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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 JANUARY 31, 1998
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( ) 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
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NATURAL WONDERS, INC.
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(Exact name of registrant as specified in its charter)
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)
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,
1998, was $27,538,337. The number of shares of Common Stock, with $.0001 par
value, outstanding on March 31, 1998 was 8,099,932 shares.
Documents incorporated by reference:
Items 5, 6, 7 and 8 of Part II are incorporated by reference from the
Company's 1997 Annual Report to Stockholders. Items 10, 11, 12 and 13 of
Part III are incorporated by reference from the Company's definitive Proxy
Statement for the 1998 Annual Meeting of Stockholders, to be held June 10,
1998. Registrant's definitive Proxy Statement will be filed with the
Securities and Exchange Commission on or before May 29, 1998.
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PART I
ITEM 1. BUSINESS
GENERAL
Natural Wonders, Inc. (the "Company), 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, apparel, 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 171
stores in 36 states at the end of fiscal 1997. In fiscal 1997, the Company
opened 9 stores with permanent locations, opened 12 stores with temporary
locations during the holiday season, and closed 2 stores. 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,
including acquisition costs, was $738,000. 10 of the stores are in Florida, 1
store is in New York, and 1 store is in New Jersey. At the end of 1997, 1 of
the temporary locations remained opened and will be moved to a permanent
location in 1998. During the 1998 calendar year, the Company plans to open
approximately 9 new stores and, during the holiday season, approximately 20
temporary locations.
PRODUCTS AND MERCHANDISING
During fiscal 1997, the typical Natural Wonders' store stocked a range of
1,900 to 2,400 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.
The following is a description of the Company's merchandise assortment by
product category:
KIDS & DISCOVERY Educational and interactive toys and games: plush animals,
ant farms, glow in the dark toys, flow-motion and kinetic sculpture products,
creativity kits and novelty toys.
HOME Lighting, ceramics, personal care and relaxation products, home
decorative, home fragrance and collectibles.
GARDEN/BACKYARD Wind chimes, bird houses, bird feeders, herb nurseries,
sundials and decorative garden accessories such as terracotta thermometers
and clocks.
APPAREL T-shirts, sweatshirts and hats for both adults and children, and
accessories such as totes and cosmetic bags.
GEOLOGY Agate boxes and bookends, sandstone coasters, jade vases, carved
mineral figurines, spheres and mineral games.
OUTDOOR Telescopes, binoculars, picnic accessories, compasses and
thermometers.
MUSIC AND VIDEO Compact discs and cassette tapes including instrumental New
Age music or environmental sounds, world music and folk dance, and videotape
selections featuring nature and science and computer animated subjects.
JEWELRY Earrings, necklaces and rings.
BOOKS Educational, pictorial, activity and instructional books for adults
and children.
OFFICE Magnets, pens, hi-tech desk accessories and globes.
Natural Wonders' merchandise organization includes 5 product teams,
consisting of senior product managers, a product support team, as well as
senior merchandising planners and store planners in the planning and
allocation teams. 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 1997, no one vendor
accounted for more than 5% of the Company's merchandise purchases.
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STORE OPENING COSTS
In 1998, the Company estimates average cost for leasehold improvements,
furniture and fixtures will be $275,000 per new store, before landlord
construction allowances. Capital expenditures for stores with temporary
locations will be minimal. In addition, estimated working capital
requirements, consisting of inventory purchases, is $112,000 per new store
and $120,000 for stores with temporary locations. Estimated average
pre-opening costs per store, which are expensed as incurred, are $18,000 for
new stores and $12,000 for stores with temporary locations.
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 that emphasizes its marketing
philosophy throughout the product assortment offered, the customer service
standards exhibited, and the shopping atmosphere created in each location. A
new logo as well as new signage, packaging and a new store prototype were
introduced to support the branded philosophy. Additionally, the Company has
created a customer database that 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, contemporary and instrumental music played to demonstrate Natural
Wonders' compact disc and cassette tape offerings. A color monitor displays
videotapes depicting science and nature 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 uses primarily common carriers to ship merchandise to its stores.
INFORMATION SYSTEMS
In February 1998, the Company completed installation of a new management
information system that integrates merchandising, distribution, and financial
systems. The new system is intended to provide detailed information about
all aspects of product flow and sales, and includes a data warehouse that
allows the management of inventory by SKU and the analysis of store trends.
In 1998, the Company plans to implement a new point-of-sale system, as well
as a planning and decisions support module. The objective of these changes is
to enable the Company to manage inventory more efficiently, and improve
customer service and execution at the store level.
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 Discovery 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. Managaement 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.
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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 of 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 January 31, 1998, the Company had approximately 2,600 employees. A
significant number of seasonal employees are hired during each holiday
selling season. None of the Company's employees is 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 future growth also depends upon
the continued successful implementation of its new information system and
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.
ITEM 2. PROPERTIES
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 January 31, 1998, the Company operated 171 stores in 36 states
occupying approximately 423,000 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 1998 and 2008. 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
On January 15, 1998, Hasbro, Inc. filed a lawsuit against the Company in the
United States District Court for the District of Massachusetts. The
complaint alleges that certain products sold by the Company infringe two
patents of the plaintiff and seeks injunctive relief, unspecified damages,
and enhanced damages and attorneys fees. The proceeding is still in its
early stages and no discovery has been conducted, nor have responsive
pleadings yet been filed.
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 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
The information required is incorporated by reference from page 24 of the
Company's 1997 Annual Report to Stockholders for the fiscal year ended
January 31, 1998 (the "1997 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required is incorporated by reference from page 7 of the
Company's 1997 Annual.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required is incorporated by reference from pages 8 through 10
of the Company's 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required is incorporated by reference from pages 11 through 23
of the Company's 1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the Directors and the Executives of the
Registrant is incorporated by reference from the definitive Proxy Statement for
the Registrant's 1998 Annual Meeting of Stockholders.
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 1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated by reference from the definitive
Proxy Statement for the Registrant's 1998 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 1998 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 1998 Annual Meeting of Stockholders.
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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 of the Registrant and Independent
Auditors' Report on such Financial Statements are incorporated by
reference from the Company's 1997 Annual Report to Stockholders, in
Part II, Item 8:
Statements of Earnings for fiscal years 1997, 1996, and 1995
Balance Sheets at January 31, 1998 and February 1, 1997
Statements of Cash Flows for fiscal years 1997, 1996, and 1995
Statements of Stockholders' Equity for fiscal years 1997, 1996, and
1995
Notes to Financial Statements
Independent Auditors' Report
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 set
forth on pages 8 through 10 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 1997.
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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 30, 1998 NATURAL WONDERS, INC.
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(Registrant)
By: /s/ Peter G. Hanelt
-------------------------------
Chief Financial Officer, Chief
Chief Operating Officer and Director
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)
/S/ PETER G. HANELT Chief Financial Officer, Chief
- ------------------------------ Operating Officer and Director (Principal
(Peter G. Hanelt) Accounting and Financial Officer)
/S/ DAVID FOLKMAN
- ------------------------------ Director
(David Folkman)
/S/ PETER L. HARRIS
- ------------------------------ Director
(Peter L. Harris)
/S/ JULIUS JENSEN III
- ------------------------------ Director
(Julius Jensen III)
Date: April 30, 1998
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INDEX TO EXHIBITS
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<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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<S> <C> <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.
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SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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10.11 First Amendment to Lease, dated April 29, 1993,
between the Company and John W. Rooker is incorporated
by reference to Exhibit 10.28 of the 1993 Form 10-K.
10.12 Second Amendment to Lease, dated May 11, 1993, between
the Company and John W. Rooker is incorporated by
reference to Exhibit 10.29 of the 1993 Form 10-K.
10.13 Third Amendment to Lease, dated November 3, 1993,
between the Company and John W. Rooker is incorporated
by reference to Exhibit 10.30 of the 1993 Form 10-K.
10.14 Fourth Amendment to Lease, dated November 24, 1993,
between the Company and John W. Rooker is incorporated
by reference to Exhibit 10.31 of the 1993 Form 10-K.
10.15 Equipment Lease Agreement, dated April 19, 1994,
between the Company and BancBoston is incorporated by
reference to Exhibit 10.32 of the Form 10-Q for the
quarterly period ended April 30, 1994.
10.16 Corporate Office Lease Agreement dated June 9, 1994
between the Company and the Lincoln National Life
Insurance Company is incorporated by reference to
Exhibit 10.33 of the Form 10-Q for the quarterly period
ended July 30, 1994.
10.17 Equipment Lease Agreement, dated October 28, 1994,
between the Company and Finance for Science
International, Inc. is incorporated by reference to
Exhibit 10.34 of the Form 10-Q for the quarterly period
ended October 29, 1994.
10.18 Equipment Lease Agreement, dated December 22, 1994,
between the Company and Lyon Credit Corporation is
incorporated by reference to Exhibit 10.35 of the 1994
Form 10-K.
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.
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<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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<S> <C> <C>
10.24.1 Amendment to Business Loan Agreement, dated February
28, 1997 between the Company and Bank of America,
National Trust and Savings Association is incorporated
by reference to Exhibit 10.24.1 of the 1996 Form 10-K.
10.27* Employment Agreement entered into on September 15,1997
between the Company and Kathleen M. Chatfield.
10.28 Credit Agreement entered into on August 19, 1997
between the Company and Wells Fargo Bank, National
Association.
13.1 1997 Annual Report to Stockholders.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule - 1997
27.2 Financial Data Schedule - 1997 restated quarters
27.3 Financial Data Schedule - 1996 restated year and quarters
* Plan or agreement pursuant to which the Company's
officers or directors have received compensation.
</TABLE>
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EXHIBIT 10.27
NATURAL WONDERS, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into by and between Natural
Wonders, Inc. (the "Company") and Kathleen Chatfield as of September 15, 1997.
1. POSITION AND DUTIES. Kathleen Chatfield shall be employed by the
Company as its President and Chief Executive Officer, reporting to the Board
of Directors, effective as of the date hereof.
As President, CEO, Kathleen Chatfield agrees to devote her full business
time, energy and skill to her duties at the Company. These duties shall
include, but not be limited to, any duties consistent with her position which
may be assigned to her from time to time by the Company's Board of Directors.
2. TERM OF EMPLOYMENT. Kathleen Chatfield's employment with the Company
pursuant to this Agreement is for no specified term, and may be terminated by
her, or the Company at any time with or without cause subject to paragraphs 4
and 5, below.
3. COMPENSATION. Kathleen Chatfield shall be compensated by the Company
for her services as follows:
(a) SALARY: Kathleen Chatfield shall be paid a salary of $360,000.00
per year, subject to applicable withholding, in accordance with the Company's
normal payroll procedures. Such salary shall be reviewed annually and
revised as determined appropriate by the Board of Directors. The annual
review shall occur on or about February 1 of each year.
(b) BENEFITS: Kathleen Chatfield shall have the right, on the same
basis as other members of senior management of the Company, to participate in
and to receive benefits under any of the Company's employee benefits plans,
including the medical, dental, and disability group insurance plans.
Kathleen Chatfield shall also be entitled to participate in the 401(k) Plan
maintained by the Company in accordance with its terms. In addition,
Kathleen Chatfield shall be entitled to the benefits afforded to other
members of senior management under the Company's vacation, holiday and
business expense reimbursement policies.
(c) CAR ALLOWANCE: Kathleen Chatfield will receive a monthly car
allowance of $800.00, payable the first paycheck of every fiscal month, in
accordance with current Company practice.
(d) PERFORMANCE BONUS: Kathleen Chatfield will be eligible to
participate in the Company's bonus program which is administered by the
Compensation Committee of the Board of Directors.
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4. BENEFITS UPON VOLUNTARY TERMINATION: In the event that Kathleen
Chatfield voluntarily resigns from her employment with the Company, or in the
event that her employment terminates as a result of her death or disability,
KATHLEEN CHATFIELD SHALL BE ENTITLED TO NO COMPENSATION OR BENEFITS FROM THE
COMPANY OTHER THAN THOSE EARNED UNDER PARAGRAPH 3 ABOVE THROUGH THE DATE OF
HER RESIGNATION OR TERMINATION; AS THE CASE MAY BE. The foregoing
notwithstanding, if Kathleen Chatfield resigns voluntarily on May 1, 1998,
she shall be entitled to receive (i) an amount equal to her then annual base
salary, which shall be paid in sixty biweekly payments commencing on May 1,
1998 and (ii) reimbursement for the employee benefits described in Section
3(b) for a period of twelve months from the date of resignation..
5. BENEFITS UPON OTHER TERMINATION: Kathleen Chatfield agrees that her
employment may be terminated by the Company at any time, with or without
cause. In the event of the termination of Kathleen Chatfield's employment by
the Company for the reasons set forth below, she shall be entitled to the
following:
(a) TERMINATION FOR CAUSE: If Kathleen Chatfield's employment is
terminated by the Company for cause as defined below, she shall be entitled
to no compensation or benefits from the Company other than those earned under
paragraph 3 through the date of her termination.
For purpose of this Agreement, a termination "for cause" occurs if
Kathleen Chatfield is terminated for any of the following reasons:
(i) theft, dishonesty, of falsification of any employment or
Company record;
(ii) improper disclosure of the Company's confidential or
proprietary information;
(iii) any intentional act by Kathleen Chatfield 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 Kathleen Chatfield's
employment is terminated by the Company for any reason other than cause, she
shall be entitled to the following separation benefits:
(i) an amount equal to her then annual base salary, which
shall be paid in sixty biweekly payments commencing on the date of
termination;
(ii) provided Kathleen Chatfield remains an employee of the
Company as of December 31 of any fiscal year for which a performance bonus
may be awarded,
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payment of any performance bonus that has become earned and payable as of her
termination date; and
(iii) continued provision of the employee benefits described in
paragraphs 3(b) and (c) for a period of twelve months from the date of
termination.
(c) TERMINATION FOLLOWING A CHANGE IN CONTROL: For purposes of this
Agreement, a "change of control" means a merger in which the Company is a
party where the stockholders of the Company before such transaction do not
retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the Company's assets (other than to one or
more corporations where the stockholder of the Company before such
transaction retain, directly or indirectly, at least a majority of the
beneficial interest in the voting stock of the corporation to which assets
were transferred); or the direct or indirect sales or exchange by the
stockholders of the Company before such transaction do not retain, directly
or indirectly, at least a majority of the beneficial interest in the voting
stock of the Company.
If Kathleen Chatfield's employment with the Company is terminated by the
Company for any reason within one (1) year following a change of control, she
shall be entitled to receive the following upon such termination:
(i) In the event that Kathleen Chatfield is entitled to and
accepts any accelerated vesting of any of her unvested company stock options
as a result of such change in control, the Company or its successor shall
continue to pay her salary for a period of six (6) months following her
termination; or
(ii) In the event that Kathleen Chatfield is not entitled to
any accelerated vesting of any of her Company stock options as a result of
such change of control (or in the event that she declines to accept any such
accelerated vesting and provides the Company with all necessary documents to
effect that desire), the Company or its successor shall continue to pay her
salary for a period of one (1) year following her termination.
(d) INVOLUNTARY RESIGNATION FOLLOWING A CHANGE OF CONTROL: In the
event that Kathleen Chatfield resigns from her employment with the Company or
its successor following a change of control, it shall be deemed an
Involuntary Resignation if it results from any of the following: (i) without
Kathleen Chatfield's express written consent, a significant reduction in her
duties or responsibilities; (ii) without Kathleen Chatfield's express written
consent, a reduction, without good business reasons, of the facilities and
prerequisite (including office space and location) available to her; (iii) a
reduction by the Company in the base salary of Kathleen Chatfield as in
effect immediately prior to such change of control; (iv) a reduction by the
Company in the kind or level of employee benefits to which she is entitled,
with the result that her overall benefits package is significantly reduced;
(v) the relocation of Kathleen Chatfield to a facility or location more than
a reasonable commute from her then-present location, without her express
written consent.
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Upon Kathleen Chatfield's Involuntary Resignation she shall be entitled to
receive the separation benefits described in either Section 5c(i) or 5c(ii),
whichever is applicable.
(e) MITIGATION; OFFSET: Kathleen Chatfield shall not be required in
any way to mitigate the amount of any payment or benefit provided for in
Sections 4 and 5, including, but not limited to, by seeking other employment;
provided, that the amount of any payment or benefit provided for in Sections
4 and 5 shall be reduced by the amount of any compensation and fringe
benefits earned by Kathleen Chatfield as the result of employment with or
other service provided to another employer after the date of her termination
or resignation during the period that salary or fringe benefits would
otherwise be payable under Sections 4 and 5.
(f) COBRA: To the extent Kathleen Chatfield is entitled to the
benefits set forth in section 3(b), upon termination of her employment
relationship, Kathleen Chatfield will be provided with the election forms for
medical insurance continuation as provided by the Consolidated Omnibus Budget
Reconciliation Act (COBRA). If she elects to continue insurance under COBRA,
the Company will reimburse her for the cost of her continued health
insurance, for up to twelve (12) months. This does not extend the length of
the COBRA period. In the event she becomes eligible, through replacement
employment, for equivalent medical coverage during the twelve month period,
this benefit will cease. Kathleen Chatfield, and not the Company, is solely
responsible for taking any steps necessary to elect to continue benefits
under COBRA.
6. EXCLUSIVE REMEDY: Except as set forth above, Kathleen Chatfield shall
be entitled to no further compensation for any damage or injury arising out
of the termination of her employment by the Company.
7. CONFIDENTIAL INFORMATION AND INVENTIONS AGREEMENT: Kathleen Chatfield
agrees to execute and abide by the terms and conditions of the Company's
employee Confidential Information and Inventions Agreement.
8. NON-SOLICITATION OF EMPLOYEES. Kathleen Chatfield recognizes that she
possesses and will possess confidential information about other employees of
the Company relating to their education, experience, skills, abilities,
compensation and benefits. Kathleen Chatfield recognizes that the information
she possesses and will possess about these other employees is not generally
known, is of substantial value to the Company in developing its business, and
has been and will be acquired by her because of her business position with
the Company. Kathleen Chatfield agrees that, during the period of her
employment hereunder and for a period of two (2) years thereafter, she will
not , directly or indirectly, solicit or recruit any employee of the Company
for the purpose of being employed by her or by any competitor of the Company
on whose behalf she is acting as an agent, representative or employee and
that she will not convey any such confidential information or trade secrets
about other employees of the Company to any other person.
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9. ATTORNEYS' FEES: The prevailing party shall be entitled to recover from
the losing party its attorneys' fees and costs incurred in any action brought
to enforce any right arising out of this Agreement.
10. DISPUTE RESOLUTION: In the event of any dispute or claim relating to or
arising out of this employment relationship, this Agreement, or the
termination of this employment relationship (including, but not limited to,
any claims of wrongful termination or age or other discrimination), all such
disputes shall be fully 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.
11. 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
Kathleen Chatfield she shall not have the right to assign or transfer any of
her right, obligations or benefits under this Agreement, except as otherwise
noted herein.
12. ENTIRE AGREEMENT: This Agreement constitutes the entire Employment
Agreement between Kathleen Chatfield and the Company regarding the terms and
conditions of her employment, with the exception of (i) the confidentiality
and inventions agreement described in paragraph 7 and (ii) any stock option
agreement between Kathleen Chatfield and the Company. This Agreement
supersedes all prior negotiations, representations or agreements between
Kathleen Chatfield and the Company, whether written or oral, concerning
Kathleen Chatfield's employment by the Company.
13. NO REPRESENTATIONS: Kathleen Chatfield acknowledges that she 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.
14. 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 or the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
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15. MODIFICATIONS: This Agreement may only be modified or amended by a
supplemental written agreement signed by Kathleen Chatfield and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year written below.
NATURAL WONDERS, INC.
Date: 10/24/97 By: /s/ Pearson C. Cummin
---------------------------------
Its Chairman of the Board of Directors
Date: 9/15/97 /s/ Kathleen Chatfield
--------------------------------------
Kathleen Chatfield
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EXHIBIT 10.28
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of August 19, 1997, by and between
NATURAL WONDERS, INC., a Delaware corporation ("Borrower"), and WELLS FARGO
BANK, NATIONAL ASSOCIATION ("Bank").
RECITAL
Borrower has requested from Bank the credit accommodations described below
(each, a "Credit" and collectively, the "Credits"), and Bank has agreed to
provide the Credits to Borrower on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I
THE CREDITS
SECTION 1.1. LINE OF CREDIT.
(a) LINE OF CREDIT. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to and including June 30, 1998, not to exceed at any time the aggregate
principal amount of Three Million Dollars ($3,000,000.00.) ("Line of Credit"),
the proceeds of which shall be used working capital. Borrower's obligation to
repay advances under the Line of Credit shall be evidenced by a promissory note
substantially in the form of Exhibit A attached hereto ("Line of Credit Note"),
all terms of which are incorporated herein by this reference.
(b) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above. Notwithstanding the foregoing, Borrower shall maintain a zero balance on
advances under the Line of Credit for a period of at least thirty (30)
consecutive days during the term of the Line of Credit.
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SECTION 1.2 LETTER OF CREDIT LINE.
(a) LETTER OF CREDIT LINE. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to issue sight commercial or standby letters of
credit for the account of Borrower to finance borrower's working capital
requirements (each, a "Letter of Credit" and collectively, "Letters of Credit")
from time to time up to and including June 30, 1998; provided however, that the
form and substance of each Letter of Credit shall be subject to approval by
Bank, in its sole discretion; and provided further, that the aggregate of all
undrawn amounts, and all amounts drawn and unreimbursed, under any Letters of
Credit issued under the Letter of Credit Line shall not at any time exceed the
principal amount of Three Million Dollars ($3,000,000.00). Each Letter of
Credit shall be issued for a term not to exceed two hundred sixty-five (265)
days, as designated by Borrower; provided however, that no Letter of Credit
shall have an expiration date subsequent to maturity of the Line of Credit.
Each Letter of Credit shall be subject to the additional terms of the Letter of
Credit Agreement and related documents, if any, required by Bank in connection
with the issuance thereof (each, a "Letter of Credit Agreement" and
collectively, "Letter of Credit Agreements").
(b) REPAYMENT OF DRAFTS. Each draft paid by Bank under any Letter of
Credit shall be repaid by Borrower in accordance with the provisions of the
applicable Letter of Credit Agreement.
SECTION 1.3. INTEREST/FEES.
(a) INTEREST. The outstanding principal balance of the Line of Credit
shall bear interest at the rate of interest set forth in the Line of Credit
Note. The amount of each draft paid by Bank under any Letter of Credit shall
bear interest from the date such draft is paid by Bank to the date such amount
is fully repaid by Borrower.
(b) COMPUTATION AND PAYMENT. Interest shall be computed on the basis of a
360-day year, actual days elapsed. Interest shall be payable at the times and
place set forth in the Line of Credit Note (the "Note").
(c) UNUSED COMMITMENT FEE. Borrower shall pay to Bank a fee equal to one
tenth of one percent (.10%) per annum (computed on the basis of a 360-day year,
actual days elapsed) on the average daily unused amount of the Line of Credit
and Letter of Credit Line, which fee shall be calculated on a quarterly basis by
Bank and shall be due and payable by Borrower in arrears on October 30, 1997 and
every three months thereafter.
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(d) LETTER OF CREDIT FEES. Borrower shall pay to Bank fees upon the
issuance of each Letter of Credit, upon the payment or negotiation by Bank of
each draft under any Letter of Credit and upon the occurrence of any other
activity with respect to any Letter of Credit (including without limitation, the
transfer, amendment or cancellation of any Letter of Credit) determined in
accordance with Bank's standard fees and charges then in effect for such
activity.
SECTION 1.4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect
all interest and fees due under each Credit by charging Borrower's demand
deposit account number ___________ with Bank, or any other demand deposit
account maintained by Borrower with Bank, for the full amount thereof. Should
there be insufficient funds in any such demand deposit account to pay all such
sums when due, the full amount of such deficiency shall be immediately due and
payable by Borrower.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank, which
representations and warranties shall survive the execution of this Agreement and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all obligations of Borrower to Bank subject to
this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the state of Delaware, and is
qualified or licensed to do business (and is in good standing as a foreign
corporation, if applicable) in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes, and
each other document, contract and instrument required hereby or at any time
hereafter delivered to Bank in connection herewith (collectively, the "Loan
Documents") have been duly authorized, and upon their execution and delivery in
accordance with the provisions hereof will constitute legal, valid and binding
agreements and obligations of Borrower or the party which executes the same,
enforceable in accordance with their respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of
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Borrower, or result in any breach of or default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement
of Borrower dated May 3, 1997, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the financial condition of Borrower, (b) discloses all
liabilities of Borrower that are required to be reflected or reserved against
under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance with
generally accepted accounting principles consistently applied. Since the date
of such financial statement there has been no material adverse change in the
financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a
security interest in or otherwise encumbered any of its assets or properties
except in favor of Bank or as otherwise permitted by Bank in writing.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to any
year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower is a party or by which Borrower may be
bound that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, consents, approvals, franchises and licenses required and
rights to all trademarks, trade names, patents, and fictitious names, if any,
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.
SECTION 2.9. ERISA. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as
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defined in ERISA) maintained or contributed to by Borrower (each, a "Plan");
no Reportable Event as defined in ERISA has occurred and is continuing with
respect to any Plan initiated by Borrower; Borrower has met its minimum
funding requirements under ERISA with respect to each Plan; and each Plan
will be able to fulfill its benefit obligations as they come due in
accordance with the Plan documents and under generally accepted accounting
principles.
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable federal or state environmental, hazardous
waste, health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to time. None of the operations of
Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any release of
any toxic or hazardous waste or substance into the environment.
ARTICLE III
CONDITIONS
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation
of Bank to grant any of the Credits is subject to the fulfillment to Bank's
satisfaction of all of the following conditions:
(a) APPROVAL OF BANK COUNSEL. All legal matters incidental to the
granting of each of the Credits shall be satisfactory to Bank's counsel.
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(b) DOCUMENTATION. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Notes.
(ii) Corporate Resolution: Borrowing
(iii) Certificate of Incumbency
(iv) Continuing Standby and Commercial Letter of Credit Agreement
(v) Such other documents as Bank may require under any other Section of
this Agreement.
(c) FINANCIAL CONDITION. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market value
of any collateral required hereunder or a substantial or material portion of the
assets of Borrower.
(d) INSURANCE. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Bank, and where required
by Bank, with loss payable endorsements in favor of Bank.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) COMPLIANCE. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of the
signing of this Agreement and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist.
(b) DOCUMENTATION. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
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ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend credit
to Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents
remain outstanding, and until payment in full of all obligations of Borrower
subject hereto, Borrower shall, unless Bank otherwise consents in writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest,
fees or other liabilities due under any of the Loan Documents at the times and
place and in the manner specified therein.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time, to inspect, audit
and examine such books and records, to make copies of the same, and to inspect
the properties of Borrower.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following,
in form and detail satisfactory to Bank:
(a) not later than 120 days after and as of the end of each fiscal year,
an audited financial statement of Borrower, prepared by a certified public
accountant satisfactory to Bank, to include a balance sheet, income statement
and statement of cash flow and all footnotes and Form 10-K;
(b) not later than 60 days after and as of the end of each fiscal quarter,
a financial statement of Borrower, prepared by Borrower, to include balance
sheet, income statement and Form 10-Q;
(c) not later than 30 days after and as of the end of each fiscal quarter,
a certificate signed by Borrower certifying that Borrower is not in violation of
any term or condition of any of its agreements with Bank of America and no
default or defined event of default has occurred thereunder;
(d) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's continued
existence
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and with the requirements of all laws, rules, regulations and orders of any
governmental authority applicable to Borrower and/or its business.
SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth all
insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that such properties
shall be fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any
and all indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except such (a) as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Bank's satisfaction, for eventual payment thereof in the
event Borrower is obligated to make such payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any
material litigation pending or threatened against Borrower.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows, using generally accepted accounting principles
consistently applied and used consistently with prior practices, except to the
extent modified by the definitions below.
(a) Working Capital not less than $20,000,000.00, at the end of each
fiscal quarter with "Working Capital" defined as total Adjusted Current Assets
minus total Adjusted Current Liabilities. "Adjusted Current Assets" defined as
total current assets plus inventory subject to outstanding Letters of Credit and
"Adjusted Current Liabilities" defined as total current liabilities plus the
face amount of outstanding letters of credit.
(b) Tangible Net Worth not less than (i) $44,900,000.00, at the end of
Borrower's third fiscal quarter of 1997; (ii) an amount equal to
(a) $52,000,000.00 plus (b) 90% of Borrower's net
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income after taxes for the 1997 fiscal year, at the end of Borrower's 1997
fiscal year; and (iii) an amount equal to (a) Borrower's Tangible Net Worth
at the end of its 1997 fiscal year minus (b) $3,000,000.00, at the end of
Borrower's first fiscal quarter of 1998; with "Tangible Net Worth" defined as
the aggregate of (1) total stockholders' equity, as determined using Adjusted
Current Assets and Adjusted Current Liabilities in lieu of, respectively,
current assets and current liabilities, plus (2) subordinated debt less
(3) any intangible assets.
(c) Total Liabilities divided by Tangible Net Worth not greater than .65
to 1.0 at each fiscal year end and 1.25 to 1.0 at the end of each third fiscal
quarter, with "Total Liabilities" defined as the aggregate of adjusted current
liabilities and adjusted non-current liabilities less subordinated debt, and
with "Tangible Net Worth" as defined above.
(d) Quick Ratio not less than 1.2 to 1.0 at the end of each fiscal year,
with "Quick Ratio" defined as the aggregate of unrestricted cash, unrestricted
marketable securities and receivables convertible into cash divided by total
adjusted current liabilities.
(e) After-tax quarterly losses not greater than (i) $2,800,000.00 for
Borrower's third fiscal quarter of 1997, and (ii) $3,000,000.00 for Borrower's
first fiscal quarter of 1998.
(f) Net income after taxes not less than $1.00, determined at each fiscal
year end.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the occurrence of each such event or matter) give written notice
to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or
any condition, event or act which with the giving of notice or the passage of
time or both would constitute an Event of Default; (b) any change in the name or
the organizational structure of Borrower, or any action, claim, investigation,
suit or proceeding pending or asserted by or before any governmental authority,
arbitrator, court or administrative agency challenging or denying Borrower's
qualification for tax treatment as if it were a partnership for income tax
purposes; (c) the occurrence and nature of any Reportable Event or Prohibited
Transaction, each as defined in ERISA, or any funding deficiency with respect to
any Plan; or (d) any termination or cancellation of any insurance policy which
Borrower is required to maintain, or any uninsured or partially uninsured loss
through liability or property damage, or through fire, theft or any other cause
affecting Borrower's property.
ARTICLE V
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NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not without Bank's prior written
consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the Credits
except for the purposes stated in Article I hereof.
SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in
fixed assets in any fiscal year in excess of an aggregate of $7,500,000.00.
SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to Bank,
(b) any other liabilities of Borrower existing as of, and disclosed to Bank
prior to, the date hereof, and (c) any other liabilities of Borrower not
exceeding an aggregate of $500,000.00.
SECTION 5.4. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity; make any substantial change in the nature of
Borrower's business as conducted as of the date hereof; acquire all or
substantially all of the assets of any other entity; nor sell, lease, transfer
or otherwise dispose of all or a substantial or material portion of Borrower's
assets except in the ordinary course of its business.
SECTION 5.5. GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except any of the
foregoing in favor of Bank.
SECTION 5.6. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to
or investments in any person or entity, except any of the foregoing existing as
of, and disclosed to Bank prior to, the date hereof, or any made in the ordinary
course of business (such as short term advances to employees).
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SECTION 5.7. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's stock now or hereafter outstanding, except
that Borrower may during the term of this Agreement make stock repurchases in an
aggregate amount not to exceed $2,000,000.00.
SECTION 5.8. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except any of the foregoing in favor of
Bank or which is existing as of, and disclosed to Bank in writing prior to, the
date hereof.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest, fees or
other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in connection
with, or any representation or warranty made by Borrower or any other party
under this Agreement or any other Loan Document shall prove to be incorrect,
false or misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any obligation,
agreement or other provision contained herein or in any other Loan Document
(other than those referred to in subsections (a) and (b) above), and with
respect to any such default which by its nature can be cured, such default shall
continue for a period of twenty (20) days from its occurrence.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument (other
than any of the Loan Documents) pursuant to which Borrower has incurred any debt
or other liability to any person or entity, including Bank.
(e) The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like process, against the
assets of Borrower; or the entry of a judgment against Borrower.
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<PAGE>
(f) Borrower shall become insolvent, or shall suffer or consent to or
apply for the appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or shall generally fail to pay its debts as they
become due, or shall make a general assignment for the benefit of creditors;
Borrower shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement with creditors or
any other relief under the Bankruptcy Reform Act, Title 11 of the United States
Code, as amended or recodified from time to time ("Bankruptcy Code"), or under
any state or federal law granting relief to debtors, whether now or hereafter in
effect; or any involuntary petition or proceeding pursuant to the Bankruptcy
Code or any other applicable state or federal law relating to bankruptcy,
reorganization or other relief for debtors is filed or commenced against
Borrower, or Borrower shall file an answer admitting the jurisdiction of the
court and the material allegations of any involuntary petition; or Borrower
shall be adjudicated a bankrupt, or an order for relief shall be entered against
Borrower by any court of competent jurisdiction under the Bankruptcy Code or any
other applicable state or federal law relating to bankruptcy, reorganization or
other relief for debtors.
(g) There shall exist or occur any event or condition which Bank in good
faith believes impairs, or is substantially likely to impair, the prospect of
payment or performance by Borrower of its obligations under any of the Loan
Documents.
(h) The dissolution or liquidation of Borrower; or Borrower, or any of
its directors, stockholders or members, shall take action seeking to effect the
dissolution or liquidation of Borrower.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default:
(a) all indebtedness of Borrower under each of the Loan Documents, any term
thereof to the contrary notwithstanding, shall at Bank's option and without
notice become immediately due and payable without presentment, demand, protest
or notice of dishonor, all of which are hereby expressly waived by each
Borrower; (b) the obligation, if any, of Bank to extend any further credit under
any of the Loan Documents shall immediately cease and terminate; and (c) Bank
shall have all rights, powers and remedies available under each of the Loan
Documents, or accorded by law, including without limitation the right to resort
to any or all security for any of the Credits and to exercise any or all of the
rights of a beneficiary or secured party pursuant to applicable law. All
rights, powers and remedies of Bank may be exercised at any time by Bank and
from time to time after the occurrence of an Event of Default, are cumulative
and not
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<PAGE>
exclusive, and shall be in addition to any other rights, powers or remedies
provided by law or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any breach of or default under any of the Loan Documents must be
in writing and shall be effective only to the extent set forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any party
is required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
BORROWER: Natural Wonders, Inc.
4209 Technology Drive
Fremont, CA 94538
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
121 Park Center Plaza
San Jose, CA 95113
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in connection with (a) the negotiation and preparation of this
Agreement and the other Loan Documents, Bank's continued administration hereof
and thereof, and the preparation of any amendments and waivers hereto and
thereto, (b) the enforcement of Bank's rights and/or the collection of any
amounts which become due to Bank under any of the Loan Documents, and (c) the
prosecution or defense of any
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<PAGE>
action in any way related to any of the Loan Documents, including without
limitation, any action for declaratory relief, whether incurred at the trial
or appellate level, in an arbitration proceeding or otherwise, and including
any of the foregoing incurred in connection with any bankruptcy proceeding
(including without limitation, any adversary proceeding, contested matter or
motion brought by Bank or any other person) relating to any Borrower or any
other person or entity.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interest hereunder without Bank's prior
written consent. Bank reserves the right to sell, assign, transfer, negotiate
or grant participations in all or any part of, or any interest in, Bank's rights
and benefits under each of the Loan Documents. In connection therewith, Bank
may disclose all documents and information which Bank now has or may hereafter
acquire relating to any of the Credits, Borrower or its business, [any guarantor
hereunder or the business of such guarantor,] or any collateral required
hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
Loan Documents constitute the entire agreement between Borrower and Bank with
respect to the Credits and supersede all prior negotiations, communications,
discussions and correspondence concerning the subject matter hereof. This
Agreement may be amended or modified only in writing signed by each party
hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every provision of
this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.
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<PAGE>
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when executed and delivered shall be deemed to be
an original, and all of which when taken together shall constitute one and the
same Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
SECTION 7.11. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who
fails or refuses to submit to arbitration following a lawful demand by any other
party shall bear all costs and expenses incurred by such other party in
compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by the
American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set forth
herein shall control. All statutes of limitation applicable to any Dispute
shall apply to any arbitration proceeding. All discovery activities shall be
expressly limited to matters directly relevant to the Dispute being arbitrated.
Judgment upon any award rendered in an arbitration may be entered in any court
having jurisdiction; provided however, that nothing contained herein shall be
deemed to be a waiver by any party that is a bank of the protections afforded to
it under 12 U.S.C. Section 91 or any similar applicable state law.
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<PAGE>
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary, in
any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for
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<PAGE>
vacating, modifying or correcting an award the right to judicial review of
(A) whether the findings of fact rendered by the arbitrators are supported by
substantial evidence, and (B) whether the conclusions of law are erroneous
under the substantive law of the state of California. Judgment confirming an
award in such a proceeding may be entered only if a court determines the
award is supported by substantial evidence and not based on legal error under
the substantive law of the state of California.
(f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK,
NATURAL WONDERS, INC. NATIONAL ASSOCIATION
By: /s/ Michael J. Waide By: /s/ Karen Barone
----------------------- -----------------------
Michael J. Waide Karen Barone
Chief Financial Officer Vice President
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<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands, except operating data and per share amounts)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net sales $149,239 $138,773 $138,080 $136,652 $ 119,591
Cost of goods sold and store
occupancy expenses 100,998 92,489 93,529 92,304 76,981
-------- -------- -------- -------- ----------
Gross margin 48,241 46,284 44,551 44,348 42,610
Selling, general and administrative
expenses 45,794 40,894 40,640 38,748 31,636
Distribution center relocation 749
Loss from earthquake 753
-------- -------- -------- -------- ----------
Operating income 2,447 5,390 3,911 5,600 9,472
Net interest and other expenses 276 791 944 2,707 1,731
-------- -------- -------- -------- ----------
Earnings before income taxes 2,171 4,599 2,967 2,893 7,741
Income taxes 803 1,698 1,157 1,128 2,829
-------- -------- -------- -------- ----------
Net earnings $ 1,368 $ 2,901 $ 1,810 $ 1,765 $ 4,912
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Basic earnings per share* $ 0.17 $ 0.37 $0.23 $ 0.24 $ 0.67
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Diluted earnings per share* $ 0.17 $ 0.36 $0.23 $ 0.23 $ 0.63
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
Shares used in computing basic
earnings per share 8,005 7,862 7,725 7,458 7,335
Shares used in computing diluted
earnings per share 8,200 8,090 7,819 7,809 7,843
OPERATING DATA:
Number of stores open at end of
period 171 151 146 145 123
Average net sales per gross square
foot (52 weeks) $ 373 $ 380 $ 382 $ 407 $ 438
Average net sales per store (52 weeks) $917,000 $932,000 $936,000 $993,000 $1,069,000
Comparable store net sales decrease (1.4)% (0.6)% (5.7)% (5.0)% (4.0)%
BALANCE SHEET DATA AT FISCAL YEAR END:
Working capital $ 29,681 $ 33,495 $ 31,252 $ 30,630 $ 26,875
Total assets 79,337 78,344 77,964 82,440 74,979
Long-term obligations 1,144 3,377 6,972 12,717 7,952
Stockholders' equity 55,802 54,156 50,658 48,659 46,577
</TABLE>
* Basic and diluted EPS amounts have been calculated in accordance with SFAS
No. 128, accordingly all previously reported amounts have been restated.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------
(Percentage of net sales) 1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold and store occupancy expenses 67.7 66.6 67.7
Gross margin 32.3 33.4 32.3
Selling, general and administrative expenses 30.7 29.5 29.4
Operating income 1.6 3.9 2.8
Net interest and other expenses 0.2 0.6 0.7
Income taxes 0.5 1.2 0.8
Net earnings 0.9% 2.1% 1.3%
Number of stores open at end of period 171 151 146
</TABLE>
RESULTS OF OPERATIONS
GENERAL
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years 1997, 1996 and 1995 ended January 31, 1998, February 1, 1997,
and February 3, 1996, respectively. Fiscal 1997 and 1996 were 52 weeks, and
fiscal 1995 was 53 weeks. All references to years, unless otherwise
specified, are intended to refer to the Company's fiscal year.
At the end of 1997, the Company operated 171 stores in 36 states
compared to 151 stores in 36 states at the end of 1996 and 146 stores in 36
states at the end of 1995. In 1997, 9 new stores were opened and 2 stores
were closed, in 1996, 5 new stores were opened and, in 1995, 3 new stores
were opened and 2 were closed. 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. In addition, in 1997, 12 stores
with temporary locations were opened during the holiday season compared to 1
store in 1996 and no stores in 1995. At the end of 1997, one temporary
location remained opened and will be moved to a permanent location in 1998.
<PAGE>
SALES
Sales increased 7.5% to $149,239,000 in 1997 from $138,773,000 in 1996.
The increase of $10,466,000 was due primarily to the 12 stores acquired from
What A World!, Inc., and to new stores and stores in temporary locations,
partially offset by a decrease in comparable store sales. The 12 stores
acquired from What A World!, Inc., accounted for $6,328,000 of the increase,
new stores accounted for $2,895,000 of the increase, the stores in temporary
locations accounted for $1,573,000 of the increase, the full year of sales
from new stores opened in 1996 accounted for $1,531,000 of the increase, and
the decrease in comparable store sales partially offset the increases by
$1,861,000.
Comparable store sales in 1997 decreased 1.4% as compared to 1996. The
decrease was due primarily to a decrease in demand in two key product
categories in the Kids and Discovery area. Although overall comparable store
sales decreased, many of the Company's stores and geographic areas
experienced positive comparable store sales. The largest decreases occurred
primarily in the Chicago and Ohio districts, which comprised 87% of the
comparable store decrease. The average dollar amount per sales ticket
slightly decreased in 1997.
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 in 1996
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 decrease partially offset the increases by $836,000.
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.
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 as a percentage of sales to 67.7% in 1997 from 66.6% in 1996
primarily due to store occupancy costs which increased as a percentage of
sales due to increased occupancy costs in new and acquired stores as well as
to the decrease in comparable store sales.
In 1996, cost of goods sold and store occupancy expenses 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
and lower costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses, which are primarily
non-occupancy store expenses and corporate overhead, increased as a
percentage of sales to 30.7% in 1997 from 29.5% in 1996. The increase was
primarily due to store payroll costs, which could not be fully leveraged with
the decrease in comparable store sales, and to a charge for salary
continuation associated with the resignation of certain executives. Expenses
also increased due to the write-off of certain fixed assets and to costs
associated with the closing of stores. Additionally, costs in 1996 as a
percentage of sales were higher than in 1997, due to an accrual for incentive
compensation based on the achievement of certain earnings targets.
<PAGE>
In 1996, SG&A expenses 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.
OPERATING INCOME
As a result of the foregoing, operating income decreased to $2,447,000,
or 1.6% of sales in 1997, from $5,390,000, or 3.9% of sales in 1996, and
decreased from $3,911,000, or 2.8% of sales in 1995.
NET INTEREST AND OTHER EXPENSES
Net interest and other expenses decreased to $276,000 or 0.2% of sales
in 1997 from $791,000 or 0.6% of sales in 1996 and $944,000 or 0.7% of sales
in 1995. The decrease in 1997 from 1996 and in 1996 from 1995 was primarily
due to a decline in interest expense as a result of reduced average
borrowings.
INCOME TAXES
The effective tax rate in 1997 was 37.0% compared to 36.9% in 1996. No
valuation allowance was necessary to offset the deferred tax asset at the end
of 1997, 1996 or 1995 due to the Company's history of earnings.
NET EARNINGS
As a result of the foregoing, net earnings decreased to $1,368,000 or
0.9% of sales in 1997 from $2,901,000 or 2.1% of sales in 1996, whereas in
1996 net earnings increased from $1,810,000 or 1.3% of sales in 1995.
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 borrowings.
At fiscal year-end 1997 cash and investments were $19,751,000 in
comparison to $25,567,000 at year-end 1996. The decrease was primarily due
to the Company's investment in a new computer hardware and software system
and to the continued strategy of reducing average borrowings. In addition,
cash was used for construction costs and fixtures for new stores, remodeling
of existing stores, and the acquisition of What a World!, Inc. which had a
total purchase price, including acquisition costs, of $738,000.
In 1998, the Company plans to open approximately 9 new stores and,
during the holiday season, approximately 20 temporary locations. The Company
anticipates that cash in 1998 will primarily be used for capital expenditures
and merchandise inventory for new stores and temporary locations, a new point
of sale system for the stores, repayment of debt, and to purchase inventory
for the Company's existing stores, particularly prior to and during the peak
holiday selling season. Additionally, the Board of Directors of the Company
has authorized the repurchase of up to $2,000,000 of Natural Wonders
outstanding common stock through September 1998. As of March 13, 1998, the
Company has repurchased 24,600 shares of Natural Wonders common stock for a
total of $119,925.
The Company has conducted a review of its computer systems to identify
those areas that could be affected by the Year 2000 issue. The Company
presently believes, with the new merchandise and financial information system
placed in service in February 1998, the Year 2000 will not pose significant
operational problems. The Company also believes that customers are not
likely to be affected by the Year 2000 issue. There can be no guarantee that
the systems of other companies on which the Company's systems rely will be
timely converted and would not have an adverse effect on the Company's
systems. The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for the Year 2000 modifications.
The Company does not expect expenditures related to the Year 2000 issue to
be material and as such, costs associated with Year 2000 are not expected to
have a significant impact on the Company's results of operations, liquidity,
or capital resources.
<PAGE>
The Company has a credit facility agreement with a commercial bank,
which includes a revolving line of credit in the amount of $12,000,000 which
expires on June 1, 1998. 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 at the time of borrowing. In addition, the Company
entered into a second credit facility agreement with another commercial bank,
which includes a revolving line of credit for $3,000,000 which expires on
June 30, 1998. Commercial and standby letters of credit are also available up
to $3,000,000. The Company has the option of choosing interest payable at a
rate based on LIBOR plus 1.5% or at a rate equal to the bank's prime rate.
Both agreements contain restrictive covenants, which include achieving
quarterly earnings/loss targets, maintaining certain financial ratios, and
requiring bank consent for the payment of dividends. At fiscal year-end
1997, the Company did not meet certain of these covenants and had received
waivers of such non-compliance from both banks. The Company believes it will
be able to renew or replace such credit facilities on substantially similar
terms.
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 facilities will be sufficient to fund the Company's
operations for the next 12 months.
In January 1998, a lawsuit was filed against the Company. The complaint
alleges that certain products sold by the Company infringe two patents of the
plaintiff and seeks injunctive relief, unspecified damages, and enhanced
damages and attorneys fees. The case is currently in the early stages of
evaluation and the Company's attorneys have not yet formed an opinion as to
either the likelihood of the outcome or the amount of damages, if any. It is
the opinion of management that the ultimate resolution of the above matter
will not have a material adverse effect on the Company's financial condition
taken as a whole.
INFLATION AND SEASONALITY
The Company does not believe that its operations have been materially
affected by inflation during 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
per share amounts)
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Net sales $ 149,239 $ 138,773 $ 138,080
Cost of goods sold and store occupancy expenses 100,998 92,489 93,529
--------- --------- ---------
Gross margin 48,241 46,284 44,551
Selling, general and administrative expenses 45,794 40,894 40,640
--------- --------- ---------
Operating income 2,447 5,390 3,911
Interest expense 625 951 1,445
Other expenses 450 550 553
Interest and other income (799) (710) (1,054)
--------- --------- ---------
Earnings before income taxes 2,171 4,599 2,967
Income taxes 803 1,698 1,157
--------- --------- ---------
Net earnings $ 1,368 $ 2,901 $ 1,810
--------- --------- ---------
--------- --------- ---------
Net earnings per common share:
Basic $ 0.17 $ 0.37 $ 0.23
Diluted $ 0.17 $ 0.36 $ 0.23
Weighted average common shares outstanding:
Basic 8,005 7,862 7,725
Diluted 8,200 8,090 7,819
</TABLE>
See notes to financial statements
<PAGE>
NATURAL WONDERS, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,351 $ 7,667
Short-term investments 13,400 17,900
Merchandise inventories 23,184 20,529
Prepaid expenses and other current assets 3,141 2,630
Deferred taxes 2,191 1,557
------- -------
Total current assets 48,267 50,283
Property and Equipment:
Leasehold improvements 28,818 25,490
Property and equipment under capital lease 4,993 13,181
Furniture, fixtures and equipment 27,232 13,937
------- -------
61,043 52,608
Less accumulated depreciation and amortization (32,200) (26,329)
------- -------
28,843 26,279
Deferred Taxes 2,080 1,635
Other Assets 147 147
------- -------
Total Assets $79,337 $ 78,344
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 7,997 $ 5,175
Accrued compensation and related costs 2,825 2,523
Accrued liabilities 3,636 2,798
Income taxes payable 1,857 2,044
Current portion of capital lease obligations 866 1,789
Current portion of long-term debt 1,405 2,459
------- -------
Total current liabilities 18,586 16,788
Capital Lease Obligations 461 1,327
Long-term Debt 683 2,050
Deferred Rent 3,805 4,023
Commitments and Contingencies (Note 5)
Stockholders' Equity:
Preferred stock, par value $.0001; authorized
1,000,000 shares; none issued
Common stock, par value $.0001; authorized
17,000,000 shares; issued and outstanding
8,072,109 and 7,986,846 shares 1 1
Capital in excess of par value 34,528 34,250
Retained earnings 21,273 19,905
------- -------
Total stockholders' equity 55,802 54,156
------- -------
Total Liabilities and Stockholders' Equity $79,337 $ 78,344
------- -------
------- -------
</TABLE>
See notes to financial statements.
<PAGE>
NATURAL WONDERS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings $ 1,368 $ 2,901 $ 1,810
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 6,174 6,047 6,008
Loss on disposal and write-down of assets 48 15
Deferred taxes (1,079) (655) 570
Changes in operating assets and liabilities,
net of effect of acquisition:
Merchandise inventories (2,341) (1,313) 1,843
Prepaid expenses and other assets (511) 36 (1,374)
Trade accounts payable 2,822 (799) 959
Accrued compensation and related costs 302 160 450
Accrued liabilities 838 507 (431)
Income taxes payable (187) 1,270 (1,766)
Deferred rent (218) 69 355
Tax benefit from exercise of stock
options and warrants 27 53 6
-------- -------- --------
Net cash provided by operating activities 7,243 8,276 8,445
Cash Flows From Financing Activities:
Principal payments on capital lease obligations (1,789) (2,218) (2,333)
Principal payments on long-term debt (2,421) (2,107) (3,709)
Short-term borrowings on bank line of credit 33,900 6,400 1,000
Payments on bank line of credit (33,900) (6,400) (1,000)
Exercise of stock options and warrants 167 480 125
Net proceeds from sale of common stock 84 64 58
-------- -------- --------
Net cash used in financing activities (3,959) (3,781) (5,859)
Cash Flows From Investing Activities:
Purchases of short-term investments (18,100) (31,350) (29,763)
Sales of short-term investments 22,600 31,545 28,968
Purchases of property and equipment (8,362) (3,375) (1,829)
Business acquisition (738)
-------- -------- --------
Net cash used in investing activities (4,600) (3,180) (2,624)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents (1,316) 1,315 (38)
Cash and Cash Equivalents:
Beginning of year 7,667 6,352 6,390
-------- -------- --------
End of year $ 6,351 $ 7,667 $ 6,352
-------- -------- --------
-------- -------- --------
Supplemental Information
Cash paid during year:
Interest $ 614 $ 952 $ 1,521
Income taxes $ 2,083 $ 1,027 $ 2,299
</TABLE>
See notes to financial statements.
<PAGE>
NATURAL WONDERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Capital in Total
------------------------ Excess of Retained Stockholders'
Shares Amount Par Value Earnings Equity
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Exercise of stock options 60,692 167 167
Tax benefit from exercise of stock
options 27 27
Employee stock purchase plan 24,571 84 84
Net earnings 1,368 1,368
--------- ------- ------- ------- -------
Balance, January 31, 1998 8,072,109 $1 $34,528 $21,273 $55,802
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
</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 171 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 1997, 1996 and 1995 ended January 31, 1998,
February 1, 1997, and February 3, 1996, respectively. Fiscal 1997 and 1996
were 52 weeks and fiscal 1995 was 53 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 an original maturity of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS Short-term investments consist of highly liquid
investments with an original maturity greater than three months. 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. Investments in the instruments of a single
entity are limited to the lesser of $5,000,000 or 20% of the market value of
the portfolio.
The amortized cost and fair value of available-for-sale municipal money
market securities as of January 31, 1998 and February 1, 1997 were
$13,400,000 and $17,900,000, respectively. There were no gross unrealized
gains or losses. All available-for-sale investment securities at January 31,
1998 are due after five years. Proceeds from the sale of securities
available for sale during 1997 and 1996 were $22,600,000 and $31,545,000,
respectively. No gains or losses were realized on these sales.
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 3 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.
<PAGE>
EARNINGS PER SHARE The Company adopted SFAS No. 128, "Earnings Per Share,"
for the year ended January 31, 1998. As required by this statement, all
prior periods presented have been restated in accordance with the provisions
of SFAS No. 128. Basic earnings per share is calculated based upon the
weighted average number of common shares outstanding, excluding common share
equivalents, during the period. Diluted earnings per share is calculated
based upon the weighted average number of shares outstanding plus common
share equivalents during the period.
The following is a reconciliation of the Company's basic and diluted net
income per share computations:
<TABLE>
<CAPTION>
(Shares in thousands)
Fiscal Year
---------------------------------------------------------
1997 1996 1995
----------------- ---------------- ----------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 8,005 $0.17 7,862 $0.37 7,725 $0.23
Effect of dilutive stock options 195 228 (0.01) 94
----------------- ---------------- ----------------
Diluted EPS 8,200 $0.17 8,090 $0.36 7,819 $0.23
----------------- ---------------- ----------------
----------------- ---------------- ----------------
</TABLE>
The following options were not included in the computation of diluted EPS
because such options' exercise price was greater than the average market
price of the common shares:
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------------------
1997 1996 1995
-------------- --------------- ---------------
<S> <C> <C> <C>
Options to purchase shares of
common stock 213,000 220,000 298,000
-------------- --------------- ---------------
Exercise prices $5.13 - $15.25 $4.94 - $15.25 $4.00 - $15.25
-------------- --------------- ---------------
Expiration dates June 2003 - June 2003 - January 1997 -
November 2007 January 2007 November 2005
-------------- --------------- ---------------
</TABLE>
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.
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.
REPORTING COMPREHENSIVE INCOME The Company is required to adopt SFAS No.
130, "Reporting Comprehensive Income", in 1998. SFAS No. 130 requires that an
enterprise report, by major components and as a single total, the change in
its net assets during the period from non-owner sources. The Company does not
expect such adoption to have a significant impact on its financial statements.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION The Company is required to
adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", in 1998. SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures
about its products, services, geographic area, and major customers. The
Company does not expect such adoption to have a significant impact on its
financial statements.
<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 which expires on June 1, 1998. 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 at the time
of borrowing. In addition, the Company has a second credit facility agreement
with another commercial bank which includes a revolving line of credit for
$3,000,000 which expires on June 30, 1998. Commercial and standby letters of
credit are also available up to $3,000,000. The Company has the option of
choosing interest payable at a rate based on LIBOR plus 1.5% or at a rate
equal to the bank's prime rate. There are no outstanding borrowings as of
January 31, 1998. Both agreements contain restrictive covenants, which
include achieving quarterly earnings/loss targets, maintaining certain
financial ratios and requiring bank consent for the payment of dividends.
The Company was not in compliance with certain debt covenants as of January
31, 1998. Waivers of such non-compliance have been obtained from both banks.
The Company believes it will be able to renew or replace such credit
facilities on substantially similar terms.
Outstanding commercial and standby letters of credit as of January 31, 1998
and February 1, 1997 approximated $984,000 and $794,000, respectively.
LONG-TERM DEBT Long-term debt consisted of the following:
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year
1997 1996
------ ------
<S> <C> <C>
Term bank loan, due in semi-annual installments of $349
through February 1999, interest at 7.4% as of January 31, 1998 $1,035 $1,724
Term bank loan, due in semi-annual installments of $500
through February 1997 500
Notes payable, due in monthly installments of $129 through
December 2000, interest at 8.7% to 11.0% 1,053 2,285
------ ------
Total long-term debt, including current portion 2,088 4,509
Less current portion 1,405 2,459
------ ------
Total long-term debt $683 $2,050
------ ------
------ ------
</TABLE>
Future maturities of long-term debt outstanding as of year-end 1997, are
as follows (in thousands) : 1998 - $1,405; 1999 - $671; 2000 - $12.
The Company was not in compliance with certain debt covenants as of January
31, 1998. Waivers of such non-compliance have been obtained from both banks.
<PAGE>
NOTE 3. STOCKHOLDERS' EQUITY AND BENEFIT PLAN
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. There
are 2,150,000 shares of common stock authorized for issuance under the plan.
Stock options generally are granted at prices equal to the fair market value on
the date of grant, vest over a period of three to five years, and expire in ten
years.
SFAS No. 123, "Accounting for Stock-Based Compensation," 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 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 1997, 1996 and in 1995; risk-free
interest rates, 6.2% in 1997, 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 1997, 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 $1.2 million (basic: $0.15 per share;
diluted: $0.14 per share) in fiscal 1997, $2.7 million (basic: $0.35 per share;
diluted: $0.34 per share) in fiscal 1996, and $1.8 million (basic and diluted:
$0.23 per share) in fiscal 1995.
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted
Options Average
Outstanding Exercise Price
----------- --------------
<S> <C> <C>
Outstanding, January 28, 1995 (461,305 exercisable at
a weighted average price of $2.65) 732,995 $4.34
Granted (weighted average fair value $1.91) 224,660 3.17
Canceled (126,281) 5.63
Exercised (240,667) 0.52
---------- ------
Outstanding, February 3, 1996 (280,007 exercisable at
a weighted average price of $5.54) 590,707 5.17
Granted (weighted average fair value $2.13) 415,510 3.57
Canceled (109,378) 7.53
Exercised (174,155) 2.64
---------- ------
Outstanding, February 1, 1997 (164,412 exercisable at
a weighted average price of $7.33) 722,684 4.54
Granted (weighted average fair value $3.09) 328,400 5.17
Canceled (266,217) 4.90
Exercised (60,692) 2.79
---------- ------
Outstanding, January 31, 1998 (253,520 exercisable at a
weighted average price of $5.41) 724,175 $4.83
---------- ------
---------- ------
</TABLE>
There were 472,670 shares available for grant under the plan.
<PAGE>
The following table summarizes additional information about stock options at
January 31, 1998:
<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 - $3.00 223,271 7.77 $2.59 97,665 $2.65
$3.06 - $4.88 224,672 8.68 4.45 36,610 4.31
$5.00 - $7.53 227,032 8.36 6.11 70,205 6.03
$9.44 - $15.25 49,200 5.56 10.86 49,040 10.86
- -------------- ------- ---- ----- ------- -----
$2.31 - $15.25 724,175 8.09 $4.83 253,520 $5.41
- -------------- ------- ---- ----- ------- -----
- -------------- ------- ---- ----- ------- -----
</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 January 31, 1998, 142,195 shares have been issued.
WARRANTS
No warrants were exercised during fiscal 1997 or 1995. Warrants for the
purchase of 3,842 shares of common stock were exercised in 1996 at an exercise
price of $4.485 per share. As of January 31, 1998, 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% of such
employee contributions up to $250 per year. Total Company contributions to the
plan were approximately $61,000, $64,000, and $53,000 in 1997, 1996, and 1995,
respectively.
STOCK REPURCHASE PROGRAM
In fiscal 1997 the Board of Directors of the Company authorized the repurchase
of up to $2,000,000 of the Company's outstanding common stock. Beginning in
February 1998, the Company began repurchasing stock and as of March 13, 1998 had
purchased 24,600 shares for a total of $119,925.
<PAGE>
NOTE 4. INCOME TAXES
The provision for income taxes consists of the following:
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,451 $1,761 $326
State 431 592 261
------ ------ ------
1,882 2,353 587
Deferred (1,079) (655) 570
------ ------ ------
Total $803 $1,698 $1,157
------ ------ ------
------ ------ ------
</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
------------------------------------
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal income
tax benefit 6.5 6.0 6.4
Non taxable interest (5.3) (2.7) (5.4)
Other 1.8 (0.4) 4.0
------ ------ ------
Effective tax rate 37.0% 36.9% 39.0%
------ ------ ------
------ ------ ------
</TABLE>
The components of the net deferred tax asset at year-end are as follows:
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------
1997 1996
----------------------- -------------------------
Current Non-Current Current Non-Current
----------------------------------------------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Deferred rent $1,552 $1,687
Merchandise Inventories $887 $652
Accrued employee benefits 562 538
Miscellaneous accruals 572 255
Depreciation 768
Alternative minimum tax credits and other 236 32 194 176
------ ------ ------ ------
2,257 2,352 1,639 1,863
------ ------ ------ ------
Deferred tax liabilities:
State taxes and other 66 272 82 228
------ ------ ------ ------
Net deferred tax asset $2,191 $2,080 $1,557 $1,635
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
No valuation allowance was necessary at January 31, 1998 or February 1, 1997.
<PAGE>
NOTE 5. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office, distribution and retail facilities under
operating leases expiring at dates from 1998 to 2008. Certain of the leases
include renewal provisions at the Company's option. The Company also subleases
space at various locations with both month-to-month and noncancellable sublease
agreements.
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 annual rental payments and sublease income under
noncancellable leases in effect at January 31, 1998 are as follows:
<TABLE>
<CAPTION>
(In thousands)
Fiscal year: Capital Operating Sublease Net Lease
Lease Lease Income Commitments
------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $1,000 $14,429 $158 $15,271
1999 433 13,985 59 14,359
2000 12,963 12,963
2001 12,195 12,195
2002 10,402 10,402
Thereafter 24,999 24,999
------ ------- ---- -------
Total minimum lease commitments 1,433 $88,973 $217 $90,189
------- ---- -------
------- ---- -------
Less amounts representing interest 106
------
Present value of capital lease obligation 1,327
Less current portion 866
------
Long-term capital lease obligations $461
------
------
</TABLE>
All of the leases for the Company's retail stores contain clauses, which
provide for additional rent if sales exceed predetermined levels. The
components of rent expense for 1997, 1996 and 1995 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Minimum and deferred rent $ 13,800 $ 12,389 $ 12,168
Percentage rent $ 80 $ 101 $ 98
Sublease income $ 99
</TABLE>
Accumulated amortization of property under capital leases as of January 31,
1998 and February 1, 1997 was $2,768,000 and $8,418,000, respectively.
During 1997 a number of capital leases expired, the related equipment was
purchased and the balances reclassified to equipment.
PURCHASE COMMITMENTS
The Company had purchase commitments at January 31, 1998 totaling $480,000
for the final payment related to the acquisition of a new computer software
and hardware system. This new system, which includes merchandising,
distribution and financial systems, was placed into service in February 1998.
<PAGE>
LITIGATION
In January 1998, a lawsuit was filed against the Company. The complaint
alleges that certain products sold by the Company infringe two patents of the
plaintiff and seeks injunctive relief, unspecified damages, and enhanced
damages and attorneys fees. The case is currently in the early stages of
evaluation and the Company's attorneys have not yet formed an opinion as to
either the likelihood of the outcome or the amount of damages, if any. It is
the opinion of management that the ultimate resolution of the above matter
will not have a material adverse effect on the Company's financial condition
taken as a whole.
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 taken as a
whole.
NOTE 6. ACQUISITION
On May 22, 1997, the company acquired 12 locations through the acquisition of
substantially all the operating assets of What A World! Inc. Inventory and
store fixtures were the primary assets acquired and certain retail facility
leases were assumed. The total purchase price, including acquisition costs,
was $738,000 and was recorded using the purchase method of accounting. The
Company had previously operated the 12 store chain under a management
agreement from March 10, 1997 until May 22, 1997 and recognized $175,000 of
management fees which have been recorded as other income.
NOTE 7. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal years 1997 and 1996 is
as follows:
<TABLE>
<CAPTION>
Fiscal Year 1997 Quarter Ended
- -------------------------------------------------------------------------------------------------------------
May 3, 1997 Aug. 2, 1997 Nov. 1, 1997 Jan. 31, 1998
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Net sales $22,236 $26,850 $25,199 $74,954
Gross margin 5,817 6,691 7,511 28,222
Net earnings (loss) (2,099) (2,327) (2,189) 7,983
Basic earnings (loss) per share $(.26) $(.29) $(.27) $0.99
Diluted earnings (loss) per share $(.26) $(.29) $(.27) $0.96
Fiscal Year 1996 Quarter Ended
- -------------------------------------------------------------------------------------------------------------
May 4, 1996 Aug. 3, 1996 Nov. 2, 1996 Feb. 1, 1997
----------- ------------ ------------ -------------
(In thousands, except per share amounts)
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
Basic earnings (loss) per share $(.28) $(.16) $(.24) $1.04
Diluted earnings (loss) per share $(.28) $(.16) $(.24) $1.02
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Natural Wonders, Inc.
Fremont, California
We have audited the accompanying balance sheets of Natural Wonders, Inc.
(the Company) as of January 31, 1998 and February 1, 1997 and the related
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended January 31, 1998. 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
January 31, 1998 and February 1, 1997, and the results of its operations and
its cash flows for each of the three years in the period ended January 31,
1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche
San Francisco, California
March 13, 1998
<PAGE>
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 1997 and 1996,
is as follows:
<TABLE>
<CAPTION>
1997 High Low
----- -----
<S> <C> <C>
First Quarter 5 3/8 3 3/4
Second Quarter 4 5/8 3 3/4
Third Quarter 7 5/8 3 3/4
Fourth Quarter 7 13/16 4 1/8
1996 High Low
----- -----
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
</TABLE>
As of March 31, 1998, there were approximately 300 stockholders of record
and 1,500 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>
[DELOITTE & TOUCHE LLP LETTERHEAD]
EXHIBIT 23.1
INDEPENDENT AUDITOR'S 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, 33-62390 and 333-49021 of Natural Wonders, Inc.
on Form S-8 of our report dated March 13, 1998, incorporated by reference in
this Annual Report on Form 10-K of Natural Wonders, Inc. for the year ended
January 31, 1998.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
San Francisco, California
April 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 6,351
<SECURITIES> 13,400
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 23,184
<CURRENT-ASSETS> 48,267
<PP&E> 61,043
<DEPRECIATION> 32,200
<TOTAL-ASSETS> 79,337
<CURRENT-LIABILITIES> 18,586
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 55,801
<TOTAL-LIABILITY-AND-EQUITY> 79,337
<SALES> 149,239
<TOTAL-REVENUES> 149,239
<CGS> 100,998
<TOTAL-COSTS> 100,998
<OTHER-EXPENSES> 45,794
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 625
<INCOME-PRETAX> 2,171
<INCOME-TAX> 803
<INCOME-CONTINUING> 1,368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,368
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998 JAN-31-1998
<PERIOD-START> FEB-02-1997 MAY-04-1998 AUG-03-1998
<PERIOD-END> MAY-03-1997 AUG-02-1997 NOV-01-1997
<CASH> 3,471 6,928 1,887
<SECURITIES> 13,000 3,300 0
<RECEIVABLES> 0 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 23,098 25,262 46,519
<CURRENT-ASSETS> 45,943 42,813 57,666
<PP&E> 53,782 55,881 57,732
<DEPRECIATION> 27,871 29,408 30,895
<TOTAL-ASSETS> 73,632 71,071 86,291
<CURRENT-LIABILITIES> 14,814 15,353 33,112
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 1 1 1
<OTHER-SE> 52,058 49,776 47,603
<TOTAL-LIABILITY-AND-EQUITY> 73,632 71,071 86,291
<SALES> 22,236 26,850 25,199
<TOTAL-REVENUES> 22,236 26,850 25,199
<CGS> 16,419 20,159 17,688
<TOTAL-COSTS> 16,419 20,159 17,688
<OTHER-EXPENSES> 9,173 10,484 10,828
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 156 136 153
<INCOME-PRETAX> (3,442) (3,816) (3,588)
<INCOME-TAX> (1,343) (1,489) (1,399)
<INCOME-CONTINUING> (2,099) (2,327) (2,189)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (2,099) (2,327) (2,189)
<EPS-PRIMARY> (0.26) (0.29) (0.27)
<EPS-DILUTED> (0.26) (0.29) (0.27)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> FEB-01-1997 FEB-01-1997 FEB-01-1997 FEB-01-1997
<PERIOD-START> FEB-04-1996 FEB-04-1996 MAY-05-1996 AUG-04-1996
<PERIOD-END> FEB-01-1997 MAY-04-1996 AUG-03-1996 NOV-02-1996
<CASH> 7,667 2,899 6,341 3,010
<SECURITIES> 17,900 13,835 8,835 0
<RECEIVABLES> 0 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 20,529 22,731 19,849 41,882
<CURRENT-ASSETS> 50,283 45,060 41,326 52,631
<PP&E> 52,608 49,508 50,209 51,414
<DEPRECIATION> 26,329 21,785 23,296 24,827
<TOTAL-ASSETS> 78,344 74,154 69,600 80,574
<CURRENT-LIABILITIES> 16,788 15,574 13,033 26,342
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 1 1 1 1
<OTHER-SE> 54,155 48,452 47,215 45,666
<TOTAL-LIABILITY-AND-EQUITY> 78,344 74,154 69,600 80,574
<SALES> 138,773 21,919 25,954 22,896
<TOTAL-REVENUES> 138,773 21,919 25,954 22,896
<CGS> 92,489 16,126 18,349 16,135
<TOTAL-COSTS> 92,489 16,126 18,349 16,135
<OTHER-EXPENSES> 40,894 9,228 9,514 9,706
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 951 282 242 208
<INCOME-PRETAX> 4,599 (3,626) (2,106) (3,148)
<INCOME-TAX> 1,698 (1,414) (821) (1,228)
<INCOME-CONTINUING> 2,901 (2,212) (1,285) (1,920)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,901 (2,212) (1,285) (1,920)
<EPS-PRIMARY> 0.37 (0.28) (0.16) (0.24)
<EPS-DILUTED> 0.36 (0.28) (0.16) (0.24)
</TABLE>
