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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 29, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20035
NATURAL WONDERS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0141610
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4209 TECHNOLOGY DRIVE, FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
(Zip code)
510-252-9600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Common stock outstanding as of May 27, 2000: 7,848,288 shares of common stock.
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NATURAL WONDERS, INC.
INDEX
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<CAPTION>
Page Number
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Operations 3
Quarters ended April 29, 2000 and May 1, 1999
Condensed Balance Sheets 4
April 29, 2000, January 29, 2000 and May 1, 1999
Condensed Statements of Cash Flows 5
Three months ended April 29, 2000 and May 1, 1999
Notes to Condensed Financial Statements 6
ITEM 2. Management's Discussion and Analysis of 7 - 10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION 11
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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APRIL 29, MAY 1,
2000 1999
-------------------- -------------------
<S> <C> <C>
Net sales $ 23,273 $ 21,552
Cost of goods sold and
store occupancy expenses 19,002 18,950
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Gross margin 4,271 2,602
Selling, general & administrative expenses 10,362 9,613
-------------------- -------------------
Operating loss (6,091) (7,011)
Interest expense (income) and other, net 152 (92)
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Loss before taxes (6,243) (6,919)
Income tax benefit 2,416 2,560
-------------------- -------------------
Net loss $ (3,827) $ (4,359)
==================== ===================
Net loss per common share
basic: $ (0.49) $ (0.55)
Weighted average common shares outstanding
basic: 7,859 7,951
Stores open at end of period 178 178
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See notes to condensed financial statements
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NATURAL WONDERS, INC.
CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
APRIL 29, JANUARY 29, MAY 1,
2000 2000 1999
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 13 $ 3,010 $ 314
Short-term investments 0 0 3,188
Merchandise inventories 29,619 28,205 22,600
Prepaid income taxes 3,827 1,386 2,692
Prepaid expenses and other current assets 3,284 3,671 4,241
---------------------- ---------------------- ----------------------
Total current assets 36,743 36,272 33,035
Property and Equipment:
Leasehold improvements 22,798 22,759 30,500
Furniture, fixtures and equipment 21,781 21,175 35,100
---------------------- ---------------------- ----------------------
44,579 43,934 65,600
Less accumulated depreciation and amortization (24,213) (22,757) (39,322)
---------------------- ---------------------- ----------------------
20,366 21,177 26,278
Other Assets 7,761 7,892 3,497
---------------------- ---------------------- ----------------------
Total Assets $ 64,870 $ 65,341 $ 62,810
====================== ====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 9,295 $ 12,664 $ 6,426
Accrued compensation and related costs 1,664 2,300 1,726
Accrued liabilities 2,418 2,743 2,055
Short-term borrowings 7,833 0 0
---------------------- ---------------------- ----------------------
Total current liabilities 21,210 17,707 10,207
Deferred Rents 2,881 2,994 3,512
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.0001; authorized
17,000,000 shares; issued and outstanding
7,848,288; 7,869,006; 7,951,392 shares 1 1 1
Capital in excess of par value 33,717 33,751 34,073
Retained earnings 7,061 10,888 15,017
---------------------- ---------------------- ----------------------
Total stockholders' equity 40,779 44,640 49,091
---------------------- ---------------------- ----------------------
Total Liabilities and Stockholders' Equity $ 64,870 $ 65,341 $ 62,810
====================== ====================== ======================
</TABLE>
See notes to condensed financial statements
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
APRIL 29, 2000 MAY 1, 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (3,827) $ (4,359)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,456 1,812
Loss on sale of asset 0 0
Change in operating assets and liabilities:
Merchandise inventories (1,414) 107
Prepaid expenses and other assets (1,923) (1,181)
Trade accounts payable (3,369) (2,074)
Accrued compensation and related costs (636) (574)
Accrued liabilities (325) (982)
Deferred rent (113) (51)
------------ ------------
Net cash used in operating activities (10,151) (7,302)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments 0 0
Sales of short-term investments 0 7,380
Proceeds from sale of equipment 0 0
Purchases of property and equipment (645) (1,417)
Business acquisition 0 0
------------ ------------
Net cash (used in)/provided by investing activities (645) 5,963
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations 0 0
Principal payments on long-term debt 0 0
Net borrowing on line of credit 7,833 0
Purchase of treasury stock (46) 0
Issuance of common stock under employee stock purchase program 12 0
------------ ------------
Net cash provided by financing activities 7,799 0
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,997) (1,339)
CASH AND CASH EQUIVALENTS:
Beginning of year 3,010 4,841
------------ ------------
End of period $ 13 $ 3,502
============ ============
CASH PAID DURING PERIOD:
Interest $ 151 $ 5
Income taxes $ 25 $ 0
</TABLE>
See notes to condensed financial statements
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NATURAL WONDERS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS AS OF APRIL 29, 2000 AND MAY 1, 1999 AND
FOR THE THREE MONTH PERIODS ENDED APRIL 29, 2000 AND MAY 1, 1999
1. The financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation of the financial
position, operating results, and cash flows for the periods presented. The
results of operations for the quarter ended April 29, 2000 are not
necessarily indicative of the results to be expected for the entire fiscal
year ending February 3, 2001. This financial information should be read in
conjunction with the audited financial statements and notes thereto
included in the Company's 1999 Annual Report to Stockholders and Form 10-K
for the fiscal year ended January 29, 2000 as filed with the Securities and
Exchange Commission.
2. The Company entered into an amended and restated credit facility agreement
with a commercial bank, effective June 15, 1999, for the purpose of
financing seasonal working capital needs. This line of credit is for a term
of three years, with a maximum credit line of $30,000,000, and is provided
by the same bank that provided the Company's previous credit facility
agreement, together with an additional lender acting as administrative
agent. The line provides for revolving advances up to the lesser of 60% of
the value of eligible inventory, 80% of the net retail liquidation value of
eligible inventory, or the maximum credit line. As of April 29, 2000, total
availability under the line was $10,788,000, with $7,833,000 outstanding.
The line includes up to $5,000,000 for the issuance of commercial and
standby letters of credit. The line of credit must be fully repaid for a
30-day consecutive period between January 1 and February 15 each year. The
Company has the option of choosing interest payable at a rate based on
LIBOR plus 2.25% or a rate equal to the bank's prime rate. The agreement
contains restrictive covenants, which include maintaining certain minimum
tangible net worth levels and requiring bank consent for the payment of
dividends. As of January 29, 2000, the Company was not in compliance with
the tangible net worth covenant. The noncompliance was waived and the
agreement was amended with a revised covenant. At the same time, the
administrative agent assumed the commercial bank's participation. As of
April 29, 2000, the Company was in compliance with the revised tangible net
worth covenant. The agreement also includes certain prepayment penalties.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
GENERAL
As of April 29, 2000, Natural Wonders operated 178 stores in 39 states
compared to 178 stores in 36 states as of May 1, 1999. During the first three
months of 2000, four stores were closed (one temporary store and three permanent
stores) as compared to one new store opened and three stores closed (one
temporary store, one permanent store and one for remodeling) in the first three
months of fiscal 1999.
RECENT DEVELOPMENT
On May 23, 2000, Natural Wonders, Inc. announced that it had
signed a letter of intent with World of Science, Inc. Under the terms of the
letter of intent, Natural Wonders will purchase all of the issued and
outstanding common stock of World of Science for $6.25 million, in cash, which
equates to approximately $1.32 per share. Funding alternatives are currently
being evaluated. The deal is expected to be completed at the beginning of the
third quarter, is subject to World of Science shareholder and regulatory
approval and will be accounted for using the purchase accounting method. A copy
of the letter is attached as Exhibit 10.34.
SALES
During the first quarter of 2000, sales increased 8.1% over the same
period in 1999. The increase was primarily due to the increase in comparable
store sales. Comparable store sales increased 5.4% in the first quarter of 2000,
as compared to the same period in 1999. The increase in the first quarter was
primarily attributable to the impact of merchandise assortment changes.
COST OF GOODS SOLD AND STORE OCCUPANCY EXPENSES
Cost of goods sold and store occupancy expenses include distribution
center costs and other expenses associated with acquiring inventory. As a
percentage of sales, these costs decreased to 81.6% in the first quarter of 2000
from 87.9% in the first quarter of 1999. The decrease in costs as a percentage
of sales in the first quarter was primarily due to the impact of the improvement
in comparable store sales on store occupancy fixed expenses as well as improved
product margins.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, (SG&A), are primarily
non-occupancy store expenses and corporate overhead. As a percentage of sales,
these costs decreased slightly to 44.5% in the first quarter of 2000 from 44.6%
in the first quarter of 1999.
OPERATING INCOME
As a result of the foregoing, the operating loss was $6,091,000 or
26.2% of sales in the first quarter of 2000 versus $7,011,000 or 32.5% of sales
in the first quarter of 1999.
INTEREST EXPENSE (INCOME) AND OTHER, NET
Interest expense (income) and other, net increased to 0.7% of sales in
the first quarter of 2000 from (0.4)% of sales in the first quarter of 1999. The
increase was due to the use of the bank line in the first quarter of 2000, as
opposed to interest income from investments in the first quarter of 1999.
NET LOSS
As a result of the foregoing, the net loss decreased to $3,827,000 or
16.4% of sales in the first quarter of 2000 from $4,359,000 or 20.2% of sales in
the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Seasonal working capital requirements have been met primarily through
short-term bank borrowings.
At April 29, 2000, cash and investments decreased $2,997,000 from prior
year-end. This was primarily due to seasonal operating losses, historically
incurred in the first three fiscal quarters.
Compared to the first quarter in the prior year, cash and investments
decreased due to lower accounts payable and higher merchandise inventories. The
lower inventory level of prior year was primarily attributable to the
merchandise assortment transition in process. This was offset in part by lower
seasonal operating losses and purchasing less equipment.
In fiscal 2000, the Company plans to open approximately 4 new stores
and, during the holiday season, approximately 25 stores in temporary locations.
The Company anticipates that cash in 2000 will primarily be used for capital
expenditures and merchandise inventory for new stores and temporary locations,
and to purchase inventory for the Company's existing stores, particularly prior
to and during the peak holiday selling season. Additionally, in fiscal 1997 the
Board of Directors of the Company authorized the repurchase of up to $2,000,000
of Natural Wonders outstanding common stock. As of April 29, 2000, the Company
had repurchased 365,957 shares of Natural Wonders common stock at a total cost
of $1,297,000.
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The Company entered into an amended and restated credit facility
agreement with a commercial bank, effective June 15, 1999, for the purpose of
financing seasonal working capital needs. This line of credit is for a term of
three years, with a maximum credit line of $30,000,000, and is provided by the
same bank that provided the Company's previous credit facility agreement,
together with an additional lender acting as administrative agent. The line
provides for revolving advances up to the lesser of 60% of the value of eligible
inventory, 80% of the net retail liquidation value of eligible inventory, or the
maximum credit line. As of April 29, 2000, total availability under the line was
$10,788,000, with $7,833,000 outstanding. The line includes up to $5,000,000 for
the issuance of commercial and standby letters of credit. The line of credit
must be fully repaid for a 30-day consecutive period between January 1 and
February 15 each year. The Company has the option of choosing interest payable
at a rate based on LIBOR plus 2.25% or a rate equal to the bank's prime rate.
The agreement contains restrictive covenants, which include maintaining certain
minimum tangible net worth levels and requiring bank consent for the payment of
dividends. As of January 29, 2000, the Company was not in compliance with the
tangible net worth covenant. The noncompliance was waived and the agreement was
amended with a revised covenant. At the same time, the administrative agent
assumed the commercial bank's participation. As of April 29, 2000, the Company
was in compliance with the revised tangible net worth covenant. The agreement
also includes certain prepayment penalties.
The Company believes that current cash and short-term investments
together with its cash flow from operations and funds available under its credit
facilities will be sufficient to fund the Company's operations for the next 12
months.
INFLATION AND SEASONALITY
The Company does not believe that its operations have been materially
affected by inflation during 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 of 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.
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FUTURE RESULTS
This report contains forward-looking statements regarding, among
other matters, the Company's future strategy, store opening and closing plans,
availability of financing and cash flows, 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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
Exhibit 10.34: Letter of intent to purchase World of Science, Inc.,
signed and acknowledged by Natural Wonders, Inc. and
World of Science, Inc. on May 23, 2000
Exhibit 11.1: Computation of Per Share Loss
Exhibit 27: Financial Data Schedule
b. REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on June 8, 2000, which included
a copy of a press release dated May 23, 2000, announcing the signing
of a letter of intent with World of Science, Inc. wherein Natural
Wonders would purchase all of the issued and outstanding common stock
of World of Science.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 12, 2000
NATURAL WONDERS, INC.
(Registrant)
/s/ Peter G. Hanelt
--------------------------------------
Peter G. Hanelt,
Chief Executive Officer
President
Chief Financial Officer
(Signing on behalf of the registrant and
as Principal Accounting and Financial Officer)
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