<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 MAY 4, 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 June 1, 1996: 7,803,348 shares of common stock.
1 of 14
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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 ended May 4, 1996 and April 29, 1995
Condensed Balance Sheets 4
May 4, 1996, February 3, 1996 and April 29, 1995
Condensed Statements of Cash Flows 5
Quarters ended, May 4, 1996 and April 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 - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K 10
SIGNATURE 11
Index to Exhibits 12-14
2 of 14
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------
MAY 4, APRIL 29,
1996 1995
---------- ----------
<S> <C> <C>
Net sales $ 21,919 $ 20,825
Cost of goods sold and
store occupancy expenses 16,126 16,320
---------- ----------
Gross Profit 5,793 4,505
Selling, general & administrative expenses 9,228 9,343
---------- ----------
Operating loss (3,435) (4,838)
Interest expense 282 401
Other expenses 135 184
Interest and other income (226) (253)
---------- ----------
Loss before taxes (3,626) (5,170)
Income taxes (1,414) (2,016)
---------- ----------
Net loss $ (2,212) $ (3,154)
---------- ----------
---------- ----------
Net loss per share $ (0.28) $ (0.41)
Shares used in computing
net loss per share 7,792 7,642
</TABLE>
See notes to financial statements
3 of 14
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NATURAL WONDERS, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
MAY 4, FEBRUARY 3, APRIL 29,
1996 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,899 $ 6,352 $ 7,063
Short-term investments 13,835 18,095 7,800
Merchandise inventories 22,731 19,216 22,622
Prepaid expenses and other current assets 5,595 3,969 5,316
---------- ---------- ----------
Total current assets 45,060 47,632 42,801
Property and Equipment:
Leasehold improvements 24,302 24,171 23,647
Property and equipment under capital lease 17,054 17,054 17,138
Furniture, fixtures and equipment 8,152 8,008 7,192
---------- ---------- ----------
49,508 49,233 47,977
Less accumulated depreciation and amortization (21,785) (20,282) (16,185)
---------- ---------- ----------
27,723 28,951 31,792
Other Assets 1,371 1,381 1,229
---------- ---------- ----------
Total Assets $ 74,154 $ 77,964 $ 75,822
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 6,429 $ 5,974 $ 6,267
Accrued compensation and related costs 1,941 2,363 1,648
Accrued liabilities 2,304 2,291 2,566
Income taxes payable 774
Current portion of capital lease obligations 1,972 2,077 2,213
Current portion of long-term debt 2,928 2,901 2,885
---------- ---------- ----------
Total current liabilities 15,574 16,380 15,579
Capital Lease Obligations 2,776 3,257 4,641
Long-Term debt 3,380 3,715 6,316
Deferred Credits 3,971 3,954 3,734
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.0001; authorized
17,000,000; shares issued and outstanding
7,803,348, 7,787,860 and 7,707,123 shares 1 1 1
Capital in excess of par value 33,660 33,653 33,511
Retained earnings 14,792 17,004 12,040
---------- ---------- ----------
Total stockholders' equity 48,453 50,658 45,552
---------- ---------- ----------
Total Liabilities and Stockholders' Equity $ 74,154 $ 77,964 $ 75,822
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to financial statements
4 of 14
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------
MAY 4, 1996 APRIL 29, 1995
----------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,212) $ (3,154)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 1,503 1,493
Change in operating assets and liabilities:
Merchandise inventories (3,515) (1,563)
Prepaid expenses and other assets (1,616) (1,998)
Trade accounts payable 455 1,252
Accrued compensation and related costs (422) (266)
Accrued liabilities 13 (380)
Deferred credits 17 135
Income tax payable (774) (2,540)
---------- ----------
Net cash used in operating activities (6,551) (7,021)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations and debt (894) (1,713)
Exercise of stock options and warrants 7 47
---------- ----------
Net cash used in financing activities (887) (1,666)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short term investments (800) (2,400)
Sales of short term investments 5,060 11,900
Purchases of property and equipment (275) (140)
---------- ----------
Net cash provided by investing activities 3,985 9,360
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,453) 673
CASH AND CASH EQUIVALENTS:
Beginning of year 6,352 6,390
---------- ----------
End of period $ 2,899 $ 7,063
---------- ----------
---------- ----------
CASH PAID DURING PERIOD:
Interest $ 275 $ 430
Income taxes $ 1,239 $ 2,564
</TABLE>
See notes to financial statements
5 of 14
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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 May 4, 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.
6 of 14
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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 May 4, 1996, Natural Wonders operated 146 stores in 36 states
compared to 145 stores in 36 states as of April 29, 1995. There were no new
stores opened in the first quarter of 1996 or 1995.
SALES
During the first quarter of 1996, sales increased 5.3 % over the same
period in 1995. The increase was attributable to positive comparable store
sales and to a full period of sales generated from stores opened in 1995.
Comparable store sales increased 1.5% in the first quarter of 1996, (for the 13
weeks ended May 4, 1996) as compared to the same period in 1995, (for the 13
weeks ended May 6, 1995). The increase occurred across most geographic regions.
The average dollar amount per sales ticket increased in comparison to the first
quarter of 1995.
Management is continuing to evaluate its merchandise strategy. In 1995,
the Company began implementing a strategy which included significantly editing
its assortment and improving presentation. 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
decreased as a percentage of sales to 73.6% in the first quarter of 1996 from
78.4% in the first quarter of 1995. This decrease was primarily due to less
markdowns in the first quarter of 1996 as compared to 1995. In late March of
1995, the Company initiated a clearance sale related to editing its product
assortment. Additionally, the decrease in the percentage was partially due to
the impact of the increase in comparable stores sales on store occupancy
expenses and expenses associated with acquiring inventory.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, (SG&A), which are primarily
non-occupancy store expenses and corporate overhead, decreased as a percentage
of sales to 42.1% in the first quarter of 1996 from 44.9% in the first quarter
of 1995. This decrease was due to the impact of the increase in comparable
stores sales in 1996, and to the 1995 charge of $264,000, or 1.3% 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 decreased to $3,435,000 or
15.7% of sales in the first quarter of 1996 from $4,838,000 or 23.2% of sales in
the first quarter of 1995.
NET INTEREST AND OTHER EXPENSES
Net interest and other expenses decreased to $191,000 or 0.9% of sales in
the first quarter of 1996 from $332,000 or 1.6% of sales in the first quarter of
1995, primarily due to the reduction of debt.
NET INCOME (LOSS)
As a result of the foregoing, the net loss decreased to $2,212,000 or 10.1%
of sales in the first quarter of 1996 from $3,154,000 or 15.1% of sales in the
first quarter 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 three months of 1996, cash and cash equivalents decreased
$3,453,000. This was primarily due to the first quarter loss (losses have
traditionally been incurred in the first three quarters), an increase in
merchandise inventories, the pay down of capital lease obligations, and payment
of income taxes. Cash and cash equivalents were positively impacted by the sale
of short term investments.
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.
Natural Wonders' primary cash requirements have been related to capital
expenditures for new stores, including construction costs and fixtures,
merchandise inventory for such stores and repayment of debt. In 1996, the
Company plans to open five new stores and has not determined the extent of store
expansion in 1997. During 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.
8 of 14
<PAGE>
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 for the next 12
months.
The Company is required to adopt Statement of Financial Accounting
Standards No. 123, (SFAS 123) "Accounting for Stock Based Compensation" in 1996.
SFAS 123 establishes accounting and disclosure requirements for stock based
employee compensation plans using a fair value based method. As allowed by SFAS
123, the Company plans to adopt only the disclosure requirements of SFAS 123;
therefore, such adoption will have no effect on the Company's consolidated
results of operations.
The Company is required to adopt Statement of Financial Accounting
Standards No. 121, (SFAS 121) "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of" in 1996. The Company believes
that there will not be a material effect of adopting SFAS 121 on the
consolidated financial statements.
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 significantly 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.
9 of 14
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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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
A list of exhibits required to be filed as part of this report is
incorporated by reference to pages 12 through 14 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 first quarter of fiscal 1996.
10 of 14
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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: June 14, 1996
NATURAL WONDERS, INC.
(Registrant)
/s/ Michael J. Waide
----------------------------------------
Michael J. Waide,
Senior Vice President, Finance,
Chief Financial Officer and Secretary
(Signing on behalf of the registrant and
as Principal Accounting and Financial
Officer)
11 of 14
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
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.
10.4 Master Lease Agreement, as amended, dated November 9, 1992,
between the Company and United States Leasing Corporation
is incorporated by reference to Exhibit 10.15 of the 1992
Form 10-K.
10.5 Equipment Lease Agreement, as amended, dated November 19,
1992, between the Company and General Electric Capital
Corporation is incorporated by reference to Exhibit 10.17
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.
10.7 Equipment Lease Agreement, dated December 17, 1993, between
the Company and BancBoston is incorporated by reference to
Exhibit 10.21 of the Form 10-K for the fiscal year ended
January 29, 1994, ("1993 Form 10-K).
12 of 14
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
10.8 Equipment Lease Agreement, dated January 24, 1994, between
the Company and BancBoston is incorporated by reference to
Exhibit 10.22 of the 1993 Form 10-K.
10.9 Master Financial Lease agreement dated June 24, 1993, between
the Company and Michigan National Bank, is incorporated by
reference to Exhibit 10.20 of the Form 10-Q for the quarterly
period ended July 31, 1993.
10.10 Equipment Lease Agreement, dated October 1, 1993, between the
Company and Oliver-Allen Corporation, Inc. is incorporated by
reference to Exhibit 10.24 of the 1993 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.
10.15 Equipment Lease Agreement, dated April 19, 1994, between
the Company and BancBoston is incorporated by reference to
Exhibit 10.32 of the Form 10-Q for the quarterly period
ended April 30, 1994.
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.
10.17 Equipment Lease Agreement, dated October 28, 1994, between
the Company and Finance for Science International, Inc. is
incorporated by reference to Exhibit 10.34 of the Form 10-Q
for the quarterly period ended October 29, 1994.
10.18 Equipment Lease Agreement, dated December 22, 1994, between
the Company and Lyon Credit Corporation is incorporated by
reference to Exhibit 10.35 of the 1994 Form 10-K.
13 of 14
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SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
10.19 Equipment Lease Agreement, dated December 29, 1994, between
the Company and Finance for Science International, Inc. is
incorporated by reference to Exhibit 10.36 of the 1994
Form 10-K.
10.20 Equipment Lease Agreement, dated January 25, 1995, between
the Company and Lyon Credit Corporation is incorporated by
reference to Exhibit 10.37 of the 1994 Form 10-K.
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.
10.23* Form of Director and Officer Indemnity Agreement is
incorporated by reference to Exhibit 10.40 of the 1994
Form 10-K.
10.24 Business Loan Agreement, dated March 28, 1996 between the
Company and Bank of America, National Trust and Savings
Association is incorporated by reference to Exhibit 10.24
of the Form 10-K for the fiscal year ended February 3, 1996,
("1995 Form 10-K").
10.25* Employment Agreement entered into on July 6, 1995 between
the Company and Michael J. Waide is incorporated by reference
to Exhibit 10.25 of the 1995 Form 10-K.
11.1 Computation of Per Share Earnings.
* Plan or agreement pursuant to which the Company's
officers or directors have received compensation.
14 of 14
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Exhibit 11.1
NATURAL WONDERS, INC.
COMPUTATION OF PER SHARE NET LOSS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------
May 4, 1996 April 29, 1995
----------------------------
<S> <C> <C>
Net loss $(2,212) $(3,144)
------- -------
Weighted average common shares
outstanding 7,792 7,642
Per share net loss $ (0.28) $ (0.41)
------- -------
</TABLE>
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>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-04-1996
<PERIOD-START> FEB-04-1996
<PERIOD-END> MAY-04-1996
<CASH> 2899
<SECURITIES> 13835
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 22731
<CURRENT-ASSETS> 45060
<PP&E> 49508
<DEPRECIATION> 21785
<TOTAL-ASSETS> 74154
<CURRENT-LIABILITIES> 15574
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 48452
<TOTAL-LIABILITY-AND-EQUITY> 74154
<SALES> 21919
<TOTAL-REVENUES> 21919
<CGS> 16126
<TOTAL-COSTS> 16126
<OTHER-EXPENSES> 9228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282
<INCOME-PRETAX> (3626)
<INCOME-TAX> (1414)
<INCOME-CONTINUING> (2212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2212)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> 0
</TABLE>
