<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JULY 29, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-20035
NATURAL WONDERS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0141610
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4209 TECHNOLOGY DRIVE, FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
(Zip code)
510-252-9600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Common stock outstanding as of August 25, 2000: 7,848,288 shares of common
stock.
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NATURAL WONDERS, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
<S> <C>
Condensed Statements of Operations 3
Quarters ended July 29, 2000 and July 31, 1999
Condensed Balance Sheets 4
July 29, 2000, January 29, 2000 and July 31, 1999
Condensed Statements of Cash Flows 5
Six months ended July 29, 2000 and July 31, 1999
Notes to Condensed Financial Statements 6 - 7
ITEM 2. Management's Discussion and Analysis of 8 - 11
Financial Condition and Results of Operations
PART II. OTHER INFORMATION 12
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders 12
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
</TABLE>
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------------------------------------- -----------------------------------
JULY 29, JULY 31, JULY 29, JULY 31,
2000 1999 2000 1999
------------ ------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Net sales $ 25,432 $ 25,415 $ 48,705 $ 46,967
Cost of goods sold and
store occupancy expenses 21,059 20,831 40,061 39,781
------------ ------------- ------------------ -------------------
Gross margin 4,373 4,584 8,644 7,186
Selling, general & administrative expenses 9,961 10,833 20,322 20,446
------------ ------------- ------------------ -------------------
Operating loss (5,588) (6,249) (11,678) (13,260)
Interest expense (income) and other, net 211 35 363 (59)
------------ ------------- ------------------ -------------------
Loss before taxes (5,799) (6,284) (12,041) (13,201)
Income tax benefit 2,244 2,325 4,660 4,885
------------ ------------- ------------------ -------------------
Net loss $ (3,555) $ (3,959) $ (7,381) $ (8,316)
============ ============= ================== ===================
Net loss per common share
basic and diluted: $ (0.45) $ (0.50) $ (0.94) $ (1.05)
Weighted average common shares outstanding
basic and diluted: 7,848 7,928 7,854 7,940
Stores open at end of period 177 177 177 177
</TABLE>
Page 3 of 13
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NATURAL WONDERS, INC.
CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
JULY 29, JANUARY 29, JULY 31,
2000 2000 1999
------------------- ------------------- -------------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 162 $ 3,010 $ 233
Merchandise inventories 31,125 28,205 22,242
Prepaid income taxes 5,079 1,386 5,006
Prepaid expenses and other current assets 3,445 3,671 4,583
------------------- ------------------- -------------------
Total current assets 39,811 36,272 32,064
Property and Equipment:
Leasehold improvements 22,994 22,759 29,976
Furniture, fixtures and equipment 22,258 21,175 31,031
------------------- ------------------- -------------------
45,252 43,934 61,007
Less accumulated depreciation and amortization (25,696) (22,757) (34,491)
------------------- ------------------- -------------------
19,556 21,177 26,516
Other Assets 7,760 7,892 3,497
------------------- ------------------- -------------------
Total Assets $ 67,127 $ 65,341 $ 62,077
=================== =================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 13,724 $ 12,664 $ 5,362
Accrued compensation and related costs 2,196 2,300 2,275
Accrued liabilities 2,273 2,743 2,071
Short-term borrowings 8,970 0 4,219
------------------- ------------------- -------------------
Total current liabilities 27,163 17,707 13,927
Deferred Rents 2,739 2,994 3,340
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.0001; authorized
17,000,000 shares; issued and outstanding
7,848,288; 7,869,006; 7,868,703 shares 1 1 1
Capital in excess of par value 33,717 33,751 33,750
Retained earnings 3,507 10,888 11,059
------------------- ------------------- -------------------
Total stockholders' equity 37,225 44,640 44,810
------------------- ------------------- -------------------
Total Liabilities and Stockholders' Equity $ 67,127 $ 65,341 $ 62,077
=================== =================== ===================
</TABLE>
See notes to financial statements
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NATURAL WONDERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------------------------
JULY 29, 2000 JULY 31, 1999
-------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (7,382) $ (8,316)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,939 3,647
Change in operating assets and liabilities:
Merchandise inventories (2,920) 465
Prepaid expenses and other assets (3,335) (3,839)
Trade accounts payable 1,060 (3,138)
Accrued compensation and related costs (103) (25)
Accrued liabilities (470) (966)
Deferred rent (255) (222)
-------------------- ---------------------
Net cash used in operating activities (10,466) (12,394)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of short-term investments 0 7,380
Purchases of property and equipment (1,318) (3,491)
-------------------- ---------------------
Net cash (used in)/provided by investing activities (1,318) 3,889
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing on line of credit 8,970 4,219
Repurchase of treasury stock (46) (351)
Issuance of common stock under employee stock purchase program 12 29
-------------------- ---------------------
Net cash provided by financing activities 8,936 3,897
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,848) (4,608)
CASH AND CASH EQUIVALENTS:
Beginning of year 3,010 4,841
-------------------- ---------------------
End of period $ 162 $ 233
==================== =====================
CASH PAID DURING PERIOD:
Interest $ 375 $ 39
Income taxes $ 51 $ 69
</TABLE>
see notes to financial statements
Page 5 of 13
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NATURAL WONDERS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS AS OF JULY 29, 2000 AND JULY 31, 1999
AND FOR THE SIX MONTH PERIODS ENDED JULY 29, 2000 AND JULY 31, 1999
1. The financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which, in the opinion
of management, are necessary for a fair presentation of the financial
position, operating results, and cash flows for the periods presented.
The results of operations for the quarter ended July 29, 2000 are not
necessarily indicative of the results to be expected for the entire
fiscal year ending February 3, 2001. This financial information should
be read in conjunction with the audited financial statements and notes
thereto included in the Company's 1999 Annual Report to Stockholders
and Form 10-K for the fiscal year ended January 29, 2000 as filed with
the Securities and Exchange Commission.
2. The Company entered into an amended and restated credit facility
agreement with a commercial bank, effective June 15, 1999, for the
purpose of financing seasonal working capital needs. This line of
credit is for a term of three years, with a maximum credit line of
$30,000,000, and is provided by the same bank that provided the
Company's previous credit facility agreement, together with an
additional lender acting as administrative agent. The line provides for
revolving advances up to the lesser of 60% of the value of eligible
inventory, 80% of the net retail liquidation value of eligible
inventory, or the maximum credit line. As of July 29, 2000, total
availability under the line was $11,362,000, with $8,970,000
outstanding. The line includes up to $5,000,000 for the issuance of
commercial and standby letters of credit. The line of credit must be
fully repaid for a 30-day consecutive period between January 1 and
February 15 each year. The Company has the option of choosing interest
payable at a rate based on LIBOR plus 2.25% or a rate equal to the
bank's prime rate. The agreement contains restrictive covenants, which
include maintaining certain minimum tangible net worth levels and
requiring bank consent for the payment of dividends. As of January 29,
2000, the Company was not in compliance with the tangible net worth
covenant. The noncompliance was waived and the agreement was amended
with a revised covenant. At the same time, the administrative agent
assumed the commercial bank's participation. As of July 29, 2000, the
Company was in compliance with the revised tangible net worth covenant.
The agreement also includes certain prepayment penalties.
As described in Note 3 below, the $30 million credit line has been
replaced with a 3-year $50 million senior revolving credit facility
with a commercial bank.
3. On September 11, 2000, the Company successfully completed the
acquisition of World of Science, Inc. ("WOSI"). The Company purchased
all of the outstanding common stock of WOSI (4,736,105 shares) for
$1.15 per share ($5,447,000). The transaction will be accounted for
using the purchase method of accounting.
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Financing for the acquisition was provided through a recently
established 3-year $50 million senior revolving credit facility with
a commercial bank. The base interest rate is the bank's prime rate
or LIBOR plus 225 - 275 basis points. The Company also obtained a $5
million credit facility from a private lender ("Private Loan") at
the interest rate of prime plus 10.5%, with a maturity date of
December 15, 2001 and sold $1,200,000 of subordinated convertible
debentures ("Debentures") to a group of five investors (which
included the Company's chief executive officer, a director, and a
large shareholder, as well as the financial advisors of both the
Company and WOSI in the form of fee deference). The Debentures carry
a 15% interest rate, payable semi-annually, in arrears, and have a
maturity date of March 15, 2001. Both the Private Loan and the
Debentures came with detachable warrants to purchase shares of
common stock of the Company
The pro forma results of operations for the combined company set forth
below assume that the merger was consummated at the beginning of the
earliest period presented and is based on the preliminary
allocations of the purchase of the assets and liabilities acquired.
Such allocations are subject to adjustments when additional analysis
concerning assets and liabilities are finalized.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
(In thousands) July 29, 2000 January 29, 2000
------------- ---------------
<S> <C> <C>
Revenues $64,033 $208,224
Net Loss $(11,774) $(11,407)
======== ========
Shares - Basic & Diluted 7,854 7,905
EPS - Basic & Diluted $(1.50) $(1.44)
====== ======
</TABLE>
This pro forma information does not reflect any cost savings and other
synergies anticipated to be achieved by the Company as a result of the
acquisition of WOSI and is not necessarily indicative of the actual
results of the combined entities had the merger been consummated at the
beginning of the periods presented, nor is it necessarily indicative of
future results of operations.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
GENERAL
As of July 29, 2000, Natural Wonders operated 177 stores in 39 states
compared to 177 stores in 36 states as of July 31, 1999. During the first six
months of 2000, seven stores were closed (one temporary store, five permanent
stores, and one for remodeling) and two new stores opened as compared to four
new stores opened (three permanent stores and one temporary store) and seven
stores closed (three temporary stores, two permanent stores, and two for
remodeling) in the first six months of fiscal 1999.
SALES
During the second quarter of 2000, sales slightly increased 0.1% over
the same period in 1999. Comparable store sales decreased 0.7% in the second
quarter of 2000, as compared to the same period in 1999. The small negative
comparable sales change was the result of less new product flow over the last
two months of the quarter as compared to last year.
COST OF GOODS SOLD AND STORE OCCUPANCY EXPENSES
Cost of goods sold and store occupancy expenses include distribution
center costs and other expenses associated with acquiring inventory. As a
percentage of sales, these costs increased to 82.8% in the second quarter of
2000 from 82.0% in the second quarter of 1999. This increase is mainly
attributable to the cost of new store leases the Company entered into during the
last 12 months.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, (SG&A), are primarily
non-occupancy store expenses and corporate overhead. As a percentage of sales,
these costs decreased to 39.2% in the second quarter of 2000 from 42.6% in the
second quarter of 1999. This decrease is mostly due to the timing of payments
for visual & marketing programs.
OPERATING INCOME
As a result of the foregoing, the operating loss was $5,588,000 or
22.0% of sales in the second quarter of 2000 versus $6,249,000 or 24.6% of sales
in the second quarter of 1999.
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INTEREST EXPENSE (INCOME) AND OTHER, NET
Interest expense (income) and other, net increased to 0.8% of sales in
the second quarter of 2000 from 0.1% of sales in the second quarter of 1999. The
increase was due to the increased use of the bank line as well as the rise in
the interest rate in the second quarter of 2000.
NET LOSS
As a result of the foregoing, the net loss decreased to $3,555,000 or
14.0% of sales in the second quarter of 2000 from $3,959,000 or 15.6% of sales
in the second quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Seasonal working capital requirements have been met primarily through
short-term bank borrowings.
At July 29, 2000, cash and investments decreased $2,848,000 from the
prior year-end. This was primarily due to seasonal operating losses,
historically incurred in the first three fiscal quarters.
Compared to the second quarter in the prior year, cash and investments
decreased due to higher merchandise inventories. The lower inventory level in
the prior year was primarily attributable to the merchandise assortment being in
transition, which was offset in part by lower seasonal operating losses and the
purchase of less equipment.
In fiscal 2000, the Company plans to open approximately 4 new stores
and, during the holiday season, approximately 30 stores in temporary
locations (this is before the consideration of the purchase of World of
Science, Inc.). The Company anticipates that cash in 2000 will primarily be
used for capital expenditures and to purchase merchandise inventory for new
stores and temporary locations, as well as to purchase inventory for the
Company's existing stores, particularly prior to and during the peak holiday
selling season.
In fiscal 1997 the Board of Directors of the Company authorized the
repurchase of up 2,000,000 of Natural Wonders outstanding common stock. As of
July 29, 2000, the Company had repurchased 365,957 shares of Natural Wonders
common stock at a total cost of $1,297,000. The Company did not repurchase
any common stock in the second quarter and does not currently intend to
purchase any more this year.
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The Company entered into an amended and restated credit facility
agreement with a commercial bank, effective June 15, 1999, for the purpose of
financing seasonal working capital needs. This line of credit is for a term of
three years, with a maximum credit line of $30,000,000, and is provided by the
same bank that provided the Company's previous credit facility agreement,
together with an additional lender acting as administrative agent. The line
provides for revolving advances up to the lesser of 60% of the value of eligible
inventory, 80% of the net retail liquidation value of eligible inventory, or the
maximum credit line. As of July 29, 2000, total availability under the line was
$11,362,000, with $8,970,000 outstanding. The line includes up to $5,000,000 for
the issuance of commercial and standby letters of credit. The line of credit
must be fully repaid for a 30-day consecutive period between January 1 and
February 15 each year. The Company has the option of choosing interest payable
at a rate based on LIBOR plus 2.25% or a rate equal to the bank's prime rate.
The agreement contains restrictive covenants, which include maintaining certain
minimum tangible net worth levels and requiring bank consent for the payment of
dividends. As of January 29, 2000, the Company was not in compliance with the
tangible net worth covenant. The noncompliance was waived and the agreement was
amended with a revised covenant. At the same time, the administrative agent
assumed the commercial bank's participation. As of July 29, 2000, the Company
was in compliance with the revised tangible net worth covenant. The agreement
also includes certain prepayment penalties.
As described below under "Subsequent Events", the $30,000,000 line of
credit was terminated and replaced by a senior revolving credit facility with a
new commercial bank.
SUBSEQUENT EVENTS
On September 11, 2000, the Company successfully completed the
acquisition of World of Science, Inc. ("WOSI"). The Company purchased all of the
outstanding common stock of WOSI (4,736,105 shares) for $1.15 per share
($5,447,000). The transaction will be accounted for using the purchase method of
accounting.
Financing for the acquisition was provided through a recently
established 3-year $50 million senior revolving credit facility with a
commercial bank. The base interest rate is the bank's prime rate or LIBOR plus
225 - 275 basis points. The Company also obtained a $5 million credit facility
from a private lender ("Private Loan") at the interest rate of prime plus 10.5%,
with a maturity date of December 15, 2001 and sold $1,200,000 of subordinated
convertible debentures ("Debentures") to a group of five investors (which
included the Company's chief executive officer, a director, and a large
shareholder, as well as the financial advisors of both the Company and WOSI in
the form of fee deference). The Debentures carry a 15% interest rate, payable
semi-annually, in arrears, and have a maturity date of March 15, 2002. Both the
Private Loan and the Debentures came with detachable warrants to purchase shares
of common stock of the Company. The private lender received warrants to acquire
100,000 shares at $1.50 per share and the Debenture investors received warrants
to acquire 180,000 shares at $1.48 per share.
The Company believes that current cash together with its funds
available under its credit facilities will be sufficient to fund the Company's
operations for the next 12 months.
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INFLATION AND SEASONALITY
The Company does not believe that its operations have been materially
affected by inflation during recent years. However, there is no assurance that
its business will not be affected by inflation in the future.
The Company's business is subject to substantial seasonal variations in
demand. Historically, a significant portion of the Company's sales and
substantially all of its net earnings have been realized during the fourth
quarter (which includes the November/December holiday season), and levels of
sales and net earnings have been significantly lower in the first three
quarters, usually resulting in losses in these quarters. If for any reason the
Company's sales were substantially below seasonal norms during the months of
November and December, as was the case in 1998, the Company's annual results
would be adversely affected. The Company's quarterly results of operations may
fluctuate significantly as a result of comparable store sales levels, the timing
of new store openings and the amount of revenue contributed by new stores.
FUTURE RESULTS
This report contains forward-looking statements regarding, among
other matters, the Company's future strategy, store opening and closing plans,
availability of financing and cash flows, as well as merchandising strategy and
growth plans. The forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements address matters which are subject to a number of
risks and uncertainties. In addition to the general risks associated with the
operation of specialty retail stores in a highly competitive environment, the
success of the Company will depend on a variety of factors. 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.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 23, 2000
at its principal offices in Fremont, California. Of the shares outstanding as of
the record date, 6,285,818 shares were present at the meeting or represented by
proxies, representing approximately 80.1% of the total votes eligible to be
cast.
At the meeting the stockholders voted to elect two Class I directors,
each to serve a three-year term and until his successor is duly elected and
qualified. The names of the Class I directors elected at the Annual Meeting and
the votes cast are set forth below.
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Bruce Beda 5,893,851 391,967
Ronald S. Staffieri 5,893,851 391,967
</TABLE>
The following Class III director continued to hold office:
Pearson C. Cummin III
The following Class II directors continued to hold office:
Peter G. Hanelt, Julius Jensen III
The Company's stockholders also voted to approve the following:
- To ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending February
3, 2001. There were 6,275,842 affirmative votes, 5,600 negative
votes, and 4,376 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 11.1: Computation of Per Share Loss
Exhibit 27: Financial Data Schedule
B. REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on August 14, 2000,
which included a copy of a press release dated August 4, 2000,
announcing the signing of a definitive merger agreement with
World of Science, Inc. pursuant to which Natural Wonders would
purchase all of the issued and outstanding shares of common
stock of World of Science, Inc. for $1.15 per share.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 18, 2000
NATURAL WONDERS, INC.
(Registrant)
/s/ Peter G. Hanelt
--------------------------------------
Peter G. Hanelt,
Chief Executive Officer
President
Chief Financial Officer
(Signing on behalf of the registrant and
as Principal Accounting and Financial Officer)
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