<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended AUGUST 2, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-20035
NATURAL WONDERS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0141610
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4209 TECHNOLOGY DRIVE, FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
(Zip code)
510-252-9600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Common stock outstanding as of August 30, 1997: 8,002,777 shares of common
stock.
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NATURAL WONDERS, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Operations 3
Quarters and six months ended August 2, 1997
and August 3, 1996
Condensed Balance Sheets 4
August 2, 1997, February 1, 1997 and August 3, 1996
Condensed Statements of Cash Flows 5
Six months ended, August 2, 1997 and August 3, 1996
Notes to Condensed Financial Statements 6
ITEM 2. Management's Discussion and Analysis of 7-10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders 11
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
----------------------- -----------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 26,850 $ 25,954 $ 49,086 $ 47,873
Cost of goods sold and
store occupancy expenses 20,159 18,349 36,578 34,475
--------- --------- --------- ---------
Gross margin 6,691 7,605 12,508 13,398
Selling, general & administrative
expenses 10,484 9,514 19,657 18,742
--------- --------- --------- ---------
Operating loss (3,793) (1,909) (7,149) (5,344)
Interest expense 136 242 292 523
Interest income and other, net (113) (45) (183) (135)
--------- --------- --------- ---------
Loss before taxes (3,816) (2,106) (7,258) (5,732)
Income taxes (1,489) (821) (2,832) (2,235)
--------- --------- --------- ---------
Net loss $ (2,327) $ (1,285) $ (4,426) $ (3,497)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share $ (0.29) $ (0.16) $ (0.55) $ (0.45)
Shares used in computing
net loss per share 7,993 7,810 7,990 7,801
</TABLE>
See notes to financial statements
3 of 13
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NATURAL WONDERS, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
AUGUST 2, FEBRUARY 1, AUGUST 3,
1997 1997 1996
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,928 $ 7,667 $ 6,341
Short-term investments 3,300 17,900 8,835
Merchandise inventories 25,262 20,529 19,849
Prepaid expenses and other
current assets 7,323 4,187 6,301
-------- -------- --------
Total current assets 42,813 50,283 41,326
Property and Equipment:
Leasehold improvements 26,501 25,490 24,584
Property and equipment under
capital lease 8,434 13,181 17,054
Furniture, fixtures and equipment 20,946 13,937 8,571
-------- -------- --------
55,881 52,608 50,209
Less accumulated depreciation
and amortization (29,408) (26,329) (23,296)
-------- -------- --------
26,473 26,279 26,913
Other Assets 1,785 1,782 1,361
-------- -------- --------
Total Assets $ 71,071 $ 78,344 $ 69,600
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 6,750 $ 5,175 $ 4,219
Accrued compensation and related costs 2,717 2,523 2,392
Accrued liabilities 3,078 2,798 2,475
Income taxes payable 2,044
Current portion of capital lease
obligations 1,398 1,789 1,868
Current portion of long-term debt 1,410 2,459 2,079
-------- -------- --------
Total current liabilities 15,353 16,788 13,033
Capital Lease Obligations 749 1,327 2,293
Long-Term Debt 1,268 2,050 3,069
Deferred Rents 3,924 4,023 3,989
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.0001;
authorized 17,000,000 shares; issued
and outstanding 8,001,177, 7,986,846
and 7,820,860 shares 1 1 1
Capital in excess of par value 34,297 34,250 33,708
Retained earnings 15,479 19,905 13,507
-------- -------- --------
Total stockholders' equity 49,777 54,156 47,216
-------- -------- --------
Total Liabilities and Stockholders'
Equity $ 71,071 $ 78,344 $ 69,600
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to financial statements
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------
AUGUST 2, 1997 AUGUST 3, 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (4,426) $ (3,497)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 3,079 3,014
Change in operating assets and
liabilities:
Merchandise inventories (4,418) (633)
Prepaid expenses and other assets (3,139) (2,312)
Trade accounts payable 1,575 (1,755)
Accrued compensation and related costs 194 29
Accrued liabilities 280 184
Deferred rent (99) 35
Income tax payable (2,044) (774)
--------- ---------
Net cash used in operating activities (8,998) (5,709)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease
obligations and debt (2,800) (2,641)
Exercise of stock options and warrants 47 55
--------- ---------
Net cash used in financing activities (2,753) (2,586)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (3,200) (3,300)
Sales of short-term investments 17,800 12,560
Purchases of property and equipment (2,850) (976)
Business acquisition (738)
--------- ---------
Net cash provided by investing activities 11,012 8,284
NET DECREASE IN CASH AND CASH EQUIVALENTS (739) (11)
CASH AND CASH EQUIVALENTS:
Beginning of year 7,667 6,352
--------- ---------
End of period $ 6,928 $ 6,341
--------- ---------
--------- ---------
CASH PAID DURING PERIOD:
Interest $ 293 $ 526
Income taxes $ 1,927 $ 993
</TABLE>
See notes to financial statements
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NATURAL WONDERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. The financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which, 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 August 2, 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 taken as
a whole. In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", which requires that an enterprise report, by major
components and as a single total, the change in its net assets during the
period from nonowner sources; and No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic area, and major
customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows, and
any effect will be limited to the form and content of its disclosures.
Both statements are effective for fiscal years beginning after December 15,
1997, with earlier application permitted.
3. On May 22, 1997, the Company acquired 12 locations through the acquisition
of substantially all of the operating assets of What A World!, Inc. The
total purchase price was approximately $600,000. Additionally the Company
incurred $138,000 of acquisition costs. The Company managed the 12 stores
under an operating agreement from March 10, 1997 until the acquisition on
May 22, 1997.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
GENERAL
As of August 2, 1997, Natural Wonders operated 165 stores in 36 states
compared to 146 stores in 36 states as of August 3, 1996. In the first six
months of 1997, two new stores were opened as compared to no new stores in the
first six months of fiscal 1996. On May 22, 1997, the Company acquired 12
locations through the acquisition of substantially all of the operating 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 total purchase price was
approximately $600,000. Additionally, the Company incurred $138,000 of
acquisition costs. The Company managed the 12 locations under an operating
agreement from March 10, 1997 until the acquisition on May 22, 1997.
SALES
During the second quarter and first six months of 1997, sales increased
3.5% and 2.5%, respectively, over the same periods in 1996. The increase was
due to the sales generated from the 12 stores acquired from What A World!, Inc.
as referred to above, and to a full period of sales generated from stores opened
in 1996. This was partially offset by a decrease in comparable store sales.
Comparable store sales decreased 4.1% in the second quarter of 1997 and
decreased 2.9% in the first six months of 1997 as compared to the same period in
1996. These decreases which occurred primarily in May and June, were due to
insufficient introduction of new products as well as late timing of receipts
during the Mother's Day and Father's Day gifting periods, and an overly edited
product assortment. Since this time, management feels the assortment has
improved, and receipts and new product introductions are back on plan,
particularly for the upcoming holiday. Although comparable store sales
decreased 1.3% in July, after excluding one major metropolitan region,
comparable store sales would have been slightly positive as most regions
experienced positive comparable store sales.
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COST OF GOODS SOLD AND STORE OCCUPANCY EXPENSES
Cost of goods sold and store occupancy expenses include distribution center
costs and other expenses associated with acquiring inventory. As a percentage
of sales, these costs increased to 75.1% in the second quarter of 1997 from
70.7% in the second quarter of 1996 and increased to 74.5% in the first six
months of 1997 from 72.0% in the first six months of 1996. The increase in
costs as a percentage of sales in both the second quarter and first six months
of 1997 was primarily due to increased clearance and promotional sales, and the
impact of the reduction in comparable store sales on store occupancy fixed
expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, (SG&A), are primarily
non-occupancy store expenses and corporate overhead. As a percentage of
sales, these costs increased to 39.0% in the second quarter of 1997 from
36.7% in the second quarter of 1996 and increased to 40.0% in the first six
months of 1997 from 39.2% in the first six months of 1996. The increase in
the costs as a percentage of sales in the second quarter and in the first six
months of 1997 was primarily due to the impact of the decrease in comparable
stores sales in 1997, and to a charge for severance costs associated with the
re-organization of the merchandising department. The increase in the costs
as a percentage of sales in 1997 was offset in part by not accruing for
incentive compensation in 1997, which was recorded in 1996 based on meeting
certain earnings targets in 1996.
OPERATING INCOME
As a result of the foregoing, the operating loss was $3,793,000 or 14.1%
of sales in the second quarter of 1997 versus $1,909,000 or 7.4% of sales in
the second quarter of 1996. For the first six months of 1997, the operating
loss was $7,150,000 or 14.6% of sales compared to an operating loss of
$5,344,000 or 11.2% of sales in the first six months of 1996.
INTEREST AND OTHER, NET
Interest and Other, Net decreased to 0.1% of sales in the second quarter
of 1997 from 0.8% of sales in the second quarter of 1996 and decreased to
0.2% of sales in the first six months of 1997 from 0.8% of sales in the first
six months of 1996. This was primarily due to lower interest expense because
of the continued reduction of long-term debt and income from managing the 12
What A World!, Inc. locations under an operating agreement between March 10,
1997 and May 22, 1997.
NET LOSS
As a result of the foregoing, the net loss increased to $2,327,000 or
8.7% of sales in the second quarter of 1997 from $1,285,000 or 4.9% of sales
in the second quarter of 1996. For the first six months of 1997, the net
loss increased to $4,426,000 or 9.0% of sales compared to $3,497,000 or 7.3%
of sales in the first six months of 1996.
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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 six months of 1997, cash and cash equivalents decreased
$739,000. This was primarily due to pre-tax seasonal losses, (generally incurred
in the first three quarters), an increase in merchandise inventories, (in part
for new and acquired stores), fixtures for new stores, remodeling of existing
stores, the pay down of capital lease obligations and long-term debt, and
payments for new information systems and income taxes. Cash and cash equivalents
were positively impacted by the sale of short-term investments.
Compared to the second quarter in the prior year, cash decreased due to
higher losses, purchasing more inventory and equipment, and to paying more
income taxes. This was offset in part by higher accounts payable balances and
sales of short-term investments.
During the remainder of 1997, the Company plans to open nine new stores and
approximately ten temporary locations during the holiday season, and has not yet
determined the extent of store expansion in 1998. During the remainder of 1997,
cash will primarily be used for capital expenditures and merchandise inventory
for new stores, repayment of debt, remodeling of existing stores, and purchase
of inventory for the Company's existing stores, particularly prior to and during
the peak holiday selling season. In addition, the Company has allocated
$2,000,000 for the purchase of highly sophisticated merchandising systems,
including hardware and software. Furthermore, the Company will repurchase up to
$2,000,000 worth of Natural Wonders Common stock over the next 12 months. Share
repurchases will be funded from existing cash, internally generated funds or
through short-term debt.
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.
As amended on June 6, 1997, the line of credit is also available for the
issuance of commercial and standby letters of credit, up to $9,500,000 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.
9 of 13
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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. In June 1997, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income", which requires that an enterprise
report, by major components and as a single total, the change in its net assets
during the period from nonowner sources; and No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic area, and major customers.
Adoption of these statements will not impact the Company's consolidated
financial position, results of operations or cash flows, and any effect will be
limited to the form and content of its disclosures. Both statements are
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted.
10 of 13
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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.
11 of 13
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 23, 1997 at
its principal offices in Fremont, California. Of the shares outstanding as of
the record date, 7,506,148 shares were present at the meeting or represented by
proxies, representing approximately 94.0% of the total votes eligible to be
cast.
At the meeting, the stockholders voted to elect one (1) Class I director of
the Company to serve for a three year term and until his successor is duly
elected and qualified. The name of the Class I director elected at the Annual
Meeting and the votes cast with respect to the individual are set forth below.
For Withheld
--------- --------
Peter L. Harris 7,176,954 329,194
The following Class II directors continued to hold office:
Peter G. Hanelt, Julius Jensen III
The following Class III directors continued to hold office:
Pearson C. Cummin III, Kathleen M. Chatfield
The Company's stockholders also voted to approve the following:
- To amend the Company's Amended and Restated 1993 Omnibus Stock
Plan to increase the number of shares reserved for issuance
thereunder from 1,710,000 to 2,000,000. There were 6,105,593
affirmative votes, 1,383,752 negative votes and 16,803
abstentions.
- To ratify the appointment of Deloitte & Touche LLP as independent
auditors of the Company for the fiscal year ending January 31,
1998. There were 7,490,085 affirmative votes, 3,103 negative
votes and 12,960 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
Exhibit 10.27 Amendment No. 2 to Business Loan Agreement, dated
February 28, 1997 between the Company and Bank of
America, National Trust and Savings Association.
Exhibit 11.1 Computation of Per Share Loss
b. REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the second quarter of fiscal 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: September 12, 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)
13 of 13
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Exhibit 11.1
NATURAL WONDERS, INC.
COMPUTATION OF PER SHARE NET LOSS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------------ ------------------------------
August 2, 1997 August 3, 1996 August 2, 1997 August 3, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss $(2,327) $(1,285) $(4,426) $(3,497)
------- ------- ------- -------
------- ------- ------- -------
Weighted average common
shares outstanding 7,993 7,810 7,990 7,801
Per share net loss $ (0.29) $ (0.16) $ (0.55) $ (0.45)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
There is no material difference in the number of shares used in computing per
share amounts as calculated for primary and fully diluted earnings per share.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> MAY-04-1997
<PERIOD-END> AUG-02-1997
<CASH> 6,928
<SECURITIES> 3,300
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 25,262
<CURRENT-ASSETS> 42,813
<PP&E> 55,881
<DEPRECIATION> 29,408
<TOTAL-ASSETS> 71,071
<CURRENT-LIABILITIES> 15,353
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 49,776
<TOTAL-LIABILITY-AND-EQUITY> 71,071
<SALES> 26,850
<TOTAL-REVENUES> 26,850
<CGS> 20,159
<TOTAL-COSTS> 20,159
<OTHER-EXPENSES> 10,484
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136
<INCOME-PRETAX> (3,816)
<INCOME-TAX> (1,489)
<INCOME-CONTINUING> (2,327)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,327)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> 0
</TABLE>
