4209<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 1, 1999
( ) 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 29, 1999: 7,951,392 shares of common stock.
1 of 12
<PAGE>
NATURAL WONDERS, INC.
INDEX
<TABLE>
<CAPTION> Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Operations 3
Quarters ended May 1, 1999 and May 2, 1998
Condensed Balance Sheets 4
May 1, 1999, January 30, 1999 and May 2, 1998
Condensed Statements of Cash Flows 5
Three months ended May 1, 1999 and May 2, 1998
Notes to Condensed Financial Statements 6-7
ITEM 2. Management's Discussion and Analysis of 7-10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION 11
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURE 12
</TABLE>
2 of 12
<PAGE>
NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share date)
(Unaudited)
<TABLE>
<CAPTION> THREE MONTHS ENDED
-------------------------------
MAY 1, MAY 2,
1999 1998
-------------- --------------
<S> <C> <C>
Net sales $ 21,552 $ 23,265
Cost of goods sold and
store occupancy expenses 18,950 19,438
-------------- --------------
Gross margin 2,602 3,827
Selling, general & administrative expenses 9,613 11,048
-------------- --------------
Operating loss (7,011) (7,221)
Interest expense 5 70
Interest income and other, net 97 27
-------------- --------------
Loss before taxes (6,919) (7,264)
Income tax benefit 2,560 2,688
-------------- --------------
Net loss $ (4,359) $ (4,576)
-------------- --------------
-------------- --------------
Net loss per common share:
Basic $ (0.55) $ (0.57)
Diluted $ (0.55) $ (0.57)
Weighted average common shares outstanding
Basic 7,951 8,072
Diluted 7,951 8,072
</TABLE>
See notes to financial statements
3 of 12
<PAGE>
NATURAL WONDERS, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION> MAY 1, JANUARY 30, MAY 2,
1999 1999 1998
------------ -------------- -----------
<S> ASSETS <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,502 $ 4,841 $ 3,247
Short-term investments 0 7,380 3,002
Merchandise inventories 22,600 22,707 27,072
Prepaid income taxes 2,692 1,403 2,658
Prepaid expenses and other current assets 4,241 4,318 5,140
-------------- -------------- ------------
Total current assets 33,035 40,649 41,119
Property and Equipment:
Leasehold improvements 30,500 30,077 29,510
Property and equipment under capital lease 0 0 4,993
Furniture, fixtures and equipment 35,100 34,106 28,287
-------------- -------------- -------------
65,600 64,183 62,790
Less accumulated depreciation and amortization (39,322) (37,510) (33,760)
-------------- -------------- -------------
26,278 26,673 29,030
Other Assets 3,497 3,526 2,216
-------------- -------------- -------------
Total Assets $ 62,810 $ 70,848 $ 72,365
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current Liabilities:
Trade accounts payable $ 6,426 $ 8,500 $ 8,423
Accrued compensation and related costs 1,726 2,300 2,184
Accrued liabilities 2,055 3,037 4,119
Income taxes payable 0 0 312
Current portion of capital lease obligations 0 0 755
Current portion of long-term debt 0 0 1,235
------------- -------------- -------------
Total current liabilities 10,207 13,837 17,028
Capital Lease Obligations 0 0 271
Long-Term Debt 0 0 211
Deferred Rents 3,512 3,561 3,723
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.0001; authorized
17,000,000 shares; issued and outstanding
7,951,392; 7,951,392; and 8,155,709 shares 1 1 1
Capital in excess of par value 34,073 34,073 34,434
Retained earnings 15,017 19,376 16,697
------------ ------------- -------------
Total stockholders' equity 49,091 53,450 51,132
------------ ------------- -------------
Total Liabilities and Stockholders' Equity $ 62,810 $ 70,848 $ 72,365
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See notes to financial statements
4 of 12
<PAGE>
NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MAY 1, 1999 MAY 2, 1998
--------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (4,359) $ (4,576)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,812 1,683
Loss on sale of asset 0 183
Change in operating assets and liabilities:
Merchandise inventories 107 (3,888)
Prepaid expenses and other assets (1,181) (2,455)
Trade accounts payable (2,074) 426
Accrued compensation and related costs (574) (641)
Accrued liabilities (982) 483
Income tax payable 0 (1,545)
Deferred rent (51) (82)
--------------------- ------------------
Net cash used in operating activities (7,302) (10,412)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments 0 (6,902)
Sales of short-term investments 7,380 17,300
Proceeds from sale of equipment 0 0
Purchases of property and equipment (1,417) (2,053)
Business acquisition 0 0
-------------------- ------------------
Net cash provided by investing activities 5,963 8,345
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations 0 (301)
Principal payments on long-term debt 0 (642)
Net borrowing on line of credit 0 0
Purchase of treasury stock 0 (312)
Issuance of common stock under employee stock purchase program 0 0
Exercise of stock options and warrants 0 218
------------------- ------------------
Net cash used in financing activities 0 (1,037)
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,339) (3,104)
CASH AND CASH EQUIVALENTS:
Beginning of year 4,841 6,351
------------------- -------------------
End of period $ 3,502 $ 3,247
------------------- -------------------
------------------- -------------------
CASH PAID DURING PERIOD:
Interest $ 5 $ 76
Income taxes $ 0 $ 1,545
</TABLE>
See notes to financial statements
5 of 12
<PAGE>
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, operating results, and cash flows for the periods presented. The
results of operations for the quarter ended May 1, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal
year ending January 29, 2000.
This financial information should be read in conjunction with the audited
financial statements and notes thereto included in the Company's 1998
Annual Report to Stockholders and Form 10-K for the fiscal year ended
January 30, 1999 as filed with the Securities and Exchange Commission.
2. The Company is required to adopt SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," in 2000. SFAS No. 133 established
accounting and reporting standards for derivative instruments embedded in
other contracts, and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value.
3. The Company had a credit facility agreement with a commercial bank for the
purpose of financing seasonal working capital needs. The Company had a
maximum total availability of $23,000,000 during the increase period,
which was from September 1, 1998 through December 31, 1998 and $12,000,000
for the rest of its term, which was July 1, 1998 through August 31, 1998
and January 1, 1999 through June 30, 1999. The facility included borrowing
on a line of credit for up to $23,000,000 during the increase period and
$7,000,000 during the remainder of the term. The facility was also
available for the issuance of commercial and standby letters of credit for
up to $4,000,000 each during the increase period and $8,000,000 each for
the rest of the term. The total borrowings on the line of credit and the
letters of credit could not exceed $23,000,000 during the increase period
or $12,000,000 during the remainder of the term. The loan was required to
be repaid in full for a period of 150 consecutive days between December
31, 1998 and the maturity date of the line of credit. The Company had the
option of choosing interest payable at a rate based on LIBOR plus 1.5% or
a rate equal to the bank's prime rate. The agreement, as amended,
contained restrictive covenants, which included 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 the bank covenants as of May 1, 1999 and received a waiver
valid through June 15, 1999. The Company entered into an amended and
restated line effective June 15, 1999. The new line is for a term of three
years, with a maximum credit line of $30,000,000, and is provided by the
same commercial bank, together with an additional lender acting, which
additional lender shall act as administrative agent. The line provides for
revolving advances up to the lesser of 60% of the value of eligible
inventory, 80% of the net retail liquidation value of eligible inventory,
or the maximum credit line. The line includes up to $5,000,000 for the
issuance of commercial and standby letters of credit. The line of credit
must be fully repaid for a 30 day consecutive period between January 1 and
February 15. The Company has the option of choosing interest payable at a
rate based on LIBOR plus
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<PAGE>
2.25% or a rate equal to the bank's prime rate. The agreement, contains
restrictive covenants, which include maintaining certain minimum tangible
net worth levels and requiring bank consent for the payment of dividends.
The agreement also includes certain prepayment penalties.
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 1, 1999, Natural Wonders operated 178 stores in 36 states
compared to 173 stores in 36 states as of May 2, 1998. In the first three months
of 1999, one new store was opened and three stores were closed (one temporary
store, one permanent store and one for remodeling) as compared to three new
stores opened and one permanent store closed in the first three months of fiscal
1998.
SALES
During the first quarter of 1999, sales decreased 7.4% over the same
period in 1998. The decrease was primarily due to the decrease in comparable
store sales. Comparable store sales decreased 9.8% in the first quarter of 1999,
as compared to the same period in 1998. The decrease in the first quarter was
primarily attributable to the impact of the ongoing core merchandise assortment
transition.
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 87.9% in the first quarter of 1999
from 83.6% in the first quarter of 1998. The increase in costs as a percentage
of sales in the first quarter was primarily due to the impact of the reduction
in comparable store sales on store occupancy fixed expenses from an increased
number of stores.
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 decreased to 44.6% in the first quarter of 1999 from 47.5% in the
first quarter of 1998. The decrease in the costs as a percentage of sales in the
first quarter was primarily due to a legal settlement and costs incurred in the
first quarter of 1998, as well as the impact of cost containment efforts.
7 of 12
<PAGE>
OPERATING INCOME
As a result of the foregoing, the operating loss was $7,011,000 or 32.5%
of sales in the first quarter of 1999 versus $7,221,000 or 31.0% of sales in the
first quarter of 1998.
INTEREST AND OTHER, NET
Interest and Other, Net increased positively to 0.4% of sales in the first
quarter of 1999 from (0.2)% of sales in the first quarter of 1998. The increase
was primarily due to a decline in interest income as a result of the pay off of
all capital leases and long term debt, and the recording of fixed asset
write-offs in 1998 from a store closing.
NET LOSS
As a result of the foregoing, the net loss decreased to $4,359,000 or
20.2% of sales in the first quarter of 1999 from $4,576,000 or 19.7% of sales in
the first quarter of 1998.
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 1999, cash and investments
decreased $8,719,000. This was primarily due to seasonal operating losses,
historically incurred in the first three fiscal quarters, and fixtures for new
stores.
Compared to the first quarter in the prior year, cash and investments
decreased due to the paydown of capital leases and long term debt, the
repurchase of stock, higher seasonal operating losses, purchasing more
equipment, and lower accounts payable. This was offset in part by lower
merchandise inventories and an income tax refund.
During the remainder of 1999, the Company plans to open 5 new stores and,
during the holiday season, approximately 20 temporary store locations. The
Company anticipates that cash for the remainder of 1999 will primarily be used
for capital expenditures and merchandise inventory for new stores and temporary
locations, 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
significantly affected by the Year 2000 issue. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be converted on a timely basis and would not have an adverse effect on
the Company. The Company will utilize both internal and external resources to
reprogram or replace, and test the software for the Year 2000 modifications.
During 1998, the Company rolled out a new operating system along with related
merchandising,
8 of 12
<PAGE>
distribution and accounting software, and upgraded the payroll system. In early
1999 the Company also upgraded the human resources information system to be Year
2000 compliant. All systems that need to be reviewed have been identified and
the Company is now in the process of reviewing questionnaires sent out to the
vendors and testing systems for compliance. The Company does not expect
expenditures related to the Year 2000 issue to be material and as such, costs
associated with Year 2000 have not and are not expected to have a significant
impact on the Company's results of operations, liquidity, or capital resources.
To date, the Company has not accelerated any system replacements or incurred any
costs for upgrades or additional personnel in order to make any systems Year
2000 compliant. It is the opinion of management that the reasonably likely worst
case scenario would arise from utility or banking industry problems, rather than
internal system or operational issues. The Company is currently developing Year
2000 contingency plans.
The Company had a credit facility agreement with a commercial bank for the
purpose of financing seasonal working capital needs. The Company had a maximum
total availability of $23,000,000 during the increase period, which was from
September 1, 1998 through December 31, 1998 and $12,000,000 for the rest of its
term, which was July 1, 1998 through August 31, 1998 and January 1, 1999 through
June 30, 1999. The facility included borrowing on a line of credit for up to
$23,000,000 during the increase period and $7,000,000 during the remainder of
the term. The facility was also available for the issuance of commercial and
standby letters of credit for up to $4,000,000 each during the increase period
and $8,000,000 each for the rest of the term. The total borrowings on the line
of credit and the letters of credit could not exceed $23,000,000 during the
increase period or $12,000,000 during the remainder of the term. The loan was
required to be repaid in full for 150 consecutive day period between December
31, 1998 and the maturity date of the line of credit. The Company had the option
of choosing interest payable at a rate based on LIBOR plus 1.5% or a rate equal
to the bank's prime rate. The agreement, as amended, contained restrictive
covenants, which included 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 the bank covenants as of May
1, 1999 and received a waiver valid through June 15, 1999. The Company entered
into an amended and restated line effective June 15, 1999. The new line is for a
term of three years, with a maximum credit line of $30,000,000, and is provided
by the same commercial bank, with an additional lender, which additional lender
shall act as administrative agent. The line provides for revolving advances up
to the lesser of 60% of the value of eligible inventory, 80% of the net retail
liquidation value of eligible inventory, or the maximum credit line. The line
includes up to $5,000,000 for the issuance of commercial and standby letters of
credit. The line of credit must be fully repaid for 30 day consecutive period
between January 1 and February 15. The Company has the option of choosing
interest payable at a rate based on LIBOR plus 2.25% or a rate equal to the
bank's prime rate. The agreement, contains restrictive covenants, which include
maintaining certain minimum tangible net worth levels and requiring bank consent
for the payment of dividends. The agreement also includes certain prepayment
penalties.
The Company believes that current cash and short-term investments together
with its cash flow from operations, and funds available under its credit
facility agreement will be sufficient to fund the Company's operations for the
next 12 months.
9 of 12
<PAGE>
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 1999 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, as was the case in 1998, the Company's annual results would be
adversely affected. The Company's quarterly results of operations may fluctuate
significantly as a result of comparable store sales levels, the timing of new
store openings and the amount of revenue contributed by new stores.
ACCOUNTING PRONOUNCEMENTS
The Company is required to adopt SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," in 2000. SFAS No. 133 established
accounting and reporting standards for derivative instruments embedded in other
contracts, and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value.
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.
10 of 12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 10.28.4 Amended and Restated Loan and Security Agreement
entered into on June 15, 1999 among the Company, Wells Fargo Bank,
National Association and Foothill Capital Corporation. (This Exhibit
will be separately filed.)
Exhibit 11.1 Computation of Per Share Loss
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the first quarter of fiscal 1999.
11 of 12
<PAGE>
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 15, 1999
NATURAL WONDERS, INC.
(Registrant)
/s/ Peter G. Hanelt
--------------------------------------
Peter G. Hanelt,
Chief Executive Officer
President
Chief Financial Officer
(Signing on behalf of the registrant and
as Principal Accounting and Financial Officer)
12 of 12
<PAGE>
Exhibit 11.1
NATURAL WONDERS, INC.
COMPUTATION OF PER SHARE NET LOSS
(Shares in thousands)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------
May 1, 1999 May 2, 1998
------------------ ----------------
<S> <C> <C>
Net loss $(4,359) $(4,576)
-------------- ----------------
Weighted average common shares
Outstanding, basic and diluted 7,951 8,072
Per share net loss, basic and diluted $ (0.55) $ (0.57)
------------- ----------------
------------- ----------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 3,502
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 22,600
<CURRENT-ASSETS> 33,035
<PP&E> 65,600
<DEPRECIATION> 39,322
<TOTAL-ASSETS> 62,810
<CURRENT-LIABILITIES> 10,207
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 49,090
<TOTAL-LIABILITY-AND-EQUITY> 62,810
<SALES> 21,552
<TOTAL-REVENUES> 21,552
<CGS> 18,950
<TOTAL-COSTS> 18,950
<OTHER-EXPENSES> 9,613
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> (6,919)
<INCOME-TAX> (2,560)
<INCOME-CONTINUING> (4,359)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,359)
<EPS-BASIC> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
