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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 OCTOBER 28, 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
-----
Common stock outstanding as of November 24, 2000:
7,860,224 shares of common stock.
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NATURAL WONDERS, INC.
INDEX
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Page
Number
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Operations 3
Quarters and nine months ended October 28, 2000
and October 30, 1999
Condensed Balance Sheets 4
October 28, 2000, January 29, 2000 and October 30, 1999
Condensed Statements of Cash Flows 5
Nine months ended October 28, 2000 and October 30, 1999
Notes to Condensed Financial Statements 6 - 7
ITEM 2. Management's Discussion and Analysis of 8 - 11
Financial Condition and Results of Operations
PART II. OTHER INFORMATION 12
ITEM 1. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
------------------------- --------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 30,886 $ 23,332 $ 79,592 $ 70,299
Cost of goods sold and
store occupancy expenses 21,586 17,599 61,648 57,380
-------- -------- -------- --------
Gross margin 9,300 5,733 17,944 12,919
Selling, general & administrative expenses 15,723 11,635 36,046 32,081
-------- -------- -------- --------
Operating loss (6,423) (5,902) (18,102) (19,162)
Interest expense and other, net 898 263 1,261 205
-------- -------- -------- --------
Loss before income taxes and extraordinary loss (7,321) (6,165) (19,363) (19,367)
Income tax benefit 2,833 2,281 7,494 7,166
-------- -------- -------- --------
Loss before extraordinary loss (4,488) (3,884) (11,869) (12,201)
Extraordinary loss related to early retirement
of debt, net of tax (368) -- (368) --
-------- -------- -------- --------
Net loss $ (4,856) $ (3,884) $(12,237) $(12,201)
======== ======== ======== ========
Basic and diluted earnings per share:
Net Loss before extraordinary loss $ (0.57) $ (0.49) $ (1.51) $ (1.54)
Extraordinary loss (0.05) -- (0.05) --
-------- -------- -------- --------
Net loss $ (0.62) $ (0.49) $ (1.56) $ (1.54)
======== ======== ======== ========
Weighted average common shares outstanding
basic and diluted: 7,860 7,865 7,856 7,915
Stores open at end of period 303 203 303 203
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SEE NOTES TO FINANCIAL STATEMENTS
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NATURAL WONDERS, INC.
CONDENSED BALANCE SHEET
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
OCTOBER 28, JANUARY 29, OCTOBER 30,
2000 2000 1999
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 404 $ 3,010 $ 802
Merchandise inventories 71,795 28,205 53,805
Prepaid income taxes 12,494 1,386 7,313
Prepaid expenses and other current assets 8,347 3,671 4,926
--------- --------- ---------
Total current assets 93,040 36,272 66,846
Property and Equipment:
Leasehold improvements 23,542 22,759 30,479
Furniture, fixtures and equipment 30,505 21,175 31,572
--------- --------- ---------
54,047 43,934 62,051
Less accumulated depreciation and amortization (28,998) (22,757) (36,041)
--------- --------- ---------
25,049 21,177 26,010
Other Assets 8,538 7,892 3,310
--------- --------- ---------
Total Assets $ 126,627 $ 65,341 $ 96,166
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 32,814 $ 12,664 $ 25,535
Accrued compensation and related costs 2,293 2,300 1,736
Accrued liabilities 6,020 2,743 2,408
Short-term borrowings 47,953 0 22,331
--------- --------- ---------
Total current liabilities 89,080 17,707 52,010
Long-Term Debt 1,200 0 0
Deferred Rents 3,599 2,994 3,244
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.0001; authorized
17,000,000 shares; issued and outstanding
7,860,224; 7,864,006; 7,865,103 shares 1 1 1
Capital in excess of par value 33,728 33,751 33,736
Retained earnings (Accumulated deficit) (981) 10,888 7,175
--------- --------- ---------
Total stockholders' equity 32,748 44,640 40,912
--------- --------- ---------
Total Liabilities and Stockholders' Equity $ 126,627 $ 65,341 $ 96,166
========= ========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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<CAPTION>
NINE MONTHS ENDED
---------------------------
OCTOBER 28, OCTOBER 30,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(12,237) $(12,201)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 6,241 5,660
Loss on disposition of asset 0 106
Change in operating assets and liabilities:
Merchandise inventories (43,590) (31,098)
Prepaid expenses and other assets (16,430) (6,302)
Trade accounts payable 20,150 17,035
Accrued compensation and related costs (7) (564)
Accrued liabilities 3,277 (629)
Deferred rent 605 (317)
------- -------
Net cash used in operating activities (41,991) (28,310)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of short-term investments 0 7,380
Purchases of property and equipment (10,112) (5,103)
------- -------
Net cash (used in)/provided by investing activities (10,112) 2,277
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing on line of credit 47,953 22,331
Long term debt 1,200 0
Loss on early retirement of debt 368 0
Repurchase of treasury stock (46) (366)
Issuance of common stock under employee stock purchase program 22 29
------- -------
Net cash provided by financing activities 49,497 21,994
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,606) (4,039)
CASH AND CASH EQUIVALENTS:
Beginning of year 3,010 4,841
------- -------
End of period $ 404 $ 802
======= =======
CASH PAID DURING PERIOD:
Interest $ 1,298 $ 289
Income taxes $ 140 $ 97
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
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NATURAL WONDERS, INC.
---------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS AS OF OCTOBER 28, 2000 AND OCTOBER 30,
1999 AND FOR THE NINE MONTH PERIODS ENDED OCTOBER 28, 2000 AND OCTOBER 30, 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 October 28, 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 replaced it's $30,000,000 credit line with a 3-year $50 million
senior revolving credit facility with a new commercial bank, effective
September 11, 2000, for the purpose of financing seasonal working capital
needs and the acquisition of World of Science, Inc. The new line provides
for revolving advances up to 100% until December 16, 2000 (90% after that
date) of the net recovery value of eligible inventory, or the maximum
credit line. As of October 28, 2000, total borrowings under the line were
$42,953,000, with an additional $4,047,000 available. The line includes up
to $20,000,000 for the issuance of commercial and standby letters of
credit. The Company has the option of choosing interest payable at a rate
based on LIBOR plus 2.25-2.75% or a rate equal to the bank's prime rate.
The agreement contains restrictive covenants, which include reaching
certain EBITDA and sales targets and requiring bank consent for the payment
of dividends. The agreement also includes certain prepayment penalties.
3. On September 11, 2000, the Company successfully completed the acquisition
of World of Science, Inc. ("WOSI"). The Company purchased all of the
outstanding common stock of WOSI (4,736,105 shares) for $1.15 per share
($5,447,520) in cash. The transaction was accounted for using the purchase
method of accounting.
Financing for the acquisition was provided through the recently established
3-year $50 million senior revolving credit facility with a commercial bank,
as described in Note 2 above. The Company also obtained a $5 million credit
facility from a private lender ("Private Loan") at the interest rate of
prime plus 10.5%, with a maturity date of December 15, 2001 and sold
$1,200,000 of subordinated convertible debentures ("Debentures") to a group
of five investors (which included the Company's chief executive officer, a
director, and a large shareholder, as well as the financial advisors of
both the Company and WOSI in the form of fee deference). The Debentures
carry a 15% interest rate, payable semi-annually, in arrears, and have a
maturity date of March 15, 2001. Both the Private Loan and the Debentures
included detachable warrants to purchase shares of common stock of the
Company.
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The pro forma results of operations for the combined company set forth
below assume that the merger was consummated at the beginning of the
earliest period presented and is based on the preliminary allocations of
the purchase of the assets and liabilities acquired. Such allocations are
subject to adjustments when additional analysis concerning assets and
liabilities are finalized:
<TABLE>
<CAPTION>
Pro Forma
-------------------------------------
Nine Months Ended Year Ended
(In thousands) October 28, 2000 January 29, 2000
----------------- ----------------
<S> <C> <C>
Revenues $ 98,701 $ 208,224
Net Loss $ (18,442) $ (12,179)
========= =========
Shares - Basic & Diluted 7,856 7,905
EPS - Basic & Diluted $ (2.35) $ (1.54)
========= =========
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This pro forma information does not reflect any cost savings and other
synergies anticipated to be achieved by the Company as a result of the
acquisition of WOSI and is not necessarily indicative of the actual results
of the combined entities had the merger been consummated at the beginning
of the periods presented, nor is it necessarily indicative of future
results of operations.
4. Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 has been amended by SFAS Nos.
137 and 138, and is interpreted by the FASB and the Derivatives
Implementation Group through "Statement 133 Implementation Issues." SFAS
No. 133, as amended, defines derivatives, requires that derivatives be
carried at fair value, and provides for hedging accounting when certain
conditions are met. The Company will adopt provisions of SFAS No. 133
effective February 4, 2001. The Company has assessed the implications of
SFAS No. 133 and does not believe the adoption of this statement will have
a material impact on its financial statements.
5. Tax Benefit
The Company has provided a tax benefit on pre-tax losses incurred in
fiscal year 2000. Historically, a significant portion of the Company's
sales and substantially all of its net earnings have been realized
during the fourth quarter. Realization of deferred tax assets is
dependent upon generating sufficient taxable income prior to the
expiration of related benefits. Although realization is not assured,
management believes it is more likely than not that the deferred tax
assets will be realized based on currently projected future
profitability.
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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 October 28, 2000, Natural Wonders operated 303 stores in 43 states
compared to 203 stores in 36 states as of October 30, 1999. On September 11,
2000, Natural Wonders acquired World of Science, Inc., which had 84 permanent
stores and 14 temporary stores. During the first nine months of 2000, seven
stores were closed (one temporary store from the prior year, six permanent
stores), and two new permanent stores were opened, 29 temporary stores were
opened and 99 World of Science stores were acquired (84 permanent and 15
temporary) as compared to five stores closed (three temporary stores from 1998
and two permanent stores) and six new stores opened, 22 temporary holiday stores
opened in the first nine months of fiscal 1999.
SALES
During the third quarter of 2000, sales increased 32.4% over the same
period in 1999. Comparable store sales increased 6.6% in the third quarter of
2000, as compared to the same period in 1999. The increase in sales was due to
the acquisition of World of Science stores, as well as positive comparable store
sales.
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 69.9% in the third quarter of
2000 from 75.4% in the third quarter of 1999. This was due to the deferral of
inventory carrying costs associated with the higher level of inventory and
the improvement in comparable store sales relative to occupancy costs,
partially offset by conversion downtime for the World of Science stores when
the store systems were converted and merchandise and fixtures changed in many
of these stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, (SG&A), are primarily
non-occupancy store expenses and corporate overhead. As a percentage of sales,
these costs increased to 50.9% in the third quarter of 2000 from 49.9% in the
third quarter of 1999. This increase is mostly due to the fact that conversion
synergies associated with the elimination of duplicative overhead costs have not
been realized yet.
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OPERATING INCOME
As a result of the foregoing, the operating loss was $6,423,000 or 20.8% of
sales in the third quarter of 2000 versus $5,902,000 or 25.3% of sales in the
third quarter of 1999.
INTEREST EXPENSE (INCOME) AND OTHER, NET
Interest expense (income) and other, net increased to 2.9% of sales in
the third quarter of 2000 from 1.1% of sales in the third quarter of 1999.
The increase was due to the increased use of the bank line to fund the
inventory build for a larger company, as well as the financing costs of the
acquisition.
EXTRAORDINARY LOSS
The Company recognized a non-recurring extraordinary loss of $368,000 net
of tax, or $.05 per share in the third quarter of 2000, as a result of an early
termination penalty for exiting the prior line of credit.
NET LOSS
As a result of the foregoing, the net loss increased to $4,856,000 in
the third quarter of 2000 from $3,884,000 in the third quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Seasonal working capital requirements have been met primarily through
short-term bank borrowings.
At October 28, 2000, cash and investments decreased $2,606,000 from the
prior year-end. This was primarily due to seasonal operating losses,
historically incurred in the first three fiscal quarters.
Compared to the third quarter in the prior year, cash and investments
remained flat. The increase in short-term borrowings, accounts payable and
inventories was due to the acquisition of World of Science, Inc. on September
11, 2000.
During the remainder of fiscal 2000, the Company plans to open 2 new stores
and, during the holiday season, approximately 5 more stores in temporary
locations. The Company anticipates that cash for the remainder of 2000 will
primarily be used for capital expenditures and to purchase merchandise inventory
for new and acquired stores and temporary locations, as well as to purchase
inventory for the Company's existing stores, particularly prior to and during
the peak holiday selling season.
In fiscal 1997 the Board of Directors of the Company authorized the
repurchase of up $2,000,000 of Natural Wonders outstanding common stock. As of
October 28, 2000, the Company had repurchased 365,957 shares of Natural Wonders
common stock at a total cost of $1,297,000 including $16,000 during 2000. The
Company did not repurchase any common stock in the third quarter and does not
currently intend to purchase any more shares of common stock this year.
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The Company replaced it's $30,000,000 credit line with a 3-year $50 million
senior revolving credit facility with a new commercial bank, effective September
11, 2000, for the purpose of financing seasonal working capital needs and the
acquisition of World of Science, Inc. The new line provides for revolving
advances up to 100% until December 16, 2000 (90% after that date) of the net
recovery value of eligible inventory, or the maximum credit line. As of October
28, 2000, borrowings under the line were $42,953,000, with an additional
$4,047,000 available. The line includes up to $20,000,000 for the issuance of
commercial and standby letters of credit. The Company has the option of choosing
interest payable at a rate based on LIBOR plus 2.25-2.75% or a rate equal to the
bank's prime rate. The agreement contains restrictive covenants, which include
reaching certain EBITDA and sales targets and requiring bank consent for the
payment of dividends. The agreement also includes certain prepayment penalties.
The Company believes that current cash together with its 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, as well as merchandising strategy and
growth plans. 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 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.
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PART II. OTHER INFORMATION
ITEM 1. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
Exhibit 10.35 Natural Wonders, Inc. 15% Convertible Subordinated
Debenture No. 001, Renaissance Capital Group, Inc.
Exhibit 10.35.1 Warrant, To Purchase Shares of Common Stock of
Natural Wonders, Inc. 60,000 Shares, Michelle A.
Facktor
Exhibit 10.36 Natural Wonders, Inc. 15% Convertible Subordinated
Debenture No. 002, Centennial Associates, L.P.
Exhibit 10.36.1 Warrant, To Purchase Shares of Common Stock of
Natural Wonders, Inc. 37,500 Shares, Centennial
Associates, L.P.
Exhibit 10.37 Natural Wonders, Inc. 15% Convertible Subordinated
Debenture No. 003, Julius Jensen III
Exhibit 10.37.1 Warrant, To Purchase Shares of Common Stock of
Natural Wonders, Inc. 7,500 Shares, Julius Jensen III
Exhibit 10.38 Natural Wonders, Inc. 15% Convertible Subordinated
Debenture No. 004, Raymond James and Associates, Inc.
Exhibit 10.38.1 Warrant, To Purchase Shares of Common Stock of
Natural Wonders, Inc. 37,500 Shares, Raymond James
and Associates, Inc.
Exhibit 10.39 Natural Wonders, Inc. 15% Convertible Subordinated
Debenture No. 005, Peter G. Hanelt.
Exhibit 10.39.1 Warrant, To Purchase Shares of Common Stock of
Natural Wonders, Inc. 37,500 Shares, Peter G. Hanelt
Exhibit 11.1 Computation of Per Share Loss
Exhibit 27 Financial Data Schedule
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B. REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on September 26, 2000, which
included a copy of a press release dated September 11, 2000, announcing the
successful completion of the acquisition of World of Science, Inc. wherein
Natural Wonders purchased all of the issued and outstanding shares of
common stock of World of Science, Inc. for $1.15 cash per share.
The Company filed a report on Form 8-K/A on November 13, 2000 indicating
that an 8-K/A, with the required financial statements, would be filed on
November 27, 2000.
The Company filed a report on Form 8-K/A on November 28, 2000, amending
Item 7, to include the requisite financial statements of the business
acquired and pro forma financial information.
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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: December 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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