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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 FEBRUARY 1, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
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Commission file number: 0-20035
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NATURAL WONDERS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0141610
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
4209 TECHNOLOGY DRIVE, FREMONT, CALIFORNIA 94538
(Address of principal executive offices) (Zip Code)
</TABLE>
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. / /
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 on March 31, 1997
was $25,400,800. The number of shares of Common Stock, with $.0001 par value,
outstanding on March 31, 1997 was 7,987,846 shares.
Documents incorporated by reference:
Items 5, 6, 7 and 8 of Part II are incorporated by reference from the
Company's 1996 Annual Report to Stockholders. A portion of Item 10 and Items 11,
12 and 13 of Part III are incorporated by reference from the Company's
definitive Proxy Statement for the 1997 Annual Meeting of Stockholders, to be
held May 23, 1997. Registrant's definitive Proxy Statement will be filed with
the Securities and Exchange Commission on or before April 18, 1997.
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PART I
ITEM 1. BUSINESS
GENERAL
Natural Wonders 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, personal care, bird
feeders, ceramics, wind chimes, 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 151 stores
in 36 states at the end of fiscal 1996. The Company opened five stores in fiscal
1996. In March 1997 the Company entered into an agreement to acquire 12 stores
through an asset purchase agreement, and intends to open approximately ten
additional stores in 1997.
PRODUCTS AND MERCHANDISING
During fiscal 1996, the typical Natural Wonders' store stocked a range of
2,000 to 2,800 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 price points, a majority are priced below $25.00.
Following is a description of the Company's merchandise assortment by
product category:
KIDS & DISCOVERY Educational and interactive toys and games: small bean bag
plush animals, ant farms, star gazers, plush puppets, flow-motion and kinetic
sculpture products.
HOME Kaleidoscopes, oil-burning lamps, sculptures, ceramics, personal care,
home decorative and fragrance and collectables.
GARDEN/BACKYARD Wind chimes, bird houses, bird feeders, herb nurseries,
sundials and planting accessories such as watering cans and gardening hats.
APPAREL T-shirts, sweatshirts, and hats.
GEOLOGY Agate boxes and bookends, sandstone coasters, jade vases, carved
mineral figurines, spheres, and mineral games.
OUTDOOR Telescopes, binoculars, camping tools, compasses and thermometers.
MUSIC AND VIDEO Compact discs and cassette tapes including instrumental New
Age music or environmental sounds and World music, videotape selections
featuring nature and science and computer animated subjects, and folkdance.
JEWELRY Earrings and necklaces.
BOOKS Educational, pictorial, activity and instructional books for adults
and children.
OFFICE Note cards, journals, hi-tech desk accessories, and globes.
Natural Wonders' merchandise organization includes a product development
team, consisting of senior product development managers and a buying support
team, and merchandise planners. 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 1996, no one vendor
accounted for more than 5% of the Company's merchandise purchases.
2
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MARKETING
Natural Wonders' marketing strategy is to create a store atmosphere which
inspires curiosity, fun and interest for its customers. The Company has recently
implemented a new branding strategy which includes a new logo as well as new
signage, packaging, and a new store prototype. Additionally, the Company has
created a new customer database which will enable the Company to engage in
special promotional and marketing programs.
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. The store environment is enhanced by New Age
music or environmental sounds played to demonstrate Natural Wonders' compact
disc and cassette tape offerings. A color monitor displays videotapes depicting
nature and science 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 select 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. 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 is shipped more frequently. The Company primarily
uses common carriers to ship merchandise to its stores.
INFORMATION SYSTEMS
Information systems consist of a full range of financial and merchandising
systems including inventory distribution and control, sales reporting, accounts
payable and automated merchandise replenishment. These systems are updated daily
by polling sales information from each store's point-of-sale terminals.
COMPETITION
The specialty retail business is highly competitive. Within the nature and
science segment of specialty retailing, the Company competes with The Nature
Company, a subsidiary of The Discover Channel, Inc., as well as many other
national and regional specialty stores such as The Learningsmith, 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. The Company believes that its moderately priced merchandise assortment,
high level of customer service and open store design 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.
3
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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 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 sales were 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.
EMPLOYEES
As of February 1, 1997 the Company had approximately 2,277 employees. A
significant number of seasonal employees are hired during each holiday selling
season. None of the Company's employees are 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, 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.
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ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 31, 1997
are as follows:
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NAME AGE POSITION WITH COMPANY
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<S> <C> <C>
Kathleen M. Chatfield.............. 44 President, Chief Executive Officer and Director
Michael Sontag..................... 52 Senior Vice President, General Merchandising
Manager
Michael J. Waide................... 49 Senior Vice President, Finance, Chief Financial
Officer and Secretary
Karen A. Daley..................... 43 Vice President, Human Resources
Elizabeth A. Jones................. 42 Vice President, Operations
Teresa L. Rutherford............... 41 Vice President, Product Development
Judith A. Soares................... 47 Vice President, MIS
</TABLE>
KATHLEEN M. CHATFIELD has served as Chief Executive Officer since February
1995, a director since November 1994 and as President since September 1994. Ms.
Chatfield also served as Chief Operating Officer from September 1994 until
February 1995. Prior to being promoted to President she served the Company as
Senior Vice President of Operations from January 1994 until September 1994 and
Vice President of Store Operations from January 1992 until January 1994.
MICHAEL SONTAG has served as Senior Vice President, General Merchandising
Manager since October 1996. Prior to joining the Company, he served as Executive
Vice President, Merchandising for Brookstone, Inc., a publicly held specialty
retailer of functional, high quality, uniquely designed consumer products from
May 1990 until February of 1996.
MICHAEL J WAIDE has served as Senior Vice President, Finance, since
February, 1996 and as Vice President, Finance, Chief Financial Officer and
Secretary since August 1995. Prior to joining the Company, he served as Vice
President, Finance and Administration for Inmac Corp., a publicly held
international computer supplies catalog company from January 1987 until August
of 1995.
KAREN A. DALEY has served as Vice President, Human Resources since April,
1995, as Director of Human Resources since August 1991 and as Human Resources
Manager since 1989.
ELIZABETH A. JONES has served as Vice President, Operations since March
1995. Prior to joining the Company, she served as Director, Stores for the
Snyder Leather Outlet, a division of Wilsons, The Leather Experts from February
1993 until March 1995 and as a Regional Sales Manager and other positions at
Wilsons from 1983 until February 1993.
TERESA L. RUTHERFORD has served as Vice President, Product Development since
March 1997, and Director of Sourcing and Product Development from September 1995
until March 1997 and Product Manager from June 1994 until September 1995. Prior
to joining the Company, she served as Merchandise Manager for DFS Merchandising,
an international duty-free retailer from January 1992 until June 1994.
JUDITH A. SOARES has served as Vice President, MIS since March 1997 and
Director of MIS from June 1996 until March 1997. Prior to joining the Company,
she served as Vice President, MIS for Home Express, a specialty retailer of home
products from March 1993 until June 1996 and as Vice President, Development for
The Gap Inc., a branded apparel retailer from June 1990 until March 1993.
5
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ITEM 2. PROPERTY
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. Management believes that the capacity of the corporate
offices and distribution center will be sufficient for the foreseeable future.
As of February 1, 1997, the Company operated 151 stores in 36 states
occupying approximately 371,000 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 11 years and
expiring between 1997 and 2007. Most leases for the Company's stores 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 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
The information required is incorporated by reference from page 22 of the
Company's 1996 Annual Report to Stockholders for the fiscal year ended February
1, 1997.
ITEM 6. SELECTED FINANCIAL DATA
The information required is incorporated by reference from page 8 of the
Company's 1996 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required is incorporated by reference from pages 9 through
11 of the Company's 1996 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required is incorporated by reference from pages 12 through
21 of the Company's 1996 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
6
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the Directors of the Registrant is
incorporated by reference from the definitive Proxy Statement for the
Registrant's 1997 Annual Meeting of Stockholders. The information as to the
Executive Officers of the Registrant is included in Part I, Item 1a, hereof
under the caption "Executive Officers of the Registrant".
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 from the definitive Proxy
Statement for the Registrant's 1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated by reference from the definitive
Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required is incorporated by reference from the definitive
Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is incorporated by reference from the definitive
Proxy Statement for the Registrant's 1997 Annual Meeting of Stockholders.
7
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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 and Supplementary Data of the
Registrant and Independent Auditors' Report on such Financial Statements
are incorporated by reference from the Company's 1996 Annual Report to
Stockholders, in Part II, Item 8:
Statements of Earnings for fiscal years 1996, 1995, and 1994
Balance Sheets at February 1, 1997 and February 3, 1996
Statements of Cash Flows for fiscal years 1996, 1995, and 1994
Statements of Stockholders' Equity for fiscal years 1996, 1995, and 1994
Notes to Financial Statements, including supplementary data entitled
"Quarterly Financial Information (unaudited)"
Independent Auditors' Report dated March 11, 1997
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
incorporated by reference from pages 10 through 12 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 1996.
8
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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 18, 1997 NATURAL WONDERS, INC.
(Registrant)
By: /s/ MICHAEL J. WAIDE
-----------------------------------------
Michael J. Waide,
SENIOR VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER AND SECRETARY
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.
SIGNATURE TITLE
- ------------------------------------ ------------------------------------
/s/ PEARSON C. CUMMIN III
- ------------------------------------ Chairman of the Board
(Pearson C. Cummin III)
/s/ KATHLEEN M. CHATFIELD Chief Executive Officer, President
- ------------------------------------ and Director (Principal Executive
(Kathleen M. Chatfield) Officer)
Senior Vice President, Finance,
/s/ MICHAEL J. WAIDE Chief Financial Officer, and
- ------------------------------------ Secretary (Principal Accounting
(Michael J. Waide) and Financial Officer)
/s/ PETER G. HANELT
- ------------------------------------ Director
(Peter G. Hanelt)
/s/ PETER L. HARRIS
- ------------------------------------ Director
(Peter L. Harris)
/s/ JULIUS JENSEN III
- ------------------------------------ Director
(Julius Jensen III)
Date: April 18, 1997
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INDEX TO EXHIBITS
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<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
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<C> <S> <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.
10.4 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").
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.
</TABLE>
10
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<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
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<C> <S> <C>
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.
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 1995 Form 10-K.
10.24.1 Amendment to Business Loan Agreement, dated February 28, 1997 between the Company and Bank
of America, National Trust and Savings Association.
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.
10.26* Employment Agreement entered into on September 26, 1996 between the Company and Michael
Sontag.
11.1 Computation of Per Share Earnings.
13.1 1996 Annual Report to Stockholders.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule
</TABLE>
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* Plan or agreement pursuant to which the Company's officers or directors have
received compensation.
11
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Exhibit 10.24.1
[LOGO] BANK OF AMERICA AMENDMENT TO DOCUMENTS
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AMENDMENT NO. 1 TO BUSINESS LOAN AGREEMENT
This Amendment No. 1 (the "Amendment") dated as of February 28, 1997, is
between Bank of America National Trust and Savings Association (the "Bank") and
Natural Wonders, Inc. (the "Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of March 28, 1996 (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in this Amendment
shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 Paragraph 1.2 is amended to change the date "July 1, 1997" to
"June 1, 1998".
2.2 The first sentence of Paragraph 10.7 is amended in its entirety as
follows:
Not to spend or incur obligations (including the total amount of any
capital leases) for more than Eight Million Dollars ($8,000,000) in
any single fiscal year to acquire fixed or capital assets.
2.3 Paragraph 10.8 is amended and shall read as follows in its entirety:
10.8 DIVIDENDS. Not to declare or pay any dividends on any of
its shares except dividends payable in capital stock of the
Borrower, and not to purchase, redeem or otherwise acquire for
value any of its shares in an amount exceeding Two Million
Dollars ($2,000,000) in any single fiscal year of the Borrower,
and not to create any sinking fund in relation thereto.
2.4 Paragraph 10.10 is amended to change the date "December 1, 1996"
to "December 1, 1997" and to change the date "January 31, 1997"
to "January 31, 1998".
2.5 Paragraph 10.20(e) is amended and shall read as follows in its
entirety:
(e) acquire or purchase a business or its assets. Provided,
however, that the Borrower may acquire certain assets of What A
World!, Inc. for a consideration not greater than Seven Hundred
Fifty Thousand Dollars ($750,000). It is further provided that
the Borrower shall not assume any of the liabilities of What A
World!, Inc. except for current stores leases, which shall be
paid current upon the date the Borrower assumes such leases.
2.6 New Paragraphs 10.21 and 10.22 are added and shall read as follows
in their entirety:
10.21 PROFITABILITY. To achieve as of the end of the quarterly
accounting period ending January 31, 1998, a positive net income
before taxes and extraordinary items at least equal to Thirteen
Million Seven Hundred Fifty Thousand Dollars ($13,750,000).
10.22 MAXIMUM LOSS. Not to achieve any loss greater than the
amounts indicated for each quarterly accounting period specified
below:
Period Maximum Amount of Loss
------ ----------------------
On May 3, 1997 [$ 4,000,000]
On August 2, 1997 [$ 2,500,000]
On November 1, 1997 [$ 3,500,000]
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AmendL (10/92) -1- 012325-T2010
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3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the
terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION NATURAL WONDERS, INC.
X /s/ Chris P. Giannotti X /s/ Michael J. Waide
------------------------------------- ------------------------------
BY: CHRIS P. GIANNOTTI, BY: Michael J. Waide
VICE PRESIDENT Senior Vice President,
Finance
Chief Financial Officer
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AmendL (10/92) -2- 012325-T2010
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EXHIBIT 10.26
NATURAL WONDERS, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into by and between Natural
Wonders, Inc. (the "Company") and Michael Sontag as of September 23, 1996.
1. POSITION AND DUTIES: Michael Sontag shall be employed by the Company as its
Sr. VP, GMM reporting to Kathie Chatfield, President, CEO , effective on October
14, 1996 (the "Commencement Date").
As Sr. VP, GMM, Michael Sontag agrees to devote his full business time, energy
and skill to his duties at the Company. These duties shall include, but not be
limited to, any duties consistent with his position which may be assigned to
Michael Sontag from time to time by the President, CEO.
2. TERM OF EMPLOYMENT: Michael Sontag's employment with the Company pursuant to
this Agreement is for no specified term, and may be terminated by Michael
Sontag, or the Company at any time with or without cause, upon the termination
of Mr. Michael Sontag employment, neither he nor the Company shall have any
further obligation or liability to the other, except as set forth in paragraphs
4, 5, 6 and 7 below.
3. COMPENSATION: Michael Sontag shall be compensated by the company for his
services as follows:
(a) SALARY: Michael Sontag shall be paid a monthly salary of $20,833.33
($250,000 on an annualized basis), subject to applicable withholding, in
accordance with the Company's normal payroll procedures. Such salary shall be
reviewed annually and may be increased as determined appropriate by the
President, CEO and Board of Directors. The first annual review shall occur on
February 2, 1997, and Michael Sontag will then be paid a monthly salary of
$22,916.67 ($275,000. on an annnualized basis).
(b) BENEFITS: Michael Sontag shall have the right, on the same basis as
other members of management of the Company, to participate in and to receive
benefits under any of the Company's employee benefits plans as offered from time
to time, including the medical, dental, and disability group insurance plans.
Michael Sontag shall also be entitled to participate in the 401(k) Plan
maintained by the Company in accordance with its terms. In addition, Michael
Sontag shall be entitled to the benefits afforded to other members of management
under the Company's vacation, holiday and business expense reimbursement
policies.
(c) CAR ALLOWANCE: Michael Sontag will receive a monthly car allowance of
$600.00, payable the first paycheck of every fiscal month, in accordance with
current company practice.
(d) STOCK OPTIONS: Subject to the Board of Directors' approval, Michael
Sontag will be granted 75,000 shares of restricted stock options subject to the
terms and conditions of the Employee Stock Option Program and agreement,
including a 5 year vesting period. 75,000 shares of options have been reserved
by the Board in anticipation of Mr. Sontag's hire and will be approved at the
next Board meeting scheduled October 30, 1996. Price will be the average of high
and low market transactions on the date he commences employment.
(e) PERFORMANCE BONUS: Michael Sontag will be able to participate in the
Natural Wonders 1996 Executive Bonus Program (the "Program"), payment timing in
accordance with the terms and conditions of the Program for a PRO RATA
GUARANTEED (1996 only) Performance Bonus of $30,000 (thirty thousand dollars).
Target award for the VP, GMM for Fiscal 1996 was 50% of base. Target award for
the VP, GMM for Fiscal 1997 will be between 55-60% of base. In the event that
other executive bonus plans are
<PAGE>
adopted in the future, if management is eligible for bonus, Michael Sontag
shall be eligible to participate in such programs. The creation of any
subsequent Executive Bonus Programs are entirely within the discretion of the
Company, and, as such, participation in the 1996 Executive Bonus Program
shall not be interpreted or construed to imply a commitment or obligation on
the part of the Company to continue such programs in the future.
4. RELOCATION EXPENSES: Relocation expenses will be paid according to
attachment A.
5. BENEFITS UPON VOLUNTARY TERMINATION: In the event that Michael Sontag
voluntarily resigns from his employment with the Company, or in the event that
Michael Sontag 's employment terminates as a result of his death or disability,
Michael Sontag shall be entitled to no compensation or benefits from the Company
other than those earned under paragraph 3 above through the date of his
termination.
6. BENEFITS UPON OTHER TERMINATION: Michael Sontag agrees that his employment
may be terminated by the Company at any time, with or without cause. In the
event of the termination of Michael Sontag's employment by the Company for the
reasons set forth below, he shall be entitled to the following:
(a) TERMINATION FOR CAUSE: If Michael Sontag's employment is terminated
by the Company for cause as defined below, Michael Sontag shall be entitled to
no compensation or benefits from the Company other than those earned under
paragraph 3 through the date of his termination.
For purpose of this Agreement, a termination "for cause" occurs if Michael
Sontag is terminated for any of the following reasons involving willful and
intentional conduct:
(i) theft, dishonesty, or falsification of any employment or Company
record;
(ii) improper disclosure of the Company's confidential or proprietary
information;
(iii) any intentional act by Michael Sontag which has a material
detrimental effect on the Company's reputation or business; or
(iv) any material breach of this Agreement, which breach is not cured
within thirty (30) days following written notice of such breach from the
Company.
(b) TERMINATION FOR OTHER THAN CAUSE: If Michael Sontag's employment is
terminated by the Company for any other than cause, Michael Sontag shall be
entitled to the following separation benefits:
(i) In the event that Michael Sontag is terminated, continuation of
Michael Sontag's salary for one (1) year.
(ii) pro rata payment of any Performance Bonus that may become earned and
payable to Michael Sontag, if and only if he has been employed through the last
day of the third fiscal quarter of a year in which bonus is earned. Payment,
and timing of payment will be according to the terms and conditions of the Bonus
Plan.
(iii) the company will pay Michael Sontag's COBRA for the salary
continuation period described in subsection (i) above.
7. EMPLOYMENT AGREEMENT REGARDING CONFIDENTIALITY: Michael Sontag agrees to
execute and abide by the terms and conditions of the Company's employee
Employment Agreement Regarding Confidentiality.
8. DISPUTE RESOLUTION: In the event of any dispute or claim relating to or
arising out of this employment relationship, this Agreement, or the entering
into or termination of this employment relationship (including, but not limited
to, any tort, contract or discrimination claims), all such disputes shall be
fully
<PAGE>
and finally resolved by binding arbitration conducted by the American
Arbitration Association in Alameda County, California; provided, however, that
this arbitration provision shall not apply to any disputes or claims relating to
or arising out of the misuse or misappropriation of the Company's trade secrets
or proprietary information.
9. SUCCESSORS AND ASSIGNS: This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. In view of the
personal nature of the services to be performed under this Agreement by Michael
Sontag he shall not have the right to assign or transfer any of his rights,
obligations or benefits under this Agreement, except as otherwise noted herein.
10. ENTIRE AGREEMENT: This Agreement constitutes the entire employment
agreement between Michael Sontag and the Company regarding the terms and
conditions of his employment, with the exception of (i) the Employment Agreement
Regarding Confidentiality described in paragraph 7 and (ii) any stock option
agreement between Michael Sontag and the Company. This Agreement supersedes all
prior negotiations, representations or agreements between Michael Sontag and the
Company, whether written or oral, concerning Michael Sontag's employment by the
Company.
11. NO REPRESENTATIONS: Michael Sontag acknowledges that he is not relying, and
has not relied, on any promise, representation or statement made by or on behalf
of the Company which is not set forth in this Agreement.
<PAGE>
12. VALIDITY: If any one or more of the provisions (or any part thereof) of
this Agreement shall be held invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions (or any
part thereof) shall not in any way be affected or impaired thereby.
13. MODIFICATION: This Agreement may only be modified or amended by a
supplemental written agreement signed by Michael Sontag and the Company.
14. INTERPRETATION: This Agreement shall be interpreted in accordance with and
governed by the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year written below.
NATURAL WONDERS, INC.
Date: 9/26/96 By /s/ Kathleen M. Chatfield
----------------------------- --------------------------
Its
-------------------------
Date: 9/26/96 /s/ Michael Sontag
----------------------------- ----------------------------
Michael Sontag
<PAGE>
NATURAL WONDERS, INC.
EMPLOYMENT AGREEMENT
Attachment A
Relocation assistance for Michael Sontag is as follows:
I. RELOCATION EXPENSES
A. Reimbursement for physical relocation of normal household goods and 2 cars.
B. Payment of ONE TIME non recurring closing costs, including credit report,
appraisal, notary fees, document charges on a new home up to $5,000. These
expenses must be incurred within 12 months of date of hire.
C. Reimbursement for real estate commission on existing home up to 6% of
selling price not to exceed $18,000. These expenses must be incurred
within 12 months of date of hire.
D. Temporary housing not to exceed 6 months, trips to New Hampshire to visit
with family and to deal with shut down of New Hampshire address, and
airfare for the family's move to New Hampshire.
E. In the event that Michael Sontag sells his house in New Hampshire for a
price less than the price he originally paid for the house, the Company
shall reimburse Michael Sontag for that difference up to an amount of
$20,000; provided, that such sale is fully consummated within a period of
(12) months from the execution of this Agreement.
The Company will gross up your salary to minimize the tax implications on
reimbursement of any of the above expenses which are not deductible. The gross
up will be paid at the time that applicable tax returns are filed, at the
applicable tax rate, subject to your providing proper accounting documentation
of such expenses as determined by the Company.
II. VOLUNTARY TERMINATION
If you should voluntarily terminate employment with the Company before 1 year
from date of employment you will be responsible to reimburse the Company for a
pro - rata portion of the total Relocation Expenses as follows:
- -------------------------------------------------------------------------------
LENGTH OF EMPLOYMENT WITH NATURAL WONDERS PERCENTAGE OF TOTAL RELOCATION
EXPENSES DUE COMPANY
- -------------------------------------------------------------------------------
Less than 6 months 100%
6 months or more - Less than 1 year 50%
NATURAL WONDERS, INC.
Date: 9/26/96 By /s/ Kathleen M. Chatfield
----------------------------- --------------------------
Its
-------------------------
I agree to and accept employment with Natural Wonders, Inc. on the terms and
conditions set forth in this Agreement.
Date 9/26/96 /s/ Michael Sontag
----------------------------- ----------------------------
Michael Sontag
<PAGE>
EXHIBIT 11.1
NATURAL WONDERS, INC.
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
FISCAL YEAR
--------------------------
1996 1995 1994
--------------------------
Net earnings $2,901 $1,810 $1,765
------ ------ ------
------ ------ ------
Weighted average common shares
outstanding 7,862 7,725 7,458
Common share equivalents:
Stock options and warrants 224 80 338
------ ------ ------
Shares used in computing
per share amounts 8,086 7,805 7,796
------ ------ ------
------ ------ ------
Per share earnings $ .36 $ .23 $ .23
------ ------ ------
------ ------ ------
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.
<PAGE>
EXHIBIT 13.1
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 1996 and 1995,
is as follows:
<TABLE>
<CAPTION>
1996 High Low
----- -----
<S> <C> <C>
First Quarter 5 1/8 2 1/4
Second Quarter 7 1/4 4 5/8
Third Quarter 6 7/8 4 5/8
Fourth Quarter 5 7/8 3 7/8
<CAPTION>
1995 High Low
----- -----
<S> <C> <C>
First Quarter 4 1/8 2 1/2
Second Quarter 3 3/4 2 5/8
Third Quarter 5 1/2 3
Fourth Quarter 4 3/8 2 1/8
</TABLE>
As of March 31, 1997, there were approximately 315 stockholders of record
and 2,000 beneficial stockholders. The Company has never paid cash dividends on
its capital stock and does not anticipate paying cash dividends in the
foreseeable future.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except operating data and earnings per share)
SUMMARY OF OPERATIONS DATA:
Net sales $ 138,773 $ 138,080 $ 136,652 $ 119,591 $ 87,646
Cost of goods sold and store
occupancy expenses 92,489 93,529 92,304 76,981 54,183
---------- ---------- ---------- ---------- ----------
Gross margin 46,284 44,551 44,348 42,610 33,463
Selling, general and administrative
expenses 40,894 40,640 38,283 31,636 23,319
Provision for store closure 465
Distribution center relocation 749
Loss from earthquake 753
---------- ---------- ---------- ---------- ----------
Operating income 5,390 3,911 5,600 9,472 10,144
Net interest and other expenses 791 944 2,707 1,731 973
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 4,599 2,967 2,893 7,741 9,171
Income taxes 1,698 1,157 1,128 2,829 3,577
---------- ---------- ---------- ---------- ----------
Net earnings $ 2,901 $ 1,810 $ 1,765 $ 4,912 $ 5,594
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net earnings per share $ 0.36 $ 0.23 $ 0.23 $ 0.63 $ 0.75
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Shares used in computing per share 8,086 7,805 7,796 7,843 7,448
amounts
OPERATING DATA:
Number of stores open at end of
period 151 146 145 123 88
Average net sales per selling square
foot (52 weeks) $ 505 $ 506 $ 537 $ 580 $ 623
Average net sales per store (52 weeks) $ 932,000 $ 936,000 $ 993,000 $1,069,000 $1,106,000
Comparable store net sales increase
(decrease) (0.6)% (5.7)% (5.0)% (4.0)% 1.5%
BALANCE SHEET DATA (at fiscal
year end):
Working capital $ 33,495 $ 31,252 $ 30,630 $ 26,875 $ 23,898
Total assets 78,344 77,964 82,440 74,979 59,402
Capital lease obligations 1,327 3,257 5,208 4,496 5,609
Long-term debt 2,050 3,715 7,509 3,456
Stockholders' equity 54,156 50,658 48,659 46,577 39,638
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year
-----------------------
(Percentage of net sales) 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold and store occupancy
expenses 66.6 67.7 67.5
Gross margin 33.4 32.3 32.5
Selling, general and administrative
expenses 29.5 29.4 28.0
Provision for store closure 0.3
Operating income 3.9 2.8 4.1
Net interest and other expenses 0.6 0.7 2.0
Income taxes 1.2 0.8 0.8
Net earnings 2.1% 1.3% 1.3%
Number of stores open at end of period 151 146 145
</TABLE>
RESULTS OF OPERATIONS
GENERAL
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years 1996, 1995 and 1994 ended February 1, 1997, February 3, 1996, and
January 28, 1995, respectively. Fiscal 1995 was 53 weeks, and fiscal 1996 and
1994 were 52 weeks. All references to years, unless otherwise specified, are
intended to refer to the Company's fiscal year.
At the end of 1996, the Company operated 151 stores in 36 states compared
to 146 stores in 36 states at the end of 1995 and 145 stores in 36 states at the
end of 1994. In 1996, 5 new stores were opened, in 1995, 3 new stores were
opened and 2 were closed, and in 1994, 22 new stores were opened. In March
1997, the Company entered into an agreement to acquire 12 stores through an
asset purchase agreement, and intends to open approximately 10 additional stores
in 1997.
SALES
Sales increased 1.5% to $138,773,000 in 1996 from $136,732,000 in 1995 for
the comparable 52 week period in 1995, (excluding the first week in fiscal 1995
which was a 53 week year). Including the 53rd week in 1995, sales increased
0.5% in 1996 from $138,080,000 in 1995.
The increase for the comparable 52 week periods of $2,041,000 was due
primarily to new stores (net of two stores closed), and one temporary store,
partially offset by a slight decrease in comparable store sales. The new stores
(net of two stores closed) and temporary store opened in 1996 accounted for
$1,919,000 of the increase, the full year of sales from new stores opened in
1995 accounted for $958,000 of the increase, and the comparable store sales
partially offset the increases by $836,000.
<PAGE>
Comparable store sales in 1996 decreased 0.6% as compared to 1995 based on
a 52 week year. Although comparable store sales slightly decreased, many of the
Company's geographic areas experienced positive comparable store sales,
primarily in the western states. Also, in 1996, there were five fewer shopping
days between Thanksgiving and Christmas. This period is especially critical for
a seasonal gift retailer such as the Company. The average dollar amount per
sales ticket increased modestly in 1996.
Sales increased 1.0% to $138,080,000 in 1995 from $136,652,000 in 1994.
The increase of $1,428,000 was due primarily to new stores and the extra (53rd)
week in 1995, partially offset by a decrease in comparable store sales. The new
stores opened in 1995 accounted for $1,907,000 of the increase, the full year of
sales from new stores opened in 1994 accounted for $5,049,000 of the increase,
the 53rd week accounted for $1,463,000 of the increase and the comparable store
sales offset the increases by $6,991,000.
Comparable store sales in 1995 decreased 5.7% compared to 1994, based on a
52 week year. In 1995, the number of customer transactions decreased and the
average dollar amount per sales ticket decreased in comparison to 1994. The
decrease in comparable store sales occurred in all geographic regions for the 52
week period, however in the last two fiscal quarters, Northern California
experienced positive comparable store 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 66.6% in 1996 from 67.7% in 1995. The
decrease was primarily due to higher product mark-up attributable to both mix of
product sold and lower costs.
In 1995, cost of goods sold and store occupancy expenses increased as a
percentage of sales to 67.7% in 1995 from 67.5% in 1994. This increase was
primarily due to store occupancy expenses which increased as a percentage of
sales due to the decrease in comparable store sales and the company incurring a
full year of costs for the stores opened in 1994. The 1994 expenses included a
one-time charge for future markdowns as a result of a refocusing of the
Company's product assortment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses, which are primarily
non-occupancy store expenses and corporate overhead, remained relatively flat as
a percentage of sales at 29.5% in 1996 compared to 29.4% in 1995. Corporate
overhead slightly increased as a percentage of sales due to charges for
incentive compensation, which are based on achievement of certain earnings
targets. Excluding these charges, SG&A would have slightly decreased as a
percentage of sales.
In 1995, SG&A expenses increased as a percentage of sales to 29.4% in 1995
from 28.0% in 1994. Non-occupancy store expenses, primarily payroll and related
benefits and depreciation expense increased 1.3% as a percentage of sales as a
result of a decrease in comparable store sales and the Company's incurring a
full year of costs for the stores opened in 1994.
OPERATING INCOME
As a result of the foregoing, operating income increased to $5,390,000 or
3.9% of sales in 1996 from $3,911,000 or 2.8% of sales in 1995 and decreased
from $5,600,000 or 4.1% of sales in 1994.
NET INTEREST AND OTHER EXPENSES
Net interest and other expenses decreased to $791,000 or 0.6% of sales in
1996 from $944,000 or 0.7% of sales in 1995 and $2,707,000 or 2.0% of sales in
1994. The decrease from 1995 was primarily due to a decline in interest expense
as a result of paying down debt. The decrease from 1994 was primarily due to
other expenses which include expenses associated with equipment lease financing.
<PAGE>
INCOME TAXES
The effective tax rate in 1996 was 36.9% compared to 39.0% in 1995 and
1994. The decline is primarily due to income tax credits and other items. No
valuation allowance was necessary to offset the deferred tax asset at the end of
1996, 1995 or 1994, due to the Company's history of earnings.
NET EARNINGS
As a result of the foregoing, net earnings increased to $2,901,000 or 2.1%
of sales in 1996 from $1,810,000 or 1.3% of sales in 1995 (which included the
favorable impact of the 53rd week), and increased from $1,765,000 or 1.3% of
sales in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of capital in recent years has been net cash
flow from operations. Seasonal working capital requirements have been met
primarily through short-term bank borrowing.
During 1996, the Company's financial position and liquidity improved. Cash
and investments at year end were $25,567,000, an increase of $1,120,000 in
comparison to 1995. Working capital increased $2,243,000 to $33,495,000 at year
end, and cash and investments, net of debt and capital lease obligations,
increased $5,445,000 from 1995.
The increase in cash and investments was primarily from operations,
including net earnings plus depreciation of $8,948,000. Cash was used during
the year for the pay down of debt and capital lease obligations, and capital
expenditures. Capital expenditures were primarily for new stores, existing
stores and management information systems.
The Company's 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 March 1997, the
Company acquired 12 stores through an asset purchase agreement for a price of
$500,000 plus up to $100,000 of reasonable legal costs and expenses. In
addition to this, the Company plans to open approximately 10 additional stores
in 1997. During 1997, the Company anticipates that cash will primarily be used
for capital expenditures and merchandise inventory for new stores, capital
expenditures for a new computer system including software and hardware,
repayment of debt, fixtures for existing stores, 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 June 1, 1998.
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 agreement contains
restrictive covenants which include achieving quarterly earnings/loss targets
and maintaining certain financial ratios and requiring bank consent for the
payment of dividends.
The Company believes that current cash and short-term investments together
with its cash flow from operations, term debt and funds available under its
credit facility will be sufficient to fund the Company's operations for the next
12 months.
<PAGE>
INFLATION AND SEASONALITY
The Company does not believe that its operations have been materially
affected by inflation during the three 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 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, 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.
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 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.
<PAGE>
NATURAL WONDERS, INC.
STATEMENTS OF EARNINGS
(In thousands except earnings per share)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 138,773 $ 138,080 $ 136,652
Cost of goods sold and store occupancy expenses 92,489 93,529 92,304
---------- ---------- ----------
Gross margin 46,284 44,551 44,348
Selling, general and administrative expenses 40,894 40,640 38,283
Provision for store closure 465
---------- ---------- ----------
Operating income 5,390 3,911 5,600
Interest expense 951 1,445 1,500
Other expenses 550 553 1,957
Interest and other income (710) (1,054) (750)
---------- ---------- ----------
Earnings before income taxes 4,599 2,967 2,893
Income taxes 1,698 1,157 1,128
---------- ---------- ----------
Net earnings $ 2,901 $ 1,810 $ 1,765
---------- ---------- ----------
---------- ---------- ----------
Net earnings per share $ 0.36 $ 0.23 $ 0.23
---------- ---------- ----------
---------- ---------- ----------
Shares used in computing per share amounts 8,086 7,805 7,796
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to financial statements
<PAGE>
NATURAL WONDERS, INC.
BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 7,667 $ 6,352
Short-term investments 17,900 18,095
Merchandise inventories 20,529 19,216
Prepaid expenses and other current assets 2,630 2,638
Deferred taxes 1,557 1,331
-------- --------
Total current assets 50,283 47,632
Property and Equipment:
Leasehold improvements 25,490 24,171
Property and equipment under capital lease 13,181 17,054
Furniture, fixtures and equipment 13,937 8,008
-------- --------
52,608 49,233
Less accumulated depreciation and
amortization (26,329) (20,282)
-------- --------
26,279 28,951
Deferred Taxes 1,635 1,206
Other Assets 147 175
-------- --------
Total Assets $ 78,344 $ 77,964
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 5,175 $ 5,974
Accrued compensation and related costs 2,523 2,363
Accrued liabilities 2,798 2,291
Income taxes payable 2,044 774
Current portion of capital lease
obligations 1,789 2,077
Current portion of long-term debt 2,459 2,901
-------- --------
Total current liabilities 16,788 16,380
Capital Lease Obligations 1,327 3,257
Long-term Debt 2,050 3,715
Deferred Rents 4,023 3,954
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.0001;
authorized 17,000,000 shares; issued
and outstanding 7,986,846 and
7,787,860 shares 1 1
Capital in excess of par value 34,250 33,653
Retained earnings 19,905 17,004
-------- --------
Total stockholders' equity 54,156 50,658
-------- --------
Total Liabilities and Stockholders' Equity $ 78,344 $ 77,964
-------- --------
-------- --------
</TABLE>
See notes to financial statements.
<PAGE>
NATURAL WONDERS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 2,901 $ 1,810 $ 1,765
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 6,047 6,008 5,256
Loss on disposal and write-down of assets 15 288
Changes in operating assets and liabilities:
Merchandise inventories (1,313) 1,843 (2,742)
Prepaid expenses and other assets 36 (1,374) 95
Deferred taxes (655) 570 (1,649)
Trade accounts payable (799) 959 (2,249)
Accrued compensation and related costs 160 450 518
Accrued liabilities 507 (431) 281
Income taxes payable 1,270 (1,766) (396)
Deferred rents 69 355 877
Tax benefit from exercise of stock options
and warrants 53 6 82
-------- -------- --------
Net cash provided by operating activities 8,276 8,445 2,126
Cash Flows From Financing Activities:
Proceeds from issuance of debt 7,817
Proceeds from sale/leaseback of property and
equipment 2,275
Principal payments on capital lease
obligations (2,218) (2,333) (2,398)
Principal payments on long-term debt (2,107) (3,709) (1,778)
Exercise of stock options and warrants 480 125 75
Net proceeds from sale of common stock 64 58 160
-------- -------- --------
Net cash provided by (used in) financing
activities (3,781) (5,859) 6,151
Cash Flows From Investing Activities:
Purchases of short-term investments (31,350) (29,763) (30,420)
Sales of short-term investments 31,545 28,968 32,270
Purchases of property and equipment (3,375) (1,829) (8,140)
-------- -------- --------
Net cash used in investing activities (3,180) (2,624) (6,290)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents 1,315 (38) 1,987
Cash and Cash Equivalents:
Beginning of year 6,352 6,390 4,403
-------- -------- --------
End of year $ 7,667 $ 6,352 $ 6,390
-------- -------- --------
-------- -------- --------
Supplemental Information
Cash paid during year:
Interest $ 952 $ 1,521 $ 1,431
Income taxes $ 1,027 $ 2,299 $ 3,816
Non-cash financing and investing transactions:
Equipment acquired through capital leases $ 3,179
</TABLE>
See notes to financial statements.
<PAGE>
NATURAL WONDERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share data)
<TABLE>
<CAPTION>
Capital in Total
Common Stock Excess of Retained Stockholders'
Shares Amount Par Value Earnings Equity
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 29, 1994 7,420,795 $1 $33,147 $13,429 $46,577
Exercise of stock options 59,766 75 75
Tax benefit from exercise
of stock options 82 82
Employee stock purchase
plan 42,898 160 160
Net earnings 1,765 1,765
--------- -- ------- ------- -------
Balance, January 28, 1995 7,523,459 1 33,464 15,194 48,659
Exercise of stock options 240,667 125 125
Tax benefit from exercise
of stock options 6 6
Employee stock purchase
plan 23,734 58 58
Net earnings 1,810 1,810
--------- -- ------- ------- -------
Balance, February 3, 1996 7,787,860 1 33,653 17,004 50,658
Exercise of stock options
and warrants 177,997 480 480
Tax benefit from exercise
of stock options and
warrants 53 53
Employee stock purchase
plan 20,989 64 64
Net earnings 2,901 2,901
--------- -- ------- ------- -------
Balance, February 1, 1997 7,986,846 $1 $34,250 $19,905 $54,156
--------- -- ------- ------- -------
--------- -- ------- ------- -------
</TABLE>
See notes to financial statements.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS Natural Wonders (the Company) is a specialty retailer which operates
151 stores, primarily in mall locations, in 36 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 1996, 1995 and 1994 ended February 1, 1997, February
3, 1996, and January 28, 1995, respectively. Fiscal 1995 was 53 weeks, and
fiscal 1996 and 1994 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.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investment
instruments with a maturity of three months or less at date of purchase to be
cash equivalents.
SHORT-TERM INVESTMENTS Short-term investments consist of highly liquid
investments with a maturity greater than three months at date of purchase. The
Company's short-term investments consist primarily of debt securities 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.
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.
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 5 to 11 years.
STORE PRE-OPENING COSTS Store pre-opening costs are expensed in the fiscal year
of the store opening.
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.
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.
NET EARNINGS PER SHARE Net earnings per share is based on the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period.
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.
<PAGE>
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. No impairment provision has been required to date.
EARNINGS PER SHARE The Company is required to adopt Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), in 1997. SFAS
128 requires presentation of basic and diluted net earnings per share amounts on
the face of the income statement. The Company does not expect such adoption to
have a significant impact on its financial statement.
<PAGE>
NOTE 2: BANK FINANCING AND LONG-TERM DEBT
BANK FINANCING
The Company has a credit facility with a commercial bank, which includes a
revolving line of credit for $12,000,000 and certain long-term debt. Commercial
and standby letters of credit are available within the line up to $4,500,000 and
$500,000, respectively. In February 1997, the Company renewed its credit
facility agreement through June 1, 1998. 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 agreement contains restrictive covenants
which include achieving quarterly earnings/loss targets and maintaining certain
financial ratios and requiring bank consent for the payment of dividends. The
Company was in compliance with its covenants as of February 1, 1997.
The total amount borrowed under the line of credit in 1996 was $4,500,000 which
was repaid by fiscal year end. Interest was payable at the bank's quoted rate,
(6.9%), or the bank's reference rate, (8.25%). Outstanding commercial and
standby letters of credit as of February 1, 1997 totaled $794,363.
In 1995, under the credit facility agreement in effect at that time, the total
amount borrowed under the line of credit was $1,000,000 which was repaid by
fiscal year end. Interest was payable at the bank's reference rate (8.75%).
Outstanding commercial and standby letters of credit as of February 3,1996
totaled $126,234. This previous credit facility agreement included a cash
restriction of $1,067,000 during fiscal 1995, which was released with the new
facility agreement in March 1996.
The credit facility agreement also includes long-term debt borrowed under
previous years' credit facility agreements. The Company has the option of
choosing interest payable at a rate based on LIBOR plus 2.0%, the bank's
reference rate plus 0.5% or a rate as quoted by the bank. The same restrictive
covenants, as indicated above, apply.
LONG-TERM DEBT
Long-term debt consisted of the following: (in thousands)
<TABLE>
<CAPTION>
Fiscal Year
1996 1995
------ ------
<S> <C> <C>
Term bank loan, due in semi-annual installments of $500
through February 1997, interest at 7.4% as of February 1, 1997 $ 500 $1,000
Term bank loan, due in semi-annual installments of $349
through February 1999, interest at 7.4% as of February 1, 1997 1,724 2,069
Notes due in monthly installments of $129 through December
2000, with interest at 8.7% to 11.0% 2,285 3,547
------ ------
Total long-term debt, including current portion 4,509 6,616
Less current portion 2,459 2,901
------ ------
Total long-term debt $2,050 $3,715
------ ------
------ ------
</TABLE>
Maturities of long-term debt outstanding as of February 1, 1997, are as
follows (in thousands): 1997 - $2,459; 1998 - $1,762; 1999 - $276; 2000 - $12.
<PAGE>
NOTE 3. LEASES
The Company leases its office, distribution and retail facilities under
operating leases expiring at dates from 1997 to 2007. Certain of the leases
include renewal provisions at the Company's option.
The Company leases fixtures and equipment under capital equipment leases.
Interest rates range from approximately 7.5% to 15.9%. Some of the leases are
subject to fair market value buyout at the end of the initial lease term.
The aggregate minimum noncancellable lease payments under leases in effect at
February 1, 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal year: (in thousands) Capital Operating
Lease Lease
------- ---------
<S> <C> <C>
1997 $2,018 $12,896
1998 1,000 12,898
1999 433 12,418
2000 11,384
2001 10,442
Thereafter 27,180
------ -------
Total minimum lease commitments 3,451 $87,218
-------
-------
Less amounts representing interest 335
------
Present value of capital lease
obligation 3,116
Less current portion 1,789
------
Long-term capital lease
obligations $1,327
------
------
</TABLE>
All of the leases for the Company's retail stores contain clauses which provide
for additional rent if sales exceed predetermined levels. During 1996, 1995 and
1994, total rent expense including minimum and deferred amounts for all
operating leases was $12,389,000, $12,168,000 and $11,260,000 and percentage
rent was $101,000, $98,000 and $183,000, respectively.
Accumulated amortization of property under capital leases as of February 1, 1997
and February 3, 1996 was $8,418,000 and $9,163,000, respectively.
<PAGE>
NOTE 4. STOCKHOLDER'S EQUITY AND BENEFIT PLAN
PREFERRED STOCK
The Company has 1,000,000 shares of preferred stock authorized, with a par
value of $.0001 per share. No preferred stock has been issued or outstanding
during the past three years.
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.
Stock options generally are granted at prices equal to the fair market value
on the date of grant, become vested over a period of three to five years and
expire in ten years.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") 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 to employees 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,
64.5% in 1996 and in 1995; risk-free interest rates, 5.9% in 1996 and 6.7% in
1995; 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 1996 and 1995
awards had been amortized to expense over the vesting period of the awards,
pro forma net earnings and net earnings per share would have been $2.7
million ($0.35 per share) in fiscal 1996 and $1.8 million ($0.23 per share)
in fiscal 1995. However, the impact of outstanding non-vested stock options
granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the fiscal 1996 and fiscal 1995 pro forma adjustments are not
indicative of future period pro forma adjustments, when the calculation will
apply to all future applicable stock options.
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted
Shares Average
Available Shares Exercise
for Grant Granted Price
--------- -------- --------
<S> <C> <C> <C>
Outstanding, January 29, 1994 414,780 727,346 $ 4.69
Granted (131,800) 131,800 4.90
Canceled 66,385 (66,385) 11.80
Exercised (59,766) 1.25
-------- -------- ------
Outstanding, January 28, 1995 (461,305
exercisable at a weighted average price
of $2.65) 349,365 732,995 4.34
Granted (weighted average grant date
fair value $1.91) (224,660) 224,660 3.17
Canceled 126,281 (126,281) 5.63
Exercised (240,667) 0.52
Authorized 300,000
-------- -------- ------
Outstanding, February 3, 1996 (280,007
exercisable at a weighted average
price of $5.54) 550,986 590,707 5.17
Granted (weighted average grant date
fair value $2.13) (415,510) 415,510 3.57
Canceled 109,378 (109,378) 7.53
Exercised (174,155) 2.64
-------- -------- ------
Outstanding, February 1, 1997 (164,412
exercisable at a weighted average price
of $7.33) 244,854 722,684 $ 4.54
-------- -------- ------
-------- -------- ------
</TABLE>
<PAGE>
The following table summarizes additional information about stock options at
February 1, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life (Yrs) Price Exercisable Price
- ---------------- ----------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.31 - $3.00 316,935 8.82 $ 2.56 25,279 $ 2.94
$3.06 - $5.81 287,343 8.78 4.64 53,759 4.30
$6.38 - $9.44 94,406 7.22 8.14 61,373 8.68
$15.25 - $15.25 24,000 6.35 15.25 24,000 15.25
- --------------- ------- ---- ------ ------- ------
$2.31 - $15.25 722,684 8.51 $ 4.54 164,412 $ 7.33
- --------------- ------- ---- ------ ------- ------
- --------------- ------- ---- ------ ------- ------
</TABLE>
STOCK PURCHASE PLAN
The Company's employee stock purchase plan enables eligible employees to
purchase Natural Wonders' common stock at 85% of 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 February 1, 1997, 117,634 shares
have been issued.
WARRANTS
Warrants for the purchase of 3,842 shares of common stock were exercised in
1996 at an exercise price of $4.485 per share. No warrants were exercised
during fiscal 1995 or 1994. As of February 1,1997, no warrants were
outstanding.
BENEFIT PLAN
The Company has available a defined contribution plan. Eligible employees
may contribute 1% to 10% of their compensation and the Company matches 50% up
to $250 per year. Total Company contributions to the plan were approximately
$64,000, $53,000 and $41,000 in 1996, 1995 and 1994, respectively.
<PAGE>
NOTE 5. INCOME TAXES
The provision for income taxes consists of the following:
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
Current:
Federal $1,761 $ 326 $ 2,330
State 592 261 494
------ ------ -------
2,353 587 2,824
Deferred (655) 570 (1,696)
------ ------ -------
Total $1,698 $1,157 $ 1,128
------ ------ -------
------ ------ -------
</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
------------------------------------
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State income taxes net of
federal income tax benefit 6.0 6.4 4.9
Non taxable interest (2.7) (5.4) (4.0)
Other (0.4) 4.0 4.1
----- ----- -----
Effective tax rate 36.9% 39.0% 39.0%
----- ----- -----
----- ----- -----
</TABLE>
The components of the net deferred tax asset at year end are as follows:
(in thousands)
<TABLE>
<CAPTION>
1996 1995
--------------------- --------------------
Current Non-Current Current Non-Current
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Deferred rents $1,687 $1,600
Merchandise inventories $ 652 $ 566
Accrued employee benefits 538 520
Miscellaneous accruals 255 200
Alternative minimum tax credits 151 138
Other 43 176 16 243
------ ------ ------ ------
1,639 1,863 1,440 1,843
------ ------ ------ ------
Deferred tax liabilities:
Depreciation 477
State taxes 228 160
Other 82 109
------ ------ ------ ------
82 228 109 637
------ ------ ------ ------
Net deferred tax asset $1,557 $1,635 $1,331 $1,206
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
No valuation allowance was necessary at February 1, 1997 or February 3, 1996.
<PAGE>
NOTE 6. LITIGATION
In April 1995, a lawsuit between the Company and The Nature Company was
settled. The suit was settled to avoid the burden and expense of further
litigation, although both the Company and The Nature Company denied all
wrong-doing and did not acknowledge any fault or liability. Accordingly, the
Company recorded a charge in the fourth quarter of 1994 of $380,000 which
represented the settlement payment, net of insurance recoveries, and other
incidental costs.
The Company is involved in other litigation incidental to its business.
Management believes that the outcome of such litigation will not have a
material adverse effect upon the Company's financial condition.
NOTE 7. STORE CLOSURE
During the fourth quarter of 1994, the Company recorded a provision of
$465,000 as a result of adopting a formal plan to close one of its stores in
1995. The estimated exit costs related to the closure of the store consisted
primarily of the write-off of store fixed assets, the write-down of store
inventory and payments to cancel lease obligations.
NOTE 8. SUBSEQUENT EVENT
In March 1997, the Company entered into an asset purchase agreement with a 12
store retail chain to acquire inventory and fixtures and to assume certain
retail facility leases. The purchase price is $500,000 plus up to $100,000 of
reasonable legal costs and expenses. The purchase price is contingent upon
shareholder approval by the 12 store chain.
NOTE 9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal years 1996 and 1995 is
as follows:
<TABLE>
<CAPTION>
Fiscal Year 1996 Quarter Ended
- ----------------------------------------------------------------------------------------
May 4, 1996 Aug. 3, 1996 Nov. 2, 1996 Feb. 1, 1997
----------- ------------ ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $21,919 $25,954 $22,896 $68,004
Gross margin 5,793 7,605 6,761 26,125
Net earnings (loss) (2,212) (1,285) (1,920) 8,318
Net earnings (loss) per share $(.28) $(.16) $(.24) $1.02
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1995 Quarter Ended
- --------------------------------------------------------------------------------------------
April 29, 1995 July 29, 1995 Oct. 28, 1995 Feb. 3, 1996
-------------- ------------- ------------- ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $20,825 $25,474 $22,649 $69,132
Gross margin 4,505 7,595 6,298 26,153
Net earnings (loss) (3,154) (1,345) (1,968) 8,277
Net earnings (loss) per share $(.41) $(.17) $(.25) $1.06
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Natural Wonders, Inc.
Fremont, California
We have audited the accompanying balance sheets of Natural Wonders, Inc.
(the Company) as of February 1, 1997 and February 3, 1996 and the related
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended February 1, 1997. 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
February 1, 1997 and February 3, 1996, and the results of its operations and
its cash flows for each of the three years in the period ended February 1,
1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touch, LLP
DELOITTE & TOUCHE LLP
San Francisco, California
March 11, 1997
<PAGE>
EXHIBIT 23.1
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, and 33-62390 of Natural Wonders, Inc. on Form S-8 of
our report dated March 11, 1997, incorporated by reference in this Annual
Report on Form 10-K of Natural Wonders, Inc. for the year ended February 1,
1997.
/s/ DELOITTE & TOUCHE, LLP
Deloitte & Touche, LLP
San Francisco, California
April 18, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<CASH> 7667
<SECURITIES> 17900
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 20529
<CURRENT-ASSETS> 50283
<PP&E> 52608
<DEPRECIATION> 26329
<TOTAL-ASSETS> 78344
<CURRENT-LIABILITIES> 16788
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 54155
<TOTAL-LIABILITY-AND-EQUITY> 78344
<SALES> 138773
<TOTAL-REVENUES> 138773
<CGS> 92489
<TOTAL-COSTS> 92489
<OTHER-EXPENSES> 40894
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 951
<INCOME-PRETAX> 4599
<INCOME-TAX> 1698
<INCOME-CONTINUING> 2901
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2901
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0
</TABLE>
