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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 30, 1999
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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
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
4209 TECHNOLOGY DRIVE, FREMONT, CALIFORNIA 94538
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 252-9600
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to section 12(g) of the Act: COMMON STOCK, PAR VALUE $.0001
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(Title of Class)
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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
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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. ( X )
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 Stock Market on
March 31, 1999, was $34,787,340. The number of shares of Common Stock, with
$.0001 par value, outstanding on March 31, 1999 was 7,951,392 shares.
Documents incorporated by reference:
Items 5, 6, 7 and 8 of Part II are incorporated by reference from the Company's
1998 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
1999 Annual Meeting of Stockholders, to be held May 25, 1999. Registrant's
definitive Proxy Statement was filed with the Securities and Exchange Commission
on April 21, 1999.
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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,
home and garden items, ceramics, wind chimes, hats and shirts, books, tapes,
cd's, videos 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 180 stores
in 36 states at the end of fiscal 1997. In fiscal 1998, the Company opened 9
stores with permanent locations, opened 27 stores with temporary locations
during the holiday season, and closed 3 stores. At the end of 1998, 3 of the
temporary locations remained opened and will be moved to a permanent location in
1999. During the 1999 calendar year, the Company plans to open approximately 8
new stores and, during the holiday season, approximately 20 temporary locations.
PRODUCTS AND MERCHANDISING
During fiscal 1998, the typical Natural Wonders' store stocked between 1,800 to
2,200 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 prices, 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, glow
in the dark toys, flow-motion and kinetic sculpture products, decorative
lighting, creativity and science kits and novelty toys.
GIFTS Lighting, ceramics, home decorative, collectibles,kaleidoscopes,
paperweights, globes and weather products.
GARDEN Wind chimes, bird houses, bird feeders, herb nurseries, fountains,
sundials and decorative garden accessories such as terracotta thermometers,
clocks, and sculpture.
APPAREL T-shirts, sweatshirts and hats for both adults and children, and
accessories such as totes and backpacks.
GEOLOGY Agate boxes and bookends, sandstone coasters, jade vases, carved mineral
figurines, fetishes, spheres and mineral games.
OPTICS Telescopes and accessories, starfinders, binoculars, picnic accessories,
compasses and thermometers.
MUSIC, VIDEOS AND BOOKS 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.
Educational, pictorial, activity and instructional books for adults and
children.
JEWELRY Earrings, necklaces, rings, pins, bracelets, and watches.
STATIONARY Magnets, pens, hi-tech desk and computer accessories, cards, notes
and journals.
RELAXATION Personal care and relaxation products, home fragrance and comfort
products.
Natural Wonders' merchandise organization includes 4 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 1998, no one vendor accounted for more than 5% of the
Company's merchandise purchases.
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STORE OPENING COSTS
In 1999, the Company estimates that the average cost for leasehold improvements,
furniture and fixtures will be $250,000 for each new store, before any landlord
construction allowances. Capital expenditures for stores with temporary
locations are expected to be minimal. Working capital requirements, primarily
consisting of inventory purchases, are expected to be an average of $140,000 for
each new store and $90,000 for stores with temporary locations. The average
pre-opening costs per store, which are expensed as incurred, are estimated to be
$12,000 for new stores and $10,000 for stores with temporary locations.
MARKETING
Natural Wonders' marketing strategy is to create an atmosphere in each store
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 provided, 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. For example a store may demonstrate Natural
Wonders' compact disc and cassette tape offerings of New Age, contemporary and
instrumental music and a color monitor may display 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 selected 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 located in Louisville,
Kentucky. 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 shipping activity
increases substantially. The Company primarily uses common carriers to ship
merchandise to its stores.
INFORMATION SYSTEMS
In February 1998, the Company completed the installation of a new management
information system that integrates merchandising, distribution, and financial
systems. The new system provides 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 1999, the Company plans
to start rolling out a new point-of-sale system, as well as a new human resource
system. 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 and Discovery Channel stores, 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. Management believes that a moderately
priced, high quality merchandise assortment, high level of customer service and
open store design will enable it to compete effectively. Natural Wonders also
competes
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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.
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
comparable store sales are substantially below seasonal norms during the months
of November and December, as was the case in 1998, the Company's annual results
for the full fiscal year 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 2,700 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 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.
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
to extend such lease. Management believes that the capacity of the corporate
offices and distribution center will be sufficient for the foreseeable future.
As of January 30, 1999, the Company operated 180 stores in 36 states occupying
approximately 450,000 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 1999 and 2009. Leases for the Company's stores typically contain
provisions for percentage rental payments after a specified sales level has been
achieved.
ITEM 3. LEGAL PROCEEDINGS
None
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 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS
The information required by this item is incorporated by reference from the
Company's 1998 Annual Report to Stockholders for the fiscal year ended January
30, 1999 (the "1998 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to the
Selected Financial Data from the Company's 1998 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to the
Management's Discussion and Analysis of Financial Condition and Results of
Operation from the Company's 1998 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
Financial Statements and accompanying Notes from the Company's 1998 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 required by this item with respect to the Directors and
Executive Officers of the Registrant is incorporated by reference from the
definitive Proxy Statement for the Registrant's 1999 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 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
definitive Proxy Statement for the Registrant's 1999 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference from the
definitive Proxy Statement for the Registrant's 1999 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
definitive Proxy Statement for the Registrant's 1999 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 1998 Annual Report to Stockholders.
Statements of Operations for fiscal years 1998, 1997, and 1996
Balance Sheets at January 30, 1999 and January 31, 1998
Statements of Stockholders' Equity for fiscal years 1998, 1997, and
1996
Statements of Cash Flows for fiscal years 1998, 1997, and 1996
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 1998.
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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, 1999 NATURAL WONDERS, INC.
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(Registrant)
By: /s/ Peter G. Hanelt
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Chief Executive Officer, President,
Chief Financial 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.
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SIGNATURE TITLE
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/s/ PEARSON C. CUMMIN III
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(Pearson C. Cummin III) Chairman of the Board
/s/ PETER G. HANELT
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(Peter G. Hanelt) Chief Executive Officer, President,
Chief Financial Officer, and Director
(Principal Executive, Accounting and
Financial Officer)
/s/ DAVID FOLKMAN
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(David Folkman) Director
/s/ PETER L. HARRIS
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(Peter L. Harris) Director
/s/ JULIUS JENSEN III
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(Julius Jensen III) Director
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Date: April 30, 1999
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INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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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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SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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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 is incorporated by
reference to Exhibit 10.27 of the 1998 Form 10-K.
10.28 Credit Agreement entered into on July 1, 1998 between the
Company and Wells Fargo Bank, National Association is
incorporated by reference to Exhibit 10.28 of the 1998 Form
10-Q, for the quarterly period ended August 1, 1998.
10.28.1 Second Amendment to Credit Agreement, entered into on
September 15, 1998 between the Company and Wells Fargo
Bank, National Association.
10.28.2 Third Amendment to Credit Agreement, entered into on
January 29, 1999 between the Company and Wells Fargo
Bank, National Association.
10.28.3 Fourth Amendment to Credit Agreement, entered into on
March 15, 1999 between the Company and Wells Fargo Bank,
National Association.
10.29* Executive Employment Agreement entered into on September 29,
1998 between the Company and Kenneth G. Norton.
10.30* Nonqualified Stock Option Agreement entered into on September
29,1998 between the Company and Kenneth G. Norton.
10.31* Secured Promissory Note for Kenneth G. Norton, dated October
19, 1998.
10.32* Nonqualified Stock Option Agreement entered into on September
29,1998 between the Company and Peter G. Hanelt
10.33* Nonqualified Stock Option Agreement entered into on September
29,1998 between the Company and David H. Folkman.
10.33.1* Amendment to Nonqualified Stock Option Agreement, entered into
on April 2, 1999 between the Company and David H. Folkman.
13.1 1998 Annual Report to Stockholders.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule - 1998
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* Plan or agreement pursuant to which the Company's officers
or directors have received compensation.
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Exhibit 10.28.1
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of September 15, 1998, by and between NATURAL WONDERS, INC., a Delaware
corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms
and conditions of that certain Credit Agreement between Borrower and Bank dated
as of July 1, 1998, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Credit Agreement and have agreed to amend the
Credit Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 5.2 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 5.2. CAPITAL EXPENDITURES. Make any additional
investments in fixed assets (inclusive of capitalized lease
expenditures) in any fiscal year in excess of an aggregate of $
6,700,000.00.
2. Section 5.5 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 5.5. DIVIDENDS, DISTRIBUTIONS. Declare or pay any
dividend or distribution either incash ' stock or any other property on
Borrower's or NWCMI's stock now or hereafter outstanding, nor redeem,
retire, repurchase or otherwise acquire any shares of any class of
Borrower's of NWCMI's stock now or hereafter outstanding; provided
however, that Borrower may repurchase its common stock during the third
and fourth fiscal quarters of fiscal year ending February 1, 1999 (so
long as Borrower is and remains in compliance with all terms and
conditions of this Agreement) up to an aggregate amount of $900,000.00
(inclusive of the amount already paid by Borrower in said fiscal year
on account of stock repurchases."
3. The following is hereby added to the Credit Agreement as Section
5.9:
"SECTION 5.9. year 2000 compliance. Perform all acts
reasonably necessary to ensure that (a) Borrower and any business in
which Borrower holds a substantial interest, and (b) all customers,
suppliers and vendors that are material to Borrower's business, become
Year
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2000 Compliant in a timely manner. Such acts shall include, without
limitation, performing a comprehensive review and assessment of all of
Borrower's systems and adopting a detailed plan, with itemized budget,
for the remediation, monitoring and testing of such systems. As used
herein, "Year 2000 Compliant" shall mean, in regard to any entity,
that all software, hardware, firmware, equipment, goods or systems
utilized by or material to the business operations or financial
condition of such entity, will properly perform date sensitive
functions before, during and after the year 2000. Borrower shall,
immediately upon request, provide to Bank such certifications or other
evidence of Borrower's compliance with the terms hereof as Bank may
from time to time require."
4. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and -effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together-, as one document.
-5. Borrower hereby remakes all representations-and warranties
contained in the Credit Agreement and reaffirms all covenants set forth therein.
Borrower further certifies that as of the date of this Amendment there exists no
Event of Default as defined in the Credit Agreement, nor any condition, act or
event which with the giving of notice or the passage of time or both would
constitute any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
NATURAL WONDERS, INC. NATIONAL ASSOCIATION
By: /s/ Peter G. Hanelt By: /s/ Karen Barone
------------------------------ -------------------------
Peter G. Hanelt Karen Barone
Chief Executive Officer Vice President
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Exhibit 10.28.2
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of January 29, 1999, by and between NATURAL WONDERS, INC., a Delaware
corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms
and conditions of that certain Credit Agreement between Borrower and Bank dated
as of July 1, 1998, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Credit Agreement and have agreed to amend the
Credit Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 4.9.(e) is hereby deleted in its entirety, and the
following substituted therefor:
"SECTION 4.9.(e) Net income after taxes not less than
($1,741,000.00) at fiscal year and January 30, 1999, net loss
not greater than $3,000,000.00 in each first fiscal greater,
net loss not greater than $1,950,000 in each second fiscal
quarter, and net loss not greater than $3,000,000 in each
third fiscal quarter.
2. Section 4.11 is hereby deleted in its entirety, without
substitution.
3. Section 5.8 is hereby deleted in its entirety, and the
following substituted therefor:
"8. LOANS, ADVANCES, INVESTMENTS. Make any loans or
advances to or investments in any person or entity, except (a)
any of the foregoing existing as of, and disclosed to Bank
prior to, the date hereof, (b)reasonable royalty payments to
NWCMI as consideration for the license to use the trademarks
and trade names owned by NWCMI,(c) unsecured loans between
NWCMI and Borrower, and (d) unsecured loans to Ken Norton in
an aggregate of $450,000.00."
4. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
5. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
<PAGE>
IN WITNESS WHGREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
NATURAL ,WCNDERS INC. NATIONAL ASSOCIATION
By: /s/ Peter G. Hanelt /s/ Karen Barone
--------------------------- ---------------------------
Peter G. Hanelt Karen Barone
Chief Financial Officer Vice President
<PAGE>
Exhibit 10.28.3
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS.FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of March 15, 1999, by and between NATURAL WONDERS, INC.R a Delaware
corporation ("Borrower") and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant; to the terms
and conditions of that certain Credit Agreement between Borrower and Bank dated
as of July1, 1998, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Credit Agreement and have agreed to amend the
Credit Agreement to reflect said changes.
NOWR THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 1.1 (d) is hereby deleted in its entirety, and the following
substituted therefor:
11(d) 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. Notwithstanding the foregoing,
Borrower shall maintain a zero balance (exclusive of L/C
Contingent Obligations) on advances under the Line of Credit for
a period of at least 150 consecutive days (the 'Out of Debt
Period") between January 1, 1999 and July 1, 1999.
2. Sections 4.9 (a), (c) and (e) are hereby deleted in their entirety,
and the following substituted therefor:
"(a) Quick Ratio not less than 0.88 to 1.0, determined as
of fiscal year end January 30, 1999, with "Quick Ratio' defined
as the aggregate of unrestricted cash, unrestricted marketable
securities and receivables convertible into cash divided by total
current liabilities.
(c) Tangible Net Worth not less than $50,500,000.00 as of
the end of each first fiscal quarter, not less than
$48,000,000.00 as of the end of each second fiscal quarter, not
less than $44,500,000.00 as of the end of each third fiscal I
quarter and not less than $53,300,000.00 as of fiscal year end
January 30, 1999, with "Tangible Net Worth' defined as the
aggregate of total stockholders equity plus subordinated debt
less any intangible assets.
(e) Net Loss after taxes not greater than $1,897,000.00 as
of fiscal year end January 30, 1999, net loss not greater than
$3,600,000.00 in each
<PAGE>
first fiscal quarter, net loss not greater than $2,l7O,000.00 in
each second fiscal quarter, and net loss not greater than
$3,000,000.00 in each third fiscal quarter."
3. Section 5.2 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 5.2. CAPITAL EXPENDITURES. Make any additional
investment in fixed assets (inclusive of capitalized lease
expenditures) in any fiscal year in excess of an aggregate of
$7,000,000.00."
4. Section 5.5 is hereby deleted in its entirety, and the following
substituted therefor:
"SECTION 5.5. DIVIDENDS, DISTRIBUTIONS. Declare or pay any
dividend or distribution either in cash, stock or any other
property on Borrower's or NWCMI's stock now or hereafter
outstanding, nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's of NWCMI's stock now or
hereafter outstanding; provided however, that Borrower may
repurchase its common stock during the third and fourth fiscal
quarters of fiscal year ending February 1, 1999 (so long as
Borrower is and remains in compliance with all terms and
conditions of this Agreement) up to an aggregate amount of
$600,000.00 (inclusive of the amount already paid by Borrower in
said fiscal year on account of stock repurchases.)"
5. Borrower shall pay to Bank, a non-refundable commitment fee for the
Line of Credit equal to Fifteen Thousand Dollars ($15,000.00),, which fee shall
be due and payable in full on the date of this Amendment.
6. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined i3i the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
7. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
NATURAL WONDERS, INC. NATIONAL ASSOCIATION
By: /s/ Peter G. Hanelt By: /s/ Karen Barone
----------------------------- ---------------------------
Peter G. Hanelt Karen Barone
Chief Executive Officer/ Vice President
Chief Financial Officer
<PAGE>
Exhibit 10.29
EXECUTIVE EMPLOYMENT AGREEMENT
This EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is made and entered
into as of this 29th day of September, 1998, by and between Natural Wonders,
Inc., a Delaware corporation (the "Company" or "Natural Wonders"), and Kenneth
G. Norton ("Executive").
For good and valuable consideration, receipt of which is hereby
acknowledged, the parties agree as follows:
1. TERM. This Agreement will become effective as of October 19, 1998, and
will remain in force until October 18, 2002, unless terminated as provided in
paragraph 12 below. Upon expiration of the term, this Agreement shall
automatically renew for successive additional one (1) year periods unless one
party delivers to the other party written notice of such party's intention not
to renew not less than ninety (90) days before the expiration of the
then-current term.
2. EMPLOYMENT AND DUTIES. The Company hereby agrees to employ Executive to
render executive services for the Company as Executive Vice President, General
Merchandise Manager, or such title as employee may subsequently have, with the
authority and responsibilities customarily accorded an employee with that title.
Executive will also perform those other duties as may be assigned to Executive,
subject to the instructions, directions, and control of the Company at all
times. Executive agrees that throughout the term of this Agreement, Executive
will perform his duties loyally and conscientiously and to the full limit of
Executive's ability. Executive will duly, punctually and faithfully perform and
observe any and all rules and regulations that the Company may now or later
establish governing the conduct of its business and its employees, including
rules and regulations prohibiting unlawful discrimination and harassment.
Subject to the provisions of paragraph 12(e) below, Executive agrees that
Executive's job title, schedule and job duties may change from time to time as
required by the Company's business needs. Executive's performance of Contract
Services will, at all times, be rendered to the Company's satisfaction.
Executive agrees that the Company will be the sole judge as to whether the
services of Executive are satisfactory. Executive will report to the President,
Natural Wonders.
3. FULL TIME. Executive will devote full business time, ability and
attention to the business of the Company during the course of Executive's
employment with the Company. However, Executive's devotion of time to personal
business matters will not be deemed a breach of this Agreement if it does not
interfere with the performance of the duties outlined herein. Specifically,
Executive anticipates continuing to engage in the following activities: board
memberships and community service. Executive agrees to request permission from
the Company to join any board of directors or trustees. The Company agrees that
it will not unreasonably refuse this permission.
4. BASE SALARY. In consideration for the services to be provided by
Executive under this Agreement, the Company will pay Executive an initial base
salary of $333,333.00 per
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year, payable every two weeks. During any period of disability, as defined in
paragraph 12(c) below, Executive shall continue to receive his then existing
salary, until Executive's employment is terminated pursuant to paragraph 12(c).
Subject to the provisions of paragraph 12(e) below, Executive's compensation may
be reviewed and adjusted by the Company's Board of Directors, annually on the
anniversary of the Effective Date.
5. BUSINESS EXPENSES. The Company will promptly reimburse Executive for all
appropriately documented, reasonable business expenses incurred by Executive in
accordance with the Company's policies.
6. VEHICLE ALLOWANCE. In addition to the compensation described in
paragraph 4 above or elsewhere herein, the Company will also pay Executive a
vehicle allowance of $600.00 per month, payable not later than the last business
day of each month.
7. BONUS. In addition to the compensation described in paragraph 4 above,
and not to be limited by any other provision for compensation or benefits
described herein, the Company agrees to pay to Executive a bonus as described in
this paragraph and in Schedule A, a copy of which is attached hereto, and
incorporated by this reference.
a. The Company agrees to pay a bonus to the Executive Team. The
"Executive Team" means the CEO, President and Executive. As set forth Schedule
A, the Executive Team will be eligible for a payment from the Bonus Pool (Column
C of Schedule A) based on the Company's "Net Income" in any given fiscal year
(Column A of Schedule A). "Net Income" for purposes hereof shall be equal to
earnings as used in the calculation of the Company's "earnings per share."
b. Upon achievement of a level of net income as shown in Column A of
Schedule A, the Bonus Pool shall be calculated using the percentage of Net
Income shown in Column B of Schedule A. This calculation shall yield a Bonus
Pool amount within the range shown in Column C of Schedule A. The Bonus Pool
will be divided in three equal shares between the members of the Executive Team,
subject to the limitation in subparagraph c below.
c. For FY 1999, the Bonus Pool (Column C of Schedule A) resulting from
earnings between $2,000,000 and $3,000,000 will be reduced by payment of a
Company-wide bonus of approximately $135,000.
d. Calculations under Schedule A are effective for fiscal years ending
in 1999 and 2000. The parties do not anticipate that the bonus percentage
(Column B) will be changed substantially as a result of review by the Board
Directors, or that the method for calculating the bonus will be altered;
provided, however, that it is understood that performance levels (Column A of
Schedule A) may be adjusted at the end of FY 2000 based on performance to
reflect reasonable revised earnings targets.
e. The Bonus Pool for amounts payable under this section will be
calculated as of the end of each fiscal year (on or around January 31). Any
bonus payable under this
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<PAGE>
paragraph shall be paid promptly following approval by the Board of Directors of
the Company of the final draft financial statements for each fiscal year as
presented to the Board by the Company's certified public accountants.
f. To be eligible for his one-third share of any Bonus Pool,
Executive's employment must continue through December 31 of the fiscal year for
which a bonus may be payable.
8. STOCK OPTION PLAN. In addition to the compensation and bonus described
in paragraphs 4 and 7 above, and not to be limited by any other provision for
compensation or benefits described herein, Executive shall be granted,
immediately upon commencement of employment, an option to purchase 250,000
shares of Natural Wonders common stock as set forth in the Nonqualified Stock
Option Agreement, Schedule B, a copy of which is attached hereto, and
incorporated by this reference.
9. LOAN. The Company agrees to loan to Executive the sum of $450,000.00
("Loan") under the terms set forth herein.
a. The Loan will be paid to Executive upon execution of a promissory
note by Executive in favor of Natural Wonders (the "Note") and compliance by
Executive with the requirements of 9(c) below, and in any event, not later than
15 days after Executive commences employment with the Company. The Loan and any
outstanding balance under the Note under this section will not be subject to
interest.
b. The company agrees to forgive the balance of the Loan due under the
Note according to the following schedule:
(i) at the end of the first twelve (12) months of
employment $150,000 of the outstanding balance
will be forgiven;
(ii) at the end of the thirteenth (13th) month of
employment, and continuing each month thereafter,
1/36th of the outstanding balance will be forgiven
until the entire balance of the Loan is forgiven;
(iii) if Executive is terminated pursuant to paragraphs
12(a), 12(c), 12(d) or 12(e) below, the entire
outstanding balance of the Loan will be forgiven
effective with the date of termination; and
(iv) if Executive is terminated pursuant to paragraph
12(b) below or Executive voluntarily resigns or
terminates this Agreement without "Good Reason" (as
defined below), Executive will repay to the Company
the outstanding balance on the Loan in accordance
with the terms of the Note.
c. Executive agrees that securities or other collateral acceptable to
the Company will be placed in escrow as collateral with Wells Fargo Bank or
another bank or
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<PAGE>
institution mutually acceptable to the parties. The collateral is to be
maintained in an amount equal to the unforgiven portion of the Loan and excess
collateral may be released from escrow subject to the request of Executive and
the terms of the escrow agreement. The collateral is to guarantee repayment to
the Company any amount of the Loan not forgiven due to termination of
Executive's employment.
10. VACATION. Executive will be eligible for paid vacation of not less than
three weeks each calendar year. Executive begins to accrue vacation concurrent
with the date of this Agreement and is eligible for prorated paid vacation in
the event he works for part of a calendar year.
11. OTHER BENEFITS. In addition to any other benefits of employment
described herein, Executive will be eligible for Company-provided employee
benefits in accordance with the terms and eligibility requirements of those
plans, as the Company may maintain from time to time, for the benefit of its
employees. Executive may receive such other and additional benefits as the
Company may determine from time to time, in its sole discretion.
12. TERMINATION OF THIS AGREEMENT. Before the expiration of this agreement
described in paragraph 1 above, this Agreement may be terminated only in
accordance with the provisions of this section.
a. TERMINATION BY COMPANY WITHOUT CAUSE UPON NOTICE. The Company may
terminate this Agreement at any time, for any lawful reason or no reason,
without cause (as cause is defined in paragraph 12(b) below), upon written
notice to Executive. In the event of such a termination, the parties agree to
act in good faith towards one another during any notice period.
b. TERMINATION FOR CAUSE BY THE COMPANY. The Company may terminate this
Agreement immediately for cause ("Cause") upon written notice to Executive, the
date of which shall specify the effective date of the termination. For purposes
of this Agreement, Cause means:
(i) the continued failure by Executive to substantially
perform Executive's duties with the Company (other
than any such failure resulting from termination for
Good Reason) after a demand for substantial
performance is delivered to Executive that
specifically identifies the manner which the Company
believes that Executive has not substantially
performed his duties, and Executive has failed to
resume substantial performance of his duties on a
continuous basis within sixty (60) days of receiving
such demand;
(ii) the willful engaging by Executive in conduct which is
demonstrably and materially injurious to the Company,
monetarily or otherwise;
(iii) Executive's conviction of a felony or conviction of a
misdemeanor which impairs his ability substantially
to perform his duties with the Company; or
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<PAGE>
(iv) Executive's dishonesty towards or fraud upon the Company.
c. TERMINATION OF EMPLOYMENT ON DISABLITY OF EXECUTIVE. If Executive
is absent from work due to mental or physical disability for a period of six
months, and at the end of that six-month period is unable to return to work on a
regular basis within thirty (30) days of receipt of written notice requesting
Executive to return to work, Executive's employment will terminate automatically
on the thirty first (31st) day after receipt of written notice from the company.
For purposes of this section, "mental or physical disability" means that a
physical or mental health practitioner determines that Executive suffers from a
physical or mental condition that prevents Executive from carrying out one or
more material aspects of his assigned duties, with or without reasonable
accommodation, for not less than ninety (90) consecutive days.
d. TERMINATION OF EMPLOYMENT ON DEATH OF EXECUTIVE. Executive's
employment will terminate automatically on Executive's death.
e. TERMINATION BY EXECUTIVE FOR GOOD REASON. Executive may terminate
this Agreement for "Good Reason" by providing the Company with written notice of
termination of the Agreement. The effective date of the termination shall be the
date specified in the notice. Executive agrees that his right to terminate the
Agreement for "Good Reason" may be waived by failure to provide the notice
required under this section within thirty (30) days of the event constituting
"Good Reason." For purposes of this Agreement, Good Reason means:
(i) a reduction by the Company in Executive's annual base
salary below the amount in paragraph 4 above, unless
because of financial circumstances the Company
reduces the annual base salary of all executives by
the same percentage;
(ii) the failure of the Company to obtain a satisfactory
agreement from any successor to the Company, or
purchaser of all or substantially all of the
Company's assets, to assume and agree to perform this
Agreement (see paragraph 23); provided, however, that
no "Good Reason" will exist as a result of a proposed
transfer of Executive's responsibilities to any
successor corporation as a result of a merger,
reorganization or consolidation, liquidation or a
sale or disposition by the Company of all or
substantially all of the Company's assets;
(iii) the assignment of Executive to duties inconsistent
with his position as Executive Vice President, or
which reflect an adverse change in authority,
responsibility or status with the Company or any
successor;
(iv) requiring Executive to relocate to offices outside
of the Bay Area; or
(v) any material adverse change in any benefit provided
to Executive, unless because of financial
circumstances the Company reduces the benefits
provided to all executives by the same percentage.
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<PAGE>
f. VOLUNTARY TERMINATION BY EXECUTIVE. Executive may terminate this
Agreement at any time by providing the Company with written notice. The
effective date of the termination shall be the date specified in the notice.
In the event of such a termination, the parties agree to act in good faith
towards one another during any notice period.
g. NOTICE OF TERMINATION. Any termination by the Company for Cause
or by Executive for Good Reason shall be communicated by Notice of
Termination to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a written notice which shall indicate the
specific termination provision in this Agreement relied upon, and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis of termination of Executive's employment under the provision so
indicated.
h. DATE OF TERMINATION. "Date of Termination" shall mean the date
specified in the Notice of Termination, where required, or this Agreement or
in any other case upon ceasing to perform services to the Corporation.
13. COMPENSATION UPON TERMINATION. Upon termination of this Agreement by
either party, Executive shall be entitled to receive the following severance
payments subject to the restrictions set forth in paragraph 14 below:
a. TERMINATION BY COMPANY BY COMPANY BY NON-RENEWAL, WITHOUT CAUSE
UPON NOTICE, TERMINATION BY DEATH OF EXECUTIVE, OR TERMINATION BY EXECUTIVE
FOR GOOD REASON. Upon termination of this Agreement by non-renewal under
paragraph 1 or upon termination of this Agreement under the provisions of
paragraph 12(a), 12(d) or 12(e) above, Executive shall be paid, in a lump
sum, any and all base salary due and owing to him through the Date of
Termination and an amount equal to his earned but unused vacation through the
Date of Termination. In addition, if Executive is terminated under the
provisions of paragraph 12(a), 12(d) or 12(e) above during the initial term
of the Agreement, Executive shall be paid, in twelve equal monthly
installments, an amount equal to $333,333.00 ("Installment Payment"), and if
Executive is terminated under the provisions of paragraph 12(a), 12(d) or
12(e) above during any subsequent renewal term of the Agreement, Executive
shall be paid, in twelve equal monthly installments, an amount equal to 50%
of the Installment Payment. In addition to these payments, the entire
outstanding balance of the Loan shall be forgiven and the Note extinguished
as set forth in paragraph 9 above. If Executive's termination occurs on or
after January 31 in any given year, Executive shall receive the bonus payment
described in paragraph 7 above, for the most recent fiscal year that has been
completed. Executive, his family or his estate shall be entitled to other
benefits to the extent permitted by law, contract, or the terms of any
benefit plan or program.
b. TERMINATION FOR CAUSE. Upon termination of this Agreement under
the provisions of paragraph 12(b) above, Executive shall be paid, in a lump
sum, any and all base salary due and owing to him through the effective date
of the termination and an amount equal to his earned but unused vacation
through the Date of Termination. If Executive's termination occurs on or
after January 31 in any given year, Executive shall receive the bonus payment
described in paragraph 7 above, for the most recent fiscal year that has been
completed.
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Executive, his family or his estate shall be entitled to other benefits to the
extent permitted by law, contract, or the terms of any benefit plan or program.
In addition, Executive shall repay to the Company the outstanding balance on the
Loan in accordance with the terms of the Note.
c. TERMINATION FOR DISABILITY. Upon termination of this Agreement
under the provisions of paragraph 12(c) above, Executive shall be paid, in a
lump sum, any and all base salary due and owing to him through the Date of
Termination and an amount equal to his earned but unused vacation through the
Date of Termination. In addition to these payments, the entire outstanding
balance of the Loan shall be forgiven and the Note extinguished as set forth
in paragraph 9 above. If Executive's termination occurs on or after January
31, Executive shall receive the bonus payment described in paragraph 7 above,
for the most recent fiscal year that has been completed. Executive, his
family or his estate shall be entitled to other benefits to the extent
permitted by law, contract, or the terms of any benefit plan or program.
d. VOLUNTARY TERMINATION BY EXECUTIVE. If Executive voluntarily
resigns or terminates this Agreement other than for Good Reason, Executive
shall be paid, in a lump sum, any and all base salary due and owing to him
through the Date of Termination and an amount equal to his earned but unused
vacation through the Date of Termination. If Executive voluntarily resigns or
terminates this Agreement other than for Good Reason on or after January 31
in any given year, Executive shall receive the bonus payment described in
paragraph 7 above, for the most recent fiscal year that has been completed.
Executive, his family or his estate shall be entitled to other benefits to
the extent permitted by law, contract, or the terms of any benefit plan or
program. In addition, Executive shall repay to the Company the outstanding
balance on the Loan in accordance with the terms of the Note.
14. RESTRICTIONS ON COMPENSATION ON TERMINATION. The payments described
under paragraph 13 above are subject to the following restrictions.
a. OBLIGATION TO OBTAIN NEW EMPLOYMENT. Executive agrees to use
reasonable efforts to obtain employment after termination, provided however,
that Executive will have no obligation to accept employment which is not
substantially equivalent in total compensation and responsibility to the
level of compensation and responsibility Executive enjoyed with the Company.
The Company shall be entitled to require, periodically, that Executive
provide the Company with information regarding his job-seeking efforts, and
the Company agrees to do nothing to interfere with the success of those
efforts.
b. REDUCTION IN INSTALLMENT PAYMENT. Any Installment Payment due to
Executive under paragraph 13(a) above will be reduced as follows upon
occurrence of any of the events listed below during the twelve month period
in which the Company is obligated to make payments under paragraph 13(a):
(i) upon commencement of any new employment by Executive,
regardless of compensation level, the Installment
Payment will be reduced by 50% during the term of
such employment;
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(ii) upon receipt of any unemployment compensation
benefits, the Installment Payment will be further
reduced by the amount of those benefits; and
(iii) upon receipt by Executive of any fees or other
compensation for services rendered to third parties
in a capacity other than as an employee, the
Installment Payment will be reduced by 50% of the
amount of such fees or other compensation.
c. RELEASE OF CLAIMS. Prior to payment of the first Installment
Payment, and in return for the Installment Payment provided for under
paragraph 13(a) and the forgiveness of the Loan under paragraph 9(b),
Executive agrees to execute a release of claims in substantially the form of
Schedule C, attached hereto.
15. APPROVALS. Whenever the approval or consent of a party is required by
this Agreement, this approval or consent may be granted or withheld for any
reason or no reason, and may be granted upon such additional terms as
determined, by the party in its sole discretion. Whenever the approval or other
act of the Company is required hereunder, this shall require the approval of the
Chief Executive Officer of the Company who may, by written designation,
authorize an agent of the Company to perform the act.
16. NOTICES. Notices and all other communications required under this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or mailed by U.S. registered mail, return receipt requested, postage
prepaid, addressed as set forth below:
To Executive: Kenneth G. Norton
903 Tournament Drive
Hillsborough, CA 94010
To the Company: Natural Wonders, Inc.
ATTN: Chief Executive Officer
4209 Technology Drive
Fremont, CA 94538
17. MODIFICATIONS IN WRITING. Except as so expressly provided for herein,
no provision of this Agreement may be modified, waived or discharged unless such
modification, waiver or discharge entitled "Amendment to Executive Employment
Agreement, dated ____" is agreed to in writing by Executive and such Officer of
the Company as may be designated by the Board of Directors.
18. ENTIRE AGREEMENT. This Agreement, which includes Schedules A, B and
C, referenced and incorporated herein, supersedes any and all other
agreements, discussions or understandings, either oral or in writing, between
the parties with respect to the subject matter of this Agreement, and this
Agreement contains all of the covenants and agreements between the parties
with respect to the subject matter of this Agreement. Executive hereby agrees
that benefits under this Agreement shall be in lieu, and in full
satisfaction, of any other severance
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benefits to which Executive is or may be entitled as a result of any other
severance policy of the Company now existing or hereafter adopted or effected.
19. SEVERABILITY. If any provision of this Agreement is held by a court
of competent jurisdiction to be invalid, void, or unenforceable, the
remaining provisions will continue in full force without being impaired or
invalidated in any way.
20. WAIVER OF BREACH. Except as so expressly provided herein, the waiver
of a breach of any provision of this Agreement or failure to exercise any
right by the Company or Executive will not operate or be construed as a
waiver of any subsequent breach or relinquishment of such right by such party.
21. INTERPRETATION. Section headings in this Agreement are for
convenience and are not a part of the agreement of the parties, and will not
be used in the construction of the Agreement. No provision of this Agreement
shall be interpreted or construed against a party because that party or its
legal counsel was the drafter.
22. GOVERNING LAW. This Agreement will be construed and enforced in
accordance with the laws of the State of California.
23. ARBITRATION OF DISPUTES. The parties agree that any controversy or
claim arising out of Executive's employment or benefits, this Agreement, or any
alleged breach of this Agreement, will be arbitrated in San Francisco,
California in accordance with the Employment Dispute Resolution Rules of the
American Arbitration Association then in effect. The arbitrator's decision will
be final and binding on both parties. Each party shall bear its own costs,
attorneys' fees, and expert witness fees. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.
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24. SUCCESSORS.
a. The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company or any division or subsidiary thereof
employing you to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession shall
be a breach of the Agreement, and shall entitle Executive to compensation from
the Company in the same amount and on the same terms as Executive would be
entitled to hereunder if Executive terminated his employment for "Good Reason"
under paragraph 12(e), except that for the purposes of implementing this
paragraph, the date on which any succession becomes effective shall be deemed
the effective date of the termination of employment.
b. This Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Executive should die
while any amount would be payable to him under this Agreement, all such amounts,
unless otherwise provided herein, shall be paid according to the terms of this
Agreement to Executive's devisee, legatee or other designee or, if there is no
such designee, to Executive's estate.
25. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
Date: September 29, 1998 NATURAL WONDERS, INC.
By: /s/ Peter G. Hanelt
-----------------------------
Peter G. Hanelt
Title: Acting Chief Executive Officer
Date: September 29, 1998
/s/ Kenneth G. Norton
-----------------------------
Kenneth G. Norton
-10-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A - BONUS CALCULATION
- ------------------------------------------------------------------------------------------------------------
[Column A] [Column B] [Column C]
Net Income in Millions Bonus Payout as a % of Bonus Pool
Net Income
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Above Up From To
to
- ------------------------------------------------------------------------------------------------------------
0.00 0.00% --- ---
1.40
- ------------------------------------------------------------------------------------------------------------
1.40 0.00% --- ---
2.00
- ------------------------------------------------------------------------------------------------------------
2.00 15.00% 300,000 450,000
3.00
- ------------------------------------------------------------------------------------------------------------
3.00 17.14% 514,200 685,600
4.00
- ------------------------------------------------------------------------------------------------------------
4.00 18.00% 720,000 900,000
5.00
- ------------------------------------------------------------------------------------------------------------
5.00 18.50% 925,000 1,100,000
6.00
- ------------------------------------------------------------------------------------------------------------
6.00 18.70% 1,122,000 1,309,000
7.00
- ------------------------------------------------------------------------------------------------------------
7.00 18.90% 1,323,000 1,512,000
8.00
- ------------------------------------------------------------------------------------------------------------
8.00 19.10% 1,528,000 1,719,000
9.00
- ------------------------------------------------------------------------------------------------------------
9.00 19.30% 1,737,000 1,930,000
10.00
- ------------------------------------------------------------------------------------------------------------
10.00 19.50% 1,950,000 2,145,000
11.00
- ------------------------------------------------------------------------------------------------------------
11.00 and higher 20.00% 2,200,000 Unlimited
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 10.30
NATURAL WONDERS, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
Natural Wonders, Inc. (the "Company") has granted to the individual named
below an option to purchase certain shares of common stock of the Company, in
the manner and subject to the provisions of this Option Agreement.
1. DEFINITIONS:
(a) "Optionee" shall mean Kenneth G. Norton.
(b) "Date of Option Grant" shall mean September 29, 1998.
(c) "Number of Option Shares" shall mean 250,000 shares of common
stock of the Company as adjusted from time to time pursuant to paragraph 9
below.
(d) "Exercise Price" shall mean $3.625 per share as adjusted from
time to time pursuant to paragraph 9 below.
(e) "Vesting Schedule" shall mean the following schedule under which
the amounts of the Option Shares listed below (as adjusted from time to time)
shall vest based on the happening of the Vesting Events listed below:
<TABLE>
<CAPTION>
NUMBER OF SHARES VESTING EVENT
<S> <C>
30%-75,000 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on which
shares of common stock of the Company may be traded at any
time during the term of this Agreement shall equal or
exceed $8.0625 for thirty (30) consecutive trading days.
25%-62,500 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on which
shares of common stock of the Company may be traded at any
time during the term of this Agreement shall equal or
exceed $13.0625 for thirty (30) consecutive trading days.
20%-50,000 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on which
shares of common stock of the Company may be traded at any
time during the term of this Agreement shall equal or
exceed $18.0625 for thirty (30) consecutive trading days.
15%-37,500 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on which
shares
-1-
<PAGE>
of common stock of the Company may be traded at any
time during the term of this Agreement shall equal or
exceed $23.0625 for thirty (30) consecutive trading days.
10%-25,000 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on which
shares of common stock of the Company may be traded at any
time during the term of this Agreement shall equal or exceed
$28.0625 for thirty (30) consecutive trading days.
</TABLE>
(f) "Option Term Date" shall mean the date ten (10) years after the
Date of Option Grant.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(h) "Company" shall mean Natural Wonders, Inc., a Delaware
corporation, and any successor corporation thereto.
(i) "Participating Company" shall mean (i) the Company and (ii) any
present or future parent and/or subsidiary corporation of the Company while such
corporation is a parent or subsidiary of the Company. For purposes of this
Option Agreement, a parent corporation and a subsidiary corporation shall be as
defined in sections 424(e) and 424(f) of the Code.
(j) "Participating Company Group" shall mean at any point in time all
corporations collectively which are then a Participating Company.
(k) "Plan" shall mean the Amended and Restated Natural Wonders, Inc.
1993 Omnibus Stock Plan.
2. STATUS OF THE OPTION. This Option is intended to be a nonqualified
stock option and shall not be treated as an incentive stock option as described
in Section 422 of the Code. As such, the Option does not qualify for any
special tax benefits . The Optionee should consult with the Optionee's own tax
advisors regarding the tax effects of this Option.
3. ADMINISTRATION. All questions of interpretation concerning this
Option Agreement shall be determined by the Board of Directors of the Company
(the "Board") and/or by a duly appointed committee of the Board having such
powers as shall be specified by the Board. Any subsequent references herein to
the Board shall also mean the committee if such committee has been appointed
and, unless the powers of the committee have been specifically limited, the
committee shall have all of the powers of the Board granted in the Plan,
including, without limitation, the power to terminate or amend the Plan at any
time, subject to the terms of the Plan and any applicable limitations imposed by
law. All determinations by the Board shall be final and binding upon all
persons having an interest in the Option. Any officer of a Participating
Company shall have the authority to act on behalf
-2-
<PAGE>
of the Company with respect to any matter, right, obligation, or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, or election.
4. EXERCISE OF THE OPTION.
(a) RIGHT TO EXERCISE. Except as provided in paragraph 4(f) below,
the Option shall be exercisable as set forth in the Vesting Schedule. The terms
of the Vesting Schedule notwithstanding, all remaining unvested amounts of the
Option Shares shall vest on the seventh (7th) anniversary of the Date of Option
Grant unless the Option has been earlier terminated in accordance with paragraph
6 below. In addition to the foregoing, in the event that the adoption of the
Plan or any amendment of the Plan is subject to the approval of the Company's
shareholders in order for the Plan to comply with the requirements of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Option shall not be exercisable prior to such shareholder approval if
the Optionee is subject to Section 16(b) of the Exchange Act, unless the Board,
in its sole discretion, approves the exercise of the Option prior to such
shareholder approval.
(b) METHOD OF EXERCISE. The Option shall be exercisable by written
notice to the Company which shall state the election to exercise the Option, the
number of shares for which the Option is being exercised and such other
representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. Such written notice shall be signed by the Optionee and shall
be delivered in person or by certified or registered mail, return receipt
requested, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in paragraph 6 below, accompanied by full payment of the
exercise price for the number of shares being purchased.
(c) FORM OF PAYMENT OF OPTION PRICE. Such payment shall be made
(i) in cash, by check, or cash equivalent, (ii) by tender to the Company of
shares of the Company's common stock owned by the Optionee having a value not
less than the option price, which either have been owned by the Optionee for
more than six (6) months or were not acquired, directly or indirectly, from the
Company, (iii) by Immediate Sales Proceeds, as defined below, or (iv) by any
combination of the foregoing. Notwithstanding the foregoing, the Option may not
be exercised by tender to the Company of shares of the Company's common stock to
the extent such tender of stock would constitute a violation of the provisions
of any law, regulation and/or agreement restricting the redemption of the
Company's common stock. "Immediate Sales Proceeds" shall mean the assignment in
form acceptable to the Company of the proceeds of a sale of some or all of the
shares acquired upon the exercise of the Option pursuant to a program and/or
procedure approved by the Company. The Company reserves, at any and all times,
the right, in the Company's sole and absolute discretion, to decline to approve
any such program and/or procedure.
(d) WITHHOLDING. At the time the Option is exercised, in whole or in
part, or at any time thereafter as requested by the Company, the Optionee shall
make adequate
-3-
<PAGE>
provision for foreign, federal and state tax withholding obligations of the
Company, if any, which arise in connection with the Option, including, without
limitation, obligations arising upon (i) the exercise, in whole or in part, of
the Option, (ii) the transfer, in whole or in part, of any shares acquired on
exercise of the Option, or (iii) the operation of any law or regulation
providing for the imputation of interest.
(e) CERTIFICATE REGISTRATION. The certificate or certificates for
the shares as to which the Option shall be exercised shall be registered in the
name of the Optionee, or, if applicable, the heirs of the Optionee.
(f) RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of the shares upon exercise of the Option
shall be subject to compliance with all applicable requirements of federal or
state law with respect to such securities. The Option may not be exercised if
the issuance of shares upon such exercise would constitute a violation of any
applicable federal or state securities laws or other law or regulations. In
addition, no Option may be exercised unless (i) a registration statement under
the Securities Act of 1933, as amended (the "Securities Act"), shall at the time
of exercise of the Option be in effect with respect to the shares issuable upon
exercise of the Option or (ii) in the opinion of legal counsel to the Company,
the shares issuable upon exercise of the Option may be issued in accordance with
the terms of an applicable exemption from the registration requirements of the
Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE
EXERCISABLE UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE
OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE
OPTION IS VESTED. As a condition to the exercise of the Option, the Company may
require the Optionee to satisfy any qualifications that may be necessary or
appropriate, to evidence compliance with any applicable law or regulation and to
make any representation or warranty with respect thereto as may be requested by
the Company.
(g) FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NON-TRANSFERABILITY OF THE OPTION. The Option may be exercised during
the lifetime of the Optionee only by the Optionee and may not be assigned or
transferred in any manner except by will or by the laws of descent and
distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
longer be exercised on the first to occur of (a) the Option Term Date as defined
above, (b) the last date for exercising the Option following termination of
employment as described in paragraph 7 below, or (c) upon a Transfer of Control
as described in paragraph 8 below.
7. TERMINATION OF EMPLOYMENT.
(a) TERMINATION OF THE OPTION. If the Optionee ceases to be an
employee of the Participating Company Group for any reason except death or
disability within the meaning
-4-
<PAGE>
of section 422(c) of the Code, the Option, to the extent unexercised and
exercisable by the Optionee on the date on which the Optionee ceased to be an
employee, may be exercised by the Optionee within three (3) months after the
date on which the Optionee's employment terminates, but in any event no later
than the Option Term Date. If the Optionee's employment with the Company is
terminated because of the death of the Optionee or disability of the Optionee
within the meaning of section 422(c) of the Code, the Option may be exercised
by the Optionee (or the Optionee's legal representative) at any time prior to
the expiration of twelve (12) months from the date the Optionee's employment
terminated, but in any event no later than the Option Term Date. The
Optionee's employment shall be deemed to have terminated on account of death
if the Optionee dies within three (3) months after the Optionee's termination
of employment. Except as otherwise provided in this paragraph 7(a), the
Option shall terminate and may not be exercised after the Optionee ceases to
be an employee of the Participating Company Group.
(b) TERMINATION OF EMPLOYMENT DEFINED. For purposes of this
paragraph 7, the Optionee's employment shall be deemed to have terminated
either upon an actual termination of employment or upon the Optionee's
employer ceasing to be a Participating Company.
(c) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option is prevented by the provisions of
paragraph 4(f) above, the Option shall remain exercisable until three (3)
months after the date the Optionee is notified by the Company that the Option
is exercisable, but in any event no later than the Option Term Date. The
Company makes no representation as to the tax consequences of any such
delayed exercise. The Optionee should consult with the Optionee's own tax
advisors as to the tax consequences to the Optionee of any such delayed
exercise.
(d) OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods
set forth above would subject the Optionee to suit under Section 16(b) of the
Exchange Act, the Option shall remain exercisable until the earliest to occur
of (i) the tenth (10th) day following the date on which the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th)
day after the Optionee's termination of employment, or (iii) the Option Term
Date. The Company makes no representation as to the tax consequences of any
delayed exercise. The Optionee should consult with the Optionee's own tax
advisors as to the tax consequences to the Optionee of any such delayed
exercise.
(e) LEAVE OF ABSENCE. For purposes hereof, the Optionee's
employment with the Participating Company Group shall not be deemed to
terminate if the Optionee takes any military leave, sick leave, or other bona
fide leave of absence approved by the Company of one hundred and eighty two
(182) days or less. In the event of a leave in excess of one hundred and
eighty two (182) days, the Optionee's employment shall be deemed to terminate
on the one hundred and eighty third (183rd) day of the leave unless the
Optionee's right to reemployment with the Participating Company Group remains
guaranteed by statute or contract.
-5-
<PAGE>
8. OWNERSHIP CHANGE AND TRANSFER OF CONTROL. For purposes hereof, the
"Control Company" shall mean the Participating Company whose stock is subject to
the Option. An "Ownership Change" shall be deemed to have occurred in the event
any of the following occurs with respect to the Control Company:
(a) the direct or indirect sale or exchange by the shareholders of
the Control Company of all or substantially all of the stock of the Control
Company;
(b) a merger in which the Control Company is a party; or
(c) the sale, exchange, or transfer (including, without limitation,
pursuant to a liquidation or dissolution) of all or substantially all of the
Control Company's assets (other than a sale, exchange, or transfer to one (1) or
more corporations where the shareholders of the Control Company before such
sale, exchange, or transfer retain, directly or indirectly, at least a majority
of the beneficial interest in the voting stock of the corporation(s) to which
the assets were transferred).
A "Transfer of Control" shall mean an Ownership Change in which the
shareholders of the Control Company before such Ownership Change do not retain,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of the Control Company.
In the event of a Transfer of Control, the surviving, continuing,
successor, or purchasing corporation or parent corporation thereof, as the case
may be (the "Acquiring Corporation"), shall assume the Company's rights and
obligations under this Option Agreement or substitute an option for the
Acquiring Corporation's stock for the Option. In the event the Acquiring
Corporation elects not to assume the Company's rights and obligations under this
Option Agreement or substitute for the Option in connection with a Transfer of
Control involving an Ownership Change described in (b) above, the Board shall
provide that any unexercised portion of the Option shall be fully exercisable as
of a date prior to the Transfer of Control, as the Board so determines. The
Option shall terminate effective as of the date of the Transfer of Control to
the extent that the Option is neither assumed by the Acquiring Corporation nor
exercised as of the date of the Transfer of Control.
9. EFFECT OF CHANGE IN STOCK SUBJECT TO THE OPTION. Appropriate
adjustments shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or like
change in the capital structure of the Company. In the event a majority of the
shares which are of the same class as the shares that are subject to the Option
are exchanged for, converted into, or otherwise become (whether or not pursuant
to an Ownership Change) shares of another corporation (the "New Shares"), the
Company may unilaterally amend the Option to provide that the Option is
exercisable for New Shares. In the event of any such amendment, the number of
shares and the exercise price shall be adjusted in a fair and equitable manner.
-6-
<PAGE>
10. RIGHTS AS A SHAREHOLDER OR EMPLOYEE. The Optionee shall have no
rights as a shareholder with respect to any shares covered by the Option until
the date of the issuance of a certificate or certificates for the shares for
which the Option has been exercised. No adjustment shall be made for dividends
or distributions or other rights for which the record date is prior to the date
such certificate or certificates are issued, except as provided in paragraph 9
above. Nothing in the Option shall confer upon the Optionee any right to
continue in the employ of a Participating Company or interfere in any way with
any right of the Participating Company Group to terminate the Optionee's
employment at any time.
11. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall
dispose of the shares acquired pursuant to the Option only in accordance with
the provisions of this Option Agreement. In addition, the Optionee shall
promptly notify the Chief Financial Officer of the Company if the Optionee
disposes of any of the shares acquired pursuant to the Option within one (1)
year from the date the Optionee exercises all or part of the Option or within
two (2) years of the date of grant of the Option. Until such time as the
Optionee disposes of such shares in a manner consistent with the provisions of
this Option Agreement, the Optionee shall hold all shares acquired pursuant to
the Option in the Optionee's name (and not in the name of any nominee) for the
one-year period immediately after exercise of the Option and the two-year period
immediately after grant of the Option. At any time during the one-year or
two-year periods set forth above, the Company may place a legend or legends on
any certificate or certificates representing shares acquired pursuant to the
Option requesting the transfer agent for the Company's stock to notify the
Company of any such transfers. The obligation of the Optionee to notify the
Company of any such transfer shall continue notwithstanding that a legend has
been placed on the certificate or certificates pursuant to the preceding
sentence.
12. LEGENDS. The Company may at any time place legends referencing any
applicable federal or state securities law restrictions on all certificates
representing shares of stock subject to the provisions of this Option
Agreement. The Optionee shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order to
effectuate the provisions of this paragraph.
13. BINDING EFFECT. This Option Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
14. TERMINATION OR AMENDMENT. The Board, including any duly appointed
committee of the Board, may terminate or amend the Plan and/or the Option at any
time; provided, however, that no such termination or amendment may adversely
affect the Option or any unexercised portion hereof without the consent of the
Optionee.
15. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Company other than
-7-
<PAGE>
those as set forth or provided for herein. To the extent contemplated herein,
the provisions of this Option Agreement shall survive any exercise of the Option
and shall remain in full force and effect.
16. APPLICABLE LAW. This Option Agreement shall be governed by the laws
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
NATURAL WONDERS, INC.
By: /s/ Peter G. Hanelt
------------------------------
Title: CEO
---------------------------
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, and hereby accepts the Option subject to
all of the terms and provisions thereof. The Optionee hereby agrees to accept
as binding, conclusive and final all decisions or interpretations of the Board
upon any questions arising under this Option Agreement.
Date: 10/19/98 /s/ Kenneth G. Norton
--------------------------- ---------------------------
Kenneth G. Norton
-8-
<PAGE>
Exhibit 10.31
SECURED PROMISSORY NOTE
US $450,000 As of October 19, 1998
Fremont, California
FOR VALUE RECEIVED, Kenneth G. Norton ("Borrower"), promises to pay to the
order of Natural Wonders, Inc., a Delaware corporation ("the Company"), at the
address listed below or at such other place as the Company may designate in
writing, the principal sum of US$450,000 (the "Principal").
1. TERMS AND CONDITIONS OF REPAYMENT; FORGIVENESS OF PRINCIPAL. The
Company agrees to forgive the Principal in accordance with the following
schedule:
a. if Borrower remains continuously employed with the Company through and
including September 30, 1999, the Company shall forgive repayment of
$150,000 of the Principal, and thereafter, the Company shall forgive
repayment of 1/36th ($8,333.33) of the remaining $300,000 of the
Principal at the end of each additional calendar month that Borrower
remains employed with the Company. Consequently, if Borrower remains
continuously employed with the Company through September 30, 2002,
then the company shall forgive repayment of the entire Principal.
b. if Borrower's employment with the Company is terminated due to death
or disability of the Borrower, by the Company without cause, by the
Company because of non-renewal of the Executive Employment Agreement
("Employment Agreement") between Borrower and the Company, or by
Borrower for good reason, as set forth in the Employment Agreement,
then the entire Principal immediately shall be forgiven by the Company
as of the date of termination.
2. ACCELERATION. In the event that Borrower is terminated by the
Company for "Cause" or Borrower resigns or terminates the Employment Agreement
without "Good Reason" (as such terms are defined in the Employment Agreement),
then the entire outstanding Principal and all other amounts due hereunder shall,
at the option of the Company, become due and payable thirty (30) calendar days
following the termination of Borrower's employment, without further presentment,
notice or demand for payment.
3. MANNER AND PLACE OF PAYMENTS. All payments under this Note shall
be payable in lawful money of the United States of America. If a payment
hereunder becomes due and payable on a Saturday, Sunday or legal holiday, the
due date thereof shall be extended to the next succeeding day.
4. SECURITY FOR THE NOTE. This Note is secured pursuant to the
terms of that certain Pledge and Security Agreement dated of even date hereof
between the Company and Borrower, pursuant to which the Borrower has pledged to
the Company and granted to the
<PAGE>
Company a security interest in the following special purpose certificates of
deposit numbered and in the amounts indicated: 1016302788000 ($150,000.00);
1016302804000 ($100,000.00); 1016302796000 ($100,000.00); 1016302812000
($100,000.00), together with all proceeds and substitutions of any thereof, all
interest paid thereon, and all other cash and non-cash proceeds of the
foregoing, equal to the value of the then outstanding Principal.
5. DEFAULT; INTEREST. Borrower agrees that, upon default in payment
of any of the Principal due under this Note, Borrower shall pay to the Company
interest on the unpaid Principal balance of the Note from and including the date
such payment was due to the date of repayment to the Company in full of all sums
owing pursuant to this Note at the Eleventh district Cost of funds rate on the
date of the default.
6. MISCELLANEOUS PROVISIONS.
a. Borrower waives presentment, protest and demand, notice of protest,
demand, dishonor and nonpayment of the Note, and any and all other
notices and demands in connection with the delivery, acceptance,
performance, default or enforcement of this Note.
b. Any provision of this Note which may be prohibited by law or otherwise
held invalid shall be ineffective only to the extent of such
prohibition or invalidity and shall not invalidate or otherwise render
ineffective the remaining provisions of this Note. No waiver or
modification of any of the terms or provisions of the Note shall be
valid or binding unless set forth in writing signed by the Borrower
and a duly authorized officer or other representative of the Company,
and then only to the extent specifically set forth.
c. The terms, covenants and conditions contained herein shall be binding
upon the heirs, successors and assigns of Borrower and shall inure to
the benefit of the heirs, successors and assigns of the Company. The
foregoing notwithstanding, neither party may assign this Note or the
proceeds thereof, in fact or by operation of law, without the prior
written consent of the other party, and any attempted assignment
without such consent shall be void.
d. All notices and other communications required or permitted hereunder
shall be in writing and shall be delivered by facsimile with a
confirming copy sent by air or personal courier, or otherwise
delivered by personal courier, by hand or by messenger, addressed as
follows or as the parties may from time to time provide in accordance
hereto:
To the Company: Natural Wonders, Inc.
4209 Technology Drive
Fremont, California 94538
Attention: Chief Executive Officer
<PAGE>
Facsimile: (510) 252-6795
To Borrower: Kenneth G. Norton
903 Tournament Drive
Hillsborough, California 94010
Facsimile: (650) 349-0137
Each such notice or other communication shall for all purposes of the
Agreement be treated as effective or having been given when delivered
if delivered personally, or, if sent by facsimile followed by air
courier delivery as provided herein, on the earlier of the date of
actual receipt or the day the facsimile is sent if such facsimile is
acknowledged as having been received by the transmitting station.
e. Upon any default hereunder, the company may exercise all rights
provided herein and in the Pledge and Security Agreement and by law
including, but not limited to, the right to immediate payment in full
of this Note. The remedies of the Company as provided herein or in
the Pledge and Security Agreement, or any one or more of them, or in
law or in equity, shall be cumulative and concurrent, and may be
pursued singularly, successively, or together at the sole discretion
of the holder hereof, and may be exercised as often as occasion
therefor shall occur.
f. Borrower agrees that the Company may have recourse for the payment of
the indebtedness evidenced hereby against his separate property and
any community property in which he may have an interest to the extent
permitted by law.
g. This Note shall be governed and interpreted in accordance with the
laws of the State of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the 19 day
of October, 1998.
BORROWER:
/s/ Kenneth G. Norton
----------------------------------
Kenneth G. Norton
<PAGE>
NATURAL WONDERS, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
Natural Wonders, Inc. (the "Company") has granted to the individual named
below an option to purchase certain shares of common stock of the Company, in
the manner and subject to the provisions of this Option Agreement.
1. DEFINITIONS:
(a) "Optionee" shall mean Peter G. Hanelt.
(b) "Date of Option Grant" shall mean September 29, 1998.
(c) "Number of Option Shares" shall mean 250,000 shares of common
stock of the Company as adjusted from time to time pursuant to paragraph 9
below.
(d) "Exercise Price" shall mean $3.625 per share as adjusted from
time to time pursuant to paragraph 9 below.
(e) "Vesting Schedule" shall mean the following schedule under which
the amounts of the Option Shares listed below (as adjusted from time to time)
shall vest based on the happening of the Vesting Events listed below:
<TABLE>
<CAPTION>
NUMBER OF SHARES VESTING EVENT
- ---------------- -------------
<S> <C>
30%-75,000 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on
which shares of common stock of the Company may be
traded at any time during the term of this Agreement
shall equal or exceed $8.0625 for thirty (30)
consecutive trading days.
25%-62,500 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on
which shares of common stock of the Company may be
traded at any time during the term of this Agreement
shall equal or exceed $13.0625 for thirty (30)
consecutive trading days.
20%-50,000 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on
which shares of common stock of the Company may be
traded at any time during the term of this Agreement
shall equal or exceed $18.0625 for thirty (30)
consecutive trading days.
15%-37,500 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on
which shares
-1-
<PAGE>
of common stock of the Company may be traded at any
time during the term of this Agreement shall equal or
exceed $23.0625 for thirty (30) consecutive trading
days.
10%-25,000 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on
which shares of common stock of the Company may be
traded at any time during the term of this Agreement
shall equal or exceed $28.0625 for thirty (30)
consecutive trading days.
</TABLE>
(f) "Option Term Date" shall mean the date ten (10) years after the
Date of Option Grant.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(h) "Company" shall mean Natural Wonders, Inc., a Delaware
corporation, and any successor corporation thereto.
(i) "Participating Company" shall mean (i) the Company and (ii) any
present or future parent and/or subsidiary corporation of the Company while such
corporation is a parent or subsidiary of the Company. For purposes of this
Option Agreement, a parent corporation and a subsidiary corporation shall be as
defined in sections 424(e) and 424(f) of the Code.
(j) "Participating Company Group" shall mean at any point in time all
corporations collectively which are then a Participating Company.
(k) "Plan" shall mean the Amended and Restated Natural Wonders, Inc.
1993 Omnibus Stock Plan.
2. STATUS OF THE OPTION. This Option is intended to be a nonqualified
stock option and shall not be treated as an incentive stock option as described
in Section 422 of the Code. As such, the Option does not qualify for any
special tax benefits . The Optionee should consult with the Optionee's own tax
advisors regarding the tax effects of this Option.
3. ADMINISTRATION. All questions of interpretation concerning this
Option Agreement shall be determined by the Board of Directors of the Company
(the "Board") and/or by a duly appointed committee of the Board having such
powers as shall be specified by the Board. Any subsequent references herein to
the Board shall also mean the committee if such committee has been appointed
and, unless the powers of the committee have been specifically limited, the
committee shall have all of the powers of the Board granted in the Plan,
including, without limitation, the power to terminate or amend the Plan at any
time, subject to the terms of the Plan and any applicable limitations imposed by
law. All determinations by the Board shall be final and binding upon all
persons having an interest in the Option. Any officer of a Participating
Company shall have the authority to act on behalf
-2-
<PAGE>
of the Company with respect to any matter, right, obligation, or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, or election.
4. EXERCISE OF THE OPTION.
(a) RIGHT TO EXERCISE. Except as provided in paragraph 4(f) below,
the Option shall be exercisable as set forth in the Vesting Schedule. The terms
of the Vesting Schedule notwithstanding, all remaining unvested amounts of the
Option Shares shall vest on the seventh (7th) anniversary of the Date of Option
Grant unless the Option has been earlier terminated in accordance with paragraph
6 below. In addition to the foregoing, in the event that the adoption of the
Plan or any amendment of the Plan is subject to the approval of the Company's
shareholders in order for the Plan to comply with the requirements of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Option shall not be exercisable prior to such shareholder approval if
the Optionee is subject to Section 16(b) of the Exchange Act, unless the Board,
in its sole discretion, approves the exercise of the Option prior to such
shareholder approval.
(b) METHOD OF EXERCISE. The Option shall be exercisable by written
notice to the Company which shall state the election to exercise the Option, the
number of shares for which the Option is being exercised and such other
representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. Such written notice shall be signed by the Optionee and shall
be delivered in person or by certified or registered mail, return receipt
requested, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in paragraph 6 below, accompanied by full payment of the
exercise price for the number of shares being purchased.
(c) FORM OF PAYMENT OF OPTION PRICE. Such payment shall be made
(i) in cash, by check, or cash equivalent, (ii) by tender to the Company of
shares of the Company's common stock owned by the Optionee having a value not
less than the option price, which either have been owned by the Optionee for
more than six (6) months or were not acquired, directly or indirectly, from the
Company, (iii) by Immediate Sales Proceeds, as defined below, or (iv) by any
combination of the foregoing. Notwithstanding the foregoing, the Option may not
be exercised by tender to the Company of shares of the Company's common stock to
the extent such tender of stock would constitute a violation of the provisions
of any law, regulation and/or agreement restricting the redemption of the
Company's common stock. "Immediate Sales Proceeds" shall mean the assignment in
form acceptable to the Company of the proceeds of a sale of some or all of the
shares acquired upon the exercise of the Option pursuant to a program and/or
procedure approved by the Company. The Company reserves, at any and all times,
the right, in the Company's sole and absolute discretion, to decline to approve
any such program and/or procedure.
(d) WITHHOLDING. At the time the Option is exercised, in whole or in
part, or at any time thereafter as requested by the Company, the Optionee shall
make adequate
-3-
<PAGE>
provision for foreign, federal and state tax withholding obligations of the
Company, if any, which arise in connection with the Option, including, without
limitation, obligations arising upon (i) the exercise, in whole or in part, of
the Option, (ii) the transfer, in whole or in part, of any shares acquired on
exercise of the Option, or (iii) the operation of any law or regulation
providing for the imputation of interest.
(e) CERTIFICATE REGISTRATION. The certificate or certificates for
the shares as to which the Option shall be exercised shall be registered in the
name of the Optionee, or, if applicable, the heirs of the Optionee.
(f) RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of the shares upon exercise of the Option
shall be subject to compliance with all applicable requirements of federal or
state law with respect to such securities. The Option may not be exercised if
the issuance of shares upon such exercise would constitute a violation of any
applicable federal or state securities laws or other law or regulations. In
addition, no Option may be exercised unless (i) a registration statement under
the Securities Act of 1933, as amended (the "Securities Act"), shall at the time
of exercise of the Option be in effect with respect to the shares issuable upon
exercise of the Option or (ii) in the opinion of legal counsel to the Company,
the shares issuable upon exercise of the Option may be issued in accordance with
the terms of an applicable exemption from the registration requirements of the
Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE
EXERCISABLE UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE
OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE
OPTION IS VESTED. As a condition to the exercise of the Option, the Company may
require the Optionee to satisfy any qualifications that may be necessary or
appropriate, to evidence compliance with any applicable law or regulation and to
make any representation or warranty with respect thereto as may be requested by
the Company.
(g) FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NON-TRANSFERABILITY OF THE OPTION. The Option may be exercised during
the lifetime of the Optionee only by the Optionee and may not be assigned or
transferred in any manner except by will or by the laws of descent and
distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
longer be exercised on the first to occur of (a) the Option Term Date as defined
above, (b) the last date for exercising the Option following termination of
employment as described in paragraph 7 below, or (c) upon a Transfer of Control
as described in paragraph 8 below.
7. TERMINATION OF EMPLOYMENT.
(a) TERMINATION OF THE OPTION. If the Optionee ceases to be an
employee of the Participating Company Group for any reason except death or
disability within the meaning
-4-
<PAGE>
of section 422(c) of the Code, the Option, to the extent unexercised and
exercisable by the Optionee on the date on which the Optionee ceased to be an
employee, may be exercised by the Optionee within three (3) months after the
date on which the Optionee's employment terminates, but in any event no later
than the Option Term Date. If the Optionee's employment with the Company is
terminated because of the death of the Optionee or disability of the Optionee
within the meaning of section 422(c) of the Code, the Option may be exercised by
the Optionee (or the Optionee's legal representative) at any time prior to the
expiration of twelve (12) months from the date the Optionee's employment
terminated, but in any event no later than the Option Term Date. The Optionee's
employment shall be deemed to have terminated on account of death if the
Optionee dies within three (3) months after the Optionee's termination of
employment. Except as otherwise provided in this paragraph 7(a), the Option
shall terminate and may not be exercised after the Optionee ceases to be an
employee of the Participating Company Group.
(b) TERMINATION OF EMPLOYMENT DEFINED. For purposes of this
paragraph 7, the Optionee's employment shall be deemed to have terminated either
upon an actual termination of employment or upon the Optionee's employer ceasing
to be a Participating Company.
(c) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option is prevented by the provisions of
paragraph 4(f) above, the Option shall remain exercisable until three (3)
months after the date the Optionee is notified by the Company that the Option
is exercisable, but in any event no later than the Option Term Date. The
Company makes no representation as to the tax consequences of any such
delayed exercise. The Optionee should consult with the Optionee's own tax
advisors as to the tax consequences to the Optionee of any such delayed
exercise.
(d) OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth above would subject the Optionee to suit under Section 16(b) of the
Exchange Act, the Option shall remain exercisable until the earliest to occur of
(i) the tenth (10th) day following the date on which the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of employment, or (iii) the Option Term Date.
The Company makes no representation as to the tax consequences of any delayed
exercise. The Optionee should consult with the Optionee's own tax advisors as
to the tax consequences to the Optionee of any such delayed exercise.
(e) LEAVE OF ABSENCE. For purposes hereof, the Optionee's employment
with the Participating Company Group shall not be deemed to terminate if the
Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of one hundred and eighty two (182) days or
less. In the event of a leave in excess of one hundred and eighty two (182)
days, the Optionee's employment shall be deemed to terminate on the one hundred
and eighty third (183rd) day of the leave unless the Optionee's right to
reemployment with the Participating Company Group remains guaranteed by statute
or contract.
-5-
<PAGE>
8. OWNERSHIP CHANGE AND TRANSFER OF CONTROL. For purposes hereof, the
"Control Company" shall mean the Participating Company whose stock is subject to
the Option. An "Ownership Change" shall be deemed to have occurred in the event
any of the following occurs with respect to the Control Company:
(a) the direct or indirect sale or exchange by the shareholders of
the Control Company of all or substantially all of the stock of the Control
Company;
(b) a merger in which the Control Company is a party; or
(c) the sale, exchange, or transfer (including, without limitation,
pursuant to a liquidation or dissolution) of all or substantially all of the
Control Company's assets (other than a sale, exchange, or transfer to one (1) or
more corporations where the shareholders of the Control Company before such
sale, exchange, or transfer retain, directly or indirectly, at least a majority
of the beneficial interest in the voting stock of the corporation(s) to which
the assets were transferred).
A "Transfer of Control" shall mean an Ownership Change in which the
shareholders of the Control Company before such Ownership Change do not retain,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of the Control Company.
In the event of a Transfer of Control, the surviving, continuing,
successor, or purchasing corporation or parent corporation thereof, as the case
may be (the "Acquiring Corporation"), shall assume the Company's rights and
obligations under this Option Agreement or substitute an option for the
Acquiring Corporation's stock for the Option. In the event the Acquiring
Corporation elects not to assume the Company's rights and obligations under this
Option Agreement or substitute for the Option in connection with a Transfer of
Control involving an Ownership Change described in (b) above, the Board shall
provide that any unexercised portion of the Option shall be fully exercisable as
of a date prior to the Transfer of Control, as the Board so determines. The
Option shall terminate effective as of the date of the Transfer of Control to
the extent that the Option is neither assumed by the Acquiring Corporation nor
exercised as of the date of the Transfer of Control.
9. EFFECT OF CHANGE IN STOCK SUBJECT TO THE OPTION. Appropriate
adjustments shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or like
change in the capital structure of the Company. In the event a majority of the
shares which are of the same class as the shares that are subject to the Option
are exchanged for, converted into, or otherwise become (whether or not pursuant
to an Ownership Change) shares of another corporation (the "New Shares"), the
Company may unilaterally amend the Option to provide that the Option is
exercisable for New Shares. In the event of any such amendment, the number of
shares and the exercise price shall be adjusted in a fair and equitable manner.
-6-
<PAGE>
10. RIGHTS AS A SHAREHOLDER OR EMPLOYEE. The Optionee shall have no
rights as a shareholder with respect to any shares covered by the Option until
the date of the issuance of a certificate or certificates for the shares for
which the Option has been exercised. No adjustment shall be made for dividends
or distributions or other rights for which the record date is prior to the date
such certificate or certificates are issued, except as provided in paragraph 9
above. Nothing in the Option shall confer upon the Optionee any right to
continue in the employ of a Participating Company or interfere in any way with
any right of the Participating Company Group to terminate the Optionee's
employment at any time.
11. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall
dispose of the shares acquired pursuant to the Option only in accordance with
the provisions of this Option Agreement. In addition, the Optionee shall
promptly notify the Chief Financial Officer of the Company if the Optionee
disposes of any of the shares acquired pursuant to the Option within one (1)
year from the date the Optionee exercises all or part of the Option or within
two (2) years of the date of grant of the Option. Until such time as the
Optionee disposes of such shares in a manner consistent with the provisions of
this Option Agreement, the Optionee shall hold all shares acquired pursuant to
the Option in the Optionee's name (and not in the name of any nominee) for the
one-year period immediately after exercise of the Option and the two-year period
immediately after grant of the Option. At any time during the one-year or
two-year periods set forth above, the Company may place a legend or legends on
any certificate or certificates representing shares acquired pursuant to the
Option requesting the transfer agent for the Company's stock to notify the
Company of any such transfers. The obligation of the Optionee to notify the
Company of any such transfer shall continue notwithstanding that a legend has
been placed on the certificate or certificates pursuant to the preceding
sentence.
12. LEGENDS. The Company may at any time place legends referencing any
applicable federal or state securities law restrictions on all certificates
representing shares of stock subject to the provisions of this Option
Agreement. The Optionee shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order to
effectuate the provisions of this paragraph.
13. BINDING EFFECT. This Option Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
14. TERMINATION OR AMENDMENT. The Board, including any duly appointed
committee of the Board, may terminate or amend the Plan and/or the Option at any
time; provided, however, that no such termination or amendment may adversely
affect the Option or any unexercised portion hereof without the consent of the
Optionee.
15. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Company other than
-7-
<PAGE>
those as set forth or provided for herein. To the extent contemplated herein,
the provisions of this Option Agreement shall survive any exercise of the Option
and shall remain in full force and effect.
16. APPLICABLE LAW. This Option Agreement shall be governed by the laws
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
NATURAL WONDERS, INC.
By: /s/ Pearson C. Cummin III
--------------------------------
Title: Chairman
------------------------------
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, and hereby accepts the Option subject to
all of the terms and provisions thereof. The Optionee hereby agrees to accept
as binding, conclusive and final all decisions or interpretations of the Board
upon any questions arising under this Option Agreement.
Date: 9/29/98 /s/ Peter G. Hanelt
------------------------ -------------------------
Peter G. Hanelt
-8-
<PAGE>
Exhibit 10.33
NATURAL WONDERS, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
Natural Wonders, Inc. (the "Company") has granted to the individual named
below an option to purchase certain shares of common stock of the Company, in
the manner and subject to the provisions of this Option Agreement.
1. DEFINITIONS:
(a) "Optionee" shall mean David H. Folkman.
(b) "Date of Option Grant" shall mean September 29, 1998.
(c) "Number of Option Shares" shall mean 250,000 shares of common
stock of the Company as adjusted from time to time pursuant to paragraph 9
below.
(d) "Exercise Price" shall mean $3.625 per share as adjusted from
time to time pursuant to paragraph 9 below.
(e) "Vesting Schedule" shall mean the following schedule under which
the amounts of the Option Shares listed below (as adjusted from time to time)
shall vest based on the happening of the Vesting Events listed below:
<TABLE>
<CAPTION>
Number of Shares Vesting Event
- ---------------- --------------
<S> <C>
30%-75,000 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on which
shares of common stock of the Company may be traded at any
time during the term of this Agreement shall equal or exceed
$8.0625 for thirty (30) consecutive trading days.
25%-62,500 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on which
shares of common stock of the Company may be traded at any
time during the term of this Agreement shall equal or exceed
$13.0625 for thirty (30) consecutive trading days.
20%-50,000 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on which
shares of common stock of the Company may be traded at any
time during the term of this Agreement shall equal or exceed
$18.0625 for thirty (30) consecutive trading days.
15%-37,500 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on
which shares
-1-
<PAGE>
<S> <C>
of common stock of the Company may be traded at any time
during the term of this Agreement shall equal or exceed
$23.0625 for thirty (30) consecutive trading days.
10%-25,000 The closing price of the shares of common stock of the
Company on the NASDAQ NMS system or other exchange on which
shares of common stock of the Company may be traded at any
time during the term of this Agreement shall equal or exceed
$28.0625 for thirty (30) consecutive trading days.
</TABLE>
(f) "Option Term Date" shall mean the date ten (10) years after the
Date of Option Grant.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(h) "Company" shall mean Natural Wonders, Inc., a Delaware
corporation, and any successor corporation thereto.
(i) "Participating Company" shall mean (i) the Company and (ii) any
present or future parent and/or subsidiary corporation of the Company while such
corporation is a parent or subsidiary of the Company. For purposes of this
Option Agreement, a parent corporation and a subsidiary corporation shall be as
defined in sections 424(e) and 424(f) of the Code.
(j) "Participating Company Group" shall mean at any point in time all
corporations collectively which are then a Participating Company.
(k) "Plan" shall mean the Amended and Restated Natural Wonders, Inc.
1993 Omnibus Stock Plan.
2. STATUS OF THE OPTION. This Option is intended to be a nonqualified
stock option and shall not be treated as an incentive stock option as described
in Section 422 of the Code. As such, the Option does not qualify for any
special tax benefits . The Optionee should consult with the Optionee's own tax
advisors regarding the tax effects of this Option.
3. ADMINISTRATION. All questions of interpretation concerning this
Option Agreement shall be determined by the Board of Directors of the Company
(the "Board") and/or by a duly appointed committee of the Board having such
powers as shall be specified by the Board. Any subsequent references herein to
the Board shall also mean the committee if such committee has been appointed
and, unless the powers of the committee have been specifically limited, the
committee shall have all of the powers of the Board granted in the Plan,
including, without limitation, the power to terminate or amend the Plan at any
time, subject to the terms of the Plan and any applicable limitations imposed by
law. All determinations by the Board shall be final and binding upon all
persons having an interest in the Option. Any officer of a Participating
Company shall have the authority to act on behalf
-2-
<PAGE>
of the Company with respect to any matter, right, obligation, or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, or election.
4. EXERCISE OF THE OPTION.
(a) RIGHT TO EXERCISE. Except as provided in paragraph 4(f) below,
the Option shall be exercisable as set forth in the Vesting Schedule. The terms
of the Vesting Schedule notwithstanding, all remaining unvested amounts of the
Option Shares shall vest on the seventh (7th) anniversary of the Date of Option
Grant unless the Option has been earlier terminated in accordance with paragraph
6 below. In addition to the foregoing, in the event that the adoption of the
Plan or any amendment of the Plan is subject to the approval of the Company's
shareholders in order for the Plan to comply with the requirements of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Option shall not be exercisable prior to such shareholder approval if
the Optionee is subject to Section 16(b) of the Exchange Act, unless the Board,
in its sole discretion, approves the exercise of the Option prior to such
shareholder approval.
(b) METHOD OF EXERCISE. The Option shall be exercisable by written
notice to the Company which shall state the election to exercise the Option, the
number of shares for which the Option is being exercised and such other
representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. Such written notice shall be signed by the Optionee and shall
be delivered in person or by certified or registered mail, return receipt
requested, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in paragraph 6 below, accompanied by full payment of the
exercise price for the number of shares being purchased.
(c) FORM OF PAYMENT OF OPTION PRICE. Such payment shall be made
(i) in cash, by check, or cash equivalent, (ii) by tender to the Company of
shares of the Company's common stock owned by the Optionee having a value not
less than the option price, which either have been owned by the Optionee for
more than six (6) months or were not acquired, directly or indirectly, from the
Company, (iii) by Immediate Sales Proceeds, as defined below, or (iv) by any
combination of the foregoing. Notwithstanding the foregoing, the Option may not
be exercised by tender to the Company of shares of the Company's common stock to
the extent such tender of stock would constitute a violation of the provisions
of any law, regulation and/or agreement restricting the redemption of the
Company's common stock. "Immediate Sales Proceeds" shall mean the assignment in
form acceptable to the Company of the proceeds of a sale of some or all of the
shares acquired upon the exercise of the Option pursuant to a program and/or
procedure approved by the Company. The Company reserves, at any and all times,
the right, in the Company's sole and absolute discretion, to decline to approve
any such program and/or procedure.
(d) WITHHOLDING. At the time the Option is exercised, in whole or in
part, or at any time thereafter as requested by the Company, the Optionee shall
make adequate
-3-
<PAGE>
provision for foreign, federal and state tax withholding obligations of the
Company, if any, which arise in connection with the Option, including, without
limitation, obligations arising upon (i) the exercise, in whole or in part, of
the Option, (ii) the transfer, in whole or in part, of any shares acquired on
exercise of the Option, or (iii) the operation of any law or regulation
providing for the imputation of interest.
(e) CERTIFICATE REGISTRATION. The certificate or certificates for
the shares as to which the Option shall be exercised shall be registered in the
name of the Optionee, or, if applicable, the heirs of the Optionee.
(f) RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of the shares upon exercise of the Option
shall be subject to compliance with all applicable requirements of federal or
state law with respect to such securities. The Option may not be exercised if
the issuance of shares upon such exercise would constitute a violation of any
applicable federal or state securities laws or other law or regulations. In
addition, no Option may be exercised unless (i) a registration statement under
the Securities Act of 1933, as amended (the "Securities Act"), shall at the time
of exercise of the Option be in effect with respect to the shares issuable upon
exercise of the Option or (ii) in the opinion of legal counsel to the Company,
the shares issuable upon exercise of the Option may be issued in accordance with
the terms of an applicable exemption from the registration requirements of the
Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE
EXERCISABLE UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE
OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE
OPTION IS VESTED. As a condition to the exercise of the Option, the Company may
require the Optionee to satisfy any qualifications that may be necessary or
appropriate, to evidence compliance with any applicable law or regulation and to
make any representation or warranty with respect thereto as may be requested by
the Company.
(g) FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NON-TRANSFERABILITY OF THE OPTION. The Option may be exercised during
the lifetime of the Optionee only by the Optionee and may not be assigned or
transferred in any manner except by will or by the laws of descent and
distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
longer be exercised on the first to occur of (a) the Option Term Date as defined
above, (b) the last date for exercising the Option following termination of
employment as described in paragraph 7 below, or (c) upon a Transfer of Control
as described in paragraph 8 below.
7. TERMINATION OF EMPLOYMENT.
(a) TERMINATION OF THE OPTION. If the Optionee ceases to be an
employee of the Participating Company Group for any reason except death or
disability within the meaning
-4-
<PAGE>
of section 422(c) of the Code, the Option, to the extent unexercised and
exercisable by the Optionee on the date on which the Optionee ceased to be an
employee, may be exercised by the Optionee within three (3) months after the
date on which the Optionee's employment terminates, but in any event no later
than the Option Term Date. If the Optionee's employment with the Company is
terminated because of the death of the Optionee or disability of the Optionee
within the meaning of section 422(c) of the Code, the Option may be exercised by
the Optionee (or the Optionee's legal representative) at any time prior to the
expiration of twelve (12) months from the date the Optionee's employment
terminated, but in any event no later than the Option Term Date. The Optionee's
employment shall be deemed to have terminated on account of death if the
Optionee dies within three (3) months after the Optionee's termination of
employment. Except as otherwise provided in this paragraph 7(a), the Option
shall terminate and may not be exercised after the Optionee ceases to be an
employee of the Participating Company Group.
(b) TERMINATION OF EMPLOYMENT DEFINED. For purposes of this
paragraph 7, the Optionee's employment shall be deemed to have terminated either
upon an actual termination of employment or upon the Optionee's employer ceasing
to be a Participating Company.
(c) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option is prevented by the provisions of
paragraph 4(f) above, the Option shall remain exercisable until three (3)
months after the date the Optionee is notified by the Company that the Option
is exercisable, but in any event no later than the Option Term Date. The
Company makes no representation as to the tax consequences of any such
delayed exercise. The Optionee should consult with the Optionee's own tax
advisors as to the tax consequences to the Optionee of any such delayed
exercise.
(d) OPTIONEE SUBJECT TO SECTION 16(b). Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth above would subject the Optionee to suit under Section 16(b) of the
Exchange Act, the Option shall remain exercisable until the earliest to occur of
(i) the tenth (10th) day following the date on which the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of employment, or (iii) the Option Term Date.
The Company makes no representation as to the tax consequences of any delayed
exercise. The Optionee should consult with the Optionee's own tax advisors as
to the tax consequences to the Optionee of any such delayed exercise.
(e) LEAVE OF ABSENCE. For purposes hereof, the Optionee's employment
with the Participating Company Group shall not be deemed to terminate if the
Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of one hundred and eighty two (182) days or
less. In the event of a leave in excess of one hundred and eighty two (182)
days, the Optionee's employment shall be deemed to terminate on the one hundred
and eighty third (183rd) day of the leave unless the Optionee's right to
reemployment with the Participating Company Group remains guaranteed by statute
or contract.
-5-
<PAGE>
8. OWNERSHIP CHANGE AND TRANSFER OF CONTROL. For purposes hereof, the
"Control Company" shall mean the Participating Company whose stock is subject to
the Option. An "Ownership Change" shall be deemed to have occurred in the event
any of the following occurs with respect to the Control Company:
(a) the direct or indirect sale or exchange by the shareholders of
the Control Company of all or substantially all of the stock of the Control
Company;
(b) a merger in which the Control Company is a party; or
(c) the sale, exchange, or transfer (including, without limitation,
pursuant to a liquidation or dissolution) of all or substantially all of the
Control Company's assets (other than a sale, exchange, or transfer to one (1) or
more corporations where the shareholders of the Control Company before such
sale, exchange, or transfer retain, directly or indirectly, at least a majority
of the beneficial interest in the voting stock of the corporation(s) to which
the assets were transferred).
A "Transfer of Control" shall mean an Ownership Change in which the
shareholders of the Control Company before such Ownership Change do not retain,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of the Control Company.
In the event of a Transfer of Control, the surviving, continuing,
successor, or purchasing corporation or parent corporation thereof, as the case
may be (the "Acquiring Corporation"), shall assume the Company's rights and
obligations under this Option Agreement or substitute an option for the
Acquiring Corporation's stock for the Option. In the event the Acquiring
Corporation elects not to assume the Company's rights and obligations under this
Option Agreement or substitute for the Option in connection with a Transfer of
Control involving an Ownership Change described in (b) above, the Board shall
provide that any unexercised portion of the Option shall be fully exercisable as
of a date prior to the Transfer of Control, as the Board so determines. The
Option shall terminate effective as of the date of the Transfer of Control to
the extent that the Option is neither assumed by the Acquiring Corporation nor
exercised as of the date of the Transfer of Control.
9. EFFECT OF CHANGE IN STOCK SUBJECT TO THE OPTION. Appropriate
adjustments shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or like
change in the capital structure of the Company. In the event a majority of the
shares which are of the same class as the shares that are subject to the Option
are exchanged for, converted into, or otherwise become (whether or not pursuant
to an Ownership Change) shares of another corporation (the "New Shares"), the
Company may unilaterally amend the Option to provide that the Option is
exercisable for New Shares. In the event of any such amendment, the number of
shares and the exercise price shall be adjusted in a fair and equitable manner.
-6-
<PAGE>
10. RIGHTS AS A SHAREHOLDER OR EMPLOYEE. The Optionee shall have no
rights as a shareholder with respect to any shares covered by the Option until
the date of the issuance of a certificate or certificates for the shares for
which the Option has been exercised. No adjustment shall be made for dividends
or distributions or other rights for which the record date is prior to the date
such certificate or certificates are issued, except as provided in paragraph 9
above. Nothing in the Option shall confer upon the Optionee any right to
continue in the employ of a Participating Company or interfere in any way with
any right of the Participating Company Group to terminate the Optionee's
employment at any time.
11. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall
dispose of the shares acquired pursuant to the Option only in accordance with
the provisions of this Option Agreement. In addition, the Optionee shall
promptly notify the Chief Financial Officer of the Company if the Optionee
disposes of any of the shares acquired pursuant to the Option within one (1)
year from the date the Optionee exercises all or part of the Option or within
two (2) years of the date of grant of the Option. Until such time as the
Optionee disposes of such shares in a manner consistent with the provisions of
this Option Agreement, the Optionee shall hold all shares acquired pursuant to
the Option in the Optionee's name (and not in the name of any nominee) for the
one-year period immediately after exercise of the Option and the two-year period
immediately after grant of the Option. At any time during the one-year or
two-year periods set forth above, the Company may place a legend or legends on
any certificate or certificates representing shares acquired pursuant to the
Option requesting the transfer agent for the Company's stock to notify the
Company of any such transfers. The obligation of the Optionee to notify the
Company of any such transfer shall continue notwithstanding that a legend has
been placed on the certificate or certificates pursuant to the preceding
sentence.
12. LEGENDS. The Company may at any time place legends referencing any
applicable federal or state securities law restrictions on all certificates
representing shares of stock subject to the provisions of this Option
Agreement. The Optionee shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order to
effectuate the provisions of this paragraph.
13. BINDING EFFECT. This Option Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
14. TERMINATION OR AMENDMENT. The Board, including any duly appointed
committee of the Board, may terminate or amend the Plan and/or the Option at any
time; provided, however, that no such termination or amendment may adversely
affect the Option or any unexercised portion hereof without the consent of the
Optionee.
15. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Company other than
-7-
<PAGE>
those as set forth or provided for herein. To the extent contemplated herein,
the provisions of this Option Agreement shall survive any exercise of the Option
and shall remain in full force and effect.
16. APPLICABLE LAW. This Option Agreement shall be governed by the laws
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
NATURAL WONDERS, INC.
By: /s/ Peter G. Hanelt
----------------------------
Title: CEO
-------------------------
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, and hereby accepts the Option subject to
all of the terms and provisions thereof. The Optionee hereby agrees to accept
as binding, conclusive and final all decisions or interpretations of the Board
upon any questions arising under this Option Agreement.
Date: 10/30/98 /s/ David S. Folkman
-------------------- -----------------------
David H. Folkman
-8-
<PAGE>
Exhibit 10.33.1
March 25, 1999
Mr. David H. Folkman
117 Roblar Avenue
Hillsborough, California 94010
Re: Amendment of Nonqualified Stock Option Agreement
This letter amends the nonqualified stock option agreement (date of option
grant: September 29,1998) which is attached hereto as follows:
Paragraph 7(a) Termination of the Option is deleted in its entirety and is
replaced by the following:
7. TERMINATION OF EMPLOYMENT.
(a) TERMINATION OF THE OPTION. If the Optionee ceases to be an employee
of the Participating Company Group for any reason except death or
disability within the meaning of Section 422(c) of the Code, the
Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee ceased to be an employee, may be
exercised by the Optionee within twelve (12) months after the date on
which Optionee's employment terminates, but in no event later than the
Option Term Date. If the Optionee's employment with the Company is
terminated because of the death of the Optionee or disability of the
Optionee within the meaning of Section 422(c) of the Code, the Option
may be exercised by the Optionee (or the Optionee's legal
representative) at any time prior to the expiration of twelve (12)
months from the date the Optionee's employment terminated, but in any
event no later than the Option Term Date. The Optionee's employment
shall be deemed to have terminated on account of death if the Optionee
dies within three (3) months after the Optionee's termination of
employment. Except as otherwise provided in this paragraph 7(a), the
Option shall terminate and may not be exercised after the Optionee
ceases to be an employee of the Participating Company Group.
NATURAL WONDERS, INC.
BY: /s/ Peter G. Hanelt
------------------------
TITLE: CEO
--------------------
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement Amendment, and hereby accepts the Option
amendment subject to all of the terms and provisions thereof. The Optionee
hereby agrees to accept as binding, conclusive, and final all decisions or
interpretations of the Board upon any questions arising under this Option
Agreement.
Date: 4/2/99 /s/ David H. Folkman
------------------------- ----------------------------
David H. Folkman
<PAGE>
Exhibit 13.1
TO OUR SHAREHOLDERS
1998 was a difficult year for Natural Wonders. The Company failed to achieve its
performance goals. This cannot and will not continue. I assure you that I have
taken actions to reverse the negative trend of recent years and to create a
program to reinvigorate the Company and its performance. I call it-.
"Recapturing the Wonder."
The transition that brought my fellow management team and me to Natural Wonders
came near the end of the fiscal year. At that time, the Company was severely
stressed. Most of the executive management had turned over and many key
positions were vacant. The multi-year comparable store sales decline continued
unabated with the key holiday season just ahead. In addition, our new
information system was experiencing the difficulties inherent in its first year
of operation. Most importantly, the previous merchandise direction and
assortment was continuing to fuel the on-going comparable store sales decline.
I accepted the challenge to turn around the business because, as a Board Member,
I had already briefly served on an interim basis as Chief Financial Officer and
then as acting CEO. I had a keen first-hand knowledge of the strengths and needs
of the organization. I knew that with the right management team, improvement
could be rapid. I readily accepted the responsibility to lead the process to
restore profitability, achieve positive sales increases, and regain the
performance and potential that Natural Wonders once enjoyed, albeit several
years ago.
MOVING FORWARD WITH CONFIDENCE
I am optimistic, based upon the early results of our efforts, that we have
effectively begun the process of "Recapturing the Wonder" and returning Natural
Wonders to its historic levels of performance. Several key strategic actions
have been taken that contribute to my optimism. We have-.
- - an approved operational budget that is not only achievable, but will
deliver significant profitability relative to recent years. The budget is
based upon a carefully calculated sales plan reflecting the phasing in of
our new merchandising approach coupled with significant and already
realized operational efficiencies. Early results validate this plan.
- - hired a substantial number of experienced and proven merchants with strong
credentials in our specific merchandise categories. As many of their new
and often exclusive selections arrive in-store, we are seeing a positive
response from our customers and look forward to the increased sales that
this response will bring in the near future.
- - completed the formation of a talented and dedicated Natural Wonders
executive and management team. They have demonstrated throughout their
careers, with other major organizations, that they can perform the
expected leadership role in accomplishing our corporate goals.
<PAGE>
RENEWING OUR STRATEGIC FOCUS
Since its founding, Natural Wonders' concept has been to be a dynamic retailer
known by its unique and fascinating merchandise inspired by the wonders of
science and nature. After a thorough examination of our most recent product
assortments, merchandise strategy, target customer, and pricing philosophy, it
was clear that the organization had lost its strategic focus. That loss of focus
has been a major contributor to comparable store sales declines over the last
six years.
Beginning in late 1998, we began to address the elements contributing to this
loss of focus and to initiate appropriate action to fine-tune our concept going
forward, I am especially grateful to David Folkman, a director of the company,
for the leadership he provided to our management team with regard to the
development of a sound, imaginative, strategic merchandising plan. The direction
we are now pursuing throughout Natural Wonders is firmly based upon this
strategic plan. It is our intention to recreate Natural Wonders stores as
multi-sensory environments. Our merchants are fully engaged in providing unique
and fascinating merchandise and in being first with the best that the market has
to offer our target customer. We will be the destination of choice for the
moderate to upper moderate income customer, our primary target. Our inviting
displays will allow customers to explore the store and will amaze and delight
them with our product offerings. Our store employees will serve as a distinct
competitive advantage with their product knowledge, helpful attitude and selling
skills. This renewed strategic focus is a significant change from our recent
past and serves as the foundation for our future success.
ENHANCING VENDOR AND BUSINESS RELATIONSHIPS
Having the "right merchandise" for our target customer is the essence of our
philosophy. To that end, we will-.
- - build our business by forging strong vendor relationships, particularly
with domestic vendors, who will work with us to provide exclusivity or
special Natural Wonders labeled products that reinforce our leading market
position.
- - reaffirm our role as a market-driven leader in the nature and science
niche with carefully selected business partners able to deliver the
highest quality products within our defined market segment.
- - continue to foster strong and enduring relationships with key real estate
developers to enhance our value as business partners as we continue to
open new stores.
- - continue to build brand equity by differentiating Natural Wonders by being
first in the marketplace, on an exclusive basis whenever possible, with
clearly focused and inviting merchandise.
- - continue proprietary product development, although the percentage will
decrease slightly. We will supplement this strategy with key vendor
alliances as we develop proprietary products in cooperation with our
vendor partners.
NEW INITIATIVES, IMPROVED RESULTS
We have completed our first fiscal year utilizing our new merchandising,
distribution, and financial information system. We are increasing our experience
in its use and are expanding its contribution to our business processes and
results. As it is new, it has a high degree of Year 2000 compliance, although we
are continuing with a test plan as well as testing all other integrated and
operating systems, We will extend our technology upgrade to our retail store
point of sale system on a prudent two year timetable.
This past holiday season we opened and successfully operated 27 temporary
seasonal stores. Several of these stores are being converted to permanent store
locations. We are considering two other sites for permanent stores once a
suitable location is available with the mall. The successful temporary store
program achieved all of our sales, gross margin, and contribution margin goals
and will be continued for the 1999 holiday season.
<PAGE>
Our real estate program continues to carefully seek new sites for permanent
stores. We plan to open approximately ten new stores during 1999. We will
totally remodel designated stores that are renewing their leases, accomplish
significant partial remodels, and install new fixturing for a large number of
existing stores, as well as continue to identify store sites for future
openings. We are pleased with the vast majority of our retail locations, but we
intend to close a few locations that have proven to be unsuccessful.
During the spring, we will open an Internet site at www.naturalwonders.com and
initiate e-commerce. We are comprehensively developing the site to include store
location and product information, company and investor information, and
personnel recruiting information for our retail stores, as well as unique
consumer gift purchase opportunities. We will expand our merchandise suggestions
for key gift-giving occasions and plan to offer personalized gift wrapping and
delivery services. The site is being developed with the active cooperation of
specialists and will be fully integrated into our retail and merchandising
information systems. We intend to advertise our site within selected Internet
shopping venues.
In 1998, we achieved substantial operational efficiencies. Selling, general and
administrative expenses were reduced by 8.3% from the prior year on a per store
basis for stores open during the year. We will realize full year benefits from
these initiatives during 1999 and, as sales increase, we will realize
substantial net income leverage from these efficiencies.
During the year, we paid off all the Company's debt as well as all capital lease
obligations. We also repurchased 243,552 shares of our common stock and expect
to continue these stock repurchases, as appropriate. We ended the year with
$12,22 1,000 in cash and investment balances and a net book value per share of
$6.72.
SHARE OUR VISION
All of the initiatives that I have described are being implemented by our senior
executives, who have the experience and expertise to make it happen
company-wide. By way of illustration, I asked two of them: Ken Norton and Bill
Soncini, each of whom represents an important cornerstone in our foundation, to
join me in briefly outlining our philosophies and plans for Natural Wonders. I
will provide additional comments on our strategic vision, Ken will discuss his
point of view on product selection and assortment, and Bill will comment on
connecting with the customer. I know that you will find their comments on the
following pages to be both informative and reassuring.
It is my intent that you share in our confidence that "Recapturing the Wonder"
will translate into financial success for our company. I am quite certain that
we are moving aggressively to fulfill that commitment. I want to thank you, our
shareholders, valued customers, business partners, and Natural Wonders staff for
your support. I invite you to visit our stores and our website to see the
progress we are making in our product assortment and in developing a retail
store environment consistent with our strategic focus. I look forward to sharing
and celebrating our successes with all of you very soon.
/s/ Peter G. Hanelt
- -------------------------
Peter G. Hanelt
Chief Executive Officer &
Chief Financial Officer
April 21,1999
<PAGE>
"RECAPTURING THE WONDER": STRATEGIC FOCUS
"NATURAL WONDERS IS NOW CLEARLY FOCUSED ON NATURE, SCIENCE, THE ENVIRONMENT,
EDUCATION AND ON OUR TARGET CUSTOMER. "
Peter Hanelt, Chief Executive Officer & Chief Financial Officer
"Our new merchandise strategy requires us to be excellent editors so that
customers will be reading important headlines and exciting stories as they pass
our windows and shop our stores. The combination of carefully selected product
and exciting and informative visual elements in the store is the key to getting
our story across to the customer in our malls.
"We will be dominant and compelling in the core categories that define Natural
Wonders-. geology, astronomy, garden, fossils, kaleidoscopes, animals, and
interactive science and nature products. In spite of the weakness of our
merchandise assortments in the past several seasons, whenever we have provided
science and nature product of the right quality and taste, customers have
responded very well. These customers have continued to traffic our stores in
search of interesting merchandise, and I am highly confident that they will
return in increasing numbers as the new assortments fill our stores in the
coming months.
"Our stores will be merchandised and visually presented to evoke an emotional
response in the minds of our customers related to a respect for nature and an
appreciation for its beauty. A unique, thoughtful selection of products will
stimulate a fascination with science. We will support the new merchandise
content with graphics and signage designed to authenticate Natural Wonders as a
store that understands the customers' interests in nature and science products
for the home and for gifts.
"We are not positioned as a gift store. Rather, we are positioned as a store
that features nature and science items that are unique and interesting, for both
personal use and gift-giving. This subtle change from our past creates
opportunity for greater frequency of shopping by our target customer as they
need not wait for a 'gifting' opportunity to shop our stores. The in-store
dynamics: merchandise selection, presentation, opportunity to interact with the
merchandise and customer service will stimulate frequent shopping visits.
"Our target customer in 1 999 represents a change from that of the past five
years. The previous assortments generally appealed to customers that were
moderate-to-budget oriented with respect to price, were accustomed to frequent
price promotions, shopped in an assortment that emphasized mass market toys for
children and toddlers, and categories for teenagers. Now, our target customers
are adults 25 and up and children 6 to 14 years old. These comprise moderate to
upper moderate income families that place a high value on education, and enjoy
middle to upper middle incomes. While not necessarily focused on nature or
science as a vocation or avocation, they share an inquisitiveness and enthusiasm
for science and nature. They have an appreciation for quality, beauty, and art
as expressed in nature. They have curiosity about and an interest in science and
nature. This customer seeks quality and tasteful items for personal use and for
gift-giving. The proportion of merchandise targeting adults versus children is
two-thirds to one-third as opposed to prior years when about half of the items
carried had been aimed at children."
<PAGE>
"RECAPTURING THE WONDER": DISTINCTIVE MERCHANDISE
"WE LITERALLY CIRCLE THE GLOBE TO BRING OUR CUSTOMERS NEW, UNIQUE, AND EXCITING
MERCHANDISE."
Ken Norton, Vice President, General Merchandise Manager
"I have always felt fortunate to have been part of the early growth and
development of Natural Wonders. I joined the Company in 1989 as the chief
merchant, and was pleased that the Company performed so well for several years.
Now, after a six year absence, I am doubly excited to have been given an
opportunity to return to Natural Wonders.
"I am very confident that with our new senior management team and with our
experienced merchant group we can revitalize our concept by returning to Natural
Wonders' roots. I believe strongly in this niche. As a merchant, I love this
customer, the product categories, and the markets from which we buy. Nature and
science provide us with a never ending opportunity to amaze and educate our
customers to the wonders of our universe. Our business is dynamic and fun: for
the merchants and for the customers.
"All of the members of our merchandise group have this same passion for this
business and it is reflected in all of their activities. We are committed to be
focused and dominant in our assortments of new and exciting, tasteful and
distinctive merchandise from many parts of the world. 'Me too' and I second
best' are simply not in our vocabulary. We know we can win in the marketplace,
because we have done it before and because we have a base of loyal Natural
Wonders customers upon which to build.
"I have strong relationships with many of the important suppliers in this market
and our team of merchants works closely with our vendors to ensure that every
product meets our stringent guidelines for quality and ultimate value for the
customer. Individual merchandise responsibilities have been restructured to
provide maximum accountability and focus to grow each respective business by
having a thoroughly knowledgeable professional in each merchandising slot.
'As merchants, we want customers to say: 'Whenever I shop at Natural Wonders, I
always find something new and unusual, for myself, my family, or to give as a
gift'. We are very encouraged that, in the early stages of refining our
assortments, our customers have reacted positively to many of our changes. We
expect this response to build as we fill our stores with exciting new
merchandise.
"My commitment to our shareholders is that our customers will find nature and
science products of good taste and quality as well as good value every time that
they shop Natural Wonders. I am confident that our revised strategy will
generate strong growth in sales, profits, and increase shareholder value in the
coming year."
<PAGE>
"RECAPTURING THE WONDER": SUPERIOR SERVICE
"I BELIEVE THAT THE MOST CRITICAL REVENUE-PRODUCING COMPONENT OF ANY GREAT
RETAIL ORGANIZATION ID THE QUALITY OF THE PEOPLE IN THE FIELD."
William J. Soncini, Vice President, Operations
"Delivering our vision to customers in a way that ensures that a purchase will
be made today and in the future is my ultimate challenge. It is the store
associates who make this vision a reality on a daily basis. To meet this
challenge, I have recently completed the building of a field team that is among
the best in the industry.
"Our district and regional managers oversee the operations of our 180 stores.
These district and regional managers are proven winners with demonstrated
success in a variety of retail environments. They are results-oriented,
sales-driven, and place a high priority on delivering unparalleled customer
service.
"Our commitment to superior customer service is evidenced at every level-from
sales associate to upper management. Store employees create an engaging,
exciting, and interactive shopping experience by demonstrating how products
function and encouraging customers to try items for themselves. During these
interactions, employees share not only their knowledge, but their appreciation
of nature and science, as well. It is this combination of entertainment and
learning that creates added value for the customer and generates repeat store
visits and more frequent purchases.
"The physical appearance of our stores is equally important to the overall
shopping experience. As our stores have matured, we have maintained a schedule
of both full and partial remodels as well as ongoing repairs. In 1999, our
remodel schedule will ensure that our standards of presentation and Natural
Wonders brand identity are enhanced. During the fall of 1 998, we tested a new
concept for store layout and fixtures in two stores. We will incorporate the
most successful aspects of this test in both new and existing stores. Our
prototype store continues to be mall-based and generally is from 2200-2600
square feet in size. This concept offers the best access to our target customer
and allows us to maximize our profits.
"While 1998 was unacceptable in comparable store sales results, the field
organization made significant contributions to the Company's bottom line. On a
per store basis, we reduced our operating costs and continued to refine our
operational model.
"My goal for 1999 is to maintain expense savings while generating sales
increases. In addition to our quality team, I am adding new field positions to
create even closer store level supervision and accountability. We will be
continually upgrading employee performance through individualized training and
development programs, bonus plans that recognize and reward sales increases, and
increased product knowledge. We will attract highly qualified and motivated new
employees by offering challenging opportunities and providing financial rewards
for successful performance. I am confident in our ability to remain
results-oriented, improve efficiency, and achieve success in the new fiscal
year."
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except operating data and per share amounts)
SUMMARY OF OPERATIONS DATA:
Net sales $ 149,821 $ 149,239 $ 138,773 $ 138,080 $ 136,652
Cost of goods sold and store
occupancy expenses 106,162 100,998 92,489 93,529 92,304
------------- --------------- --------------- ---------------- -----------------
Gross margin 43,659 48,241 46,284 44,551 44,348
Selling, general and administrative
expenses 46,211 45,794 40,894 40,640 38,748
Operating income (loss) (2,552) 2,447 5,390 3,911 5,600
Net interest and other expenses 465 276 791 944 2,707
------------- --------------- --------------- ---------------- -----------------
Earnings (loss) before income taxes (3,017) 2,171 4,599 2,967 2,893
Income tax provision (benefit) (1,120) 803 1,698 1,157 1,128
------------- --------------- --------------- ---------------- -----------------
Net earnings (loss) $ (1,897) $ 1,368 $ 2,901 $ 1,810 $ 1,765
------------- --------------- --------------- ---------------- -----------------
------------- --------------- --------------- ---------------- -----------------
Basic earnings (loss) per share $ (0.24) $ 0.17 $ 0.37 $ 0.23 $ 0.24
------------- --------------- --------------- ---------------- -----------------
------------- --------------- --------------- ---------------- -----------------
Diluted earnings (loss) per share $ (0.24) $ 0.17 $ 0.36 $ 0.23 $ 0.23
------------- --------------- --------------- ---------------- -----------------
------------- --------------- --------------- ---------------- -----------------
Shares used in computing basic
earnings (loss) per share 8,014 8,005 7,862 7,725 7,458
Shares used in computing diluted
earnings (loss) per share 8,014 8,200 8,090 7,819 7,809
OPERATING DATA:
Number of stores open at end of
year 180 171 151 146 145
Average net sales per gross square
foot (52 weeks) $ 333 $ 373 $ 380 $ 382 $ 407
Average net sales per store (52 weeks) $ 831,000 $ 917,000 $ 932,000 $ 936,000 $ 993,000
Comparable store net sales decrease (6.8)% (1.4)% (0.6)% (5.7)% (5.0)%
BALANCE SHEET DATA AT FISCAL YEAR END:
Working capital $ 26,812 $ 29,681 $ 33,495 $ 31,252 $ 30,630
Total assets 70,848 79,337 78,344 77,964 82,440
Long-term borrowings - 1,144 3,377 6,972 12,717
Stockholders' equity 53,450 55,802 54,156 50,658 48,659
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------------------------
(Percentage of net sales) 1998 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 %
Cost of goods sold and store occupancy expenses 70.9 67.7 66.6
Gross margin 29.1 32.3 33.4
Selling, general and administrative expenses 30.8 30.7 29.5
Operating income (loss) (1.7) 1.6 3.9
Net interest and other expenses 0.3 0.2 0.6
Income tax provision (benefit) (0.7) 0.5 1.2
Net earnngs (loss) (1.3)% 0.9 % 2.1 %
Number of stores open at end of period 180 171 151
</TABLE>
RESULTS OF OPERATIONS
GENERAL
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years 1998, 1997 and 1996 ended January 30, 1999, January 31, 1998, and
February 1, 1997, respectively. All references to years, unless otherwise
specified, are intended to refer to the Company's fiscal year.
At the end of 1998, the Company operated 180 stores in 36 states
compared to 171 stores in 36 states at the end of 1997 and 151 stores in 36
states at the end of 1996. In 1998, 9 new stores were opened, 3 stores were
closed, and 3 temporary stores were still open on January 30, 1999. In 1997, 9
new stores were opened and 2 closed, and in 1996, 5 new stores were opened. On
May 22, 1997, the Company acquired 12 locations through the acquisition of
substantially all of the operating assets of What A World!, Inc. 10 of the
stores were in Florida, 1 store in New York, and 1 store in New Jersey. In
addition, in 1998, 27 stores with temporary locations were opened during the
holiday season compared to 12 stores in 1997 and 1 store in 1996. At the end of
1998, 3 temporary stores remained open and 2 will be converted to permanent
stores during 1999. At the end of 1997, 1 temporary store remained open and was
converted to a permanent store during 1998.
<PAGE>
SALES
Sales increased 0.4% to $149,821,000 in 1998 from $149,239,000 in 1997.
The increase of $582,000 was due primarily to new stores and stores in temporary
locations, mostly offset by a decrease in comparable store sales. The 9 new
stores accounted for $4,208,000 of the increase, the stores in temporary
locations accounted for $3,819,000 of the increase, and the full year of sales
from new stores opened in 1997, accounted for $4,814,000 of the increase. This
was mostly offset by the decrease in stores opened prior to 1997, which
accounted for a $11,604,000 decrease and closed stores for a $654,000 decrease.
Comparable store sales in 1998 decreased 6.8% as compared to 1997. The
decrease was due primarily to a decrease in demand in the Discovery, Media and
Geology product categories. The largest decreases occurred primarily in the
Ohio, Mid-Atlantic and South Central districts. Although overall comparable
store sales decreased, some of the Company's stores experienced positive
comparable store sales. The average dollar amount per sales ticket increased
slightly in 1998.
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, other 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. The largest decreases occurred primarily in the
Chicago and Ohio districts, which comprised 87% of the comparable store
decrease. Although overall comparable store sales decreased, many of the
Company's stores and geographic areas experienced positive comparable store
sales. The average dollar amount per sales ticket decreased slightly in 1997.
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 70.9% in 1998 from 67.7% in 1997 primarily
due to the occupancy costs for a greater number of new and temporary stores open
in 1998 than 1997 coupled with flat sales.
In 1997, cost of goods sold and store occupancy expenses increased as a
percentage of sales to 67.7% in 1997 from 66.6% in 1996. The increase was
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses, which are
primarily non-occupancy store expenses and corporate overhead, increased
slightly as a percentage of sales to 30.8% in 1998 from 30.7% in 1997. The
increase in costs was due to the negotiated settlement of a patent infringement
claim for $525,000. In addition, benefits of cost controls were offset by the
decline in comparable store sales and the increase in the number of permanent
and temporary stores.
In 1997, SG&A expenses increased as a percentage of sales at 30.7%
compared to 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
<PAGE>
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.
OPERATING INCOME (LOSS)
As a result of the foregoing, there was an operating loss of
$(2,552,000), or (1.7)% of sales in 1998, compared to operating income of
$2,447,000, or 1.6% of sales in 1997, which was a decrease from $5,390,000, or
3.9% of sales in 1996.
NET INTEREST AND OTHER EXPENSES
Net interest and other expenses increased to $465,000 or 0.3% of sales
in 1998 from $276,000 or 0.2% of sales in 1997 and 1997 decreased from $791,000
or 0.6% of sales in 1996. The increase in 1998 from 1997 was due primarily to
less other income. The decrease in 1997 from 1996 was primarily due to a decline
in interest expense as a result of reduced average borrowings.
INCOME TAX PROVISION (BENEFIT)
The effective tax rate was 37.1% in 1998 and 37.0% in 1997. No
valuation allowance was necessary to offset the deferred tax asset at the end of
1998, 1997 or 1996 due to the Company's history of earnings.
NET EARNINGS (LOSS)
As a result of the foregoing, there was a net loss of $(1,897,000) or
(1.3)% of sales in 1998 compared to net income of $1,368,000 or 0.9% of sales in
1997, and $2,901,000 or 2.1% of sales in 1996.
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 1998 cash and investments were $12,221,000 in
comparison to $19,751,000 at year-end 1997. The decrease was primarily due to
the payoff of all long-term debt and capital leases, stock repurchases,
construction costs and fixtures for new stores, and the remodeling of existing
stores.
In 1999, the Company plans to open approximately 10 new stores and,
during the holiday season, approximately 20 temporary locations. The Company
anticipates that cash in 1999 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, 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. As
of January 30, 1999, the Company has repurchased 243,552 shares of Natural
Wonders common stock for a total of $900,000.
During 1998, under the existing plans, the Company granted 750,000
shares of common stock options to certain executives, at an exercise price of
$3.625. These options vest in different share amounts, upon achieving certain
stock prices, which range from $8 per share to $28 per share. Any remaining
unvested shares vest seven years after the date of the option grant.
<PAGE>
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, 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,
which included a revolving line of credit for $12,000,000 and expired on June 1,
1998. The line of credit was also available for the issuance of commercial and
standby letters of credit up to $9,500,000 and $500,000 respectively. The
Company had a second credit facility with another commercial bank, which
included a revolving line of credit for $3,000,000 which expired on June 30,
1998. Commercial and standby letters of credit were also available up to
$3,000,000. The Company has replaced both facilities with a single facility at
one of the banks. The new credit facility agreement has a maximum total
availability of $23,000,000 during the increase period, which is from September
1, 1998 through December 31, 1998 and $12,000,000 for the rest of its term,
which is July 1, 1998 through August 31, 1998 and January 1, 1999 through June
30, 1999. The facility includes 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 is 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. There is a 150 consecutive day out
of borrowing period for the line of credit between December 31, 1998 and the
maturity date of the line of credit. The Company has 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, contains restrictive covenants,
which include achieving quarterly earnings/loss targets, maintaining certain
financial ratios, and requiring bank consent for the payment of dividends. 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
alleged that certain products sold by the Company infringed two patents of the
plaintiff and sought injunctive relief, unspecified damages, and enhanced
damages and attorneys fees. In June 1998, the Company reached a negotiated
settlement of this claim. The impact of the settlement, including legal expenses
and reserves was approximately $525,000 and was recorded in the first quarter
ended May 2, 1998.
<PAGE>
NEW 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. The Company does
not expect such adoption to have a significant impact on its financial
statements.
The Company is required to adopt the American Institute of Certified
Public Accountants' Statement of Position (SOP) 98-1, "Accounting For the Costs
of Computer Software Developed or Obtained for Internal Use," in 1999. SOP 98-1
provides guidelines for accounting for costs of computer hardware developed for
internal use. The Company does not expect such adoption to have a significant
impact on its financial statements.
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, 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.
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.
MARKET RISK
The Company does not undertake any specific actions to cover its
exposure to interest rate risk and the Company is not a party to any interest
rate risk management transactions. The Company does not purchase or hold any
derivative financial instruments.
<PAGE>
NATURAL WONDERS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except
per share amounts)
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------------
1998 1997 1996
--------------- --- --------------- -- -----------------
<S> <C> <C> <C>
Net sales $ 149,821 $ 149,239 $ 138,773
Cost of goods sold and store occupancy expenses 106,162 100,998 92,489
--------------- --------------- -----------------
Gross margin 43,659 48,241 46,284
Selling, general and administrative expenses 46,211 45,794 40,894
--------------- --------------- -----------------
Operating income (loss) (2,552) 2,447 5,390
Interest expense 428 625 951
Other expenses 484 450 550
Interest and other income (447) (799) (710)
--------------- --------------- -----------------
Earnings (loss) before income taxes (3,017) 2,171 4,599
Income tax provision (benefit) (1,120) 803 1,698
--------------- --------------- -----------------
--------------- --------------- -----------------
Net earnings (loss) $ (1,897) $ 1,368 $ 2,901
--------------- --------------- -----------------
--------------- --------------- -----------------
Net earnings (loss) per common share:
Basic $ (0.24) $ 0.17 $ 0.37
Diluted $ (0.24) $ 0.17 $ 0.36
Weighted average common shares outstanding:
Basic 8,014 8,005 7,862
Diluted 8,014 8,200 8,090
</TABLE>
See notes to financial statements
<PAGE>
NATURAL WONDERS, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
----------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,841 $ 6,351
Short-term investments 7,380 13,400
Merchandise inventories 22,707 23,184
Prepaid income taxes 1,403 -
Prepaid expenses and other current assets 3,262 3,141
Deferred taxes 1,056 2,191
---------------- ----------------
Total current assets 40,649 48,267
PROPERTY AND EQUIPMENT:
Leasehold improvements 30,077 28,818
Property and equipment under capital lease - 4,993
Furniture, fixtures and equipment 34,106 27,232
---------------- ----------------
64,183 61,043
Less accumulated depreciation and amortization (37,510) (32,200)
---------------- ----------------
26,673 28,843
Deferred Taxes 3,085 2,080
Other Assets 441 147
---------------- ----------------
Total Assets $ 70,848 $ 79,337
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 8,500 $ 7,997
Accrued compensation and related costs 2,300 2,825
Accrued liabilities 3,037 3,636
Income taxes payable - 1,857
Current portion of capital lease obligations - 866
Current portion of long-term debt - 1,405
---------------- ----------------
Total current liabilities 13,837 18,586
Capital Lease Obligations - 461
Long-term Debt - 683
Deferred Rent 3,561 3,805
Commitments and Contingencies (Note 6)
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
7,951,392 and 8,072,109 shares in 1998 and 1997. 1 1
Capital in excess of par value 34,073 34,528
Retained earnings 19,376 21,273
---------------- ----------------
Total stockholders' equity 53,450 55,802
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 70,848 $ 79,337
---------------- ----------------
---------------- ----------------
</TABLE>
See notes to financial statements.
<PAGE>
NATURAL WONDERS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss) $(1,897) $1,368 $2,901
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 7,269 6,174 6,047
Loss on disposal and write-down of assets 950 48
Deferred taxes 130 (1,079) (655)
Changes in assets and liabilities:
Merchandise inventories 477 (2,341) (1,313)
Prepaid expenses and other current assets (415) (511) 36
Prepaid income taxes (1,403)
Trade accounts payable 503 2,822 (799)
Accrued compensation and related costs (525) 302 160
Accrued liabilities (599) 838 507
Income taxes payable (1,857) (187) 1,270
Deferred rent (244) (218) 69
Tax benefit from exercise of stock options and warrants 97 27 53
-------------- ----------- ----------
Net cash provided by operating activities 2,486 7,243 8,276
Cash Flows From Investing Activities:
Purchases of short-term investments (21,381) (18,100) (31,350)
Sales of short-term investments 27,401 22,600 31,545
Purchases of property and equipment (6,077) (8,362) (3,375)
Proceeds from sale of equipment 28
Business acquisition (738)
-------------- ----------- ----------
Net cash used in investing activities (29) (4,600) (3,180)
Cash Flows From Financing Activities:
Principal payments on capital lease obligations (1,327) (1,789) (2,218)
Principal payments on long-term debt (2,088) (2,421) (2,107)
Purchase of treasury stock (900)
Grant of treasury shares 23
Short-term borrowings on bank line of credit 54,000 33,900 6,400
Payments on bank line of credit (54,000) (33,900) (6,400)
Exercise of stock options and warrants 266 167 480
Net proceeds from sale of common stock 59 84 64
-------------- ----------- ----------
Net cash used in financing activities (3,967) (3,959) (3,781)
Net Increase (Decrease) in Cash and Cash Equivalents (1,510) (1,316) 1,315
Cash and Cash Equivalents:
Beginning of year 6,351 7,667 6,352
-------------- ----------- ----------
End of year $ 4,841 $ 6,351 $ 7,667
-------------- ----------- ----------
-------------- ----------- ----------
Supplemental Information Cash paid during year:
Interest $ 442 $ 614 $ 952
Income taxes $ 1,857 $ 2,083 $1,027
</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, 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
Exercise of stock options 99,592 266 266
Tax benefit from exercise of stock
options 97 97
Employee stock purchase plan 15,743 59 59
Stock repurchase (243,552) (900) (900)
Grant of treasury shares 7,500 23 23
Net loss (1,897) (1,897)
------------- ----------- ------------- ------------ ----------------
Balance, January 30, 1999 7,951,392 $1 $34,073 $19,376 $53,450
------------- ----------- ------------- ------------ ----------------
------------- ----------- ------------- ------------ ----------------
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS Natural Wonders (the Company) is a specialty retailer, which operates
180 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 1998, 1997 and 1996 ended January 30, 1999, January 31, 1998,
and February 1, 1997, respectively. Fiscal 1998, 1997 and 1996 were 52 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 commercial paper and discount notes,
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 fair value of available-for-sale commercial paper and discount notes as of
January 30, 1999 was $7,380,000. The amortized cost and fair value of
available-for-sale municipal money market securities as of January 31, 1998 was
$13,400,000.
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. Depreciation expense
totaled $7,269,000, $6,174,000 and $6,047,000 for 1998, 1997 and 1996,
respectively.
STORE PRE-OPENING COSTS Store pre-opening costs are expensed as incurred.
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>
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 adopted Statement of Financial
Accounting Standards (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 had no items of comprehensive income and comprehensive
income (loss) equals earnings for all periods presented.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION The Company adopted 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 operates in one
reportable segment: the operation of retail science and nature related gift
stores in malls located in 36 states.
DERIVATIVE INSTRUMENTS 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. The
Company does not expect such adoption to have a significant impact on its
financial statements.
INTERNALLY DEVELOPED SOFTWARE The Company is required to adopt the American
Institute of Certified Public Accountants' Statement of Position (SOP) 98-1,
"Accounting For the Costs of Computer Software Developed or Obtained for
Internal Use," in 1999. SOP 98-1 provides guidelines for accounting for costs of
computer hardware developed for internal use. 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 had a credit facility agreement with a commercial bank, which
included a revolving line of credit for $12,000,000 and expired on June 1, 1998.
The line of credit was also available for the issuance of commercial and standby
letters of credit up to $9,500,000 and $500,000 respectively. The Company had a
second credit facility with another commercial bank, which included a revolving
line of credit for $3,000,000 which expired on June 30, 1998. Commercial and
standby letters of credit were also available up to $3,000,000.
The Company has replaced both facilities with a single facility at one of the
banks. The new credit facility agreement has a maximum total availability of
$23,000,000 during the increase period, which is from September 1, 1998 through
December 31, 1998 and $12,000,000 for the rest of its term, which is July 1,
1998 through August 31, 1998 and January 1, 1999 through June 30, 1999. The
facility includes 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 is
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. There is a 150 consecutive day out of borrowing period for the
line of credit between December 31, 1998 and the maturity date of the line of
credit. The Company has 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, contains restrictive covenants, which include achieving quarterly
earnings/loss targets, maintaining certain financial ratios, and requiring bank
consent for the payment of dividends. The Company believes it will be able to
renew or replace its credit facility on substantially similar terms.
Outstanding commercial and standby letters of credit as of January 30, 1999 and
January 31, 1998 approximated $892,000 and $984,000, respectively.
LONG-TERM DEBT Long-term debt consisted of the following:
(In thousands)
<TABLE>
<CAPTION>
January 30,1999 January 31,1998
-------------------- --------------------
<S> <C> <C>
Term bank loan paid off June 1998 $ - $1,035
Notes payable paid off June 1998 - 1,053
-------------------- --------------------
Total long-term debt, including current portion - 2,088
Less current portion - 1,405
-------------------- --------------------
Total long-term debt $ - $683
-------------------- --------------------
-------------------- --------------------
</TABLE>
<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 2,750,000 shares of common stock authorized for issuance under the plans.
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. In addition, the Company granted 750,000 shares of common stock to
certain executives at an exercise price of $3.625, during 1998, These options
vest in different share amounts, upon achieving certain stock prices, which
range from $8 per share to $28 per share. Any remaining unvested shares vest
seven years after the date of the option grant. Accordingly, no compensation
charge has been recognized for these performance based shares.
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, 118.9% in 1998 and 64.5% in 1997 and 1996; risk-free
interest rates, 5.2% in 1998, 6.2% in 1997, and 5.9% in 1996; 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 1998, 1997 and 1996 awards had been amortized to
expense over the vesting period of the awards, pro forma net earnings (loss) and
net earnings (loss) per share would have been $(2.2) million (basic: $(0.27) per
share; diluted: $(0.27) per share) in fiscal 1998, $1.2 million (basic: $0.15
per share; diluted: $0.14 per share) in fiscal 1997, and $2.7 million (basic:
$0.35 per share; diluted: $0.34 per share) in fiscal 1996.
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise
Outstanding Price
--------------- ---------------
<S> <C> <C>
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
Granted (weighted average fair value $3.13) 995,537 3.73
Canceled (452,333) 4.91
Exercised (99,592) 2.67
--------------- ---------------
Outstanding, January 30, 1999 (115,277 exercisable at a weighted
average price of $6.21) 1,167,787 $4.06
--------------- ---------------
--------------- ---------------
</TABLE>
<PAGE>
There were 529,466 shares available for grant under the plan.
The following table summarizes additional information about stock options at
January 30, 1999:
<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 - $3.56 66,472 8.59 $3.04 17,275 $2.63
$3.63 - $3.63 750,000 9.67 3.63 - -
$3.75 - $4.50 213,965 9.15 4.18 22,488 4.16
$4.56 - $15.25 137,350 7.49 6.72 75,514 7.63
- --------------------- --------------- -------------- -------------- ------------- --------------
$2.31 - $15.25 1,167,787 9.25 $4.06 115,277 $6.21
- --------------------- --------------- -------------- -------------- ------------- --------------
- --------------------- --------------- -------------- -------------- ------------- --------------
</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 30, 1999, 166,756 shares have been issued.
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 January 30, 1999
had purchased 243,552 shares for a total of $900,000.
BENEFIT PLAN
The Company has available a defined contribution plan. Eligible employees may
contribute 1% to 15% 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, $61,000, and $64,000 in 1998, 1997, and 1996,
respectively.
<PAGE>
NOTE 4. INCOME TAXES
The income tax provision (benefit) consists of the following:
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (1,337) $1,451 $1,761
State 87 431 592
------------- -------------- -------------
(1,250) 1,882 2,353
Deferred 130 (1,079) (655)
------------- -------------- -------------
Total $ (1,120) $803 $1,698
------------- -------------- -------------
------------- -------------- -------------
</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
----------------------------------------------
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal income
tax benefit 4.8 6.5 6.0
Non taxable interest (1.7) (5.3) (2.7)
Other - 1.8 (0.4)
------------- --------------- -----------
Effective tax rate 37.1% 37.0% 36.9%
------------- --------------- -----------
------------- --------------- -----------
</TABLE>
The components of the net deferred tax asset at year-end are as follows:
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------------------------------------
1998 1997
---------------------------------- ---------------------------------
Current Non-Current Current Non-Current
-------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
DEFERRED TAX ASSETS:
Deferred rent $1,470 $1,552
Merchandise inventories $292 $887
Accrued employee benefits 436 562
Miscellaneous accruals 587 572
Depreciation 1,816 768
Alternative minimum tax credits and other 375 236 32
-------------- ---------------- ------------- ----------------
1,690 3,286 2,257 2,352
-------------- ---------------- ------------- ----------------
DEFERRED TAX LIABILITIES:
State taxes and other 634 201 66 272
-------------- ---------------- ------------- ----------------
Net deferred tax asset $1,056 $3,085 $2,191 $2,080
-------------- ---------------- ------------- ----------------
-------------- ---------------- ------------- ----------------
</TABLE>
No valuation allowance was necessary at January 30, 1999 or January 31, 1998.
<PAGE>
NOTE 5. EARNINGS PER SHARE 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
(loss) per share computations:
(Shares in thousands)
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------------------------------------
1998 1997 1996
------------------------ -------------------------- -----------------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
------------ ----------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 8,014 $(0.24) 8,005 $0.17 7,862 $0.37
Effect of dilutive stock options 195 - 228 (0.01)
------------------------ -------------------------- -----------------------
Diluted EPS 8,014 $(0.24) 8,200 $0.17 8,090 $0.36
------------------------ -------------------------- -----------------------
------------------------ -------------------------- -----------------------
</TABLE>
In 1998, stock options did not have a dilutive effect on EPS because of the net
loss.
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
---------------------- -------------------------
<S> <C> <C>
Options to purchase shares of common
stock 213,000 220,000
---------------------- --------------------------
Exercise prices $5.13 - $15.25 $4.94 - $15.25
---------------------- --------------------------
Expiration dates June 2003 - June 2003 -
November 2007 January 2007
</TABLE>
<PAGE>
NOTE 6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office, distribution and retail facilities under
operating leases expiring at dates from 1999 to 2009. 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 leased fixtures and equipment under capital equipment leases during
part of 1998 and prior years. All existing leases were bought out during 1998.
Interest rates ranged from approximately 7.5% to 15.9%. Some of the leases were
subject to fair market value buyout at the end of the initial lease term.
The aggregate minimum annual rental payments under noncancellable operating
leases in effect at January 30, 1999 are as follows:
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year
<S> <C>
1999 $15,195
2000 14,190
2001 13,432
2002 12,293
2003 9,124
Thereafter 22,649
------------
Total minimum lease commitments $86,883
------------
------------
</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 1998, 1997 and 1996 were as follows (In thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum and deferred rent $ 15,170 $ 13,800 $ 12,389
Percentage rent 112 80 101
Sublease income (278) (99)
------------ ------------ ------------
Total rent expense $ 15,004 $ 13,781 $ 12,490
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Accumulated amortization of property under capital leases as of January 31, 1998
was $2,768,000. During 1998 and 1997 a number of capital leases expired, the
related equipment was purchased and the balances reclassified to equipment. All
remaining capital leases were bought out during 1998, the equipment returned or
purchased and the balances reclassified to equipment or expensed.
LITIGATION
In January 1998, a lawsuit was filed against the Company. The complaint alleged
that certain products sold by the Company infringed two patents of the plaintiff
and sought injunctive relief, unspecified damages, and enhanced damages and
attorneys fees. In June 1998, the Company reached a negotiated settlement of
this claim. The impact of the settlement, including legal expenses and reserves
was approximately $525,000 and was recorded in the first quarter ended May 2,
1998.
<PAGE>
The Company is involved in other litigation in the ordinary course of 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 7. 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.
NOTE 8. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal years 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
Fiscal Year 1998 Quarter Ended
- ---------------------------------------- -------------------------------------------------------------------------------
May 2, 1998 Aug. 1, 1998 Oct. 31, 1998 Jan. 30, 1999
------------------ ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Net sales $23,265 $27,443 $24,464 $74,648
Gross margin 3,827 7,482 5,678 26,670
Net earnings (loss) (4,576) (1,569) (2,996) 7,245
Basic earnings (loss) per share $ (0.57) $(0.19) $(0.38) $0.91
Diluted earnings (loss) per share $ (0.57) $(0.19) $(0.38) $0.91
</TABLE>
<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 $ (0.26) $(0.29) $(0.27) $0.99
Diluted earnings (loss) per share $ (0.26) $(0.29) $(0.27) $0.96
</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 30, 1999 and January 31, 1998 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended January 30, 1999. 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
30, 1999 and January 31, 1998, and the results of its operations and its cash
flows for each of the three years in the period ended January 30, 1999 in
conformity with generally accepted accounting principles.
San Francisco, California
March 12, 1999
<PAGE>
CORPORATE INFORMATION
<TABLE>
<CAPTION>
BOARD OF DIRECTORS CORPORATE OFFICERS
<S> <C>
Pearson C. Cummin III Peter G. Hanelt
Chairman of the Board of Directors, Chief Executive Officer, Chief Financial
Natural Wonders, Inc. Officer and Director
General Partner,
Consumer Venture Partners Kenneth G. Norton
Executive Vice President, General
David Folkman Merchandising Manager
Principal, Regent Pacific Management
Corporation William J. Soncini
Vice President, Operations
Peter G. Hanelt
Chief Executive Officer, Chief Financial Ronald J. Rouse
Officer and Director, Vice President, Merchandising
Natural Wonders, Inc. Administration and Planning
Peter L. Harris Denise A. Ellwood
President, Chief Executive Officer and Divisional Merchandising Manager
Chairman of the Board of Directors,
Expressly Portraits John de Benedictis
Divisional Merchandising Manager
Julius Jensen III
Managing General Partner, CORPORATE HEADQUARTERS
Copley Venture Partners 4209 Technology Drive
Fremont, California 94538
(510) 252-9600
REGISTER AND TRANSFER AGENT
BankBoston, N.A.
c/o EquiServe
P.O. Box 8040
Boston, Massachusetts 02266
(781) 575-3170
INDEPENDENT AUDITORS
Deloitte & Touche LLP
San Francisco, California
ANNUAL MEETING
The Annual Meeting of Shareholders
will be held Tuesday, May 25, 1999
at 9:00 a.m. (PDT) at the Company's
headquarters.
FORM 10K
A copy of the Company's 1998 Form
10K as filed with the SEC may be
obtained without charge by calling
or writing Investor Relations at
the Company's headquarters.
</TABLE>
<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 1998 and
1997, is as follows:
<TABLE>
<CAPTION>
1998 High Low
---- ---
<S> <C> <C>
First Quarter 5 3/8 3 15/16
Second Quarter 4 7/8 3 7/8
Third Quarter 4 1/2 2
Fourth Quarter 5 1/8 3
</TABLE>
<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
</TABLE>
As of February 28, 1999, there were approximately 250 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>
Exhibit 23.1
INDEPENDENT AUDITORS' 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 333-63779, 333-65521 and 333-49021 of
Natural Wonders, Inc. on Form S-8 of our report dated March 12, 1999,
incorporated by reference in this Annual Report on Form 10-K of Natural Wonders,
Inc. for the year ended January 30, 1999.
/s/ Deloitte & Touche, LLP
Deloitte & Touche, LLP
San Francisco, California
April 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 4,841
<SECURITIES> 7,380
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 22,707
<CURRENT-ASSETS> 40,649
<PP&E> 64,183
<DEPRECIATION> 37,510
<TOTAL-ASSETS> 70,848
<CURRENT-LIABILITIES> 13,837
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 53,449
<TOTAL-LIABILITY-AND-EQUITY> 70,848
<SALES> 149,821
<TOTAL-REVENUES> 149,821
<CGS> 106,162
<TOTAL-COSTS> 106,162
<OTHER-EXPENSES> 46,211
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 428
<INCOME-PRETAX> (3,017)
<INCOME-TAX> (1,120)
<INCOME-CONTINUING> (1,897)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,897)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
