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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MAY 3, 1997
( ) 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.
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(Exact name of Registrant as specified in its charter)
DELAWARE 77-0141610
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4209 TECHNOLOGY DRIVE, FREMONT, CALIFORNIA 94538
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 510-252-9600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Common stock outstanding as of May 31, 1997: 7,987,846 shares of common stock.
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NATURAL WONDERS, INC.
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INDEX
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Page
Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Operations 3
Quarters ended May 3, 1997 and May 4, 1996
Condensed Balance Sheets 4
May 3, 1997, February 1, 1997 and May 4, 1996
Condensed Statements of Cash Flows 5
Quarters ended May 3, 1997 and May 4, 1996
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of 7-9
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K 10
SIGNATURE 11
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
QUARTER ENDED
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MAY 3, MAY 4,
1997 1996
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Net sales $22,236 $21,919
Cost of goods sold and
store occupancy expenses 16,419 16,126
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Gross margin 5,817 5,793
Selling, general & administrative expenses 9,173 9,228
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Operating loss (3,356) (3,435)
Interest expense 156 282
Interest income and other, net (70) (91)
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Loss before taxes (3,442) (3,626)
Income taxes (1,343) (1,414)
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Net loss $(2,099) $(2,212)
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Net loss per share $ (0.26) $ (0.28)
Shares used in computing
net loss per share 7,988 7,792
See notes to financial statements
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NATURAL WONDERS, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
MAY 3, FEBRUARY 1, MAY 4,
1997 1997 1996
---------- ----------- ----------
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,471 $ 7,667 $ 2,899
Short-term investments 13,000 17,900 13,835
Merchandise inventories 23,098 20,529 22,731
Prepaid expenses and other current assets 6,374 4,187 5,595
-------- -------- --------
Total current assets 45,943 50,283 45,060
Property and Equipment:
Leasehold improvements 26,037 25,490 24,302
Property and equipment under capital lease 13,181 13,181 17,054
Furniture, fixtures and equipment 14,564 13,937 8,152
-------- -------- --------
53,782 52,608 49,508
Less accumulated depreciation and amortization (27,871) (26,329) (21,785)
-------- -------- --------
25,911 26,279 27,723
Other Assets 1,778 1,782 1,371
-------- -------- --------
Total Assets $ 73,632 $ 78,344 $ 74,154
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 6,876 $ 5,175 $ 6,429
Accrued compensation and related costs 1,961 2,523 1,941
Accrued liabilities 2,827 2,798 2,304
Income taxes payable 2,044
Current portion of capital lease obligations 1,603 1,789 1,972
Current portion of long-term debt 1,547 2,459 2,928
-------- -------- --------
Total current liabilities 14,814 16,788 15,574
Capital Lease Obligations 1,019 1,327 2,776
Long-Term debt 1,769 2,050 3,380
Deferred Rent 3,971 4,023 3,971
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.0001; authorized
17,000,000; shares issued and outstanding
7,987,514, 7,986,846 and 7,803,348 shares 1 1 1
Capital in excess of par value 34,252 34,250 33,660
Retained earnings 17,806 19,905 14,792
-------- -------- --------
Total stockholders' equity 52,059 54,156 48,453
-------- -------- --------
Total Liabilities and Stockholders' Equity $ 73,632 $ 78,344 $ 74,154
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to financial statements
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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MAY 3, 1997 MAY 4, 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(2,099) $(2,212)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 1,542 1,503
Change in operating assets and liabilities:
Merchandise inventories (2,569) (3,515)
Prepaid expenses and other assets (2,183) (1,616)
Trade accounts payable 1,701 455
Accrued compensation and related costs (562) (422)
Accrued liabilities 29 13
Deferred rent (52) 17
Income tax payable (2,044) (774)
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Net cash used in operating activities (6,237) (6,551)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease
obligations and debt (1,687) (894)
Exercise of stock options and warrants 2 7
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Net cash used in financing activities (1,685) (887)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (3,200) (800)
Sales of short-term investments 8,100 5,060
Purchases of property and equipment (1,174) (275)
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Net cash provided by investing activities 3,726 3,985
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,196) (3,453)
CASH AND CASH EQUIVALENTS:
Beginning of year 7,667 6,352
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End of period $ 3,471 $ 2,899
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------- -------
CASH PAID DURING PERIOD:
Interest $ 157 $ 275
Income taxes $ 1,862 $ 1,239
</TABLE>
See notes to financial statements
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NATURAL WONDERS, INC.
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NOTES TO FINANCIAL STATEMENTS
1. The financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which, in the opinion
of management, are necessary for a fair presentation of the financial
position and operating results for the interim periods. The results of
operations for the quarter ended May 3, 1997, are not necessarily
indicative of the results to be expected for the entire fiscal year
ending January 31, 1998.
This financial information should be read in conjunction with the
audited financial statements and notes thereto included in the Company's
1996 Annual Report to Stockholders and Form 10-K for the fiscal year
ended February 1, 1997, as filed with the Securities and Exchange
Commission.
2. 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
statements.
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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
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GENERAL
As of May 3, 1997, the Company operated 152 Natural Wonders stores in 36
states compared to 146 stores in 36 states as of May 4, 1996. One new store
was opened in the first quarter of 1997 as compared to no new stores in the
first quarter of 1996. On May 22, 1997, the Company acquired 12 stores
through the acquisition of substantially all of the assets of What A World!,
Inc. Ten of the stores are in Florida. One store is in New York, and one
store is in New Jersey. The Company has been operating these stores under a
management agreement since March 10, 1997.
SALES
During the first quarter of 1997, sales increased 1.4 % over the same
period in 1996. The increase was due primarily to a full period of sales
generated from stores opened in 1996. Comparable store sales decreased 1.5%
in the first quarter of 1997, as compared to the same period in 1996. The
decrease in the first quarter occurred primarily in February which was
impacted by weak apparel sales. March and April combined comparable store
sales increased 1.0%, which reflects positive performance during the Easter
gift period and improved apparel sales. The average dollar amount per sales
ticket slightly decreased in comparison to the first quarter of 1996 while
the average number of customers slightly increased.
COST OF GOODS SOLD AND STORE OCCUPANCY EXPENSES
Cost of goods sold and store occupancy expenses include distribution
center costs and other expenses associated with acquiring inventory. These
costs increased slightly as a percentage of sales to 73.8% in the first
quarter of 1997 from 73.6% in the first quarter of 1996. This increase was
primarily due to store occupancy expenses which increased as a percentage of
sales due to the decrease in comparable stores sales.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, (SG&A), which are
primarily non-occupancy store expenses and corporate overhead, decreased as a
percentage of sales to 41.3% in the first quarter of 1997 from 42.1% in the
first quarter of 1996. This decrease was primarily due to a reduction in
store payroll costs.
OPERATING INCOME
As a result of the foregoing, the operating loss decreased to $3,356,000
or 15.1% of sales in the first quarter of 1997 from $3,435,000 or 15.7% of
sales in the first quarter of 1996.
NET INTEREST AND OTHER EXPENSES
Net interest and other expenses decreased to $86,000 or 0.4% of sales in
the first quarter of 1997 from $191,000 or 0.9% of sales in the first quarter
of 1996. This was primarily due to lower interest expense because of the
continued reduction of long-term debt.
NET INCOME (LOSS)
As a result of the foregoing, the net loss decreased to $2,099,000 or
9.4% of sales in the first quarter of 1997 from $2,212,000 or 10.1% of sales
in the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital in recent years have been net
cash flow from operations. Seasonal working capital requirements have been
met through short-term bank borrowings.
During the first three months of fiscal 1997, cash and cash equivalents
decreased $4,196,000. This was primarily due to seasonal losses (generally
incurred in the first three quarters), an increase in merchandise
inventories, the pay down of capital lease obligations and long-term debt,
and payment of income taxes. Cash and cash equivalents were positively
impacted by the sale of short-term investments.
Compared to the first quarter in the prior year, the Company paid more
income taxes and debt which was offset in part by higher accounts payable
balances.
In addition to 12 stores acquired in May 1997 through the acquistion of
subtantially all of the assets of What A World!, Inc., the Company plans to
open approximately 10 new stores in 1997. During 1997, the Company
anticipates that cash will primarily be used for capital expenditures and
merchandise inventory for new stores, 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. In
addition, the Company has allocated $3,000,000 for the purchase of state of
the art merchandising and point of sales systems, including hardware and
software.
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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, long-term debt and funds
available under its credit facility agreement will be sufficient to fund the
Company's operations for the next 12 months.
INFLATION AND SEASONALITY
The Company does not believe that its operations have been materially
affected by inflation during the three recent fiscal years or in 1997 to
date. However, there is no assurance that its business will not be affected
by inflation in the future.
The Company's business is subject to substantial seasonal variations in
demand. Historically, a significant portion of the Company's sales and
substantially all its net earnings have been realized during the fourth
quarter (which includes the November/December holiday season), and levels of
sales and net earnings have been significantly lower in the first three
quarters, usually resulting in losses in these quarters. If for any reason
the Company's sales were 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.
ACCOUNTING PRONOUNCEMENTS
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 statements.
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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, such as
consumer spending which is dependent on economic conditions affecting
disposable consumer income such as employment, business conditions, interest
rates and taxation. The Company's continued growth also depends upon the
demand for its products, which in turn is dependent upon various factors,
such as the introduction and acceptance of new products and the continued
popularity of existing products, as well as the timely supply of all
merchandise. Reference is made to the Company's filings with the Securities
and Exchange Commission for further discussion of risks and uncertainties
regarding the Company's business.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
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 first quarter of fiscal 1997.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 13, 1997
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)
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Exhibit 11.1
NATURAL WONDERS, INC.
COMPUTATION OF PER SHARE NET LOSS
(In thousands, except per share data)
Quarter Ended
------------------------------
May 3, 1997 May 4, 1996
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Net loss $(2,099) $(2,212)
Weighted average common shares
outstanding 7,988 7,792
Per share net loss $ (0.26) $ (0.28)
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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> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> MAY-03-1997
<CASH> 3471
<SECURITIES> 13000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 23098
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0
0
<COMMON> 1
<OTHER-SE> 52058
<TOTAL-LIABILITY-AND-EQUITY> 73632
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<EPS-PRIMARY> (0.26)
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