 900 Jefferson
Road, Building Four, Rochester, New York.
At the special meeting, you will be asked to consider and vote upon a
proposal to adopt a merger agreement, dated as of August 3, 2000, by and among
Natural Wonders, Inc., Merger Sub, a wholly-owned subsidiary of Natural Wonders
to be formed, and World of Science, pursuant to which World of Science will
become a wholly-owned subsidiary of Natural Wonders and each share of World of
Science common stock will be converted into a right to receive $1.15 in cash.
Approval of the proposed merger requires the affirmative vote of the holders of
at least two-thirds of the outstanding shares of World of Science common stock
entitled to vote on the merger.
Your board of directors has unanimously approved the merger and recommends
that its stockholders vote FOR the merger proposal.
Information about the merger is contained in this proxy statement. I urge
you to read this proxy statement and give it your careful attention.
If the merger is approved, stockholders will receive appropriate
instructions for exchanging their stock certificates for cash. Please do not
send in your stock certificates at this time.
Your vote is very important, regardless of the number of shares you own.
Whether or not you intend to attend the special meeting, please vote as soon as
possible to make sure that your shares are represented at the special meeting.
If you do not vote, it will have the same effect as voting against the merger.
/s/ Fred H. Klaucke
Fred H. Klaucke
President and Chief Executive Officer,
Chairman of the Board
This proxy statement is dated August 15, 2000, and is first being mailed
to stockholders of World of Science on or about August 18, 2000.
<PAGE>
WORLD OF SCIENCE, INC.
900 Jefferson Road, Building Four
Rochester, New York 14623
(716) 475-0100
Notice of Special Meeting of World of Science Stockholders
Friday, September 8, 2000 at 11:00 a.m.
To The Stockholders Of World Of Science, Inc.:
NOTICE HEREBY IS GIVEN that a special meeting of stockholders of World of
Science, Inc., a New York corporation, will be held at 11:00 a.m., local time,
on Friday, September 8, 2000, at the principal offices of World of Science at
900 Jefferson Road, Building Four, Rochester, New York, for the following
purposes:
1. To consider and vote upon a proposal to adopt a merger agreement,
dated as of August 3, 2000, by and among Natural Wonders, Inc., Merger Sub, a
wholly-owned subsidiary of Natural Wonders to be formed, and World of Science,
pursuant to which World of Science will become a wholly owned subsidiary of
Natural Wonders and each share of World of Science common stock will be
converted into a right to receive $1.15 in cash.
2. To transact such other business as may properly come before the
special meeting or any adjournments or postponements of the special meeting.
The item of business is described in the attached proxy statement. The
affirmative vote of the holders of at least two-thirds of the outstanding shares
of World of Science common stock entitled to vote on the merger is required for
adoption of the merger agreement. Holders of record of World of Science common
stock at the close of business on August 15, 2000, the record date, are entitled
to notice of, and to vote at, the special meeting and any adjournments or
postponements of the special meeting.
Your vote is very important, regardless of the number of shares you own.
Please vote as soon as possible to make sure that your shares are represented at
the meeting. To vote your shares, you must complete and return the enclosed
proxy card. If you are a holder of record, you may also cast your vote in person
at the special meeting. If your shares are held in an account at a brokerage
firm or bank, you must instruct them on how to vote your shares. If you do not
vote or do not instruct your broker or bank how to vote, it will have the same
effect as voting against the merger.
By Order of the Board of Directors of
World of Science, Inc.
/s/ Richard B. Callen
Richard B. Callen
Corporate Secretary
Rochester, New York
August 15, 2000
<PAGE>
SUMMARY TERM SHEET
This summary highlights selected information from this proxy statement. It
may not contain all of the information that is important to you. We urge you to
read carefully the proxy statement and the documents attached to this proxy
statement for a complete understanding of the merger. See "Where You Can Find
More Information" (page 42). Each item in this summary includes a page reference
directing you to a more complete description of that item.
<TABLE>
<S> <C>
The Parties to the Merger (see page 32) interactive toys and games. Natural Wonders'
target customers are predominately well
World of Science, Inc. educated, middle income families (adults ages
900 Jefferson Road, Building Four 25 and up and children ages 6 to 12). As of
Rochester, New York 14623 the date of this proxy statement, Natural
(716) 475-0100 Wonders operated 177 retail stores in 39
states. A copy of Natural Wonders' 1999
World of Science, Inc., a New York Annual Report to Stockholders and its
corporation, is a specialty retailer of a variety Quarterly Report on Form 10-Q for the quarter
of traditional and distinctive science and ended April 29, 2000 are included in this
nature products. Its stores typically include proxy statement as Annex D and Annex G,
products from 25 different merchandise respectively.
categories, including anatomy (anatomical
models, charts and books), astronomy Merger Sub
(telescopes, solar system models), dinosaurs, 4209 Technology Drive
geography, geology (mineral and fossil Fremont, California 94538
collectibles), physics and puzzles and games. (510) 252-9600
World of Science has a broad customer base,
as its products appeal to customers of all ages Merger Sub will be a wholly-owned
for gift-giving, educational use and subsidiary of Natural Wonders, formed as a
entertainment. The Company operates both a corporation under the laws of the State of New
permanent and seasonal store format. At the York, for the specific purpose of being merged
date of this proxy statement, World of Science with and into World of Science in order to
operated 85 permanent stores and 16 facilitate the merger.
seasonal stores in 25 states. In addition to its
traditional retail stores, World of Science Special Meeting (see page 11)
operates an e-commerce retail site, through its
wholly-owned subsidiary, WOSI on the Web, The special meeting of World of Science
Inc., which is a New York corporation. stockholders will be held on Friday, September 8,
2000 at 11:00 a.m., local time, at the principal offices
Natural Wonders, Inc. of World of Science at 900 Jefferson Road, Building Four,
4209 Technology Drive Rochester, New York.
Fremont, California 94538
(510) 252-9600 Record Date; Vote Required (see page 11)
Natural Wonders, Inc., a Delaware You can vote at the special meeting if you
corporation, is a specialty gift retailer of owned common stock of World of Science at
unique and affordable family gifts inspired by the close of business on August 15, 2000,
the wonders of science and nature. Its the record date. On that date, there were
merchandise assortment includes telescopes, 4,736,105 shares of common stock outstanding
mineral carvings, globes, home and garden and entitled to vote. To adopt the merger
items, ceramics, wind chimes, hats and shirts, agreement, the holders of two-thirds of
books, tapes, cd's, videos and a variety of those shares must vote in favor of doing so.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
You may cast one vote for each share of General.
common stock that you owned on
August 15, 2000. We propose a merger in which a wholly-
owned subsidiary of Natural Wonders will
A failure to vote, either by not returning the merge with and into World of Science. When
enclosed proxy card or by checking the the merger is complete, each share of World
"Abstain" box on the proxy card, or a failure of Science common stock (other than shares
to instruct your broker to vote if your shares owned by Natural Wonders, Merger Sub or
are held in an account at a brokerage firm or World of Science) will automatically convert
bank will have the same effect as a vote into the right to receive cash in the amount of
against the merger. Accordingly, the board of $1.15, without interest.
directors of World of Science urges you to
complete, date and sign the accompanying Opinion of Financial Advisor (see page 19)
proxy card and return it promptly in the
enclosed, postage paid envelope. In deciding to approve the merger and the
merger agreement, World of Science's board
Voting by Directors and Executive Officers of directors considered the opinion of its
(see page 39) financial advisor, Raymond James &
Associates, Inc., that, as of August 3, 2000,
As of August 15, 2000, the date the cash consideration to be received in the
of this proxy statement, directors and merger was fair from a financial point of view
executive officers of World of Science held, as to the holders of World of Science common
a group, approximately 43% of common stock stock. The full text of this opinion is attached
entitled to vote at the special meeting. as Annex B. You should read the opinion
All of the directors of World of Science completely to understand the assumptions
have signed a voting agreement under which made, matters considered and limitations of
they have agreed to vote all shares of the review undertaken by Raymond James
common stock held by them in favor of the in providing its opinion.
merger. As of the date of this proxy statement,
the directors held, as a group, approximately Effective Time (see page 28).
42% of the voting power of World of Science
common stock entitled to vote at the The merger will occur after all of the
World of Science special meeting. conditions to the completion of the merger
have been satisfied or waived in accordance
Recommendation of the Board of Directors with the merger agreement. The merger will
and Reasons for the Merger (see page 18) become effective when a certificate of merger
is filed by the New York Department of State,
The board of directors of World of the effective time. We expect to complete the
Science believes that the merger is fair to you merger during the third calendar quarter of
and in your best interest, and unanimously 2000.
voted to approve the merger agreement and
unanimously recommends that you vote Exchange of Certificates (see page 28).
"FOR" the approval of the merger agreement.
Pursuant to the merger agreement,
The Merger (see page 13) immediately prior to the date of the closing
of the merger, Natural Wonders will deposit,
The merger agreement is attached to this or will cause the Merger Sub to deposit, with
document as Annex A. Please read the merger American Stock Transfer & Trust Company, the
agreement. It is the legal document that disbursing agent, the amount of cash equal to
governs the merger. the product of $1.15 multiplied by the shares
of World of Science common stock
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
outstanding immediately prior to the effective . holders of the requisite number of shares
time, other than shares held by World of of World of Science common stock must have
Science, Natural Wonders and Merger Sub. approved the merger agreement;
Promptly after the effective time, the
disbursing agent will send to each stockholder . there must have been no material adverse
of record immediately prior to the effective change in the prospects, financial condition or
time, a letter of transmittal and detailed results of operations of World of Science since
instructions specifying the procedures to be January 29, 2000; and
followed in surrendering certificates. Share
certificates should not be forwarded to the . neither company shall have breached its
disbursing agent until receipt of the letter representations, warranties or covenants in the
of transmittal. Upon the surrender of a share merger agreement.
certificate, the disbursing agent will issue to
the surrendering holder $1.15 for each share of Interests of Directors and Officers in the
World of Science common stock, in cash, without Merger (see page 25)
interest, the merger consideration.
Treatment of Outstanding Options (see
page 13) You should be aware that certain directors
and executive officers of World of Science
The merger agreement requires World of have interests in the merger that are different
Science to cancel all outstanding options to from, or in addition to, the interests of World
purchase World of Science common stock, of Science's stockholders. Among other
whether vested or unvested, and convert the things, certain executives will have their
options into the right to receive cash in an existing employment and compensation
amount equal to the difference between the agreements assumed, and the severance
merger consideration and the exercise price benefits under those agreements paid, by
with respect to the options, multiplied by the Natural Wonders. These executive officers of
number of shares covered by the option. For World of Science may enter into new
example, if you hold an option to purchase agreements or arrangements with respect to
100 shares of World of Science at an exercise employment with Natural Wonders or World
price of $1.00 per share, you will be entitled to of Science, as the surviving corporation.
receive $15.
Termination of the Merger Agreement;
Conditions to the Completion of the (see page 38)
Merger (see page 36)
The merger agreement contains provisions
World of Science and Natural Wonders addressing the circumstances under which
will complete the merger only if they satisfy World of Science or Natural Wonders may
or, in some cases waive, several conditions, terminate the merger agreement. Either
including the following: company may terminate the merger
agreement:
. Natural Wonders shall have obtained the
necessary financing to pay the merger . if Natural Wonders has not obtained
consideration. As more fully discussed in financing sufficient to consummate the
"The Merger - Lack of Financing Sufficient to merger prior to August 25, 2000;
Complete the Merger", Natural Wonders does
not currently have firm commitment letters . if the merger is not completed on or before
from its financing sources; October 2, 2000 (unless extended by the
mutual consent of the parties), so long as
the terminating company is not in breach
under the merger agreement;
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
. if the World of Science stockholders do Stockholders desiring to exercise their
not approve the merger; or appraisal rights will have the rights and duties
and must follow the procedures set forth in
. if the other company breaches its Section 623 of the New York Business
representations, warranties or covenants in Corporation Law, the full text of Section 623
the merger agreement in a material way. is attached to this proxy statement as Annex
C. Stockholders who wish to exercise
In addition, World of Science can appraisal rights must carefully follow the
terminate the agreement in the event its board procedures described in Section 623 and are
of directors determines, consistent with its urged to read Annex C in its entirety.
fiduciary obligations, to accept an unsolicited
third party offer. Certain Federal Income Tax Consequences
(see page 39)
"No Solicitation" (see page 36).
Your exchange of shares of common stock
The merger agreement prohibits World of for cash pursuant to the merger will be a
Science, WOSI on the Web, or any of their taxable transaction for federal income tax
respective officers, directors, employees, purposes. You will recognize gain or loss for
agents and representatives, from taking any federal income tax purposes equal to the
action to initiate or solicit a proposal for the difference between the amount of cash you
acquisition of World of Science or WOSI on receive for your shares and your tax basis in
the Web. The merger agreement does not, the shares surrendered, assuming that you do
however, prohibit World of Science or its not have a special tax status or did not acquire
board of directors from considering, and your shares pursuant to an incentive stock
potentially accepting, an unsolicited option or special compensation arrangement.
acquisition proposal from a third party.
Determining the actual tax consequences of
Break-up Fee (see page 36) the merger to you may be complex. They will
depend on your specific situation and on
In the event World of Science violates the variables not within our control. You should
no solicitation prohibition contained in the consult your own tax advisor for a full
merger agreement, or closes an acquisition understanding of the merger's tax
transaction arising from an unsolicited third consequences.
party offer, World of Science must pay Natural
Wonders a $150,000 break-up fee.
Expenses (see page 38)
In the merger agreement, Natural Wonders
has agreed to pay documented costs and expenses
incurred by World of Science in the amount of
(i) $150,000, upon the filing of the
preliminary proxy statement with the
Securities and Exchange Commission and
(ii) $250,000, upon the mailing of this proxy
statement to World of Science stockholders.
Except for that agreement, World of Science
and Natural Wonders will each bear its own
expenses in connection with the merger.
Appraisal Rights of Dissenting
Stockholders (see page 29)
Under New York law, World of Science
stockholders who do not vote in favor of the
merger will be entitled to exercise appraisal
rights in connection with the merger.
</TABLE>
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY TERM SHEET....................................................................... 1
The Parties to the Merger.............................................................. 1
Special Meeting........................................................................ 1
Record Date; Vote Required............................................................. 1
Voting By Directors and Executive Officers............................................. 2
Recommendation of the Board of Directors and Reasons for the Merger.................... 2
The Merger............................................................................. 2
Appraisal Rights of Dissenting Stockholders............................................ 4
Certain Federal Income Tax Consequences................................................ 4
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING........................... 7
THE SPECIAL MEETING...................................................................... 11
Proxy Statement........................................................................ 11
Date, Time and Place of Special Meeting................................................ 11
Purpose of the Special Meeting......................................................... 11
Recommendation of the Board of Directors............................................... 11
Stockholder Record Date for the Special Meeting........................................ 11
Vote Required for Adoption of the Merger Agreement..................................... 12
Proxies................................................................................ 12
Solicitation of Proxies................................................................ 13
THE MERGER............................................................................... 13
General................................................................................ 13
Background of the Merger............................................................... 14
Recommendation of the Board of Directors and Reasons for the Merger.................... 18
Opinion of Financial Advisor........................................................... 19
Interests of Certain Directors and Executive Officers in the Merger.................... 25
Lack of Financing Sufficient to Complete the Merger.................................... 27
Completion and Effectiveness of the Merger............................................. 28
Structure of the Merger................................................................ 28
Payment for Shares; Disbursing Agent................................................... 28
Dissenters' Rights..................................................................... 29
Regulatory Matters..................................................................... 31
The Merger Agreement................................................................... 32
Voting Agreement....................................................................... 39
Certain Federal Income Tax Consequences of the Merger.................................. 39
Accounting Treatment of the Merger..................................................... 40
PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT.............................. 40
STOCKHOLDER PROPOSALS.................................................................... 41
OTHER MATTERS............................................................................ 41
WHERE YOU CAN FIND MORE INFORMATION...................................................... 42
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
ANNEXES
Annex A - Agreement and Plan of Merger
Annex B - Opinion of Financial Advisor
Annex C - Section 623 of the New York Business Corporation Law
Annex D - 1999 Annual Report to Stockholders of Natural Wonders, Inc.
Annex E - Natural Wonders' Annual Report on Form 10-K for the year ended
January 29, 2000
Annex F - Natural Wonders' Report on Form 8-K dated May 23, 2000
Annex G - Quarterly Report on Form 10-Q for the first quarter ended April
29, 2000 of Natural Wonders, Inc.
Annex H - Natural Wonders' Report on Form 8-K dated August 4, 2000
</TABLE>
6
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
AND THE SPECIAL MEETING
Q: Is the financial condition of Natural Wonders relevant to my decision on
how to vote or for any other reason?
A: A condition to the completion of the merger is that Natural Wonders
deposit, or cause to be deposited, with the disbursing agent an amount of cash
equal to the aggregate merger consideration. If Natural Wonders is not able to
fulfill this condition the merger will not occur. However, once your shares of
World of Science common stock are purchased you will no longer have an
investment in the company that survives as a result of the merger.
Q: Does Natural Wonders have the resources to pay the full cash price for all
of the outstanding shares?
A: No. Natural Wonders does not currently have the funds necessary to complete
the merger transaction in accordance with the terms of the merger agreement,
including the payment of the merger consideration. Natural Wonders has executed
financing term sheets with two financial institutions. The term sheets are not
binding and do not evidence a commitment to extend credit.
Although Natural Wonders has advised World of Science's board of directors
that the proposed financing terms with the two institutional lenders are
acceptable, there can be no assurances that Natural Wonders will, in fact, close
the financing transactions with those lenders and, if not, that Natural Wonders
will be able to secure financing in an amount sufficient to complete the merger
or on acceptable terms. The closings of the financings are subject to, among
other things, Natural Wonders' securing $1.25 million of additional subordinated
debt or equity beyond the amounts proposed from the two institutional lenders,
the satisfactory completion of due diligence by the lenders, and the absence of
any material adverse change in the financial condition, business, profitability,
assets or operations of Natural Wonders. Natural Wonders has indicated to World
of Science that certain principals of Natural Wonders are prepared to provide
financing to Natural Wonders in the amount of $550,000, and that the financial
advisors of both Natural Wonders and World of Science have each agreed to defer
a portion of their fees in consideration of a promissory note and warrants.
Q: What will happen if Natural Wonders is unable to secure the financing
necessary for it to pay the merger consideration?
A: The merger agreement provides that in the event Natural Wonders does not
remove the contingency to closing the merger transaction due to the lack of
adequate financing by August 25, 2000, either World of Science or Natural
Wonders may terminate the merger agreement.
Q: What will happen to the outstanding shares of World of Science common
stock?
A: If the merger occurs, each stockholder of World of Science will receive
$1.15 in cash, the merger consideration, without interest, for each share of
common stock held by that stockholder.
7
<PAGE>
Q: Will World of Science continue to exist following the merger?
A: World of Science will be the surviving corporation in the merger, and will
operate as a wholly-owned subsidiary of Natural Wonders. You will have no
further interest in World of Science after completion of the merger.
Q: Does World of Science's board of directors recommend approval of the
merger?
A: Yes. The board of directors of World of Science has approved the merger and
unanimously recommends that World of Science stockholders vote in favor of the
merger. In addition, each of the directors of World of Science has entered into
a voting agreement with Natural Wonders to vote his shares of common stock in
favor of the merger.
Q: Is the proposed merger a taxable transaction?
A: Yes. The acquisition of your shares for cash consideration is a taxable
transaction and may result in tax liability. You should consult your own tax
advisor to determine the tax consequences of the transaction.
Q: What needs to happen in order for the merger to occur?
A: Natural Wonders must secure the financing necessary to pay the merger
consideration. Moreover, the merger cannot occur unless holders of World of
Science common stock representing at least two-thirds of all outstanding shares
entitled to vote on the merger vote in favor of the merger and the necessary
third-party consents are obtained.
Q: When do you expect the merger to be completed?
A: We expect to complete the merger during the third calendar quarter of 2000.
However, because the merger is subject to third-party consents and Natural
Wonders' securing the necessary financing to pay the merger consideration, we
cannot predict the exact timing.
Q: Is the merger fair to World of Science stockholders?
A: Raymond James & Associates has issued a written fairness opinion dated as
of August 4, 2000, stating that, as of August 3, 2000, the amount which will be
paid to World of Science stockholders in the merger is fair from a financial
point of view.
Q: Should I send in my stock certificates now?
A: No. After completion of the merger, Natural Wonders will send instructions
to World of Science stockholders whose shares are being purchased in the merger.
These instructions will explain how to submit your World of Science stock
certificates for payment of the merger consideration.
Q: How do I vote?
A: After carefully reading and considering the information contained in this
proxy statement, please respond by completing, signing and dating your proxy
card and returning it in the enclosed
8
<PAGE>
postage paid envelope as soon as possible so that your shares may be represented
at the special meeting.
Q: What if I don't vote?
A: . If you fail to respond, it will have the same effect as a vote against
the merger.
. If you respond and do not indicate how you want to vote, your proxy
will be counted as a vote in favor of the merger.
. If you respond and abstain from voting, your proxy will have the same
effect as a vote against the merger.
Q: If my shares are held in an account at a brokerage firm or bank, will the
broker or bank vote the shares for me?
A: Not unless you instruct your broker or bank to vote your shares, following
the directions provided to you by your broker or bank. A failure to instruct
your broker or bank to vote your shares in favor of adoption of the merger is
the equivalent of a vote against the merger.
Q: Can I change my vote after I have delivered my proxy?
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways. First, you can revoke
your proxy. Second, you can submit a new proxy. If you choose either of these
two methods, you must submit your notice of revocation or your new proxy to the
secretary of World of Science before the special meeting. If your shares are
held in an account at a brokerage firm or bank, you should contact your
brokerage firm or bank to change your vote. Third, if you are a holder of
record, you can attend the special meeting and vote in person.
Q: Do I have appraisal rights?
A: Yes. You will be entitled to appraisal rights. We describe the procedures
for exercising appraisal rights in this proxy statement and we have attached the
provisions of New York law that govern appraisal rights as Annex C.
Q: Do the directors and officers of World of Science have an interest in the
merger?
A: Yes. Natural Wonders has agreed to assume, and pay the severance benefits
under, Mr. Klaucke's employment agreement and the compensation agreements of
Charles Callahan, World of Science's chief financial officer, vice president of
finance and assistant secretary, and Christine Luchi, World of Science's vice
president of operations. In addition, World of Science, as the surviving
corporation after the merger, and Natural Wonders will provide indemnity, and
World of Science or Natural Wonders will provide liability insurance, to the
current officers and directors of World of Science.
Thomas James, a director of World of Science is the chairman of the board
of directors and chief executive officer of Raymond James & Associates, World of
Science's financial advisor. World of Science has paid Raymond James &
Associates a retainer fee of $50,000. Raymond James & Associates is entitled to
additional aggregate fees in the amount of $400,000, of that amount $150,000 was
payable at the time it issued its fairness opinion to World of Science's board
of directors and $250,000 is payable at the closing of the merger. Raymond James
& Associates has agreed to defer payment of the $250,000 portion of its fee in
consideration
9
<PAGE>
of a promissory note and warrants to purchase shares of Natural Wonders' common
stock.
Q: Is World of Science subject to any restrictions pending the merger?
A: In general, World of Science has agreed that it will not seek or encourage
a competing transaction to acquire World of Science or its subsidiary, WOSI on
the Web, except in very limited situations in which an unsolicited offer is
made. World of Science has agreed to conduct its business in the ordinary and
usual course, subject to certain restrictions, pending the merger. Additionally,
World of Science has agreed to provide Natural Wonders with access to certain
operating information and, upon the occurrence of specified events,
World of Science has agreed to permit Natural Wonders to place some of its
employees at World of Science's offices in Rochester, New York to oversee World
of Science's inventory decisions and to coordinate the shipment of merchandise.
Q: Who can help answer my questions?
A: If you have any questions about the merger or how to submit your
proxy, or if you need additional copies of this proxy statement or the enclosed
proxy card, you should contact:
World of Science, Inc.
900 Jefferson Road, Building Four
Rochester, New York 14623
(716) 475-0100
Attention: Charles Callahan,
Vice President of Finance, Chief
Financial Officer and Assistant Secretary
10
<PAGE>
THE SPECIAL MEETING
Proxy Statement
This proxy statement is being furnished by World of Science to the holders
of outstanding shares of its common stock, par value $.01 per share, in
connection with the solicitation of proxies by World of Science's board of
directors in connection with the proposed merger.
This proxy statement is first being furnished to stockholders of World of
Science on or about August 18, 2000.
Date, Time and Place of Special Meeting
The special meeting of the stockholders of World of Science is to be held
at the principal offices at World of Science at 900 Jefferson Road, Building
Four, Rochester, New York at 11:00 a.m., local time, on Friday, September 8,
2000, and any adjournments or postponements of the special meeting. Holders of
common stock are entitled to one vote for each share held by them.
Purpose of the Special Meeting
The special meeting is being held so that the stockholders of World of
Science may consider and vote upon a proposal to adopt a merger agreement, dated
as of August 3, 2000, among Natural Wonders, Merger Sub, a wholly-owned
subsidiary of Natural Wonders to be formed, and World of Science, providing for
the merger of Merger Sub with and into World of Science. In the merger, each
outstanding share of World of Science common stock (other than shares owned by
Natural Wonders, Merger Sub or World of Science) will be converted into the
right to receive a cash payment of $1.15, without interest.
Recommendation of the Board of Directors
The board of directors of World of Science has unanimously adopted the
merger agreement and has determined that the merger is fair and in the best
interests of World of Science and its stockholders. Accordingly, the board of
directors of World of Science unanimously recommends that World of Science's
stockholders vote "FOR" adoption of the merger agreement.
Stockholder Record Date for the Special Meeting
The board of directors of World of Science has fixed the close of business
on August 15, 2000 as the record date for the determination of stockholders
entitled to notice of and to vote at the special meeting. Only holders of record
of shares of common stock at the close of business on the record date will be
entitled to notice of and to vote at the special meeting. On the record date,
there were 4,736,105 shares of World of Science stock outstanding, held by
approximately 121 holders of record.
11
<PAGE>
Vote Required for Adoption of the Merger Agreement
The presence, either in person or by properly executed proxy, of the
holders of a majority of the outstanding shares of World of Science common stock
entitled to vote at the special meeting is required to constitute a quorum at
the special meeting.
The affirmative vote of two-thirds of the outstanding shares of World of
Science common stock entitled to vote on the merger is required to adopt the
merger agreement.
At the special meeting, each stockholder of World of Science is entitled to
one vote for each share of common stock held in that stockholder's name on the
record date. The directors of World of Science have agreed to vote each share of
common stock beneficially owned by them in favor of adoption of the merger
agreement and the transactions contemplated thereby. As of the record date, the
directors as a group owned approximately 42% of the voting power of World of
Science common stock outstanding on the record date.
Proxies
All shares of World of Science common stock represented by properly
executed proxies received before or at the World of Science special meeting
will, unless the proxies are revoked, be voted in accordance with the
instructions indicated on those proxies. IF NO INSTRUCTIONS ARE INDICATED ON A
PROPERLY EXECUTED PROXY CARD, THE SHARES WILL BE VOTED FOR ADOPTION OF THE
MERGER AGREEMENT. THE PROXIES WILL ALSO HAVE THE AUTHORITY TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING, INCLUDING ANY
MOTION TO ADJOURN THE SPECIAL MEETING, AND ANY ADJOURNMENT OR POSTPONEMENT OF
THE SPECIAL MEETING. You are urged to mark the box on the proxy card to indicate
how to vote your shares.
If a properly executed proxy card is returned and the stockholder has abstained
from voting on adoption of the merger agreement, the World of Science common
stock represented by the proxy will be considered present at the special meeting
for purposes of determining a quorum, but will not be considered to have been
voted in favor of adoption of the merger agreement. If your shares are held in
an account at a brokerage firm or bank, you must instruct them on how to vote
your shares. If an executed proxy card is returned by a broker or bank holding
shares which indicates that the broker or bank does not have discretionary
authority to vote on adoption of the merger agreement, the shares will be
considered present at the meeting for purposes of determining the presence of a
quorum, but will not be considered to have been voted in favor of adoption of
the merger agreement. Your broker or bank will vote your shares only if you
provide instructions on how to vote by following the information provided to you
by your broker or bank.
Because adoption of the merger agreement requires the affirmative vote of
at least two-thirds of the shares of World of Science's common stock outstanding
on the record date, abstentions, failures to vote and broker non-votes will have
the same effect as a vote against adoption of the merger agreement.
The World of Science special meeting may be adjourned or postponed in order
to permit further solicitation of proxies. No proxy voted against the proposal
to adopt the merger agreement will be voted on any proposal to adjourn or
postpone the special meeting that is submitted to the stockholders for a vote.
12
<PAGE>
World of Science does not expect that any matter other than adoption of the
merger agreement will be brought before the special meeting. If, however, other
matters are properly presented, the persons named as proxies will vote in
accordance with the direction of a majority of the board of directors with
respect to those matters, unless authority to do so is withheld on the proxy
card.
A stockholder may revoke his or her proxy at any time before it is voted
by:
. notifying in writing the Corporate Secretary of World of Science, Inc.
at 900 Jefferson Road, Building Four, Rochester, New York 14623 of his
or her intention to revoke;
. granting a subsequently dated proxy; or
. appearing in person and voting at the special meeting if you are a
holder of record.
Attendance at the special meeting will not in and of itself constitute
revocation of a proxy.
Solicitation of Proxies
This solicitation of proxies is being made by the board of directors of
World of Science. All expenses associated with soliciting proxies, including the
preparation, assembly, printing and mailing of this proxy statement, will be
borne by World of Science. It is contemplated that proxies will be solicited
principally through the use of the mail, but officers, directors and employees
of World of Science may solicit proxies personally or by telephone. No
additional compensation will be paid to directors, officers or employees for
such solicitation. World of Science has retained D.F. King & Co., Inc. to aid in
the solicitation of proxies, including from brokers, bank nominees, and other
institutional owners, at an estimated cost of $5,000 plus reimbursement of
expenses. In addition, World of Science will reimburse banks, brokerage houses,
and other custodians, nominees and fiduciaries for their reasonable out-of-
pocket expenses in forwarding these proxy materials to their principals.
You should not send in any stock certificates with your proxy card. A
transmittal letter with instructions for the surrender of stock certificates
will be mailed to you as soon as practicable after completion of the merger.
THE MERGER
This section of the proxy statement describes material aspects of the
proposed merger, including the merger agreement and the voting agreement. While
we believe that the description covers the material terms of the merger, this
summary may not contain all of the information that is important to you. You
should read this entire proxy statement and the other documents we refer to
carefully for a more complete understanding of the merger.
General
Under the merger agreement, at the time the merger becomes effective, each
outstanding share of World of Science common stock, other than shares owned by
Natural Wonders, Merger Sub or World of Science, will be converted automatically
into the right to receive the merger
13
<PAGE>
consideration, of $1.15 per share. Additionally, all outstanding options to
purchase common stock, whether vested or unvested, are required to be canceled
and converted into the right to receive cash in an amount equal to the merger
consideration less the exercise price with respect to those options, multiplied
by the number of shares covered by those options. As a result of the merger,
holders of common stock will cease to have an equity or other interest in, or
possess any rights as stockholders of, World of Science.
Background of the Merger
Since November 1999, Fred Klaucke and representatives of Natural Wonders
have had periodic, informal conversations regarding a potential business
combination between the two companies. In November 1999, Fred Klaucke contacted
Peter Hanelt, president, chief executive officer and chief financial officer of
Natural Wonders, by telephone to discuss, among other things, the softening of
the specialty retail industry and the impending LearningSmith bankruptcy. Fred
Klaucke and Peter Hanelt also discussed generally the benefits that might be
associated with a combination of Natural Wonders and World of Science. In
December 1999, Fred Klaucke and Peter Hanelt determined that it would be
mutually beneficial to meet and discuss, on a more formal basis, the possibility
of combining the two companies.
In connection with these initial discussions, the companies began
consulting with various financial and legal advisors about issues associated
with transactions of the kind discussed. World of Science discussed these
matters with its counsel, Harris Beach & Wilcox, LLP and with Raymond James &
Associates, the financial advisor it subsequently retained for these purposes.
Natural Wonders retained Renaissance Capital Group, Inc. as its financial
advisor and Sheppard, Mullin, Richter & Hampton, LLP, as its legal counsel. The
parties consulted with their advisors at the outset of discussions and these
consultations continued throughout the remaining merger discussions.
In contemplation of an upcoming meeting between Fred Klaucke and Peter
Hanelt, World of Science's board of directors determined that World of Science
and Natural Wonders should enter into a confidentiality agreement prior to the
meeting, which they did on December 16, 1999. The board of directors also
approved the retention of Raymond James & Associates to assist it in discussions
with Natural Wonders, as well as to explore and evaluate other opportunities
that may be available to World of Science to enhance stockholder value through a
possible strategic transaction with a third party.
On January 3, 2000, World of Science retained Raymond James & Associates to
act as its financial advisor. The board of directors of World of Science
instructed Raymond James & Associates to explore various investment and
acquisition alternatives designed to maximize stockholder value.
The board of directors of World of Science placed no restrictions on
Raymond James & Associates with respect to contacting potential candidates that
Raymond James & Associates might identify as parties with whom World of Science
might engage in a transaction that would accomplish the objectives of World of
Science - to maximize stockholder value. During the period from January 3, 2000
through May 23, 2000, Raymond James & Associates engaged in discussions
with 18 potential candidates that were identified as possible transaction
partners.
14
<PAGE>
On January 10, 2000, Peter Hanelt met with Fred Klaucke, Charles Callahan
and a representative of Raymond James & Associates at World of Science's offices
in Rochester, New York. At that meeting the parties exchanged selected
information and discussed the strategic benefits of a possible transaction and
the possible synergies and opportunities that might be realized by combining
World of Science and Natural Wonders, as well as steps in the process towards a
possible transaction.
On March 13, 2000, Charles Callahan and a representative of Raymond James &
Associates met with Peter Hanelt, other representatives of Natural Wonders, and
a representative of Renaissance Capital Group, at Natural Wonders' offices in
Fremont, California. At that meeting, Raymond James & Associates presented
information concerning the valuation of World of Science and collected
additional information about Natural Wonders' business operations to better
refine its assumptions.
At a telephonic meeting of the board of directors of World of Science on
April 21, 2000, a representative of Raymond James & Associates presented a
report concerning its progress and dealings with potential transaction partners,
including the current status of discussions with Natural Wonders. At that
meeting the representative of Raymond James & Associates also provided the board
of directors with a summary of its financial analysis related to any proposed
transaction. The board of directors authorized the representative of Raymond
James & Associates to continue discussions with Natural Wonders about a possible
transaction between the two companies, including a transaction involving a
consideration consisting of the common stock of Natural Wonders or other equity
securities.
On April 25, 2000 and April 26, 2000, Peter Hanelt, other representatives
of Natural Wonders, and a representative of Renaissance Capital, and Fred
Klaucke, Charles Callahan and a representative of Raymond James & Associates met
at World of Science's offices. The purpose of the meetings was to provide
Natural Wonders with an opportunity to acquire detailed information about World
of Science, its business, financial condition and operations. Natural Wonders
requested this information so that it could refine its valuation of World of
Science for purposes of preparing and submitting an offer to World of Science to
combine the two companies. At this meeting, and in telephone calls between
Raymond James & Associates and Renaissance Capital, a representative of
Renaissance Capital communicated the preference of Natural Wonders' board of
directors not to use its common stock or other securities as consideration in an
acquisition transaction by Natural Wonders.
On May 10, 2000, Natural Wonders submitted a proposed, non-binding letter
of intent to World of Science for its consideration. The terms of the letter of
intent included an offer to purchase all of the outstanding common stock of
World of Science at a purchase price not to exceed $7.0 million in cash, subject
to possible reduction related to specified examinations. Over the next several
days, World of Science's management team, together with representatives of
Harris Beach & Wilcox, LLP and Raymond James & Associates discussed various
terms and provisions of the letter of intent, and negotiated the terms of the
letter of intent with Renaissance Capital and Sheppard, Mullin, Richter &
Hampton, LLP.
15
<PAGE>
On May 23, 2000, the board of directors of World of Science met to discuss
the terms of a non-binding letter of intent presented to World of Science for
signature. During that meeting the board of directors discussed in great detail
Natural Wonders' proposal to acquire all of the issued and outstanding shares of
World of Science for $1.32 in cash per share, as well as alternative strategies
available to World of Science. Representatives of Raymond James & Associates and
Harris Beach & Wilcox, LLP attended the meeting to review with the board its
fiduciary duties in considering a merger transaction, the potential financial
and strategic benefits of the proposed transaction, Raymond James & Associates'
financial valuation analyses, and the terms and conditions of the Natural
Wonders' proposal. The board unanimously concluded, after extensive deliberation
and discussion and consultation with their legal and financial advisors, as to
the financial and legal impact of such a cash offer, that the Natural Wonders
offer represented value to the World of Science stockholders that could not be
obtained through any other strategy. At the conclusion of that meeting, the
board of directors of World of Science unanimously authorized World of Science's
management to enter into the letter of intent and, in the afternoon of May 23,
2000, the parties executed the letter of intent and issued a joint press release
announcing the execution of the letter of intent.
During the next several weeks Natural Wonders and World of Science
exchanged draft merger agreements, delivered various due diligence items and
draft disclosure schedules. Throughout this time, representatives of Natural
Wonders met with various potential financing sources.
From June 9, 2000 to June 16, 2000 Peter Hanelt, together with other
Natural Wonders' representatives conducted due diligence examinations at World
of Science's headquarters in Rochester, New York.
On June 30, 2000, the letter of intent between Natural Wonders and World of
Science expired. World of Science's management team, board of directors and its
legal and financial advisors discussed, both internally, as well as with
representatives of Renaissance Capital and Sheppard, Mullin, Richter & Hampton,
LLP, the status of Natural Wonders' on-going efforts to secure financing. Both
companies decided to continue negotiations, and Natural Wonders continued to
seek the financing necessary to complete the transaction and to accommodate the
ongoing operations of the combined companies.
On July 17, 2000, Renaissance Capital notified Raymond James & Associates
that, after numerous discussions with the financial institutions from whom
Natural Wonders was seeking to secure financing, and in light of the terms
proposed in such financings, revisions to the terms and conditions of the
agreement, including a possible reduction in the per share purchase price were
being evaluated. During the period from July 17, 2000 through July 21, 2000 the
parties discussed possible alternative structures, terms and conditions.
In the afternoon of July 21, 2000, Peter Hanelt and Cathy Klein of Natural
Wonders, Charles Callahan of World of Science, and representatives of World of
Science's and Natural Wonders' respective legal
16
<PAGE>
and financial advisors participated in a telephone conference call. During that
call, Mr. Hanelt communicated Natural Wonders' proposed revisions to its
original proposed terms for the merger. Among other things, it was communicated
that the purchase price per share would be reduced from $1.32 to $1.20 per share
of common stock, assuming a closing of the merger prior to August 23, 2000, and
a per share price of $1.15 in the event that the merger closed after August 23,
2000. It was further communicated that the merger had to be completed no later
than September 8, 2000.
On July 24, 2000, the board of directors of World of Science met to discuss
the status of negotiations with Natural Wonders. At this meeting a
representative of Raymond James & Associates reported to the board of directors
the terms of Natural Wonders revised offer, including a reduction in the
purchase price and the condition that the merger be completed on or before
September 8, 2000. During this meeting, Raymond James & Associates reviewed with
the board its financial valuation analyses of the proposed purchase price.
Raymond James advised the board that Natural Wonders continued to engage in
discussions and negotiations with potential sources of financing. After
substantial discussion, the board of directors instructed Mr. Klaucke to
communicate in writing with Natural Wonders outlining the terms on which World
of Science was prepared to proceed with discussions, including a requirement
that the execution of any merger agreement be concluded by July 27, 2000 and be
preceded by the delivery of term sheets executed by both Natural Wonders and its
proposed financial lenders evidencing the availability of financing adequate for
Natural Wonders to complete the merger. Mr. Klaucke was instructed to further
advise Natural Wonders that World of Science would have no choice but to
discontinue discussions in the event that the conditions could not be met. On
the morning of July 25, 2000, Mr. Klaucke delivered a letter to Mr. Hanelt
outlining World of Science's terms for continuing discussions about a possible
merger.
During the period from July 25, 2000 through July 27, 2000 numerous
discussions took place between representatives of World of Science and Natural
Wonders, but the discussions did not conclude with an agreement on mutually
acceptable terms of a possible combination between the two companies.
On July 27, 2000, the board of directors of World of Science met to discuss
the status of discussions and Natural Wonders' response to World of Science's
conditions. Representatives of Raymond James & Associates provided a summary of
the discussions and negotiations that had taken place since the delivery of
World of Science's written communication and advised that Natural Wonders was
unwilling or unable to meet certain of the conditions set out in that letter.
After substantial discussion, the board of directors unanimously approved the
termination of further discussions and instructed Mr. Klaucke to inform Natural
Wonders that World of Science would be unable to continue negotiations related
to a possible merger. Mr. Klaucke informed Mr. Hanelt in writing that World of
Science was terminating its discussions and provided a form of proposed press
release. On July 28, 2000, World of Science issued a press release announcing
its termination of further merger negotiations.
Over the weekend of July 29, 2000, Mr. Hanelt contacted Mr. Klaucke by
telephone to discuss the possibility of resurrecting the proposed merger
transaction and indicated that Natural Wonders might be able to meet conditions
previously identified by World of Science as being essential to any merger of
the two companies. On July 29, 2000, Mr. Hanelt forwarded a letter proposing
revised terms and conditions. Throughout the weekend, Mr. Klaucke and Mr.
Hanelt, together with Raymond James & Associates and Renaissance Capital,
engaged in numerous telephone conversations regarding a proposed merger.
17
<PAGE>
On Monday, July 31, 2000, the board of directors of World of Science met
telephonically to discuss a new merger proposal received from Natural Wonders.
At the meeting Raymond James & Associates outlined Natural Wonders' new merger
proposal. The World of Science board of directors authorized Raymond James &
Associates to communicate to Natural Wonders its position with respect to
Natural Wonders' proposed terms and conditions.
On August 2, the Natural Wonders' board of directors held a meeting.
Counsel to the company provided the directors with a summary of the proposed
merger agreement and related transactions contemplated by the merger agreement
and representatives of Renaissance Capital described its financial analysis with
respect to the possible combination. Following presentations regarding
financial, legal and other aspects of the merger, the Natural Wonders' board of
directors considered the terms of the merger and the merger agreement and
approved and adopted the merger agreement.
On August 3, 2000, the World of Science board of directors held a meeting.
Members of the board of directors were provided copies of the proposed merger
agreement and, during the meeting, a representative of Harris Beach & Wilcox
discussed the terms of the merger agreement and the related transactions
contemplated by the merger agreement. Representatives of Raymond James &
Associates provided the board with a package of analytical exhibits, reaffirming
its earlier guidance provided orally to the board, that the consideration
offered by Natural Wonders to the World of Science stockholders was fair from a
financial point of view, and later delivered its written opinion, to the effect
that, as of August 3, 2000, the purchase price to be paid to the holders of
World of Science common stock was fair, from a financial point of view to such
stockholders. Upon completing its deliberations, the board of directors of World
of Science unanimously approved the merger agreement.
On the evening of August 3, 2000, the merger agreement was executed on
behalf of World of Science and Natural Wonders.
On the morning of August 4, 2000, World of Science and Natural Wonders
issued a joint press release announcing the execution of the merger agreement.
Recommendation of the Board of Directors and Reasons for the Merger
During the August 3, 2000 meeting, after extended discussions covering the
factors described below, the board of directors unanimously approved the
proposed merger agreement. In determining whether to approve the merger and the
merger agreement, the board of directors of World of Science considered a number
of factors, including the following principal factors:
. the consideration to be received by the stockholders of World of
Science in the merger and the board of directors' view of the
likelihood that the merger would deliver value to the stockholders of
World of Science exceeding the value that could be expected in
connection with continued independence;
. the likelihood that the merger could be consummated, noting the timing
of and conditions to the merger;
18
<PAGE>
. the terms and conditions set forth in the merger agreement, including,
but not limited to, the financing contingency and the timing of its
removal;
. the oral presentation of Raymond James & Associates, Inc., followed by
written confirmation, with respect to its determination as to the
fairness of the merger, from a financial point of view, to World of
Science's stockholders, and the analyses, methodologies and
conclusions underlying such determination;
. the premium of $.46 per share, which represents the difference
between the merger consideration and the last reported sale price of
the common stock as reported by Nasdaq on August 2, 2000 ($ .69
per share), the last trading day prior to the August 3, 2000 board
of directors meeting;
. the recent sales release of World of Science and the trading prices of
its common stock; and
. World of Science's future prospects and uncertainties in the business
in which World of Science engages.
This description of the information and factors considered by the board of
directors of World of Science above is not meant to be exhaustive, but is
believed to include all material factors considered by the board of directors of
World of Science. The board of directors did not quantify or attach any
particular weight to the various factors that it considered in reaching its
determination that the merger is advisable for, and in the best interests of,
the stockholders of World of Science. Rather, the board of directors made its
determination based on the total mix of information available to it, and the
judgments of individual directors may have been influenced to a greater or
lesser degree by different factors. In considering the recommendation of the
board of directors of World of Science with respect to the merger, stockholders
of World of Science should be aware that the interests of certain directors and
executive officers with respect to the merger are or may be different from or in
addition to the interests of the stockholders of World of Science generally. The
board of directors was aware of these interests and took them into account in
making its recommendation.
The board of directors unanimously recommends adoption of the merger
agreement by the stockholders of World of Science.
Opinion of Financial Advisor
The World of Science board of directors retained Raymond James &
Associates, Inc. to deliver an opinion to the board as to the fairness of the
merger consideration to World of Science's stockholders from a financial point
of view. Prior to the August 3, 2000 meeting of the World of Science board of
directors, during which the board of directors reviewed and considered the terms
of the merger, Raymond James provided the board with a package of analytical
exhibits, reaffirming earlier guidance, provided orally to the board, that the
consideration offered by Natural Wonders to the World of Science stockholders
was fair from a financial point of view. The terms of the merger, including the
merger consideration, were determined by arms-length negotiation between World
of Science and Natural Wonders.
19
<PAGE>
On August 4, 2000, Raymond James delivered to the World of Science board of
directors a written opinion that, as of August 3, 2000 and based upon and
subject to the various considerations described therein, the merger
consideration of $1.15 per share in cash to be received by the holders of common
stock pursuant to the merger agreement was fair to such stockholders from a
financial point of view. As set forth in the written opinion, Raymond James
assumed and relied upon, without independent verification, the accuracy and
completeness of the information reviewed by it for the purposes of its opinion.
Raymond James did not make or obtain an independent evaluation or appraisal of
the assets or liabilities of World of Science.
THE FULL TEXT OF RAYMOND JAMES' OPINION IS ATTACHED AS ANNEX B AND IS
INCORPORATED INTO THIS DOCUMENT BY REFERENCE. THE SUMMARY OF THE OPINION SET
FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
OPINION. Shareholders of World of Science are urged to read Raymond James'
opinion in its entirety for a description of the assumptions made, matters
considered and the qualifications and limitations of the review undertaken by
Raymond James in rendering its opinion. The opinion was provided to World of
Science's board of directors in connection with its consideration of the
transaction contemplated by the merger agreement; however, Raymond James'
opinion does not address the relative merits of the merger, any alternatives
thereto or the World of Science board of directors' decision to proceed with the
merger. Further, the opinion does not constitute a recommendation as to how
holders of World of Science's common stock should vote with respect to the
merger.
In connection with its opinion, Raymond James, among other things:
(i) reviewed the financial terms and conditions as stated in the August
3, 2000 draft of the merger agreement and assumed the final form of
the merger agreement would not vary in any respect material to
Raymond James' analysis;
(ii) reviewed the audited financial statements of World of Science as of
and for the years ended January 29, 2000, January 30, 1999 and
January 31, 1998 and its unaudited financial statements for the
quarters ended April 29, 2000 and May 1, 1999;
(iii) reviewed World of Science's annual reports filed on Form 10-K for the
past three fiscal years ended January 29, 2000, as well as its Form
10-Q for the quarter ended April 29, 2000;
(iv) reviewed other financial and operating information requested from
and/or provided by World of Science, including financial and
operating projections, lease agreements and other documents related
to World of Science;
(v) discussed with members of the senior management of World of Science
certain information relating to the aforementioned and any other
matters which Raymond James deemed relevant to its inquiry;
(vi) reviewed the historical market prices and trading activity of the
common stock of World of Science;
(vii) compared historical and projected revenues, operating earnings, net
income and capitalization of World of Science and certain other
publicly held companies deemed comparable to World of Science;
20
<PAGE>
(viii) reviewed financial and operating information concerning selected
business combinations which were deemed comparable in whole or in
part;
(ix) compared the merger consideration to the estimated proceeds to
holders of World of Science common stock that could be reasonably
expected in an orderly liquidation of the business; and
(x) conducted such other financial studies, analyses and investigations
as Raymond James deemed appropriate for rendering its opinion.
In preparing the opinion, Raymond James performed a variety of financial
and comparative analyses and made assumptions in conjunction with World of
Science with respect to assets, financial condition and other matters, many of
which are beyond the control of World of Science. The estimates of value arrived
at by Raymond James based on such analyses and the valuation results determined
from any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, and are inherently subject to
substantial uncertainty.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Each of the
analyses conducted by Raymond James was carried out in order to provide a
different perspective on the transaction and to add to the total mix of
information available. Raymond James did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support an
opinion as to fairness of the merger consideration from a financial point of
view. Rather, in reaching its conclusion, Raymond James considered the results
of the analyses in light of each other and ultimately reached its opinion based
on the results of all analyses taken as a whole. Raymond James did not place any
particular reliance or weight on any individual analysis, but instead concluded
that its analyses, taken as a whole, supported its determination.
With respect to financial forecasts and projections provided to Raymond
James by World of Science, Raymond James assumed that such forecasts were
reasonably prepared on bases reflecting the best available estimates and
judgments of World of Science's management as to the future financial
performance of World of Science and that such projections provided a reasonable
basis upon which Raymond James could form an opinion. Raymond James has assumed
no responsibility for, and expressed no view as to, such forecasts, projections,
or the assumptions on which they were based.
Raymond James' opinion is necessarily based on general economic, market,
financial and other conditions as they existed on, and could be evaluated as of,
the date of such opinion, as well as the information then currently available to
Raymond James. It should be understood that, although subsequent developments
may have affected Raymond James' report, Raymond James does not have any
obligation to update, revise or reaffirm its report.
The following paragraphs summarize the most significant quantitative and
qualitative analyses performed by Raymond James in arriving at its opinion and
reviewed by World of Science's board of directors. The summary set forth below
does not purport to be a complete description of either the analyses underlying
Raymond James' opinion or the presentation made by Raymond James to the World of
Science board of directors.
21
<PAGE>
Comparison of Historical Stock Price Performance. Raymond James examined
the history of the trading prices for World of Science common stock from January
3, 2000 to August 2, 2000. During this period, World of Science's common stock
closing price ranged from a low of $0.53 per share to a high of $1.88 per share.
The merger agreement sets forth a purchase price of $1.15 per share, which
represents a premium to the period's low closing price of 116.5% and a discount
to the period's high closing price of 38.7%. Raymond James has conducted a
review of 51 acquisition transactions completed since January 1, 1998 involving
public companies, each having a transaction value of $25 million or less, and
has observed the following range of historical premiums:
<TABLE>
<CAPTION>
1 Day Before
Agreement
(8/02/00)
-------
<S> <C>
Merger Consideration per Share to World of Science Shareholders $ 1.15
World of Science Closing Price $ 0.6875
Premium 67.3%
Historical Premiums for 51 Recent Comparable Transactions:
Low 4.3%
High 102.3%
Average 38.1%
</TABLE>
The premium of 67.3% being received by World of Science stockholders is
substantially greater than the 38.1% average premium observed for the sample of
comparable transactions. Raymond James also considered the premium of the merger
consideration to World of Science's closing price on the day prior to the
announcement, on January 4, 2000, that World of Science had retained Raymond
James to pursue certain strategic alternatives, including a sale of the
business. This premium was equal to 53.3%, and is also substantially greater
than the 38.1% average premium of merger consideration to the stock price
prevailing the day before the transaction announcement for the sample of
comparable transactions.
Comparison With Selected Publicly Traded Companies. Raymond James compared
selected financial data of World of Science with certain data from publicly
traded companies considered by Raymond James to be comparable to World of
Science. Specifically, Raymond James included in its review the following
specialty toy and mall-based retailers:
. Toys "R" Us
. Zany Brainy
. Brookstone
. Sharper Image
. Electronics Boutique
. Hibbett Sporting Goods
. Sunglass Hut
. Natural Wonders
Except for Toys "R" Us, all of the companies considered are small-capitalization
stocks as determined by their market value of equity of less than $500 million.
22
<PAGE>
In examining these comparable companies, Raymond James calculated the enterprise
value of each company as a multiple of its respective: (i) LTM sales; (ii) LTM
EBITDA; (iii) LTM EBIT; (iv) projected fiscal year ending January 2001 EBITDA;
and (v) projected fiscal year ending January 2002 EBITDA. The "enterprise value"
of a company is equal to the value of its fully diluted common equity plus the
average level of debt over the past four quarters and the liquidation value of
outstanding preferred stock, if any, minus the average level of cash and
marketable securities over the past four quarters. "LTM" is defined as the last
twelve-month period for which financial data for the company at issue has been
publicly reported. "EBITDA" is defined as earnings before interest expense,
taxes, depreciation and amortization. "EBIT" is defined as earnings before
interest expenses and taxes. Raymond James also calculated the market value of
the equity of each company as a multiple of: (i) current book value; (ii) LTM
earnings; (iii) projected fiscal year ending January 2001 earnings; and (iv)
projected fiscal year ending January 2002 earnings. All historical data was
derived from publicly available sources and all projected data was obtained from
First Call Research consensus earnings estimates and Wall Street analyst
projections. For the twelve months ended April 29, 2000, World of Science
reported negative EBITDA, EBIT and earnings and, therefore, there was no
financial basis on which to compare World of Science to the selected comparable
companies on these criteria. World of Science is also expected to report a loss
for the fiscal year ended January 2001 and comparison to the respective
multiples of the selected comparable companies was not meaningful. However,
World of Science is expected to generate positive EBITDA for the fiscal year
ended January 2001 and positive net income and EBITDA for the fiscal year ended
January 2002. Raymond James did make comparisons to the selected comparable
companies on these criteria. Raymond James' analysis of the comparable companies
yielded the following range of multiples:
<TABLE>
<CAPTION>
World of
Science Median Mean Range
--------- -------- ------ -------
<S> <C> <C> <C> <C>
Enterprise Value/LTM Sales 0.2 x 0.5 x 0.5 x 0.1 to 0.9 x
Enterprise Value/
FYE 1/2001 EBITDA 8.7 5.5 5.0 1.7 to 8.8
Enterprise Value/
FYE 1/2002 EBITDA 4.6 4.3 4.0 1.0 to 7.0
Equity Value/
FYE 1/2002 EPS 7.7 9.3 8.9 1.9 to 14.1
Equity Value/Book Value 0.3 2.0 2.3 0.2 to 6.4
</TABLE>
Analysis of Selected Mergers and Acquisitions. Raymond James reviewed
selected acquisitions involving companies in the specialty toy and mall-based
retail industries that Raymond James believed are reasonably comparable to World
of Science. These transactions consisted of:
Target/Acquiror:
. Noodle Kidoodle/Zany Brainy
. Funco/Barnes & Noble
. Afterthoughts/Claire's Stores
. Babbage's Etc./Barnes & Noble
. Camelot Music/Trans World Entertainment
. Imaginarium/Toys "R" Us
. Kay-Bee Toy & Hobby Shops/Consolidated Stores
As several of the targets were either private companies or divisions of larger
organizations, or in a distressed financial condition, reliable historical and
projected financial data was difficult to obtain. Consequently, Raymond James
could employ only two valuation methodologies in measuring consideration
received by target shareholders, neither of which Raymond James deemed as being
as relevant as EBITDA-based or other
23
<PAGE>
earnings-based methodologies. Raymond James calculated the enterprise value of
the acquired company implied by each of these transactions as a multiple of LTM
sales and the equity value of the acquired company as a multiple of book value.
Raymond James' analysis of these comparable acquisitions yielded the following
range of multiples:
<TABLE>
<CAPTION>
World of Median Mean Range
Science
--------- -------- ------ -------
<S> <C> <C> <C> <C>
Enterprise Value/LTM Sales 0.2 x 0.5 x 0.5 x 0.3 to 1.2 x
Equity Value/Book Value 0.3 1.5 2.2 0.6 to 4.2
</TABLE>
For purposes of this analysis, Raymond James focused primarily on the
Noodle Kidoodle/Zany Brainy transaction. This transaction was highlighted
because it was the most recent and relevant transaction when compared to the
merger. Additionally, both Noodle Kidoodle and Zany Brainy were public companies
with readily obtainable historical and projected financial data. Noodle Kidoodle
is a mall-based retailer of educational and non-violent children's products, a
close comparable to World of Science, and the transaction was completed on July
27, 2000. In addition to the above analysis, Raymond James calculated the
enterprise value of target Noodle Kidoodle implied by the transaction as a
multiple of: (i) LTM sales; (ii) projected fiscal year ending January 2001
EBITDA; and (iii) projected fiscal year ending January 2002 EBITDA. Raymond
James also calculated the equity value of Noodle Kidoodle implied by the
transaction as a multiple of book value. For the twelve months ended
April 29, 2000, World of Science reported negative EBITDA, EBIT and earnings
and, therefore, there was no financial basis on which to compare World of
Science to the Noodle Kidoodle acquisition on these criteria. Raymond James'
analysis of this transaction yielded the following multiples:
<TABLE>
<CAPTION>
Noodle Kidoodle/
World of Science Zany Brainy
---------------- ----------------
<S> <C> <C>
Enterprise Value/LTM Sales 0.2 x 0.3 x
Enterprise Value/FYE 1/2001 EBITDA 8.7 6.3
Enterprise Value/FYE 1/2002 EBITDA 4.6 4.2
Equity Value/Book Value 0.3 0.6
</TABLE>
As shown above, the merger consideration for World of Science shareholders
represents a greater multiple of fiscal 2001 and fiscal 2002 EBITDA than was
observed in the Noodle Kidoodle transaction.
Liquidation Analysis. As part of its analysis, Raymond James also attempted
to estimate the proceeds that World of Science's common stockholders could
reasonably be expected to receive in the event of an orderly liquidation of the
World of Science assets as of April 29, 2000. Raymond James is not an expert in
liquidation analyses and it relied upon conversations with and estimates of the
senior management of World of Science and a review of recent retail industry
liquidations, especially that of Learningsmith, a retailer comparable to World
of Science that liquidated its assets during the Christmas 1999 selling season.
Based on these analyses, Raymond James estimated that the expected proceeds from
an orderly liquidation of World of Science would likely be less than the merger
consideration of $1.15 per share.
Based upon all of the foregoing analyses and those discussed in the
opinion, Raymond James determined that the merger consideration was fair to
holders of World of Science common stock from a financial point of view.
24
<PAGE>
Engagement Letter. Raymond James is actively involved in the investment
banking business and regularly undertakes the valuation of investment securities
in connection with public offerings, private placements, business combinations
and similar transactions. The World of Science board of directors selected
Raymond James to act as its financial advisor in connection with the merger
based on Raymond James' qualifications, expertise and reputation. Pursuant to
the terms of an engagement letter executed by World of Science on January 3,
2000, World of Science paid Raymond James a non-refundable retainer fee of
$50,000 and became obligated to pay a fee of $150,000 when Raymond James
delivered its fairness opinion. Raymond James & Associates is also entitled to
receive a fee of $250,000 at the completion of the merger. In addition, World of
Science agreed to reimburse Raymond James, upon request by Raymond James from
time to time, for all out-of-pocket expenses up to $20,000 incurred by Raymond
James in connection with its engagement, and to indemnify Raymond James and
certain related persons against certain liabilities in connection with its
engagement, including liabilities under U.S. federal securities laws. As
described below in "Interests of Certain Directors and Executive Officers in the
Merger - Relationship of Director with Financial Advisor", Raymond James has
agreed to defer the payment of the $250,000 fee it is entitled to at the
completion of the merger.
Other Relationships. In the ordinary course of business, Raymond James and
its affiliates may own or actively trade the securities of World of Science for
their accounts and the accounts of their customers and, accordingly, may at any
time hold a long or short position in World of Science securities. Raymond James
has performed investment banking and other services for World of Science in the
past, including acting as a co-manager of World of Science's 1997 initial public
offering and has been compensated for such services. In addition, Thomas A.
James, chairman and chief executive officer of Raymond James, is a member of
World of Science's board of directors.
Interests of Certain Directors and Executive Officers in the Merger
In considering the recommendation of the board of directors to vote for the
proposal to adopt the merger agreement, stockholders of World of Science should
be aware that certain members of the World of Science board of directors and
members of its management team have agreements or arrangements that provide them
with interests in the merger that differ from those of World of Science
stockholders. The World of Science board of directors was aware of these
agreements and arrangements during its deliberations on the merits of the merger
and in determining to recommend to the stockholders of World of Science that
they vote for the proposal to adopt the merger agreement.
Indemnification and Insurance.
The merger agreement provides that, upon completion of the merger, World
of Science, then as the surviving corporation, and Natural Wonders, will, for a
period of six years from the completion of the merger, indemnify, defend and
hold harmless, and provide advancement of expenses to, all past and present
directors and officers of World of Science and WOSI on the Web in all of their
capacities:
. to the same extent they were indemnified or had the right to
advancement of expenses as of August 3, 2000, which is the date of the
merger agreement, pursuant to World of Science's certificate of
incorporation and by-laws; and
. to the fullest extent permitted by law, in each case for acts or
omissions occurring at or prior to the completion of the merger.
The merger agreement also provides that, upon completion of the merger,
World of Science, then as the surviving corporation, or Natural Wonders, will
cause to be maintained, for a period of
25
<PAGE>
six years after completion of the merger, the current policy of directors' and
officers' liability insurance maintained by World of Science, or a policy of at
least the same coverage and amounts containing terms and conditions which are,
in the aggregate, no less advantageous to the insured, with respect to claims
arising from facts or events that occurred on or before the completion of the
merger, although World of Science, then as the surviving corporation, or Natural
Wonders, will not be required to expend in any one year an amount in excess of
twice the annual premium currently paid by World of Science for directors' and
officers' liability insurance.
Assumption of Employment and Compensation Agreements; Payment of Severance
Benefits.
Natural Wonders has agreed to assume, and pay the severance benefits under,
the employment agreement of Fred Klaucke, the president and chief executive
officer of World of Science, and the compensation agreements of Charles
Callahan, the chief financial officer, vice president of finance and assistant
secretary of World of Science, and Christine Luchi, the vice president of
operations of World of Science.
In addition to the merger consideration for his stock, Mr. Klaucke will be
paid approximately $394,615 upon the closing of the merger transaction. Pursuant
to the terms of Mr. Klaucke's employment agreement, he may terminate his
employment with World of Science upon completion of the merger. Mr. Klaucke has
advised Natural Wonders that he intends to terminate his employment upon
completion of the merger. As a result of such termination, Mr. Klaucke will be
paid: (i) any current bonus entitlements and accrued vacation; and (ii) a lump
sum payment equal to $360,000. He is also entitled to continued participation
for 24 months in the benefit plans of World of Science immediately before the
completion of the merger or the provision of comparable benefits by Natural
Wonders, and the payment of any legal fees and expenses incurred by Mr. Klaucke
in enforcing his rights under the agreement. The present term of Mr. Klaucke's
agreement expires on January 31, 2002.
In addition to the merger consideration payable to Mr. Callahan and Ms.
Luchi, for their stock, Mr. Callahan will be paid approximately $129,230 and Ms.
Luchi will be paid approximately $104,121 upon the closing of the merger
transaction. Pursuant to the terms of their respective compensation agreements,
Mr. Callahan and Ms. Luchi may terminate their employment with World of Science
upon completion of the merger. Both Mr. Callahan and Ms. Luchi have advised
Natural Wonders of their intentions to terminate their employment. As a result,
the executive officer will be paid: (i) any current bonus entitlements and
accrued vacation; and (ii) a lump sum payment equal to twelve months of base
salary - $120,000 for Mr. Callahan and $100,000 for Ms. Luchi. In addition,
upon termination, any outstanding stock options previously granted to the
executive immediately vest and the executive is entitled to continued
participation for twelve months in the benefit plans of World of Science
immediately before the completion of the merger or the provision of comparable
benefits by Natural Wonders.
In addition, those executive officers may enter into consulting or
employment agreements or similar types of arrangements with Natural Wonders or
World of Science, as the surviving corporation.
26
<PAGE>
Relationship of Director with Financial Advisor.
Thomas James, one of World of Science's directors, is the chairman of the
board of directors and chief executive officer of Raymond James & Associates and
Raymond James Financial, Inc., its parent. World of Science paid Raymond James &
Associates a non-refundable retainer fee of $50,000 in January 2000, when it
retained Raymond James & Associates to assist World of Science in exploring and
evaluating various strategic alternatives to maximize stockholder value. At the
time Raymond James & Associates delivered its fairness opinion to World of
Science's board of directors, it became entitled to payment of a fee of
$150,000. At the completion of the merger, Raymond James & Associates will be
paid a fee of $250,000, together with the reimbursement of up to $20,000 of out-
of-pocket expenses. As discussed below, Raymond James & Associates has agreed to
defer the payment of $250,000 of its fee in consideration of a promissory note
and a warrant from Natural Wonders.
Lack of Financing Sufficient to Complete the Merger
On August 2, 2000, Natural Wonders entered into a term sheet with IBJ
Whitehall Retail Finance, Inc. and a term sheet with Hilco Capital LLP. The IBJ
Whitehall term sheet contemplates a senior revolving line of credit facility
providing for a maximum borrowing availability of $50.0 million, secured by a
first lien on all of the assets of Natural Wonders and its subsidiaries,
including World of Science. The IBJ term sheet contemplates that the credit
facility will be used to, among other things, pay the merger consideration,
refinance Natural Wonders' existing revolving line of credit, and finance the
working capital needs of the combined companies. The term sheet provides that,
the credit facility would bear interest at IBJ's prime rate or LIBOR plus 2.75%,
and would mature three years from the date of the closing of the merger. The
Hilco term sheet contemplates a junior secured term loan in an amount equal to
the lesser of: $5.0 million from the closing of the merger through December 15,
2000 and $2.5 million thereafter or 100% of the net recovery value of Natural
Wonders' eligible inventory, which will be determined after giving effect to the
inventory portion of IBJ's credit facility. The Hilco credit facility would be
secured by a second lien on all of the assets of Natural Wonders. The Hilco term
sheet contemplates that the proceeds of the Hilco credit facility would be used
to finance the merger transaction and ongoing working capital needs of the
combined companies. The Hilco term sheet provides that the Hilco credit facility
will bear interest at 20% per annum and will mature on December 15, 2001.
The IBJ and Hilco financing are both subject to the satisfaction of a
number of conditions, including Natural Wonders securing $1.25 million of
additional subordinated debt or equity beyond the amounts proposed by IBJ and
Hilco, the satisfactory completion of due diligence by Hilco and IBJ, there
being no material adverse change in the financial condition, business,
profitability, assets or operations of Natural Wonders and the approval of IBJ's
and Hilco's respective credit committees. The IBJ and Hilco term sheets are not
binding and do not evidence a commitment to extend credit to Natural Wonders.
There can be no assurance that the credit facilities and other transactions
contemplated by the term sheets will be consummated and, if not, that Natural
Wonders will be able to secure financing in an amount sufficient to complete the
merger or on acceptable terms.
Natural Wonders has informed World of Science that various principals of
Natural Wonders have agreed to provide $550,000 of financing toward the
additional $1.25 million required under the IBJ and Hilco term sheets, and that
Renaissance Capital has agreed to defer $450,000 of its fees, and Raymond James
& Associates has agreed to defer $250,000 of its fees.
27
<PAGE>
Completion and Effectiveness of the Merger
The merger will be completed when all of the conditions to completion of
the merger are satisfied or waived, including Natural Wonders having obtained
the necessary financing to pay the merger consideration and the adoption of the
merger agreement by the stockholders of World of Science. The merger will become
effective upon the filing of a certificate of merger with the New York
Department of the State.
We are working toward completing the merger as quickly as possible. We
expect to complete the merger during the third calendar quarter of 2000.
Structure of the Merger
To accomplish the merger, Natural Wonders will form a wholly-owned
subsidiary, Merger Sub. At the time the merger is completed, Merger Sub will be
merged into World of Science, and World of Science will be the surviving
corporation.
As a result of the merger, at the effective time, each share of common
stock issued and outstanding (other than shares owned by Natural Wonders, World
of Science or Merger Sub) will be converted into the right to receive, without
interest, the merger consideration of $1.15 per share. Upon consummation of
the merger, stockholders will cease to have any further ownership or other
interest in World of Science.
Payment for Shares; Disbursing Agent
Upon the consummation of the merger, each issued and outstanding share of
World of Science common stock, other than shares owned by Natural Wonders, World
of Science or Merger Sub, will be deemed for all purposes to represent only the
right of the holder to receive the merger consideration. American Stock Transfer
& Trust Company will act as disbursing agent in order to facilitate the payment
of the merger consideration in exchange for certificates previously representing
shares of World of Science common stock.
Instructions with regard to the surrender of certificates, together with a
letter of transmittal to be used for this purpose, will be mailed to
stockholders promptly after the effective date of the merger. Stockholders
should surrender certificates for shares of World of Science common stock in
accordance with the instructions in the letter of transmittal. Each holder of
common stock shall receive payment promptly after surrender of the certificate
or certificates representing his or her shares of World of Science common stock
and related documentation by mailing such stock certificate or certificates and
related documentation to the disbursing agent, for payment, as promptly as
practicable following the effective date of the merger, by return mail. Each
holder of shares held in street name by a broker, dealer, clearing agency or
other nominee should contact that entity as soon as possible prior to the
effective date of the merger to direct the entity to tender such holder's shares
as instructed by the letter of transmittal.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD
Upon receipt of a certificate or certificates for World of Science common
stock together with a duly executed letter of transmittal from a particular
stockholder, the disbursing agent will issue cash
28
<PAGE>
or a cash equivalent to the person or persons entitled thereto in an amount
equal to the product determined by multiplying the merger consideration of $1.15
per share by the number of shares of common stock represented by such
stockholder's certificate or certificates. No interest will accrue to holders of
common stock in respect of payments to which they become entitled upon
consummation of the merger.
If any payment for shares of common stock is to be made in a name other
than that in which the certificate or certificates for such shares are
registered on the stock transfer books of World of Science as of the effective
time of the merger, it will be a condition of such payment that the certificate
or certificates so surrendered be properly endorsed or otherwise be in
proper form for transfer, and that the person requesting such transfer pay to
the disbursing agent all transfer or other taxes or establish that such taxes
have been paid or are not required to be paid.
Natural Wonders has agreed in the merger agreement to deposit or cause to
be deposited in trust with the disbursing agent, not later than the date of the
closing of the merger, all of the cash required for payment of the aggregate
merger consideration to be made to all holders of World of Science common stock.
Dissenters' Rights
The following summary of the provisions of Section 623 of the New York
Business Corporation Law is not intended to be a complete statement of those
provisions and is qualified in its entirety by reference to the full text of
Section 623 of the New York Business Corporation Law, a copy of which is
attached to this proxy statement as Annex C and is incorporated into this
summary by reference.
Under New York law, World of Science common stockholders are entitled to
appraisal rights in connection with the merger.
If the merger is completed, each holder of World of Science common stock
who (1) files a written objection to the merger with World of Science, which
objection must include a notice of election to dissent, the holder's name and
residence address, the number of shares of common stock as to which dissent is
made and a demand for payment of the fair value of the holder's shares, prior to
the World of Science special meeting or at the special meeting, but before the
vote at the special meeting, and (2) follows the procedures and meets the
requirements set forth in Section 623, will be entitled to be paid for his or
her World of Science common stock by the surviving corporation the fair value in
cash of the shares of World of Science common stock. Within ten days after the
date of the special meeting, World of Science, as the surviving corporation in
the merger, must mail a notice to all stockholders who have complied with (1)
and (2) above notifying such stockholders of the approval of the merger.
29
<PAGE>
A dissenting stockholder may not dissent as to less than all shares of
World of Science common stock beneficially owned by the stockholder. At the time
of filing the notice of election to dissent or within one month thereafter, the
dissenting stockholder must submit certificates representing all of the
dissenting shares to World of Science or its transfer agent. Failure to submit
the certificates may result in the loss of such stockholder's dissenters'
rights.
Within 15 days after the expiration of the period within which stockholders
may file their notices of election to dissent or within 15 days after completion
of the merger, whichever is later, but in no event later than 90 days after the
special meeting, World of Science must make a written offer, which, if the
merger has not been consummated within such 90 day period, may be conditioned
upon such consummation, to each dissenting stockholder who has filed a notice
of election, to pay for the dissenting shares at a specified price which World
of Science considers to be their fair value. If World of Science and the
dissenting stockholders are unable to agree as to the fair value of the
dissenting shares, Section 623 provides for a judicial determination of the fair
value. The fair value of shares of World of Science common stock will be
determined by the New York Seventh Judicial District Supreme Court.
Upon completion of the merger, a dissenting stockholder shall cease to have
any of the rights of a stockholder, except the right to be paid the fair value
of the dissenting stockholder's shares, and any other rights under Section 623.
A vote against approval and adoption of the merger agreement does not
constitute the written objection required to be filed by a dissenting
stockholder. Failure by a stockholder to vote against approval and adoption of
the merger agreement, however, will not constitute a waiver of rights under
Section 623 provided that a written objection has been properly filed and such
stockholder has not voted any of his or her shares for the approval and adoption
of the merger agreement. A notice of election may be withdrawn by a stockholder
at any time prior to acceptance of World of Science's offer or within 60 days of
the effective time of the merger.
If you wish to exercise appraisal rights but have a beneficial interest in
shares which are held of record by or in the name of another person, such as a
broker or nominee, you should act promptly to cause the record holder to follow
the procedures set forth in Section 623 to perfect your appraisal rights.
A demand for payment of fair value should be signed by or on behalf of the
stockholder exactly as the stockholder's name appears on the stockholder's stock
certificates. If the shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, the demand should be executed in that
capacity, and if the shares are owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all joint owners. A record holder such as a broker who holds shares as
nominee for several beneficial owners may exercise appraisal rights for the
shares held for one or more beneficial owners and not exercise rights for the
shares held for other beneficial owners. In this case, the written demand should
state the number of shares for which payment of fair value is being demanded.
When no number of shares is stated, the demand will be presumed to cover all
shares held of record by the broker or nominee.
If any holder of World of Science common stock who demands payment of fair
value for his or her shares under Section 623 fails to perfect, or effectively
withdraws or loses the right to appraisal, his or her shares will be converted
into a right to receive $1.15 in cash, for each share of World of Science common
stock in accordance with the terms of the merger agreement. Dissenting shares
lose their status as dissenting shares if:
30
<PAGE>
. the merger is abandoned;
. the dissenting stockholder fails to make a timely written demand for
appraisal;
. the dissenting shares are voted in favor of the merger;
. neither World of Science nor the stockholder institutes a proceeding
to determine the rights of dissenting stockholders and to fix the fair
value of the dissenting shares within the statutory time periods
prescribed in Section 623; or
. the stockholder delivers to World of Science, as the surviving
corporation, within 60 days of the effective time of the merger, or
thereafter with World of Science's approval, a written withdrawal of
the stockholder's demand for appraisal of the dissenting shares,
although no appraisal proceeding in the New York Supreme Court may be
dismissed as to any stockholder without the approval of the court.
Failure to follow the steps required by Section 623 of the New York Business
Corporation Law for perfecting appraisal rights may result in the loss of
appraisal rights, in which event a World of Science stockholder will be entitled
to receive the consideration with respect to the holder's dissenting shares in
accordance with the merger agreement. In view of the complexity of the
provisions of Section 623 of the New York Business Corporation Law, World of
Science stockholders who are considering objecting to the merger should consult
their own legal advisors.
Regulatory Matters
There are no Federal or state regulatory requirements which remain to be
complied with in order to consummate the merger (other than the filing of the
certificate of merger by the New York Department of State).
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 prevents specified
transactions from being completed until required information and materials are
furnished to the Antitrust Division of the Department of Justice and the Federal
Trade Commission and specified waiting periods are terminated or expire. World
of Science and Natural Wonders each filed the required information and materials
to notify the Department of Justice and the Federal Trade Commission of the
merger and requested early termination of the specified waiting period. Both
World of Science and Natural Wonders received early termination of the specified
waiting period. Essentially, this means that the Antitrust Division of the
Department of Justice and the Federal Trade Commission have determined not to
challenge the merger on antitrust grounds. Notwithstanding the grant of early
termination of the waiting period, either the Antitrust Division of the
Department of Justice or the Federal Trade Commission could take action under
the antitrust laws if it later determines that such action is necessary or
desirable in the public interest, or other persons could take action under the
antitrust laws, including seeking to enjoin the merger. Additionally, at any
time before or after the completion of the merger, notwithstanding that the
applicable waiting period was terminated, any state in which either Natural
Wonders or World of Science conducts business could take action under the
antitrust laws as it deems necessary or desirable in the public interest. There
can be no assurance that a challenge to the merger will not be made or that, if
a challenge is made, we will prevail.
31
<PAGE>
The Merger Agreement
The following summary of the merger agreement is qualified in its entirety
by reference to the complete text of the merger agreement, which is incorporated
by reference and attached as Annex A to this proxy statement. We urge you to
read the full text of the merger agreement.
Parties to the Merger
World of Science, Inc. World of Science is a New York corporation. It is a
specialty retailer of a variety of traditional and distinctive science and
nature products including wind chimes, globes, binoculars, telescopes, solar
system models, dinosaur models and replicas, minerals, fossils, puzzles and
games. World of Science has developed a broad customer base, as its products
are purchased by customers of all ages for gift-giving, educational use and
entertainment. World of Science operates both a permanent and seasonal store
format. Permanent World of Science stores are open year-round under long-term
leases and seasonal stores are open during the holiday selling season, or for an
extended period beyond that season, under leases with shorter terms. At the
date of this proxy statement World of Science operated 85 permanent stores and
16 seasonal stores in 25 states, primarily in enclosed malls. In addition to
its traditional retail stores, World of Science operates an e-commerce retail
site, through its wholly-owned subsidiary, WOSI on the Web, Inc., which is a New
York corporation. The principal executive offices of World of Science are
located at 900 Jefferson Road, Building Four, Rochester, New York 14623, and its
telephone number is (716) 475-0100.
Merger Sub, Inc. Merger Sub will be a newly formed, wholly-owned
subsidiary of Natural Wonders, incorporated under the laws of the State of New
York in connection with the merger. It will not have carried on any activities
other than in connection with the merger. The principal offices of Merger Sub
are located at 4209 Technology Drive, Fremont, California 94538, and its
telephone number is (510) 252-9600.
Natural Wonders, Inc. Natural Wonders is a Delaware corporation. Its
principal offices are located at 4209 Technology Drive, Fremont, California
94538, and its telephone number is (510) 252-9600. Natural Wonders is a
specialty retailer of unique and affordable family gifts inspired by the wonders
of science and nature. Its products include telescopes, carvings, globes, home
garden items, ceramics, wind chimes, hats and shirts, books, tapes, cd's, videos
and a variety of interactive toys and games. Natural Wonders' target customers
are predominately well educated, middle income families. At the date of this
proxy statement Natural Wonders operated 177 retail stores in 39 states,
primarily in enclosed malls.
Representations and Warranties
Representations and Warranties by World of Science
The merger agreement contains customary representations and warranties by
World of Science as to:
. corporate organization and similar corporate matters concerning World
of Science and WOSI on the Web;
. the capital structure of World of Science;
. the power and authority of World of Science to execute the merger
agreement and complete the merger subject to stockholder approval;
. compliance with instruments, including the World of Science
certificate of incorporation and bylaws and other agreements to which
World of Science is a party;
. fair presentation of World of Science's financial statements and
reports filed with the Securities and Exchange Commission;
. absence of changes in the respective businesses of World of Science
and WOSI on the Web since January 29, 2000;
. no required filing or approvals from any governmental or regulatory
agency other than under the Hart-Scott Rodino Antitrust Improvements
Act, and the filing of this proxy statement with the Securities and
Exchange Commission and the filing of the certificate of merger by the
New York Department of State;
. pending or threatened litigation;
. obligations and liabilities;
. labor and employment matters;
. employee benefit matters;
. broker's and finder's fees;
. accuracy and truthfulness of information relating to World of Science
and WOSI on the Web contained in this proxy statement;
. tax matters;
32
<PAGE>
. description and title to, or leasehold interests in, all real
properties, and the absence, or the extent of, any liens and
encumbrances on property used by World of Science and WOSI on the Web;
. absence of any material breach or default under agreements, contracts
and other instrument to which World of Science is a party;
. ownership of and rights to use intellectual property and absence of
related infringement claims;
. insurance;
. contracts and other instruments of World of Science or WOSI on the
Web, which are material to or restrictive on the business of World of
Science or WOSI on the Web, or relate to independent consultants and
guarantees;
. arrangements or agreements with officers and directors;
. compliance with applicable laws, licenses or government
authorizations;
. environmental matters; and
. absence of any untrue representation or warranty.
Representations and Warranties by Natural Wonders
The merger agreement contains standard representations and warranties
by Natural Wonders and Merger Sub, its wholly-owned subsidiary, which will be
merged into World of Science pursuant to the merger, as to:
. corporate organization and similar corporate matters concerning
Natural Wonders and Merger Sub;
. the power and authority of Natural Wonders and Merger Sub to execute
the merger agreement and complete the merger;
. compliance with instruments, including the Natural Wonders' and Merger
Sub's respective certificates of incorporation and bylaws and other
agreements to which Natural Wonders or Merger Sub is a party;
. no required filing or approvals from any governmental or regulatory
agency other than under the Hart-Scott Rodino Antitrust Improvements
Act, and the filing of this proxy statement with the Securities and
Exchange Commission and the filing of the certificate of merger by the
New York Department of State;
. best efforts to obtain financing necessary for Parent and Merger Sub
to complete the merger;
. accuracy and truthfulness of information relating to Natural Wonders,
Merger Sub and Natural Wonders' affiliates contained in this proxy
statement; and
33
<PAGE>
. absence of any untrue representation or warranty.
Conduct of Business Pending the Merger. Under the merger agreement, World
of Science has agreed that, during the period before completion of the merger,
except as expressly contemplated or permitted by the merger agreement or to the
extent that Natural Wonders consents in writing, it will carry on its business
in the usual and ordinary course and will:
. preserve its business organization intact and maintain its existing
relationships with its customers, suppliers, employees, agents and
other business partners;
. file and cause WOSI on the Web to file all reports and returns when
due;
. provide Natural Wonders with access to its properties, books and
records;
. provide prompt notice of any breach or potential breach of a
representation, any material adverse change in the financial
condition, properties or businesses of World of Science or WOSI on the
Web or any event which would render its representations and warranties
untrue or inaccurate;
. convene a special meeting of its stockholders to consider and vote on
the merger;
. cause its independent auditors to prepare and deliver a letter
with respect to World of Science's interim financial statements;
. cancel all outstanding options to acquire shares of World of Science
common stock;
. use its best efforts to take, or cause to be taken, such action
necessary to complete the merger; and
. provide notice of its intention to enter into leases for seasonal
stores, and will not enter into a lease, for a seasonal store in a
mall where Natural Wonders currently maintains or has executed a lease
to operate a retail store, having a term beyond January 31, 2001, in a
mall where average mall sales for the prior year were below $225 per
square foot.
In addition, World of Science has agreed, subject to certain exceptions, to
comply and insure WOSI on the Web's compliance with specific restrictions
relating to the following:
. the declaration of dividends in respect of capital stock and the
split, combination, reclassification of its capital stock;
. the amendment of its certificate of incorporation or bylaws;
. the sale, pledge, disposition or encumbrance of its and WOSI on the
Web's capital stock, or securities convertible or exchangeable for, or
options, warrants or other rights to acquire its capital stock or the
capital stock of WOSI on the Web;
. the transfer, sale, lease, license, mortgage, pledge or other
disposition of any assets;
. incurrence of any indebtedness or other liability;
34
<PAGE>
. the acquisition or redemption of its capital stock;
. the authorization of capital expenditures in excess of $10,000
individually and $50,000 in the aggregate, or the making of an
investment in, or the acquisition of the assets or stock of, any other
person in excess of $10,000 individually and $50,000 in the aggregate;
. entering into new leases for permanent retail stores;
. the grant of any severance or termination pay to, or entering into any
employment agreement with, any director, officer or employee of World
of Science or WOSI on the Web;
. the adoption or amendment of any employment agreement or employee
benefit plan to increase compensation or benefits payable thereunder;
. the acquisition of control or majority ownership interest of any
business, corporation, partnership, association or other business
organization or division, or the acquisition of a substantial portion
of the foregoing entities' assets;
. the merger, consolidation or combination with another corporation;
. the modification, amendment or termination of any lease, contract or
agreement, or the waiver, release or assignment of any rights or
claims;
. cancelation or termination of insurance policies; and
. taking or agreeing or take any of the actions described above.
Interim Operations. In addition to the above operational covenants, World
of Science has agreed that from August 3, 2000, the date of the merger
agreement, until Natural Wonders has secured the financing necessary to
consummate the merger and has removed the condition to the closing of the merger
related to such financing, it will provide Natural Wonders with access,
generally, to World of Science's operating information. The information provided
will be primarily focused on World of Science's "open to buy" positions,
personnel issues, inventory and sales, and borrowings and cash position. Natural
Wonders will not have any control over the business operations of World of
Science and will have no right to participate in World of Science's purchasing,
hiring, borrowing or other operational decisions.
After Natural Wonders has secured the financing necessary to consummate the
merger and the condition to closing the merger related to such financing is
removed, World of Science has agreed to permit Natural Wonders to locate one or
more of its employees at World of Science's corporate headquarters in Rochester,
New York. Natural Wonders' employees would assume responsibility, in
coordination with World of Science's management, for direct oversight of World
of Science's acquisition of inventory and coordination of the shipment of
merchandise to World of Science stores.
35
<PAGE>
No Solicitation of Other Transactions. Pursuant to the merger agreement,
World of Science has agreed that it will not, and it will not permit WOSI on the
Web, or any officer, director, employee, representative or agent of World of
Science to, solicit or initiate inquiries, or the making of any proposal with
respect to the acquisition, business combination or purchase of all or a
significant portion of the assets of or any equity interest in World of Science
or WOSI on the Web.
Nothing in the merger agreement prohibits World of Science from
participating in discussions, negotiations or furnishing information in
connection with, or from considering, reviewing and accepting an unsolicited
third-party offer to acquire World of Science.
World of Science has agreed to notify Natural Wonders of any inquiries or
proposals received by, or if any information is requested from, or of any
discussions or negotiations being sought with, World of Science. World of
Science has also agreed to request or cause to be requested the return of all
information it may have provided to others prior to August 3, 2000, the date of
the merger agreement, in connection with the possible acquisition of World of
Science. In the event World of Science violates the non-solicitation provision
of the Merger Agreement or World of Science closes a transaction for the
acquisition of all or substantially all of World of Science shares of common
stock or assets arising out of an unsolicited third party purchase offer made
prior to the closing of the merger, World of Science is obligated to pay Natural
Wonders a break up fee of $150,000 within 30 days of the violation or closing of
the third-party transaction.
Conditions to the Completion of Merger. Each of World of Science's and
Natural Wonders' obligation to complete the merger is subject to the
satisfaction or waiver of the following conditions:
. Natural Wonders shall have secured the financing necessary to complete
the merger prior to August 25, 2000;
. the adoption of the merger agreement by the affirmative vote of
two-thirds of the outstanding shares of World of Science common stock;
. the absence of any law, order or injunction prohibiting completion of
the merger;
. the receipt of all necessary approvals and consents; and
. World of Science's receipt of a written opinion from Raymond James &
Associates that the merger consideration is fair from a financial
point of view to the World of Science stockholders.
The obligation of World of Science to complete the merger is subject to the
satisfaction of the following additional conditions, which may be waived by
World of Science:
. Natural Wonders shall have deposited or caused to be deposited in
trust with the disbursing agent an amount of cash equal to the
aggregate merger consideration to be paid to the holders of World of
Science common stock;
36
<PAGE>
. Natural Wonders shall have executed and delivered agreements of
assumption and acknowledgment of entitlement, agreeing to assume, and
pay the severance benefits under, Mr. Klaucke's employment agreement
and Mr. Callahan's and Ms. Luchi's compensation agreements;
. World of Science must have received a written opinion of counsel from
Sheppard, Mullin, Richter & Hampton, LLP with respect to the corporate
organization of Natural Wonders and Merger Sub, the power and
authority of Natural Wonders and Merger Sub to complete the merger,
the receipt of all necessary approvals, and the absence of any
conflict or breach under the certificates of incorporation and bylaws
of Natural Wonders and Merger Sub and other agreements to which
Natural Wonders or Merger Sub is a party in the performance of each of
their obligations under the merger agreement;
. the representations and warranties of Natural Wonders and Merger Sub
must be true and correct as of the date of the merger agreement and as
of the date of completion of the merger; and
. Natural Wonders and Merger Sub must have performed and complied in all
material respects with all of their respective agreements, covenants
and conditions required to be performed or complied with by each of
them under the merger agreement.
The obligations of Natural Wonders and Merger Sub to complete the merger
are subject to the satisfaction of the following additional conditions which may
be waived by Natural Wonders or Merger Sub:
. no material adverse change in the prospects, financial condition or
results of operations of World of Science between January 29, 2000 and
the completion of the merger;
. Natural Wonders and Merger Sub must have received from Harris Beach &
Wilcox, LLP, a written opinion with respect to the corporate
organization of World of Science, the absence of any issuance or
change in the authorized capital stock of World of Science, the due
authorization, validity and assessability of issued shares of World of
Science common stock, the power and authority of World of Science to
complete the merger, the receipt of all necessary approvals and the
absence of any conflict or breach under the certificate of
incorporation and bylaws of World of Science and other agreements to
which World of Science is a party in the performance of its
obligations under the merger agreement;
. World of Science's representations and warranties must be true and
correct as of the date of the merger agreement and as of the date of
completion of the merger; and
37
<PAGE>
. World of Science must have performed or complied in all material
respects with all agreements, covenants and conditions required to be
performed or complied with by it under the merger agreement.
Termination. The merger agreement may be terminated at any time prior to
the completion of the merger, whether before or after the stockholder approval
has been obtained:
. by either World of Science or Natural Wonders if the merger is not
completed on or before October 2, 2000, except that this right to
terminate the merger agreement will not be available to any party who
shall be in breach of its obligations under the merger agreement;
. by either World of Science or Natural Wonders if the financing
contingency is not removed by Natural Wonders in writing by August 25,
2000;
. by either World of Science or Natural Wonders if the shareholders
of World of Science do not approve the merger; and
. by either World of Science or Natural Wonders if the other party
materially breaches any of its representations and warranties or fails
to comply in any material respect with its covenants or other
agreements contained in the merger agreement.
Amendment, Extension and Waiver. The merger agreement may be amended by the
parties, by action taken by their respective boards of directors, at any time
before or after approval of the merger by the stockholders of World of Science
has been obtained. After the approval has been obtained, no amendment may be
made which by law requires further approval by the stockholders of World of
Science. All amendments to the merger agreement must be in writing and signed by
each party.
At anytime before the completion of the merger, the parties may, by action
taken or authorized by their respective boards of directors, waive any terms or
provisions of the merger agreement, provided such waiver is in writing and is
given by the party which is, or whose stockholders or directors are entitled to
the benefits of the term or provision waived.
Expenses. Whether or not the merger is completed, all expenses and fees
incurred in connection with the merger agreement and the merger will be paid by
the party incurring the expenses or fees, except that in the merger agreement
Natural Wonders has agreed to pay $150,000, upon the filing of a preliminary
proxy statement, of documented costs and expenses incurred by World of Science,
and $250,000 of such costs and expenses upon the mailing of this proxy
statement.
38
<PAGE>
Voting Agreement
In connection with the execution and delivery of the merger agreement,
Natural Wonders entered into a voting agreement with each of the directors of
World of Science under which they agreed to vote all their shares of World of
Science common stock in favor of the adoption of the merger agreement. As of the
record date for the special meeting, these directors owned shares of World of
Science common stock representing approximately 42% of the total voting power
of the outstanding shares of World of Science capital stock.
Each voting agreement prohibits the director from selling, transferring,
pledging, encumbering, assigning or otherwise disposing of any shares of World
of Science common stock.
The voting agreement terminates upon the earlier to occur of the completion
of the merger and the termination of the merger agreement in accordance with its
terms.
Certain Federal Income Tax Consequences of the Merger
The following summary is a general discussion of certain anticipated United
States federal income tax consequences of the merger to World of Science
stockholders. The summary assumes that stockholders are individuals or
corporations who do not have a special tax status (e.g., dealers in securities,
nonresident aliens, individual retirement accounts, or tax-exempt
organizations). The discussion is based upon existing federal tax law and does
not address any state, local or foreign tax consequences of the merger. The
discussion also does not describe certain special tax rules that may apply to
stockholders who acquired their stock pursuant to incentive stock options or
other stock compensation arrangements.
The exchange by stockholders of their shares of common stock for the merger
consideration pursuant to the merger will be a taxable transaction for federal
income tax purposes. A stockholder whose shares are exchanged generally will
recognize gain or loss equal to the difference between the amount of cash
received pursuant to the merger and his or her adjusted tax basis in the shares
exchanged therefor. Such gain or loss will constitute capital gain or loss if
the shares exchanged in the merger were held as capital assets. Capital gain or
loss will constitute long-term capital gain or loss if the stockholder's holding
period with respect to the shares is greater than one year and otherwise will
constitute short-term capital gain or loss.
Under current federal income tax law, the highest marginal tax rate
applicable to ordinary income of individuals is 39.6%, and the highest rate
applicable to corporations is 35%. Net capital gains (the excess of net long-
term capital gains over net short-term capital losses) generally are taxed at
rates up to 20% for individuals and at the regular corporate rates for
corporations. The excess of net short-term capital gains (the excess of short-
term capital gains over short-term capital losses) over net long-term capital
losses (the excess of long-term capital losses over long-term capital gains)
generally is taxed at the same rates as ordinary income for both individuals and
corporations, as applicable. Corporations may use capital losses only against
capital gains. Individuals may use capital losses only against capital gains and
up to $3,000 of ordinary income (married individuals filing separate returns may
each only apply capital losses against up to $1,500 of ordinary income).
39
<PAGE>
Compensatory stock option holders whose options are canceled in connection with
the merger in exchange for a cash payment will recognize ordinary compensation
income in the amount of such cash payment. World of Science will be required to
withhold applicable federal and state taxes from such payment.
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO
THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE MERGER, INCLUDING
POTENTIAL AND RECENT CHANGES OF LAW. THE FOREGOING SUMMARY IS INTENDED AS A
GENERAL DESCRIPTION ONLY OF CERTAIN MATERIAL TAX CONSEQUENCES AND DOES NOT
CONSIDER THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER.
Accounting Treatment of the Merger
The merger will be accounted for under the "purchase" method whereby the
purchase price paid for common stock will be allocated based upon the fair value
of the assets acquired and the liabilities assumed pursuant to the merger as of
the effective date of the merger.
PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The following tables set forth certain information regarding the beneficial
ownership of World of Science's common stock, as of the record date, by (i) each
person known by World of Science to be the beneficial owner of more than 5% of
the outstanding common stock (without taking into account shares of World of
Science's common stock that Natural Wonders may be deemed to beneficially own as
a result of the voting agreement), (ii) each of World of Science's directors and
executive officers, and (iii) all directors and executive officers of World of
Science as a group.
The nature of beneficial ownership shown in the tables is, unless otherwise
noted, shares for which the owner has sole voting and sole investment power.
Beneficial ownership as set forth in the table includes 108,000 presently
exercisable options to purchase shares of World of Science common stock. At the
effective time of the merger, each outstanding option to purchase common stock
is required to be canceled and converted into the right to receive the
difference between the merger consideration and the exercise price for those
options. The options listed in the following tables do not represent shares of
common stock entitled to vote at the special meeting.
Ownership information is based upon information furnished by the respective
persons listed.
Amount Percent of
Name of Beneficial Owner or Group of Beneficial Common Stock
and Nature of Beneficial Ownership Ownership Outstanding
---------------------------------- ------------- ------------
Fred H. Klaucke (1) ............................ 1,769,140 37.4%
Thomas A. James (2) ............................ 229,800 4.8%
Richard B. Callen (3) .......................... 34,335 *
Patrick J. Fulford (4) ......................... 6,500 *
Charles A. Callahan (5) ........................ 56,000 1.2%
Christine M. Luchi (6) ......................... 54,500 1.1%
40
<PAGE>
All executive officers and directors as a
Group (6 persons) /(7)/..................... 2,150,275 44.4%
------------------
* Less than 1%
(1) Includes 227,140 shares which are owned jointly with Mr. Klaucke's
spouse.
(2) Includes 213,800 shares held by trusts of which Mr. James is the sole
trustee and 16,000 shares subject to currently exercisable stock
options. Mr. James's business address is: Raymond James Financial,
Inc., 880 Carillon Parkway, St. Petersburg, Florida 33716.
(3) Includes 16,000 shares subject to currently exercisable stock options
and 8,335 shares held by a bank custodian for Mr. Callen's IRA
Account.
(4) Includes 4,000 shares subject to currently exercisable stock options.
(5) Includes 36,000 shares subject to currently exercisable stock options.
(6) Includes 36,000 shares subject to currently exercisable stock options.
(7) Includes 108,000 shares subject to currently exercisable stock options.
STOCKHOLDER PROPOSALS
If the merger is consummated, World of Science will not hold an annual
meeting of stockholders in 2001. However, if the merger is not consummated and
the 2001 annual meeting of stockholders is held, stockholders interested in
submitting a proposal for inclusion in the proxy materials for the Company's
annual meeting of stockholders in 2001 may do so by following the procedures
prescribed in Rule 14a-8 under the Securities Exchange Act of 1934 and the
Company's bylaws. To be eligible for inclusion in the Company's proxy statement
and proxy, stockholder proposals must be received by the Company's Corporate
Secretary no later than January 6, 2001.
Advance Notice Procedures. Under the Company's bylaws, no business may be
brought before an annual meeting unless it is specified in the notice of the
meeting (which includes shareholder proposals that the Company is required to
include in its proxy statement pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934) or is otherwise brought before the meeting by or at the
direction of the Board or by a shareholder entitled to vote at the meeting who
has delivered notice to the Secretary of the company (containing certain
information specified in the bylaws) not less than 90 or more than 120 days
prior to the first anniversary of the date of the Company's proxy statement for
the preceding year's annual meeting. These requirements are separate from and in
addition to the SEC's requirements that a shareholder must meet in order to have
a shareholder proposal included in the Company's proxy statement. The Company
may use its discretion in voting proxies with respect to stockholder proposals
that do not meet the foregoing advanced notice procedures.
OTHER MATTERS
Management knows of no other business to be transacted at the special
meeting, but, if any other matters do properly come before the special meeting,
the persons named as proxies or their substitute will vote or act with respect
to such other matters in accordance with the direction of a majority of the
board of directors of World of Science.
41
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Both World of Science and Natural Wonders file reports, proxy statements
and other information with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended. You may read and copy this
information at the following SEC locations:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp. Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York , New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You also may obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. Further information on the operation of the
SEC's Public Reference Room in Washington, D.C. may be obtained by calling the
SEC at 1-800-SEC-0330.
The SEC also maintains a worldwide website that contains reports, proxy
statements and other information about registrants, such as us, that file
electronically with the SEC. The address of that website is: http:\\www.sec.gov.
The SEC allows us to "incorporate by reference" into this proxy statement
information Natural Wonders has filed with it, which means we can disclose
important information to you by referring you to those documents. These
incorporated documents contain important business and financial information
about Natural Wonders that may not be included in or delivered with this proxy
statement. The information incorporated by reference is considered to be part of
this proxy statement. We incorporate by reference the documents listed below:
. Natural Wonders' 1999 Annual Report to Stockholders;
. Natural Wonders' Annual Report on Form 10-K for the year ended January 29,
2000;
. Natural Wonders' Report on Form 8-K dated May 23, 2000;
. Natural Wonders' Quarterly Report on Form 10-Q for the fiscal quarter ended
April 29, 2000;
. Natural Wonders' Report on Form 8-K dated August 4, 2000; and
. all other reports filed pursuant to Section 13(a) or Section 15(d) of the
Exchange Act since the end of Natural Wonders' fiscal year ended January 29,
2000.
A copy of Natural Wonders' 1999 Annual Report to Stockholders, Natural
Wonders' Annual Report on Form 10-K for the year ended January 29, 2000, Natural
Wonders' Report on Form 8-K dated May 23, 2000, Natural Wonders' Quarterly
Report on Form 10-Q for the quarter ended April 29, 2000 and Natural Wonders'
Report on Form 8-K dated August 4, 2000 are included in this proxy statement as
Annex D, Annex E, Annex F, Annex G and Annex H, respectively. The documents
incorporated by reference in this proxy statement and not delivered with this
proxy statement are available from us upon request. We will provide a copy of
the document(s) to you, without charge, upon your written or oral request within
one business day of our receipt of such request. If exhibits to these documents
are not themselves specifically incorporated by reference in this proxy
statement, then the exhibits will not be provided. Requests for documents should
be directed to: World of Science, Inc., 900 Jefferson Road, Building Four,
Rochester, New York 14623. Attention: Charles Callahan, telephone:
716-475-0100.
You should rely only on the information contained or incorporated by reference
in this proxy statement to vote your shares at the special meeting. World of
Science has not authorized anyone to provide you with information that is
different from what is contained in this proxy statement. This proxy statement
is dated August 15, 2000. You should not assume that the information contained
in this proxy statement is accurate as of any date other than that date. The
mailing of this proxy statement to stockholders does not create any implication
to the contrary.
42
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
----------------------------
AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"),
dated as of August 3, 2000, among World of Science, Inc., a New York corporation
(the "Company"), Natural Wonders, Inc. a Delaware corporation ("Parent"), and a
New York corporation to be formed, as referred to in Section 9.10, which will be
a wholly-owned subsidiary of Parent ("Merger Sub"), the Company and Merger Sub
being hereinafter collectively referred to as the "Constituent Corporations."
RECITALS
--------
The Company desires to merge with Merger Sub and Merger Sub desires to
merge with the Company, all upon the terms and subject to the conditions of this
Agreement.
The Company, Parent and Merger Sub desire to make certain
representations, warranties, covenants and agreements in connection with the
merger of the Company and Merger Sub, including the provision by Parent and
Merger Sub of the funds necessary to accomplish such merger.
The Company had 4,736,105 issued and outstanding shares of Common
Stock, par value $.01 per share ("Common Stock"), at June 30, 2000 which number
has not changed materially since such date through the date hereof. The merger
of the Company and Merger Sub will require the approval of this Agreement by the
affirmative vote of the holders of two-thirds of the outstanding shares of
Common Stock.
Merger Sub has 1,000 issued and outstanding shares of Common Stock,
par value $.01 per share ("Merger Sub Common Stock"). The merger of the Company
and Merger Sub will require the approval of this Agreement by the affirmative
vote of the holders of two-thirds of the outstanding shares of Merger Sub Common
Stock.
The Board of Directors of Parent have approved and adopted this
Agreement. The Board of Directors of the Company have adopted this Agreement and
have resolved, subject to the terms of this Agreement, to recommend to the
shareholders of the Company to vote to approve this Agreement in conjunction
with their approval of the merger.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions herein
contained, the parties hereto agree as follows:
A-1
<PAGE>
ARTICLE I
THE MERGER; CLOSING; EFFECTIVE TIME
1.1 The Merger. Subject to the terms and conditions of this Agreement,
at the Effective Time (as defined in Section 1.3) Merger Sub shall be merged
with and into the Company and the separate corporate existence of Merger Sub
shall thereupon cease (the "Merger"). The Company shall be the surviving
corporation in the Merger (sometimes hereinafter referred to as the "Surviving
Corporation") and shall continue to be governed by the laws of the State of New
York, and the separate corporate existence of the Company with all its rights,
privileges, immunities and powers and all its duties and liabilities as a New
York corporation organized under New York Business Corporation Law ("BCL") shall
continue unaffected by the Merger, except as set forth in Section 2.1.
1.2 Closing. The closing of the Merger (the "Closing") shall take
place:
(a) On or before October 2, 2000, unless extended by both the
Company and the Parent.
(b) By the exchange of executed copies of the various Merger
documents via facsimile, U.S. Mail, overnight courier or messenger service,
on the first business day on or by which the last to be fulfilled or waived
of the conditions set forth in Article VII hereof shall be fulfilled or
waived in accordance with this Agreement; or at such other time and place
and/or on such other date as the Company and Parent may agree.
1.3 Effective Time. As soon as practicable following Closing, but in
no event more than twenty-four (24) hours following the Closing, the Company,
Merger Sub and Parent will cause an executed Certificate of Merger (the "New
York Certificate of Merger") to be filed with the Department of State of the
State of New York (the "Department"). The Merger shall become effective at the
time the New York Certificate of Merger is filed by the Department, and such
time is hereinafter referred to as the "Effective Time."
1.4 Subsequent Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of the Constituent Corporations acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger or otherwise to carry out this Agreement, the officers and directors of
the Surviving Corporation shall be authorized to execute and deliver, in the
name and on behalf of each of the Constituent Corporations or otherwise, all
such deeds,
A-2
<PAGE>
bills of sale, assignments and assurances and to take and do, in the name and on
behalf of each of the Constituent Corporations or otherwise, all such other
actions and things as may be necessary or desirable to vest, perfect or confirm
any and all right, title and interest in, to and under such rights, properties
or assets in the Surviving Corporation or otherwise to carry out this Agreement.
ARTICLE II
CERTIFICATE OF INCORPORATION AND BYLAWS
OF THE SURVIVING CORPORATION
2.1 Effect of Merger. The parties agree to the following provisions
with respect to the Merger:
(a) The name of the Surviving Corporation from and after the
Effective Time shall continue to be "World of Science, Inc." until changed
in accordance with applicable law.
(b) From and after the Effective Time, the Certificate of
Incorporation of the Company shall be amended and restated to conform to
the Certificate of Incorporation of the Merger Sub as in effect immediately
prior to the Effective Time.
(c) The bylaws of the Merger Sub, as in effect immediately prior
to the Effective Time, shall be the bylaws of the Surviving Corporation
from and after the Effective Time until thereafter amended in accordance
with law, the Certificate of Incorporation of the Surviving Corporation and
such bylaws.
ARTICLE III
OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION
3.1 Officers and Directors. The president and the directors of the
Merger Sub (who are listed on Schedule 3.1 hereto) immediately prior to the
Effective Time shall be the president and the directors of the Surviving
Corporation, and the officers of the Company at the Effective Time (who are
listed on Schedule 3.1) shall be the officers of the Surviving Corporation, from
and after the Effective Time, until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation and removal in
accordance with the Surviving Corporation's Certificate of Incorporation and
Bylaws.
A-3
<PAGE>
ARTICLE IV
CONVERSION OR CANCELLATION OF SHARES
IN THE MERGER; APPRAISAL RIGHTS
4.1 Conversion or Cancellation of Shares. The manner of converting or
canceling shares of the Company and Merger Sub in the Merger shall be as
follows:
(a) At the Effective Time, each share of Common Stock ("Share")
issued and outstanding immediately prior to the Effective Time (other than
Shares owned by Merger Sub, Parent, any of Parent's subsidiaries or any
subsidiary of the Company) shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into the right to
receive $1.15 in cash (the "Merger Consideration").
(b) At the Effective Time, each Share issued and outstanding at
the Effective Time and owned by Merger Sub, Parent or any of its
subsidiaries, and each Share issued and held in the Company's treasury at
the Effective Time and each Share issued and outstanding at the Effective
Time and owned by any subsidiary of the Company, shall, by virtue of the
Merger and without any action on the part of the holder thereof, cease to
be outstanding, shall be canceled and retired without payment of any
consideration therefor and shall cease to exist.
(c) At the Effective Time, each share of Merger Sub Common Stock
issued and outstanding immediately prior to the Effective Time shall, by
virtue of the Merger and without any action on the part of Merger Sub or
the holders of such shares, convert into 1000 shares of Common Stock, par
value $.01 per share, of the Surviving Corporation.
4.2 Payment for Shares.
(a) Immediately prior to or at the time of the Closing, Parent
shall, or shall cause the Merger Sub to, and the Merger Sub shall,
irrevocably deposit or cause to be deposited with American Stock Transfer &
Trust Company or a similar institution acceptable to both the Parent and
the Company (the "Disbursing Agent"), as agent for the holders of Shares,
cash in the aggregate amount equal to the product of (i) the number of
Shares issued and outstanding immediately prior to the Effective Time
(other than the Shares owned by Merger Sub, Parent, any of Parent's
subsidiaries or any subsidiary of the Company) and (ii) the Merger
Consideration (the "Aggregate Merger Consideration"). The Disbursing Agent
shall, pursuant to irrevocable instructions, make the payments referred to
in Section 4.2(b). Pending distribution pursuant to Section 4.2(b) hereof
of the cash deposited with the Disbursing Agent, such cash shall be held in
trust for the benefit of the holders of the Company's Shares and the funds
shall not
A-4
<PAGE>
be used for any other purposes, and the Merger Sub and Surviving
Corporation may direct the Disbursing Agent to invest such cash, provided
that such investments: (i) shall be obligations of or guaranteed by the
United States of America, commercial paper obligations receiving the
highest rating from either Moody's Investors Services, Inc. or Standard &
Poor's Corporation, or certificates of deposit, bank repurchase agreements
or bankers acceptances of domestic commercial banks with capital exceeding
$250,000,000 (collectively "Permitted Investments") or money market funds
that are invested solely in Permitted Investments; and (ii) shall have
maturities that will not prevent or delay payments to be made pursuant to
Section 4.2(b) hereof. Each holder of a certificate or certificates
representing Shares cancelled at the Effective Time pursuant to Section
4.1(a) hereof may thereafter surrender such certificate or certificates to
the Disbursing Agent, as agent for such holder of Shares, which shall
effect the exchange of such certificate or certificates on such holder's
behalf for a period ending six months after the Effective Time. Any
interest and other income resulting from such investments shall be paid to
the Surviving Corporation .
(b) After surrender to the Disbursing Agent of any certificate that
prior to the Effective Time shall have represented any Shares, the
Disbursing Agent shall promptly distribute to the individual, corporation,
partnership, joint venture, association, joint stock company, trust, fund,
unincorporated association, organization or other entity (each, a "Person")
in whose name such certificate shall have been registered a check
representing the amount of Merger Consideration into which Shares shall
have been converted at the Effective Time pursuant to Section 4.1(a)
hereof. Until so surrendered and exchanged, each such certificate shall,
after the Effective Time, be deemed to represent only the right to receive
such Merger Consideration, and until such surrender and exchange, none of
the Merger Consideration shall be paid to the holder of such outstanding
certificate in respect thereof. The Surviving Corporation shall promptly
after the Effective Time, but in no event more than twenty-four (24) hours
after the Effective Time, cause to be distributed to such holders
appropriate materials (including a letter of transmittal and instructions
for its use in surrendering certificates representing the Shares in
exchange for payment of the Merger Consideration) to facilitate such
surrender.
(c) If any cash deposited with the Disbursing Agent for purposes of
payment in exchange for Shares remains unclaimed following the expiration
of six months after the Effective Time, such cash shall be delivered to the
Surviving Corporation by the Disbursing Agent, and thereafter the
Disbursing Agent shall not be liable to any Persons claiming any amount of
such cash, and the surrender and exchange shall be effected directly with
the Surviving Corporation (subject to applicable abandoned property,
escheat and similar laws). No interest shall accrue or be payable with
respect to any amounts that any such holder shall be so entitled
A-5
<PAGE>
to receive. The Surviving Corporation or the Disbursing Agent shall be
authorized to pay the cash attributable to any certificate theretofore
issued that has been lost or destroyed, upon receipt of satisfactory
evidence of ownership of the Shares represented thereby and of appropriate
indemnification.
(d) None of Parent, Merger Sub, the Surviving Corporation or the
Disbursing Agent shall be liable to any Person in respect of any
certificates representing Shares (or dividends or distributions with
respect thereto) or cash delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any certificates
representing Shares shall not have been surrendered prior to two years
after the Effective Time (or immediately prior to such earlier date on
which any cash, if any, in lieu of fractional Shares would otherwise
escheat to or become the property of any governmental entity), any such
cash, dividends or distributions in respect of such certificate shall, to
the extent permitted by applicable law, become the property of the
Surviving Corporation, free and clear of all claims or interest of any
Person previously entitled thereto.
4.3 Transfer of Shares After the Effective Time. No transfers of
Shares shall be made on the stock transfer books of the Surviving Corporation at
or after the Effective Time.
4.4 Appraisal Rights.
(a) Notwithstanding anything in this Agreement to the contrary,
any Shares ("Dissenting Shares") which are issued and outstanding
immediately prior to the Effective Time and which are held by shareholders
of the Company who have timely filed with the Company, before the taking of
the vote of the shareholders of the Company to approve this Agreement and
the Merger, written objections to such approval stating their intention to
demand payment for such Shares, and who have not voted such Shares in favor
of the adoption of this Agreement will not be converted as described in
Section 4.1(a) hereof, but will thereafter constitute only the right to
receive payment of the fair value of such Shares in accordance with the
applicable provisions of Section 623 of the BCL (the "Appraisal Rights
Provisions"); provided, however, that all Shares held by shareholders who
shall have failed to perfect or who effectively shall have withdrawn or
lost their rights to appraisal of such Shares under the Appraisal Rights
Provisions shall thereupon be deemed to have been canceled and retired and
to have been converted, as of the Effective Time, into the right to receive
the Merger Consideration, without interest, in the manner provided in
Section 4.1(a) hereof. Persons who have perfected statutory rights with
respect to Dissenting Shares as aforesaid will not be paid by the Parent or
the Surviving Corporation as provided in this Agreement and will have only
such rights as are provided by the Appraisal Rights Provisions with respect
to such Dissenting Shares.
A-6
<PAGE>
Notwithstanding anything in this Agreement to the contrary, if Parent or
Merger Sub abandons or is finally enjoined or prevented from carrying out,
or the shareholders rescind their adoption of, this Agreement, the right of
each holder of Dissenting Shares to receive the fair value of such
Dissenting Shares in accordance with the Appraisal Rights Provisions will
terminate, effective as of the time of such abandonment, injunction,
prevention or rescission.
(b) The Company shall give Parent: (i) prompt notice of any
demands for appraisal received by the Company, withdrawals of such demands,
and any other instruments served pursuant to the BCL and received by the
Company; and (ii) the opportunity to direct all negotiations and
proceedings with respect to demands for appraisal under the BCL. The
Company shall not, except with the prior written consent of Parent, make
any payment with respect to any demands for appraisal or offer to settle
any such demands.
(c) Each dissenting shareholder who becomes entitled under the
BCL to payment for Dissenting Shares shall receive payment therefor after
the Effective Time from the Surviving Corporation (but only after the
amount thereof shall have been agreed upon or finally determined pursuant
to the BCL) and such Dissenting Shares shall be canceled.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of the Company. The Company hereby
represents and warrants to Parent and Merger Sub that:
(a) Corporate Organization and Qualification. Each of the
Company and its subsidiaries (as identified on Schedule 5.1(a)) is a
corporation duly organized, validly existing and in good standing under the
laws of its respective jurisdiction of incorporation and is in good
standing as a foreign corporation in each jurisdiction where the properties
owned, leased or operated, or the business conducted, by it require such
qualification and where failure to so qualify or be in good standing in the
aggregate is reasonably likely to have a material adverse effect on the
financial condition, properties, businesses or results of operations of the
Company and its subsidiaries taken as a whole. Each of the Company and its
subsidiaries has the corporate power and authority and has all necessary
licenses and other governmental authorizations to carry on its respective
businesses as they are now being conducted. Except as set forth in Schedule
5.1(a), neither the Company nor any of its subsidiaries has received
written notice that any such license, franchise, permit or other
authorization is not valid and sufficient for such ownership and the
conduct of such business. The
A-7
<PAGE>
Company has made available to Parent a complete and correct copy of each of
the Company's and its subsidiaries' Certificates of Incorporation, as
amended to date, and each of the Company's and its subsidiaries' Bylaws, as
amended to date. Each of the Company's and its subsidiaries' Certificate of
Incorporation and Bylaws so delivered are in full force and effect. No
jurisdiction in which either the Company or any subsidiary of the Company
is authorized to do business specifically restricts in a manner material to
the business of the Company and its subsidiaries, any of them from engaging
in any lines of business in which the Company or any subsidiary of the
Company is currently engaged .
(b) Authorized Capital. The authorized capital stock of the
Company consists of 10,000,000 Shares, of which 4,736,105 Shares were
outstanding on June 30, 2000, 5,000,000 shares of preferred stock, par
value $.01 per share, none of which were outstanding on June 30, 2000 and
343,850 Shares were held by the Company as treasury stock on June 30, 2000.
All of the outstanding Shares have been validly issued and are fully paid
and nonassessable. The Company has no Shares reserved for issuance, except
that, as of June 30, 2000, there were 337,500 Shares reserved for issuance
(which amounts are sufficient to meet all such commitments) pursuant to the
Company's stock option plans and other employee benefit plans (all option
plans so referred to being called, collectively, the "Stock Option Plans")
and are identified on Schedule 5.1(b). Except as contemplated by this
Agreement and the related acquisition arrangements or otherwise set forth
in the Company Reports, as hereinafter defined or Schedule 5.1(b), to the
best knowledge of the Company there is no existing voting trust or voting
agreement with respect to the voting of 10,000 or more Shares.
(c) Corporate Authority. Subject only to approval of this
Agreement by the affirmative vote of the holders of two-thirds of the
outstanding Shares, the Company has the requisite corporate power and
authority and has taken all corporate action necessary in order to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. This Agreement is a valid and binding agreement of the Company
enforceable against the Company in accordance with its terms.
(d) Compliance. Except as set forth in Schedule 5.1(d) or as
otherwise specifically disclosed herein the execution and delivery of this
Agreement by the Company do not, and the consummation of the transactions
contemplated hereby by the Company will not, constitute or result in: (i) a
breach or violation of, or a default under, the Certificate of
Incorporation or Bylaws of the Company or any of its subsidiaries; (ii) a
breach or violation of, a default under or the triggering of any
obligations pursuant to, any of the Company's or any of its Subsidiaries'
employee benefit plans or arrangements, any grant, obligation or
A-8
<PAGE>
award made under any of the foregoing or any contract, arrangement, policy
or understanding entered into with any employee or employees of the Company
or any of its subsidiaries; or (iii) a breach or violation of, or a default
under or an event which, with notice or lapse of time or both, would become
a default or permit the acceleration of any obligations under, or the
creation of a lien, pledge, security interest or other encumbrance on
assets pursuant to (with or without the giving of notice or lapse of time
or both), any provision of any obligation or guarantee for borrowed money,
agreement, lease, contract, arrangement or other obligation ("Contracts")
of the Company or any of its subsidiaries or any law, rule, ordinance or
regulation or judgment, decree, order, award or governmental or non-
governmental permit or license to which the Company or any of its
subsidiaries or any of their respective properties and assets is subject,
except in the case of clauses (ii) and (iii) above insofar as it relates to
Contracts, for such breaches, violations, defaults, events or accelerations
which, alone or in the aggregate, are not reasonably likely to have a
material adverse effect on the financial condition, properties, businesses
or results of operations of the Company and its subsidiaries and its
subsidiaries taken as a whole.
(e) Company Reports; Financial Statements. The Company has
delivered to Parent true and complete copies of: (i) the annual reports on
Form 10-K for the fiscal years ending January 31, 1998, January 30, 1999,
January 29, 2000, as filed with the Securities and Exchange Commission
("SEC") by the Company; (ii) all other reports required to be filed by the
Company pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 since January 31, 1998, including Form 10-Q for the first quarter
ended April 29, 2000; (iii) all proxy statements furnished to shareholders
of the Company since January 31, 1998; and (iv) all registration statements
and other documents as filed with the SEC by the Company under the
Securities Act of 1933 since January 31, 1998 (collectively, the "Company
Reports"). As of their respective dates, except as otherwise disclosed in
Schedule 5.1(e), the Company Reports did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances in which they were made, not misleading; provided that this
and any other representation or warranty herein relating to the Company
Reports shall be interpreted as if Rule 412 under the Securities Act of
1933 were directly applicable to the same. Each of the consolidated balance
sheets of the Company included in or incorporated by reference into the
Company Reports (including the related notes and schedules) fairly presents
the consolidated financial position of the Company and its subsidiaries as
of its date and each of the consolidated statements of income,
stockholders' equity and cash flow of the Company included in or
incorporated by reference into the Company Reports (including any related
notes and schedules) fairly presents the consolidated results of
operations, retained earnings and changes in financial position, as the
case may be, of the Company for
A-9
<PAGE>
the periods set forth therein (subject, in the case of unaudited
statements, to normal year-end audit adjustments which will not be material
to the Company and its subsidiaries), in each case in accordance with
generally accepted accounting principles ("GAAP") consistently applied
during the periods involved, except as may be noted therein or may be
permitted by Form 10-Q. Other than the Company Reports, the Company has not
filed any other definitive reports or statements with the SEC since January
29, 2000.
(f) Absence of Certain Changes. Except as disclosed in the
Company Reports or in Schedule 5.1(f), since January 29, 2000, the Company
and its subsidiaries have conducted their respective businesses only in,
and have not engaged in any material transaction other than according to,
the ordinary and usual course and there has not been: (i) any material
adverse change in the financial condition, properties or ongoing business
of the Company or any its subsidiaries which could result in any such
change; (ii) in the case of the Company, any declaration setting aside or
payment of any dividend or other distribution with respect to its capital
stock; (iii) any change by the Company in accounting principles or methods;
or (iv) any restatement or proposed restatement of the Company's balance
sheet as of January 29, 2000; provided, however, the expenses and fees
incurred by the Company in connection with this Agreement and the
transactions contemplated herein, including but not limited to, those fees
and expenses identified in Schedule 6.13 to this Agreement, shall be deemed
to have been incurred in the ordinary and usual course and shall not be
deemed to have a material adverse affect on the prospects, financial
condition or results of operations of the Company. Since January 29, 2000,
except as provided for herein or as disclosed in the Company Reports or in
Schedule 5.1(f) and other than in the ordinary course, there has not been
any increase in the compensation payable or to become payable by the
Company and its subsidiaries to any officer or employee, and the Company
has not entered into or made any increase in any bonus, insurance, pension
or other employee benefit plan, payment or arrangement made to, for or with
any such officers or employees.
(g) Governmental Approvals. Other than the filings and approvals
provided for in Section 1.3 and those required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act"), and the Securities
Exchange Act of 1934 (the "Exchange Act"), no notices, reports or other
filings are required to be made by the Company or any of its subsidiaries
with, nor are any consents, registrations, approvals, permits or
authorizations required to be obtained by the Company from, any
governmental or regulatory authorities of the United States, the several
States and any foreign jurisdiction in which the Company or any subsidiary
does business in connection with the execution and delivery of this
Agreement by the Company and the consummation of the transactions
contemplated hereby by the Company, the failure to make or
A-10
<PAGE>
obtain any or all of which could have a material adverse effect on the
financial condition, properties, business or results of operations of the
Company and its subsidiaries, or which could prevent, delay or materially
burden the transactions contemplated by this Agreement.
(h) Litigation and Liabilities. Except as disclosed in the
Company Reports or in Schedule 5.1(h), there are no: (i) actions, suits or
proceedings pending or, to the best knowledge of the management of the
Company, threatened against the Company or any of its subsidiaries; or (ii)
obligations or liabilities, whether or not accrued, contingent or
otherwise, or any facts or circumstances of which the management of the
Company is aware, including, without limitation, those relating to
environmental and occupational safety, and health matters, that, alone or
in the aggregate, could result in a claim against, obligation of or
liability to the Company or any of its subsidiaries which could have a
material adverse effect on the financial condition of the Company and its
subsidiaries; provided, however, the expenses and fees incurred by the
-------- -------
Company in connection with this Agreement and the transactions contemplated
herein, including but not limited to, those fees and expenses identified in
Schedule 6.13 to this Agreement, shall be deemed to have been incurred in
the ordinary and usual course and shall not be deemed to have a material
adverse affect on the prospects, financial condition or results of
operations of the Company.
(i) Labor and Employment. Except as set forth in Schedule
5.1(i): (i) no collective bargaining agreement presently covers any
employees of the Company or any subsidiary of the Company in connection
with their employment by the Company or any subsidiary of the Company, nor
is any currently being negotiated by the Company or any subsidiary of the
Company; (ii) there is no unfair labor practice complaint against the
Company or any subsidiary of the Company pending before the National Labor
Relations Board or any comparable state, local or foreign agency; (iii)
there is no labor strike, dispute, slowdown, stoppage or organizational
effort actually pending or, to the best knowledge of the Company,
threatened against or involving the Company or any subsidiary of the
Company; (iv) the Company has not classified or otherwise treated any
worker as an independent contractor; and (v) the Company does not have any
arrangement or agreement, pursuant to which it leases employees.
(j) Employee Benefits.
(i) Except as set forth in Schedule 5.1(j), at the date
hereof, neither the Company, nor any trade or business (whether or not
incorporated) which is under control, or which is treated as a single
employer, with Company under Section 414(b), (c), (m) or (o) of the
Internal Revenue Code of 1986, as amended (the "Code") ("ERISA Affiliate")
maintains, contributes or is
A-11
<PAGE>
obligated to contribute to any employee benefit plan under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), any employee
stock purchase, stock option, bonus or executive compensation plans,
programs, funds, trusts, arrangements and practices (such plans, programs,
funds, trusts, arrangements and practices of the Company and its ERISA
Affiliates being referred to as the "Company Plans"), including employee
benefit plans within the meaning set forth in Section 3(3) of ERISA, or
other similar arrangements for the provision of benefits or perquisites.
Neither the Company nor any ERISA Affiliate maintains, participates in, or
contributes to, or has ever maintained, participated in, or contributed to
any "Multiemployer Plan" within the meaning of Section 3(37) of ERISA, any
"Multiple Employer Plan" within the meaning of Section 413(c) of the Code,
or any Company Plan subject to Title IV or Section 302 of ERISA.
(ii) With respect to each Company Plan, the Company has
heretofore delivered to Parent true and complete copies of each of the
following documents: (i) a copy of the Company Plan and any amendments
thereto (or if the Company Plan is not a written plan, a description
thereof); (ii) a copy of the three most recent annual reports and actuarial
reports, if required under ERISA, and the most recent report prepared with
respect thereto in accordance with Statement of Financial Accounting
Standards No. 87; (iii) a copy of the most recent summary plan description
required under ERISA with respect thereto; (iv) if the Company Plan is
funded through a trust or any third party funding vehicle, a copy of the
trust or other funding agreement and the latest financial statements
thereof; and (v) the most recent determination letter received from the
Internal Revenue Service with respect to each Company Plan intended to
qualify under Section 401 of the Code.
(iii) Except as set forth in Schedule 5.1(j), (i) there have been
no prohibited transactions within the meaning of Section 406 or 407 of ERISA or
Section 4975 of the Code with respect to any of the Company Plans that could
result in any penalties, taxes or liabilities; (ii) none of the Company Plans
has incurred any "accumulated funding deficiency" (as defined in Section 302 of
ERISA and Section 412 of the Code), whether or not waived, as of the last day of
the most recent fiscal year of each of the Company Plans ended prior to the date
of this Agreement; (iii) each of the Company Plans has been operated and
administered in all material respects in accordance with applicable laws during
the period of time covered by the applicable statute of limitations; (iv) each
of the Company Plans which is intended to be "qualified" within the meaning of
Section 401 (a) of the Code has been determined by the Internal Revenue Service
to be qualified, and such determination has not been modified, revoked or
limited by failure to satisfy any condition thereof or by a subsequent amendment
thereto or a failure to amend, except that it may be necessary to make
additional
A-12
<PAGE>
amendments retroactively to maintain the "qualified" status of such Company
Plans, and the period for making any such necessary retroactive amendments
has not expired; and (v) there are no pending, or to the knowledge of the
Company, threatened or anticipated claims involving any of the Company
Plans other than claims for benefits in the ordinary course.
(iv) Except as set forth in Schedule 5.1(j), no Company Plan
provides medical, surgical, hospitalization, death or similar benefits
(whether or not insured) for employees or former employees of the Company
or any Subsidiary for periods extending beyond their retirement or other
termination of service, other than: (i) coverage mandated by the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"), and other applicable law; (ii) death benefits under any tax
qualified pension plan; or (iii) benefits the full cost of which is borne
by the current or former employee (or beneficiary of such employee). The
Company and any ERISA Affiliate which maintains a "group health plan"
within the meaning of Section 5000(b)(1) of the Code, have complied with
the notice and continuation requirements of Section 4980B of the Code or
Part 6 of Title I of ERISA and the applicable regulations thereunder.
(v) Schedule 5.1(j) contains a true and complete summary or
list of or otherwise describes all material employment contracts and all
other employee benefit arrangements with "change of control" or similar
provisions and all severance, retirement or termination agreements,
arrangements, policies or practices with directors, executive officers or
any other employees.
(vi) Except as set forth in Schedule 5.1(j), there are no
agreements which will or may provide payments to any officer, employee,
independent contractor, shareholder, or highly compensated individual which
will be "parachute payments" under Code Section 280G that may be
nondeductible to the Company or subject to tax under Code Section 4999 for
which the Company or any ERISA Affiliate would have withholding liability.
(vii) Except as set forth in Schedule 5.1(j) or as expressly
provided in this Agreement, the consummation of the transactions
contemplated by this Agreement will not, either alone or in combination
with another event: (i) entitle any current or former employee, independent
contractor or officer of the Company or any Subsidiary to severance pay,
unemployment compensation or any other payment; or (ii) accelerate the time
of payment or vesting, or increase the amount of compensation due any such
employee, independent contractor or officer.
(viii) All Company Plans that are subject to the laws of any
jurisdiction outside the United States are in material compliance with such
A-13
<PAGE>
applicable laws, including relevant tax laws relating thereto, and the
requirements of any trust deed under which they are established.
(k) Brokers and Finders. Neither the Company nor any of its
officers, directors or employees has employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finders' fees
in connection with the transactions contemplated herein, except that the
Company has employed Raymond James & Associates, Inc. as its financial
advisor, pursuant to an agreement dated January 3, 2000, a copy of which is
attached with Schedule 5.1(k).
(l) Proxy Statement. The Company Information (as hereinafter
defined) contained in the Company's Proxy Statement with respect to the
shareholders meeting referred to in Section 6.3 (the "Proxy Statement")
will include in all material respects all statements required to be
contained therein and will not, either on the date the Proxy Statement is
first mailed to shareholders or on the date of such shareholders meeting,
contain any statement which, at the time and in the light of the
circumstances under which it is made, is false or misleading with respect
to any material fact or omit to state any material fact necessary in order
to make the statements therein not false or misleading or necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for such shareholders meeting which has become
false or misleading. For the purposes of this Agreement, the term "Company
Information" means all information with respect to the Company and its
affiliates provided specifically for use in the Proxy Statement.
(m) Tax Matters. Except as set forth in Schedule 5.1(m), each of
the Company and the subsidiaries of the Company has filed all Federal,
state, local and foreign tax returns required to be filed by it and each
such return is complete and accurate in all material respects. The Company
and the subsidiaries of the Company have paid all taxes of any nature
whatsoever, with any related penalties, interest and liabilities (any of
the foregoing being referred to herein as a "Tax") that are shown on such
tax returns as due and payable on or before the date hereof, other than
such Taxes as are being contested in good faith and which are listed on
Schedule 5.1(m). The provisions for current and deferred Taxes reflected on
the Company's most recent balance sheet included in the Company Reports are
sufficient, as of the balance sheet date, in all material respects in
accordance with generally accepted accounting principles consistently
applied. Except as set forth in Schedule 5.1(m), there are no material
claims or assessments pending against the Company or any of the
subsidiaries of the Company for any alleged Tax deficiency, and the Company
does not know of any threatened Tax claims or assessments against the
Company or any of the subsidiaries of the Company, which, (i) in any case
involves amounts in excess of $10,000, or (ii) questions the
A-14
<PAGE>
availability to the Company of its net operating loss carry-forward as
disclosed in the Company Reports, and there are currently no agreements in
effect with respect to the Company, any of the subsidiaries of the Company
or the affiliated group of which the Company is the common parent
corporation to extend the period of limitations for the assessment or
collection of any Tax imposed by the Code.
(n) Properties. Schedule 5.1(n) contains a true and complete
list and brief description of all real estate owned or leased by the
Company or any subsidiary of the Company. Except as set forth in Schedule
5.1(n) or the Company Reports: (i) the Company or a subsidiary of the
Company has good title to or a leasehold estate in all real properties and
improvements listed in Schedule 5.1(n), as well as to or in any personal
property, including, without limitation, software used by the Company and
its subsidiaries, free and clear of any mortgages, liens, security
interests or other encumbrances; (ii) all leases for leased premises remain
in full force and effect and, except as otherwise set forth in Schedule
5.1(n), have not been materially modified since January 29, 2000; and (iii)
all leased premises are in good condition and repair, ordinary wear and
tear excepted, and there does not exist any condition which materially
interferes with the economic value or use thereof, as such leased premises
are currently being used. The Company has delivered to Parent a true and
complete list and brief description of all items of machinery, equipment,
motor vehicles, office furniture, fixtures and similar personal property
owned or leased by the Company or any subsidiary of the Company having (in
the case of any item owned) an original cost in excess of $10,000 per item
and under which (in the case of any item leased) payments per item to the
owner thereof exceed $5,000 per annum. Except as set forth in such
Schedule, each of the items of machinery, equipment, motor vehicles, office
furniture, fixtures and similar personal property identified in the list
previously delivered to Parent is in good operating condition and repair,
ordinary wear and tear excepted, and there does not exist any condition
which materially interferes with the economic value or use thereof, as such
property is currently being used.
(o) No Defaults. This Agreement does not contravene or otherwise
avoid any existing contract or agreement by or with the Company. Except as
set forth in Schedule 5.1(o), there is no material breach or default, and
no event which with notice or lapse of time or both would constitute a
material breach or default, on the part of the Company or of any subsidiary
of the Company, or to the best knowledge of the Company, of any other party
thereto, under any material contract (including, without limitation,
contracts with agents, managers and brokers), agreement, lease, license,
mortgage, note, bond, indenture, guarantee, instrument or commitment to
which the Company or any such subsidiary of the Company is a party or to
which the property of any thereof is subject.
A-15
<PAGE>
(p) Patents, Trademarks and Names. The Company or a subsidiary
of the Company, as the case may be, owns all material rights in its name
and logo, pays no royalty to anyone under any of them and has the right to
bring actions for the infringement thereof. Except as set forth in Schedule
5.1(p), to the Company's knowledge the conduct by the Company and the
subsidiaries of the Company of their business does not infringe in any
material respect upon or violate the trademarks, service marks, trade
names, trade secrets, copyrights, patents, licenses or rights of any other
person or entity, or the right of any other person or entity to the
exclusive use of a name in any location.
(q) Insurance. The Company and its subsidiaries are adequately
insured in accordance with retail industry practice in the following areas
(excluding policies issued by them and reinsurance or similar items in
their favor): liability, theft, fidelity, casualty and other similar normal
forms of business insurance held by the Company or any subsidiary of the
Company. The Company has provided Parent with a true and complete list of
all policies of insurance held by the Company or any subsidiary of the
Company (specifying the insurer, amount of coverage, annual premium, type
of insurance, policy number and any pending claims thereunder).
(r) Contracts. Schedule 5.1(r) contains a true and complete list
of every agreement (including existing leases and lease proposals) and
instruments to which the Company or any subsidiary of the Company is a
party or by which any of them is bound and which are not otherwise set
forth in the Schedules hereto which: (i) is material to the business of the
Company and its subsidiaries taken as a whole; (ii) contains covenants
limiting the freedom of the Company or any subsidiary of the Company to
compete in any line of business or with any person; (iii) would be effected
by the execution of this Agreement; (iv) relates to any consulting
agreement; or (v) involves a guarantee of payment or performance; in each
case as the same may have been supplemented or amended prior to the date
hereof.
(s) Dealings with Officers and Directors. Except as set forth in
Schedule 5.1(s), no Director or officer has a material conflicting interest
against the Company and its subsidiaries taken as a whole. Except for the
employee benefit arrangements referred to in Section 5.1(j) and as
otherwise set forth in the Company Reports or in Schedule 5.1(s), neither
the Company nor any subsidiary of the Company is a party to any agreement
(other than sales commission agreements entered into in the ordinary course
of business) involving payments to any person or entity based on the
profits or gross revenues of the Company or any subsidiary of the Company.
A-16
<PAGE>
(t) Compliance with Applicable Laws; Licenses, etc. The present
conduct by each of the Company and each of its subsidiaries of their
respective businesses does not violate any applicable United States
Federal, state or local, or foreign, law, statute, order, license or other
governmental authorization, rule or regulation, in each case in a manner
which, when taken together with any similar or related violations, could
have a material adverse effect on the financial condition, properties,
businesses, results of operations, or prospects of the Company and its
subsidiaries taken as a whole; and neither the Company nor any of its
subsidiaries has received written notice that any such violation is being
alleged.
(u) Environmental Matters. The Company is in material compliance
with all applicable environmental laws which compliance includes, but is
not limited to, the possession of all needed government permits required
under applicable environmental laws. Except as set forth in Schedule
5.1(u), there are no environmental claims threatened or pending against the
Company or any of its subsidiaries or any facility maintained or operated
by the Company or its subsidiaries.
(v) Disclosure. No representation or warranty made by the
Company in this Agreement or as provided herein contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained therein, in the light of
circumstances under which made, not false or misleading.
5.2 Representations and Warranties of Parent and Merger Sub. Parent
and Merger Sub jointly and severally represent and warrant to the Company that:
(a) Corporate Organization and Qualification. Each of Parent and
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation.
Parent has made available to the Company a complete and correct copy of
Parent's charter documents. Merger Sub has made available to the Company a
complete and correct copy of Merger Sub's Certificate of Incorporation and
Bylaws. Parent's charter documents and Merger Sub's Certificate of
Incorporation and Bylaws so delivered are in full force and effect.
(b) Corporate Authority. Parent and Merger Sub each have the
requisite corporate power and authority and have taken all corporate action
necessary in order to execute and deliver this Agreement and to consummate
the transactions contemplated hereby. This Agreement is a valid and binding
agreement of Parent and Merger Sub enforceable against Parent and Merger
Sub in accordance with its terms.
A-17
<PAGE>
(c) Compliance. The execution and delivery of this Agreement by
Parent and Merger Sub do not and the consummation of the transactions
contemplated hereby by Parent and Merger Sub will not, constitute or result
in (i) a breach or violation of, or a default under, the charter documents
of Parent or the Certificate of Incorporation or Bylaws of Merger Sub or
(ii) a breach or violation of, a default under or an event which, with
notice or lapse of time or both would become a default or permit the
acceleration of any obligation under, or the creation of a lien, pledge,
security interest or other encumbrance on assets pursuant to (with or
without the giving of notice or the lapse of time), any provision of any
Contract of Parent or Merger Sub or any law, ordinance, rule or regulation
or judgment, decree, order, award or governmental or non-governmental
permit or license to which Parent or Merger Sub or any of their respective
properties and assets is subject, except, in the case of clause (ii) above,
for such breaches, violations, defaults or accelerations which, alone or in
the aggregate, are not reasonably likely to have a material adverse effect
on the consummation of the transactions contemplated by this Agreement.
(d) Governmental Approvals. Other than the filings provided for
in Section 1.3, and those required under the HSR Act, and the Exchange Act,
no notices, reports or other filings are required to be made by Parent or
Merger Sub with, nor are any consents, registrations, approvals, permits or
authorizations required to be obtained by Parent or Merger Sub from, any
governmental or regulatory authorities of the United States, the several
States and any foreign jurisdictions in connection with the execution and
delivery of this Agreement by Parent and Merger Sub and the consummation of
the transactions contemplated hereby by Parent and Merger Sub, the failure
to make or obtain any or all of which could prevent, materially hinder or
materially burden the transactions contemplated by this Agreement.
(e) Financing. Parent will use its best efforts to obtain
available financing by August 25, 2000 to ensure that Parent and Merger Sub
each fulfill and satisfy their respective obligations under this Agreement
and to ensure the consummation of the transactions contemplated hereby,
including (but not limited to) Parent's or Merger Sub's deposition of cash,
in an amount equal to the Aggregate Merger Consideration, with the
Disbursing Agent in accordance with Section 4.2(a) for the payment of the
Aggregate Merger Consideration in accordance with Sections 4.1(a) and
4.2(a) of this Agreement.
(f) Proxy Statement. The Acquiror Information (as hereinafter
defined) contained in the Proxy Statement will include in all material
respects all statements required to be contained therein and will not,
either on the date the Proxy Statement is first mailed to shareholders or
on the date of the shareholders meeting referred to in Section 6.3, contain
any statement which, at the time and in
A-18
<PAGE>
the light of the circumstances under which it is made, is false or
misleading with respect to any material fact or omit to state any material
fact necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for such
shareholders meeting which has become false or misleading. For the purposes
of this Agreement, the term "Acquiror Information" means all information
with respect to Parent, Merger Sub and its affiliates, the financing of the
transactions contemplated hereby, any securities of Parent or Merger Sub,
the plans of Parent with respect to the Surviving Corporation after the
Effective Time and any other written information concerning Parent or
Merger Sub or any of its affiliates specifically for use in the Proxy
Statement.
(g) Form S-2 Status and Annual Report Compliance. Parent meets
the requirements for use of Form S-2 of the Securities Act of 1933, and its
1999 Annual Report to Shareholders, at the time of its original
preparation, met the requirements of Rule 14a-3 of the Exchange Act.
(h) Disclosure. No representation or warranty made by the Parent
or the Merger Sub in this Agreement contains any untrue statement of a
material fact or omits a material fact necessary in order to make the
statements contained therein, in light of circumstances under which made,
not false or misleading.
ARTICLE VI
COVENANTS
6.1 Interim Operations of the Company. The Company covenants and
agrees that after the date hereof, and prior to the Effective Time (unless
Parent shall otherwise agree in writing and except as otherwise contemplated by
this Agreement):
(a) the business of the Company and its subsidiaries shall be
conducted only in the ordinary and usual course and, to the extent
consistent therewith, each of the Company and its subsidiaries shall use
its best efforts to preserve its business organization intact and maintain
its existing relations with customers, suppliers, employees, agents and
business partners;
(b) the Company shall not: (i) sell or pledge or agree to sell
or pledge any stock owned by it in any of its subsidiaries; (ii) amend its
Certificate of Incorporation or Bylaws; (iii) split, combine or reclassify
the outstanding Shares; or (iv) declare, set aside or pay any dividend
payable in cash, stock or property with respect to the Shares;
A-19
<PAGE>
(c) neither the Company nor any of its subsidiaries shall: (i)
issue, sell, pledge, dispose of or encumber any additional shares of, or
securities convertible or exchangeable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of capital stock
of any class of the Company or its subsidiaries other than Shares issuable
pursuant to options or rights outstanding on the date hereof under the
existing employee benefit plans of the Company and its subsidiaries; (ii)
transfer, lease, license, sell, mortgage, pledge, dispose of or encumber
any assets other than in the ordinary and usual course of business, or
incur or modify any indebtedness or other liability other than in the
ordinary and usual course of business; (iii) acquire directly or indirectly
by redemption or otherwise any shares of the capital stock of the Company
of any class; (iv) authorize any capital expenditure which is in excess of
$10,000 individually or $50,000 in the aggregate, or make any acquisition
of, or investment in, assets or stock of any other person in excess of
$10,000, individually or $50,000 in the aggregate; or (v) enter into a new
lease for permanent stores (for purposes of this Agreement, "permanent
store" shall mean a store evidenced by a lease having a term of more than
12 months);
(d) the Company shall not enter into a lease for a seasonal
store: (i) without first notifying Parent of its intention to do so, which
notification shall identify the proposed location of the seasonal store;
(ii) in a mall where Parent currently maintains or has executed a lease to
operate a retail specialty Natural Wonders store; (iii) having a lease term
beyond January 31, 2001; or (iv) in a mall where the prior year average
mall sales per square foot were below $225.
(e) neither the Company nor any of its subsidiaries shall grant
any severance or termination pay to, or enter into any employment agreement
with any director, officer or other employee of the Company or such
subsidiaries (other than in the ordinary course of business and consistent
with past practice or as otherwise provided in this Agreement); and neither
the Company nor any of its subsidiaries shall adopt, or amend to increase
compensation or benefits payable under, any employment agreement or
arrangement, bonus, deferred compensation, pension, retirement, profit
sharing, stock option, stock purchase or other employee benefit plan (other
than increases granted in the ordinary course of business and consistent
with past practice or as otherwise provided in this Agreement);
(f) neither the Company nor any of its subsidiaries shall
modify, amend or terminate any of its leases, contracts or agreements or
waive, release or assign any rights or claims, except in the ordinary and
usual course of business;
(g) neither the Company nor any subsidiary shall permit any
insurance policy naming it as a beneficiary or a loss payable payee to be
canceled
A-20
<PAGE>
or terminated without notice to Parent, except in the ordinary and usual
course of business;
(h) neither the Company nor any subsidiary shall acquire control
or majority ownership of any other corporation, association, joint venture,
partnership, business trust or other business entity, or acquire control or
majority ownership of all or a substantial portion of the assets of any of
the foregoing, or merge, consolidate or otherwise combine with any other
corporation; an d
(i) neither the Company nor any of its subsidiaries will enter
into an agreement to do any of the foregoing.
6.1A Interim Operating Agreement. Subject to the terms and
conditions of Article VI, the Company and Parent agree to use their best
reasonable efforts to cooperate and coordinate with respect to the basic
operating procedures described below, during the period following the execution
of this Agreement and through and until the Effective Date.
(a) Immediately after the execution of this Agreement, the
Company will provide Parent with access to certain operating information,
including, but not limited to, documents and records relating to "open to
buy" positions, personnel, inventory and sales, borrowings and cash
position. During this operating period, the Parent's involvement would be
limited to information gathering. All business and operating decisions
would be exclusively made by the Company, and the Parent would have no veto
or approval authority.
(b) After the Parent has received a binding financing commitment
in the amount necessary to make the payment described in Sections 4.1(a)
and 4.2(a) and released the financing contingency set forth in Section
7(i), the Parent shall have the right to place one or more employees at the
Company's headquarters office in Rochester, New York to review, monitor and
comment on open to buy and inventory positions. During this operating
period, the Parent's employees' involvement would be limited to monitoring
and coordinating the future integration of the two companies' operations.
All business and operating decisions would be made exclusively by the
Company, and the Parent would have no veto or approval authority.
(c) After the Parent has received a binding financing commitment
in the amount necessary to make the payment described in Sections 4.1(a)
and 4.2(a) and released the financing contingency, the proxy statement has
been cleared by the SEC and the definitive proxy statement has been mailed
to the Company's shareholders, the Parent's employees on site at the
Rochester headquarters would assume responsibility, in coordination with
the Company's management, for direct oversight of inventory decisions (not
purchasing decisions)
A-21
<PAGE>
and coordination of the shipment of merchandise out of the Company's
distribution center and into the Company's stores.
6.2 Acquisition Proposals. The Company will not, nor will it permit
any of its subsidiaries or any officer, director, employee or any investment
banker, attorney, accountant or other agent retained by the Company or any of
its subsidiaries to initiate or solicit, directly or indirectly, any inquiries
or the making of any proposal with respect to any acquisition, business
combination or purchase of all or any significant portion of the assets of, or
any equity interest in, the Company or any subsidiary thereof, or otherwise
facilitate any effort or attempt to do or seek any of the foregoing. The Company
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing. Nothing in this Section 6.2 or Section 6.1(h) shall
prohibit the Company's Board of Directors from participating in any discussions,
negotiations or furnishing information in connection with, or from considering,
reviewing and accepting an unsolicited third-party offer to acquire the Company.
The Company will notify Parent immediately if any such inquiries or proposals
are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with the
Company. The Company will promptly request or cause to be requested from each
other person which has heretofore executed a confidentiality agreement in
connection with its consideration of acquiring the Company the return all
confidential information heretofore furnished to such person by or on behalf of
the Company.
6.3 Board of Directors Approval; Meeting of the Company's
Shareholders; Preparation of Proxy Statement. The Company's Board of Directors
have voted to approve this Agreement and the Company will take all action
necessary in accordance with applicable law and its Certificate of Incorporation
and Bylaws to convene a meeting of holders of Shares as promptly as practicable
to consider and vote upon the approval of this Agreement and the Merger.
Concurrently with the signing of this Agreement, each member of the Board of
Directors of the Company has entered into a voting agreement with the Parent to
vote to approve the Merger and each shall recommend that the shareholders
approve the Agreement and the Merger. At any such meeting of the Company all of
the Shares then owned by Merger Sub and its affiliates will be voted in favor of
this Agreement and the Merger. The Proxy Statement shall not be filed, and no
amendment or supplement to the Proxy Statement will be made by the Company,
without the prior review and consultation with Parent and its legal counsel. The
Company and its legal counsel will promptly notify the Parent and its legal
counsel of the receipt of any SEC comments on the Proxy Statement or any other
communication received from the SEC with respect to the Proxy Statement or
otherwise related to the Merger.
6.4 Letter of Company's Accountants. The Company shall cause to be
delivered to Parent a letter of the Company's independent auditors, dated a date
within
A-22
<PAGE>
two business days before the Closing and addressed to the Company's Board of
Directors, in form and substance reasonably satisfactory to Parent, to the
effect that:
(a) they are public accountants, independent with respect to
both the Company and its subsidiaries, within the meaning of the Exchange
Act and the applicable published rules and regulations thereunder;
(b) the financial statements of the Company and its consolidated
subsidiaries examined by them comply as to form in all material respects
with the applicable accounting requirement of the Exchange Act and of the
published rules and regulations thereunder; and
(c) at the request of the Company, they have: (1) reviewed the
unaudited financial statements of the Company and its consolidated
subsidiaries, included in the Company's Form 10-Q for the period ended
April 29, 2000; and (2) consulted with certain officers of the Company
responsible for financial and accounting matters as to certain specified
matters, and, based on such procedures, nothing has come to their attention
which would cause them to believe that (A) any unaudited financial
statements of the Company and its consolidated subsidiaries included in the
Company's Form 10-Q for the period ended April 29, 2000 do not comply as to
form in all material respects with the applicable accounting requirements
of the Exchange Act and of the published rules and regulations thereunder;
or (B) such unaudited financial statements are not fairly presented in
conformity with generally accepted accounting principles (except as
permitted by Form 10-Q of the SEC) applied on a basis substantially
consistent with that of the audited financial statements of the Company
included in the Company's Annual Report on Form 10-K for the period ended
January 29, 2000; or (C) there were, except as set forth in such letter,
any material decreases, as compared with the corresponding period in the
preceding year, in consolidated revenues or in the total or per share
amounts of income before extraordinary items, income before income taxes or
net income of the Company and its consolidated subsidiaries.
6.5 Filings; Other Action. Subject to the terms and conditions herein
provided, the Company, Parent and Merger Sub shall: (a) promptly make their
respective filings and thereafter make any other required submissions under the
HSR Act with respect to the Merger; and (b) use their best efforts to promptly
take, or cause to be taken, all other action and do, or cause to be done, all
other things necessary, proper or appropriate under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement.
6.6 Access and Agreement to Cooperate. Upon reasonable notice, the
Company shall (and shall cause each of its subsidiaries to) afford officers,
employees,
A-23
<PAGE>
counsel, accountants and other authorized representatives of Parent
("Representatives") access, during normal business hours throughout the period
prior to the Effective Time, to its properties, books, Contracts and records
(except for minutes of Board meetings relating to any confidential discussion of
this Agreement and the transactions contemplated thereby) and, during such
period, the Company shall (and shall cause each of its subsidiaries to) furnish
promptly to Parent all information concerning its business, properties and
personnel as Parent may reasonably request, provided that no investigation
pursuant to this Section 6.6 shall affect or be deemed to modify any
representation or warranty made by the Company. Parent and Merger Sub will not,
and will cause their respective Representatives not to, use any information
obtained pursuant to this Section 6.6 or Section 6.1A for any purpose unrelated
to the consummation of the transactions contemplated by this Agreement. Subject
to the requirements of law, pending consummation of the transactions herein
contemplated, Parent and Merger Sub will keep confidential, and will cause their
respective Representatives to keep confidential, all information and documents
obtained pursuant to this Section 6.6 and Section 6.1A. Upon any termination of
this Agreement, Parent will collect and deliver to the Company all such
documents obtained by it or any of its Representatives or Merger Sub's
Representatives then in their possession and any copies thereof. The second,
third and fourth sentences of this Section 6.6 shall survive any termination of
this Agreement. Company will not, and will cause its representatives not to, use
any information obtained from Parent in the course of negotiations relating to
this Agreement or any transaction contemplated by this Agreement, for any
purpose unrelated to the consummation of the transactions contemplated by this
Agreement. Subject to the requirements of law, pending consummation of the
transactions herein contemplated, the Company will keep confidential, and will
cause its representatives to keep confidential, all such information and
documents obtained from Parent. Upon any termination of this Agreement, the
Company will collect and deliver to Parent all such documents obtained by it or
any of its representatives then in their possession and any copies thereof. The
obligations set forth in the preceding sentence of this Section 6.6 shall
survive any termination of this Agreement.
6.7 Notification of Certain Matters. The Company shall give prompt
notice to Parent of: (a) any notice of, or other communication relating to, any
breach or prospective breach of the representations made in Section 5.1(d)
received by the Company or any of its subsidiaries subsequent to the date of
this Agreement and prior to the Effective Time; (b) any material adverse change
in the financial condition, properties or ongoing businesses of the Company and
its subsidiaries or the occurrence of any event which, so far as reasonably can
be foreseen at the time of its occurrence, could result in any such change; and
(c) any event occurring subsequent to the date of this Agreement which would
render any representation or warranty of the Company contained in this Agreement
untrue or inaccurate as of the date when made and, except for changes expressly
contemplated by this Agreement and except as to representations and warranties
which are expressly limited to a state of facts existing at a time prior to the
A-24
<PAGE>
Closing, at and as of the Closing as if made on the Closing Date. Each of the
Company and Parent shall give prompt notice to the other party of any notice or
other communication from any third party alleging that the consent of such third
party is or may be required in connection with the transactions contemplated by
this Agreement.
6.8 Publicity. The Company and Parent shall consult with each other
in issuing any press releases or otherwise making public statements with respect
to the transactions contemplated hereby and in making any filings with any
federal or state governmental or regulatory agency or other proper authority.
6.9 Employee Benefits. Immediately prior to and conditional upon the
Closing, the Company shall take whatever action is necessary to cause the
adoption of resolutions to terminate the Company's 401(k) Plan. The Company
shall, within 90 days after the Closing, apply for a determination from the IRS
that the termination of the Company's 401(k) Plan has not adversely affected its
qualified status under Section 401(a) of the Code. Upon receipt of a favorable
IRS determination letter applicable to the termination of the Company's 401(k)
Plan, the Parent, in its sole discretion, shall cause its 401(k) Plan to accept
any voluntary rollover contribution or transfer from the Company's terminated
401(k) Plan.
Following the Effective Time, the Company's employees will be
permitted to participate in the employee benefit plans of Parent as in effect on
the date thereof on terms substantially similar to those provided to employees
of Parent. Until such time as Parent causes employees of the Company to
participate in the employee benefit plans of Parent, employees of the Company
will continue to participate in the Company's benefit plans (other than its
Stock Option Plans) on substantially similar terms to those in effect
immediately prior to the Closing.
If any employee of the Company or any of the Company's subsidiaries
becomes a participant in any employee benefit plan, practice or policy of Parent
or any of its affiliates or the Surviving Corporation, such employee shall be
given credit under such plan, to the extent permitted therein, for all service
with the Company and any of the Company's subsidiaries prior to the Effective
Time, for purposes of determining eligibility (including, without limitation,
waiting periods) and vesting. In addition, if any employees of the Company or
its subsidiaries employed as of the Closing Date become covered by a medical
plan of Parent or any of its affiliates or the Surviving Corporation, to the
extent permitted by the Parent's group insurance providers, such employees shall
be given credit for any co-payment or deductible paid under the Company's
medical plan prior to the Closing.
6.10 Stock Options. On or prior to the Effective Time, the Company
shall take such actions as may be necessary such that, at the Effective Time,
each stock option outstanding pursuant to the Stock Option Plans together with
any rights related thereto
A-25
<PAGE>
("Options"), whether or not then exercisable, shall only entitle the holder
thereof, upon surrender thereof, to receive, at or after the Effective Time, an
amount in cash equal to the difference between the Merger Consideration per
Share and the exercise price per Share of such Option multiplied by the number
of Shares previously subject to such Option.
6.11 Indemnification. For six years after the Effective Time, the
Surviving Corporation and the Parent, jointly and severally, shall indemnify,
defend and hold harmless the present and former officers and directors of the
Company and its subsidiaries (an "Indemnified Party") against all losses,
claims, damages or liabilities arising out of actions or omissions occurring on
or prior to the Effective Time to the full extent permitted or required under
New York law and the Company's Certificate of Incorporation and Bylaws in effect
at the date hereof, including provisions relating to advances of expenses
incurred in the defense of any action or suit, provided that any determination
required to be made with respect to whether an Indemnified Party's conduct
complies with the standards set forth under New York law and the Company's
Certificate of Incorporation and Bylaws shall be made by independent counsel
selected by the Surviving Corporation and reasonably satisfactory to the
Indemnified Party. Either the Parent or the Surviving Corporation shall maintain
the Company's existing officers' and directors' liability insurance ("D&O
Insurance") for a period of six years after the Effective Time so long as the
annual premium therefor is not in excess of twice the last annual premium paid
prior to the date hereof (approximately $120,000) (the "Current Premium");
provided that the Surviving Corporation or Parent, as the case may be, may
substitute therefor policies for officers' and directors' liability insurance of
at least the same coverage and amounts containing terms and conditions which are
not less advantageous than the Company's existing D & O Insurance policy. This
Section 6.11 shall survive the closing of the transactions contemplated hereby,
and is expressly intended to be for the benefit of each of the Indemnified
Parties and their heirs and representatives (each of whom shall be entitled to
enforce this Section 6.11 against Parent, the Company, the Surviving Corporation
or any successors and assigns thereof) and shall be binding on all such
successors and assigns of the Parent, Merger Sub, the Company and the Surviving
Corporation. In connection with any liquidation of the Surviving Corporation,
Parent shall expressly assume, and shall cause each of its direct and indirect
subsidiaries to assume, the obligations of the Surviving Corporation under this
Section 6.11. In the event that Parent or the Surviving Corporation or any of
its successors or assigns: (i) consolidates with or merges into any other person
or entity and shall not be the continuing or surviving corporation or entity of
such consolidation or merger; or (ii) transfers or conveys all or substantially
all of its properties and assets to any person or entity, then and in each such
case, proper provision shall be made so that the successors and assigns of
Parent, Surviving Corporation and their respective successors or assigns, as the
case may be, assume the obligations set forth in this Section 6.11.
A-26
<PAGE>
6.12 Reports; Taxes; etc. Except as otherwise consented to in writing
by Parent, prior to the Effective Time of the Merger, the Company will, and will
cause each subsidiary of the Company to, duly and timely (by the due date or any
duly granted extension thereof) file all reports and returns required to be
filed with Federal, state, local, foreign and other authorities.
6.13 Expenses. Subject to the terms and conditions of the sentence
immediately below, the Parent and the Company will each separately bear its own
expenses incurred in connection with this Agreement or any transaction
contemplated by this Agreement. The Parent agrees to pay all reasonable,
documented costs and expenses incurred by the Company in connection with the
Merger in the following amounts and at the following times: (a) $150,000 upon
the filing of the preliminary proxy statement with the SEC; and (b) $250,000
upon the clearance of the proxy statement by the SEC and the mailing of the
definitive proxy statement to the Company's shareholders. The Parent
acknowledges that if the Merger is completed as contemplated by this Agreement,
the Company will have incurred expenses in connection with this Agreement and
any transaction contemplated by this Agreement, including (but not limited to)
the fees identified on Schedule 6.13 and that such fees and/or expenses will be
borne by the Surviving Corporation and Parent, and will have no affect on the
Merger Consideration and Parent's or Merger Sub's obligation to pay the Merger
Consideration as contemplated in Section 4.2(b) of this Agreement.
6.14 Further Assurances. Each party hereto agrees to execute and
deliver such instruments and take such other actions as the other parties may
reasonably require in order to carry out the intent of this Agreement.
ARTICLE VII
CONDITIONS
7.1 Conditions to Obligations of Parent and Merger Sub. The
respective obligations of Parent and Merger Sub to consummate the Merger are
subject to the fulfillment of each of the following conditions, any or all of
which may be waived in whole or in part by Parent or Merger Sub, as the case may
be, to the extent permitted by applicable law:
(a) Shareholders' Approval. This Agreement shall have been duly
approved by the required shareholder vote of the Company in accordance with
applicable law and the Certificate of Incorporation and Bylaws of the
Company.
(b) No Material Adverse Change. There shall be no material
adverse change in the prospects, financial condition or results of
operations of the
A-27
<PAGE>
Company between January 29, 2000 and the Closing Date, except as previously
disclosed to the Parent prior to the execution of this Agreement.
(c) Fairness Opinion of Raymond James & Associates. The
Company's Board of Directors shall have received a written opinion from
Raymond James & Associates that the consideration to be paid to the Company
in connection with the Merger is fair from a financial point of view to the
shareholders of the Company.
(d) Litigation. There shall not be in effect, nor threatened by
any court or governmental or regulatory agency of competent jurisdiction,
any preliminary or permanent injunction or other order of a court or
governmental or regulatory agency of competent jurisdiction directing that
the Merger not be consummated (including any such threatened item, an
"Order").
(e) Opinion of Counsel to the Company. At the Closing, Parent
and Merger Sub shall have received from Harris Beach & Wilcox LLP or other
counsel of the Company satisfactory to the Parent and Merger Sub a written
opinion, dated as of the date of the Closing, substantially to the effect
that:
(i) Each of the Company and its subsidiaries is a
corporation duly organized, validly existing, and in good standing under
the laws of its respective jurisdiction of incorporation and has all
requisite corporate power and authority to own, lease and operate its
properties and to conduct its business.
(ii) Since the date of this Agreement, there have been no
changes in the authorized capital stock of the Company, and all of the
issued and outstanding Shares, as constituted just prior to the time of the
Closing, were duly authorized, validly issued, fully paid and
nonassessable.
(iii) The Company has the corporate power and has taken all
requisite corporate action required of it to effect the Merger in
accordance with the terms of this Agreement. This Agreement has been duly
executed and delivered by the Company and, assuming due authorization,
execution and delivery by Parent and Merger Sub, respectively, constitutes
the legal, valid and binding obligation of the Company.
(iv) The execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions on the
part of the Company contemplated hereby, will not result in any breach,
violation, default or acceleration of obligations under any provision of
its Certificate of Incorporation or Bylaws, or, to the best knowledge of
such counsel, without independent investigation, of any judgment, decree or
order of any court or administrative agency having jurisdiction, or of any
mortgage, indenture, loan
A-28
<PAGE>
agreement or other instrument evidencing indebtedness or the guaranty of
indebtedness for money borrowed, or of any other material agreement, lease,
license or other instrument applicable to the Company.
(v) To the best knowledge of such counsel without
independent investigation, all consents or approvals by governmental
authorities or other parties which are required in connection with the
consummation by the Company of the transactions contemplated by this
Agreement have been obtained.
(vi) Such counsel has not independently verified the
accuracy, completeness or fairness of the information in the Proxy
Statement, although such counsel has generally reviewed and discussed such
information, insofar as it relates to the Company, with representatives of
the Company and such counsel is familiar with this Agreement. Based upon
and subject to the foregoing, such counsel believes (but expresses no
opinion) that as of the date of its mailing and as of the date of the
shareholders meeting, the Proxy Statement (except for the financial
statements, financial projections and other financial data included
therein, and except for information included therein with respect to Parent
and Merger Sub, as to which such counsel expresses no opinion), appears on
its face to be appropriately responsive in all material respects to the
requirements of the Exchange Act.
(f) Other Obligations. The representations and warranties of the
Company contained in this Agreement shall be in all material respects true
and accurate as of the date when made and, except for changes expressly
contemplated by this Agreement and except as to representations and
warranties which are expressly limited to a state of facts existing at a
time prior to the Closing, at and as of the Closing as if made on the date
of Closing. The Company shall have performed and complied in all material
respects with each and every covenant, agreement and condition required by
this Agreement to be performed or complied with by it prior to or on the
Closing Date. The Company shall have furnished the Parent with a
certificate of the Company signed on its behalf by its Chairman and Chief
Executive Officer that this condition has been complied with.
(g) Other Approvals and Consents. All approvals of applications
to public authorities, Federal, state, local or foreign, and all consents
or approvals of any nongovernmental persons, the granting of which is
necessary for the consummation of the Merger or for preventing the
termination of any right, privilege, license or agreement of the Company or
any subsidiary of the Company which is material to the Company's business,
or any material loss or disadvantage to Parent or the Company's business,
by reason of the Merger, shall have been obtained, no such consents or
approvals shall have imposed any terms or conditions other than those
generally and ordinarily contained in all such consents
A-29
<PAGE>
and approvals or such as are not unduly burdensome to Parent or Merger Sub,
and all waiting periods specified by law shall have passed.
(h) Assumption of Employment and Compensation Agreements. The
Parent shall have executed and delivered the Assumption and Acknowledgment
of Entitlement agreements relating to Fred H. Klaucke's employment
agreement and Charles A. Callahan's and Christine M. Luchi's compensation
agreements substantially similar to the forms attached to this Agreement as
Exhibit A.
(i) Financing. Prior to August 25, 2000, the Parent shall have
obtained the necessary financing to make the payment described in Sections
4.1(a) and 4.2(a) of this Agreement.
(j) Accountant's Letter. Parent shall have received a copy of the
letter of the Company's independent auditors dated the Closing Date in form
and substance reasonably satisfactory to Parent, making the statements
required by Section 6.4 on the basis of procedures set forth therein
carried out by them to a specified date not more than five business days
prior to the Closing Date.
7.2 Conditions to Obligations of the Company. The obligations of the
Company to consummate the Merger are subject to the fulfillment of each of the
following conditions, any or all of which may be waived in whole or in part by
the Company to the extent permitted by applicable law:
(a) Shareholders' Approval. This Agreement shall have been duly
approved by the required shareholder vote of the Company in accordance with
applicable law and the Certificate of Incorporation and Bylaws of the
Company;
(b) Litigation. There shall not be in effect, nor threatened by
any court or governmental or regulatory agency of competent jurisdiction,
any Order; and
(c) Opinion of Counsel to Parent and Merger Sub. At the Closing
the Company shall have received from Sheppard, Mullin, Richter & Hampton
LLP, counsel for Parent and Merger Sub a written opinion dated as of the
date of the Closing, which opinion is substantially to the effect that (it
is agreed that with respect to matters of New York law, the opinion of
Sheppard, Mullin, Richter & Hampton LLP, may rely on the opinion of New
York counsel reasonably satisfactory to the Company):
(i) Parent is a corporation duly organized, validly
existing and in good standing under the laws of Delaware. Merger Sub is a
corporation
A-30
<PAGE>
duly organized, validly existing and in good standing under the laws of its
State of Incorporation .
(ii) Each of Parent and Merger Sub has the corporate power
and has taken all requisite corporate action required of it to effect the
Merger in accordance with the terms of this Agreement. This Agreement has
been duly executed and delivered by each of Parent and Merger Sub and,
assuming due authorization, execution and delivery by the Company,
constitutes the legal, valid and binding obligation of each of Parent and
Merger Sub.
(iii) The execution, delivery and performance of this
Agreement by each of Parent and Merger Sub and the consummation of the
transactions on the part of each of Parent and Merger Sub contemplated
hereby, will not result in any breach, violation, default or acceleration
of obligations under any provision of its respective charter documents or
by-laws (to be specifically enumerated in such opinion) or, to the best
knowledge of such counsel, of any judgment, decree or order of any court of
administrative agency having jurisdiction, or of any mortgage, indenture,
loan agreement or other instrument evidencing indebtedness or the guaranty
of indebtedness for money borrowed, or of any other material agreement,
lease, license or other instrument applicable to Parent or Merger Sub .
(iv) To the best knowledge of such counsel, all consents or
approvals by governmental authorities or other parties which are required
in connection with the consummation by each of Parent and Merger Sub of the
transactions contemplated by this Agreement have been obtained.
(d) Other Obligations. The representations and warranties of
Parent and Merger Sub contained in this Agreement shall be true and correct
as of the date when made and as of the Closing as if made on the date of
Closing. The Parent and Merger Sub shall have performed and complied in all
material respects with each and every covenant, agreement and condition
required by this Agreement to be performed or complied by them prior to or
on the Closing. The Parent and Merger Sub shall have furnished the Company
with a certificate corresponding to that called for by Section 7.1(f).
Additionally, the condition of Section 7.1(g) shall be satisfied.
(e) Financing. Prior to August 25, 2000, the Parent shall have
obtained the necessary financing to make the payment described in Sections
4.1(a) and 4.2(a) of this Agreement.
(f) Funds Deposited with Disbursing Agent. Parent shall have
obtained the necessary financing to make the payment described in Section
4.1(a) of this Agreement and shall have deposited, or caused to be
deposited, in trust
A-31
<PAGE>
with the Disbursing Agent, an amount of cash equal to the Aggregate Merger
Consideration for payment to the Company shareholders pursuant to Section
4.2.
(g) Assumption of Employment and Compensation Agreements. The
Parent shall have executed and delivered the Assumption and Acknowledgment
of Entitlement agreements relating to Fred H. Klaucke's employment
agreement and Charles A. Callahan's and Christine M. Lucchi's compensation
agreements substantially similar to the forms attached to this Agreement as
Exhibit A.
(h) Fairness Opinion of Raymond James & Associates. The
Company's Board of Directors shall have received a written opinion from
Raymond James & Associates that the consideration to be paid to the Company
in connection with the Merger is fair from a financial point of view to the
shareholders of the Company.
ARTICLE VIII
TERMINATION
8.1 Termination by Mutual Consent. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, before
or after the approval by holders of Shares, by the mutual consent of Parent and
the Company, by action of their respective Boards of Directors. For purposes of
this Article VIII and Section 9.2, no action taken by the Board of Directors of
the Company shall be effective unless any such action is approved by the
affirmative vote of at least a majority of the Board of Directors at the time of
such vote who were also members of the Board of Directors of the Company on the
date hereof.
8.2 Termination by either Parent or the Company. It is recognized
that in Section 6.5 the parties have agreed to use their best efforts to take
actions necessary to make effective the transactions contemplated by this
Agreement. This Agreement may be terminated and the Merger may be abandoned by
action of the Board of Directors of either Parent or the Company if: (a) the
financing contingency described in Sections 7.1(i) and 7.2(e) has not been
waived in writing by Parent by August 25, 2000; (b) the Merger has not occurred
by October 2, 2000 (unless extended by the mutual consent of the parties); (c)
the shareholders of the World of Science do not approve the Merger; or (d) the
Effective Time has not occurred, provided that in order to exercise the right of
termination the party concerned shall not then be in breach of this Agreement.
The Board of Directors of the Company may terminate this Agreement and may
abandon the Merger in the event the Board of Directors determines, consistent
with its fiduciary duties, to accept an unsolicited third-party offer.
A-32
<PAGE>
8.3 Termination by Parent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Closing, before or after the
approval by holders of Shares, by action of the Board of Directors of Parent, if
there is a material breach of any of the representations and warranties of the
Company or if the Company shall have failed to comply in any material respect
with any of its covenant or agreements contained herein to be complied with or
performed by the Company at or prior to such date of termination.
8.4 Termination by the Company. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Closing, before or after
the approval by holders of Shares, by action of the Board of Directors of the
Company, if there is a material breach of any of the representations and
warranties of Parent or Merger Sub or if Parent or Merger Sub shall have failed
to comply in any material respect with any of its covenants and agreements
contained herein to be complied with or performed by Parent or Merger Sub at or
prior to such date of termination.
8.5 Effect of Termination and Abandonment. In the event of termination
of this Agreement and abandonment of the Merger pursuant to this Article VIII,
except as otherwise provided herein, no party hereto (or any of its directors or
officers) shall have any liability or further obligation to any other party to
this Agreement, except that nothing herein will relieve any party from liability
for any willful breach of this Agreement. In the event the Company violates the
exclusivity provisions of Section 6.2 of this Agreement or the Company closes a
transaction for the acquisition of all or substantially all of the Company's
Shares or assets arising out of an unsolicited third-party purchase offer made
prior to the Closing, the Company shall pay the Parent a breakup fee of $150,000
within 30 days of such violation or closing.
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1 Survival. The agreements of the Company, Parent and Merger Sub
contained in this Article IX and in Sections 1.3, 1.4, 4.1, 4.2, 4.3, 4.4, 6.9,
6.11, 6.13 and 9.8 shall survive the consummation of the Merger. To the extent
provided therein, the agreements of the Company, Parent and Merger Sub contained
in Sections 6.6, 6.13, 8.5 and 9.8 shall survive the termination of this
Agreement. All other representations, warranties, agreements and covenants in
this Agreement shall not survive the consummation of the Merger.
9.2 Amendment and Waiver. Subject to applicable law, at any time
prior to the Effective Time (notwithstanding any shareholder approval), if
authorized by their respective Boards of Directors: (i) the parties hereto may,
by written agreement, modify, amend or supplement any term or provisions of this
Agreement; and (ii) any term or
A-33
<PAGE>
provisions of this Agreement may be waived in writing by the party which is, or
whose shareholders or directors are, entitled to the benefits thereof; provided,
however, that after the approval of this Agreement by the shareholders of the
Company, no such amendment, modification or supplement shall reduce or change
the Merger Consideration into which each Share will be converted upon
consummation of the Merger or shall otherwise materially change the terms of
this Agreement, such that shareholder approval would be required.
9.3 Counterparts. For the convenience of the parties hereto, this
Agreement may be executed in any number of counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute the same agreement.
9.4 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
9.5 Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, if to
Parent or Merger Sub, addressed to Parent or Merger Sub at 4209 Technology
Drive, Fremont, CA 94538, Attention: Peter G. Hanelt (with copies to Sheppard,
Mullin, Richter & Hampton, LLP, Four Embarcadero Center, San Francisco, CA
94111, Attention: A. John Murphy, Esq. and Renaissance Capital Group, Inc., 200
West Madison Street, Suite 3450, Chicago, Illinois 60606, Attention: Michelle A.
Facktor; and if to the Company, addressed to the Company at 900 Jefferson Road,
Building 4 Rochester, NY 14623, Attention: Chairman of the Board (with copies to
Thomas E. Willett, Esq., Harris Beach & Wilcox, LLP, 130 East Main Street,
Rochester, NY 14604 and Thomas W. Mullins, Raymond James & Associates, Inc., 880
Carillon Parkway, St. Petersburg, Florida 33716, or to such other persons or
addresses as may be designated in writing by the party to receive such notice).
9.6 Entire Agreement, etc. This Agreement together with the Schedules
and Exhibits attached hereto, (a) constitutes the entire agreement, and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, with respect to the subject matter hereof, and this Agreement
shall continue in force and effect in accordance with its terms, and (b) shall
not be assignable by operation of law or otherwise and is not intended to create
any obligations to, or rights in respect of, any persons (except as specifically
mentioned herein) other than the parties hereto; provided, however, that Parent
may designate, by written notice to the Company, another directly or indirectly
wholly-owned subsidiary of Parent to be a Constituent Corporation in lieu of
Merger Sub, in the event of which, all references herein to Merger Sub shall be
deemed references to such other subsidiary except that all obligations of Merger
Sub and all representations and warranties made herein with respect to Merger
Sub as of the date of
A-34
<PAGE>
this Agreement shall be deemed to be the obligations of, and the representations
and warranties made with respect to, such other subsidiary as of the date of
such designation.
9.7 Definition of "Subsidiary." When a reference is made in this
Agreement to a subsidiary of a party, the word "subsidiary" means any
corporation or other organization whether incorporated or unincorporated of
which at least a majority of the securities or interests having by the terms
thereof ordinary voting power to elect a majority of the board of directors or
others performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or by
any one or more of its subsidiaries, or by such party and one or more of its
subsidiaries.
9.8 Obligation of Parent. Whenever this Agreement requires Merger Sub
or any assignee to take any action, such requirement shall be deemed to include
an undertaking on the part of Parent to itself take, or cause Merger Sub, to
take such action, and from and after the Effective Time, any requirement of the
Surviving Corporation to take any action, shall be deemed to include an
undertaking on the part of Parent to cause Surviving Corporation to take such
action.
9.9 Consent to Jurisdiction. Each party irrevocably agrees that any
legal action or proceeding against it arising out of or in connection with this
Agreement or for enforcement of any judgment rendered in any such action or
proceeding may be brought in the United States courts located in the City of
Wilmington, Delaware, and each party hereby irrevocably accepts and submits to
the jurisdiction of each of the aforesaid courts in person, generally and
unconditionally with respect to any such action or proceeding. For the purposes
of any such action or proceeding instituted in such courts, (i) Parent and
Merger Sub each hereby irrevocably designates Sheppard, Mullin, Richter &
Hampton LLP, Four Embarcadero Center, San Francisco, California 94111,
Attention: A. John Murphy, Esq. and the Company hereby irrevocably designates
Harris Beach & Wilcox, The Granite Building, 130 East Main Street, Rochester,
New York 14604, Attention: Thomas E. Willett, Esq., as their respective agents
to receive for and on their behalf service of process therein and each agrees to
take any action necessary to continue such designation in full force and effect,
(ii) each party irrevocably consents to the service of process by the mailing of
a copy thereof, by registered mail (or equivalent, airmail if overseas), postage
prepaid, to the party being served, and (iii) each party irrevocably waives, to
the fullest extent permitted by law, any immunity from such action or
proceeding, any objection which it may now or hereafter have to the venue of any
such action or proceeding brought in any such court and any claim that any such
action or proceeding brought in such court has been brought in an inconvenient
forum. Nothing in this Section shall affect the right of any party to serve
legal process in any other manner permitted by law or affect the right of any
party to bring any action or proceeding against any other party hereto or its
property in the courts of any other jurisdiction.
A-35
<PAGE>
9.10 Formation of Merger Sub. Parent covenants and agrees to use its
best efforts to form Merger Sub as soon as reasonably practicable. Parent shall
cause Merger Sub to become a party to this Agreement immediately following
Merger Sub's formation. The representations and warranties of Merger Sub made
herein shall speak as of the date that Merger Sub executes and delivers this
Agreement and as of the date of Closing as provided in Section 7.2(d).
9.11 Captions. The Article, Section and paragraph captions herein are
for convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the parties acting by their duly authorized officers on the date
first hereinabove written.
WORLD OF SCIENCE, INC.
By /s/ Fred H. Klaucke
----------------------------------------
President and Chief Executive Officer
NATURAL WONDERS, INC.
By /s/ Peter G. Hanelt
----------------------------------------
President and Chief Executive Officer
A-36
<PAGE>
ANNEX B
August 4, 2000
Board of Directors
World of Science, Inc.
900 Jefferson Road, Building 4
Rochester, NY 14623
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of the outstanding common stock, par value $0.01 (the
"Common Stock") of World of Science, Inc. ("World of Science" or the "Company")
of the consideration to be received by such holders in connection with the
proposed merger (the "Merger") of the Company with Natural Wonders, Inc.
("Natural Wonders") pursuant and subject to the Agreement and Plan of Merger
between the Company and Natural Wonders (the "Merger Agreement"). The Merger
Agreement provides, among other things, that each outstanding share of Common
Stock will be converted into the right to receive $1.15 per share (the "Merger
Consideration") from Natural Wonders upon the closing of the Merger.
In connection with our review of the proposed Merger and the preparation of our
opinion herein, we have, among other things:
1. reviewed the financial terms and conditions as stated in the August 3,
2000 draft of Merger Agreement and assumed the final form of the
Merger Agreement would not vary in any respect material to our
analysis;
2. reviewed the audited financial statements of the Company as of and for
the years ended January 29, 2000, January 30, 1999 and January 31,
1998 and the unaudited financial statements for the quarters ended
April 29, 2000 and May 1, 1999;
3. reviewed the Company's Annual Reports filed on Form 10-K for the past
three fiscal years ended January 29, 2000, as well as the Company's
Form 10-Q for the quarter ended April 29, 2000;
4. reviewed other Company financial and operating information requested
from and/or provided by the Company, including financial and operating
projections, lease agreements and other documents related to World of
Science;
5. reviewed certain other publicly available information on the Company;
and
6. discussed with members of the senior management of the Company certain
information relating to the aforementioned and any other matters which
we have deemed relevant to our inquiry.
B-1
<PAGE>
Board of Directors
World of Science, Inc.
August 4, 2000
Page 2
We have assumed and relied upon the accuracy and completeness of all information
supplied or otherwise made available to us by the Company or any other party, or
that was publicly available, and have not attempted to verify independently any
of such information. We have not made or obtained an independent appraisal of
the assets or liabilities (contingent or otherwise) of the Company. With respect
to financial forecasts and other information and data provided to or otherwise
reviewed by or discussed with us, we have assumed that such forecasts and other
information and data have been reasonably prepared in good faith on bases
reflecting the best currently available estimates and judgments of management,
and we have relied upon each party to advise us promptly if any information
previously provided became inaccurate or was required to be updated during the
period of our review.
Our opinion is based upon market, economic, financial and other circumstances
and conditions existing and disclosed to us as of August 3, 2000 and any
material change in such circumstances and conditions would require a
reevaluation of this opinion, which we are under no obligation to undertake.
We express no opinion as to the underlying business decision to effect the
Merger, the structure or tax consequences of the Merger Agreement or the
availability or advisability of any alternatives to the Merger. We did not
structure the Merger or negotiate the final terms of the Merger. Our opinion is
limited to the fairness, from a financial point of view, of the Merger to the
shareholders of World of Science. We express no opinion with respect to any
other reasons, legal, business, or otherwise, that may support the decision of
the Board of Directors to approve or consummate the Merger.
In conducting our investigation and analyses and in arriving at our opinion
expressed herein, we have taken into account such accepted financial and
investment banking procedures and considerations as we have deemed relevant,
including the review of (i) historical and projected revenues, operating
earnings, net income and capitalization of the Company and certain other
publicly held companies in businesses we believe to be comparable to the
Company; (ii) the current and projected financial position and results of
operations of the Company; (iii) the historical market prices and trading
activity of the Common Stock of the Company; (iv) financial and operating
information concerning selected business combinations which we deemed comparable
in whole or in part; (v) the amount of proceeds to common shareholders that
would be expected from an orderly liquidation of the Company; and (vi) such
other factors as were deemed appropriate.
In arriving at this opinion, Raymond James did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Raymond James believes that its analyses must be considered as a
whole and that selecting portions of its analyses, without considering all
analyses, would create an incomplete view of the process underlying this
opinion.
B-2
<PAGE>
Board of Directors
World of Science, Inc.
August 4, 2000
Page 3
Raymond James & Associates, Inc. ("Raymond James") is actively engaged in the
investment banking business and regularly undertakes the valuation of investment
securities in connection with public offerings, private placements, business
combinations and similar transactions. Raymond James has been engaged to render
financial advisory services to the Company in connection with the proposed
Merger and will receive a fee for such services, which fee is contingent upon
consummation of the Merger. Raymond James will also receive a fee upon the
delivery of this opinion. In addition, the Company has agreed to indemnify us
against certain liabilities arising out of our engagement.
In the ordinary course of our business, Raymond James may trade in the
securities of the Company for our own account or for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
It is understood that this letter is for the information of the Board of
Directors of the Company in evaluating the proposed Merger and does not
constitute a recommendation to any shareholder of the Company regarding how said
shareholder should vote on the proposed Merger. This opinion is not to be quoted
or referred to, in whole or in part, without our prior written consent, which
will not be unreasonably withheld; provided, however, that this letter may be
reproduced in full in the Proxy Statement related to the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of August 3,
2000, the consideration to be received by the shareholders of the Company
pursuant to the Merger Agreement is fair, from a financial point of view, to the
holders of the Company's outstanding Common Stock.
Very truly yours,
/s/ Raymond James & Associates, Inc.
RAYMOND JAMES & ASSOCIATES, INC.
B-3
<PAGE>
ANNEX C
(S) 623. Procedure to enforce shareholder's right to receive payment for shares.
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporation action, the shareholder shall
cease to have any of the rights of a shareholder except the right to be paid the
fair value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a
C-1
<PAGE>
notice of election is withdrawn, or the corporate action is rescinded, or a
court shall determine that the shareholder is not entitled to receive payment
for his shares, or the shareholder shall otherwise lose his dissenters' rights,
he shall not have the right to receive payment for his shares and he shall be
reinstated to all his rights as a shareholder as of the consummation of the
corporate action, including any intervening preemptive rights and the right to
payment of any intervening dividend or other distribution or, if any such rights
have expired or any such dividend or distribution other than in cash has been
completed, in lieu thereof, at the election of the corporation, the fair value
thereof in cash as determined by the board as of the time of such expiration or
completion, but without prejudice otherwise to any corporate proceedings that
may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will he made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporation
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders'
C-2
<PAGE>
authorization date, the offer may be conditioned upon the consummation of such
action. Such offer shall be made at the same price per share to all dissenting
shareholders of the same class, or if divided into series, of the same series
and shall be accompanied by a balance sheet of the corporation whose shares the
dissenting shareholder holds as of the latest available date, which shall not be
earlier than twelve months before the making of such offer, and a profit and
loss statement or statements for not less than a twelve month period ended on
the date of such balance sheet or, if the corporation was not in existence
throughout such twelve month period, for the portion thereof during which it was
in existence. Notwithstanding the foregoing, the corporation shall not be
required to furnish a balance sheet or profit and loss statement or statement or
statements to any shareholder to whom such balance sheet or profit and loss
statement or statements were previously furnished, nor if in connection with
obtaining the shareholders' authorization for or consent to the proposed
corporate action the shareholders were furnished with a proxy or information
statement, which included financial statements, pursuant to Regulation 14A or
Regulation 14C of the United States Securities and Exchange Commission. If
within thirty days after the making of such offer, the corporation making the
offer and any shareholder agree upon the price to be paid for his shares,
payment thereof shall be made within sixty days after the making of such offer
or the consummation of the proposed corporate action, whichever is later, upon
the surrender of the certificates for any such shares represented by
certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a special
proceeding in the supreme court in the judicial district in which the office of
the corporation is located to determine the rights of dissenting shareholders
and to fix the fair value of their shares. If, on the case of merger of
consolidation, the surviving or new corporation is a foreign corporation without
an office in this state, such proceeding shall be brought in the county where
the office of the domestic corporation, whose shares are to be valued, was
located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such proceeding
for the same purpose not later than thirty days after the expiration of such
twenty day period. If such proceeding is not instituted within such thirty-day
period, all dissenter's rights shall be lost unless the supreme court, for good
cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid for
their shares, shall be made parties to such proceeding, which shall have the
effect of an action quasi in rem against their shares. The corporation shall
serve a copy of the petition in such proceeding upon each dissenting shareholder
who is a resident of this state in the manner provided by law for the service of
a
C-3
<PAGE>
summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not request
any such determination or if the court finds that any dissenting shareholder is
so entitled, it shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close of business on
the day prior to the shareholders' authorization date. In fixing the fair value
of the shares, the court shall consider the nature of the transaction giving
rise to the shareholder's right to receive payment for shares and its effects on
the corporation and its shareholders, the concepts and methods then customary in
the relevant securities and financial markets for determining fair value of
shares of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the fair
value of the shares without a jury and without referral to an appraiser or
referee. Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit pretrial
disclosure, including, but not limited to, disclosure of any expert's reports
relating to the fair value of the shares whether or not intended for use at the
trial in the proceeding and notwithstanding subdivision (d) of section 3101 of
the civil practice law and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept the
corporate offer of payment for his shares was arbitrary, vexatious or otherwise
not in good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees incurred by
the corporation against any or all of the dissenting shareholders who are
parties to the proceeding, including any who have withdrawn their notices of
election as provided in paragraph (e), if the court finds that their refusal to
accept the corporate offer was arbitrary, vexatious or otherwise not in good
faith. The court may, in its discretion, apportion and assess all or any part of
the costs, expenses and fees incurred by any or all of the dissenting
shareholders who are parties to the proceeding against the corporation if the
court finds any of the following: (A) that the fair value of the shares as
determined materially exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the corporation; (C)
that
C-4
<PAGE>
the corporation failed to institute the special proceeding within the period
specified therefor; or (D) that the action of the corporation in complying with
its obligations as provided in this section was arbitrary, vexatious or
otherwise not in good faith. In making any determination as provided in clause
(A), the court may consider the dollar amount or the percentage, or both, by
which the fair value of the shares as determined exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be due
him, upon surrender of the certificates for any such shares represented by
certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be canceled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it
is liquidated, be subordinated to the rights of creditors of the corporation,
but have rights superior to the non-dissenting shareholders, and if it is not
liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this paragraph
do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment for
his shares cannot be made because of the restrictions of this paragraph. If the
dissenting shareholder fails to exercise such option as provided, the
corporation shall exercise the option by written notice given to him within
twenty days after the expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
C-5
<PAGE>
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations).
C-6
<PAGE>
ANNEX D
naturalwonders.com
D-1
<PAGE>
growing the business
natural wonders
annual report 1999
history
Founded in 1987, Natural Wonders is a national specialty retailer with 182
stores, offering unique and quality merchandise focused on the wonders of
nature, science, the environment, and education. Stores feature a multi-sensory
experience coupled with superb customer service that makes the shopping
experience fun and rewarding. With corporate headquarters located in Fremont,
California, the stock trades on the NASDAQ National Market System under the
symbol NATW. Visit our website at www.naturalwonders.com
growing the business
We are evolving; we are changing; we are growing. Growing the business is
complex. It is more than adding stores, it is adding profitable stores. It is
more than increasing sales, it is maintaining a healthy profit component for
these sales. We are mindful of the importance of evolving to a better state of
growth, one that rewards the shareholders for patience with their Natural
Wonders investment.
To evolve, we have created a more effective retailing organization both in
merchandising and store operations. The year ended with a positive response
from customers that confirmed we are recapturing the wonder in the marketplace.
We will now build upon the momentum of last year's program.
Evolution
"Evolution aptly describes the process that we have begun. Natural Wonders
has taken dramatic and decisive action in an effort to regain our credibility
with our customers and shareholders." Peter Hanelt, Chief Executive Officer &
Chief Financial Officer.
to our shareholders
We continue along the path of recapturing the wonder that began last year.
While not a success by profitability expectations, the year was a major step
forward in the evolution of the new Natural Wonders. To be profitable, we must
meet two significant challenges. First, the seven-year comparable store sales
decline must be reversed. Second, we must eliminate the unprofitable stores
within our portfolio. Many of these leases were negotiated in the 1995 to 1997
period. Declining sales and unprofitable stores combined to create the
unacceptable losses of the last two years. Solving these two issues is the key
to restoring profitability and shareholder value.
While the progress toward improving sales has been slow, there have been
encouraging signs. Since September 1999 we have had a cumulative positive
comparable store sales increase and in February 2000 completed the first
consecutive three month period with positive monthly comparable store sales
increases since 1992.
We completed the analysis of our unprofitable stores. A $4.1 million charge
to expense for the closure of unprofitable stores and related asset impairments
was recognized in 1999. This accounted for over 30% of our reported fiscal year
loss. Some additional costs associated with closing specific stores will be
incurred in fiscal 2000, however, we expect these costs to be fully offset by
occupancy cost reductions. We expect to close most of our unprofitable stores
by the end of 2000.
To be prudent, we continue the two year trend of decreasing total company
expenses as measured on a per store operating month basis. We are not only
offsetting all inflationary expense increases but are decreasing expenses on an
absolute basis. This creates the opportunity for ever increasing positive
operating leverage as the improving sales trend continues.
D-2
<PAGE>
evolution
Last year's theme was recapturing the wonder. This year our theme is
evolution.
Evolution aptly describes the process that we have begun. Natural Wonders
has taken dramatic and decisive action to regain our credibility with our
customers and shareholders. We expanded our successful holiday store program,
closed several unprofitable stores, decreased corporate overhead, and increased
our merchandise availability, selection and value. We rebuilt vendor
relationships, established key vendor partnerships in important categories,
began the expansion of proprietary product development and negotiated new
product sourcing arrangements. We also reorganized the field store management
organization to increase accountability. Natural Wonders will continue these
efforts, particularly increasing merchandising newness and continued closing of
unprofitable stores, until we achieve our substantial profitability potential.
not just evolution but successful evolution
More importantly, the evolution continues into the new fiscal year. The
first month of the 2000 fiscal year delivered a positive comparable store
result of 5.1% and a healthy gross profit. The outlook for substantial
improvement from last year's financial results is very positive for the new
fiscal year.
We believe we are successfully addressing key infrastructure issues in
support of our merchandising and sales efforts. We have a reasonable amount of
excess capacity in information systems and distribution facilities. The
corporate support staff is adequate to support the store base. We had no
difficulties with the Y2K transition.
Natural Wonders embraces the benefits of information technology and
continues to improve our systems and their utilization. Our new systems,
installed in 1998, are fully integrated into our internal operations. We
successfully launched our Internet site last year. Our Internet sales continue
to grow and we have effective fulfillment and back office operations. The
Internet is an opportunity for us to leverage our brand, sell our products and
enhance our corporate visibility. We fully expect the Internet to become a more
important brand-building and sales vehicle going forward.
where have all the flowers gone
The last couple of years witnessed the demise or sale of several independent
competitors in our mall-based specialty retail niche. Learningsmith was
liquidated, Imaginarium and the Nature Company were sold, World of Science and
other specialty gift retailers are being offered for sale. The liquidation of
Learningsmith during December of 1999 created extreme promotional activity and
adversely affected our sales and margins. Nevertheless, the longer-term impact
of a reduced number of competitors is positive for us. We intend, and have the
resources, determination and energy, to be the leading survivor within the
category. The departure of numerous competitors creates an opportunity for us.
birds of a feather flock together
We continue to be inspired to deliver a concept known by its unique
merchandise and inspired by the wonders of nature and science. As part of our
program to recapture the wonder in our stores, we strive to support important
natural themes. We are pleased that we are able to assist, through innovative
concepts and creative partnerships, such organizations as the Gorilla
Foundation and the National Audubon Society. We are proud of our support of
these worthwhile organizations.
survival of the fittest
Not all of our stores are successful. We have a group of stores that are
incurring losses at the contribution margin level and the response in these
stores to our new merchandising strategies adopted in 1999 was not sufficient
to overcome the high occupancy costs in these locations. Most of these stores
were opened between 1995 to 1997. These stores represent a substantial drain on
corporate profitability and assets. During the fourth
D-3
<PAGE>
quarter of 1999, we recorded a charge of $3.2 million to recognize the asset
impairment associated with specific stores targeted for closure. We closed nine
stores during 1999 and will close the remainder of the underperforming stores
as soon as possible. We have been able to restructure other leases and have
received significant occupancy cost reductions as a result. I emphasize that
these stores represent a relatively small portion of our real estate base but
account for a large part of our operating loss. I am encouraged by the progress
to date and the prospects for further success.
At the same time, we are expanding our store base with carefully selected
openings and are actively working with the developer community to increase our
presence in attractive malls. We have negotiated leases for stores to open in
the new fiscal year and are in active and productive discussions to open
several other stores this year.
our holiday stores evolve to regular stores
During the 1998 holiday season, we doubled our temporary holiday store
program and substantially increased our per store contribution margin. In 1999,
we again expanded the program with further contribution margin improvement. The
stores are different from regular stores in terms of fixtures, physical size,
number of items offered and types of malls targeted for the stores. Because of
our high holiday sales, these temporary stores can be very profitable even if
operationally complex. Based upon their actual results, we believe that we can
project with confidence their potential to become successful permanent stores.
In fact, in 1998 we converted three temporary stores to permanent stores and
subsequently attained projected sales. From the 1999 program, we are converting
three other temporary stores to permanent stores and will possibly convert
additional stores after further analysis and negotiations.
Because our holiday stores are appreciated by mall shoppers, offer unique
merchandise, are visually attractive and might become regular stores, both the
developers and we believe that this program offers mutual benefits. We are in
active discussions for the year 2000 program and are confident that once again
we can deliver improved per store profitability results.
all in the family, genus: natural wonders
The process of evolution involves each of the company's executives. They are
the ones with the experience and expertise to create improvement. Within this
annual report, certain executives will add their observations, comments, and
commitments to our message of growth, evolution and success. We promise to give
our best each day in order to achieve Natural Wonders' substantial
profitability potential and to improve shareholder value.
Peter G. Hanelt
Chief Executive Officer &
Chief Financial Officer
D-4
<PAGE>
Rejuvenation
"We will capture our customer through compelling products, bold marketing
and engaging visual presentation. Each of these elements will consistently
contribute to the Natural Wonders persona." Michael Cape, Vice President,
Marketing & Visual
Natural Wonders nurtures the relationship between people and the earth. It
is our business to sell merchandise that generates excitement about the world
of nature and science. This is our mission.
Our goal for 2000 is to rejuvenate the Natural Wonders concept and showcase
it to the customer. The following are key initiatives to support this goal.
theme presentations
This strategy highlights a related group of products that tell a story about
a specific place or activity inspired by the wonders of nature, science,
education and the environment.
In 2000 we will support three theme presentations in the store at all times.
We have established our theme calendar and determined our merchandising
statements based on trends and seasonal merchandise. The merchant team has
taken these concepts overseas and to domestic markets and developed their
assortment of new and exclusive products based on these themes. We look forward
to presenting themes such as the "Rainforest", the "Naturalist" and many more.
These presentations support a highly interactive and educational experience in
our stores.
marketing partnerships
We are developing partnerships with non-profit organizations that support
the environment and conservation. These relationships are consistent with our
merchandising and brand character. Examples include The Gorilla Foundation and
our partnership with the National Audubon Society (N.A.S) in support of the
"Naturalist" theme presentation. The N.A.S mission is to conserve and restore
natural ecosystems, focusing on birds and other wildlife for the benefit of
humanity and the earth's biological diversity. Elements of this partnership
include: in-store Audubon membership drives, fund raising, joint press
releases, a customer sweepstakes for an ecotour, web site links, a feature in
the Audubon magazine, newsletters and more. We will heighten awareness for both
Natural Wonders and the National Audubon Society through shared marketing
vehicles.
engaging the customer
Our storefront offers a marketing opportunity as each potential customer
approaches. We will leverage our window and first fixture presentation with
themed and seasonal products, dynamic graphics and visual displays. These will
rotate regularly to stay fresh and unique, thus capturing the attention of
shoppers.
We are enhancing our dialog with the Natural Wonders' customer through a
direct mail newsletter called "Words of Wonder". This newsletter will highlight
new products, promotions, theme presentations, non-profit partnerships, gift
ideas, customer letters and important information about conservation. Our
newsletter will strengthen our relationship with our customer, build awareness
and reinforce the Natural Wonders brand.
We are partnering with our vendors and mall-marketing resources in a
cooperative advertising strategy for print advertising, direct mail and in-
store events that will reach out to existing and new customers.
Our web site will continue to support the "click and mortar" strategy of
driving traffic to our stores by highlighting events, promotions, store
directory and company information, as well as offer a product assortment for
purchase online.
At Natural Wonders we have a great story to tell and we look forward to
communicating it to our customers.
D-5
<PAGE>
Unique
"Our mission is to offer a unique assortment and an interactive store
environment that differentiates Natural Wonders from the competition." Ken
Norton, Executive Vice President, General Merchandise Manager
uniqueness
Our uniqueness is derived through the merchandise assortment and how it is
gathered together through visuals and our theme presentations. Using nature as
an overall store concept creates a unique product offering. Nature is
represented in the use of materials, texture and patterns. An ever-present
quality and value available in all our products also add to our uniqueness.
Our uniqueness is accentuated by the many different types of products we
offer, which include: Ecospheres(R), minerals and fossils, science kits,
astronomy, home decor, relaxation, garden accents, fountains, books, music and
videos.
growing categories
Garden is an area that enjoyed wonderful growth in 1999. It is also an area
in which we have a unique range of products. Our garden statement includes:
chimes, seed kits, cachepots, bird houses and feeders, garden statuary, weather
instruments, and of course, fountains.
Fountains are desired for their tranquil aesthetic qualities. Natural
Wonders has become the destination for indoor fountains. We offer an assortment
that includes a range of materials and prices. Many of our fountains are
proudly made by craftsman in the United States; others are produced overseas
for value pricing. We will be updating our assortment of fountains throughout
the year in order to keep it fresh and interesting to the customer.
As the interest in Feng Shui has grown and become a part of everyday
America, so the interest in relaxation and aromatherapy has grown. We see
relaxation products and aromatherapy transition from the New Age concept to
everyday life. Massagers, comfort pillows, incense and diffusers are increasing
in popularity. Aromatherapy is transitioning into home fragrance designed to
enhance the home and stimulate the senses. Both fountains and relaxation
support the home as a daily "retreat" from fast paced everyday life.
Geology is another area in which we are unique. This uniqueness has garnered
a growth category in minerals and fossils. Collectors as well as the customer
who finds a particular mineral bookend or sculpture to their liking, come to
Natural Wonders to find just what they are looking for.
reach for the stars
Natural Wonders will continue to be a destination for telescopes and
telescope accessories. We will optimize this strategy by increasing our product
offering and supporting new marketing and in-store presentations.
Germination
"Our product offering will be true to our mission of offering merchandise
that focuses on the wonders of nature, science, the environment and education."
Denise Ellwood, Vice President, Merchandising
vision
Our vision for merchandising our stores is one of synergy throughout the
store. This is attained through visual presentation as well as the product
assortment itself. Rough ideas for the vision are outlined through blueprint
and concept boards developed well in advance of any travel, trade shows or
product design.
D-6
<PAGE>
For 2000, the vision entails the use of a variety of themes throughout the
year, a color palette that is seen in product across categories, visual
presentation and packaging. All these elements result in a germination of ideas
that lead to unique, impactful products.
product development
Natural Wonders' development teams work a year in advance to create product
that is uniquely our own. We begin with a blueprint that outlines the items,
materials, colors, themes and price points that fit into our merchandising
vision for the year. From the blueprint, we create concept boards for the
various themes and color palettes. The blueprint and concept boards are then
sent overseas to our agents. The development teams travel around the world in
order to meet with vendors, attend trade shows and work with our agents to
source the best factories in which to realize our concepts. This is a new
process for Natural Wonders that will come to fruition with proprietary product
during the Fall of 2000 and into 2001.
Ideas for product development come from many sources. Current trends in the
home, the garden, relaxation, environment and education are all taken into
consideration. We also interpret trends for home decor into merchandise that
reflects our interest in nature through use of materials and patterns. Product
development is most successful when it offers unique product that the customer
perceives as a value due to the quality inherent in the design and through the
use of materials.
assortment
Merchandise teams travel overseas twice a year as well as throughout the
United States several times a year to attend trade shows and markets in order
to find unique product crafted by talented artisans. All product must fit
certain criteria in order to become part of the Natural Wonders' assortment. We
search for product that fits into a nature or science view as well as meeting
certain quality requirements that would present a value to our customer.
Samples are gathered from around the world to create a merchandise
statement. We sort through the samples gathered and decide upon which items
will best show our vision. We look at what materials, colors and patterns are
used throughout the categories. Synergy is created as we tell a common story
through the merchandise offered in relaxation, garden and home decor gifts.
Structure
"One of Natural Wonders' competitive advantages has always been the high
level of customer service and product knowledge in the stores." William
Soncini, Senior Vice President, Operations
The primary goals of the field organization are to generate sales increases
and deliver exceptional customer service. Meeting these goals hinges on the
structure of the field group, our commitment to our employees and our ability
to communicate effectively.
structure
While 1999 proved to be one of the most challenging years for Natural
Wonders, it has produced significant and exciting changes in the operational
group. Faced with disappointing sales results, we began to reassess the entire
structure of the field organization. We reviewed what worked, opportunities for
improvement and how to maximize the dedication and experience of the employees
in the field.
We realized that one key to revitalizing our stores' performance was to
reduce the number of stores reporting to each direct supervisor. By reducing
the span of control, especially at the regional level, we could enhance
development and improve execution. To achieve this goal, a third regional
position was created. Each regional is now responsible for approximately 60
stores resulting in closer supervision, greater accountability
D-7
<PAGE>
and quicker resolution of problems. Regional Managers now have a small group of
stores reporting directly to them which allows them to quickly assess the
impact of corporate direction on store operations and sales, as well as provide
feedback to corporate to improve processes. These structural changes have
already resulted in significant sales improvements in the last few months.
employees
Retailing is often known as employment's revolving door. Keeping good
employees is a challenge that must be balanced with the competitive pressures
of the marketplace. At Natural Wonders we know that employees are the backbone
of the company. To support these critical players we have instituted several
training programs, a new bonus program and an extremely competitive benefit
package. We've created opportunities for ownership and continue to reward
performance. As a result, our employees are committed to Natural Wonders. They
bring a rare excitement to their work and we will ensure this energy results in
sales increases. One of Natural Wonders' competitive advantages has always been
the high level of customer service and product knowledge in the stores.
Customer feedback continues to show that we have maintained that level with
consistency. In 2000, we will continue to emphasize these factors that have
made the Natural Wonders concept viable--creating an interactive shopping
environment with helpful and knowledgeable employees.
expectations
We have dedicated ourselves to quickly recognize individual store issues and
correct them. Our expectation is that service and presentation will remain at
an all time high, that sales increases will continue and that the quality and
caliber of all Natural Wonders associates will be a source of pride. By
focusing on these key factors, we, out in the stores, are attending to every
detail of our business with confidence and determination.
D-8
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands, except operating data and per
share amounts)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Data:
Net sales............... $147,089 $149,821 $149,239 $138,773 $138,080
Cost of goods sold and
store occupancy
expenses............... 108,483 106,162 100,998 92,489 93,529
-------- -------- -------- -------- --------
Gross margin............ 38,606 43,659 48,241 46,284 44,551
Selling, general and
administrative
expenses............... 52,001 46,211 45,794 40,894 40,640
-------- -------- -------- -------- --------
Operating income
(loss)................. (13,395) (2,552) 2,447 5,390 3,911
Net interest and other
expenses............... 452 465 276 791 944
-------- -------- -------- -------- --------
Earnings (loss) before
income taxes........... (13,847) (3,017) 2,171 4,599 2,967
Income tax provision
(benefit).............. (5,359) (1,120) 803 1,698 1,157
-------- -------- -------- -------- --------
Net earnings (loss)..... $ (8,488) $ (1,897) $ 1,368 $ 2,901 $ 1,810
======== ======== ======== ======== ========
Basic earnings (loss)
per share.............. $ (1.07) $ (0.24) $ 0.17 $ 0.37 $ 0.23
======== ======== ======== ======== ========
Diluted earnings (loss)
per share.............. $ (1.07) $ (0.24) $ 0.17 $ 0.36 $ 0.23
======== ======== ======== ======== ========
Shares used in computing
basic earnings
(loss) per share....... 7,905 8,014 8,005 7,862 7,725
Shares used in computing
diluted earnings
(loss) per share....... 7,905 8,014 8,200 8,090 7,819
Operating Data:
Number of stores open at
end of year............ 182 180 171 151 146
Average net sales per
gross square foot (52
weeks)................. $ 328 $ 333 $ 373 $ 380 $ 382
Average net sales per
store (52 weeks)....... $794,000 $831,000 $917,000 $932,000 $936,000
Comparable store net
sales decrease......... (4.2)% (6.8)% (1.4)% (0.6)% (5.7)%
Balance Sheet Data at
Fiscal Year End:
Working capital......... $ 18,565 $ 26,812 $ 29,681 $ 33,495 $ 31,252
Total assets............ 65,341 70,848 79,337 78,344 77,964
Long-term borrowings.... -- -- 1,144 3,377 6,972
Stockholders' equity.... 44,640 53,450 55,802 54,156 50,658
</TABLE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
<TABLE>
<CAPTION>
Fiscal Year
---------------------
1999 1998 1997
----- ----- -----
(Percentage of
net sales)
<S> <C> <C> <C>
Net sales................................................ 100.0% 100.0% 100.0%
Cost of goods sold and store occupancy expenses.......... 73.7 70.9 67.7
Gross margin............................................. 26.3 29.1 32.3
Selling, general and administrative expenses............. 35.4 30.8 30.7
Operating income (loss).................................. (9.1) (1.7) 1.6
Net interest and other expenses.......................... 0.3 0.3 0.2
Income tax provision (benefit)........................... (3.6) (0.7) 0.5
Net earnings (loss)...................................... (5.8)% (1.3)% 0.9%
Number of stores open at end of period................... 182 180 171
</TABLE>
D-9
<PAGE>
Results of Operations
General The Company's fiscal year ends on the Saturday closest to January
31. Fiscal years 1999, 1998 and 1997 ended January 29, 2000, January 30, 1999,
and January 31, 1998, respectively. All references to years, unless otherwise
specified, are intended to refer to the Company's fiscal year.
At the end of 1999, the Company operated 182 stores in 39 states compared to
180 stores in 36 states at the end of 1998 and 171 stores in 36 states at the
end of 1997. In 1999, 10 new stores were opened, 9 permanent and 3 temporary
stores were closed, and 4 temporary stores were still open on January 29, 2000.
In 1998, 9 new stores were opened, 3 stores were closed, and 3 temporary stores
were still open on January 30, 1999. In 1997, 9 new stores were opened and 2
closed. On May 22, 1997, the Company acquired 12 locations through the
acquisition of substantially all of the operating assets of What A World!, Inc.
In addition, in 1999, 26 stores with temporary locations were opened during the
holiday season compared to 27 stores in 1998 and 12 stores in 1997. At the end
of 1999, 4 temporary stores remained open and 3 will be converted to permanent
stores during 2000. At the end of 1998, 3 temporary stores remained open and 2
were converted to permanent stores during 1999. At the end of 1997, 1 temporary
store remained open and was converted to a permanent store during 1998.
Sales Sales decreased 1.8% to $147,089,000 in 1999 from $149,821,000 in
1998. The decrease of $2,732,000 was due primarily to a decrease in comparable
store sales partially offset by new stores, stores in temporary locations and
Internet sales. The 10 new stores accounted for $4,907,000 of sales increase
and the full year of sales from new stores opened in 1998, accounted for
$1,067,000 of sales increase. This was fully offset by the decrease in
comparable store sales of $5,896,000 and the lost sales impact of 9 closed
stores and 6 remodeled stores of $2,907,000.
The Company defines comparable store sales as the change in sales for stores
that have been open for twelve full consecutive months. Comparable store sales
in 1999 decreased 4.2% as compared to 1998. The decrease was primarily
attributable to the impact of repositioning the merchandise assortment over the
first three quarters of the year, as well as delays in implementing the
changes. Although overall comparable store sales decreased, some of the
Company's stores experienced positive comparable store sales. The average
dollar amount per customer transaction increased significantly in 1999, from
$22 to $25 (or 13.6%).
Sales increased 0.4% to $149,821,000 in 1998 from $149,239,000 in 1997. The
increase of $582,000 was due primarily to new stores and stores in temporary
locations, mostly offset by a decrease in comparable store sales. The 9 new
stores accounted for $4,208,000 of the increase, the stores in temporary
locations accounted for $3,819,000 of the increase, and the full year of sales
from new stores opened in 1997 accounted for $4,814,000 of the increase. This
was mostly offset by the decrease in stores opened prior to 1997, which
accounted for a $11,604,000 decrease and closed stores for a $654,000 decrease.
Comparable store sales in 1998 decreased 6.8% as compared to 1997. The
decrease was due primarily to a decrease in demand in the Discovery, Media and
Geology product categories. The largest decreases occurred primarily in the
Ohio, Mid-Atlantic and South Central districts. Although overall comparable
store sales decreased, some of the Company's stores experienced positive
comparable store sales. The average dollar amount per sales ticket increased
slightly in 1998.
Cost of Goods Sold and Store Occupancy Expenses Cost of goods sold and store
occupancy expenses include distribution center costs and other expenses
associated with acquiring inventory. These costs increased as a percentage of
sales to 73.7% in 1999 from 70.9% in 1998 primarily due to higher costs of
goods for inventory, as well as higher occupancy and other fixed expenses on
decreased per store sales levels.
In 1998, cost of goods sold and store occupancy expenses increased as a
percentage of sales to 70.9% in 1998 from 67.7% in 1997. The increase was
primarily due to the occupancy costs for a greater number of new and temporary
stores open in 1998 than 1997 coupled with flat sales.
D-10
<PAGE>
Selling, General and Administrative Expenses Selling, general and
administrative (SG&A) expenses, which are primarily non-occupancy store
expenses and corporate overhead, increased as a percentage of sales to 35.4% in
1999 from 30.8 % in 1998. The increase in expenses was due primarily to
expenses and write-offs of $860,000 associated with closed stores as well as a
charge of $3,240,000 representing the impairment of certain long-lived store
assets, primarily leasehold improvements.
In 1998, SG&A expenses increased slightly as a percentage of sales to 30.8%
compared to 30.7% in 1997. The increase was due the negotiated settlement of a
patent infringement claim for $525,000. In addition, benefits of cost controls
were offset by the decline in comparable store sales and the expenses
associated with the increase in the number of permanent and temporary stores.
Operating Income (Loss) As a result of the foregoing, there was an operating
loss of $ 13,395,000, or 9.1% of sales in 1999 and $2,552,000, or 1.7% of sales
in 1998, compared to operating income of $2,447,000, or 1.6% of sales in 1997.
Net Interest and Other Expenses Net interest and other expenses decreased to
$452,000 or 0.3% of sales in 1999 from $465,000 or 0.3% of sales in 1998, which
was an increase from $276,000 or 0.2% of sales in 1997. The increase in 1998
from 1997 was due primarily to less interest income due to a lower average
investment balance.
Income Tax Provision (Benefit) The effective tax rate was 38.7% in 1999 and
37.1% in 1998. No valuation allowance was necessary to offset the deferred tax
asset at the end of 1999, 1998 or 1997. Management evaluated the need for such
an allowance and based on the Company's history of earnings and projected
future profitability, determined that one was not necessary. Should actual
future results differ from management estimates, the deferred tax assets,
including the tax benefit recorded in 1999 and 1998, may not be realized.
Net Earnings (Loss) As a result of the foregoing, there was a net loss of
$8,488,000 or 5.8% of sales in 1999 and $1,897,000 or 1.3% of sales in 1998
compared to net income of $1,368,000 or 0.9% of sales in 1997.
Liquidity and Capital Resources Seasonal working capital requirements have
been met primarily through short-term bank borrowings.
At fiscal year-end 1999 cash and investments were $3,010,000 in comparison
to $12,221,000 at year-end 1998. The decrease was primarily due to operating
losses, stock repurchases, construction costs and fixtures for new stores, and
the remodeling of existing stores, as well as increased inventory levels.
In fiscal 2000, the Company plans to open approximately 6 new stores and,
during the holiday season, approximately 25 temporary locations. The Company
anticipates that cash in 2000 will primarily be used for capital expenditures
and merchandise inventory for new stores and temporary locations, and to
purchase inventory for the Company's existing stores, particularly prior to and
during the peak holiday selling season. Additionally, in fiscal 1997 the Board
of Directors of the Company authorized the repurchase of up to $2,000,000 of
Natural Wonders outstanding common stock. As of January 29, 2000, the Company
had repurchased 334,357 shares of Natural Wonders common stock for a total of
$1,250,000.
The Company entered into an amended and restated credit facility agreement
with a commercial bank effective June 15, 1999 for the purpose of financing
seasonal working capital needs. This line of credit is for a term of three
years, with a maximum credit line of $30,000,000, and is provided by the same
bank as the Company's previous credit facility agreement, together with an
additional lender acting as administrative agent. The line provides for
revolving advances up to the lesser of 60% of the value of eligible inventory,
80% of the net retail liquidation value of eligible inventory, or the maximum
credit line. As of January 29, 2000, total availability under the line was
$12,284,000, with no amount outstanding. The line includes up to $5,000,000 for
the issuance of commercial and standby letters of credit. The line of credit
must be fully repaid for a 30-day consecutive period between January 1 and
February 15 each year. The Company has the option of choosing
D-11
<PAGE>
interest payable at a rate based on LIBOR plus 2.25% or a rate equal to the
bank's prime rate. The agreement contains restrictive covenants, which include
maintaining certain minimum tangible net worth levels and requiring bank
consent for the payment of dividends. As of January 29, 2000, the Company was
not in compliance with the tangible net worth covenant. The noncompliance was
waived and the agreement was amended with a revised covenant. At the same time,
the administrative agent assumed the commercial bank's participation. The
agreement also includes certain prepayment penalties.
The Company has reviewed its plans to return the Company to profitability,
as well as progress on executing those plans, with its lender, when the line
was amended at year-end. An important component of the plan addresses the
profitability of individual stores. During the fourth quarter 1999, the Company
completed an in-depth analysis of its portfolio of store leases. A group of
unprofitable store locations was identified for closure and the Company is now
actively pursuing the termination or renegotiation of these lease agreements. A
long-lived asset impairment reserve was established for most of these locations
and outside resources have been retained to support this effort. Charges will
be incurred in 2000 in order to close some stores, but the amount of these
charges is expected to be less than the operating cost savings from closing
these stores. The Company will periodically reassess the success of its real
estate strategy as well as the rest of its management plan to return the
Company to profitability.
The Company believes that current cash and short-term investments together
with its cash flow from operations and funds available under its credit
facilities will be sufficient to fund the Company's operations for the next 12
months.
The Company was not materially affected by the Year 2000 issue. The Company
did not have material expenditures related to the Year 2000 issue and as such,
costs associated with Year 2000 have not had a significant impact on the
Company's results of operations, liquidity, or capital resources. The Company
did not accelerate any system replacements or incur any costs for upgrades or
additional personnel in order to make any systems Year 2000 compliant.
In January 1998, a lawsuit was filed against the Company alleging that
certain products sold by the Company infringed two patents of the plaintiff and
sought injunctive relief, unspecified damages, and enhanced damages and
attorneys fees. In June 1998, the Company reached a negotiated settlement of
this claim. The cost of the settlement, including legal expenses and reserves,
was approximately $525,000 and was recorded in the first quarter ended May 2,
1998.
New Accounting Pronouncements SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as delayed by SFAS No. 137, will be
effective for the Company in fiscal 2001. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments embedded in other contracts,
and hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company does not expect adoption of this
new standard to have a significant impact on its financial statements.
Inflation and Seasonality The Company does not believe that its operations
have been materially affected by inflation during recent years. However, there
is no assurance that its business will not be affected by inflation in the
future.
The Company's business is subject to substantial seasonal variations in
demand. Historically, a significant portion of the Company's sales and
substantially all of its net earnings have been realized during the fourth
quarter (which includes the November/December holiday season), and levels of
sales and net earnings have been significantly lower in the first three
quarters, usually resulting in losses in these quarters. If for any reason the
Company's sales were substantially below seasonal norms during the months of
November and December, as was the case in 1998, the Company's annual results
would be adversely affected. The Company's quarterly results of operations may
fluctuate significantly as a result of comparable store sales levels, the
timing of new store openings and the amount of revenue contributed by new
stores.
D-12
<PAGE>
Future Results This report contains forward-looking statements regarding,
among other matters, the Company's future strategy, store opening and closing
plans, availability of financing and cash flows, merchandising strategy and
growth. The forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements address matters which are subject to a number of risks and
uncertainties. In addition to the general risks associated with the operation
of specialty retail stores in a highly competitive environment, the success of
the Company will depend on a variety of factors. The success of the Company's
operations depends upon a number of factors relating to consumer spending,
including economic conditions affecting disposable consumer income such as
employment, business conditions, interest rates and taxation. The Company's
continued growth also depends upon the demand for its products, which in turn
is dependent upon various factors, such as the introduction and acceptance of
new products and the continued popularity of existing products, as well as the
timely supply of all merchandise. Reference is made to the Company's filings
with the Securities and Exchange Commission for further discussion of risks and
uncertainties regarding the Company's business.
Market Risk The Company does not undertake any specific actions to cover its
exposure to interest rate risk and the Company is not a party to any interest
rate risk management transactions. The Company does not purchase or hold any
derivative financial instruments.
D-13
<PAGE>
NATURAL WONDERS, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 3,010 $ 4,841
Short-term investments............................... -- 7,380
Merchandise inventories.............................. 28,205 22,707
Prepaid income taxes................................. 1,386 1,403
Prepaid expenses and other current assets............ 3,083 3,262
Deferred taxes....................................... 588 1,056
------- -------
Total current assets............................... 36,272 40,649
Property and Equipment:
Leasehold improvements............................... 22,759 30,077
Furniture, fixtures and equipment.................... 21,175 34,106
------- -------
43,934 64,183
Less accumulated depreciation and amortization....... (22,757) (37,510)
------- -------
Total property and equipment....................... 21,177 26,673
Deferred Taxes......................................... 7,707 3,085
Other Assets........................................... 185 441
------- -------
Total Assets........................................... $65,341 $70,848
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable............................... $12,664 $ 8,500
Accrued compensation and related costs............... 2,300 2,300
Accrued liabilities.................................. 2,743 3,037
------- -------
Total current liabilities.......................... 17,707 13,837
Deferred Rent.......................................... 2,994 3,561
Commitments and Contingencies (Note 6)
Stockholders' Equity:
Preferred stock, par value $.0001; authorized
1,000,000 shares; none issued. Common stock, par
value $.0001; authorized 17,000,000 shares; issued
and outstanding 7,869,006 and 7,951,392 shares in
1999 and 1998....................................... 1 1
Capital in excess of par value....................... 33,751 34,073
Retained earnings.................................... 10,888 19,376
------- -------
Total stockholders' equity......................... 44,640 53,450
------- -------
Total Liabilities and Stockholders' Equity............. $65,341 $70,848
======= =======
</TABLE>
See notes to financial statements.
D-14
<PAGE>
NATURAL WONDERS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales................. $147,089 $149,821 $149,239
Cost of goods sold and
store occupancy
expenses................. 108,483 106,162 100,998
-------- -------- --------
Gross margin............ 38,606 43,659 48,241
Selling, general and
administrative expenses.. 52,001 46,211 45,794
-------- -------- --------
Operating income
(loss)................. (13,395) (2,552) 2,447
Interest expense.......... 556 428 625
Other expenses............ 59 484 450
Interest and other
income................... (163) (447) (799)
-------- -------- --------
Earnings (loss) before
income taxes........... (13,847) (3,017) 2,171
Income tax provision
(benefit)................ (5,359) (1,120) 803
-------- -------- --------
Net earnings (loss)..... $ (8,488) $ (1,897) $ 1,368
======== ======== ========
Net earnings (loss) per
common share:
Basic................... $ (1.07) $ (0.24) $ 0.17
Diluted................. $ (1.07) $ (0.24) $ 0.17
Weighted average common
shares outstanding:
Basic................... 7,905 8,014 8,005
Diluted................. 7,905 8,014 8,200
</TABLE>
See notes to financial statements.
D-15
<PAGE>
NATURAL WONDERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Capital in Total
----------------- Excess of Retained Stockholders'
Shares Amount Par Value Earnings Equity
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, February 1, 1997.. 7,986,846 $ 1 $34,250 19,905 $54,156
Exercise of stock
options................. 60,692 167 167
Tax benefit from exercise
of stock Options........ 27 27
Employee stock purchase
plan.................... 24,571 84 84
Net earnings............. 1,368 1,368
------- -------
Balance, January 31, 1998.. 8,072,109 1 34,528 21,273 55,802
Exercise of stock
options................. 99,592 266 266
Tax benefit from exercise
of stock options........ 97 97
Employee stock purchase
plan.................... 15,743 59 59
Stock repurchase......... (243,552) (900) (900)
Grant of treasury
shares.................. 7,500 23 23
Net loss................. (1,897) (1,897)
------- -------
Balance, January 30, 1999.. 7,951,392 1 34,073 19,376 53,450
Employee stock purchase
plan.................... 8,419 28 28
Stock repurchase......... (90,805) (350) (350)
Net loss................. (8,488) (8,488)
------- -------
Balance, January 29, 2000.. 7,869,006 $ 1 $33,751 $10,888 $44,640
========= === ======= ======= =======
</TABLE>
See notes to financial statements.
D-16
<PAGE>
NATURAL WONDERS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss)............................ $ (8,488) $ (1,897) $ 1,368
Adjustments to reconcile net earnings (loss)
to net cash from operating activities:
Depreciation and amortization................ 7,248 7,269 6,174
Loss on disposal and impairment of long-lived
assets...................................... 4,085 950 48
Deferred taxes............................... (4,154) 130 (1,079)
Changes in assets and liabilities:
Merchandise inventories.................... (5,498) 477 (2,341)
Prepaid expenses and other current assets.. 435 (415) (511)
Prepaid income taxes....................... 17 (1,403)
Trade accounts payable..................... 4,164 503 2,822
Accrued compensation and related costs..... (525) 302
Accrued liabilities........................ (294) (599) 838
Income taxes payable....................... (1,760) (160)
Deferred rent.............................. (567) (244) (218)
-------- -------- --------
Net cash (used in) provided by operating
activities...................................... (3,052) 2,486 7,243
Cash Flows From Investing Activities:
Purchases of short-term investments............ (21,381) (18,100)
Sales of short-term investments................ 7,380 27,401 22,600
Purchases of property and equipment............ (5,837) (6,049) (8,362)
Business acquisition........................... (738)
-------- -------- --------
Net cash provided by (used in) investing
activities...................................... 1,543 (29) (4,600)
Cash Flows From Financing Activities:
Principal payments on capital lease
obligations................................... (1,327) (1,789)
Principal payments on long-term debt........... (2,088) (2,421)
Purchase of treasury stock..................... (350) (900)
Grant of treasury shares....................... 23
Short-term borrowings on bank line of credit... 84,717 54,000 33,900
Payments on bank line of credit................ (84,717) (54,000) (33,900)
Exercise of stock options and warrants......... 266 167
Net proceeds from sale of common stock......... 28 59 84
-------- -------- --------
Net cash used in financing activities............ (322) (3,967) (3,959)
Net Decrease in Cash and Cash Equivalents........ (1,831) (1,510) (1,316)
Cash and cash equivalents:
Beginning of year.............................. 4,841 6,351 7,667
-------- -------- --------
End of year.................................... $ 3,010 $ 4,841 $ 6,351
======== ======== ========
Supplemental Information Cash paid during year:
Interest....................................... $ 550 $ 442 $ 614
Income taxes................................... $ 132 $ 1,857 $ 2,083
======== ======== ========
</TABLE>
See notes to financial statements.
D-17
<PAGE>
NATURAL WONDERS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business. Natural Wonders (the Company) is a specialty retailer, which
operates 182 stores, primarily in mall locations, in 39 states. The Company's
products are inspired by the wonders of science and nature, and include
telescopes, minerals, gardening and outdoor products, educational toys and
games and apparel.
Fiscal Year. The Company's fiscal year ends on the Saturday closest to
January 31. Fiscal years 1999, 1998 and 1997 ended January 29, 2000, January
30, 1999, and January 31, 1998, respectively. Fiscal 1999, 1998 and 1997 were
52 weeks.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates used in the financial statements include the estimates
of (i) expected inventory markdowns, (ii) sales return reserves (iii)
impairment of long-lived assets, and (iv) realizability of deferred tax assets.
The amounts that the Company will ultimately incur or recover could differ
materially from the Company's current estimates. The underlying estimates and
facts supporting these estimates could change in 2000 or thereafter.
Revenue Recognition. Revenue is recognized at the point of sale, net of
estimated sales returns.
Cash and Cash Equivalents. The Company considers all highly liquid
investment instruments with an original maturity of three months or less to be
cash equivalents.
Short-Term Investments. Short-term investments consist of highly liquid
investments with an original maturity greater than three months. The Company's
short-term investments consist primarily of commercial paper and discount
notes, which have been classified as available for sale and are carried at fair
value, which approximates cost. The Company's policy is to invest cash in
excess of immediate operating and expansion needs in investment grade, highly
liquid income producing investments. Investments in the instruments of a single
entity are limited to the lesser of $5,000,000 or 20% of the market value of
the portfolio.
Merchandise Inventories. Merchandise inventories are stated at lower of
average cost or market. Merchandise inventory includes expenses associated with
the acquisition and distribution of inventory. Inventory is recorded net of
markdown reserves and as such are management's best estimate. For fiscal year
ended 1999, the Company implemented a new policy to establish a sales return
reserve as a part of merchandise inventories.
Property and Equipment. Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful life of the assets, which range from 3 to 10 years.
Depreciation expense totaled $7,248,000, $7,269,000 and $6,174,000 for 1999,
1998, and 1997, respectively.
Store Pre-Opening Costs. Store pre-opening costs are expensed as incurred.
Rent Expense. Certain of the Company's operating leases contain
predetermined fixed increases of the minimum rental rate during the initial
term. For these leases, the Company recognizes the related rental expense on a
straight-line basis over the lease term. The Company has recorded the
difference between the amounts charged to operations and the amounts payable
under the leases as deferred rent in the accompanying balance sheets.
D-18
<PAGE>
NATURAL WONDERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes. Income taxes are computed using the asset and liability
method, under which deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities.
Stock-Based Compensation. The Company accounts for stock-based awards to
employees and directors using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation cost has been recognized for its fixed
cost stock option plans or its employee stock purchase plan.
Impairment of Long-Lived Assets. The Company periodically reviews its long-
lived assets for impairment to determine whether any events or circumstances
indicate that the carrying amount of the assets may not be recoverable based on
expected future cash flows. In 1999 the Company recorded a charge of $3,240,000
representing the impairment of certain long-lived store assets, primarily
leasehold improvements (see Note 2).
Comprehensive Income (Loss). The Company's comprehensive income (loss) for
1999, 1998 and 1997 is equal to its net income (loss).
Derivative Instruments. SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as delayed by SFAS No. 137, will be effective for the
Company in fiscal 2001. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments embedded in other contracts, and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company does not expect adoption of this new
standard to have a significant impact on its financial statements.
Note 2. Fiscal 1999 Results of Operations and Management Plans for Fiscal 2000
The Company has incurred significant operating losses and negative cash
flows from operations. In 1999 and 1998, the Company had pre-tax net losses of
$13,847,000 and $3,017,000, respectively, and in 1999 had net cash used in
operating activities of $3,052,000.
The Company has reviewed its plans to return the Company to profitability,
as well as progress on executing those plans, with its lender. Fiscal 2000 will
be the first full year of operations under new merchandising strategies
implemented by the Company during 1999. As a result of those strategies,
merchandise inventories have increased $5,498,000 from $22,707,000 at January
29, 2000 to $28,205,000 at January 30, 2000. Management believes that the
build-up of inventory levels with new merchandise is critical to the success of
its plans.
Another important component of the Company's plans addresses the
profitability of the individual stores. During the fourth quarter of 1999, the
Company completed an analysis of its portfolio of store leases. A group of
unprofitable store locations was identified for closure, and the Company is now
actively pursuing the termination or renegotiation of these lease agreements. A
long-lived asset impairment reserve was established related to these locations,
and outside resources have been retained to support this effort. Charges will
be incurred in 2000 in order to close some stores, but the amount of these
charges is expected to be less than the operating cost savings from closing
these stores.
While there can be no assurance that the implementation of the Company's
plans will enable it to return to profitability in 2000, the Company believes
that its existing cash and cash equivalents, combined with borrowings available
under its credit facility (see Note 3), will be sufficient for the Company to
sustain its operations and meet its financial obligations through the end of
the next fiscal year.
D-19
<PAGE>
NATURAL WONDERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3. Bank Financing and Liquidity
The Company entered into an amended and restated credit facility agreement
with a commercial bank effective June 15, 1999 for the purpose of financing
seasonal working capital needs. This line of credit is for a term of three
years, with a maximum credit line of $30,000,000, and is provided by the same
bank as the Company's previous credit facility agreement, together with an
additional lender acting as administrative agent.
The line provides for revolving advances up to the lesser of 60% of the
value of eligible inventory, 80% of the net retail liquidation value of
eligible inventory, or the maximum credit line. As of January 29, 2000, total
availability under the line was $12,284,000, with no amount outstanding. The
line includes up to $5,000,000 for the issuance of commercial and standby
letters of credit. The line of credit must be fully repaid for a 30-day
consecutive period between January 1 and February 15 each year. The Company has
the option of choosing interest payable at a rate based on LIBOR plus 2.25% or
a rate equal to the bank's prime rate. The agreement contains restrictive
covenants, which include maintaining certain minimum tangible net worth levels
and requiring bank consent for the payment of dividends. As of January 29,
2000, the Company was not in compliance with the tangible net worth covenant.
The noncompliance was waived and the agreement was amended with a revised
covenant. At the same time, the administrative agent assumed the commercial
bank's participation. The agreement also includes certain prepayment penalties.
Outstanding commercial and standby letters of credit as of January 29, 2000
and January 30, 1999 approximated $534,000 and $892,000, respectively.
Note 4. Stockholders' Equity and Benefit Plan
Stock Option Plans The Company has stock option plans, which allow for the
granting of incentive and non-qualified stock options to employees and non-
employee directors. There are 2,750,000 shares of common stock authorized for
issuance under the plans. Stock options generally are granted at prices equal
to the fair market value on the date of grant, vest over a period of three to
five years, and expire in ten years. In addition, the Company granted 750,000
shares of common stock to certain executives at an exercise price of $3.625
during 1998. These options vest in different share amounts, upon achieving
certain stock prices, which range from $8 per share to $28 per share. Any
remaining unvested shares vest seven years after the date of the option grant.
Accordingly, no compensation charge has been recognized for these option
grants.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net earnings and net earnings per share had the Company
adopted the fair value method as of the beginning of 1995. Under SFAS 123, the
fair value of stock-based awards is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions: five year
expected life from date of grant; stock volatility, 110.8% in 1999, 118.9% in
1998 and 64.5% in 1997; risk-free interest rates, 5.7% in 1999, 5.2% in 1998,
and 6.2% in 1997; and no dividends during the expected term. The Company's
calculations are based on a single option valuation approach and forfeitures
are recognized as they occur. If the computed fair values of the 1999, 1998 and
1997 awards had been amortized to expense over the vesting period of the
awards, pro forma net earnings (loss) and net earnings (loss) per share would
have been $(8.9) million (basic: $(1.13) per share; diluted: $(1.13) per share)
in fiscal 1999, $(2.2) million (basic: $(0.27) per share; diluted: $(0.27) per
share) in fiscal 1998, and $1.2 million (basic: $0.15 per share; diluted: $0.14
per share) in fiscal 1997.
D-20
<PAGE>
NATURAL WONDERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted
Options Average
Outstanding Exercise Price
----------- --------------
<S> <C> <C>
Outstanding, February 1, 1997
(164,412 exercisable at a weighted average price of
$7.33)............................................. 722,684 4.54
Granted (weighted average fair value $3.09)....... 328,400 5.17
Canceled.......................................... (266,217) 4.90
Exercised......................................... (60,692) 2.79
--------- -----
Outstanding, January 31, 1998
(253,520 exercisable at a weighted average price of
$5.41)............................................. 724,175 4.83
Granted (weighted average fair value $3.13)....... 995,537 3.73
Canceled.......................................... (452,333) 4.91
Exercised......................................... (99,592) 2.67
--------- -----
Outstanding, January 30, 1999
(115,277 exercisable at a weighted average price of
$6.21)............................................. 1,167,787 4.06
Granted (weighted average fair value $2.21)....... 178,650 2.72
Canceled.......................................... (124,096) 4.38
--------- -----
Outstanding, January 29, 2000
(205,849 exercisable at a weighted average price of
$5.16)............................................. 1,222,341 $3.83
--------- -----
</TABLE>
There were 474,913 shares available for grant under the plan.
The following table summarizes additional information about stock options at
January 29, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------
Weighted Weighted
Average Average Weighted
Range of Remaining Exercise Number Average
Exercise Prices Number Outstanding Life (Yrs) Price Exercisable Exercise Price
--------------- ------------------ ---------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.09-
$ 3.56 172,048 9.06 2.32 37,010 $2.90
$3.63-
$ 3.63 750,000 8.67 3.63 -- --
$3.75-
$ 4.50 184,609 8.34 4.14 86,889 4.09
$4.56-
$15.25 115,684 6.53 6.88 81,950 7.31
------- --------- ---- ----- ------- -----
$1.09-
$15.25 1,222,341 8.47 $3.83 205,849 $5.16
</TABLE>
Stock Purchase Plan The Company's employee stock purchase plan enables
eligible employees to purchase Natural Wonders' common stock at the average
market price on the first or the last day of each six month purchase period,
whichever is lower. Employees may authorize periodic payroll deductions of up
to 10% of eligible compensation for common stock purchases, up to a maximum
amount of 750 shares per six-month period. The total number of shares which may
be issued under the plan is 300,000. As of January 29, 2000, 175,175 shares
have been issued.
D-21
<PAGE>
NATURAL WONDERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Repurchase Program In fiscal 1997 the Board of Directors of the Company
authorized the repurchase of up to $2,000,000 of the Company's outstanding
common stock. Beginning in February 1998, the Company began repurchasing stock
and as of January 29, 2000 had purchased 334,357 shares for a total of
$1,250,000.
Benefit Plan The Company has available a defined contribution plan. Eligible
employees may contribute 1% to 15% of their compensation and the Company
matches 50% of the first 5% of such employee contributions up to $2,000 per
year. Total Company contributions to the plan were approximately $132,000,
$61,000, and $61,000 in 1999, 1998, and 1997, respectively.
Note 5. Income Taxes
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
Fiscal Year
-------------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Current:
Federal............................................ $(1,262) $(1,337) $ 1,451
State.............................................. 57 87 431
------- ------- -------
(1,205) (1,250) 1,882
Deferred............................................. (4,154) 130 (1,079)
------- ------- -------
Total................................................ $(5,359) $(1,120) $ 803
======= ======= =======
</TABLE>
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Fiscal Year
----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory rate............................................. 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit...... 4.7 4.8 6.5
Non taxable interest....................................... -- (1.7) (5.3)
Other...................................................... -- -- 1.8
---- ---- ----
Effective tax rate......................................... 38.7% 37.1% 37.0%
==== ==== ====
</TABLE>
D-22
<PAGE>
NATURAL WONDERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the net deferred tax asset at year-end are as follows: (In
thousands)
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------
1999 1998
--------------- ---------------
Non- Non-
Current Current Current Current
------- ------- ------- -------
<S> <C> <C> <C> <C>
Deferred tax assets:
Deferred rent................................. $1,235 $1,470
Merchandise inventories....................... $ 457 $ 292
Accrued employee benefits..................... 375 436
Miscellaneous accruals........................ 256 183 587
Basis in fixed assets......................... 3,249 1,816
Alternative minimum tax credits and other..... 525 375
Net operating loss carryforward............... 3,227
----- ------ ------ ------
1,088 8,419 1,690 3,286
----- ------ ------ ------
Deferred tax liabilities:
State taxes and other......................... 500 712 634 201
----- ------ ------ ------
Net deferred tax asset.......................... $ 588 $7,707 $1,056 $3,085
===== ====== ====== ======
</TABLE>
No valuation allowance has been recorded at January 29, 2000 or January 30,
1999. Management evaluated the need for such an allowance, and based on the
Company's history of earnings and projected future profitability, determined
that one was not necessary. Realization of deferred of tax assets is dependent
upon generating sufficient taxable income prior to the expiration of related
benefits. Although realization is not assured, management believes it is more
likely than not that the deferred tax assets will be realized. The deferred tax
assets considered realizable could be reduced if estimates of future taxable
income during the carryforward periods are reduced.
At January 29, 2000, the Company has federal and state net operating loss
carryforwards of approximately $5,777,887 and $17,333,721, respectively, which
expire between 2003 and 2019.
Note 6. Earnings Per Share Basic earnings per share is calculated based upon
the weighted average number of common shares outstanding, excluding common
share equivalents, during the period. Diluted earnings per share is calculated
based upon the weighted average number of shares outstanding plus common share
equivalents during the period.
The following is a reconciliation of the Company's basic and diluted net
income (loss) per share computations:
(Shares in thousands)
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
(Shares in thousands)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS.......................... 7,905 $(1.07) 8,014 $(0.24) 8,005 $0.17
Effect of dilutive stock options... 195 --
----- ------ ----- ------ ----- -----
Diluted EPS........................ 7,905 $(1.07) 8,014 $(0.24) 8,200 $0.17
===== ====== ===== ====== ===== =====
</TABLE>
In 1999 and 1998, stock options did not have a dilutive effect on EPS
because of the net loss.
D-23
<PAGE>
NATURAL WONDERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following options were not included in the computation of diluted EPS
because such options' exercise price was greater than the average market price
of the common shares:
<TABLE>
<CAPTION>
Fiscal Year
1997
-------------
<S> <C>
Options to purchase shares of common stock....................... 213,000
-------------
Exercise prices.................................................. $5.13-$ 15.25
-------------
Expiration dates................................................. June 2003-
November 2007
</TABLE>
Note 7. Commitments and Contingencies
Leases The Company leases its office, distribution and retail facilities
under operating leases expiring at dates from 2000 to 2010. Certain of the
leases include renewal provisions at the Company's option. The Company also
subleases space at various locations with both month-to-month and noncancelable
sublease agreements.
The Company leased fixtures and equipment under capital equipment leases
during part of 1998 and prior years. All existing leases were bought out during
1998. Interest rates ranged from approximately 7.5% to 15.9%. Some of the
leases were subject to fair market value buyout at the end of the initial lease
term.
The aggregate minimum annual rental payments and sublease income under
noncancelable operating leases in effect at January 29, 2000 are as follows:
<TABLE>
<CAPTION>
Fiscal Year Minimum Sublease
Rent Income Total
----------- ------- --------
(In thousands)
<S> <C> <C> <C>
2000............................................... $15,166 $201 $14,965
2001............................................... 13,995 222 13,773
2002............................................... 12,156 230 11,926
2003............................................... 10,775 237 10,538
2004............................................... 6,954 80 6,874
Thereafter......................................... 19,660 -- 19,660
------- ---- -------
Total minimum lease commitments.................... $78,706 $970 $77,736
======= ==== =======
</TABLE>
All of the leases for the Company's retail stores contain clauses which
provide for additional rent if sales exceed predetermined levels. The
components of rent expense for 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Minimum and deferred rent............................ $15,248 $15,170 $13,800
Percentage rent...................................... 170 112 80
Sublease income...................................... (294) (278) (99)
------- ------- -------
Total rent expense................................... $15,124 $15,004 $13,781
======= ======= =======
</TABLE>
Accumulated amortization of property under capital leases as of January 31,
1998 was $2,768,000. During 1998 a number of capital leases expired, the
related equipment was purchased and the balances reclassified to equipment. All
remaining capital leases were bought out during 1998, the equipment returned or
purchased and the balances reclassified to equipment or expensed.
D-24
<PAGE>
NATURAL WONDERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Litigation In January 1998, a lawsuit was filed against the Company alleging
that certain products sold by the Company infringed two patents of the
plaintiff and sought injunctive relief, unspecified damages, and enhanced
damages and attorneys fees. In June 1998, the Company reached a negotiated
settlement of this claim. The cost of the settlement, including legal expenses
and reserves, was approximately $525,000 and was recorded in the first quarter
ended May 2, 1998.
The Company is involved in other litigation in the ordinary course of its
business. Management believes that the outcome of such litigation will not have
a material adverse effect upon the Company's financial statements.
Note 8. Acquisition
On May 22, 1997, the company acquired 12 locations through the acquisition
of substantially all operating assets of What A World!, Inc. Inventory and
store fixtures were the primary assets acquired and certain retail facility
leases were assumed. The total purchase price, including acquisition costs, was
$738,000 and was recorded using the purchase method of accounting.
Note 9. Quarterly Financial Information (unaudited)
Summarized quarterly financial information for fiscal years 1999 and 1998 is
as follows:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------
Jul. Oct.
May 1, 31, 30, Jan. 29,
Fiscal Year 1999 1999 1999 1999 2000(1)
---------------- ------- ------- ------- --------
(In thousands, except per share
amounts)
<S> <C> <C> <C> <C>
Net sales................................... $21,552 $25,415 $23,332 $76,790
Gross margin................................ 2,602 4,584 5,733 25,687
Net earnings (loss)......................... (4,359) (3,959) (3,884) 3,714
Basic earnings (loss) per share............. $ (0.55) $ (0.50) $ (0.49) $ 0.47
Diluted earnings (loss) per share........... $ (0.55) $ (0.50) $ (0.49) $ 0.47
<CAPTION>
Quarter Ended
-----------------------------------
Oct.
May 2, Aug. 1, 31, Jan. 30,
Fiscal Year 1998 1998 1998 1998 1999
---------------- ------- ------- ------- --------
(In thousands, except per share
amounts)
<S> <C> <C> <C> <C>
Net sales................................... $23,265 $27,443 $24,464 $74,648
Gross margin................................ 3,827 7,482 5,678 26,670
Net earnings (loss)......................... (4,576) (1,569) (2,996) 7,245
Basic earnings (loss) per share............. $ (0.57) $ (0.19) $ (0.38) $ 0.91
Diluted earnings (loss) per share........... $ (0.57) $ (0.19) $ (0.38) $ 0.91
</TABLE>
--------
(1) The Company recorded a charge of $3,240,000 representing the impairment of
certain long-lived store assets in the fourth quarter of fiscal 1999.
D-25
<PAGE>
NATURAL WONDERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Natural Wonders, Inc.
Fremont, California
We have audited the accompanying balance sheets of Natural Wonders, Inc.
(the Company) as of January 29, 2000 and January 30, 1999 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended January 29, 2000. 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, such financial statements present fairly, in all material
respects, the financial position of Natural Wonders, Inc. as of January 29,
2000 and January 30, 1999, and the results of its operations and its cash flows
for each of the three years in the period ended January 29, 2000 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
San Francisco, California
March 3, 2000
D-26
<PAGE>
CORPORATE INFORMATION
Board of Directors Corporate Officers
Pearson C. Cummin III Peter G. Hanelt
Chairman of the Board of Directors, Chief Executive Officer, Chief
Natural Wonders, Inc. Financial
Officer and Director
General Partner,
Consumer Venture Partners Kenneth G. Norton
David Folkman Executive Vice President,
Director and Chief Executive Officer, General
Merchandising Manager
On-Site Dental Care, Inc.
Principal, Regent Pacific Management William J. Soncini
Senior Vice President,
Operations
Corporation
Peter G. Hanelt Denise A. Ellwood
Vice President, Merchandising
Chief Executive Officer, Chief Financial
Officer and Director, Debbie M. Wibbenmeyer
Natural Wonders, Inc. Vice President, Merchandise
Planning and Allocation
Bruce Beda
Chief Executive Officer Michael L. Cape
Vice President, Marketing and
Visual
Orion Partners LLC
Julius Jensen III Catherine S. Klein
Controller
Managing General Partner,
Copley Venture Partners Corporate Headquarters
4209 Technology Drive
Fremont, California 94538
(510) 252-9600
Register and Transfer Agent
BankBoston, N.A.
c/o EquiServe
P.O. Box 8218
Boston, Massachusetts 02266-8218
(781) 575-3100
Independent Auditors
Deloitte & Touche LLP
San Francisco, California
Annual Meeting
The Annual Meeting of
Shareholders will be held
Tuesday, May 23, 2000 at 9:00
a.m. (PDT) at the Company's
headquarters.
D-27
<PAGE>
Form 10K A copy of the Company's 1999 Form 10K as filed with the SEC may be
obtained without charge by calling or writing Investor Relations at the
Company's headquarters.
Market Information and Dividend Policy
Natural Wonders, Inc. common stock trades on the NASDAQ Stock Market under
the symbol NATW. Market price for the Company's stock for fiscal 1999 and 1998
is as follows:
<TABLE>
<CAPTION>
1999 High Low
---- ---- ---
<S> <C> <C>
First Quarter................................................ 4 5/8 3 15/16
Second Quarter............................................... 4 1/8 3 1/2
Third Quarter................................................ 4 1 1/4
Fourth Quarter............................................... 2 1 1/32
<CAPTION>
1998 High Low
---- ---- ---
<S> <C> <C>
First Quarter................................................ 5 3/8 3 15/16
Second Quarter............................................... 4 7/8 3 7/8
Third Quarter................................................ 4 1/2 2
Fourth Quarter............................................... 5 1/8 3
</TABLE>
As of February 29, 2000, there were approximately 250 stockholders of record
and 1,500 beneficial stockholders. The Company has never paid cash dividends on
its capital stock and does not anticipate paying cash dividends in the
foreseeable future.
D-28
<PAGE>
STORE LOCATIONS
The Falls Shopping MICHIGAN
ALABAMA Center Briarwood
*Bel Air Mall The Gardens Fairlane Town Center
Treasure Coast Square Genesee Valley Mall
ARIZONA Tyrone Square Lansing Mall
Fiesta Mall West Shore Plaza Meridian Mall
Metrocenter RiverTown Crossings
Paradise Valley Mall GEORGIA Somerset North
Cumberland Mall Twelve Oaks Mall
CALIFORNIA Gwinnett Place Woodland
Antelope Valley Mall North Point Mall
Arden Fair Shopping Perimeter Mall MINNESOTA
Center Town Center at Cobb Mall of America
Beverly Center
Ridgedale Shopping
Capitola Mall IDAHO Center
Coddingtown Mall Boise Towne Square Rosedale Shopping
Del Amo Fashion Center Center
Galleria at South Bay ILLINOIS
Galleria at Tyler Mall at CherryVale MISSOURI
Hilltop Mall Fox Valley Center Battlefield Mall
La Cumbre Plaza Hawthorn Center Chesterfield Mall
Main Place/Santa Ana Orland Square
Montclair Plaza St. Clair Square NEVADA
NewPark Mall Stratford Square Galleria at Sunset
North County Fair Woodfield Meadowood Mall
Northridge Fashion Yorktown Shopping Center New Hampshire
Center Pheasant Lane Mall
Oakridge Mall INDIANA The Mall at
Palm Desert Town Castleton Square Rockingham Park
Center
Eastland Mall
Santa Monica Place Glenbrook Square NEW JERSEY
Sherman Oaks Fashion Cherry Hill Mall
Square Deptford Mall
IOWA
Stoneridge *Coral Ridge Mall Freehold Raceway Mall
Stonestown Galleria Valley West Mall Mall at Short Hills
Sun Valley Menlo Park Mall
The Oaks KANSAS Monmouth Mall
The Promenade at Oak Park Mall Quaker Bridge Mall
Temecula Valley Rockaway Townsquare
Topanga Plaza KENTUCKY Willowbrook Mall
Valencia Town Center
Fayette Mall
Vallco Fashion Park Florence Mall NEW MEXICO
Valley Plaza Shopping Oxmoor Center Coronado Center
Center
Westminster Mall LOUISIANA NEW YORK
Westside Pavilion Cortana Mall Boulevard Mall
Roosevelt Field Mall
COLORADO MAINE Smith Haven Mall
Cherry Creek Maine Mall Staten Island Mall
Park Meadows
The Citadel MARYLAND NORTH CAROLINA
Annapolis Mall Cary Towne Center
CONNECTICUT Lakeforest Carolina Place
Greenwich Montgomery Mall Four Seasons Town
Stamford Town Center Towson Town Center Centre
Westfarms
MASSACHUSETTS OHIO
FLORIDA Burlington Mall Belden Village Mall
Aventura Mall Cambridgeside Galleria Columbus City Center
Countryside Mall Emerald Square Dayton Mall
De Soto Square Natick Mall Great Lakes Mall
Edison Mall Northshore Mall Mall at Fairfield
Governor's Square South Shore Plaza Commons
Orange Park Mall Tri-County Mall
Orlando Fashion Square Tuttle Crossing
Paddock Mall
Pembroke Lakes Mall OKLAHOMA
Regency Square Penn Square Mall
Sarasota Square Woodland Hills Mall
D-29
<PAGE>
OREGON TENNESSEE VIRGINIA
Clackamas Town Center Coolsprings Galleria Dulles Town Center
Lloyd Center Hamilton Place Fair Oaks
Valley River Center Hickory Ridge Mall MacArthur Center
Washington Square
West Town Mall
Regency Square
PENNSYLVANIA TEXAS Springfield Mall
Tysons Corner Center
Capital City Mall Barton Creek Square
Granite Run Mall Baybrook Mall WASHINGTON
Lehigh Valley Mall Collin Creek Mall Alderwood Mall
Logan Valley Mall NorthPark Center Bellis Fair
Mall at Streamtown Parks at Arlington Northgate Shopping
Monroeville Mall Vista Ridge Mall Center
Ross Park Mall West Oaks Mall South Hill Mall
South Hills Village Southcenter Mall
Willowbrook Mall
SOUTH CAROLINA UTAH Tacoma Mall
Westlake Center
Haywood Mall
Fashion Place Mall
SOUTH DAKOTA Provo Towne Center WEST VIRGINIA
Charlestown Town
Center
*Empire Mall
WISCONSIN
Southridge Mall
--------
* Opening in 2000
D-30
<PAGE>
ANNEX E
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 29, 2000
----------------------------------------------------
( ) 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: 0-20035
-------------------------------------------------------
NATURAL WONDERS, INC.
--------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0141610
------------------------------ ------------------
State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
4209 Technology Drive, Fremont, California 94538
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 252-9600
----------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act: Common Stock, par
value $.0001
-------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X___. NO___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to be the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the average of the closing bid and ask
prices of the Registrant's Common Stock as reported on NASDAQ Stock Market on
March 31, 2000, was $10,041,285. The number of shares of Common Stock, with
$.0001 par value, outstanding on March 31, 2000 was 7,837,406 shares.
Documents incorporated by reference:
Items 5, 6, 7 and 8 of Part II are incorporated by reference from the Company's
1999 Annual Report to Stockholders. Items 10, 11, 12 and 13 of Part III are
incorporated by reference from the Company's definitive Proxy Statement for the
2000 Annual Meeting of Stockholders, to be held May 23, 2000. Registrant's
definitive Proxy Statement was filed with the Securities and Exchange Commission
on April 14, 2000.
E-1
<PAGE>
PART I
Item 1. BUSINESS
General
Natural Wonders, Inc. (the "Company), is a specialty gift retailer of unique and
affordable family gifts inspired by the wonders of science and nature. The
Company's merchandise assortment includes telescopes, mineral carvings, globes,
home and garden items, ceramics, wind chimes, hats and shirts, books, tapes,
cd's, videos and a variety of interactive toys and games. Natural Wonders'
merchandise is moderately priced and appeals to consumers' appreciation of the
wonders of the world. Target customers are predominantly well educated, middle
income families (adults ages 25 and up and children ages 6 to 12).
Natural Wonders was incorporated in California on December 12, 1986, and
reincorporated in Delaware on October 27, 1994. The Company operated 182 stores
in 39 states at the end of fiscal 1999. In fiscal 1999, the Company opened 10
stores with permanent locations, 9 permanent and 3 temporary stores were closed,
and 26 temporary stores were opened and 22 closed during the holiday season. At
the end of 1999, 4 of the temporary locations remained opened and 3 will be
moved to permanent locations in 2000. During the 2000 calendar year, the Company
plans to open approximately 6 new stores and, during the holiday season,
approximately 25 temporary locations.
Products and Merchandising
During fiscal 1999, the typical Natural Wonders' store stocked between 1,500 to
2,000 different stock keeping units ("SKU's"). Specific quantities of
merchandise are allocated according to the requirements of individual stores
based upon a merchandise classification planning system. While items are offered
in a wide range of prices, a majority are priced below $25.00.
The following is a description of the Company's merchandise assortment by
product category:
Kids & Discovery Educational and interactive toys and games: plush animals, glow
in the dark toys, flow-motion and kinetic sculpture products, decorative
lighting, creativity and science kits and novelty toys.
Gifts Lighting, ceramics, home decorative, collectibles, kaleidoscopes,
paperweights, globes and weather products.
Garden Wind chimes, bird houses, bird feeders, herb nurseries, fountains,
sundials and decorative garden accessories such as terracotta thermometers,
clocks, and sculpture.
Apparel T-shirts, sweatshirts and hats for both adults and children, and
accessories such as totes and backpacks.
Geology Agate boxes and bookends, sandstone coasters, jade vases, carved mineral
figurines, fetishes, spheres and mineral games.
Optics Telescopes and accessories, starfinders, binoculars, compasses and
thermometers.
Music, Videos and Books Compact discs and cassette tapes including instrumental
New Age music or environmental sounds, world music and folk dance, and videotape
selections featuring nature and science and computer animated subjects.
Educational, pictorial, activity and instructional books for adults and
children.
Jewelry Earrings, necklaces, rings, pins, bracelets, and watches.
Stationary Magnets, pens, hi-tech desk and computer accessories, cards, notes
and journals.
Relaxation Personal care and relaxation products, home fragrance and comfort
products.
Natural Wonders' merchandise organization includes 4 product teams, consisting
of senior product managers, a product support team, as well as senior
merchandising planners and store planners in the planning and allocation teams.
The Company currently purchases merchandise from over 650 vendors. These vendors
include artisans, craftsmen and importers, as well as larger manufacturers and
distributors. In fiscal 1999, only one vendor accounted for more than 5% of the
Company's merchandise purchases. Natural Wonders purchased 9% of its merchandise
from Meade Instruments Corporation. Prior to 1999, no one vendor accounted for
more that 5% of the Company's merchandise purchases.
E-2
<PAGE>
Store Opening Costs
In 2000, the Company estimates that the average cost for leasehold improvements,
furniture and fixtures will be $260,000 for each new store, before any landlord
construction allowances. Capital expenditures for stores with temporary
locations are expected to be minimal. Working capital requirements, primarily
consisting of inventory purchases, are expected to average $110,000 for each new
store and $85,000 for stores with temporary locations. The average pre-opening
costs per store, which are expensed as incurred, are estimated to be $11,000 for
new stores and $9,000 for stores with temporary locations.
Marketing
Natural Wonders' marketing strategy is to create an atmosphere that generates
excitement about the world of nature and science. The strategy includes theme
presentations, which highlight a related group of products that tell a story
about a specific place or activity. Marketing may also involve developing
partnerships with non-profit organizations that support environmental and
conservation efforts. Additionally, the Company has created a customer database
that enables the Company to engage in special promotional and marketing programs
targeted at specific potential customer groups.
Store Environment. Natural Wonders' stores are well lighted with glass
storefronts designed to be visible and appealing from a distance. Inside the
store, customers find a hands-on environment where they are encouraged to pick
up and explore different products. For example, a store may demonstrate Natural
Wonders' compact disc and cassette tape offerings of New Age, contemporary and
instrumental music and a color monitor may display videotapes depicting science
and nature themes from Natural Wonders' video collection.
Customer Service. The products that the Company sells are often enhanced by
explanation, demonstration or story-telling. The Company seeks to offer
knowledgeable and enthusiastic customer service supported by creative packaging
and signage. Store personnel receive comprehensive in-house product and sales
instruction administered by field personnel and are trained to engage customers
in the fun and fascination of Natural Wonders' products.
Promotional Activities. The Company conducts selected promotional and public
relations activities as well as customer loyalty programs designed to promote
repeat business.
Distribution
Natural Wonders' merchandise distribution strategy is to process a major portion
of its merchandise through a centralized facility located in Louisville,
Kentucky. Pre-ticketed merchandise received from suppliers at this facility is
inspected and warehoused for distribution to all stores. Orders are picked and
shipped to the stores on a weekly basis throughout most of the year. During
preparation for the holiday selling season, merchandise shipping activity
increases substantially. The Company primarily uses common carriers to ship
merchandise to its stores.
Information Systems
In February 1998, the Company completed the installation of a new management
information system that integrates its merchandising, distribution, and
financial systems. The new system provides detailed information about all
aspects of product flow and sales, and includes a data warehouse that allows the
management of inventory by SKU and the analysis of store trends.
Competition
The specialty retail business is highly competitive. Within the nature and
science segment of specialty retailing, the Company competes with The Nature
Company and Discovery Channel stores, a subsidiary of The Discovery Channel,
Inc., as well as many other national and regional specialty retailers such as
Store of Knowledge and World of Science stores. The Company competes on the
basis of product assortment, customer service, store location and attractiveness
of store design. Management believes that a moderately priced, high quality
merchandise assortment, high level of customer service and open store design
will enable it to compete effectively. Natural Wonders also competes with
specific segments of a wide variety of department and specialty stores, many of
which are larger and have substantially greater resources than the Company.
There is no assurance that in the future the Company will not face greater
competition from other national or regional retailers.
E-3
<PAGE>
Seasonality and Quarterly Fluctuations
The Company's business is subject to substantial seasonal variations in demand.
Historically, a significant portion of the Company's sales and substantially all
of its net income have been realized during the fourth fiscal quarter (which
includes the November/December holiday season), and levels of sales and net
earnings have been significantly lower in the first three fiscal quarters,
usually resulting in losses in these quarters. If for any reason the Company's
comparable store sales are substantially below seasonal norms during the months
of November and December, as was the case in 1998, the Company's annual results
for the full fiscal year would be adversely affected. The Company's quarterly
results of operations may fluctuate significantly as a result of comparable
store sales levels, the timing of new store openings and the amount of revenue
contributed by new stores.
Employees
As of January 29, 2000, the Company had approximately 2,300 employees. A
significant number of seasonal employees are hired during each holiday selling
season. None of the Company's employees is represented by a labor union.
Future Results
This report contains forward-looking statements regarding, among other matters,
the Company's future strategy, store opening plans, availability of financing
and cash flows, merchandising strategy and growth. The forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements address
matters which are subject to a number of risks and uncertainties. In addition to
the general risks associated with the operation of specialty retail stores in a
highly competitive environment, the success of the Company will depend on a
variety of factors. The success of the Company's operations depends upon a
number of factors relating to consumer spending, including economic conditions
affecting disposable consumer income such as employment, business conditions,
interest rates and taxation. The Company's continued growth also depends upon
the demand for its products, which in turn is dependent upon various factors,
such as the introduction and acceptance of new products and the continued
popularity of existing products, as well as the timely supply of all
merchandise.
Item 2. PROPERTIES
The Company leases corporate offices in Fremont, California and a distribution
facility in Louisville, Kentucky. The corporate facility lease expires in 2004
and the distribution facility lease expires in 2014 with two five-year options
to extend such lease. Management believes that the capacity of the corporate
offices and distribution center will be sufficient for the foreseeable future.
As of January 29, 2000, the Company operated 182 stores in 39 states occupying
approximately 450,000 gross square feet of leased space. The average size of a
Natural Wonders store is approximately 2,500 square feet. The Company leases all
of the stores with most lease terms ranging from 8 to 10 years and expiring
between 2000 and 2009. Leases for the Company's stores typically contain
provisions for percentage rental payments after a specified sales level has been
achieved.
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
E-4
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
The information required by this item is incorporated by reference to the
section entitled "Market Information and Dividend Policy" in the Company's 1999
Annual Report to Stockholders for the fiscal year ended January 29, 2000 (the
"1999 Annual Report").
Item 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to the
section entitled "Selected Financial Data" in the Company's 1999 Annual Report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operation" in the Company's 1999 Annual Report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
Financial Statements and accompanying Notes in the Company's 1999 Annual Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the Directors and
Executive Officers of the Registrant is incorporated by reference to the
definitive Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders.
There are no family relationships among directors or executive officers of the
Company. The executive officers are elected by and serve at the discretion of
the Company's Board of Directors. The Company is dependent upon the efforts of
its executive officers, the loss of whom could materially affect the Company's
business, financial condition and results of operations.
The information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference to the definitive Proxy
Statement for the Registrant's 2000 Annual Meeting of Stockholders.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
definitive Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
definitive Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference in the
definitive Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders.
E-5
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules, and Exhibits.
1. Financial Statements
The following Financial Statements of the Registrant and Independent
Auditors' Report on such Financial Statements are incorporated by
reference to the Company's 1999 Annual Report to Stockholders.
Statements of Operations for fiscal years 1999, 1998, and 1997
Balance Sheets at January 29, 2000 and January 30, 1999
Statements of Stockholders' Equity for fiscal years 1999, 1998, and
1997
Statements of Cash Flows for fiscal years 1999, 1998, and 1997
Notes to Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules
Schedules not listed above have been omitted because they are not
applicable or are not required.
3. Exhibits
A list of Exhibits required to be filed as part of this report is set
forth on pages 8 through 10 of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange Commission
during the last quarter of fiscal 1999.
E-6
<PAGE>
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.
Date: April 25, 2000 NATURAL WONDERS, INC.
(Registrant)
By: /s/ Peter G. Hanelt
-------------------------------------
Chief Executive Officer, President,
Chief Financial Officer, and Director
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 date indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Pearson C. Cummin III
--------------------------------------
(Pearson C. Cummin III) Chairman of the Board
/s/ Peter G. Hanelt
--------------------------------------
(Peter G. Hanelt) Chief Executive Officer, President,
Chief Financial Officer, and Director
(Principal Executive, Accounting and
Financial Officer)
/s/ David Folkman
--------------------------------------
(David Folkman) Director
/s/ Bruce Beda
--------------------------------------
(Bruce Beda) Director
/s/ Julius Jensen III
--------------------------------------
(Julius Jensen III) Director
</TABLE>
Date: April 25, 2000
E-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ----
<S> <C> <C>
3.1 Certificate of Incorporation is incorporated by reference to Exhibit
3.1 of the Form 10-K for the fiscal year ended January 28, 1995
("1994 Form 10-K").
3.2 Amended and Restated By-Laws is incorporated by reference to Exhibit
3.2 of the 1994 Form 10-K.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Registration Rights Agreement dated July 20, 1990, among the Company
and certain holders of Preferred Stock, Common Stock and warrants to
purchase Preferred Stock is incorporated by reference to Exhibit 4.2
of the Company's Registration Statement on Form S-1, Commission No.
33-46821 as filed with the Securities and Exchange Commission on
March 30, 1992, (the "S-1").
10.1* Amended and Restated 1993 Omnibus Stock Plan is incorporated by
reference to Exhibit 10.1 of the 1994 Form 10-K.
10.2* 1992 Employee Stock Purchase Plan is incorporated by reference to
Exhibit 10.12 of the Form 10-K for the fiscal year ended January 30,
1993 ("1992 Form 10-K").
10.3* 1993 Outside Directors Stock Option Plan is incorporated by reference
to Exhibit 10.13 of the 1992 Form 10-K.
10.6 Lease Agreement, dated March 2, 1993, between the Company and John W.
Rooker is incorporated by reference to Exhibit 10.19 of the 1992 Form
10-K.
10.11 First Amendment to Lease, dated April 29, 1993, between the Company
and John W. Rooker is incorporated by reference to Exhibit 10.28 of
the 1993 Form 10-K.
10.12 Second Amendment to Lease, dated May 11, 1993, between the Company
and John W. Rooker is incorporated by reference to Exhibit 10.29 of
the 1993 Form 10-K.
10.13 Third Amendment to Lease, dated November 3, 1993, between the Company
and John W. Rooker is incorporated by reference to Exhibit 10.30 of
the 1993 Form 10-K.
10.14 Fourth Amendment to Lease, dated November 24, 1993, between the
Company and John W. Rooker is incorporated by reference to Exhibit
10.31 of the 1993 Form 10-K.
10.16 Corporate Office Lease Agreement dated June 9, 1994 between the
Company and the Lincoln National Life Insurance Company is
incorporated by reference to Exhibit 10.33 of the Form 10-Q for the
quarterly period ended July 30, 1994.
10.21* 401(k) Plan Adoption Agreement, effective July 1, 1994 is
incorporated by reference to Exhibit 10.38 of the 1994 Form 10-K.
10.22 Settlement Agreement, dated April 6, 1995, between the Company and
The Nature Company is incorporated by reference to Exhibit 10.39 of
the 1994 Form 10-K.
*Plan or agreement pursuant to which the Company's officers or
directors have received compensation.
</TABLE>
E-8
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ----
<S> <C> <C>
10.23* Form of Director and Officer Indemnity Agreement is incorporated by
reference to Exhibit 10.40 of the 1994 Form 10-K.
10.27* Employment Agreement entered into on September 15,1997 between the
Company and Kathleen M. Chatfield is incorporated by reference to
Exhibit 10.27 of the 1997 Form 10-K.
10.28 Credit Agreement entered into on July 1, 1998 between the Company and
Wells Fargo Bank, National Association is incorporated by reference
to Exhibit 10.28 of the 1998 Form 10-Q, for the quarterly period
ended August 1, 1998.
10.28.1 Second Amendment to Credit Agreement, entered into on September 15,
1998 between the Company and Wells Fargo Bank, National Association
is incorporated by reference to Exhibit 10.28.1 of the 1998 Form
10-K.
10.28.2 Third Amendment to Credit Agreement, entered into on January 29, 1999
between the Company and Wells Fargo Bank, National Association is
incorporated by reference to Exhibit 10.28.2 of the 1998 Form 10-K. .
10.28.3 Fourth Amendment to Credit Agreement, entered into on March
15, 1999 between the Company and Wells Fargo Bank, National
Association is incorporated by reference to Exhibit 10.28.3 of the
1998 Form 10-K. . 10.28.4 Amended and Restated Loan and Security
Agreement entered into on June 15, 1999 among the Company, Wells
Fargo Bank, National Association and Foothill Capital Corporation is
incorporated by reference to Exhibit 10.28.4 of the 1999 Form 10-Q,
for the quarterly period ended May 1, 1999.
10.28.5 Amendment Number One to Amended and Restated Loan and Security
Agreement entered into on June 15, 1999 among the Company, Wells
Fargo Bank, National Association and Foothill Capital Corporation is
incorporated by reference to Exhibit 10.28.5 of the 1999 Form10-Q,
for the quarterly period ended October 30, 1999.
10.29* Executive Employment Agreement entered into on September 29,1998
between the Company and Kenneth G. Norton is incorporated by
reference to Exhibit 10.29 of the 1998 Form 10-K.
10.30* Nonqualified Stock Option Agreement entered into on September 29,1998
between the Company and Kenneth G. Norton is incorporated by
reference to Exhibit 10.30 of the 1998 Form 10-K.
10.31* Secured Promissory Note for Kenneth G. Norton, dated October 19, 1998
is incorporated by reference to Exhibit 10.31 of the1998 Form 10-K.
10.32* Nonqualified Stock Option Agreement entered into on September 29,1998
between the Company and Peter G. Hanelt is incorporated by reference
to Exhibit 10.32 of the 1998 Form 10-K.
*Plan or agreement pursuant to which the Company's officers or
directors have received compensation.
</TABLE>
E-9
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ----
<S> <C> <C>
10.33* Nonqualified Stock Option Agreement entered into on September 29,1998
between the Company and David H. Folkman is incorporated by reference
to Exhibit 10.33 of the 1998 Form 10-K.
10.33.1* Amendment to Nonqualified Stock Option Agreement, entered into on
April 2, 1999 between the Company and David H. Folkman is
incorporated by reference to Exhibit 10.33.1 of the 1998 Form 10-K.
13.1 1999 Annual Report to Stockholders.
27.1 Financial Data Schedule - 1999
*Plan or agreement pursuant to which the Company's officers or
directors have received compensation.
</TABLE>
E-10
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Natural Wonders, Inc.
Fremont, California
We consent to the incorporation by reference in Registration Statements Nos.
33-80017, 33-62380, 33-62388, 33-62390 333-63779, 333-65521 and 333-49021 of
Natural Wonders, Inc. on Form S-8 of our report dated March 3, 2000,
incorporated by reference in this Annual Report on Form 10-K of Natural Wonders,
Inc. for the year ended January 29, 2000.
/s/ Deloitte & Touche, LLP
Deloitte & Touche, LLP
San Francisco, California
April 21, 2000
E-11
<PAGE>
ANNEX F
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported): May 23, 2000
Natural Wonders, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 0-20035 77-0141610
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File Number) Identification No.)
4209 Technology Drive, Fremont, California 94538
(Address of principal executive offices)
(Zip code)
510-252-9600
(Registrant's telephone number, including area code)
F-1
<PAGE>
Item 5. Other Events
On May 23, 2000, Natural Wonders, Inc. announced that it has signed a
letter of intent with World of Science, Inc. Under the terms of the letter of
intent, Natural Wonder will purchase all of the issued and outstanding common
stock of World of Science.
A copy of the press release is attached as Exhibit A.
F-2
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
Dated: June 8, 2000
NATURAL WONDERS, INC.
(Registrant)
/s/ Peter G. Hanelt
--------------------------------------
Peter G. Hanelt,
Chief Executive Officer, President and
Chief Financial Officer
(Signing on behalf of the registrant and
as Principal Accounting and Financial Officer)
F-3
<PAGE>
Exhibit A:
FOR IMMEDIATE RELEASE
CONTACTS: Peter G. Hanelt
Chief Executive Officer/CFO
Natural Wonders, Inc.
(510) 252-6607
www.naturalwonders.com
WORLD OF SCIENCE TO MERGE WITH
------------------------------
NATURAL WONDERS
---------------
NATURAL WONDERS TO ADD 104 STORES AND OVER $60 MILLION IN REVENUE.
Fremont, CA - May 23, 2000-- Natural Wonders, Inc. (NASDAQ: NATW), a
leading specialty retailer of unique and affordable family gifts inspired by the
wonders of science and nature, and World of Science, Inc. (NASDAQ: WOSI),
another leading retailer of a variety of traditional and distinctive science and
nature products, today announced that they have signed a letter of intent with
regard to the purchase by Natural Wonders of all of the issued and outstanding
stock of World of Science for $6.25 million, in cash, which equates to
approximately $1.32 per share.
The deal is expected to be completed at the beginning of the third
quarter, is subject to World of Science shareholder and regulatory approval and
will be accounted for using the purchase accounting method.
For the fiscal year ended January 29, 2000, Natural Wonders reported
$147.1 million in revenues and World of Science reported $61.1 million in
revenues. As a result of the merger, Natural Wonders will have a store base of
261 regular stores and 19 seasonal stores. Given the holiday store opening plans
for Natural Wonders and World of Science, the combined store count is expected
to expand to approximately 300 stores by calendar year end.
Peter G. Hanelt, CEO of Natural Wonders, Inc., said, "Because both
companies are well known for their strength in nature and science retailing, we
are thrilled with the substantial merchandising and operating synergies. This
partnership is a natural fit and will benefit our customers, employees, and
shareholders. This merger will substantially increase our 2000 revenue base,
improve our earnings potential and increase our number of stores. Within the
important markets
F-4
<PAGE>
in the eastern half of the United States, this will approximately double our
market presence. Moreover, we will seek to achieve significant operating and
administrative synergies as we integrate the businesses."
World of Science's CEO Fred H. Klaucke said, "As previously
announced, our company has been exploring alternatives to maximize shareholder
value and we believe that this transaction satisfies that objective. The
combination of these two companies will result in a formidable specialty
retailer of science and nature products."
Natural Wonders CEO Hanelt will continue in his role as CEO. World
of Science CEO Klaucke will be extensively involved with the integration of the
two companies.
About Natural Wonders, Inc.
Natural Wonders, Inc. is a specialty gift retailer of unique and
affordable family gifts inspired by the wonders of science and nature. The
Company's merchandise assortment includes telescopes, mineral carvings, globes,
home and garden items, ceramics, wind chimes, hats and shirts, books, tapes,
cd's, videos, and a variety of interactive toys and games. Natural Wonder's
merchandise is moderately priced and appeals to consumers' appreciation of the
wonders of the world. Target customers are predominantly well educated, middle
income families (adults ages 25 and up and children ages 6 to 12. Natural
Wonders' marketing strategy is to create an atmosphere that generates excitement
about the world of nature and science. The strategy includes theme
presentations, which highlight a related group of products that tell a story
about a specific place or activity. Marketing may also involve developing
partnerships with non-profit organizations that support environmental and
conservation efforts.
About World of Science
World of Science is a specialty retailer of a variety of traditional
and distinctive science and nature products. The Company's merchandising
strategy emphasizes both the educational and entertainment values of its
products.
Certain statements in this report, including statements regarding
the timing of the merger and its impact on revenue, growth and earnings, the
accounting treatment for the merger, first quarter results and new store
openings are forward-looking statements within the meaning of the Private
F-5
<PAGE>
Securities Litigation Reform Act. Actual results may differ
materially from those indicated in such statements due to a number of factors,
including the ability to obtain all necessary consents and approvals for the
merger; unanticipated operational challenges in connection with combining
operations; delays in opening new stores; the ability to retain key personnel;
the availability of capital to fund continuing operations of both companies and
their affiliates; changes in consumer spending patterns and in demand for
popular products; the ability to open and operate new stores on a profitable
basis; and prevailing economic conditions. Additional information on factors
that may affect the business and financial results of Natural Wonders or World
of Science can be found in their filings with the Securities and Exchange
Commission.
Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995: This press release contains certain forward-looking statements that
are subject to risks and uncertainties that could cause the Company's actual
results to differ materially from management's current expectations. These
factors include the Company's ability to purchase attractive and appropriate
merchandise, changes in consumer demands and preferences, competition from other
retailers, and uncertainties generally associated with gift retailing. Other
risk factors are detailed in the Company's Securities and Exchange Commission
filings.
# # #
F-6
<PAGE>
ANNEX G
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 29, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-20035
Natural Wonders, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 77-0141610
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4209 Technology Drive, Fremont, California 94538
(Address of principal executive offices)
(Zip code)
510-252-9600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
-----
Common stock outstanding as of May 27, 2000: 7,848,288 shares of common stock.
G-1
<PAGE>
NATURAL WONDERS, INC.
---------------------
INDEX
-----
<TABLE>
<CAPTION>
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
<S> <C> <C>
Condensed Statements of Operations 3
Quarters ended April 29, 2000 and May 1, 1999
Condensed Balance Sheets 4
April 29, 2000, January 29, 2000 and May 1, 1999
Condensed Statements of Cash Flows 5
Three months ended April 29, 2000 and May 1, 1999
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of 7 - 10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION 11
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
</TABLE>
G-2
<PAGE>
NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED
--------------------
APRIL 29, MAY 1,
2000 1999
-------- --------
Net sales $ 23,273 $ 21,552
Cost of goods sold and
store occupancy expenses 19,002 18,950
-------- --------
Gross margin 4,271 2,602
Selling, general & administrative expenses 10,362 9,613
-------- --------
Operating loss (6,091) (7,011)
Interest expense (income) and other, net 152 (92)
-------- --------
Loss before taxes (6,243) (6,919)
Income tax benefit 2,416 2,560
-------- --------
Net loss $ (3,827) $ (4,359)
======== ========
Net loss per common share
basic: $ (0.49) $ (0.55)
Weighted average common shares outstanding
basic: 7,859 7,951
Stores open at end of period 178 178
See notes to condensed financial statements
G-3
<PAGE>
NATURAL WONDERS, INC.
CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
APRIL 29, JANUARY 29, MAY 1,
2000 2000 1999
-------- -------- --------
ASSETS
Current Assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 13 $ 3,010 $ 314
Short-term investments 0 0 3,188
Merchandise inventories 29,619 28,205 22,600
Prepaid income taxes 3,827 1,386 2,692
Prepaid expenses and other current assets 3,284 3,671 4,241
-------- -------- --------
Total current assets 36,743 36,272 33,035
Property and Equipment:
Leasehold improvements 22,798 22,759 30,500
Furniture, fixtures and equipment 21,781 21,175 35,100
-------- -------- --------
44,579 43,934 65,600
Less accumulated depreciation and amortization (24,213) (22,757) (39,322)
-------- -------- --------
20,366 21,177 26,278
Other Assets 7,761 7,892 3,497
-------- -------- --------
Total Assets $ 64,870 $ 65,341 $ 62,810
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 9,295 $ 12,664 $ 6,426
Accrued compensation and related costs 1,664 2,300 1,726
Accrued liabilities 2,418 2,743 2,055
Short-term borrowings 7,833 0 0
-------- -------- --------
Total current liabilities 21,210 17,707 10,207
Deferred Rents 2,881 2,994 3,512
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.0001; authorized
17,000,000 shares; issued and outstanding
7,848,288; 7,869,006; 7,951,392 shares 1 1 1
Capital in excess of par value 33,717 33,751 34,073
Retained earnings 7,061 10,888 15,017
-------- -------- --------
Total stockholders' equity 40,779 44,640 49,091
-------- -------- --------
Total Liabilities and Stockholders' Equity $ 64,870 $ 65,341 $ 62,810
======== ======== ========
</TABLE>
See notes to condensed financial statements
G-4
<PAGE>
NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
APRIL 29, 2000 MAY 1, 1999
-------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $ (3,827) $ (4,359)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,456 1,812
Change in operating assets and liabilities:
Merchandise inventories (1,414) 107
Prepaid expenses and other assets (1,923) (1,181)
Trade accounts payable (3,369) (2,074)
Accrued compensation and related costs (636) (574)
Accrued liabilities (325) (982)
Deferred rent (113) (51)
-------- --------
Net cash used in operating activities (10,151) (7,302)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of short-term investments 0 7,380
Purchases of property and equipment (645) (1,417)
-------- --------
Net cash (used in)/provided by investing activities (645) 5,963
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing on line of credit 7,833 0
Purchase of treasury stock (46) 0
Issuance of common stock under employee stock purchase program 12 0
-------- --------
Net cash provided by financing activities 7,799 0
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,997) (1,339)
CASH AND CASH EQUIVALENTS:
Beginning of year 3,010 4,841
-------- --------
End of period $ 13 $ 3,502
======== ========
CASH PAID DURING PERIOD:
Interest $ 151 $ 5
Income taxes $ 25 $ 0
</TABLE>
See notes to condensed financial statements
G-5
<PAGE>
NATURAL WONDERS, INC.
---------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS AS OF APRIL 29, 2000 AND MAY 1, 1999 AND
FOR THE THREE MONTH PERIODS ENDED APRIL 29, 2000 AND MAY 1, 1999
1. The financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which, in the opinion
of management, are necessary for a fair presentation of the financial
position, operating results, and cash flows for the periods presented.
The results of operations for the quarter ended April 29, 2000 are not
necessarily indicative of the results to be expected for the entire
fiscal year ending February 3, 2001. This financial information should
be read in conjunction with the audited financial statements and notes
thereto included in the Company's 1999 Annual Report to Stockholders and
Form 10-K for the fiscal year ended January 29, 2000 as filed with the
Securities and Exchange Commission.
2. The Company entered into an amended and restated credit facility
agreement with a commercial bank, effective June 15, 1999, for the
purpose of financing seasonal working capital needs. This line of credit
is for a term of three years, with a maximum credit line of $30,000,000,
and is provided by the same bank that provided the Company's previous
credit facility agreement, together with an additional lender acting as
administrative agent. The line provides for revolving advances up to the
lesser of 60% of the value of eligible inventory, 80% of the net retail
liquidation value of eligible inventory, or the maximum credit line. As
of April 29, 2000, total availability under the line was $10,788,000,
with $7,833,000 outstanding. The line includes up to $5,000,000 for the
issuance of commercial and standby letters of credit. The line of credit
must be fully repaid for a 30-day consecutive period between January 1
and February 15 each year. The Company has the option of choosing
interest payable at a rate based on LIBOR plus 2.25% or a rate equal to
the bank's prime rate. The agreement contains restrictive covenants,
which include maintaining certain minimum tangible net worth levels and
requiring bank consent for the payment of dividends. As of January 29,
2000, the Company was not in compliance with the tangible net worth
covenant. The noncompliance was waived and the agreement was amended
with a revised covenant. At the same time, the administrative agent
assumed the commercial bank's participation. As of April 29, 2000, the
Company was in compliance with the revised tangible net worth covenant.
The agreement also includes certain prepayment penalties.
G-6
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
General
As of April 29, 2000, Natural Wonders operated 178 stores in 39
states compared to 178 stores in 36 states as of May 1, 1999. During the first
three months of 2000, four stores were closed (one temporary store and three
permanent stores) as compared to one new store opened and three stores closed
(one temporary store, one permanent store and one for remodeling) in the first
three months of fiscal 1999.
Recent Development
On May 23, 2000, Natural Wonders, Inc. announced that it had
signed a letter of intent with World of Science, Inc. Under the terms of the
letter of intent, Natural Wonders will purchase all of the issued and
outstanding common stock of World of Science for $6.25 million, in cash, which
equates to approximately $1.32 per share. Funding alternatives are currently
being evaluated. The deal is expected to be completed at the beginning of the
third quarter, is subject to World of Science shareholder and regulatory
approval and will be accounted for using the purchase accounting method. A copy
of the letter is attached as Exhibit 10.34.
Sales
During the first quarter of 2000, sales increased 8.1% over the same
period in 1999. The increase was primarily due to the increase in comparable
store sales. Comparable store sales increased 5.4% in the first quarter of 2000,
as compared to the same period in 1999. The increase in the first quarter was
primarily attributable to the impact of merchandise assortment changes.
Cost of Goods Sold and Store Occupancy Expenses
Cost of goods sold and store occupancy expenses include distribution
center costs and other expenses associated with acquiring inventory. As a
percentage of sales, these costs decreased to 81.6% in the first quarter of 2000
from 87.9% in the first quarter of 1999. The decrease in costs as a percentage
of sales in the first quarter was primarily due to the impact of the improvement
in comparable store sales on store occupancy fixed expenses as well as improved
product margins.
G-7
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses, (SG&A), are primarily
non-occupancy store expenses and corporate overhead. As a percentage of sales,
these costs decreased slightly to 44.5% in the first quarter of 2000 from 44.6%
in the first quarter of 1999.
Operating Income
As a result of the foregoing, the operating loss was $6,091,000 or
26.2% of sales in the first quarter of 2000 versus $7,011,000 or 32.5% of sales
in the first quarter of 1999.
Interest Expense (Income) and Other, Net
Interest expense (income) and other, net increased to 0.7% of sales
in the first quarter of 2000 from (0.4)% of sales in the first quarter of 1999.
The increase was due to the use of the bank line in the first quarter of 2000,
as opposed to interest income from investments in the first quarter of 1999.
Net Loss
As a result of the foregoing, the net loss decreased to $3,827,000
or 16.4% of sales in the first quarter of 2000 from $4,359,000 or 20.2% of sales
in the first quarter of 1999.
Liquidity and Capital Resources
-------------------------------
Seasonal working capital requirements have been met primarily
through short-term bank borrowings.
At April 29, 2000, cash and investments decreased $2,997,000 from
prior year-end. This was primarily due to seasonal operating losses,
historically incurred in the first three fiscal quarters.
Compared to the first quarter in the prior year, cash and
investments decreased due to lower accounts payable and higher merchandise
inventories. The lower inventory level of prior year was primarily attributable
to the merchandise assortment transition in process. This was offset in part by
lower seasonal operating losses and purchasing less equipment.
In fiscal 2000, the Company plans to open approximately 4 new stores
and, during the holiday season, approximately 25 stores in temporary locations.
The Company anticipates that cash in 2000 will primarily be used for capital
expenditures and merchandise inventory for new stores and temporary locations,
and to purchase inventory for the Company's existing stores, particularly prior
to and during the peak holiday selling season. Additionally, in fiscal 1997 the
Board of Directors of the Company authorized the repurchase of up to $2,000,000
of Natural Wonders outstanding common stock. As of April 29, 2000, the Company
had repurchased 365,957 shares of Natural Wonders common stock at a total cost
of $1,297,000.
G-8
<PAGE>
The Company entered into an amended and restated credit facility
agreement with a commercial bank, effective June 15, 1999, for the purpose of
financing seasonal working capital needs. This line of credit is for a term of
three years, with a maximum credit line of $30,000,000, and is provided by the
same bank that provided the Company's previous credit facility agreement,
together with an additional lender acting as administrative agent. The line
provides for revolving advances up to the lesser of 60% of the value of eligible
inventory, 80% of the net retail liquidation value of eligible inventory, or the
maximum credit line. As of April 29, 2000, total availability under the line was
$10,788,000, with $7,833,000 outstanding. The line includes up to $5,000,000 for
the issuance of commercial and standby letters of credit. The line of credit
must be fully repaid for a 30-day consecutive period between January 1 and
February 15 each year. The Company has the option of choosing interest payable
at a rate based on LIBOR plus 2.25% or a rate equal to the bank's prime rate.
The agreement contains restrictive covenants, which include maintaining certain
minimum tangible net worth levels and requiring bank consent for the payment of
dividends. As of January 29, 2000, the Company was not in compliance with the
tangible net worth covenant. The noncompliance was waived and the agreement was
amended with a revised covenant. At the same time, the administrative agent
assumed the commercial bank's participation. As of April 29, 2000, the Company
was in compliance with the revised tangible net worth covenant. The agreement
also includes certain prepayment penalties.
The Company believes that current cash and short-term investments
together with its cash flow from operations and funds available under its credit
facilities will be sufficient to fund the Company's operations for the next 12
months.
INFLATION AND SEASONALITY
-------------------------
The Company does not believe that its operations have been
materially affected by inflation during recent years. However, there is no
assurance that its business will not be affected by inflation in the future.
The Company's business is subject to substantial seasonal variations
in demand. Historically, a significant portion of the Company's sales and
substantially all of its net earnings have been realized during the fourth
quarter (which includes the November/December holiday season), and levels of
sales and net earnings have been significantly lower in the first three
quarters, usually resulting in losses in these quarters. If for any reason the
Company's sales were substantially below seasonal norms during the months of
November and December, as was the case in 1998, the Company's annual results
would be adversely affected. The Company's quarterly results of operations may
fluctuate significantly as a result of comparable store sales levels, the timing
of new store openings and the amount of revenue contributed by new stores.
G-9
<PAGE>
FUTURE RESULTS
--------------
This report contains forward-looking statements regarding, among
other matters, the Company's future strategy, store opening and closing plans,
availability of financing and cash flows, merchandising strategy and growth. The
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
address matters which are subject to a number of risks and uncertainties. In
addition to the general risks associated with the operation of specialty retail
stores in a highly competitive environment, the success of the Company will
depend on a variety of factors. The success of the Company's operations depends
upon a number of factors relating to consumer spending, including economic
conditions affecting disposable consumer income such as employment, business
conditions, interest rates and taxation. The Company's continued growth also
depends upon the demand for its products, which in turn is dependent upon
various factors, such as the introduction and acceptance of new products and the
continued popularity of existing products, as well as the timely supply of all
merchandise. Reference is made to the Company's filings with the Securities and
Exchange Commission for further discussion of risks and uncertainties regarding
the Company's business.
G-10
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 10.34: Letter of intent to purchase World or Science,
Inc., signed and acknowledged by Natural Wonders,
Inc. and World of Science, Inc. on May 23, 2000
Exhibit 11.1: Computation of Per Share Loss
Exhibit 27: Financial Data Schedule
b. Reports on Form 8-K
The Company filed a report on Form 8-K on June 8, 2000, which
included a copy of a press release dated May 23, 2000, announcing
the signing of a letter of intent with World of Science, Inc.
wherein Natural Wonders would purchase all of the issued and
outstanding common stock of World of Science.
G-11
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
Dated: June 12, 2000
NATURAL WONDERS, INC.
(Registrant)
/s/ Peter G. Hanelt
--------------------------------------
Peter G. Hanelt,
Chief Executive Officer
President
Chief Financial Officer
(Signing on behalf of the registrant and
as Principal Accounting and Financial Officer)
G-12
<PAGE>
Exhibit 11.1
NATURAL WONDERS, INC.
COMPUTATION OF PER SHARE NET LOSS
(Shares in thousands)
<TABLE>
<CAPTION>
Quarter Ended
-------------
April 29, 2000 May 1, 1999
-------------- -----------
<S> <C> <C>
Net loss $(3,827) $(4,359)
======= =======
Weighted average common shares
Outstanding, basic and diluted 7,859 7,951
Per share net loss, basic and diluted $ (0.49) $ (0.55)
======= =======
</TABLE>
G-13
<PAGE>
ANNEX H
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported): August 4, 2000
Natural Wonders, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 0-20035 77-0141610
(State or other jurisdiction of (Commission (IRS Employer Identification No.)
incorporation or organization) File Number)
</TABLE>
4209 Technology Drive, Fremont, California 94538
(Address of principal executive offices)
(Zip code)
510-252-9600
(Registrant's telephone number, including area code)
H-1
<PAGE>
Item 5. Other Events
On August 4, 2000, Natural Wonders, Inc. and World of Science, Inc.
announced that they had signed a definitive merger agreement, pursuant to which
Natural Wonders would purchase all of the issued and outstanding shares of
common stock of World of Science, Inc for $1.15 per share.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
2.1 Agreement and Plan of Merger
99.1 Press Release dated August 4, 2000
H-2
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
Dated: August 14, 2000
NATURAL WONDERS, INC.
(Registrant)
/s/ Peter G. Hanelt
______________________________________
Peter G. Hanelt,
Attac Chief Executive Officer, President and
Chief Financial Officer
(Signing on behalf of the registrant and
as Principal Accounting and Financial Officer)
H-3
<PAGE>
FOR IMMEDIATE RELEASE
CONTACTS: Peter G. Hanelt Charles A. Callahan
Chief Executive Officer/CFO Chief Financial Officer
Natural Wonders, Inc. World of Science, Inc.
(510) 252-6607 (716) 475-0100
www.naturalwonders.com www.worldofscience.com
----------------------
WORLD OF SCIENCE TO MERGE WITH
------------------------------
NATURAL WONDERS
---------------
Fremont, CA - August 4, 2000-- Natural Wonders, Inc. (Nasdaq: NATW), a
leading specialty retailer of unique and affordable family gifts inspired by the
wonders of nature and science, and World of Science, Inc. (Nasdaq: WOSI),
another leading retailer of a variety of traditional and distinctive science and
nature products, today announced that they have signed a definitive merger
agreement pursuant to which Natural Wonders would purchase all of the shares of
common stock of World of Science for $1.15 per share, in cash. The transaction
is subject to certain conditions, including approval of the shareholders of
World of Science and the receipt of financing commitments by Natural Wonders.
The parties expect that the transaction will close prior to the end of the third
calendar quarter.
Peter G. Hanelt, CEO of Natural Wonders, Inc., said, "We are excited at the
prospects for Natural Wonders. The combined Company will be the largest mall
based specialty retailer within the nature and science category. We have always
admired World of Science and now have the opportunity to combine their strengths
with Natural Wonders. We expect aggressive growth in profitability beginning
with this fiscal year as the powerful synergies of the combination are realized
virtually from the closing. We expect to operate approximately 310 stores this
holiday season with positive comparable store sales. With very few stores of
each Company located in the same malls, the combination gives Natural Wonders an
excellent concentration of retail stores in the critically important eastern
half of the country and improves substantially our geographical representation
throughout the country.''
World of Science's CEO Fred H. Klaucke said, "I am glad that Natural
Wonders was able to present us with a proposal that warranted a resurrection of
a proposed transaction that we can recommend to our shareholders for approval.
We are pleased to be part of what will become a dynamic mall based specialty
retailer of science and nature products. We look forward to working with
Natural Wonders in combining the formidable talents and strengths of the two
companies. We will all work hard to make the transition as seamless as possible
in order to effectuate a prompt closing of the transaction and insure the best
possible holiday selling season.''
H-4
<PAGE>
About Natural Wonders, Inc.
Natural Wonders, Inc. is a specialty gift retailer of unique and affordable
family gifts inspired by the wonders of science and nature. The Company's
merchandise assortment includes telescopes, mineral carvings, globes, home and
garden items, ceramics, wind chimes, hats and shirts, books, tapes, cd's,
videos, and a variety of interactive toys and games. Natural Wonder's
merchandise is moderately priced and appeals to consumers' appreciation of the
wonders of the world. Target customers are predominantly well educated, middle
income families (adults ages 25 and up and children ages 6 to 12. Natural
Wonders' marketing strategy is to create an atmosphere that generates excitement
about the world of nature and science. The strategy includes theme
presentations, which highlight a related group of products that tell a story
about a specific place or activity. Marketing may also involve developing
partnerships with non-profit organizations that support environmental and
conservation efforts.
About World of Science
World of Science is a specialty retailer of a variety of traditional and
distinctive science and nature products. The Company's merchandising strategy
emphasizes both the educational and entertainment values of its products.
Certain statements in this report, including statements regarding the
timing of the merger and its impact on revenue, growth and earnings, and new
store openings are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act. Actual results may differ materially from
those indicated in such statements due to a number of factors, including the
ability to obtain all necessary consents and approvals for the merger; obtaining
the financing needed to fund the merger; unanticipated operational challenges in
connection with combining operations; delays in opening new stores; the ability
to retain key personnel; the availability of capital to fund continuing
operations of both companies and their affiliates; changes in consumer spending
patterns and in demand for popular products; the ability to open and operate new
stores on a profitable basis; and prevailing economic conditions. Additional
information on factors that may affect the business and financial results of
Natural Wonders or World of Science can be found in their filings with the
Securities and Exchange Commission.
# # #
By /s/ Peter G. Hanelt
--------------------
President and Chief Executive Officer
H-5
<PAGE>
REVOCABLE PROXY
WORLD OF SCIENCE, INC.
900 JEFFERSON ROAD, BUILDING FOUR
ROCHESTER, NEW YORK 14623
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF
WORLD OF SCIENCE, INC. FOR THE
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON September 8, 2000
The undersigned hereby constitutes and appoints Fred H. Klaucke and Richard B.
Callen, and each of them, as proxies (the "Proxies") of the undersigned, with
full power of substitution in each, and authorizes each of them to represent and
to vote all shares of common stock, par value $0.01 per share, of World of
Science, Inc. ("World of Science") held of record by the undersigned as of the
close of business on August 15, 2000, at the Special Meeting of Stockholders
(the "Special Meeting") to be held at the principal offices of World of Science
at 900 Jefferson Road, Building Four, Rochester, New York, on Friday, September
8, 2000 at 11:00 a.m. local time and at any adjournments or postponements
thereof.
When properly executed, this proxy will be voted in the manner directed herein
by the undersigned stockholder(s). IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR THE PROPOSAL SET FORTH IN PARAGRAPH 1 ON THE REVERSE SIDE HEREOF. THE
PROXIES ARE EACH AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY
COME BEFORE THE SPECIAL MEETING, INCLUDING ANY MOTION TO ADJOURN THE SPECIAL
MEETING, AND ANY ADJOURNMENT OR POSTPONEMENT THEREOF. Stockholders of record
who plan to attend the Special Meeting may revoke their proxy by casting their
vote at the meeting in person.
The undersigned hereby acknowledge(s) receipt of a copy of the accompanying
Notice of Special Meeting of Stockholders and the Proxy Statement with respect
thereto and hereby revoke(s) any proxy or proxies heretofore given.
PLEASE VOTE, DATE AND SIGN THIS PROXY ON REVERSE SIDE AND
RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
[X] PLEASE MARK VOTE
AS IN THIS EXAMPLE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEM 1
FOR AGAINST ABSTAIN
1. To approve the Agreement and Plan of Merger [_] [_] [_]
dated as of August 3, 2000, by and among
Natural Wonders, Inc., Merger Sub, a
wholly-owned subsidiary of Natural Wonders
to be formed, and World of Science, Inc.,
providing for the merger of Merger Sub
with and into World of Science with World
of Science being the surviving corporation,
as a wholly-owned subsidiary of Natural
Wonders, Inc.
2. To consider and act upon such other matters
as may properly come before the Special
Meeting and any adjournments or
postponements thereof.
________________________________
Please be sure to sign and date this Proxy.
<PAGE>
Date:________________________
Stockholder(s) signature(s):
_________________________________________________________________
_________________________________________________________________
Please sign name exactly as shown on reverse. Where there is more than one
holder, each should sign. When signing as an attorney, administrator, executor,
guardian or trustee, please add your title as such. If executed by a
corporation or partnership, the proxy should be executed in the full corporate
or partnership name and signed by a duly authorized person, stating his or her
title or authority.
PLEASE, SIGN, DATE AND PROMPTLY MAIL YOUR PROXY.
