<PAGE>
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 AUGUST 3, 1996
( ) 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 77-0141710
_______________________________ ___________________
(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
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 August 31, 1996: 7,823,460 shares of common
stock.
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NATURAL WONDERS, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Operations 3
Quarters and six months ended August 3, 1996
and July 29, 1995
Condensed Balance Sheets 4
August 3, 1996, February 3, 1996 and July 29, 1995
Condensed Statements of Cash Flows 5
Six months ended, August 3, 1996 and July 29, 1995
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of 7-10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
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 11
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
----------------------- --------------------------
AUGUST 3, JULY 29, AUGUST 3, JULY 29,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 25,954 $ 25,474 $ 47,873 $ 46,299
Cost of goods sold and
store occupancy expenses 18,349 17,879 34,475 34,199
-------- -------- -------- --------
Gross margin 7,605 7,595 13,398 12,100
Selling, general & administrative expenses 9,514 9,245 18,742 18,588
-------- -------- -------- --------
Operating loss (1,909) (1,650) (5,344) (6,488)
Interest expense 242 381 523 782
Other expenses 129 332 265 517
Interest and other income (174) (158) (400) (412)
-------- -------- -------- --------
Loss before taxes (2,106) (2,205) (5,732) (7,375)
Income taxes (821) (860) (2,235) (2,876)
-------- -------- -------- --------
Net loss $ (1,285) $ (1,345) $ (3,497) $ (4,499)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share $ (0.16) $ (0.17) $ (0.45) $ (0.59)
Shares used in computing
net loss per share 7,810 7,732 7,801 7,687
</TABLE>
See notes to financial statements
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NATURAL WONDERS, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
AUGUST 3, FEBRUARY 3, JULY 29,
1996 1996 1995
--------- ----------- ----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,341 $ 6,352 $ 10,709
Short-term investments 8,835 18,095 6,450
Merchandise inventories 19,849 19,216 17,762
Prepaid expenses and other current assets 6,301 3,969 6,035
--------- ----------- --------
Total current assets 41,326 47,632 40,956
Property and Equipment:
Leasehold improvements 24,584 24,171 24,025
Property and equipment under capital lease 17,054 17,054 17,068
Furniture, fixtures and equipment 8,571 8,008 7,555
--------- ----------- --------
50,209 49,233 48,648
Less accumulated depreciation and amortization (23,296) (20,282) (17,680)
--------- ----------- --------
26,913 28,951 30,968
Other Assets 1,361 1,381 1,223
--------- ----------- --------
Total Assets $ 69,600 $ 77,964 $ 73,147
--------- ----------- --------
--------- ----------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 4,219 $ 5,974 $ 5,184
Accrued compensation and related costs 2,392 2,363 2,038
Accrued liabilities 2,475 2,291 2,434
Income taxes payable 774
Current portion of capital lease obligations 1,868 2,077 2,313
Current portion of long-term debt 2,079 2,901 2,912
--------- ----------- --------
Total current liabilities 13,033 16,380 14,881
Capital Lease Obligations 2,293 3,257 4,166
Long-Term debt 3,069 3,715 6,001
Deferred Credits 3,989 3,954 3,791
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.0001; authorized
17,000,000; shares issued and outstanding
7,820,860, 7,787,860 and 7,754,652 shares 1 1 1
Capital in excess of par value 33,708 33,653 33,612
Retained earnings 13,507 17,004 10,695
--------- ----------- --------
Total stockholders' equity 47,216 50,658 44,308
--------- ----------- --------
Total Liabilities and Stockholders' Equity $ 69,600 $ 77,964 $ 73,147
--------- ----------- --------
--------- ----------- --------
</TABLE>
See notes to financial statements
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
AUGUST 3, 1996 JULY 29, 1995
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (3,497) $ (4,499)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 3,014 2,988
Change in operating assets and liabilities:
Merchandise inventories (633) 3,297
Prepaid expenses and other assets (2,312) (2,712)
Trade accounts payable (1,755) 169
Accrued compensation and related costs 29 125
Accrued liabilities 184 (524)
Deferred credits 35 192
Income tax payable (774) (2,528)
---------- ----------
Net cash used in operating activities (5,709) (3,492)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 224
Principal payments on capital lease obligations and debt (2,641) (2,600)
Exercise of stock options and warrants 55 148
---------- ----------
Net cash used in financing activities (2,586) (2,228)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short term investments (3,300) (3,400)
Sales of short term investments 12,560 14,250
Purchases of property and equipment (976) (811)
---------- ----------
Net cash provided by investing activities 8,284 10,039
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11) 4,319
CASH AND CASH EQUIVALENTS:
Beginning of year 6,352 6,390
---------- ----------
End of period $ 6,341 $ 10,709
---------- ----------
CASH PAID DURING PERIOD:
Interest $ 526 $ 811
Income taxes $ 993 $ 2,564
</TABLE>
See notes to financial statements
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NATURAL WONDERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. The financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the financial position
and operating results for the interim periods. The results of operations
for the quarter ended August 3, 1996 are not necessarily indicative of the
results to be expected for the entire fiscal year ending February 1, 1997.
This financial information should be read in conjunction with the audited
financial statements and notes thereto included in the Company's 1995
Annual Report to Stockholders and Form 10K as filed with the Securities and
Exchange Commission.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
GENERAL
As of August 3, 1996, Natural Wonders operated 146 stores in 36 states
compared to 147 stores in 36 states as of July 29, 1995. In the first six
months of 1996, no new stores were opened as compared to 2 new stores in the
first six months of fiscal 1995.
SALES
During the second quarter and first six months of 1996, sales increased
1.9% and 3.4%, respectively, over the same periods in 1995. The increase was
attributable to positive comparable store sales and to a full period of sales
generated from stores opened in 1995, offset in part by the closure of two
stores in the fourth quarter of 1995.
Comparable store sales increased 0.6% in the second quarter of 1996 and
increased 1.0% in the first six months of 1996, (for the 13 and 26 weeks ended
August 3, 1996) as compared to the same period in 1995, (for the 13 and 26 weeks
ended August 5, 1995). The increase occurred in most geographic regions. For
the second quarter and the first six months of 1996, the average dollar amount
per sales ticket and new products as a percentage of sales increased.
In 1995, the Company began implementing a strategy which included
significantly editing its product assortment and improving presentation of
products in stores. In 1996, the Company has continued to refine this strategy
including testing a new store layout and testing a further reduction of the
product assortment. However, there can be no assurance that these current
programs or any further actions will positively impact sales.
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 slightly as a percentage of sales in the second quarter of 1996.
Improved mark-up on new product sales was offset by timing differences on
clearance related sales. For the first six months of 1996, these costs
decreased as a percentage of sales due primarily to better product mark-up.
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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 increased to 36.7% in the second quarter of 1996 from 36.3% in the second
quarter of 1995 and decreased to 39.1% in the first six months of 1996 from
40.1% in the first six months of 1995. The increase in the costs as a percentage
of sales in the second quarter was primarily due to incentive compensation which
is accrued based on meeting certain earnings targets, but is dependent on year-
end results. The decrease in the costs as a percentage of sales in the first six
months compared to the prior year was due to the impact of the increase in
comparable stores sales in 1996, and to the 1995 charge of $288,000, or 0.6% as
a percentage of sales, for severance costs associated with reductions in
corporate staff.
OPERATING INCOME
As a result of the foregoing, the operating loss was $1,909,000 or 7.4% of
sales in the second quarter of 1996 versus $1,650,000 or 6.5% of sales in the
second quarter of 1995. For the first six months of 1996, the operating loss
was $5,344,000 or 11.2% of sales compared to an operating loss of $6,488,000 or
14.0% of sales in the first six months of 1995.
NET INTEREST AND OTHER EXPENSES
Net interest and other expenses decreased to 0.8% of sales in the second
quarter of 1996 from 2.2% of sales in the second quarter of 1995 and decreased
to 0.8% of sales in the first six months of 1996 from 1.9% of sales in the first
six months of 1995. This was primarily due to the reduction of debt and other
expenses associated with equipment lease financing.
NET LOSS
As a result of the foregoing, the net loss decreased to $1,285,000 or 4.9%
of sales in the second quarter of 1996 from $1,345,000 or 5.3% of sales in the
second quarter of 1995. For the first six months of 1996, the net loss
decreased to $3,497,000 or 7.3% of sales compared to $4,499,000 or 9.7% of sales
in the first six months of 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of capital in recent years have been net cash
flow from operations and bank and equipment lease financing. Seasonal working
capital requirements have been met through short-term bank borrowings.
During the first six months of 1996, cash and cash equivalents remained
relatively unchanged. Reductions due to seasonal losses, (losses in the first
three quarters of the fiscal year have been traditional for a seasonal gift
business such as ours), and the pay down of capital lease obligations were
substantially offset by the sale of short term investments.
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Compared to the prior year, the decrease in cash and cash equivalents was
primarily due to the Company's investing more diligently in interest-bearing
short term investments and to an increase in merchandise inventories while
paying down over $6,000,000 in long term debt and capital lease obligations.
During the remainder of 1996, the Company plans to open five new stores and
has not determined the extent of store expansion in 1997. During the remainder
of 1996, cash will primarily be used for capital expenditures and merchandise
inventory for new stores, repayment of debt, fixtures for existing stores,
software upgrades, and to purchase inventory for the Company's existing stores,
particularly prior to and during the peak holiday selling season.
The Company has a credit facility agreement with a commercial bank which
includes a revolving line of credit for $12,000,000 expiring on July 1, 1997.
The line of credit is also available for the issuance of commercial and standby
letters of credit up to $4,500,000 and $500,000 respectively. The Company has
the option of choosing interest payable at a rate based on LIBOR plus 1.5%, the
bank's reference rate or a rate as quoted by the bank.
The Company believes that current cash and short-term investments together
with its cash flow from operations and funds available under its credit facility
agreement will be sufficient to fund the Company's operations at least for the
next 12 months.
INFLATION AND SEASONALITY
- -------------------------
The Company does not believe that its operations have been materially
affected by inflation during the three recent fiscal years or in 1996 to date.
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 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 comparatively lower in the first three quarters, usually
resulting in losses in these quarters. If for any reason the Company's sales
were to be substantially below seasonal norms during the months of November and
December, 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.
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FUTURE RESULTS
- --------------
This report contains forward looking statements regarding, among other
matters, the Company's future strategy, store opening plans, merchandising
strategy and growth. The forward looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation 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.
10 of 12
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 5, 1996 at
its principal offices in Fremont, California. Of the shares outstanding as of
the record date, 7,374,004 shares were present at the meeting or represented by
proxies, representing approximately 94.6% of the total votes eligible to be
cast.
At the meeting, the stockholders voted to elect two (2) Class III directors
of the Company to serve for a three-year term and until their successors are
duly elected and qualified. The name of each Class III director elected at the
Annual Meeting and the votes cast with respect to each such individual are set
forth below.
For Withheld
--------- ---------
Kathleen M. Chatfield 7,296,384 77,620
Pearson C. Cummin III 7,288,773 85,231
The following Class I directors continued to hold office:
Arthur S. Berliner*, Robert S. Rubenstein
The following Class II directors continued to hold office:
Julius Jensen III
* Resigned as of August 12, 1996
The Company's shareholders also voted to approve the following:
- To ratify the appointment of Deloitte & Touche LLP as independent
auditors of the Company for the fiscal year ending February 1,
1997. There were 7,360,461 affirmative votes, 5,680 negative
votes and 7,863 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 11.1 Computation of Per Share Loss
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the second quarter of fiscal 1996.
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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: September 13, 1996
NATURAL WONDERS, INC.
(Registrant)
/s/ Michael J. Waide
_____________________________
Michael J. Waide,
Senior Vice President, Finance,
Chief Financial Officer and Corporate Secretary
(Signing on behalf of the registrant and
as Principal Accounting and Financial Officer)
12 of 12
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Exhibit 11.1
NATURAL WONDERS, INC.
COMPUTATION OF PER SHARE NET LOSS
(In thousands, except per share data)
Six Months Ended
------------------------------
August 3, 1996 July 29, 1995
------------------------------
Net loss $(3,497) $(4,499)
-------- --------
Weighted average common shares
outstanding 7,801 7,687
Per share net loss $ (0.45) $ (0.59)
-------- --------
There is no material difference in the number of shares used in computing per
share amounts as calculated for primary and fully diluted earnings per share.
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
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<PERIOD-START> MAY-05-1996
<PERIOD-END> AUG-03-1996
<CASH> 6341
<SECURITIES> 8835
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<ALLOWANCES> 0
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0
0
<COMMON> 1
<OTHER-SE> 47215
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