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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 29, 2000
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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
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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 (IRS 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
Securities registered pursuant
to section 12(g) of the Act: COMMON STOCK, PAR VALUE $.0001 (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, 2000, was $10,041,285. The number of shares of Common Stock, with
$.0001 par value, outstanding on March 31, 2000 was 7,837,406 shares.
Documents incorporated by reference:
Items 5, 6, 7 and 8 of Part II are incorporated by reference from the Company's
1999 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
2000 Annual Meeting of Stockholders, to be held May 23, 2000. Registrant's
definitive Proxy Statement was filed with the Securities and Exchange Commission
on April 14, 2000.
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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 182 stores
in 39 states at the end of fiscal 1999. In fiscal 1999, the Company opened 10
stores with permanent locations, 9 permanent and 3 temporary stores were closed,
and 26 temporary stores were opened and 22 closed during the holiday season. At
the end of 1999, 4 of the temporary locations remained opened and 3 will be
moved to permanent locations in 2000. During the 2000 calendar year, the Company
plans to open approximately 6 new stores and, during the holiday season,
approximately 25 temporary locations.
PRODUCTS AND MERCHANDISING
During fiscal 1999, the typical Natural Wonders' store stocked between 1,500 to
2,000 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, 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 1999, only one vendor accounted for more than 5% of the
Company's merchandise purchases. Natural Wonders purchased 9% of its merchandise
from Meade Instruments
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Corporation. Prior to 1999, no one vendor accounted for more that 5% of the
Company's merchandise purchases.
STORE OPENING COSTS
In 2000, the Company estimates that the average cost for leasehold improvements,
furniture and fixtures will be $260,000 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 average $110,000 for each new
store and $85,000 for stores with temporary locations. The average pre-opening
costs per store, which are expensed as incurred, are estimated to be $11,000 for
new stores and $9,000 for stores with temporary locations.
MARKETING
Natural Wonders' marketing strategy is to create an atmosphere that generates
excitement about the world of nature and science. The strategy includes theme
presentations, which highlight a related group of products that tell a story
about a specific place or activity. Marketing may also involve developing
partnerships with non-profit organizations that support environmental and
conservation efforts. Additionally, the Company has created a customer database
that enables the Company to engage in special promotional and marketing programs
targeted at specific potential customer groups.
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 its 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.
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 retailers such as
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 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
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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 29, 2000, the Company had approximately 2,300 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, 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.
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 29, 2000, the Company operated 182 stores in 39 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 10 years and expiring
between 2000 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 1999.
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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 to the
section entitled "Market Information and Dividend Policy" in the Company's 1999
Annual Report to Stockholders for the fiscal year ended January 29, 2000 (the
"1999 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to the
section entitled "Selected Financial Data" in the Company's 1999 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
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operation" in the Company's 1999 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 in the Company's 1999 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 to the
definitive Proxy Statement for the Registrant's 2000 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 to the definitive Proxy
Statement for the Registrant's 2000 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
definitive Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference to the
definitive Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference in the
definitive Proxy Statement for the Registrant's 2000 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 to the Company's 1999 Annual Report to Stockholders.
Statements of Operations for fiscal years 1999, 1998, and 1997
Balance Sheets at January 29, 2000 and January 30, 1999
Statements of Stockholders' Equity for fiscal years 1999, 1998, and
1997
Statements of Cash Flows for fiscal years 1999, 1998, and 1997
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 1999.
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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 25, 2000 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE
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<S> <C>
/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/ BRUCE BEDA
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(Bruce Beda) Director
/s/ JULIUS JENSEN III
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(Julius Jensen III) Director
</TABLE>
Date: April 25, 2000
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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.
10.6 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.
10.11 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.
10.16 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.
10.21* 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.
*Plan or agreement pursuant to which the Company's officers or
directors have received compensation.
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EXHIBIT
NUMBER DESCRIPTION
10.23* Form of Director and Officer Indemnity Agreement is
incorporated by reference to Exhibit 10.40 of the 1994 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 is incorporated by reference to Exhibit 10.28.1
of the 1998 Form 10-K.
10.28.2 Third Amendment to Credit Agreement, entered into on January
29, 1999 between the Company and Wells Fargo Bank, National
Association is incorporated by reference to Exhibit 10.28.2
of the 1998 Form 10-K.
10.28.3 Fourth Amendment to Credit Agreement, entered into on March 15,
1999 between the Company and Wells Fargo Bank, National
Association is incorporated by reference to Exhibit 10.28.3
of the 1998 Form 10-K.
10.28.4 Amended and Restated Loan and Security Agreement entered into
on June 15, 1999 among the Company, Wells Fargo Bank, National
Association and Foothill Capital Corporation is incorporated by
reference to Exhibit 10.28.4 of the 1999 Form 10-Q, for the
quarterly period ended May 1, 1999.
10.28.5 Amendment Number One to Amended and Restated Loan and Security
Agreement entered into on June 15, 1999 among the Company,
Wells Fargo Bank, National Association and Foothill Capital
Corporation is incorporated by reference to Exhibit 10.28.5 of
the 1999 Form 10-Q, for the quarterly period ended October 30,
1999.
10.29* Executive Employment Agreement entered into on September
29,1998 between the Company and Kenneth G. Norton is
incorporated by reference to Exhibit 10.29 of the 1998 Form
10-K.
10.30* Nonqualified Stock Option Agreement entered into on September
29,1998 between the Company and Kenneth G. Norton is
incorporated by reference to Exhibit 10.30 of the 1998 Form
10-K.
10.31* Secured Promissory Note for Kenneth G. Norton, dated October
19, 1998 is incorporated by reference to Exhibit 10.30 of the
1998 Form 10-K.
10.32* Nonqualified Stock Option Agreement entered into on September
29,1998 between the Company and Peter G. Hanelt is incorporated
by reference to Exhibit 10.32 of the 1998 Form 10-K.
*Plan or agreement pursuant to which the Company's officers
or directors have received compensation.
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10.33* Nonqualified Stock Option Agreement entered into on September
29,1998 between the Company and David H. Folkman is
incorporated by reference to Exhibit 10.33 of the 1998 Form
10-K.
10.33.1* Amendment to Nonqualified Stock Option Agreement, entered into
on April 2, 1999 between the Company and David H. Folkman is
incorporated by reference to Exhibit 10.33.1 of the 1998 Form
10-K.
13.1 1999 Annual Report to Stockholders.
27.1 Financial Data Schedule - 1999
*Plan or agreement pursuant to which the Company's officers or
directors have received compensation.
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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 3, 2000,
incorporated by reference in this Annual Report on Form 10-K of Natural Wonders,
Inc. for the year ended January 29, 2000.
/s/ Deloitte & Touche, LLP
Deloitte & Touche, LLP
San Francisco, California
April 21, 2000
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GROWING THE BUSINESS
NATURAL WONDERS
ANNUAL REPORT 1999
HISTORY
Founded in 1987, Natural Wonders is a national specialty retailer with 182
stores, offering unique and quality merchandise focused on the wonders of
nature, science, the environment, and education. Stores feature a multi-sensory
experience coupled with superb customer service that makes the shopping
experience fun and rewarding. With corporate headquarters located in Fremont,
California, the stock trades on the NASDAQ National Market System under the
symbol NATW. Visit our website at www.naturalwonders.com
GROWING THE BUSINESS
We are evolving; we are changing; we are growing. Growing the business is
complex. It is more than adding stores, it is adding profitable stores. It is
more than increasing sales, it is maintaining a healthy profit component for
these sales. We are mindful of the importance of evolving to a better state of
growth, one that rewards the shareholders for patience with their Natural
Wonders investment.
To evolve, we have created a more effective retailing organization both in
merchandising and store operations. The year ended with a positive response
from customers that confirmed we are recapturing the wonder in the
marketplace. We will now build upon the momentum of last year's program.
EVOLUTION
"Evolution aptly describes the process that we have begun. Natural Wonders has
taken dramatic and decisive action in an effort to regain our credibility with
our customers and shareholders." Peter Hanelt, Chief Executive Officer & Chief
Financial Officer
to our shareholders
We continue along the path of recapturing the wonder that began last year.
While not a success by profitability expectations, the year was a major step
forward in the evolution of the new Natural Wonders. To be profitable, we
must meet two significant challenges. First, the seven-year comparable store
sales decline must be reversed. Second, we must eliminate the unprofitable
stores within our portfolio. Many of these leases were negotiated in the 1995
to 1997 period. Declining sales and unprofitable stores combined to create
the unacceptable losses of the last two years. Solving these two issues is
the key to restoring profitability and shareholder value. While the progress
toward improving sales has been slow, there have been encouraging signs.
Since September 1999 we have had a cumulative positive comparable store sales
increase and in February 2000 completed the first
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consecutive three month period with positive monthly comparable store
sales increases since 1992.
We completed the analysis of our unprofitable stores. A $4.1 million charge
to expense for the closure of unprofitable stores and related asset
impairments was recognized in 1999. This accounted for over 30% of our
reported fiscal year loss. Some additional costs associated with closing
specific stores will be incurred in fiscal 2000, however, we expect these
costs to be fully offset by occupancy cost reductions. We expect to close
most of our unprofitable stores by the end of 2000.
To be prudent, we continue the two year trend of decreasing total company
expenses as measured on a per store operating month basis. We are not only
offsetting all
inflationary expense increases but are decreasing expenses on an absolute
basis. This creates the opportunity for ever increasing positive operating
leverage as the improving sales trend continues.
evolution
Last year's theme was recapturing the wonder. This year our theme is
evolution.
Evolution aptly describes the process that we have begun. Natural Wonders has
taken dramatic and decisive action to regain our credibility with our
customers and shareholders. We expanded our successful holiday store
program, closed several unprofitable stores, decreased corporate overhead,
and increased our merchandise availability, selection and value. We rebuilt
vendor relationships, established key vendor partnerships in important
categories, began the expansion of proprietary product development and
negotiated new product sourcing arrangements. We also reorganized the field
store management organization to increase accountability. Natural Wonders
will continue these efforts, particularly increasing merchandising newness
and continued closing of unprofitable stores, until we achieve our
substantial profitability potential.
not just evolution but successful evolution
More importantly, the evolution continues into the new fiscal year. The first
month of the 2000 fiscal year delivered a positive comparable store result of
5.1% and a healthy gross profit. The outlook for substantial improvement from
last year's financial results is very positive for the new fiscal year.
We believe we are successfully addressing key infrastructure issues in
support of our merchandising and sales efforts. We have a reasonable amount
of excess capacity in information systems and distribution facilities. The
corporate support staff is adequate to support the store base. We had no
difficulties with the Y2K transition.
Natural Wonders embraces the benefits of information technology and continues
to improve our systems and their utilization. Our new systems, installed in
1998, are fully integrated into our internal operations. We successfully
launched our Internet site last year. Our Internet sales continue to grow and
we have effective fulfillment and back office
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operations. The Internet is an opportunity for us to leverage our brand, sell
our products and enhance our corporate visibility. We fully expect the
Internet to become a more important brand-building and sales vehicle going
forward.
where have all the flowers gone
The last couple of years witnessed the demise or sale of several independent
competitors in our mall-based specialty retail niche. Learningsmith was
liquidated, Imaginarium and the Nature Company were sold, World of Science
and other specialty gift retailers are being offered for sale. The
liquidation of Learningsmith during December of 1999 created extreme
promotional activity and adversely affected our sales and margins.
Nevertheless, the longer-term impact of a reduced number of competitors is
positive for us. We intend, and have the resources, determination and energy,
to be the leading survivor within the category. The departure of numerous
competitors creates an opportunity for us.
birds of a feather flock together
We continue to be inspired to deliver a concept known by its unique
merchandise and inspired by the wonders of nature and science. As part of our
program to recapture the wonder in our stores, we strive to support important
natural themes. We are pleased that we are able to assist, through innovative
concepts and creative partnerships, such organizations as the Gorilla
Foundation and the National Audubon Society. We are proud of our support of
these worthwhile organizations.
survival of the fittest
Not all of our stores are successful. We have a group of stores that are
incurring losses at the contribution margin level and the response in these
stores to our new merchandising strategies adopted in 1999 was not sufficient
to overcome the high occupancy costs in these locations. Most of these stores
were opened between 1995 to 1997. These stores represent a substantial drain
on corporate profitability and assets. During the fourth quarter of 1999, we
recorded a charge of $3.2 million to recognize the asset impairment
associated with specific stores targeted for closure. We closed nine stores
during 1999 and will close the remainder of the underperforming stores as
soon as possible. We have been able to restructure other leases and have
received significant occupancy cost reductions as a result. I emphasize that
these stores represent a relatively small portion of our real estate base but
account for a large part of our operating loss. I am encouraged by the
progress to date and the prospects for further success. At the same time, we
are expanding our store base with carefully selected openings and are
actively working with the developer community to increase our presence in
attractive malls. We have negotiated leases for stores to open in the new
fiscal year and are in active and productive discussions to open several
other stores this year.
our holiday stores evolve to regular stores
<PAGE>
During the 1998 holiday season, we doubled our temporary holiday store
program and substantially increased our per store contribution margin. In
1999, we again expanded the program with further contribution margin
improvement. The stores are different from regular stores in terms of
fixtures, physical size, number of items offered and types of malls targeted
for the stores. Because of our high holiday sales, these temporary stores can
be very profitable even if operationally complex. Based upon their actual
results, we believe that we can project with confidence their potential to
become successful permanent stores. In fact, in 1998 we converted three
temporary stores to permanent stores and subsequently attained projected
sales. From the 1999 program, we are converting three other temporary stores
to permanent stores and will possibly convert additional stores after further
analysis and negotiations.
Because our holiday stores are appreciated by mall shoppers, offer unique
merchandise, are visually attractive and might become regular stores, both
the developers and we believe that this program offers mutual benefits. We
are in active discussions for the year 2000 program and are confident that
once again we can deliver improved per store profitability results.
all in the family, genus: natural wonders
The process of evolution involves each of the company's executives. They are
the ones with the experience and expertise to create improvement. Within this
annual report, certain executives will add their observations, comments, and
commitments to our message of growth, evolution and success. We promise to
give our best each day in order to achieve Natural Wonders' substantial
profitability potential and to improve shareholder value.
Peter G. Hanelt
Chief Executive Officer &
Chief Financial Officer
REJUVENATION
"We will capture our customer through compelling products, bold marketing and
engaging visual presentation. Each of these elements will consistently
contribute to the Natural Wonders persona." Michael Cape, Vice President,
Marketing & Visual
Natural Wonders nurtures the relationship between people and the earth. It is
our business to sell merchandise that generates excitement about the world of
nature and science. This is our mission. Our goal for 2000 is to rejuvenate the
Natural Wonders concept and showcase it to the customer. The following are key
initiatives to support this goal.
theme presentations
This strategy highlights a related group of products that tell a story about
a specific place or activity inspired by the wonders of nature, science,
education and the environment.
<PAGE>
In 2000 we will support three theme presentations in the store at all times.
We have established our theme calendar and determined our merchandising
statements based on trends and seasonal merchandise. The merchant team has
taken these concepts overseas and to domestic markets and developed their
assortment of new and exclusive products based on these themes. We look
forward to presenting themes such as the "Rainforest", the "Naturalist" and
many more. These presentations support a highly interactive and educational
experience in our stores.
marketing partnerships
We are developing partnerships with non-profit organizations that support the
environment and conservation. These relationships are consistent with our
merchandising and brand character. Examples include The Gorilla Foundation
and our partnership with the National Audubon Society (N.A.S) in support of
the "Naturalist" theme presentation. The N.A.S mission is to conserve and
restore natural ecosystems, focusing on birds and other wildlife for the
benefit of humanity and the earth's biological diversity. Elements of this
partnership include: in-store Audubon membership drives, fund raising, joint
press releases, a customer sweepstakes for an ecotour, web site links, a
feature in the Audubon magazine, newsletters and more. We will heighten
awareness for both Natural Wonders and the National Audubon Society through
shared marketing vehicles.
engaging the customer
Our storefront offers a marketing opportunity as each potential customer
approaches. We will leverage our window and first fixture presentation with
themed and seasonal products, dynamic graphics and visual displays. These
will rotate regularly to stay fresh and unique, thus capturing the attention
of shoppers.
We are enhancing our dialog with the Natural Wonders' customer through a
direct mail newsletter called "Words of Wonder". This newsletter will
highlight new products, promotions, theme presentations, non-profit
partnerships, gift ideas, customer letters and important information about
conservation. Our newsletter will strengthen our relationship with our
customer, build awareness and reinforce the Natural Wonders brand.
We are partnering with our vendors and mall-marketing resources in a
cooperative advertising strategy for print advertising, direct mail and
in-store events that will reach out to existing and new customers.
Our web site will continue to support the "click and mortar" strategy of
driving traffic to our stores by highlighting events, promotions, store
directory and company information, as well as offer a product assortment for
purchase online.
At Natural Wonders we have a great story to tell and we look forward to
communicating it to our customers.
<PAGE>
UNIQUE
"Our mission is to offer a unique assortment and an interactive store
environment that differentiates Natural Wonders from the competition." Ken
Norton, Executive Vice President, General Merchandise Manager
uniqueness
Our uniqueness is derived through the merchandise assortment and how it is
gathered together through visuals and our theme presentations. Using nature
as an overall store concept creates a unique product offering. Nature is
represented in the use of materials, texture and patterns. An ever-present
quality and value available in all our products also add to our uniqueness.
Our uniqueness is accentuated by the many different types of products we
offer, which include: Ecospheres-Registered Trademark-, minerals and fossils,
science kits, astronomy, home decor, relaxation, garden accents, fountains,
books, music and videos.
growing categories
Garden is an area that enjoyed wonderful growth in 1999. It is also an area
in which we have a unique range of products. Our garden statement includes:
chimes, seed kits, cachepots, bird houses and feeders, garden statuary,
weather instruments, and of course, fountains.
Fountains are desired for their tranquil aesthetic qualities. Natural Wonders
has become the destination for indoor fountains. We offer an assortment that
includes a range of materials and prices. Many of our fountains are proudly
made by craftsman in the United States; others are produced overseas for
value pricing. We will be updating our assortment of fountains throughout the
year in order to keep it fresh and interesting to the customer.
As the interest in Feng Shui has grown and become a part of everyday America,
so the interest in relaxation and aromatherapy has grown. We see relaxation
products and aromatherapy transition from the New Age concept to everyday
life. Massagers, comfort pillows, incense and diffusers are increasing in
popularity. Aromatherapy is transitioning into home fragrance designed to
enhance the home and stimulate the senses. Both fountains and relaxation
support the home as a daily "retreat" from fast paced everyday life.
Geology is another area in which we are unique. This uniqueness has garnered
a growth category in minerals and fossils. Collectors as well as the customer
who finds a particular mineral bookend or sculpture to their liking, come to
Natural Wonders to find just what they are looking for.
reach for the stars
Natural Wonders will continue to be a destination for telescopes and
telescope accessories. We will optimize this strategy by increasing our
product offering and supporting new marketing and in-store presentations.
<PAGE>
GERMINATION
"Our product offering will be true to our mission of offering merchandise that
focuses on the wonders of nature, science, the environment and education."
Denise Ellwood, Vice President, Merchandising
vision
Our vision for merchandising our stores is one of synergy throughout the store.
This is attained through visual presentation as well as the product assortment
itself. Rough ideas for the vision are outlined through blueprint and concept
boards developed well in advance of any travel, trade shows or product design.
For 2000, the vision entails the use of a variety of themes throughout the year,
a color palette that is seen in product across categories, visual presentation
and packaging. All these elements result in a germination of ideas that lead to
unique, impactful products.
product development
Natural Wonders' development teams work a year in advance to create product
that is uniquely our own. We begin with a blueprint that outlines the items,
materials, colors, themes and price points that fit into our merchandising
vision for the year. From the blueprint, we create concept boards for the
various themes and color palettes. The blueprint and concept boards are then
sent overseas to our agents. The development teams travel around the world in
order to meet with vendors, attend trade shows and work with our agents to
source the best factories in which to realize our concepts. This is a new
process for Natural Wonders that will come to fruition with proprietary
product during the Fall of 2000 and into 2001.
Ideas for product development come from many sources. Current trends in the
home, the garden, relaxation, environment and education are all taken into
consideration. We also interpret trends for home decor into merchandise that
reflects our interest in nature through use of materials and patterns. Product
development is most successful when it offers unique product that the customer
perceives as a value due to the quality inherent in the design and through the
use of materials.
assortment
Merchandise teams travel overseas twice a year as well as throughout the
United States several times a year to attend trade shows and markets in order
to find unique product crafted by talented artisans. All product must fit
certain criteria in order to become part of the Natural Wonders' assortment.
We search for product that fits into a nature or science view as well as
meeting certain quality requirements that would present a value to our
customer.
Samples are gathered from around the world to create a merchandise statement.
We sort through the samples gathered and decide upon which items will best
show our vision. We look at what materials, colors and patterns are used
throughout the categories. Synergy is created as we tell a common
<PAGE>
story through the merchandise offered in relaxation, garden and home decor
gifts.
STRUCTURE
"One of Natural Wonders' competitive advantages has always been the high level
of customer service and product knowledge in the stores." William Soncini,
Senior Vice President, Operations
The primary goals of the field organization are to generate sales increases
and deliver exceptional customer service. Meeting these goals hinges on the
structure of the field group, our commitment to our employees and our ability
to communicate effectively.
structure
While 1999 proved to be one of the most challenging years for Natural
Wonders, it has produced significant and exciting changes in the operational
group. Faced with disappointing sales results, we began to reassess the
entire structure of the field organization. We reviewed what worked,
opportunities for improvement and how to maximize the dedication and
experience of the employees in the field.
We realized that one key to revitalizing our stores' performance was to
reduce the number of stores reporting to each direct supervisor. By reducing
the span of control, especially at the regional level, we could enhance
development and improve execution. To achieve this goal, a third regional
position was created. Each regional is now responsible for approximately 60
stores resulting in closer supervision, greater accountability and quicker
resolution of problems. Regional Managers now have a small group of stores
reporting directly to them which allows them to quickly assess the impact of
corporate direction on store operations and sales, as well as provide
feedback to corporate to improve processes. These structural changes have
already resulted in significant sales improvements in the last few months.
employees
Retailing is often known as employment's revolving door. Keeping good
employees is a challenge that must be balanced with the competitive pressures
of the marketplace. At Natural Wonders we know that employees are the
backbone of the company. To support these critical players we have instituted
several training programs, a new bonus program and an extremely competitive
benefit package. We've created opportunities for ownership and continue to
reward performance. As a result, our employees are committed to Natural
Wonders. They bring a rare excitement to their work and we will ensure this
energy results in sales increases. One of Natural Wonders' competitive
advantages has always been the high level of customer service and product
knowledge in the stores. Customer feedback continues to show that we have
maintained that level with consistency. In 2000, we will continue to
emphasize these factors that have made the Natural Wonders
<PAGE>
concept viable--creating an interactive shopping environment with helpful and
knowledgeable employees.
expectations
We have dedicated ourselves to quickly recognize individual store issues and
correct them. Our expectation is that service and presentation will remain at
an all time high, that sales increases will continue and that the quality and
caliber of all Natural Wonders associates will be a source of pride. By
focusing on these key factors, we, out in the stores, are attending to every
detail of our business with confidence and determination.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except operating data and per share amounts)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net sales $ 147,089 $ 149,821 $ 149,239 $ 138,773 $ 138,080
Cost of goods sold and store
occupancy expenses 108,483 106,162 100,998 92,489 93,529
------------ ------------ ------------- -------------- ------------
Gross margin 38,606 43,659 48,241 46,284 44,551
Selling, general and administrative
expenses 52,001 46,211 45,794 40,894 40,640
------------ ------------ ------------- -------------- ------------
Operating income (loss) (13,395) (2,552) 2,447 5,390 3,911
Net interest and other expenses 452 465 276 791 944
------------ ------------ ------------- -------------- ------------
Earnings (loss) before income taxes (13,847) (3,017) 2,171 4,599 2,967
Income tax provision (benefit) (5,359) (1,120) 803 1,698 1,157
------------ ------------ ------------- -------------- ------------
Net earnings (loss) $ (8,488) $ (1,897) $ 1,368 $ 2,901 $ 1,810
============ ============ ============= ============== ============
Basic earnings (loss) per share $ (1.07) $ (0.24) $ 0.17 $ 0.37 $ 0.23
============ ============ ============= ============== ============
Diluted earnings (loss) per share $ (1.07) $ (0.24) $ 0.17 $ 0.36 $ 0.23
============ ============ ============= ============== ============
Shares used in computing basic
earnings (loss) per share 7,905 8,014 8,005 7,862 7,725
Shares used in computing diluted
earnings (loss) per share 7,905 8,014 8,200 8,090 7,819
OPERATING DATA:
Number of stores open at end of
year 182 180 171 151 146
Average net sales per gross square
foot (52 weeks) $ 328 $ 333 $ 373 $ 380 $ 382
Average net sales per store (52 weeks) $ 794,000 $ 831,000 $ 917,000 $ 932,000 $ 936,000
Comparable store net sales decrease (4.2)% (6.8)% (1.4)% (0.6)% (5.7)%
BALANCE SHEET DATA AT FISCAL YEAR END:
Working capital $ 18,565 $ 26,812 $ 29,681 $ 33,495 $ 31,252
Total assets 65,341 70,848 79,337 78,344 77,964
Long-term borrowings - - 1,144 3,377 6,972
Stockholders' equity 44,640 53,450 55,802 54,156 50,658
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------------------------
(Percentage of net sales) 1999 1998 1997
-------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 %
Cost of goods sold and store occupancy expenses 73.7 70.9 67.7
Gross margin 26.3 29.1 32.3
Selling, general and administrative expenses 35.4 30.8 30.7
Operating income (loss) (9.1) (1.7) 1.6
Net interest and other expenses 0.3 0.3 0.2
Income tax provision (benefit) (3.6) (0.7) 0.5
Net earnings (loss) (5.8) % (1.3) % 0.9 %
Number of stores open at end of period 182 180 171
</TABLE>
RESULTS OF OPERATIONS
GENERAL
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years 1999, 1998 and 1997 ended January 29, 2000, January 30, 1999, and
January 31, 1998, respectively. All references to years, unless otherwise
specified, are intended to refer to the Company's fiscal year.
At the end of 1999, the Company operated 182 stores in 39 states
compared to 180 stores in 36 states at the end of 1998 and 171 stores in 36
states at the end of 1997. In 1999, 10 new stores were opened, 9 permanent and 3
temporary stores were closed, and 4 temporary stores were still open on January
29, 2000. 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. On May 22, 1997, the Company acquired 12 locations through
the acquisition of substantially all of the operating assets of What A World!,
Inc. In addition, in 1999, 26 stores with temporary locations were opened during
the holiday season compared to 27 stores in 1998 and 12 stores in 1997. At the
end of 1999, 4 temporary stores remained open and 3 will be converted to
permanent stores during 2000. At the end of 1998, 3 temporary stores remained
open and 2 were 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 decreased 1.8% to $147,089,000 in 1999 from $149,821,000 in
1998. The decrease of $2,732,000 was due primarily to a decrease in comparable
store sales partially offset by new stores, stores in temporary locations and
Internet sales. The 10 new stores accounted for $4,907,000 of sales increase and
the full year of sales from new stores opened in 1998, accounted for $1,067,000
of sales increase. This was fully offset by the decrease in comparable store
sales of $5,896,000 and the lost sales impact of 9 closed stores and 6 remodeled
stores of $2,907,000.
The Company defines comparable store sales as the change in sales for
stores that have been open for twelve full consecutive months. Comparable store
sales in 1999 decreased 4.2% as compared to 1998. The decrease was primarily
attributable to the impact of repositioning the merchandise assortment over the
first three quarters of the year, as well as delays in implementing the changes.
Although overall comparable store sales decreased, some of the Company's stores
experienced positive comparable store sales. The average dollar amount per
customer transaction increased significantly in 1999, from $22 to $25 (or
13.6%).
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.
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 73.7% in 1999 from 70.9% in 1998 primarily
due to higher costs of goods for inventory, as well as higher occupancy and
other fixed expenses on decreased per store sales levels.
In 1998, cost of goods sold and store occupancy expenses increased as a
percentage of sales to 70.9% in 1998 from 67.7% in 1997. The increase was
primarily due to the occupancy costs for a greater number of new and temporary
stores open in 1998 than 1997 coupled with flat sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses, which are
primarily non-occupancy store expenses and corporate overhead, increased as a
percentage of sales to 35.4% in 1999 from 30.8 % in 1998. The increase in
expenses was due primarily to expenses and write-offs of $860,000 associated
with closed stores as well as a charge of $3,240,000 representing the impairment
of certain long-lived store assets, primarily leasehold improvements.
In 1998, SG&A expenses increased slightly as a percentage of sales to
30.8% compared to 30.7% in 1997. The increase was due the negotiated settlement
of a patent infringement claim for $525,000. In addition,
<PAGE>
benefits of cost controls were offset by the decline in comparable store sales
and the expenses associated with the increase in the number of permanent and
temporary stores.
OPERATING INCOME (LOSS)
As a result of the foregoing, there was an operating loss of
$ 13,395,000, or 9.1% of sales in 1999 and $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.
NET INTEREST AND OTHER EXPENSES
Net interest and other expenses decreased to $452,000 or 0.3% of sales
in 1999 from $465,000 or 0.3% of sales in 1998, which was an increase from
$276,000 or 0.2% of sales in 1997. The increase in 1998 from 1997 was due
primarily to less interest income due to a lower average investment balance.
INCOME TAX PROVISION (BENEFIT)
The effective tax rate was 38.7% in 1999 and 37.1% in 1998. No
valuation allowance was necessary to offset the deferred tax asset at the end of
1999, 1998 or 1997. Management evaluated the need for such an allowance and
based on the Company's history of earnings and projected future profitability,
determined that one was not necessary. Should actual future results differ from
management estimates, the deferred tax assets, including the tax benefit
recorded in 1999 and 1998, may not be realized.
NET EARNINGS (LOSS)
As a result of the foregoing, there was a net loss of $8,488,000 or
5.8% of sales in 1999 and $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.
LIQUIDITY AND CAPITAL RESOURCES
Seasonal working capital requirements have been met primarily through
short-term bank borrowings.
At fiscal year-end 1999 cash and investments were $3,010,000 in
comparison to $12,221,000 at year-end 1998. The decrease was primarily due to
operating losses, stock repurchases, construction costs and fixtures for new
stores, and the remodeling of existing stores, as well as increased inventory
levels.
In fiscal 2000, the Company plans to open approximately 6 new stores
and, during the holiday season, approximately 25 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 January 29, 2000, the Company
had repurchased 334,357 shares of Natural Wonders common stock for a total of
$1,250,000.
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 as 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 January 29, 2000, total availability under the line was
$12,284,000, with no amount outstanding. The line includes up to $5,000,000 for
the
<PAGE>
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. The agreement also includes certain
prepayment penalties.
The Company has reviewed its plans to return the Company to
profitability, as well as progress on executing those plans, with its lender,
when the line was amended at year-end. An important component of the plan
addresses the profitability of individual stores. During the fourth quarter
1999, the Company completed an in-depth analysis of its portfolio of store
leases. A group of unprofitable store locations was identified for closure and
the Company is now actively pursuing the termination or renegotiation of these
lease agreements. A long-lived asset impairment reserve was established for most
of these locations and outside resources have been retained to support this
effort. Charges will be incurred in 2000 in order to close some stores, but the
amount of these charges is expected to be less than the operating cost savings
from closing these stores. The Company will periodically reassess the success of
its real estate strategy as well as the rest of its management plan to return
the Company to profitability.
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.
The Company was not materially affected by the Year 2000 issue. The
Company did not have material expenditures related to the Year 2000 issue and as
such, costs associated with Year 2000 have not had a significant impact on the
Company's results of operations, liquidity, or capital resources. The Company
did not accelerate any system replacements or incur any costs for upgrades or
additional personnel in order to make any systems Year 2000 compliant.
In January 1998, a lawsuit was filed against the Company alleging 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 cost of the settlement, including legal expenses and reserves,
was approximately $525,000 and was recorded in the first quarter ended May 2,
1998.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as delayed by SFAS No. 137, will be effective for the Company in
fiscal 2001. SFAS No. 133 establishes 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 adoption of this new standard 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 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
<PAGE>
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 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.
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
--------------------------------------------------------
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 147,089 $ 149,821 $ 149,239
Cost of goods sold and store occupancy expenses 108,483 106,162 100,998
--------------- --------------- -----------------
Gross margin 38,606 43,659 48,241
Selling, general and administrative expenses 52,001 46,211 45,794
--------------- --------------- -----------------
Operating income (loss) (13,395) (2,552) 2,447
Interest expense 556 428 625
Other expenses 59 484 450
Interest and other income (163) (447) (799)
--------------- --------------- -----------------
Earnings (loss) before income taxes (13,847) (3,017) 2,171
Income tax provision (benefit) (5,359) (1,120) 803
--------------- --------------- -----------------
Net earnings (loss) $ (8,488) $ (1,897) $ 1,368
=============== =============== =================
Net earnings (loss) per common share:
Basic $ (1.07) $ (0.24) $ 0.17
Diluted $ (1.07) $ (0.24) $ 0.17
Weighted average common shares outstanding:
Basic 7,905 8,014 8,005
Diluted 7,905 8,014 8,200
</TABLE>
See notes to financial statements.
<PAGE>
NATURAL WONDERS, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
-------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,010 $ 4,841
Short-term investments - 7,380
Merchandise inventories 28,205 22,707
Prepaid income taxes 1,386 1,403
Prepaid expenses and other current assets 3,083 3,262
Deferred taxes 588 1,056
---------------- ----------------
Total current assets 36,272 40,649
PROPERTY AND EQUIPMENT:
Leasehold improvements 22,759 30,077
Furniture, fixtures and equipment 21,175 34,106
---------------- ----------------
43,934 64,183
Less accumulated depreciation and amortization (22,757) (37,510)
---------------- ----------------
Total property and equipment 21,177 26,673
Deferred Taxes 7,707 3,085
Other Assets 185 441
---------------- ----------------
Total Assets $ 65,341 $ 70,848
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 12,664 $ 8,500
Accrued compensation and related costs 2,300 2,300
Accrued liabilities 2,743 3,037
---------------- ----------------
Total current liabilities 17,707 13,837
Deferred Rent 2,994 3,561
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
7,869,006 and 7,951,392 shares in 1999 and 1998. 1 1
Capital in excess of par value 33,751 34,073
Retained earnings 10,888 19,376
---------------- ----------------
Total stockholders' equity 44,640 53,450
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 65,341 $ 70,848
================ ================
</TABLE>
See notes to financial statements.
<PAGE>
NATURAL WONDERS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings (loss) $(8,488) $(1,897) $1,368
Adjustments to reconcile net earnings (loss) to net cash from
operating activities:
Depreciation and amortization 7,248 7,269 6,174
Loss on disposal and impairment of long-lived assets 4,085 950 48
Deferred taxes (4,154) 130 (1,079)
Changes in assets and liabilities:
Merchandise inventories (5,498) 477 (2,341)
Prepaid expenses and other current assets 435 (415) (511)
Prepaid income taxes 17 (1,403)
Trade accounts payable 4,164 503 2,822
Accrued compensation and related costs (525) 302
Accrued liabilities (294) (599) 838
Income taxes payable (1,760) (160)
Deferred rent (567) (244) (218)
--------------- ----------- ----------
Net cash (used in) provided by operating activities (3,052) 2,486 7,243
Cash Flows From Investing Activities:
Purchases of short-term investments (21,381) (18,100)
Sales of short-term investments 7,380 27,401 22,600
Purchases of property and equipment (5,837) (6,049) (8,362)
Business acquisition (738)
--------------- ----------- ----------
Net cash provided by (used in) investing activities 1,543 (29) (4,600)
Cash Flows From Financing Activities:
Principal payments on capital lease obligations (1,327) (1,789)
Principal payments on long-term debt (2,088) (2,421)
Purchase of treasury stock (350) (900)
Grant of treasury shares 23
Short-term borrowings on bank line of credit 84,717 54,000 33,900
Payments on bank line of credit (84,717) (54,000) (33,900)
Exercise of stock options and warrants 266 167
Net proceeds from sale of common stock 28 59 84
--------------- ----------- ----------
Net cash used in financing activities (322) (3,967) (3,959)
Net Decrease in Cash and cash equivalents (1,831) (1,510) (1,316)
Cash and cash equivalents:
Beginning of year 4,841 6,351 7,667
--------------- ----------- ----------
End of year $ 3,010 $ 4,841 $ 6,351
=============== =========== ==========
Supplemental Information Cash paid during year:
Interest $ 550 $ 442 $ 614
Income taxes $ 132 $ 1,857 $ 2,083
</TABLE>
See notes to financial statements.
<PAGE>
NATURAL WONDERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Capital in Total
COMMON STOCK Excess of Retained Stockholders'
Shares Amount Par Value Earnings Equity
- ------------------------------------------------ ------------- ----------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
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
Employee stock purchase plan 8,419 28 28
Stock repurchase (90,805) (350) (350)
Net loss (8,488) (8,488)
------------- ----------- ------------- ------------ ----------------
Balance, January 29, 2000 7,869,006 $1 $33,751 $10,888 $44,640
============= =========== ============= ============ ================
</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
182 stores, primarily in mall locations, in 39 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 1999, 1998 and 1997 ended January 29, 2000, January 30, 1999,
and January 31, 1998, respectively. Fiscal 1999, 1998 and 1997 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.
Significant estimates used in the financial statements include the
estimates of (i) expected inventory markdowns, (ii) sales return reserves (iii)
impairment of long-lived assets, and (iv) realizability of deferred tax assets.
The amounts that the Company will ultimately incur or recover could differ
materially from the Company's current estimates. The underlying estimates and
facts supporting these estimates could change in 2000 or thereafter.
REVENUE RECOGNITION Revenue is recognized at the point of sale, net of estimated
sales returns.
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.
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. Inventory is recorded net of markdown
reserves and as such are management's best estimate. For fiscal year ended 1999,
the Company implemented a new policy to establish a sales return reserve as a
part of merchandise inventories.
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 10 years. Depreciation expense
totaled $7,248,000, $7,269,000 and $6,174,000 for 1999, 1998, and 1997,
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.
<PAGE>
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.
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. In 1999 the Company recorded a charge of $3,240,000
representing the impairment of certain long-lived store assets, primarily
leasehold improvements (see Note 2).
COMPREHENSIVE INCOME (LOSS) The Company's comprehensive income (loss) for 1999,
1998 and 1997 is equal to its net income (loss).
DERIVATIVE INSTRUMENTS SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as delayed by SFAS No. 137, will be effective for the
Company in fiscal 2001. SFAS No. 133 establishes 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 adoption of this new
standard to have a significant impact on its financial statements.
NOTE 2. FISCAL 1999 RESULTS OF OPERATIONS AND MANAGEMENT PLANS FOR FISCAL 2000
The Company has incurred significant operating losses and negative cash flows
from operations. In 1999 and 1998, the Company had pre-tax net losses of
$13,847,000 and $3,017,000, respectively, and in 1999 had net cash used in
operating activities of $3,052,000.
The Company has reviewed its plans to return the Company to profitability, as
well as progress on executing those plans, with its lender. Fiscal 2000 will be
the first full year of operations under new merchandising strategies implemented
by the Company during 1999. As a result of those strategies, merchandise
inventories have increased $5,498,000 from $22,707,000 at January 29, 2000 to
$28,205 000 at January 30, 2000. Management believes that the build-up of
inventory levels with new merchandise is critical to the success of its plans.
Another important component of the Company's plans addresses the profitability
of the individual stores. During the fourth quarter of 1999, the Company
completed an analysis of its portfolio of store leases. A group of unprofitable
store locations was identified for closure, and the Company is now actively
pursuing the termination or renegotiation of these lease agreements. A
long-lived asset impairment reserve was established related to these locations,
and outside resources have been retained to support this effort. Charges will be
incurred in 2000 in order to close some stores, but the amount of these charges
is expected to be less than the operating cost savings from closing these
stores.
While there can be no assurance that the implementation of the Company's plans
will enable it to return to profitability in 2000, the Company believes that its
existing cash and cash equivalents, combined with borrowings available under its
credit facility (see Note 3), will be sufficient for the Company to sustain its
operations and meet its financial obligations through the end of the next fiscal
year.
NOTE 3. BANK FINANCING AND LIQUIDITY
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
<PAGE>
three years, with a maximum credit line of $30,000,000, and is provided by the
same bank as 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 January 29, 2000, total availability under the line was
$12,284,000, with no amount 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. The agreement also includes certain
prepayment penalties.
Outstanding commercial and standby letters of credit as of January 29, 2000 and
January 30, 1999 approximated $534,000 and $892,000, respectively.
<PAGE>
NOTE 4. 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 option grants.
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, 110.8% in 1999, 118.9% in 1998 and 64.5% in 1997;
risk-free interest rates, 5.7% in 1999, 5.2% in 1998, and 6.2% in 1997; 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 1999, 1998 and 1997 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 $(8.9) million (basic: $(1.13)
per share; diluted: $(1.13) per share) in fiscal 1999, $(2.2) million (basic:
$(0.27) per share; diluted: $(0.27) per share) in fiscal 1998, and $1.2 million
(basic: $0.15 per share; diluted: $0.14 per share) in fiscal 1997.
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise
Outstanding Price
--------------- ---------------
<S> <C> <C>
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
Granted (weighted average fair value $2.21) 178,650 2.72
Canceled (124,096) 4.38
--------------- ---------------
Outstanding, January 29, 2000 (205,849 exercisable at a weighted
average price of $5.16) 1,222,341 $3.83
</TABLE>
There were 474,913 shares available for grant under the plan.
<PAGE>
The following table summarizes additional information about stock options at
January 29, 2000:
<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>
$1.09 - $3.56 172,048 9.06 2.32 37,010 $2.90
$3.63 - $3.63 750,000 8.67 3.63 - -
$3.75 - $4.50 184,609 8.34 4.14 86,889 4.09
$4.56 - $15.25 115,684 6.53 6.88 81,950 7.31
- --------------------- --------------- -------------- -------------- ------------- --------------
$1.09 - $15.25 1,222,341 8.47 $3.83 205,849 $5.16
</TABLE>
STOCK PURCHASE PLAN
The Company's employee stock purchase plan enables eligible employees to
purchase Natural Wonders' common stock at 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 29, 2000, 175,175 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 29, 2000
had purchased 334,357 shares for a total of $1,250,000.
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 the
first 5% of such employee contributions up to $2,000 per year. Total Company
contributions to the plan were approximately $132,000, $61,000, and $61,000 in
1999, 1998, and 1997, respectively.
<PAGE>
NOTE 5. INCOME TAXES
The income tax provision (benefit) consists of the following:
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(1,262) $(1,337) $1,451
State 57 87 431
------------- ---------------- -------------
(1,205) (1,250) 1,882
Deferred (4,154) 130 (1,079)
------------- ---------------- -------------
Total $(5,359) $(1,120) $803
============= ================ =============
</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
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal income
tax benefit 4.7 4.8 6.5
Non taxable interest - (1.7) (5.3)
Other - - 1.8
------------- ---------------- -------------
Effective tax rate 38.7% 37.1% 37.0%
============= ================ =============
</TABLE>
The components of the net deferred tax asset at year-end are as follows:
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------------------------------------
1999 1998
---------------------------------- ---------------------------------
-----------------------------------------------------------------------
Current Non-Current Current Non-Current
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEFERRED TAX ASSETS:
Deferred rent $1,235 $1,470
Merchandise inventories $457 $292
Accrued employee benefits 375 436
Miscellaneous accruals 256 183 587
Basis in fixed assets 3,249 1,816
Alternative minimum tax credits and other 525 375
Net operating loss carryforward 3,227
-------------- ---------------- ------------- ----------------
1,088 8,419 1,690 3,286
-------------- ---------------- ------------- ----------------
DEFERRED TAX LIABILITIES:
State taxes and other 500 712 634 201
-------------- ---------------- ------------- ----------------
Net deferred tax asset $588 $7,707 $1,056 $3,085
============== ================ ============= ================
</TABLE>
No valuation allowance has been recorded at January 29, 2000 or January 30,
1999. Management evaluated the need for such an allowance, and based on the
Company's history of earnings and projected future profitability, determined
that one was not necessary. Realization of deferred of 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. The deferred tax
<PAGE>
assets considered realizable could be reduced if estimates of future taxable
income during the carryforward periods are reduced.
At January 29, 2000, the Company has federal and state net operating loss
carryforwards of approximately $5,777,887 and $17,333,721, respectively, which
expire between 2003 and 2019.
NOTE 6. 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
----------------------------------------------------------------------------------
1999 1998 1997
------------------------ -------------------------- -----------------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
------------ ----------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 7,905 $(1.07) 8,014 $(0.24) 8,005 $0.17
Effect of dilutive stock options 195 -
------------ ----------- ------------- ------------ ----------- -----------
Diluted EPS 7,905 $(1.07) 8,014 $(0.24) 8,200 $0.17
============ =========== ============= ============ =========== ===========
</TABLE>
In 1999 and 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:
Fiscal Year
----------------------------
1997
----------------------
Options to purchase shares of common
stock 213,000
----------------------
Exercise prices $5.13 - $15.25
----------------------
Expiration dates June 2003 -
November 2007
<PAGE>
NOTE 7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office, distribution and retail facilities under
operating leases expiring at dates from 2000 to 2010. 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 noncancelable 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 and sublease income under
noncancelable operating leases in effect at January 29, 2000 are as follows:
(In thousands)
<TABLE>
<CAPTION>
Minimum Sublease
Fiscal Year rent income Total
------------- ------------ -------------
<S> <C> <C> <C>
2000 $15,166 $201 $14,965
2001 13,995 222 13,773
2002 12,156 230 11,926
2003 10,775 237 10,538
2004 6,954 80 6,874
Thereafter 19,660 - 19,660
------------- ------------ -------------
Total minimum lease commitments $78,706 $970 $77,736
============= ============ =============
</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 1999, 1998 and 1997 were as follows
(In thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum and deferred rent $ 15,248 $ 15,170 $ 13,800
Percentage rent 170 112 80
Sublease income (294) (278) (99)
---------- ---------- ----------
Total rent expense $ 15,124 $ 15,004 $ 13,781
========== ========== ==========
</TABLE>
Accumulated amortization of property under capital leases as of January 31, 1998
was $2,768,000. During 1998 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.
<PAGE>
LITIGATION
In January 1998, a lawsuit was filed against the Company alleging 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
cost of the settlement, including legal expenses and reserves, was approximately
$525,000 and was recorded in the first quarter ended May 2, 1998.
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 statements.
NOTE 8. ACQUISITION
On May 22, 1997, the company acquired 12 locations through the acquisition of
substantially all 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 9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal years 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
Fiscal Year 1999 Quarter Ended
- ---------------------------------------- -------------------------------------------------------------------------------
May 1, 1999 Jul. 31, 1999 Oct. 30, 1999 Jan. 29, 2000 (1)
------------------ ----------------- ---------------- --------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $21,552 $25,415 $23,332 $76,790
Gross margin 2,602 4,584 5,733 25,687
Net earnings (loss) (4,359) (3,959) (3,884) 3,714
Basic earnings (loss) per share $(0.55) $(0.50) $(0.49) $0.47
Diluted earnings (loss) per share $(0.55) $(0.50) $(0.49) $0.47
Fiscal Year 1998 Quarter Ended
- ---------------------------------------- -------------------------------------------------------------------------------
May 2, 1998 Aug. 1, 1998 Oct. 31, 1998 Jan. 30, 1999
------------------ ----------------- ---------------- ----------------
(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>
(1) The Company recorded a charge of $3,240,000 representing the impairment of
certain long-lived store assets in the fourth quarter of fiscal 1999.
<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 29, 2000 and January 30, 1999 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended January 29, 2000. 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
29, 2000 and January 30, 1999, and the results of its operations and its cash
flows for each of the three years in the period ended January 29, 2000 in
conformity with generally accepted accounting principles.
San Francisco, California
March 3, 2000
<PAGE>
CORPORATE INFORMATION
<TABLE>
<CAPTION>
<S> <C>
BOARD OF DIRECTORS CORPORATE OFFICERS
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
Director and Chief Executive Officer,
On-Site Dental Care, Inc.
Principal, Regent Pacific Management
Corporation William J. Soncini
Senior Vice President, Operations
Peter G. Hanelt
Chief Executive Officer, Chief Financial Denise A. Ellwood
Officer and Director, Vice President, Merchandising
Natural Wonders, Inc.
Debbie M. Wibbenmeyer
Bruce Beda Vice President, Merchandise
Chief Executive Officer Planning and Allocation
Orion Partners LLC
Michael L. Cape
Julius Jensen III Vice President, Marketing and Visual
Managing General Partner,
Copley Venture Partners Catherine S. Klein
Controller
CORPORATE HEADQUARTERS
4209 Technology Drive
Fremont, California 94538
(510) 252-9600
REGISTER AND TRANSFER AGENT
BankBoston, N.A.
c/o EquiServe
P.O. Box 8218
Boston, Massachusetts 02266-8218
(781) 575-3100
INDEPENDENT AUDITORS
Deloitte & Touche LLP
San Francisco, California
ANNUAL MEETING
The Annual Meeting of Shareholders will be
held Tuesday, May 23, 2000 at 9:00 a.m.
(PDT) at the Company's headquarters.
<PAGE>
FORM 10K
A copy of the Company's 1999
Form 10K as filed with
the SEC may be obtained
without charge by calling or
writing Investor Relations
at the Company's headquarters.
</TABLE>
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 1999 and
1998 is as follows:
1999 HIGH LOW
---- ---
First Quarter 4 5/8 3 15/16
Second Quarter 4 1/8 3 1/2
Third Quarter 4 1 1/4
Fourth Quarter 2 1 1/32
1998 HIGH LOW
---- ---
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
As of February 29, 2000, 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.
<TABLE> <S> <C>
<PAGE>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
<CASH> 3,010
<SECURITIES> 0
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<INVENTORY> 28,205
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<PP&E> 43,934
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0
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<SALES> 147,089
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<CGS> 108,483
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<INCOME-PRETAX> (13,847)
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