<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 NOVEMBER 2, 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 principle 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 November 30, 1996: 7,965,252 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 nine months ended November 2, 1996
and October 28, 1995
Condensed Balance Sheets 4
November 2, 1996, February 3, 1996 and October 28, 1995
Condensed Statements of Cash Flows 5
Nine months ended, November 2, 1996 and October 28, 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 11
SIGNATURE 12
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
---------------------- -------------------------
NOVEMBER 2, OCTOBER 28, NOVEMBER 2, OCTOBER 28,
1996 1995 1996 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 22,896 $ 22,649 $ 70,768 $ 68,948
Cost of goods sold and
store occupancy expenses 16,135 16,351 50,608 50,549
--------- --------- --------- ---------
Gross margin 6,761 6,298 20,160 18,399
Selling, general & administrative expenses 9,706 9,290 28,449 27,878
--------- --------- --------- ---------
Operating loss (2,945) (2,992) (8,289) (9,479)
Interest expense 208 337 731 1,119
Other expenses 115 93 380 610
Interest and other income (120) (196) (520) (608)
--------- --------- --------- ---------
Loss before taxes (3,148) (3,226) (8,880) (10,600)
Income taxes (1,228) (1,258) (3,463) (4,134)
--------- --------- --------- ---------
Net loss $ (1,920) $ (1,968) $ (5,417) $ (6,466)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share $ (0.24) $ (0.25) $ (0.69) $ (0.84)
Shares used in computing
net loss per share 7,878 7,755 7,830 7,712
</TABLE>
See notes to financial statements
3 of 12
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NATURAL WONDERS, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NOVEMBER 2, FEBRUARY 3, OCTOBER 28,
1996 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,010 $ 6,352 $ 4,486
Short-term investments 18,095 200
Merchandise inventories 41,882 19,216 38,499
Prepaid expenses and other current assets 7,739 3,969 7,351
--------- -------- ---------
Total current assets 52,631 47,632 50,536
Property and Equipment:
Leasehold improvements 24,982 24,171 24,171
Property and equipment under capital lease 17,054 17,054 17,067
Furniture, fixtures and equipment 9,378 8,008 7,885
--------- -------- ---------
51,414 49,233 49,123
Less accumulated depreciation and amortization (24,827) (20,282) (19,187)
--------- -------- ---------
26,587 28,951 29,936
Other Assets 1,356 1,381 1,217
--------- -------- ---------
Total Assets $ 80,574 $ 77,964 $ 81,689
--------- -------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 12,924 $ 5,974 $ 17,685
Accrued compensation and related costs 2,075 2,363 1,664
Accrued liabilities 2,984 2,291 2,377
Short-term borrowings 4,500
Income taxes payable 774
Current portion of capital lease obligations 1,788 2,077 2,184
Current portion of long-term debt 2,071 2,901 2,849
--------- -------- --------
Total current liabilities 26,342 16,380 26,759
Capital Lease Obligations 1,837 3,257 3,743
Long-Term debt 2,758 3,715 4,925
Deferred Credits 3,970 3,954 3,920
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.0001; authorized
17,000,000; shares issued and outstanding
7,958,752, 7,787,860 and 7,756,568 shares 1 1 1
Capital in excess of par value 34,079 33,653 33,613
Retained earnings 11,587 17,004 8,728
--------- -------- ---------
Total stockholders' equity 45,667 50,658 42,342
--------- -------- ---------
Total Liabilities and Stockholders' Equity $ 80,574 $ 77,964 $ 81,689
--------- -------- ---------
</TABLE>
See notes to financial statements
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------------
NOVEMBER 2, 1996 OCTOBER 28, 1995
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (5,417) $ (6,466)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 4,545 4,495
Change in operating assets and liabilities:
Merchandise inventories (22,666) (17,440)
Prepaid expenses and other assets (3,745) (4,022)
Trade accounts payable 6,950 12,670
Accrued compensation and related costs (288) (249)
Accrued liabilities 693 (569)
Deferred credits 16 321
Income tax payable (774) (2,540)
-------- --------
Net cash used in operating activities (20,686) (13,800)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term borrowings 4,500
Principal payments on capital lease obligations and debt (3,496) (4,291)
Proceeds from issuance of debt 224
Net proceeds from sales of common stock 22 32
Exercise of stock options and warrants 404 117
-------- --------
Net cash provided by (used in) financing activities 1,430 (3,918)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short term investments (5,150) (2,418)
Sales of short term investments 23,245 19,518
Purchases of property and equipment (2,181) (1,286)
-------- --------
Net cash provided by investing activities 15,914 15,814
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,342) (1,904)
CASH AND CASH EQUIVALENTS:
Beginning of year 6,352 6,390
End of period $ 3,010 $ 4,486
-------- --------
-------- --------
CASH PAID DURING PERIOD:
Interest $ 708 $ 1,158
Income taxes $ 971 $ 2,585
</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 November 2, 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 10-K 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 November 2, 1996, Natural Wonders operated 150 stores in 36 states
compared to 147 stores in 36 states as of October 28, 1995. In the first nine
months of fiscal 1996, four new stores were opened as compared to two new stores
in the first nine months of fiscal 1995.
SALES
During the third quarter and first nine months of 1996, sales increased
1.1% and 2.6%, respectively, over the same periods in 1995. The increase was
attributable to new stores 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 decreased 0.9% in the third quarter of 1996 and
increased 0.4% in the first nine months of 1996, (for the 13 and 39 weeks ended
November 2, 1996) as compared to the same periods in 1995, (for the 13 and 39
weeks ended November 4, 1995). In the third quarter, the majority of geographic
regions experienced positive comparable store sales increases, which were offset
slightly by decreases primarily in the midwest and northeast. For the third
quarter and the first nine 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 that 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. As a percentage
of sales, these costs decreased in the third quarter and the first nine months
of 1996 as compared to the same periods in 1995. The decrease was primarily due
to higher product mark-up attributable to both mix of product and costs.
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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 42.4% in the third quarter of 1996 from 41.0% in the third
quarter of 1995. The increase in the costs as a percentage of sales in the
third quarter was primarily due to marketing costs and the timing of
expenditures for visual presentation costs.
As a percentage of sales, SG&A decreased to 40.2% in the first nine months
of 1996 from 40.4% in the first nine months of 1995. The decrease in the costs
as a percentage of sales in the first nine months compared to the prior year was
due to the 1995 charge of $288,000, or 0.4% as a percentage of sales, for
severance costs associated with reductions in corporate staff. Excluding the
charge for severance costs, SG&A increased as a percentage of sales in the first
nine months compared to the prior year due primarily to charges for incentive
compensation which are accrued based on meeting certain earnings targets, but is
dependent on year-end results.
OPERATING INCOME
As a result of the foregoing, the operating loss was $2,945,000 or 12.9% of
sales in the third quarter of 1996 versus $2,992,000 or 13.2% of sales in the
third quarter of 1995. For the first nine months of 1996, the operating loss
was $8,289,000 or 11.7% of sales compared to an operating loss of $9,479,000 or
13.7% of sales in the first nine months of 1995.
NET INTEREST AND OTHER EXPENSES
Net interest and other expenses decreased to 0.9% of sales in the third
quarter of 1996 from 1.0% of sales in the third quarter of 1995 and decreased to
0.8% of sales in the first nine months of 1996 from 1.6% of sales in the first
nine 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 $1,920,000 or 8.4%
of sales in the third quarter of 1996 from $1,968,000 or 8.7% of sales in the
third quarter of 1995. For the first nine months of 1996, the net loss
decreased to $5,417,000 or 7.7% of sales compared to $6,466,000 or 9.4% of sales
in the first nine 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.
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During the first nine months of 1996, cash and cash equivalents decreased
$3,342,000. This was mainly due to cash used in operating activities, primarily
for off season losses (generally incurred in the first three quarters), and
seasonal merchandise build-up. Additionally, cash was used to pay down capital
lease obligations and other debt. Cash and cash equivalents were positively
impacted by short-term borrowings on the Company's revolving line of credit and
the sale of short-term investments. Typically, excess cash has been invested in
short-term investments after the holiday season and liquidated during the first
three quarters to meet capital asset and seasonal inventory requirements.
Compared to the prior year, the decrease in cash and cash equivalents was
primarily due to an increase in merchandise inventories and a decrease in
accounts payable due to the use of more import vendors who require earlier
payment through letters of credit. As a result, short-term borrowings were
required on the Company's revolving line of credit.
In the first week of November 1996, the Company opened one more new store
and one temporary store, and has not yet determined the extent of store
expansion in 1997. During the remainder of 1996, cash will primarily be used to
purchase inventory for the peak holiday selling season, repayment of debt and
capital expenditures for new stores.
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.
Within this line, commercial and standby letters of credit are available up to
$4,500,000 and $500,000 respectively. As of November 2, 1996, amounts borrowed
under the revolving line of credit were $4,500,000 and letters of credit
outstanding were $1,491,000. 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 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 11.1 Computation of Per Share Net Loss
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the third 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: December 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)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
---------------------------------- ----------------------------------
November 2, 1996 October 28, 1995 November 2, 1996 October 28, 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net loss $(1,920) $(1,968) $(5,417) $(6,466)
Weighted average common
shares outstanding 7,878 7,755 7,830 7,712
Per share net loss $(0.24) $(0.25) $(0.69) $(0.84)
</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-01-1997
<PERIOD-START> AUG-04-1996
<PERIOD-END> NOV-02-1996
<CASH> 3010
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 41882
<CURRENT-ASSETS> 52631
<PP&E> 51414
<DEPRECIATION> 24827
<TOTAL-ASSETS> 80574
<CURRENT-LIABILITIES> 26342
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 45666
<TOTAL-LIABILITY-AND-EQUITY> 80574
<SALES> 22896
<TOTAL-REVENUES> 22896
<CGS> 16135
<TOTAL-COSTS> 16135
<OTHER-EXPENSES> 9706
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 208
<INCOME-PRETAX> (3148)
<INCOME-TAX> (1228)
<INCOME-CONTINUING> (1920)
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<NET-INCOME> (1920)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> 0
</TABLE>
