<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MAY 2, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-20035
NATURAL WONDERS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0141610
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4209 TECHNOLOGY DRIVE, FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
(Zip code)
510-252-9600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Common stock outstanding as of May 30, 1998: 8,058,659 shares of common stock.
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NATURAL WONDERS, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
PART I. FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Operations 3
Quarters ended May 2, 1998 and May 3, 1997
Condensed Balance Sheets 4
May 2, 1998, January 31, 1998 and May 3, 1997
Condensed Statements of Cash Flows 5
Three months ended May 2, 1998 and May 3, 1997
Notes to Condensed Financial Statements 6-7
ITEM 2. Management's Discussion and Analysis of 8-11
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 11
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security
Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
</TABLE>
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------
MAY 2, MAY 3,
1998 1997
------- -------
<S> <C> <C>
Net sales $ 23,265 $ 22,236
Cost of goods sold and
store occupancy expenses 19,438 16,419
------- -------
Gross margin 3,827 5,817
Selling, general & administrative expenses 11,048 9,173
------- -------
Operating loss (7,221) (3,356)
Interest expense 70 156
Interest income and other, net (27) (70)
------- -------
Loss before taxes (7,264) (3,442)
Income tax benefit (2,688) (1,343)
------- -------
Net loss $ (4,576) $ (2,099)
------- -------
------- -------
Net loss per share, basic & diluted: $ (0.57) $ (0.26)
Shares used in computing per share amounts,
basic and diluted: 8,072 7,988
</TABLE>
See notes to financial statements
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NATURAL WONDERS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 2, JANUARY 31, MAY 3,
1998 1998 1997
------------ ------------ ------------
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,247 $ 6,351 $ 3,471
Short-term investments 3,002 13,400 13,000
Merchandise inventories 27,072 23,184 23,098
Prepaid expenses and other current assets 7,798 5,332 6,374
------------ ------------ ------------
Total current assets 41,119 48,267 45,943
Property and Equipment:
Leasehold improvements 29,510 28,818 26,037
Property and equipment under capital lease 4,993 4,993 13,181
Furniture, fixtures and equipment 28,287 27,232 14,564
------------ ------------ ------------
62,790 61,043 53,782
Less accumulated depreciation and amortization (33,760) (32,200) (27,871)
------------ ------------ ------------
29,030 28,843 25,911
Other Assets 2,216 2,227 1,778
------------ ------------ ------------
Total Assets $ 72,365 $ 79,337 $ 73,632
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 8,423 $ 7,997 $ 6,876
Accrued compensation and related costs 2,184 2,825 1,961
Accrued liabilities 4,119 3,636 2,629
Income taxes payable 312 1,857 198
Current portion of capital lease obligations 755 866 1,603
Current portion of long-term debt 1,235 1,405 1,547
------------ ------------ ------------
Total current liabilities 17,028 18,586 14,814
Capital Lease Obligations 271 461 1,019
Long-Term Debt 211 683 1,769
Deferred Rent 3,723 3,805 3,971
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.0001; authorized
17,000,000 shares; issued
8,155,709, 8,072,109 and 7,987,514 shares 1 1 1
Capital in excess of par value 34,746 34,528 34,252
Retained earnings 16,697 21,273 17,806
------------ ------------ ------------
51,444 55,802 52,059
Less: Treasury stock at cost: 67,800 shares 312
Total stockholders' equity 51,132 55,802 52,059
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 72,365 $ 79,337 $ 73,632
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to financial statements
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MAY 2, 1998 MAY 3, 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (4,576) $ (2,099)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,683 1,542
Loss on sale of asset 183
Change in operating assets and liabilities:
Merchandise inventories (3,888) (2,569)
Prepaid expenses and other assets (2,455) (2,183)
Trade accounts payable 426 1,701
Accrued compensation and related costs (641) (562)
Accrued liabilities 483 29
Income tax payable (1,545) (2,044)
Deferred rent (82) (52)
------------ -----------
Net cash used in operating activities (10,412) (6,237)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (301) (1,687)
Principal payments on long-term debt (642)
Purchase of treasury stock (312)
Exercise of stock options and warrants 218 2
------------ -----------
Net cash used in financing activities (1,037) (1,685)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (6,902) (3,200)
Sales of short-term investments 17,300 8,100
Purchases of property and equipment (2,053) (1,174)
------------ -----------
Net cash provided by investing activities 8,345 3,726
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,104) (4,196)
CASH AND CASH EQUIVALENTS:
Beginning of year 6,351 7,667
------------ -----------
End of period $ 3,247 $ 3,471
------------ -----------
------------ -----------
CASH PAID DURING PERIOD:
Interest $ 76 $ 157
Income taxes $ 1,545 $ 1,862
</TABLE>
See notes to financial statements
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NATURAL WONDERS, INC.
---------------------
NOTES TO FINANCIAL STATEMENTS
1. The financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation of the financial position
and operating results for the interim periods. The results of operations
for the quarter ended May 2, 1998 are not necessarily indicative of the
results to be expected for the entire fiscal year ending January 30, 1999.
This financial information should be read in conjunction with the audited
financial statements and notes thereto included in the Company's 1997
Annual Report to Stockholders and Form 10-K for the fiscal year ended
January 31, 1998 as filed with the Securities and Exchange Commission.
2. In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
which requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources; and No. 131, "Disclosures about Segments of an Enterprise and
Related Information" which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures
about its products, services, geographic area, and major customers.
Adoption of these statements will not materially impact the Company's
financial position, results of operations or cash flows. Both statements
are effective for fiscal years beginning after December 15, 1997, with
earlier application permitted.
3. Effective June 5, 1998, Natural Wonders, Inc. reached a negotiated
settlement of the patent infringement claim disclosed in its annual report
and Form 10K as of fiscal year end January 31, 1998. The claim involved the
sale of product primarily in the company's fiscal years of 1996 and 1997
ending January 28, 1997 and January 31, 1998 respectively. The current year
impact of the settlement, including the cash settlement paid, legal
expenses and reserves, net of amounts previously accrued, was approximately
$525,000 or $0.04 per share.
4. The Company has a credit facility agreement 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. The Company has a second
credit facility 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. 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 out of
compliance with one of the banks as of May 2, 1998, and is in the process
of renegotiating the terms of its lines. The Company believes it will be
able to renew or replace such credit facilities on substantially similar
terms.
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5. 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
the end of the first quarter of fiscal 1998 had purchased 67,800 shares for
a total of $312,000.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
- ---------------------
GENERAL
As of May 2, 1998, Natural Wonders operated 173 stores in 36 states
compared to 152 stores in 36 states as of May 3, 1997. In the first three months
of 1998, three new stores were opened and one store was closed as compared to
one new store opened in the first three months of fiscal 1997.
SALES
During the first quarter of 1998, sales increased 4.6% over the same period
in 1997. The increase was primarily due to new stores and to a full period of
sales generated from stores opened in 1997. Comparable store sales decreased
5.1% in the first quarter of 1998, as compared to the same period in 1997. The
decrease in the first quarter was primarily due to continued weakness in the
Discovery and Kids merchandizing areas.
COST OF GOODS SOLD AND STORE OCCUPANCY EXPENSES
Cost of goods sold and store occupancy expenses include distribution center
costs and other expenses associated with acquiring inventory. As a percentage
of sales, these costs increased to 83.5% in the first quarter of 1998 from
73.8% in the first quarter of 1997. The increase in costs as a percentage of
sales in the first quarter was primarily due to increased clearance and
promotional sales, store occupancy costs which increased as a percentage of
sales due to increased occupancy costs in new and acquired stores, and to the
impact of the reduction in comparable store sales on store occupancy fixed
expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, (SG&A), are primarily
non-occupancy store expenses and corporate overhead. As a percentage of sales,
these costs increased to 47.5% in the first quarter of 1998 from 41.3% in the
first quarter of 1997. The increase in the costs as a percentage of sales in the
first quarter was primarily due to a legal settlement and costs, as well as
store payroll costs, which could not be fully leveraged with the decrease in
comparable store sales.
OPERATING INCOME
As a result of the foregoing, the operating loss was $7,221,000 or 31.0% of
sales in the first quarter of 1998 versus $3,356,000 or 15.1% of sales in the
first quarter of 1997.
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INTEREST AND OTHER, NET
Interest and Other, Net decreased to 0.02% of sales in the first quarter of
1998 from 0.4 % of sales in the first quarter of 1997. The decrease was
primarily due to a decline in interest expense as a result of reduced average
borrowings.
NET LOSS
As a result of the foregoing, the net loss increased to $4,576,000 or 19.7%
of sales in the first quarter of 1998 from $2,099,000 or 9.4% of sales in the
first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of capital in recent years have been net cash
flow from operations. Seasonal working capital requirements have been met
through short-term bank borrowings.
During the first three months of fiscal 1998, cash and cash equivalents
decreased $13,490,000. This was primarily due to seasonal operating losses,
(historically incurred in the first three fiscal quarters), an increase in
merchandise inventories and fixtures for new stores, the pay down of capital
lease and long-term debt obligations, and payments for new information systems
and income taxes. Additionally, 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 the end of the first quarter of fiscal 1998 had
purchased 67,800 shares for a total of $312,000. Cash and cash equivalents were
positively impacted by the sale of short-term investments.
Compared to the first quarter in the prior year, cash decreased due to
higher seasonal operating losses and purchasing more inventory and equipment.
This was offset in part by higher accounts payable balances and sales of
short-term investments.
During the remainder of 1998, the Company plans to open 6 new stores and,
during the holiday season, approximately 20 temporary store locations. The
Company anticipates that cash for the remainder of 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.
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
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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.
The Company has a credit facility agreement 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. The Company has a second credit facility 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. 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 out of
compliance with one of the banks as of May 2, 1998, and is in the process of
renegotiating the terms of its lines. 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, long-term debt and funds available under its
credit facility agreement will be sufficient to fund the Company's operations
for the next 12 months.
INFLATION AND SEASONALITY
- -------------------------
The Company does not believe that its operations have been materially
affected by inflation during the three recent fiscal years or in 1998 to date.
However, there is no assurance that its business will not be affected by
inflation in the future.
The Company's business is subject to substantial seasonal variations in
demand. Historically, a significant portion of the Company's sales and
substantially all its net earnings have been realized during the fourth quarter
(which includes the November/December holiday season), and levels of sales and
net earnings have been significantly lower in the first three quarters, usually
resulting in losses in these quarters. If for any reason the Company's sales
were substantially below seasonal norms during the months of November and
December, the Company's annual results would be adversely affected. The
Company's quarterly results of operations may fluctuate significantly as a
result of comparable store sales levels, the timing of new store openings and
the amount of revenue contributed by new stores.
ACCOUNTING PRONOUNCEMENTS
- -------------------------
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from non-owner sources; and No.
131, "Disclosures about Segments of an Enterprise and Related Information" which
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic area,
and major customers. Adoption of these statements will not materially impact
the Company's financial position, results of operations or cash flows. Both
statements are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
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FUTURE RESULTS
- --------------
This report contains forward-looking statements regarding, among other
matters, the Company's future strategy, store opening plans, merchandising
strategy and growth. The forward- looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Act of 1995.
Forward-looking statements address matters which are subject to a number of
risks and uncertainties. In addition to the general risks associated with the
operation of specialty retail stores in a highly competitive environment, the
success of the Company will depend on a variety of factors such as consumer
spending which is dependent on economic conditions affecting disposable consumer
income such as employment, business conditions, interest rates and taxation. The
Company's continued growth also depends upon the demand for its products, which
in turn is dependent upon various factors, such as the introduction and
acceptance of new products and the continued popularity of existing products, as
well as the timely supply of all merchandise. Reference is made to the Company's
filings with the Securities and Exchange Commission for further discussion of
risks and uncertainties regarding the Company's business.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Effective June 5, 1998, Natural Wonders, Inc. reached a negotiated settlement of
the patent infringement claim disclosed in its annual report and Form 10K as of
fiscal year end January 31, 1998. The claim involved the sale of product
primarily in the company's fiscal years of 1996 and 1997 ending January 28, 1997
and January 31, 1998, respectively. The current year impact of the settlement,
including the cash settlement paid, legal expenses and reserves, net of amounts
previously accrued, was approximately $525,000 or $0.04 per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 11.1 Computation of Per Share Loss
Exhibit 27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the first quarter of fiscal 1998.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 16, 1998
NATURAL WONDERS, INC.
(Registrant)
/s/ Peter G. Hanelt
______________________________________
Peter G. Hanelt,
Acting Chief Executive Officer,
Chief Financial Officer
(Signing on behalf of the registrant and
as Principal Accounting and Financial Officer)
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Exhibit 11.1
NATURAL WONDERS, INC.
COMPUTATION OF PER SHARE NET LOSS
(Shares in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------
MAY 2, 1998 MAY 3, 1997
---------------------------------------
<S> <C> <C>
Net loss $(4,576) $(2,099)
------- -------
------- -------
Weighted average common shares
outstanding 8,072 7,988
Per share net loss, basic and diluted $ (0.57) $ (0.26)
------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> MAY-02-1998
<CASH> 3,247
<SECURITIES> 3,002
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 27,072
<CURRENT-ASSETS> 41,119
<PP&E> 62,790
<DEPRECIATION> 33,760
<TOTAL-ASSETS> 72,365
<CURRENT-LIABILITIES> 17,028
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 51,131
<TOTAL-LIABILITY-AND-EQUITY> 72,365
<SALES> 23,265
<TOTAL-REVENUES> 23,265
<CGS> 19,438
<TOTAL-COSTS> 19,438
<OTHER-EXPENSES> 11,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> (7,264)
<INCOME-TAX> (2,688)
<INCOME-CONTINUING> (4,576)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,576)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>