UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended February 1, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period ____________to____________
Commission File Number 0-25002
WHAT A WORLD!, INC.
(Name of small business issuer as specified in its charter)
Delaware 59-3200879
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10901-B Roosevelt Boulevard, Suite 100
St. Petersburg, Florida 33716
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (813) 577-9366
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class Registered: Common Stock, par value $.01:
Redeemable Warrants, each to purchase
one share of Common Stock
Check whether the issuer (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
Issuer's revenues for its most recent fiscal year: $8,166,755
The aggregate market value of the voting stock held by
non-affiliates of the Registrant
(based on the last reported sale price of the stock as of May 15, 1997)
was approximately $119,751
The number of shares outstanding of the registrant's Common Stock,
par value $.01 per share, as of May 15, 1997 was 2,118,125
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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WHAT A WORLD!, INC.
ANNUAL REPORT ON FORM 10-KSB
for the
FISCAL YEAR ENDED FEBRUARY 1, 1997
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTIES 14
ITEM 3. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS TO A SPECIAL MEETING OF SECURITY
HOLDERS 15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17
ITEM 7. FINANCIAL STATEMENTS 20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT 20
ITEM 10. EXECUTIVE COMPENSATION 22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 24
MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 25
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K 26
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Part I.
Item 1. DESCRIPTION OF BUSINESS
Proposed Sale to Natural Wonders, Inc.
Summary
In March 1997, What A World!, Inc. (the "Company" or "WAW") entered into an
agreement (the "Sale Agreement") to sell substantially all the Company's
operating assets (the "Sale") to Natural Wonders, Inc. (the "Buyer" or "Natural
Wonders"). Pursuant to the terms of the Sale Agreement, the Buyer has agreed to
pay $500,000 in cash, subject to adjustment, and to assume certain liabilities
of the Company relating to the assets and business to be transferred. For a more
particular description of the Sale Agreement and the assets and liabilities to
be transferred to, and assumed by, the Buyer and to be retained by the Company,
see "The Sale Agreement".
Consummation of the Sale is subject to the satisfaction of a number of
conditions, including obtaining the approval of the stockholders of the Company.
A Special Meeting of Stockholders of the Company has been scheduled for May 22,
1997.
CONDUCT OF BUSINESS AFTER THE SALE; USE OF PROCEEDS
Consummation of the proposed Sale will terminate the Company's unique
specialty retail business, selling nature and science products. After payment of
the Company's accounts payable, the Company will have no operating business. The
Company intends to look for acquisition candidates for a new business for the
Company. See "Business Plan for Post Sale WAW".
The Board will explore any opportunities which arise in the future which it
believes are in the best interests of the Company's stockholders. Such
opportunities include selling the stock of the Company to raise capital to make
an acquisition or to merge with a privately-held company. Any such acquisition
would depend on the availability of attractive acquisition candidates and the
Company's ability to finance any such acquisition. The Company has not
identified any acquisition candidates or the availability of financing
arrangements and there can be no assurance that any acquisition will be
accomplished.
The Company plans to use the cash proceeds from the Sale to repay its debt,
fund transactional expenses and pay ongoing general and administrative costs,
which are anticipated to be minimal. The Company may use the remainder of the
net proceeds, if any, for general corporate purposes and to seek acquisition
candidates, as yet unidentified.
The Company agreed that, during the term of the Management Agreement (as
hereafter defined), it shall maintain its corporate office and distribution
center and shall provide the services of two employees of the Company to
dedicate a substantial portion of their business time and attention to providing
services by the Company required thereunder. Thereafter, the Company will either
continue in or close such facility depending upon its business requirements.
In order to carry out the Sale Transaction, the Buyer will be licensed to
use the name of the Company for a limited period.
The Sale Agreement
General. Pursuant to the terms of the Sale Agreement, in consideration of
the transfer to the Buyer of substantially all of the operating assets of the
Company ("Assets"), comprised of specified inventories, fixed assets and
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tangible personal property, intangible personal property and contract rights,
including store leases, other than certain excluded assets, the Buyer has agreed
to pay to the Company $500,000 in cash (the "Purchase Price"), subject to
adjustment, and to assume certain liabilities of the Company. The liabilities to
be assumed by the Buyer ("Assumed Liabilities") include certain minimum future
rental payments under the store leases, estimated by the Company to be
approximately $7,863,000, as well as certain other liabilities, including common
area maintenance charges and other obligations thereunder.
The Purchase Price (subject to adjustment as described below) is payable in
cash at the Closing (as hereinafter defined). On March 7, 1997, the sum of
$500,000 was deposited by Buyer into escrow with Baker & McKenzie, the Buyer's
legal advisors, pursuant to the terms of an escrow agreement dated as of March
7, 1997, among the Company, the Buyer and Baker & McKenzie (the "Escrow
Agreement").
The Purchase Price is subject to adjustment as follows: the Buyer has
undertaken a physical inventory of certain of the Company's locations on or
about March 8, 1997 (the "Buyer's Inventory"). The Buyer's Inventory shall be
compared to the Company's perpetual inventory records for the select inventories
dated as of March 8, 1997, as adjusted for differences from its physical
inventory as of February 1, 1997. In the event that the Buyer's Inventory (as
extrapolated over all of the Company's inventory maintained at all locations) is
less than $700,000 (the "Minimum Inventory Amount"), any such difference shall
be subtracted at the Closing from the Purchase Price. Based on the preliminary
results of the Buyer's inventory, the Company believes that no such adjustment
will be required.
Pursuant to the Sale Agreement, the Buyer will pay at Closing an additional
amount, of up to $25,000, to the Company equal to one-quarter of the value of
all good and saleable current inventory of the Company (exclusive of all goods
which are defined by the Company as permanent markdowns [approximately $80,000
in goods] which goods the Buyer shall receive at no charge) in excess of the
Minimum Inventory Amount. In addition, the Buyer shall reimburse the Company for
(i) all prepaid expenses and deposits (including rent deposits for store leases)
assigned to the Buyer and all cash on hand at each of the Company's retail store
locations ("Leased Properties") as of the close of business on March 9, 1997.
The closing of the Sale (the "Closing") is scheduled to occur on the first
business day following the approval of the Sale by the Company's stockholders at
the Meeting, or at such other place as the Buyer and the Company may agree (the
"Closing Date"). The obligations of the parties to consummate the Sale are
subject to certain customary conditions such as the accuracy of representations
and warranties in the Sale Agreement, to the performance of the covenants set
forth therein and to the absence of certain legal actions or proceedings. David
B. Cornstein, the Chairman of the Board of the Company, David F. Miller, the
President and Secretary of the Company and Edward J. Munley, the former
President of the Company, who collectively hold an aggregate of 54.3% of the
Common Stock, have irrevocably agreed to vote in favor of the Proposal relating
to the Sale.
Assets and Liabilities to be Transferred. The Assets to be transferred to
the Buyer include all good and saleable current inventory of the Company (which
has a value of at least $700,000), fixed assets and tangible personal property
located at the Leased Properties and the Company's warehouse (including store
fixtures, furniture, lighting fixtures, and all store supplies), intangible
personal property (including deposits and prepaid expenses, vendor lists,
customer lists, customer files, customer records, licenses and permits
susceptible of transfer under regulatory agency rules) and contract rights
relating to the operation and maintenance of the Leased Properties. Excluded
assets include, among other assets, cash, a certificate of deposit, a portion of
the Company's inventory and other miscellaneous property including its corporate
office and distribution center. See "Properties."
Assumed Liabilities include obligations of the Company under its store
leases (the "store leases"). The Buyer is assuming all liabilities under the
store leases arising on or after the Closing Date, regardless of whether the
Company is able to obtain the requisite consent to assignment of any one or more
of the store leases. To the extent consent to assignment of a store lease cannot
be obtained, the Company and the Buyer shall enter into such alternative
arrangements and agreements as may be appropriate to effectuate the intent of
the parties with respect to the store leases.
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Pursuant to the Sale Agreement, the Company has agreed to permit the Buyer
to have full access and rights to the continued use of the computer and store
register equipment ("Leased Register Equipment") presently leased by the Company
(at a cost to the Company of approximately $7,000 per month in lease payments)
for a period not to exceed one year from the Closing Date, although the Buyer
has agreed to use its best efforts to discontinue the use of the Leased Register
Equipment as quickly as possible after Closing. Furthermore, in the event the
Company discontinues the use of its current corporate offices which house
certain components of the Leased Register Equipment, the Buyer shall undertake
to obtain and pay for a suitable facility for such equipment for the period
during which it requires the use thereof. The Buyer has agreed to pay all
maintenance costs related to the Leased Register Equipment, excluding the
underlying lease payments which shall remain solely an obligation of the
Company.
Liabilities not assumed by the Buyer include, among other liabilities,
accounts payable, accrued prior to (but unpaid as of) March 10, 1997, expenses,
long term debt, computer equipment lease, certain severance obligations and
other minor liabilities.
Representations and Warranties. The Sale Agreement contains various
representations and warranties of the Company including, among others,
representations and warranties related to organization and similar corporate
matters; authorization, performance, enforceability and related matters;
requisite consents; the accuracy of financial statements and other financial
information provided to the Buyer; undisclosed liabilities; taxes; litigation;
ownership, condition and title to assets and properties; inventories; personal
property; contracts; real property; warranties and guarantees; personnel;
employee benefit plans; absence of certain changes; compliance with applicable
laws and environmental matters; licenses and permits; insurance; absence of
brokers; employee and labor relations; corporate names and proprietary rights;
and the disclosure in the Sale Agreement regarding representations and
warranties of the Company.
The Sale Agreement contains various representations and warranties of the
Buyer including, among others, representations and warranties related to
organization and similar corporate matters; authorization, performance,
enforceability and related matters; requisite consents; and absence of brokers.
The representations and warranties survive the Closing for a period of two
years from the Closing Date or until expiration of the applicable statutes of
limitations in respect of tax matters and litigation. With respect to the
Buyer's assumption of the liabilities, such obligation shall survive for so long
as there remain outstanding obligations under any of the assumed liabilities.
Covenants. Pursuant to the Sale Agreement, the Company has agreed, among
other things, that the Company (i) shall in good faith proceed to take all
actions within its power necessary to satisfy all conditions to its obligations
to consummate the transactions contemplated by the Sale Agreement; (ii) after
the Closing Date will conduct no business which competes with the business of
the Buyer; (iii) before the Closing Date will reimburse Buyer for the full
amount of gift certificates redeemed at any Leased Properties and, after the
Closing, will reimburse the Buyer for 50% of the face value of all gift
certificates redeemed; and (iv) after the Closing Date, to continue to make all
lease payments in connection with leased register equipment for a period not to
exceed twelve months.
Pursuant to the Sale Agreement, the Buyer has agreed that it shall in good
faith proceed to take or cause to be taken all actions within its power
necessary to satisfy all conditions to its obligations to consummate the
transactions contemplated by the Sale Agreement and to pay and perform all of
its obligations under the Assumed Liabilities.
Indemnification. The Company has agreed to indemnify the Buyer from and
against damages arising out of or based upon (i) the breach by the Company of
any representation or warranty made by the Company pursuant to the Sale
Agreement; (ii) the non-performance of any covenant made by it pursuant to the
Sale Agreement; (iii) any activities of the Company prior to the Closing; (iv)
liabilities under any employee benefit plans of the Company; (v) any claims for
brokers' fees; (vi) any liabilities arising from the failure to comply with
applicable bulk transfer laws; and (vii) any other liabilities of the Company
not assumed by the Buyer.
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The Buyer has agreed to indemnify the Company from and against any damages
which arise out of or are based upon (i) the breach by the Buyer of any
representation or warranty made by the Buyer pursuant to the Sale Agreement;
(ii) any claims for brokers' fees; (iii) the non-performance of any covenant
made by it pursuant to the Sale Agreement; or (iv) the failure to satisfy any of
the Assumed Liabilities.
Pursuant to the Sale Agreement, neither party shall be obligated to
indemnify the other thereunder unless and until the aggregate amount of the
other party's damages exceeds $10,000.
Opinion of Counsel. Buyer has agreed to furnish at the Closing an opinion
of Zimet, Haines, Friedman and Kaplan, its legal counsel, with respect to the
enforceability of the Sale Agreement, its execution, delivery of the principal
documents of the Sale transaction and certain other matters.
Expenses. Each party agreed to absorb its own expenses in respect of the
Sale transaction, except that the Buyer agreed to reimburse the Company for up
to $100,000 of reasonable, documented legal costs and expenses.
Termination. The Sale Agreement may be terminated (i) by mutual written
consent of the Company and the Buyer, (ii) by the Buyer if on the Closing Date
the conditions to obligations of the Buyer to close shall not have been met by
the Company or waived by the Buyer or if the Closing does not occur on or before
May 31, 1997 (the "Final Closing Date"), and (iii) by the Company if the
conditions to the obligations of the Company to close shall not have been met by
the Buyer or waived by the Company.
Closing Penalty. The Sale Agreement provides that if the Closing does not
occur by April 15, 1997, for any reason other than the fault of the Buyer, the
Company shall pay to the Buyer on a weekly basis, commencing on April 18, 1997,
the sum of $1,000 per day for the period April 16, 1997, through the Final
Closing Date.
The Management Agreement
Simultaneously with the execution of the Sale Agreement and in order to
implement immediately the benefits of the Sale (and to reduce losses by the
Company), the Buyer and the Company entered into a management agreement (the
"Management Agreement"), pursuant to which the Company engaged the Buyer to
operate the Company's specialty gift retail business (the "Business") consistent
with the past practice of the Buyer.
The Buyer agreed to fund certain costs, expenses and liabilities which
relate to the operation of the Business at the Leased Properties (excluding
corporate overhead costs, expenses and liabilities associated with the operation
of the Company's corporate office and distribution center) during the term
thereof (the "Operating Expenses"), it being agreed by the parties that the
Buyer shall not be responsible for any costs, expenses and liabilities which
relate to the operation of the Business by the Company prior to March 10, 1997.
The Buyer agreed, as needed and on a continuing basis during the term thereof,
to procure requisite inventories and provide managerial advice, direction and
services to the Company's store and corporate office personnel. Inventories
shall, unless otherwise agreed by the parties, be supplied to the Company on a
C.O.D. basis, provided the Buyer provides the cash in payment therefor at or
before the time payment is due, or on a consignment basis.
The parties agreed that the Buyer shall be entitled to a fee (the
"Management Fee") equal to all gross operating revenues recognized and/or
received ("Operating Revenues") in respect of the operation of the Business from
and after March 10, 1997, through the date of termination of the Management
Agreement.
The Buyer agreed to open a bank account for the purpose of receiving (i)
cash generated from operations during the term of the Management Agreement and
(ii) to the extent that Operating Revenues exceed Operating Expenses, the
Management Fee. The Company agreed, on a weekly basis, during the term thereof,
to provide to the Buyer information regarding Operating Expenses to be paid
during the then-current week ("Weekly Reports") and the Buyer is required,
within two days after receipt of each Weekly Report, to wire transfer to the
Company such amounts as would enable the Company to make such Operating Expense
payments, it being agreed that any cash from credit card sales during the term
thereof shall be retained by the Company hereunder and shall be applied by the
Company
<PAGE>
against Operating Expense payments (and the Weekly Reports shall include
information regarding the amount of such credit card receipts in the prior
week).
The Buyer acknowledged that no rights in or to any of the trademarks, trade
names or labels ("Trademarks") of the Company of any kind shall accrue to it by
virtue of the performance of the activities contemplated thereby; provided,
however, that during the term of the Management Agreement, the Buyer shall have
a royalty-free license to use the Trademarks in respect of operation of the
Business at the Leased Properties.
The Company agreed that, during the term of the Management Agreement, it
shall maintain its corporate office and distribution center and shall provide
the services of two employees of the Company to dedicate a substantial portion
of their business time and attention to providing services by the Company
required thereunder.
The Management Agreement was effective as of March 10, 1997, and shall
terminate upon the earlier of the Closing Date or the Final Closing Date.
Subject to the terms of the Management Agreement, in the event the Closing
does not occur by May 31, 1997 due to the failure of the Company to satisfy the
closing conditions set forth in the Sale Agreement by such date, (a) the Buyer
shall be entitled to retain its fee thereunder relating to the period ending on
the date of termination; (b) the Company shall reimburse the Buyer to the extent
of the excess, if any, of Operating Expenses funded by the Buyer thereunder
above Operating Revenues during the term of the Management Agreement; and (c) to
the extent not covered above, the Company shall reimburse the Buyer for its
reasonable, documented out-of-pocket expenses, including without limitation
legal, accounting and other advisory fees and expenses, salaries (up to a
maximum of $25,000 in aggregate salaries) and travel costs, related to the
transactions contemplated by the Sale Agreement and the Management Agreement
(excluding executive salaries and, except for reimbursable salaries referred to
above, corporate office overhead). The Company shall have no obligation to (i)
pay for inventory purchased or committed to purchase by the Buyer or (ii)
reimburse the Buyer for any expenses not constituting Operating Expenses. In
addition, if the Closing does not occur, the Buyer shall ensure that the Company
has on hand, in the Leased Properties, inventories of current, saleable
merchandise in an aggregate amount of at least $700,000. The Company shall have
no obligation to pay the Buyer for inventories in excess of $700,000 in the
event the Closing does not occur. The Buyer shall incur no capital expenditures
without the Company's consent.
The Company agreed to continue to keep in force and effect during the term
of the Management Agreement all insurance theretofore maintained by the Company
involving the operation of the Business, subject to the obligation of the Buyer
to provide funds thereunder for the payment of premiums on all such insurance
constituting Operating Expenses.
The Company agreed to indemnify and hold harmless the Buyer, and its
officers, directors and employees, from and against any and all damages which
arise out of or are based upon the operation of the Business during the term of
the Management Agreement unless such damages resulted from the Buyer's gross
negligence or willful misconduct.
The Buyer agreed to indemnify and hold harmless the Company, and its
officers, directors and employees, from and against any and all damages which
arise out of or are based upon the Buyer's gross negligence or willful
misconduct.
The Non-Competition Agreement
By a non-competition undertaking to be entered into at or about the time of
the Closing of the Sale, Messrs. Cornstein and Miller will agree not to compete
with the existing retail market category of the Company for a period of two
years from the Closing Date.
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BUSINESS PLAN FOR POST-SALE WAW
INTRODUCTION
The Company will be transformed to serve as a vehicle to effect
acquisitions, whether by merger, exchange of capital stock, acquisition of
assets or other similar business combination (a "Business Combination"), with an
operating business (an "Acquired Business"). The business objective of the
transformed Company (hereinafter, "Post-Sale WAW") will be to effect a Business
Combination with an Acquired Business which Post-Sale WAW believes has
significant growth potential. Post-Sale WAW intends to seek to utilize cash,
equity, debt or a combination thereof in effecting a Business Combination. While
Post-Sale WAW may, under certain circumstances, explore possible Business
Combinations with more than one prospective Acquired Business, in all
likelihood, until other financing provides additional funds, or its stature
matures, Post-Sale WAW may be able to effect only a single Business Combination
in accordance with its business objective, although there can be no assurance
that any such transaction will be effected.
TRANSITION ACTIVITIES
At the closing of the Sale, substantially all of the operating assets of
the Company will be sold to Natural Wonders. In the interim, the Company has
engaged Natural Wonders to operate the Business. In transition, certain current
staff of the Company will be employed to invoice and collect funds, pay trade
creditors and perform other services. Post-Sale WAW will thereafter own accounts
receivable, cash, furniture and equipment at its corporate office/distribution
center and miscellaneous assets; and will have certain liabilities and ongoing
requirements to meet regulatory and stockholder obligations while the business
plan is being implemented. During the transition period, Post-Sale WAW will
evaluate its remaining assets with the objective of maximizing their value. This
may result in a liquidation of the Company or some or substantially all of its
assets.
INITIAL TRANSACTIONS
No agreements, commitments or understandings have been made with any
Acquired Business candidates. No assurances can be made that future discussions
will result in definitive agreements, although it is the Company's intention to
proceed diligently with Post-Sale WAW's business plan.
FUNDING OF THE BUSINESS PLAN
In view of the limited tangible net worth of Post-Sale WAW following the
sale of the assets, consideration may be given to additional private equity or
debt placement to fund its merger and acquisition activities as well as to fund
working capital for general corporate purposes that might be required to
effectuate the business plan.
It is anticipated that, in the event a Business Combination is effected,
Post-Sale WAW would use cash, equity, debt or a combination of these to achieve
a Business Combination.
Post-Sale WAW may borrow funds to increase the amount of capital available
for a Business Combination or otherwise finance the operation of the Acquired
Business. The amount and nature of any borrowings by Post-Sale WAW will depend
on numerous considerations including its capital requirements, its perceived
ability to service such debt and prevailing conditions in the financial markets
and the general economy.
CERTAIN FACTORS
Additional Financing Required. The funds available to Post-Sale WAW may not
be adequate for it to acquire an interest in any chosen property, business, or
opportunity. Without raising additional funds, Post-Sale WAW may not have
sufficient capital to fully exploit any property, business or opportunity
acquired. Accordingly, the ultimate success of Post-Sale WAW may depend upon its
ability to raise additional capital or to have other parties bear a portion of
the required costs to further develop or exploit any business venture in which
Post-Sale
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WAW becomes involved. There is no assurance that funds will be
available from any source, and if not available, it will be necessary for
Post-Sale WAW to limit its operations to those that can be financed from the
existing assets.
Limited Assets. The Company's only assets after the Sale will be cash and
minor furniture, equipment and its corporate office and distribution center and
any remainder of net proceeds of the Sale will be used for general corporate
purposes and to seek acquisition candidates. Any business activity that
Post-Sale WAW eventually undertakes may require substantial capital, which may
be difficult to obtain or not available in light of the Company's pro forma
financial condition. The success of Post-Sale WAW will depend upon its ability
to acquire additional capital. Since the Company does not know the type of
business, if any, in which it will eventually engage, the Company does not know
what its ultimate capital needs will be.
Lack of Liquidity. Immediately following the closing of the Sale, the
Company will have no business to generate income. The Company's ongoing ability
to meet its general and administrative cost obligations will be dependent on its
ability to complete successfully a business combination with an entity having
sufficient cash flow to meet the Company's obligations.
No Operating History. The Company will change the nature of its business if
the Sale is approved and consummated. Post-Sale WAW has no operating history in
its new line of businesses, which is yet to be determined. There can be no
assurance that Post-Sale WAW's activities will be profitable. As of the date of
this Form 10-KSB, the Company has not entered into any arrangement to
participate in any business ventures or purchase any products.
Speculative Nature of Company's Proposed Operations. The success of
Post-Sale WAW will depend to a great extent on the operations, financial
condition and management of the Company or companies, if any, with which
Post-Sale WAW may merge or which it may acquire. Management intends to cause
Post-Sale WAW to merge into or acquire one or more privately held entities with
established operating histories. However, there can be no assurance that
Post-Sale WAW will be successful in locating an acquisition candidate meeting
such criterion. In the event Post-Sale WAW completes a merger or acquisition
transaction, the success of its operations may be dependent, wholly or partly,
upon management of the successor firm and numerous other factors beyond
Post-Sale WAW's control. Post-Sale WAW anticipates that it will seek to acquire
an existing business. After the acquisition has taken place, management from the
acquired entity may operate Post-Sale WAW. There is, however, a possibility that
Post-Sale WAW may seek to operate an ongoing business, in which case Post-Sale
WAW's management might be retained.
Change of Control. The consummation of a Business Combination may involve a
change in officers and directors of Post-Sale WAW.
Dilution in Merger or Acquisition Transaction. In order to merge with or
acquire a private concern, Post-Sale WAW may issue securities to the
stockholders of any such target concern. The issuance of previously authorized
and unissued Common Stock of Post-Sale WAW or the creation and issuance of
preferred stock would result in substantial dilution to present stockholders of
the Company, which may result in another change in control or management of
Post-Sale WAW.
Management Commitment. The management of Post-Sale WAW will serve at will
and may seek other opportunities at any time. The loss of part or of the
entirety of its management could have a material adverse impact on the viability
of Post-Sale WAW.
Dependence on Inexperienced Management. The success of Post-Sale WAW will
be dependent largely upon the active participation of its management. In the
event such management lacks experience or background in the business in which
Post-Sale WAW proposes to engage, it will probably be required to obtain
independent outside professionals to effectively evaluate and appraise a
potential business combination. Certain of the post-Sale directors have other
full time employment and will be available to participate in management
decisions only on a part time or as needed basis. Once Post-Sale WAW acquires a
business opportunity, the post-Sale management may
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resign. The amount of time the post-Sale officers and directors devote to
Post-Sale WAW matters will increase if Post-Sale WAW operates an active
business. The time which the post-Sale officers and directors devote to the
business affairs of Post-Sale WAW and the skill with which they discharge their
responsibilities, will substantially affect Post-Sale WAW's success.
Business Risks. The Company has not identified the business opportunities
in which it will attempt to obtain an interest. The Company therefore cannot
describe the specific risks presented by such business. Such business may
involve an unproven product, technology or marketing strategy, the ultimate
success of which cannot be assured. The acquired business opportunity may be in
competition with larger, more established firms over which it will have no
competitive advantage. The specific risks of a business opportunity will be
disclosed to Post-Sale WAW's stockholders prior to its acquisition, and approval
therefor will be obtained. Post-Sale WAW's investment in a business opportunity
may be highly illiquid and could result in a total loss to Post-Sale WAW if the
opportunity is unsuccessful.
Conflicts of Interest. Certain of the directors and officers of Post-Sale
WAW will be associated with other firms or occupations involving other business
activities. Because of the affiliations, there are potential inherent conflicts
of interest in their acting as directors and officers of Post-Sale WAW and of
other entities. All of the Company's post-Sale directors and officers may be
directors or controlling stockholders of other entities engaged in a variety of
businesses which may in the future have various transactions with Post-Sale WAW.
Additional conflicts of interest and non-arm's length transactions may also
arise in the future in the event the Company's post-Sale officers or directors
are involved in the management of any firms with which Post-Sale WAW transacts
business. Post-Sale WAW may pay finder's fees or other fees to its post-Sale
officers, directors or affiliates in connection with any potential business
combination involving Post-Sale WAW.
Dependence on Outside Advisors. In order to supplement the business
experience of post-Sale management, Post-Sale WAW may employ accountants,
technical experts, appraisers, attorneys or other consultants or advisors. The
selection of any such advisors will be made by post-Sale management and without
any control from stockholders. Additionally, it is anticipated that such persons
may be engaged by Post-Sale WAW on an independent basis without a continuing
fiduciary or other obligation to Post-Sale WAW.
No Dividends Anticipated. At the present time management does not
anticipate that Post-Sale WAW will pay dividends, cash or otherwise, on its
Common Stock in the foreseeable future. Future dividends will depend on
earnings, if any, of Post-Sale WAW, its financial requirements and other
factors.
Scarcity of and Competition for Merger or Acquisition Prospects. Post-Sale
WAW will be an insignificant participant in the business of seeking mergers with
and acquisitions of small private entities. In addition, Post-Sale WAW will have
very limited assets to support an acquisition. A large number of established and
well financed entities, including venture capital firms, are active in mergers
and acquisitions of private companies which may be desirable target candidates
for Post-Sale WAW. Nearly all such entities have significantly greater financial
resources, technical expertise and managerial capabilities than Post-Sale WAW,
and consequently, Post-Sale WAW will be at a competitive disadvantage in
identifying possible merger or acquisition candidates.
No Agreement for Business Combination or Other Transaction. The Company has
no arrangement, agreement or understanding with respect to a merger with, or
acquisition of, any entity, private or public. There can be no assurance
Post-Sale WAW will be successful in identifying and evaluating suitable merger
or acquisition candidates and in concluding a merger or acquisition transaction
on terms favorable to the Company; or, if concluded, whether any such
transaction will result in a financial return to its stockholders.
Lack of Market Research. The Company has neither conducted nor has it
engaged other entities to conduct market research to determine that demand
exists for any transactions contemplated by Post-Sale WAW or for the business
activity in which a potential acquisition candidate engages. Even in the event
demand is identified for the business of an acquisition candidate, there is no
assurance Post-Sale WAW will be successful in completing any such transaction.
<PAGE>
Possible Lack of Diversification. Post-Sale WAW may be unable to diversify
its business activities and, as a consequence, may suffer a total loss to
Post-Sale WAW and the stockholders should an acquisition by Post-Sale WAW prove
to be unprofitable. Post-Sale WAW's failure or inability to diversify its
activities into a number of areas may subject Post-Sale WAW to economic
fluctuations within a particular business or industry and, therefore, increase
the risks associated with Post-Sale WAW's operations.
Issuance of Additional Shares. Approximately 7,300,000 shares of stock or
73% of the total authorized shares (10,000,000) of Common Stock of the Company,
less the number of shares underlying outstanding options and warrants, have not
yet been issued and thus are available for sale. The Board of Directors has the
power to issue such shares. Post-Sale WAW may issue shares of Common Stock to
raise additional capital or to effect a merger or acquisition with a target
corporation. Stockholders do not have preemptive rights with respect to the
issuance of shares of the Company's Common Stock. Any additional issuance by
Post-Sale WAW from its authorized but unissued shares would have the effect of
further reducing the percentage ownership of the Stockholders.
Regulation. Although Post-Sale WAW will be subject to regulation under the
Securities Act of 1933 and the Securities Exchange Act of 1934, management
believes Post-Sale WAW will not be subject to regulation under the Investment
Company Act of 1940 insofar as Post-Sale WAW will not be engaged in the business
of investing or trading in securities. In the event Post-Sale WAW engages in
business combinations which result in Post-Sale WAW holding passive investment
interests in a number of entities, Post-Sale WAW could be subject to regulation
under the Investment Company Act of 1940. In such event, Post-Sale WAW would be
required to register as an investment company and could be expected to incur
significant registration and compliance costs. Management has obtained no formal
determination from the Securities and Exchange Commission as to the status of
Post-Sale WAW under the Investment Company Act of 1940 and, consequently, any
violation of such Act would subject Post-Sale WAW to material adverse
consequences.
Probable Change in Control and Management. Mergers or acquisitions
involving the issuance of Post-Sale WAW's Common Stock may result in
stockholders of a target company obtaining a controlling interest in Post-Sale
WAW. The resulting change in control of Post-Sale WAW could result in removal of
the post-Sale officers and directors and a corresponding reduction in their
participation in the future affairs of Post-Sale WAW.
DESCRIPTION OF PAST BUSINESS
General
The Company was a mall-based specialty unique gift retailer. The Company's
assortment of products generally targeted customers who had an active interest
in nature, education, the outdoors and science. The merchandise offered by the
Company included home products, outdoor and garden merchandise, recorded nature
music, videotapes, statuary, telescopes, books, games and puzzles and apparel.
The Company believed that its customers were generally middle or upper-middle
income adults, ages 25 to 54, who may have been purchasing for themselves or
others.
The Company was incorporated in Delaware in July 1993, opened its first
store in August 1993 and until March 9, 1997, operated twelve stores, which were
located in major regional malls in Florida (Tampa, Clearwater, Tallahassee,
Bradenton, Jacksonville, Ocala, Jensen Beach, Miami (two) and Orlando), New York
(Staten Island) and New Jersey (Eatontown). In addition, the Company operated
thirteen temporary holiday outlets (the "temporary stores") in Florida, Georgia
and South Carolina during the 1996 Christmas selling season.
In November 1994, the Company completed its initial public offering (the
"Offering") whereby 1,000,000 shares of Common Stock and 1,150,000 Redeemable
Warrants were sold. Concurrent with the consummation of the Offering, the
Company changed its fiscal year end from December 31 to the Saturday closest to
January 31.
<PAGE>
Business Strategy
The Company's strategy had been to provide an interactive, unique gift
store environment which generated a sense of discovery for its customers.
High-quality customer service, through demonstration and assistance, was an
integral part of the Company's marketing strategy. Throughout its stores, the
Company had displayed its products prominently so as to be readily accessible to
customers, who were encouraged by an attentive, knowledgeable and enthusiastic
sales staff to take an active "hands on" approach to the merchandise. Each of
the Company's stores operated during the entire year (the "permanent stores")
typically has stocked over 3,000 different items and offered products at prices
generally ranging from $3 to $500. The Company stocked its best selling products
in its temporary stores.
The following is a brief description of certain of the merchandise
categories that the Company had included in its stores:
o Home Products: Decorative throw rugs, candles, frames, an assortment
of bath and body fragrances, essential oils, aromatherapy and
relaxation oriented products for the home.
o Outdoor and Gardening: Bird houses and feeders, wind chimes,
fountains, gardening seeds and kits, and decorative lawn and garden
ornaments.
o Music and Video: Easy listening compact discs and cassette tapes
featuring natural and environmental sounds. Assorted video tapes of
animals and nature settings.
o Statuary: Miniature wildlife statuary for collectors and animal
lovers.
o Optical Instruments and Other Products: Kaleidoscopes, telescopes,
weather instruments and globes.
o Educational Items: Teaching aids, books and science related
merchandise.
o Toys, Games, and Kits: Games, puzzles and "hands-on" activity kits.
o Rocks and Minerals: Gift assortments of rocks, minerals and fossils,
which include bookends, clocks, pen and pencil sets and assorted
decorative items.
o Apparel: T-shirts and sweatshirts featuring nature and environmental
themes, hats and other outdoor gear.
Store Operations
The Company endeavored to maintain an interactive store environment which
generated a sense of discovery for its customers. The Company kept distinctive
signage and design of its stores consistent among its locations to increase its
name recognition. Throughout the Company's stores, which offered a well-lighted
shopping atmosphere utilizing a standardized floor plan that emphasized its
merchandising concept, products were prominently displayed so as to be readily
accessible to customers, who are encouraged by attentive, knowledgeable and
enthusiastic sales associates to take an active "hands-on" approach to the
merchandise. Interactive fixtures permitted customers to hear a sampling of
music titles offered and one or more television monitors continually played
tapes of videos which were available for sale. The Company believed that its
strategy of appealing to the customers' senses of smell, hearing and touch (as
well as sight), when combined with the assistance of the Company's sales
associates, served to enhance customer interest and the level of involvement,
excitement and enjoyment associated with shopping in the Company's stores.
Permanent stores generally ranged in size from approximately 2,200 to 3,300
square feet of space. The Company's stores had been open seven days a week
during mall operating hours. Stores were typically staffed with a manager, an
assistant manager and several full-time and part-time sales associates, the
number of which varies
<PAGE>
depending on store volume. In order to assure that employees are knowledgeable
with respect to the Company's merchandise, the Company generally provided new
employees with on-the-job training under the supervision of an experienced
employee for approximately two weeks. In addition, at least one day of product
orientation class was provided for employees of the Company's new permanent or
temporary stores, and the Company periodically arranged for various of its
suppliers to give employee seminars in which their products were demonstrated
(and underlying scientific or other applicable principles were explained) so as
to facilitate the understanding by the Company's staff of such products. Store
management received compensation in the form of salaries and performance-based
bonuses. Sales associates were paid on an hourly basis plus performance
incentives.
Purchasing and Inventory
The Company purchased merchandise from over 250 suppliers, including
manufacturers, distributors, craftsmen and importers. Although certain suppliers
may have provided a majority or all of the Company's requirements for a
particular product or category during the year ended February 1, 1997 (fiscal
1996), no supplier accounted for more than 4.5% of the Company's total
merchandise purchases during such period. In fiscal 1996, approximately 99% of
the Company's merchandise was purchased from domestic vendors. The Company
believed that the loss of any one or more of its suppliers would not have had a
material adverse effect on the Company and that alternative sources of
merchandise were readily available at comparable prices in all product
categories. Although the Company believes that its relationships with its
suppliers are satisfactory, deferred payment arrangements have been necessitated
by the extremely competitive environment and cash-starved condition in which the
Company has been operating.
Promotional Activities
The Company did not rely on advertising to generate sales but, rather, was
substantially dependent upon mall traffic to attract new customers.
Distribution
In conjunction with a change during March 1996 of its chief executive
officer, the Company had altered its distribution strategy and substantially
discontinued shipments from vendors to the Company's distribution center in St.
Petersburg, Florida, which occupies approximately 4,000 square feet of office
and warehouse space. The Company had utilized this facility for the centralized
receipt of goods from vendors, as well as the storage of inventory and the
shipment of merchandise to its stores. The Company and its vendors have used
common carriers to deliver merchandise to its stores.
Competition
The specialty retail business is characterized by intense competition. The
Company believes that it had competed with Natural Wonders, Inc., The Nature
Company, a subsidiary of CML Group, Inc., and World of Science, Inc., each of
which operates numerous nature and science specialty stores. In April 1996,
Discovery Communications Inc., which operates cable television's Discovery
Channel and owns and operates the 15 store Discovery Channel Store chain,
announced that it had acquired The Nature Company from CML Group, Inc.
Personnel
Pursuant to the Sale Agreement and the Management Agreement, certain
employees of the Company have been retained by the Buyer and will be evaluated
by the Buyer in accordance with its requirements. A portion or a significant
portion of benefits accrued prior to March 9, 1997 to current employees will be
paid by the Company. At the time of the execution of the Sale Agreement, the
Company had approximately 39 full-time employees and 50 part-time sales
associates. The Company currently has two employees. Temporary employees were
usually added during peak sales periods. Store management received compensation
in the form of salaries and performance-based bonuses. Sales associates
typically were paid on an hourly basis plus performance incentives. A number of
<PAGE>
programs offered incentives to both management and sales associates to increase
sales, including various sales contests. None of the Company's employees is
covered by any collective bargaining agreement. Management believes that its
well trained and motivated employees were an integral part of its concept and
that its employee relations were good.
Service Mark
The Company intends to retain its federal service mark registration for the What
A World(R) name and the Company's design and logo. The Company believes that its
service marks have value and are important to its marketing and future
prospects. There can be no assurance that the Company's marks would be upheld if
challenged or that the Company would not be prevented by third parties (other
than Natural Wonders) from using its mark, which could have an adverse effect on
the Company. In addition, the Company would be prevented by the Sales Agreement
from using its marks in a retail segment in competition with the Buyer.
Moreover, there can be no assurance that the Company will have the financial
resources necessary to enforce or defend its service marks. The Company is not
aware of any claims of infringement or other challenges to the Company's right
to use its marks in the United States. .
Item 2. DESCRIPTION OF PROPERTIES
All leases for the twelve permanent stores of the Company will be assigned
to, and assumed by, the Buyer in accordance with the Sale Agreement, and the
Buyer has agreed as part of such assignment or assumption to secure necessary
consents or modifications from interested parties. The Company currently has
leases for ten permanent stores in Florida, one permanent store in New York and
one permanent store in New Jersey. The store leases, which expire at various
times from 2003 through 2005, provide for specified minimum rental payments and
contingent payments based on gross sales exceeding certain levels. The leases
also require the Company to pay the cost of common area maintenance, insurance,
taxes and other expenses. Certain of the Company's lease agreements contain
provisions which enable the Company to terminate such agreements under certain
conditions, including failure to achieve specified sales performance levels. The
locations of the stores and the approximate square footage under the various
store leases are as follows:
<TABLE>
<CAPTION>
Approximate Total Square
Footage
Name of Mall (Location) (Including Storage Space) Date of Opening
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Tampa Bay Center (Tampa, FL) 2,800 August 1993
Countryside Mall (Clearwater, FL) 2,200 November 1993
Governor's Square Mall (Tallahassee, FL) 2,600 November 1993
DeSoto Square Mall (Bradenton, FL) 2,600 August 1994
Orange Park Mall (Jacksonville, FL) 4,400 September 1994
Paddock Mall (Ocala, FL) 3,300 January 1995
Treasure Coast Square Mall (Jensen Bch, FL) 2,500 September 1995
Aventura Mall (Miami, FL) 3,200 November 1995
The Falls (Miami, FL) 3,200 November 1995
Monmouth Mall (Eatontown, NJ) 2,700 December 1995
Staten Island Mall (Staten Island, NY) 3,100 November 1995
Fashion Square Mall (Orlando, FL) 3,000 October 1995
</TABLE>
The Company also leases approximately 4,000 square feet for its corporate
office and distribution center in St. Petersburg, Florida, under a lease which
expires in 1998. The Company is reviewing its options in connection with this
facility.
<PAGE>
During the 1996 Christmas selling season, the Company operated thirteen
temporary stores in Florida, Georgia and South Carolina pursuant to short term
license agreements each of which expired by January 1997.
Item 3. LEGAL PROCEEDINGS
The Company is not a party or subject to any legal proceedings, other than
claims and lawsuits arising in the ordinary course of its business. The Company
does not believe that any such claims or lawsuits will have a material adverse
effect on its financial condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the fiscal quarter ended February 1, 1997; however, a proposal in respect
to the proposed Sale Transaction will be submitted to a vote at the Special
Meeting of Stockholders scheduled for May 22, 1997. See "Description of Business
- -- Summary"
Part II.
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the periods indicated, the range of
high and low closing sale prices for the Common Stock. Through January 31, 1997,
the shares of Common Stock of the Company traded on the Nasdaq Small
Capitalization Market under the symbol "WHAT". Thereafter, the Company's Common
Stock traded under the same symbol on the bulletin board system maintained by
the National Association of Securities Dealers ("NASD") or in the
over-the-counter "pink sheets".
For the Fiscal Year Ended February 3, 1996 High Low
- ------------------------------------------------- ------ ------
First Quarter (January 29 through April 29, 1995) $ 4.25 $ 3.00
Second Quarter (April 30 through July 29, 1995) $ 3.75 $ 2.88
Third Quarter (July 30 through October 28, 1995) $ 3.50 $ 2.63
Fourth Quarter (October 29, 1995 through $ 3.00 $ 1.25
February 3, 1996)
<TABLE>
<CAPTION>
Closing Bid Closing Ask
For the Fiscal Year Ended February 1, 1997 High Low High Low
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter (February 4 through May 4, 1996) $ 1.625 $ .75 $ 1.75 $ 1.25
Second Quarter (May 5 through August 3, 1996) $ 1.625 $ .50 $ 2.00 $ 0.75
Third Quarter (August 4 through November 2, 1996) $ 1.000 $ 1.00 $ 1.125 $ 1.00
Fourth Quarter (November 3, 1996 through $ 1.4375 $ .6875 $1.4375 $ .6875
February 1, 1997)
</TABLE>
On May 15, 1997, the last reported sale price of the Common Stock on the
NASD Bulletin Board or in the over-the-counter "pink sheets" was $0.125 per
share. The prices set forth above reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not necessarily represent actual
transactions and were provided by consultation with the NASD composite feed or
other qualified quotation medium.
<PAGE>
The Company experienced during 1996 a substantial decline in the price of
its Common Stock. The market price fell to a point that precluded the Company
from continuing its listing on the Nasdaq Small Cap Market. Pursuant to the
requirements of Nasdaq, to be eligible for continued listing on the Nasdaq Small
Cap Market, the Common Stock must have maintained a minimum bid price of $1.00
per share or, if the bid price is less than $1.00, maintain capital and surplus
of $2,000,000 and a market value of the public float of at least $1,000,000. The
Company was notified by Nasdaq that the Company's Common Stock failed to
maintain a closing bid price greater than or equal to $1.00 during a specified
period of ten consecutive trade dates prior to the date of the notice, and that
the public float alternative requirement had also not been met. (The closing bid
price was equal to or higher than $1.00 per share prior to April 9, 1996 and was
higher than such price on the four consecutive trading dates of April 26, 1996
and April 29 through May 1, 1996.) As the Company was unable to demonstrate, on
or before the 90-day period ended July 28, 1996, compliance with either the
minimum $1.00 bid price during a period of ten consecutive trading days or the
alternative requirement, it submitted by that date its proposal for achieving
compliance. The submission was deemed by Nasdaq to not warrant continued
listing, and, accordingly, Nasdaq issued a formal notice of deficiency for the
Company's securities. As a result of such delisting, an investor could find it
more difficult to dispose of, or obtain accurate quotations as to the market
value of, the Company's securities. Delisting of the Company's securities may
result in lower prices for the Company's securities than might otherwise
prevail.
In addition, once the Common Stock was delisted from trading on Nasdaq and
the trading price of the Common Stock remained below $5.00 per share, trading in
the Common Stock also became subject to certain rules promulgated under the
Securities Exchange Act of 1934, as amended, which require additional disclosure
by broker-dealers in connection with any trades involving a stock defined as a
"penny stock" (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules require
the delivery, prior to any penny stock market transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith,
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). For these types of transactions, the broker dealers
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale. The
additional burden imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in the Company's
securities, the ability of security holders to sell the Company's securities in
the secondary market and the Company's ability to obtain additional financing.
The Company has not paid any cash dividends. Any determination to pay
dividends in the future will be at the discretion of the Company's Board of
Directors and will be dependent upon the Company's results of operations,
financial condition, capital requirements, contractual restrictions and other
factors deemed relevant by the Board of Directors. The Board of Directors does
not intend to declare dividends in the foreseeable future, but instead intends
to retain earnings, if any, for use in the Company's business operations.
As of May 15, 1997, as reported by the Company's transfer agent, shares
were held by approximately 17 persons based on the number of record holders,
including several holders who are nominees for an undetermined number of
beneficial owners.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company was organized in July 1993 and opened its first permanent store
in August 1993. All of the Company's twelve permanent stores have been in
operation for over one year. Accordingly, the Company has a limited operating
history upon which an evaluation of its performance and prospects can be made.
The fiscal year ended February 1, 1997 ("Fiscal 1996") included 52 weeks,
while the fiscal year ended February 3, 1996 ("Fiscal 1995") included 53 weeks
of operations. The quarterly period ended February 1, 1997 (the "Fourth Quarter
of Fiscal 1996") included 13 weeks while the quarterly period ended February 3,
1996 (the "Fourth Quarter of Fiscal 1995") included 14 weeks of operations.
The Company operated twelve permanent stores at both February 1, 1997 and
February 3, 1996. In addition, the Company operated 13 temporary stores during
the Fourth Quarter of Fiscal 1996, as compared to three temporary stores during
the Fourth Quarter of Fiscal 1995.
Results of Operations
The foregoing section and other portions of this Annual Report on Form
10-KSB contain certain forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the factors described herein, including, but not limited to, the success of the
Company's efforts to modify its product assortment, the Company's ability to
improve its merchandise presentation, the Company's development of the temporary
store concept during the Christmas selling season, the timely introduction of
new products, the modification of the Company's cost structureas well as the
seasonal impact of the Company's business. Such differences could occur because
of the application of such factors, of competitive or general business
conditions or of some other and unforeseen factor.
Net sales for the 13 weeks ended February 1, 1997 increased by
approximately $806,000 over net sales for the comparable 14 weeks ended February
3, 1996. Net sales also increased by $2,656,000 for the 52 weeks ended February
1, 1997 over the 53 weeks ended February 3, 1996. The increases are principally
a result of additional sales from 13 seasonal stores operated during the Fourth
Quarter of Fiscal 1996 and the operation of 12 permanent stores for the full 52
week period ended February 1, 1997.
Comparable store sales (sales of stores opened during the same months
during the comparable period in the prior year) decreased 4.9% in the Fourth
Quarter of Fiscal 1996 and decreased 6.7% in the 52 weeks of Fiscal 1996. The
comparable store sales analysis for stores opened during Fiscal 1995 includes
less days of operation during the initial month of operation as compared to the
comparable month in Fiscal 1996. In addition, the seasonal store locations are
not included in the calculation, since there were no identical locations. The
Company adjusted its product assortment to respond to increased competition and
the changing demands of its customers.
Gross profit for the Fourth Quarter of Fiscal 1996 was approximately
$2,050,000 or 46.9% of net sales, compared with approximately $1,783,000 or
50.0% of net sales for the Fourth Quarter of Fiscal 1995. Gross profit for the
52 weeks of Fiscal 1996 was approximately $3,858,000, or 47.2% of net sales, as
compared to approximately $2,733,000, or 49.6% of net sales in the 53 weeks of
Fiscal 1995. The decrease in gross profit as a percentage of net sales was
principally a result of markdowns which were taken during the Fourth Quarter of
Fiscal 1996 and the 52 weeks of Fiscal 1996 in an effort to refine the product
assortment.
Comparable store gross profit (gross profit of stores opened during the
same months during the comparable period in the prior year) for the Fourth
Quarter of Fiscal 1996 decreased approximately $107,000 to approximately
$1,518,000, or 48.1% of net sales, from approximately $1,625,000, or 49.9% of
net sales, in the Fourth Quarter of
<PAGE>
Fiscal 1995. Comparable store gross profit for the 52 weeks of Fiscal 1996
decreased approximately $300,000 to approximately $2,573,000, or 49.5% of net
sales, from approximately $2,274,000, or 46.8% of net sales, in the comparable
53 weeks of Fiscal 1995. The comparable store gross profit analysis for stores
opened during Fiscal 1995 includes less days of operation during the initial
month as compared to the comparable month in Fiscal 1996. The decrease in
comparable store gross profit as a percentage of sales has resulted primarily
from inventory markdowns.
Net loss of $1,209,000 was recorded for the Fourth Quarter of Fiscal 1996,
compared with net income of approximately 286,000 for the comparable period in
Fiscal 1995.
Selling, general and administrative expenses ("SG&A") increased to
approximately $1,777,000 in the Fourth Quarter of Fiscal 1996 and to
approximately $4,911,000 for the 52 weeks of Fiscal 1996 from approximately
$1,422,000 and $3,318,000 for the Fourth Quarter of Fiscal 1995 and the 53 weeks
of Fiscal 1995, respectively. The primary components of SG&A are store occupancy
costs (which include rent, utilities, common area charges, real estate taxes and
other expenses associated with the operation of a retail store in a regional
mall), store management and sales staff payroll, depreciation expense and
corporate payroll. The increase in SG&A was, for the most part, the result of
increases in store operating expenses, including store personnel compensation
and occupancy costs associated with additional permanent store openings.
Loss on impairment of equipment and leasehold improvements increased to
approximately $1,486,000 in the Fourth Quarter of Fiscal 1996 from approximately
$86,000 in the Fourth Quarter of Fiscal 1995 due to recurring and projected
operating losses and negative cash flows for certain permanent store locations.
Interest and other income for the Fourth Quarter of Fiscal 1996 and in the
52 weeks of Fiscal 1996 was approximately $18,000 and $46,000, respectively, as
compared to approximately $17,000 and $135,000 from comparable periods in 1995.
The quarterly increase is due primarily to the increase in cash equivalents
during the Company's peak season while the yearly decrease is primarily a result
of reduced levels of cash equivalents throughout the year due to new store
openings.
Interest expense for the Fourth Quarter of Fiscal 1996 and in the 52 weeks
of Fiscal 1996 was approximately $14,000 and $37,000, respectively, as compared
to approximately $7,000 and $25,000 from comparable periods in 1995. The
increases are due primarily to the interest paid on the cash borrowed against
the Working Capital Commitment (see below).
Liquidity and Capital Resources
The Company had working capital of approximately $1.8 million and $1.0
million at February 3, 1996, and February 1, 1996, respectively. In order to
fund its capital and operating requirements, the Company has been primarily
dependent (i) on cash proceeds received from loans from certain members of the
Board of Directors, from the Company's initial public offering in November 1994
(the "Offering") and, prior thereto, from sales of equity securities to David B.
Cornstein, the Company's Chairman of the Board of Directors, David F. Miller,
the Company's current President, and Edward J. Munley, the Company's former
President, each of whom is a director and founder of the Company (collectively,
the "Original Stockholders"), and (ii) on loans from others.
On August 28, 1996, Mr. Miller, Mr. Cornstein, and Hugh H. Jones, Jr., also
a member of the Company's Board of Directors (collectively, the "lenders"),
entered into a commitment to lend the Company, for working capital purposes, as
needed, and to fund the opening of 13 temporary stores, up to an aggregate of
$600,000 at an interest rate of 12% per annum (the "Working Capital
Commitment"). All amounts outstanding under the Working Capital Commitment were
repaid when due, together with accrued interest thereon, on January 3, 1997.
Such loans had been secured by a first priority lien on substantially all of the
assets of the Company. As partial consideration for the Working Capital
Commitment, the Company granted to the lenders options to purchase an aggregate
of 200,000 shares at an exercise price of $1.00, exercisable until August 31,
2001. In connection with the Working Capital Commitment, the Company granted to
the lenders certain demand and piggyback registration rights relating to the
securities underlying such warrants.
<PAGE>
During the 52 weeks of Fiscal 1996, cash decreased by approximately $93,000
to approximately $1,294,000. The overall decrease in cash resulted primarily
from cash used for the purchases of property and equipment used in temporary
stores of approximately $196,000. The Company repaid approximately $62,000 in
indebtedness during the period.
During the 53 weeks of Fiscal 1995, cash decreased by approximately
$1,565,000 to approximately $1,387,000. The overall decrease in cash resulted
primarily from cash used in the purchase of property and equipment of
$1,645,000. The Company repaid approximately $55,000 in indebtedness during the
period.
Except as stated above, the Company currently does not maintain any lines
of credit or cash borrowings to finance its capital requirements. The Company
maintains a $100,000 letter-of-credit to serve as collateral for primarily all
of the Company's capital lease obligations. The letter-of-credit expires in
November 1997 or in the event of a sale of all or substantially all of the
assets of the Company.
During Fiscal 1996, the Company's inventories increased by approximately
$229,000 to approximately $1,207,000 from approximately $978,000 at February 3,
1996. The increase is primarily a result of the Company retaining unsold
inventory from the seasonal locations. During Fiscal 1995, the Company's
inventories increased by approximately $333,000 to approximately $978,000 from
approximately $645,000 at January 28, 1995. The increase was primarily a result
of the Company modifying inventory quantities to appropriate seasonal levels.
Except as noted above, the Company has no current material arrangements
with respect to, or sources of, additional financing, and it cannot be
anticipated that any of the officers, directors or stockholders will provide any
additional portion of the Company's future financing requirements. With the
expiration of the Working Capital Commitment on January 3, 1997, there can be no
assurance that additional financing will be available to the Company on
commercially reasonable terms, or at all. Any inability to obtain additional
financing could have a materially adverse effect on the Company, including
possibly requiring the Company to significantly curtail, and possibly causing
the Company to cease, its operations. In addition, any equity financing may
involve substantial dilution to the interests of the Company's then-existing
stockholders. Further, there can be no assurance that the Company will achieve
profitability or positive cash flow.
Seasonality and Quarterly Fluctuations
As is the general pattern in the retail industry where disproportionately
higher sales levels are generated during the Christmas selling season, the
Company's business is, and is expected to continue to be, highly seasonal, with
a substantial portion of its revenues derived from product sales during the
months of November and December. Seasonality factors have caused the Company's
operating results to fluctuate significantly from quarter to quarter. Sales
substantially below those normally expected in the fourth quarter of any fiscal
year would have a materially adverse effect on the Company's operating results
for such fiscal year. The Company's results of operations have also fluctuated
significantly from quarter to quarter as a result of a number of other factors,
including the timing of new store openings (and expenses incurred in connection
therewith) by either the Company or its competitors, the marketing activities of
its competitors and the emergence of new market entrants.
Tax Loss Carryforwards
The Company's status as an S Corporation terminated upon the consummation
of the Offering. Any pro-rata net operating losses incurred by the Company prior
to such termination are not available to offset future taxable income of the
Company.
Due to a change in the Company's operations from the specialty retail
business to an acquisition company after the Sale Transaction, the benefit of
any net operating loss carryforwards most likely will not be realized.
<PAGE>
Effects of Inflation
Inflation has not had a material effect on the Company's operations. The Company
anticipates that it would be able to diminish the effects of inflationary cost
increases by increasing its prices.
Item 7. FINANCIAL STATEMENTS
Financial statements are set forth in a separate section of this Annual Report
on Form 10-KSB. See "Index to Financial Statements".
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Part III.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The current directors and executive officers of the Company are as follows:
Name Age Position
- ------------------- ---- -----------------------------------------
David B. Cornstein 58 Chairman of the Board and Director
David F. Miller 67 President, Secretary, and Director
Brian S. Lappin 28 Vice President of Finance and Chief Financial
Officer
James Martin Kaplan 52 Director
Hugh H. Jones, Jr. 65 Director
Edward J. Munley* 65 Director
*President through 3/26/96
David B. Cornstein, a co-founder of the Company, has been a director of the
Company since its inception and has served as Chairman of the Board since
September 1994. Mr. Cornstein has been Chairman of Finlay Enterprises, Inc.
("FEI"), since May 1993 and has, since December 1998, been a director of FEI and
its wholly-owned subsidiary, Finlay Fine Jewelry Corporation ("FFJC"), which is
the largest operator of leased fine jewelry departments in the United States and
France operating over 930 departments in many of the leading department store
chains in both countries. Mr. Cornstein was named Chairman and Chief Executive
Officer of Finlay International in January 1996. From December 1988 through
January 1996, Mr. Cornstein was President and Chief Executive Officer of FEI.
From December 1985 to December 1988, Mr. Cornstein was President, Chief
Executive Officer and a director of SL Holdings Corporation, the predecessor of
FEI and FFJC. Prior thereto, Mr. Cornstein was the Chief Executive Officer of
Tru-Run, Inc., a corporation principally owned by Mr. Cornstein, which was
engaged in the operation of leased jewelry departments and leased jewelry and
watch repair departments. Mr. Cornstein is also a director of a privately-held
corporation.
David F. Miller, a co-founder of the Company, was appointed president of the
Company in March 1996 and has also served as the Secretary and a director of the
Company since its inception. Since April 1990, Mr. Miller has served as Chairman
of the Board of PureIce of the South, Inc., a corporation principally owned by
Mr. Miller, which is the major supplier of packaged ice for Northeast Florida.
Mr. Miller is also Chairman of the Board of Quality Food Equipment Distributors,
Inc. a provider of equipment for the food and restaurant industry. In April
1990, Mr Miller retired from the JCPenney Company after 37 years of service. Mr.
Miller is also a director of
<PAGE>
Winn-Dixie Stores, Inc. and is President of Amelia Service Center, a real estate
management company in Fernandina Beach, Florida.
Brian S. Lappin, was appointed Vice President of Finance and Chief Financial
Officer in August 1996 and served as the Accounting Manager of the Company from
September 1993 through August 1996. From January 1993 through September 1993,
Mr. Lappin was an Accounting Asssistant for Padgett Business Services, an
accounting and financial services firm in Gainesville, Georgia. From June 1991
to December 1993, Mr. Lappin was a staff accountant at Halls Tampa Wholesale
Florist, handling the daily reporting and accounting operations.
James Martin Kaplan, was appointed to the Board of Directors in December 1994.
Mr. Kaplan has been a partner with the law firm of Zimet, Haines, Friedman &
Kaplan, counsel to the Company, since 1977. Mr. Kaplan also serves on the Board
of Directors of FEI and FFJC.
Hugh H. Jones, Jr., was appointed to the Board of Directors in December 1994.
Since 1993, Mr. Jones has served as president of Baptist Health System
Foundation, Inc. Mr. Jones serves on the Board of Directors of Caring Institute.
Mr. Jones served on the Board of Directors of The Barnett Bank of Jacksonville,
N.A. from September 1980 to February 1996. From 1982 to 1993, Mr. Jones served
as Chairman and Chief Executive Officer of Barnett Bank of Jacksonville, N.A.
and from 1980 to 1982, he served as Vice Chairman and Director, retiring from
Barnett Bank of Jacksonville, N.A. in 1993 after 23 years of service.
Edward J. Munley, a co-founder of the Company, has been a director of the
Company since its inception and served as President of the Company from July
1993 until he resigned in March 1996. Since December 1990, Mr. Munley has been
the President and sole stockholder of Handley Walker Incorporated, a payroll
processing firm ("Handley Walker"). From 1977 to February 1990, Mr. Munley
served as President and Chief Executive Officer of Dey Brothers Inc., a
subsidiary of Allied Stores Corporation ("Allied Stores"). Prior to 1977, Mr.
Munley held various positions with regional divisions of Allied Stores.
All directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors.
Compliance with Section 16 (a) of the Securities Exchange Act of 1934
Section 16 (a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and to furnish the Company with copies of such reports. Based solely on its
review of the copies of such forms furnished to the Company by such reporting
persons and on the written representations from such reporting persons that no
reports on Form 5 were required, the Company believes that during the fiscal
year ended February 1, 1997 all of the reporting persons complied with their
Section 16 (a) filing requirements.
<PAGE>
Item 10. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation of the Company's
president for services rendered during the year-ended February 1, 1997:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term Compensation
-----------------------------
Annual Compensation Awards Payouts
---------------------------- -------------------- -------
Other
Annual Restricted All Other
Compen- Stock LTIP Compen-
sation Award(s) Options/ Payouts sation
Name and Principal Position Year Salary ($) Bonus $ $ $ SARs (#) $ $
--------------------------- ---- ---------- ------- ------ ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David F. Miller(1),
President 1996 -0- -0- -0- -0- 100,000 -0- -0-
Edward J. Munley(2),
Former President and Chief 1996 $76,153 -0- -0- -0- -0- -0- -0-
Executive Officer 1995 $90,000 -0- -0- -0- -0- -0- -0-
1994 $85,481 -0- -0- -0- 75,000 -0- -0-
</TABLE>
(1) Mr. Miller is currently not compensated other than reimbursed expenses
incurred while serving as President.
(2) Mr. Munley resigned as President in March 1996. Under the terms of his
employment agreement he is to be compensated at a rate of $95,000 per annum
through February 1, 1997 (see "Employment Agreement").
Option/SAR Grants Table
The following table shows information concerning stock options granted during
the year ended February 1, 1997 for the individual shown in the Summary
Compensation Table.
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price
Name Granted (#) Fiscal Year ($/sh) Expiration Date
- ----------------- ------------ ------------- ----------- -----------------
David F. Miller 100,000* 25.0% $ 1.00 3/26/2006
Edward J. Munley -0-
* does not include additional warrants to purchase shares granted under the 1996
Working Capital Committment (See "Certain Relationships and Related
Transactions")
Option/SAR Exercises and Year-end Value Table
No stock options were exercised by any of the Company's executive officers
during year-ended February 1, 1997. The following table shows information
concerning stock option values as of February 1, 1997.
<PAGE>
Aggregated Year-ended February 1, 1997 Option Values
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
February 1, 1997(#) February 1, 1997($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------- -------------------------------- --------------------------
David F. Miller 100,000*/-0- -0-/-0-
Edward J. Munley 75,000/-0- -0-/-0-
* does not include additional warrants to purchase shares granted under the 1996
Working Capital Committment (See "Certain Relationships and Related
Transactions")
1994 Stock Option Plan
In order to attract, retain and motivate employees (including officers),
directors, consultants and other persons who perform substantial services for or
on behalf of the Company, in November 1994, the Company adopted the 1994 Stock
Option Plan (the "Stock Option Plan"), pursuant to which stock options covering
an aggregate of 260,000 shares of the Company's Common Stock may be granted to
such persons. Under the Stock Option Plan, "incentive stock options" ("Incentive
Options") within the meaning of Section 422 of the Code, may be granted to
employees (including officers), and non-incentive stock options ("Non-incentive
Options") may be granted to any such employee and to other persons (including
directors) who perform substantial services for or on behalf of the Company.
Incentive Options and Non-incentive Options are collectively referred to herein
as "Options".
The Stock Option Plan is to be administered by the Board of Directors or, at its
discretion, by a committee appointed by the Board to perform such function (the
"Committee"). The Board of Directors or the Committee will be vested with
complete authority to administer and interpret the Stock Option Plan, to
determine the terms upon which Options may be granted, to prescribe, amend and
rescind such interpretations and determinations and to grant Options. The Board
of Directors or the Committee will have the power to terminate or amend the
Stock Option Plan from time to time in such respects as it deems advisable,
except that no termination or amendment shall materially adversely affect any
outstanding Option without the consent of the grantee, and the approval of the
Company's stockholders will be required in respect of any amendment which would
(i) change the total number of shares subject to the Stock Option Plan or (ii)
change the designation or class of employees or other persons eligible to
receive Incentive Options or Non-incentive Options.
The price at which shares covered by an Option may be purchased pursuant thereto
shall be no less than the par value of such shares and, in the case of Incentive
Options, no less than the fair market value of such shares on the date of grant
(the "Fair Market Value"). The Fair Market Value is generally equal to the last
sale price quoted for shares of Common Stock on NASDAQ on the date of grant. The
purchase price of shares issuable upon exercise of an Option may be paid in cash
or by delivery of shares with a value equal to the exercise price of the Option.
The Company may also loan the purchase price to the optionee, or guarantee
third-party loans to the optionee, on terms and conditions acceptable to the
Board of Directors. The number of shares covered by an Option is subject to
adjustment for stock splits, mergers, consolidations, combinations of shares,
reorganizations and recapitalizations. Options are generally non-transferable
except by will or by the laws of descent and distribution, and in the case of
employees, with certain exceptions, may be exercised only so long as the
optionee continues to be employed by the Company. If the employee dies or
becomes disabled, the right to exercise the Option, to the extent then vested,
continues for specified periods. Non-incentive Options may be exercised within a
period not exceeding 10 years from the date of grant. The terms of Incentive
Options are subject to additional restrictions provided by the Stock Option
Plan.
Amendment to 1994 Stock Option Plan
At the Annual Meeting of Stockholders on May 21, 1996, an amendment was adopted
to add 300,000 shares to the 260,000 shares already authorized as subject to
options under the Stock Option Plan, making a total of 560,000 shares of Common
Stock available for grant under the Stock Option Plan.
<PAGE>
1994 Nonemployee Directors' Stock Option Plan
In order to attract and retain the services of non-employee members of the Board
of Directors and to provide them with increased motivation and incentive to
exert their best efforts on behalf of the Company by enlarging their personal
stake in the Company, in November 1994, the Company adopted the 1994 Nonemployee
Directors' Stock Option Plan (the "Directors' Plan"), pursuant to which stock
options covering an aggregate of 40,000 shares of the Company's Common Stock may
be granted to such non-employee directors.
Pursuant to the Directors' Plan, each member of the Board of Directors of the
Company who is not an employee of the Company (or a subsidiary) (a "Non-employee
Director") and who is elected or re-elected as a director of the Company by the
stockholders at any annual meeting of stockholders, will receive, as of the date
of each such election or re-election, options to purchase 2,500 shares of the
Company's Common Stock. In addition, Non-employee Directors at the time of the
Offering received options to purchase 2,500 shares of the Company's Common
Stock, and any other future Non-employee Director will receive options to
purchase 2,500 shares of the Company's Common Stock upon his election or
appointment as director. All options granted under the Directors' Plan will be
exercisable at the fair market value of the Company's Common Stock as of the
date of grant. The options granted under the Directors' Plan are to be
Non-incentive Options.
Employment Agreement
In November 1994, the Company entered into an agreement with Edward J. Munley,
which provided for his employment as President of the Company until February 1,
1997 (the "Employment Agreement"). Mr Munley resigned as President on March
1996. The Company agreed to treat him as if he was terminated without cause and
as a result he shall be entitled to receive the scheduled base salary (and
certain other benefits provided to the Company's senior executives) for the full
remaining term of the Employment Agreement. The Employment Agreement also
provides that the Company shall obtain for Mr. Munley disability insurance
providing for base salary continuation coverage for a period of 36 months
following his disability and $150,000 of life insurance, provided such insurance
is available to the Company at commercially reasonable rates and at a reasonable
cost . In addition, the Employment Agreement provides that in the event of Mr.
Munley's death, his estate or legal representative shall be entitled to sell to
the Company, and the Company shall be required to buy, up to $500,000 of his
Common Stock at a price per share equal to the fair market value thereof at such
time, provided that the Company is able to obtain $500,000 of "key man"
insurance on Mr. Munley's life at commercially reasonable rates and at a
reasonable cost to fund the cost of such purchase.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 15, 1997 the beneficial ownership of
shares of Common Stock by (i) each person who is known by the Company to own
more than 5% of the outstanding shares of Common Stock, (ii) each director of
the Company and each executive officer of the Company listed in the Summary
Compensation Table and (iii) all of the Company's current officers and directors
as a group.
Name and Address of Beneficial Amount and Nature of
Owner (1) Beneficial Ownership (2) Percent of Class
- ------------------------------ -------------------------- --------------------
David B. Cornstein 680,352(3) 29.80%
David F. Miller 627,062(4) 27.14%
Edward J. Munley 280,000(5) 12.54%
Brian S. Lappin 7,533(6) *
<PAGE>
James Martin Kaplan 14,000(7) *
Hugh H. Jones, Jr. 27,000(8) 1.26%
All officers and directors as a
group (6 persons) 1,630,949(3)(4)(5) 63.00%
(6)(7)(8)
* - Less than one percent
(1) The address of each person listed is c/o What A World!, Inc., Suite 100,
McCormick Center II-B, Roosevelt Boulevard, St. Petersburg, Florida 33716.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this filing upon the
exercise of options or warrants. Each beneficial owner's percentage ownership is
determined by assuming that options or warrants that are held by such person
(but not those held by any other person) and which are exercisable within 60
days from the date of this filing have been exercised. Unless otherwise noted,
the Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially owned
by them.
(3) The number of shares beneficially owned by Mr. Cornstein assumes the
exercise of options to purchase 5,000 shares of Common Stock and the exercise of
warrants to purchase 160,000 shares of Common Stock.
(4) The number of shares beneficially owned by Mr. Miller assumes the exercise
of options to purchase 102,500 shares of Common Stock and the exercise of
warrants to purchase 90,000 shares of Common Stock, but does not include any
shares owned by Mr. Miller's adult children. Mr. Miller disclaims beneficial
ownership of any shares owned by his children.
(5) The number of shares beneficially owned by Mr. Munley assumes the exercise
of options to purchase 75,000 shares of Common Stock but does not include any
shares owned by Mr. Munley's adult children. Mr. Munley disclaims beneficial
ownership of any shares owned by his children. Mr. Munley resigned as President
of the Company in March 1996.
(6) The number of shares owned beneficially by Mr. Lappin assumes the exercise
of options to purchase 7,333 shares of Common Stock but does not include an
aggregate of 12,667 shares of Common Stock issuable at various times upon the
exercise of options granted to Mr. Lappin.
(7) The number of shares beneficially owned by Mr. Kaplan assumes the exercise
of options to purchase 5,000 shares of Common Stock.
(8) The number of shares beneficially owned by Mr. Jones assumes the exercise of
options to purchase 5,000 shares of Common Stock and the exercise of warrants to
purchase 21,000 shares of Common Stock.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1993, David B. Cornstein, the Company's Chairman of the Board of
Directors, David F. Miller, the Company's President and Secretary, and Edward J.
Munley, The Company's former President each of whom is a director and founder of
the Company (collectively, the "Original Stockholders") entered into an
agreement in connection with the formation of the Company (`the Stockholders
Agreement'), pursuant to which Messrs. Cornstein Miller, and Munley purchased
600,000, 600,000, and 800,000 shares of Common Stock of the Company for a
purchase price of $60,000, $60,000 and $80,000, respectively. On September 8,
1994, the Original
<PAGE>
Stockholders, in consideration of the mutual undertakings made by each of them,
contributed an aggregate of 981,875 shares of Common Stock back to the Company.
No other determined of contingent consideration (e.g. performance payments),
current or future, has been or will be paid to any person or organization in
respect of such contribution of shares of Common Stock. Messrs. Cornstein,
Miller, and Munley, pursuant to the Stockholders Agreement, also agreed to make
certain revolving credit loans (the "Original Stockholder Loans") in an
aggregate amount of $500,000, at an interest rate equal to the prime rate plus
0.5%, payable quarterly in arrears to the extent there were adequate revenues
and funds from operations to the Company, on an unsecured basis, from time to
time until January 31, 1996, of up to $195,000, $195,000 and $110,000,
respectively. The Original Stockholder Loans bore interest at a rate equal to
the prime rate (as defined) from time to time plus 0.5%. In connection with the
November 1994 Initial Public Offering of the Company's securities (the
`Offering'), all $500,000 outstanding principal amount owed under the Original
Stockholder Loans was converted as of the date of the Offering, into an
aggregate of 100,000 shares of Common Stock at a price of $5.00 per share.
Pursuant to the Stockholders Agreement, Mr. Munley was elected by the Board of
Directors to serve as President of the Company. Mr. Munley resigned as President
in March 1996.
In August 1994, a trust established for the benefit of the son of Mr. Cornstein,
and certain family members of Mr. Miller, made working capital loans of $150,000
and $150,000, respectively (or a total of $300,00), to the Company (the "Bridge
Financing"). Such loans were secured by a first priority lien on substantially
all of the assets of the Company and were evidenced by bridge notes which bore
interest at a rate of 9% per annum and were due upon the earlier of the
consummation of the Offering or January 31, 1996. The Company used the proceeds
of the Bridge Financing in connections with the opening of new stores, and for
working capital and general corporate purposes. The outstanding balance of such
loans (including accrued interest) was paid from the proceeds of the Offering.
All liens (and any other security interests) in respect of the bridge notes were
released at repayment of the bridge notes.
In September 1994, Mr. Cornstein and Mr. Miller each made loans for working
capital purposes (the "Interim Loans") to the Company, at an interest rate of
10% per annum, in an amount of $161,250 (a total of $322,500). In connection
with such loans, the Company issued to the lenders secured promissory notes (the
"Interim Loan Notes"). The Company used the proceeds of the Interim loans in
connection with the opening of new stores, and for working capital and general
corporate purposes. The Interim Loans were secured by a second priority lien on
substantially all of the assets of the Company and were due upon the earlier of
the consummation of the Offering or January 31,1996. The outstanding balance of
such loans (including accrued interest) was paid from the proceeds of the
Offering. All liens (and any other security interests) in respect of the Interim
Loan Notes were released at repayment of the Interim Notes.
In October 1994, the Original Stockholders entered into an agreement, pursuant
to which they agreed to lend to the company for working capital purposes, as
needed, up to an aggregate of $200,000 in additional funds through January 31,
1995, at an interest rate of 10% per annum (the " 1994 Working Capital
Commitment"). In October 1994, an aggregate of $100,000 was advanced under the
1994 Working Capital Commitment. Such amount, plus accrued interest, was due and
payable no later than the earlier of the Offering or January 31, 1996. Said
balance (including accrued interest) was paid from the proceeds of the Offering.
No additional amounts were borrowed under the 1994 Working Capital Commitment.
On August 28, 1996, Mr. Miller, Mr. Cornstein, and Hugh H. Jones, Jr., also
a member of the Company's Board of Directors (collectively, the "lenders"),
entered into a commitment to lend the Company, for working capital purposes, as
needed, and to fund the opening of 13 temporary stores, up to an aggregate of
$600,000 at an interest rate of 12% per annum (the "1996 Working Capital
Commitment"). All amounts outstanding under the 1996 Working Capital Commitment
were repaid when due, together with accrued interest thereon, on January 3,
1997. Such loans had been secured by a first priority lien on substantially all
of the assets of the Company. As partial consideration for the Working Capital
Commitment, the Company granted to the lenders options to purchase an aggregate
of 200,000 shares at an exercise price of $1.00, exercisable until August 31,
2001. In connection with the 1996 Working Capital Commitment, the Company
granted to the lenders certain demand and piggyback registration rights relating
to the securities underlying such warrants.
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
A. A. (1) The following financial statements of the Company
and the reports thereon of Arthur Andersen LLP dated March 29,
1997 are being filed as part of this Annual Report on Form 10-KSB.
Report of Independent Certified Public Accountants.
Balance Sheet February 1, 1997
Statements of Operations and Accumulated Deficits for the years ended
February 3, 1996 and February 1, 1997.
Statements of Cash Flows for the years ended February 3, 1996 and
February 1, 1997.
Notes to the Financial Statements
(2) The following exhibits are filed as part of this report (exhibits
marked with an asterisk have been previously filed with the Commission as
indicated and are incorporated herein by this reference):
Exhibit
Number Description
- -------- ----------------------------------------------------------------------
1.1* Underwriting Agreement between Registrant and Whale Securities Co.,
L.P. and Selected Dealer Agreement.(incorporated by reference to
exhibit 1.1 of the Registrant's Form 10-KSB for the year ended
December 31, 1994 as filed with the Securities and Exchange
Commission(the `1994 Form 10-KSB'))
3.1* Certificate of Incorporation of Registrant, as amended (incorporated
by reference from Exhibit 1.1 of the Registrant's Registration
Statement on Form SB-2, (Commission No.33-84774) as filed with the
Securities and Exchange Commission (the"SB-2"))..
3.2* By-Laws of Registrant (incorporated by reference to exhibit 3.2 of the
SB-2).
3.2.A* Restated By-Laws of Registrant (incorporated by reference to exhibit
3.2A of the SB-2).
4.1* Form of Certificate for Common Stock (incorporated by reference to
exhibit 4.1 of the SB-2).
4.2* Public Warrant Agreement between the Registrant, American Stock
Transfer & Trust Company and Whale Securities Co., L.P.
4.3* Form of Public Warrant Certificate (incorporated by reference to
exhibit 4.3 of the SB-2).
4.4* Underwriter's Warrant Agreement (incorporated by reference to exhibit
4.4 of the SB-2).
10.1* Agreement among the Registrant, Edward J. Munley, David B. Cornstein,
David Miller and the other parties thereto, dated as of July 21, 1993,
together with amendments to said Agreement (incorporated by reference
to exhibit 10.1 of the SB-2).
10.2* Employment Agreement with Edward J. Munley dated as of November 8,
1994 (incorporated by reference to exhibit 10.3 of the SB-2)
10.3* Consulting Agreement between the Registrant and the Whale Securities
Co., L.P. (incorporated by reference to exhibit 10.11 of the 1994 Form
10-KSB)
10.4* 1994 Stock Option Plan (incorporated by reference to exhibit 10.12 of
the SB-2).
10.4.A* 1994 Nonemployee Directors' Stock Option Plan (incorporated by
reference to exhibit 10.12.A of the SB-2).
10.5* Letter agreement dated October 3, 1994 by and among the Registrant,
David B. Cornstein, David F. Miller and Edward J. Munley (incorporated
by reference to exhibit 10.17 of the SB-2).
<PAGE>
10.6* Agreement dated as of September 8, 1994 by and among the Registrant,
Edward J. Munley, David B. Cornstein and David F. Miller in respect of
contribution of shares to the Registrant (incorporated by reference to
exhibit 10.19 of the SB-2).
10.7* Equipment Lease Agreement, dated December 2, 1994, between the Company
and Wasco Funding Corporation. (incorporated by reference to exhibit
10.21 of the 1994 Form 10-KSB)
10.8* Form of Seasonal Secured Revolving Note dated August 28, 1996 in favor
of each of David B. Cornstein, Hugh H. Jones, Jr., and David F.
Miller. (incorporated by reference to the Registrant's Form 10-Q for
the Quarter ended August 3, 1996 as filed September 17, 1996 (the
"Third Quarter 1996 10-Q)).
10.9* Form of Warrant and Registration Agreement dated as of August 28, 1996
in favor of each of David B. Cornstein, Hugh H. Jones, Jr., and David
F. Miller. (incorporated by reference to the Third Quarter 1996 10-Q).
10.10* Security Agreement dated as of August 28, 1996 in respect of Seasonal
Secured Revolving Notes. (incorporated by reference to the Third
Quarter 1996 10-Q).
10.11 Asset Purchase Agreement dated as of March 7, 1997 between the
Registrant and Natural Wonders, Inc.
10.12 Form of Shareholder Lock-up Agreement dated March 7, 1997 by each of
David B. Cornstein, David F. Miller, and Edward J. Munley
10.13 Management Agreement dated March 7, 1997 between the Registrant and
Natural Wonders, Inc.
10.14 Form of Non Competition Agreement dated March 7, 1997 by David B.
Cornstein and David F. Miller.
11* Statement re Computation of Per Share Earnings (not required because
the relevant computations can be clearly determined from material
contained in the financial statements included herein).
16* Letter dated January 26, 1995 from Ernst & Young LLP in regard to
their review of the Current Report on Form 8-K dated January 20, 1995
which reports the dismissal of Ernst & Young as the Registrant's
independent certified public accountants(incorporated by reference
from Exhibit 1 of the Current Report on Form 8-K dated January 20,
1995 as filed with the Securities and Exchange Commission).
B. No Reports on Form 8-K were filed with the Securities and Exchange Commission
during the last quarter of Fiscal 1996
<PAGE>
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.
What A World!, Inc.
By:
/s/ David F. Miller May 16, 1997
----------------------------- -------------------
David F. Miller Date
President
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 dates indicated.
/s/ David F. Miller
- ---------------------------------------------------------------- --------------
David F. Miller, President, Secretary, and Director Date
(Principal Executive Officer)
/s/ David B. Cornstein
- ---------------------------------------------------------------- --------------
David B. Cornstein, Chairman of the Board and Director Date
/s/ Brian S. Lappin
- ---------------------------------------------------------------- --------------
Brian S. Lappin, Vice President of Finance and Chief Financial Date
Officer (Principal Financial and Accounting Officer)
/s/ James Martin Kaplan
- ---------------------------------------------------------------- --------------
James Martin Kaplan, Director Date
/s/ Hugh H. Jones, Jr.
- ---------------------------------------------------------------- --------------
Hugh H. Jones, Jr., Director Date
- ---------------------------------------------------------------- --------------
Edward J. Munley, Director Date
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
What a World!, Inc.:
We have audited the accompanying balance sheet of What a World!, Inc. (a
Delaware corporation) as of February 1, 1997, and the related statements of
operations and accumulated deficit and cash flows for the years ended February
3, 1996, and February 1, 1997. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of What a World!, Inc. as of
February 1, 1997, and the results of its operations and its cash flows for the
years ended February 3, 1996, and February 1, 1997, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring operating losses, the Board of
Directors' unanimous approval of the proposed sale of substantially all of the
Company's operating assets, the speculative nature of the post-sale business,
and the lack of liquidity and financing raise substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Tampa, Florida,
March 29, 1997 /s/ Arthur Andersen, LLP
F-1
<PAGE>
WHAT A WORLD!, INC.
BALANCE SHEET -- FEBRUARY 1, 1997
(Note 1)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,294,189
Certificate of deposit 100,000
Inventories 1,207,015
Prepaid expenses and other current assets 95,567
-----------
Total current assets 2,696,771
PROPERTY AND EQUIPMENT (Note 2) 1,275,113
Less- Accumulated depreciation and amortization (301,265)
-----------
973,848
OTHER ASSETS 27,806
-----------
Total assets $ 3,698,425
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,386,608
Accrued expenses (Note 4) 257,779
Current maturities of capital lease obligations (Note 4) 68,156
-----------
Total current liabilities 1,712,543
-----------
DEFERRED RENT (Note 3) 731,652
CAPITAL LEASE OBLIGATIONS (Note 4) 91,630
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000,000 shares
authorized, 2,118,125 shares issued and
outstanding as of February 3, 1996, and
February 1, 1997 21,181
Additional paid-in capital 4,538,782
Accumulated deficit (3,397,363)
-----------
Total stockholders' equity 1,162,600
-----------
Total liabilities and stockholders' equity $ 3,698,425
===========
The accompanying notes are an integral part of this balance sheet.
F-2
<PAGE>
WHAT A WORLD!, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Note 1)
Year Ended Year Ended
February 3, February 1,
1996 1997
----------- -----------
NET SALES $ 5,510,278 $ 8,166,755
COST OF SALES 2,777,633 4,308,643
----------- -----------
Gross profit 2,732,645 3,858,112
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,318,179 4,910,755
LOSS ON IMPAIRMENT 85,789 1,485,535
----------- -----------
Loss from operations (671,323) (2,538,178)
----------- -----------
INTEREST AND OTHER INCOME 135,076 46,356
INTEREST EXPENSE (24,970) (36,789)
----------- -----------
110,106 9,567
----------- -----------
NET LOSS (561,217) (2,528,611)
ACCUMULATED DEFICIT, beginning of year (307,535) (868,752)
----------- -----------
ACCUMULATED DEFICIT, end of year $ (868,752) $(3,397,363)
=========== ===========
NET LOSS PER WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARE $ (.26) $ (1.19)
=========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 2,118,125 2,118,125
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
WHAT A WORLD!, INC.
STATEMENTS OF CASH FLOWS
Year Ended Year Ended
February 3, February 1,
1996 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (561,217) $(2,528,611)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization 207,285 386,749
Loss on sales of property and equipment -- 4,114
Loss on impairment 85,789 1,485,535
Changes in operating assets and liabilities-
Construction allowance receivable (227,000) 267,000
Inventories (332,894) (228,786)
Prepaid expenses and other current assets (121,404) 84,262
Other assets (20,737) (2,713)
Accounts payable 387,236 834,192
Accrued expenses 295,968 (223,712)
Deferred rent 421,196 87,479
----------- -----------
Net cash provided by operating
activities 134,222 165,509
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,644,542) (212,391)
Proceeds from sales of property and equipment -- 15,900
----------- -----------
Net cash used in investing activities (1,644,524) (196,491)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under related party loan agreements -- 410,000
Repayment of related party loans -- (410,000)
Payments on capital lease obligations (54,829) (61,827)
----------- -----------
Net cash used in financing activities (54,829) (61,827)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,565,131) (92,809)
CASH AND CASH EQUIVALENTS, beginning of year 2,952,129 1,386,998
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,386,998 $ 1,294,189
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 26,777 $ 36,789
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
WHAT A WORLD!, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 3, 1996, AND FEBRUARY 1, 1997
1. BUSINESS ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business and Basis of Presentation
What a World!, Inc. (the Company) was a mall-based unique gift specialty
retailer. The Company's assortment of products generally targeted customers who
have an active interest in nature, the outdoors and science. The Company opened
its first store in August 1993 and had 12 permanent stores in operation at
February 3, 1996, and at February 1, 1997, which are located in major regional
malls. Ten of the stores are located in Florida and one store each is located in
New York and New Jersey. In addition, the Company operated three temporary
holiday outlets (temporary stores) in Florida and 13 temporary stores in
Florida, Georgia and South Carolina during the 1995 and 1996 Christmas selling
seasons, respectively.
The Company's financial statements for the year ended February 1, 1997, have
been prepared on a going concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. The Company incurred net losses of $561,217 and $2,528,611 for the
years ended February 3, 1996, and February 1, 1997, respectively, and had an
accumulated deficit of $3,397,363 as of February 1, 1997.
The Company operated its chain of mall-based specialty gift retail stores until
March 10, 1997. Pursuant to the terms of the proposed Sale Agreement unanimously
approved by the Company's Board of Directors (the Board), in consideration of
the transfer to Natural Wonders, Inc. (the Buyer) of substantially all of the
Company's operating assets (including specified inventories, fixed assets and
tangible personal property, intangible personal property and contract rights and
store leases), the Buyer has agreed to pay the Company approximately $500,000 in
cash, subject to certain adjustments pursuant to the Sale Agreement, and to
assume certain liabilities (including minimum future rental payments under the
store leases, common area maintenance charges and other related obligations). In
addition, in order to immediately implement the benefits of the Sale Agreement
(and to reduce operating losses which were continuing to be incurred by the
Company), the Company entered into a Management Agreement with the Buyer whereby
the Buyer began operating the Company's specialty gift retail business
consistent with the Buyer's past practices as of March 10, 1997. Under the
Management Agreement, the Buyer is entitled to a management fee equal to all
gross operating revenue recognized and/or received in respect of the operation
of the business from and after March 10, 1997, through the date of termination,
which is the earlier of the closing date or May 31, 1997. The Buyer has agreed
to fund certain costs, expenses and liabilities associated with the operation of
the Company during the term thereof.
F-5
<PAGE>
The Company will be liable to the Buyer, in accordance with the terms of the
Management Agreement, for costs and expenses in excess of gross operating
revenues during the term thereof, if the closing does not occur by May 31, 1997,
due to the failure of the Company to satisfy the closing conditions.
In addition, the Chairman of the Board, the President and the Company will enter
into agreements at the closing of the Sale Agreement not to compete in the
existing retail market category.
The Sale Agreement may be terminated by the Buyer if, on the closing date,
certain conditions, including majority approval by the stockholders, are not met
by the Company or waived by the Buyer or if the closing does not occur on or
before May 31, 1997.
Upon closing of the Sale Agreement, the Company is expected to pay its remaining
liabilities and obligations with available cash and the proceeds of the Sale
Agreement. At that time, the Company is expected to become an acquisition
vehicle to effect acquisitions, whether by merger, exchange of capital stock,
acquisition of assets or other similar business combination, of or with an
operating business. After the closing of the sale transaction, the Company's
ability to meet its general and administrative cost obligations will be limited,
as it will at that time have no operating business to generate income and have
limited excess cash, if any, after paying its vendors and other liabilities.
There is no assurance that funds will be available from any source, particularly
in light of the Company's anticipated financial condition, to effect any such
business combinations. The Company has not yet identified any business
opportunities and has not entered into any arrangement in which it will attempt
to obtain an interest.
In the event that the closing of the Sale Agreement does not occur by May 31,
1997, or if the stockholders do not approve the sale transaction, the Company
would explore other alternatives, which could affect the realizable values of
the Company's assets and liabilities in the accompanying balance sheet.
Fiscal Year
The years ended February 3, 1996, and February 1, 1997, were 53-week and 52-week
years, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and investments with original
maturities of less than three months.
Certificate of Deposit
A certificate of deposit is maintained to serve as collateral for the Company's
letter-of-credit relating to certain leased equipment. The certificate of
deposit matures in November 1997 and bears interest at a rate of 4.64 percent
per annum.
F-6
<PAGE>
Inventories
Inventories are recorded at lower of cost or market by utilizing the retail
method of inventory valuation.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Assets
acquired under capital lease obligations and leasehold improvements are
amortized over the lesser of the useful lives of the assets or the lease terms.
Maintenance and repairs of property and equipment are expensed as incurred, and
major improvements are capitalized. Upon retirement, sale or other disposition
of property and equipment, the cost and accumulated depreciation or amortization
are eliminated from the accounts, and any gain or loss is charged or credited to
operations.
In the year ended February 3, 1996, the Company adopted the Financial Accounting
Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" (SFAS 121). The impact of adopting SFAS 121 is
reflected in loss on impairment in the accompanying statements of operations and
accumulated deficit for the years ended February 3, 1996, and February 1, 1997.
Deferred Rent
Certain of the Company's operating leases contain predetermined fixed increases
of the base rental rate during the initial term and concessions granted by
lessors, including construction allowances. 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 amounts payable under the leases as deferred rent in the
accompanying balance sheet.
Store Pre-Opening Costs
Operating costs (including site selection costs and store set-up and stocking
costs) incurred prior to the opening of a new store are expensed and included in
selling, general and administrative expenses in the accompanying statements of
operations and accumulated deficit. All pre-opening expenses associated with
temporary stores are expensed during the period. Legal and architectural fees
associated with permanent store openings are capitalized.
F-7
<PAGE>
Net Loss per Weighted Average Common and Common Equivalent Share
Net loss per weighted average common and common equivalent share is computed by
dividing net loss by the weighted average number of shares of common stock
outstanding and dilutive common equivalent shares from stock options and
warrants using the treasury stock method.
The FASB has issued SFAS No. 128, "Earnings Per Share" (SFAS 128). SFAS 128
effectively changes the primary earnings per share calculation to basic earnings
per share and requires a calculation for fully diluted earnings per share, which
is now referred to as diluted earnings per share. The Company is required to
adopt SFAS 128 in the following fiscal year. Management believes that the
adoption of SFAS 128 will have no impact on the financial statements.
Use of 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.
Seasonality
The Company's business is highly seasonal, with a substantial portion of its
revenues derived from product sales during the months of November and December.
If for any reason the Company's sales were substantially below those normally
expected in the fourth quarter of any fiscal year, the Company's operating
results would be materially adversely affected.
2. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of February 1, 1997:
Estimated
Useful Lives Amount
------------ -----------
Leasehold improvements 10 years $ 833,183
Furniture, fixtures and equipment 5 years 441,930
-----------
1,275,113
Less- Accumulated depreciation and amortization (301,265)
-----------
$ 973,848
===========
The Company acquired assets under capital lease obligations with a cost of
$97,798 during the year ended February 3, 1996. The Company recorded a loss on
impairment of equipment and leasehold improvements at certain store locations to
their net realizable value. A majority of these assets represent improvements to
the property, which were revalued to zero, since they cannot be sold or used in
other store locations.
F-8
<PAGE>
3. DEFERRED RENT:
The aggregate maturities of deferred rent as of February 1, 1997, were as
follows:
Fiscal Year Amount
----------- ----------
1998 $ (8,016)
1999 16,192
2000 44,901
2001 74,064
2002 127,890
Thereafter 476,621
---------
$ 731,652
=========
4. COMMITMENTS AND CONTINGENCIES:
The Company leases retail store space and office space under operating leases
expiring in various years through 2005. These leases include fixed rent payments
that escalate over the term of the lease and contingent rent payments based on
gross sales exceeding certain thresholds. There were no contingent rent payments
for the years ended February 3, 1996, and February 1, 1997. Certain of the
Company's lease agreements contain provisions which enable the Company to
terminate such agreements if specific conditions, including sales performance,
are met.
Minimum future rental payments under noncancelable operating leases (exclusive
of common area maintenance charges) as of February 1, 1997, were as follows:
Fiscal Year Amount
----------- ----------
1998 $ 875,740
1999 899,948
2000 928,657
2001 957,820
2002 1,011,646
Thereafter 3,189,123
----------
$7,862,934
==========
Total rent expense, including common area maintenance charges under the
Company's operating leases, was approximately $707,000 and $1,328,000 during the
years ended February 3, 1996, and February 1, 1997, respectively.
The Company maintains a $100,000 letter-of-credit to serve as collateral for
primarily all of the Company's capital lease obligations. The letter-of-credit
expires in November 1997.
F-9
<PAGE>
Future minimum lease payments under capital lease obligations, together with the
present value of the future minimum lease payments, were as follows as of
February 1, 1997:
Fiscal Year Amount
----------- ---------
1998 $ 85,463
1999 76,662
2000 23,690
---------
Total minimum lease obligations 185,815
Less- Interest (26,029)
---------
Present value of capital lease obligations,
including current maturities of $68,156 $ 159,786
=========
Effective March 26, 1996, the president of the Company resigned. The president
had an employment agreement (the Agreement) with the Company which, as amended,
expires in February 1997. Under the Agreement, the president was entitled to
receive a base salary of approximately $90,000 and $95,000, respectively, during
the fiscal years ended February 3, 1996, and February 1, 1997. Amounts due
through the end of the contract period of $95,000 were accrued as of February 3,
1996. The remaining amount due under the Agreement of approximately $14,000 is
included in accrued expenses in the accompanying balance sheet.
The Agreement also provides that, in the event of the president's death, his
estate shall be entitled to sell to the Company, and the Company shall be
required to buy, up to $500,000 of his common stock at a price per share equal
to the fair market value thereof at such time, provided the Company has been
able to obtain "key man" insurance on the president's life at commercially
reasonable rates.
The Company had a $55,000 corporate credit line as of February 1, 1997, to
facilitate employee expenses. The amount outstanding under this line is minimal
and is included in accounts payable in the accompanying balance sheet.
The Company is not a party or subject to any legal proceedings, other than
claims and lawsuits arising in the ordinary course of business. The Company does
not believe that any such claims or lawsuits will have a material adverse effect
on its financial condition or results of operations.
5. INCOME TAXES:
As of February 1, 1997, the Company had net deferred income tax assets of
approximately $1,200,000, which was fully offset by a valuation allowance. The
net deferred income tax asset (before allocation of the valuation allowance)
consisted of the following as of February 1, 1997:
Amount
----------
Accrued expenses $ 308,000
Net operating loss (NOL) carryforwards 401,000
Tax and financial basis differences
of property and equipment 491,000
----------
Net deferred income tax assets $1,200,000
==========
As of February 1, 1997, the Company had federal NOL carryforwards of
approximately $1,066,000. Approximately $90,000 of the NOL is associated with
the period January 1, 1995, through January 28, 1995, and can be carried forward
ratably over the next four fiscal years. Approximately $976,000 of the NOL
relates to the Company's C corporation periods and can be carried forward
through periods ranging from 2009 to 2012. The benefit of the NOL carryforwards
most likely will not be realized due to a change in the Company's operations
from the specialty retail business to an acquisition company after the closing
of the sale transaction.
6. RELATED PARTY TRANSACTION:
During the year ended February 1, 1997, the Company entered into agreements with
three members of its Board to borrow up to $600,000 to fund operations. The
Company borrowed $410,000 under these agreements, all of which was repaid before
February 1, 1997. Outstanding balances under these agreements accrued interest
at 12 percent per annum,
F-10
<PAGE>
and interest of approximately $9,000 is included in interest expense in the
accompanying statements of operations and accumulated deficit. Additionally, the
Company granted to the three directors one warrant for every three dollars of
borrowings made available (see Note 7).
7. WARRANTS:
As of February 1, 1997, the following warrants were outstanding:
<TABLE>
<CAPTION>
Aggregate
Title of Issue Amount of
of Security Securities
Called for by Called for by Terms of Exercise Redemption
Title Warrants Warrants Warrants Price Price
----- -------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Redeemable Warrants Common 5/17/95-
Stock 1,150,000 5/17/98 $5.00 $0.10
Underwriters' Warrants Common 11/17/95-
Stock 100,000 11/17/99 $7.25 --
Underwriters' Warrants Redeemable 11/17/95-
Warrant 100,000 11/17/99 $.145 --
Directors' Warrants Common 8/31/96-
Stock 200,000 8/31/01 $1.00 --
---------
Warrants outstanding 1,550,000
=========
</TABLE>
F-11
<PAGE>
The Redeemable Warrants may be redeemed by the Company, subject to certain
conditions, at $.10 per warrant if the Company's common stock trades for 20
consecutive days at or above $7.50 per share. The Underwriters' Warrants and
Directors' Warrants are not redeemable by the Company. The effect of warrants
outstanding has not been included in weighted average common and common
equivalent shares outstanding on the accompanying statements of operations and
accumulated deficit, as these warrants would have an antidilutive effect on net
loss per weighted average common and common equivalent share.
8. STOCK OPTION PLANS:
1994 Non-Employee Directors' Stock Option Plan
In November 1994, the Board adopted the 1994 Non-Employee Directors' Stock
Option Plan (the Directors' Plan), which became effective upon the effective
date of the Company's initial public offering (the Offering), reserving 40,000
unregistered shares of common stock for issuance under the Directors' Plan.
Options under the Directors' Plan vest ratably over three years and may be
exercised for 10 years from the grant date. The exercise price per share of each
stock option will be equal to the fair market value of the stock on the date of
grant. No options were granted during the year ended February 3, 1996. During
the year ended February 1, 1997, the Company granted 10,000 options to
non-employee directors at an exercise price of $1.50 under the Directors' Plan.
1994 Stock Option Plan
In November 1994, the Board adopted the 1994 Stock Option Plan (the Stock Option
Plan) which became effective upon the effective date of the Offering, reserving
260,000 unregistered shares of common stock for issuance under the Stock Option
Plan as incentive or non-incentive stock options. Options under the Stock Option
Plan vest ratably between one and five years as stated and may be exercised for
10 years from the grant date. The exercise price per share of each stock option
will be an amount not less than the par value of such shares and, in the case of
incentive options, not less than the fair market value of such shares on the
date of grant. No options were granted during the year ended February 3, 1996,
under the Stock Option Plan.
In May 1996, the Stock Option Plan was amended to add 300,000 shares to the
previously authorized shares that were subject to options under the Stock Option
Plan, resulting in a total of 560,000 shares of common stock available to grant
under the Stock Option Plan. During the year ended February 1, 1997, the Company
granted 400,000 options at exercise prices ranging from $1.00 to $1.68 per share
under the Stock Option Plan.
F-12
<PAGE>
Aggregate Stock Option Activity
The following table summarizes information about the aggregate stock option
activity for the years ended February 3, 1996, and February 1, 1997:
February 3, 1996 February 1, 1997
--------------------- ---------------------
Weighted- Weighted-
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- --------- --------- ---------
Outstanding, beginning of year 130,000 $ 4.54 130,000 $ 4.54
Granted -- -- 410,000 1.51
Exercised -- -- -- --
Forfeited -- -- -- --
-------- -------- -------- --------
Outstanding, end of year 130,000 $ 4.54 540,000 $ 2.24
======== ======== ======== ========
Options vested, end of year 85,000 $ 4.54 293,333 $ 2.85
======== ======== ======== ========
The weighted-average fair value of options granted during the year ended
February 1, 1997, was $.69.
The following table summarizes information about stock options at February 1,
1997:
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Number Exercise Contractual Number Exercise
Exercise Prices Outstanding Price Life (Years) Exercisable Price
- --------------- ----------- ----- ------------ ----------- -----
$ 1.00 70,000 $ .13 9 14,000 $ .05
$ 1.50 110,000 .30 9 103,333 .52
$ 1.68 230,000 .71 9 46,000 .26
$ 4.25 80,000 .63 7 80,000 1.16
$ 5.00 50,000 .47 7 50,000 .86
------- ------- ------- ------- ------- -------
540,000 $ 2.24 8.51 293,333 $ 2.85
======= ======= ======= ======= =======
The effect of options outstanding has not been included in weighted average
common and common equivalent shares outstanding in the accompanying statements
of operations and accumulated deficit, as these options would have an
antidilutive effect on net loss per weighted average common and common
equivalent share.
F-13
<PAGE>
Accounting for Stock-based Compensation
The Company accounts for its stock option plans under Accounting Principles
Board Opinion No. 25 (APB 25), under which no compensation expense has been
recognized. In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), which was effective for fiscal years
beginning after December 15, 1995. SFAS 123 allows companies to continue
following the accounting guidance of APB 25, but requires pro forma disclosure
of net income and earnings per share for the effects on compensation expense had
the accounting guidance of SFAS 123 been adopted. The pro forma disclosures are
required only for options granted in fiscal years beginning after December 15,
1994.
The Company adopted SFAS 123 for disclosure purposes in the year ended February
1, 1997. For SFAS 123 purposes, the fair value of each option granted has been
estimated as of the grant date using the Black-Scholes option pricing model with
the following weighted average assumptions: risk-free interest rates ranging
from 5.9 to 6.4 percent, expected life of three years, no expected dividends,
and expected volatility of approximately 60 percent. Using these assumptions,
the fair value of the stock options granted in the year ended February 1, 1997,
was approximately $75,000, which would be amortized as compensation expense over
the vesting periods of the options.
Had compensation expense been recognized under SFAS 123, utilizing the
assumptions detailed above, the Company's net loss and net loss per weighted
average common and common equivalent share (LPS) would have been changed to the
following pro forma amounts for the fiscal year ended February 1, 1997 (no
effect for the fiscal year ended February 3, 1996):
Amount
-----------
Net loss: As reported $(2,528,611)
Pro forma $(2,570,863)
LPS: As reported $ (1.19)
Pro forma $ (1.21)
Because the SFAS 123 method of accounting has not been applied to options
granted in fiscal years beginning prior to December 15, 1994, the resulting pro
forma compensation expense may not be representative of that to be expected in
future years.
F-14
<PAGE>
9. PRO FORMA DISCLOSURES (Unaudited):
The following unaudited pro forma information reflects the adjustments pursuant
to the proposed Sale Agreement as if the sale had occurred on February 1, 1997,
for pro forma balance sheet purposes and at the beginning of fiscal years ended
February 3, 1996, and February 1, 1997, for pro forma statements of operations.
In fact, during the period February 2, 1997, through March 9, 1997, the Company
operated the specialty retail business consistent with its past practices and
incurred NOL of approximately $231,000 (unaudited).
Pro Forma Balance Sheet
February 1,
Pro Forma 1997
February 1, Adjustments Pro Forma
1997 (Unaudited) (Unaudited)
----------- ----------- -----------
ASSETS:
Cash and cash equivalents $ 1,294,189 $ 584,208 $ 1,878,397
Inventories 1,207,015 (1,207,015) --
Net property and equipment 973,848 (973,848) --
Other assets 223,373 (123,373) 100,000
----------- ----------- -----------
Total assets $ 3,698,425 $(1,720,028) $ 1,978,397
=========== =========== ===========
LIABILITIES:
Accounts payable $ 1,386,608 $ 121,434 $ 1,508,042
Deferred rent 731,652 (731,652) --
Other liabilities 417,565 -- 417,565
----------- -----------
Total liabilities 2,535,825 (610,218) 1,925,607
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Paid-in capital 4,559,963 -- 4,559,963
Accumulated deficit (3,397,363) (1,109,810) (4,507,173)
----------- ----------- -----------
Total stockholders' equity 1,162,600 (1,109,810) 52,790
----------- ----------- -----------
Total liabilities and
stockholders' equity $ 3,698,425 $(1,720,028) $ 1,978,397
=========== =========== ===========
The pro forma balance sheet adjustments reflect the sale of inventories and
property and equipment for $500,000 cash plus $25,000 for inventories in excess
of $700,000. The remaining adjustments relate to reimbursable deposits and
prepaid expenses, revaluation of remaining property and equipment and other
assets, accruals for severance, insurance, interest and lease commitment costs,
and the reversal of deferred rent due to assumption of leases by the Buyer.
F-15
<PAGE>
In the first quarter of fiscal 1997, the Sale will result in an estimated loss
of approximately $868,000. In addition to the transactions reflected above in
the pro forma balance sheet, the Company could also be liable for a maximum
closing penalty of $45,000, as defined in the Sale Agreement, if the closing
occurs between April 15, 1997, and May 31, 1997. The Company will be reimbursed
for up to $100,000 of reimbursable and documented legal costs and expenses, as
defined in the Sale Agreement. The Company also expects to incur approximately
$100,000 of non-reimbursable legal costs and expenses relating to the sale
transaction subsequent to February 1, 1997.
Pro Forma Statements of Operations
Year Ended
February 3,
Pro Forma 1996
February 3, Adjustments Pro Forma
1996 (Unaudited) (Unaudited)
----------- ----------- -----------
NET SALES $ 5,510,278 $(5,510,278) $ --
COST OF SALES 2,777,633 (2,777,633) --
----------- ----------- -----------
Gross profit 2,732,645 (2,732,645) --
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,318,179 (2,892,479) 425,700
LOSS ON IMPAIRMENT 85,789 (85,789) --
----------- ----------- -----------
Loss from operations (671,323) 245,623 (425,700)
INTEREST AND OTHER INCOME 135,076 -- 135,076
INTEREST EXPENSE (24,970) -- (24,970)
----------- ----------- -----------
NET LOSS FROM OPERATIONS $ (561,217) $ 245,623 $ (315,594)
=========== =========== ===========
NET LOSS FROM OPERATIONS PER
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARE $ (.26) $ (.15)
=========== ===========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 2,118,125 2,118,125
=========== ===========
F-16
<PAGE>
Year Ended
February 1,
Pro Forma 1997
February 1, Adjustments Pro Forma
1997 (Unaudited) (Unaudited)
----------- ----------- -----------
NET SALES $ 8,166,755 $(8,166,755) $ --
COST OF SALES 4,308,643 (4,308,643) --
----------- ----------- -----------
Gross profit 3,858,112 (3,858,112) --
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,910,755 (4,670,055) 240,700
LOSS ON IMPAIRMENT 1,485,535 (1,484,535) --
----------- ----------- -----------
Loss from operations (2,538,178) 2,297,478 (240,700)
INTEREST AND OTHER INCOME 46,356 -- 46,356
INTEREST EXPENSE (36,789) 9,000 (27,789)
----------- ----------- -----------
NET LOSS FROM OPERATIONS $(2,528,611) $ 2,306,478 $ (222,133)
=========== =========== ===========
NET LOSS FROM OPERATIONS PER
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARE $ (1.19) $ (.10)
=========== ===========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 2,118,125 2,118,125
=========== ===========
The Company's loss from discontinued operations would have been approximately
$1,259,000, or $(.59) per share, and $2,510,000, or $(1.19) per share, for
the fiscal years ended February 3, 1996, and February 1, 1997, respectively,
had the sale transaction consummated at the beginning of the fiscal years.
The pro forma adjustments reflect reversal of sales and cost of sales as if
the sale had occurred at the beginning of the fiscal years. The pro forma
adjustment of selling, general and administrative expenses includes reversal
of store and support personnel compensation and occupancy, supply, freight
and vehicle costs and certain professional fees from continuing operations.
The remaining balance of selling, general and administrative expenses
consists of $84,000 of leased register equipment expense, Board insurance,
corporate and certain other administrative expenses, including $185,000
compensation expense for the Company's former president in the year ended
February 3, 1996 (see Note 4). The remaining pro forma adjustments are for
reversal of loss on impairment relating to permanent store locations and
reversal of interest expense for borrowings from the Company's directors (see
Note 6).
F-17
Exhibit 1.8
[FORM OF STOCKHOLDER LOCK-UP AGREEMENT]
AGREEMENT, dated March , 1997, between Natural Wonders, Inc., a
Delaware corporation (the "Buyer") and , a stockholder (the "Holder") of
What A World!, Inc. (the "Corporation").
In order to induce the Buyer to enter into the Asset Purchase Agreement (the
"Purchase Agreement") dated as of the date hereof among the Buyer and the
Corporation providing for the sale of substantially all of the assets of the
Corporation to the Buyer, the Holder and the Buyer hereby agree as set forth
below:
1. The Holder represents and warrants that he owns of record and
beneficially, and has good and marketable title to (free and clear of any lien,
pledge, charge or other encumbrance) an aggregate of shares of the
Corporation's common stock, par value $.01 per share (the "Common Stock").
2. The Holder hereby irrevocably appoints Ms. Kathleen M. Chatfield or Mr.
Michael J. Waide, the President and Chief Financial Officer of the Buyer,
respectively, as his proxy and attorney-in-fact, with full power of
substitution, on behalf of and in the name of the Holder, to represent the
Holder at any meeting of the stockholders of the Corporation held, or to sign
any written consents executed, during the term of this Agreement for the sole
purpose of voting upon the proposed sale of substantially all of the
Corporation's assets to the Buyer as contemplated by the Purchase Agreement. The
Holder acknowledges that the proxy and power of attorney granted hereby,
inasmuch as it is granted in conjunction with the proposed asset sale as
contemplated by the Purchase Agreement, is coupled with an interest.
3. The Holder agrees as follows:
(i) from and after the date hereof through the Closing (as defined in
the Purchase Agreement), to refrain from transferring, selling, pledging,
assigning or otherwise disposing of any of the shares of Common Stock
presently owned or hereafter acquired by him to any person, provided,
however, that the Holder may donate all or a portion of the Common Stock if
the donee, simultaneously with the donation, signs and delivers to Buyer an
agreement substantially similar to this Agreement;
1
<PAGE>
(ii) from and after the date hereof through the Closing, to refrain from
soliciting or engaging in negotiations or discussions with respect to or
entering into any agreement with any person (except the Buyer or a
wholly-owned subsidiary thereof) for such transfer, sale, pledge, assignment
or disposition;
(iii) from and after the date hereof through the Closing, to use his best
efforts to cause the Corporation to comply with the terms of the Purchase
Agreement; and
(iv) subject to applicable laws, including without limitation, federal
securities laws, from and after the date hereof through the Closing, to
refrain from issuing any public statement or communication regarding the
matters contemplated hereby without first notifying the Buyer and the
Corporation and providing them with a copy of the text thereof;
4. The Holder acknowledges that this Agreement and the proxy granted
hereunder are provided in furtherance of Buyer's proposal to acquire
substantially all of the assets of the Corporation and that money damages are
not an adequate remedy. The Holder hereby agrees that in the event of any breach
of this Agreement by the Holder, Buyer shall be entitled to equitable relief of
specific performance of the terms hereof; provided that nothing herein shall be
deemed to constitute a waiver by Buyer of any other remedy available to it
hereunder, in law or in equity.
5. This Agreement is binding upon the parties and their respective heirs,
administrators, successors and assigns. This Agreement shall not be assignable
by any party without the prior written consent of the other party.
6. This Agreement shall be construed in accordance with the laws of the
State of Delaware.
7. This Agreement may be amended or modified but only by a writing signed by
the parties hereto or their respective successors and assigns.
8. The Agreement shall terminate upon the earlier to occur of (i) the
Closing or (ii) the termination of the Purchase Agreement in accordance with the
terms thereof.
9. This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute but one and the same
instrument.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
NATURAL WONDERS, INC.
By:
-------------------------------
Name:
Title:
- ----------------------------------
[Stockholder]
3
Exhibit 1.9
MANAGEMENT AGREEMENT
AGREEMENT made as of March 7, 1997, by and between Natural Wonders,
Inc., a Delaware corporation ("Natural Wonders"), and What A World!, Inc., a
Delaware corporation ("WAW").
WHEREAS, the parties hereto have entered into an asset purchase
agreement of even date herewith (the "Purchase Agreement"), pursuant to which
Natural Wonders has agreed to purchase the Assets as of March 10, 1997 (the
"Effective Date");
WHEREAS, the Closing of the Purchase Agreement will not take place
on the date hereof; and
WHEREAS, WAW desires to engage, from the Effective Date until the
Closing, Natural Wonders to operate and manage WAW's specialty gift retail
business which involves the sale primarily of nature and science related
products at the locations ("WAW Locations") heretofore operated by WAW (the
"Business"), subject to the terms and conditions hereof.
NOW THEREFORE, in consideration of the terms, conditions, agreements
and covenants contained herein, the parties hereto mutually agree as follows:
1. Definitions. Unless the context requires otherwise, or unless
specified herein to the contrary, all capitalized terms used in this Agreement
without definition shall have the respective meanings provided therefor in the
Purchase Agreement.
2. Services To Be Rendered. (a) Subject to the terms and conditions
hereof, WAW hereby engages Natural Wonders to operate the Business consistent
with the past practice of Natural Wonders.
(b) Natural Wonders shall fund all costs, expenses and
liabilities referred to on Annex A which relate to the operation of the Business
at the WAW locations (excluding corporate overhead costs, expenses and
liabilities associated with the operation of WAW's home office/warehouse
facility) during the term hereof (the "Operating Expenses"), it being agreed
that Natural Wonders shall not be responsible for any costs, expenses and
liabilities which relate to the operation of the Business by WAW prior to the
Effective Date. Natural Wonders shall, as needed and on a continuing basis
during the term hereof, procure requisite inventories and provide managerial
advice, direction and services to WAW store and home office personnel.
Inventories shall, unless otherwise agreed by the parties, be supplied to WAW
(A) on a C.O.D. basis, provided Natural Wonders provides the cash in payment
therefor at or before the time payment is due, or (B) on a consignment basis.
(c) The parties agree that the Business shall be operated in
the ordinary course during the term hereof.
3. Management Fee. (a) Subject to the terms hereof, the parties
hereby agree that Natural Wonders shall be entitled to a fee (the "Management
Fee") equal to all gross operating revenues recognized and/or received
("Operating Revenues") in respect of the operation of the Business from and
after the Effective Date through the date of termination of this Agreement.
(b) Natural Wonders shall open a bank account for the purpose
of receiving (i) cash generated from operations during the term hereof and (ii)
to the extent that Operating Revenues exceed Operating Expenses, the Management
Fee. WAW shall, on a weekly basis, during the term hereof provide to Natural
Wonders information regarding Operating Expenses to be paid during the
then-current week ("Weekly Reports") and Natural Wonders shall, within two days
after receipt of each Weekly Report, wire transfer to WAW such amounts which
would enable WAW to make such Operating Expense payments, it being agreed that
any cash from credit card sales during the term hereof shall be retained by WAW
hereunder and shall be applied by WAW against Operating Expense payments (and
the Weekly Reports shall include information regarding the amount of such credit
card receipts in the prior week). WAW shall include in each Weekly Report
evidence of payment of Operating Expenses during the prior week.
4. Trademarks, Etc. Natural Wonders acknowledges that no rights in
or to any of the trademarks, trade names or labels ("Trademarks") of WAW of any
kind shall accrue to it by virtue of the performance of the activities
contemplated by this Agreement; provided, however, that during the term of this
Agreement, Natural Wonders shall have a royalty-free license to use the
Trademarks in respect of operation of the
<PAGE>
Business at the WAW Locations. WAW also agrees that if Natural Wonders desires
to use other trademarks in the Business during the term of this Agreement, such
use is acceptable to WAW provided that such use does not violate the terms of
any lease or other agreement to which WAW is a party. It is acknowledged and
agreed that during the term hereof Natural Wonders' branded merchandise may be
marketed and sold at the WAW Locations, subject to the proviso in the
immediately preceding sentence.
5. WAW Management Personnel. WAW agrees that, during the term
hereof, it shall maintain its home office/warehouse facility and shall provide
the services of Brian Lappin and Michelle Van Gelder, or such two other
employees of WAW as the parties may mutually agree upon, to dedicate a
substantial portion of their business time and attention to providing services
by WAW hereunder.
6. Term of Agreement. This Agreement shall be effective as of the
Effective Date, and shall terminate upon the earlier of the Closing Date or the
Final Closing Date. The termination of this Agreement shall not affect any of
the parties' rights and obligations hereunder arising prior to the date of such
termination. Notwithstanding anything to the contrary herein, the parties shall
have the right to terminate this Agreement in accordance with the provisions of
Section 7 hereof.
7. Events of Default. Upon the occurrence of any of the following
events, in addition to all other remedies at law or in equity that a party may
possess, such party may declare this Agreement terminated:
(i) default in the performance of any material term of
this Agreement or the Purchase Agreement by the other party (the "Other Party")
and the failure to cure the same within five (5) days after written notice to
the Other Party specifying such default and demanding that the same be remedied;
(ii) in the event the Other Party shall admit in writing
its inability to pay its debts generally as they become due, call a meeting of
its creditors, file a petition for relief under any bankruptcy laws or any
amended or successor statute, or any other applicable law, statute or
regulation, or take advantage of any insolvency law, statute or regulation, or a
petition to take advantage of any insolvency statute; make an assignment for the
benefit of its creditors; commence a proceeding for the appointment of a
receiver, trustee, liquidator or conservator of itself or of the whole or a
substantial part of its property; file a petition or answer seeking
reorganization or arrangements of similar relief under the bankruptcy laws or
under any other applicable law, statute or regulation of the United States or of
any state thereof; or
(iii) in the event the Other Party shall be named as a
debtor in an order for relief under any bankruptcy laws, statutes or regulations
or any amended or successor law, statute or regulation or a court of competent
jurisdiction shall enter an order, judgment or decree appointing a receiver,
trustee, liquidator or conservator of the Other Party or of the whole or a
substantial part of its properties or approve a petition filed against the Other
Party seeking reorganization or arrangement or similar relief under the federal
bankruptcy laws or any applicable law or statute of the United States or any
state thereof; or if, under the provisions of any other law for the relief or
aid of debtors, a court of competent jurisdiction shall assume custody or
control of the Other Party or of the whole or a substantial part of its
properties; or if there is commenced against the Other Party any proceeding for
any of the foregoing relief or if a petition relating to any insolvency statute
is filed against the Other Party and such proceeding or petition remains
undismissed for a period of thirty (30) days; or if the Other Party by any act
indicates its consent to, approval of or acquiescence in any such proceeding or
petition.
8. Failure to Consummate Purchase Agreement. Subject to the terms
hereof, in the event the Closing does not occur by May 31, 1997 due to the
failure of WAW to satisfy the closing conditions set forth in Section 4 of the
Purchase Agreement by such date, (a) Natural Wonders shall be entitled to retain
its fee hereunder relating to the period ending on the date of termination; (b)
WAW shall reimburse, within seven (7) days after the date of termination,
Natural Wonders to the extent of the excess of, if any, of Operating Expenses
funded by Natural Wonders hereunder above Operating Revenues during the term of
this Agreement; and (c) to the extent not covered by (b) above, WAW shall,
within seven (7) days after the date of termination, reimburse Natural Wonders
for its reasonable, documented out-of-pocket expenses, including without
limitation legal, accounting and other advisory fees and expenses, salaries (up
to a maximum of $25,000 in aggregate salaries) and travel costs, related to the
transactions contemplated by the Purchase Agreement and this Agreement
(excluding executive salaries and, except for reimbursable salaries referred to
above, corporate office overhead). WAW shall have no obligation to (i) pay for
inventory purchased or committed to purchase by Natural Wonders or (ii)
reimburse Natural Wonders for any expenses not constituting Operating Expenses.
In addition, if the Closing does not occur, Natural Wonders shall ensure that
WAW has on hand, in the WAW Locations, inventories of current, saleable
merchandise in an aggregate amount of at least $700,000. WAW shall have no
obligation to pay Natural Wonders for inventories in excess of $700,000 in the
event the Closing does not occur. Natural Wonders shall incur no capital
expenditures
-2-
<PAGE>
without WAW's consent. In the event the Closing does not occur in accordance
with the Purchase Agreement and Natural Wonders shall have made capital
expenditures which were not approved by WAW, then Natural Wonders shall be
entitled to retain ownership of any assets acquired through any such capital
expenditures.
9. Independent Contractor. Natural Wonders shall act as, and shall
be deemed to be, an independent contractor hereunder. Nothing contained in this
Agreement shall be construed to place the parties in a relationship as partners,
joint venturers or employer and employee. Neither party shall have any authority
to act or purport to act as the other party's agent or legally empowered
representative for any purpose whatsoever, except as expressly set forth herein.
10. Insurance. WAW shall continue to keep in force and effect during
the term hereof all insurance heretofore maintained by WAW involving the
operation of the Business and listed on Schedule 2.17 to the Purchase Agreement,
subject to the obligation of Natural Wonders to provide funds hereunder for the
payment of premiums on all such insurance constituting Operating Expenses. It is
the intention of the parties that WAW shall reimburse Natural Wonders for any
premiums paid or funded by Natural Wonders for any period prior to the Effective
Date.
11. Indemnification. (a) WAW shall indemnify and hold harmless
Natural Wonders, and its officers, directors and employees, from and against any
and all losses, costs, expenses, liabilities, claims, damages and judgments of
every nature, including the cost of investigation and defense thereof and
reasonable attorneys' fees ("Damages") which arise out of or are based upon the
operation of the Business during the term hereof unless such Damages resulted
from Natural Wonders' gross negligence or willful misconduct hereunder or
otherwise.
(b) Natural Wonders shall indemnify and hold harmless WAW, and
its officers, directors and employees, from and against any and all Damages
which arise out of or are based upon Natural Wonders' gross negligence or
willful misconduct hereunder or otherwise.
12. Notices. Any notice or other communication required or permitted
under this Agreement shall be in writing and sent in accordance with the terms
of the Purchase Agreement.
13. Entire Agreement, Amendments, Etc. This Agreement supersedes and
terminates any and all prior existing agreements between the parties hereto
relating to the subject matter hereof and constitutes the complete understanding
between the parties hereto. No alteration, amendment, or modification of any of
the terms and provisions of this Agreement shall be valid unless made pursuant
to an instrument in writing signed by a duly authorized representative of the
parties hereto. All remedies, rights, undertakings, obligations, and agreements
contained in this Agreement shall be cumulative and none of them shall be in
limitation of any other remedy, right, undertaking, obligation or agreement of
either party. This Agreement shall be construed and enforced in accordance with
the laws of the State of Delaware.
14. Severability. In the event that any provision of this Agreement
shall be held to be invalid or unenforceable in any respect, the validity,
legality, or enforceability of the remaining provisions of this Agreement shall
be unaffected thereby.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same document.
16. Headings. The headings of the paragraphs hereof are inserted for
reference purposes only, and shall not be construed as part of this Agreement.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date and year first above written.
NATURAL WONDERS, INC.
By: /s/ Michael J. Waide
-------------------------------
Name: Michael J. Waide
Title: Senior Vice President,
Finance and Chief
Financial Officer
WHAT A WORLD!, INC.
By: /s/ David F. Miller
-------------------------------
Name: David F. Miller
Title: President
-4-
<PAGE>
Annex A
Natural Wonders shall fund all of the following costs, expenses and liabilities
referred to below which relate to the operation of the Business at the WAW
Locations (excluding costs, expenses and liabilities associated with the
operation of WAW's home office/warehouse facility) during the term of the
foregoing Agreement (it being agreed that Natural Wonders shall not be
responsible for any costs, expenses and liabilities which relate to the
operation of the Business by WAW prior to the Effective Date):
- - Inventories
- - Costs and expenses associated with personnel, including without limitation,
salaries, workers' compensation, employee and dependent health insurance
(consistent with present Natural Wonders' personnel practices), and
unemployment insurance (all such insurance being referred to on Schedule
2.17 to the Purchase Agreement), and payroll service costs
- - Costs and expenses incurred pursuant to or in connection with the Store
Leases, including rent, common area maintenance, trash pick up and similar
expenses
- - Taxes, including without limitation sales tax, real estate and rental tax,
FICA, FUTA, Social Security and Medicare
- - Insurance (commercial real and personal property; commercial business
income; commercial crime insurance; commercial general liability; commercial
umbrella liability)
- - Utilities, including electric and telephone (including local and long
distance charges)
- - Supplies
- - Bank card/transaction fees
- - Banking fees
- - Check guaranty services
- - License and permit costs
- - Merchant association dues
- - Postage/shipping
- - Common area maintenance, trash pick-up and similar expenses
- - Store manager travel and entertainment
- - Advertising costs
-5-
_________________________ , 1997
Natural Wonders, Inc.
4209 Technology Drive
Fremont, CA 94538
Re: Sale and Purchase of the Assets of What A World!, Inc.
----------------------------------------------------------
Ladies and Gentlemen:
We have acted as legal counsel to What A World!, Inc. (the "Seller")
in connection with the sale to Natural Wonders, Inc. (the "Buyer") of certain of
the assets of the Seller, pursuant to a certain Asset Purchase Agreement, dated
March 1, 1997 (the "Agreement"). This opinion is furnished to you pursuant to
Section 4.4 of the Agreement. All capitalized terms used herein without
definition shall have the meanings assigned to them in the Agreement.
We have examined originals, or copies, certified or otherwise
identified to our satisfaction, of (i) the Seller's Certificate of Incorporation
and By-Laws, each as amended to date, and minutes of meetings or written actions
taken without a meeting of stockholders and the Board of Directors of the Seller
and (ii) such other corporate records of the Seller, certificates or comparable
documents or telegrams of public officials, certificates of officers and
representatives of the Seller and other documents as we deemed relevant and
necessary as a basis for the opinions hereinafter set forth. In such
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as original documents, the conformity to
original documents of all documents submitted to us as certified, conformed or
reproduced copies and the authenticity of the originals of such latter
documents. We have also assumed the due authorization, execution and delivery of
agreements and other documents by each party thereto (other than the Seller) and
that each such agreement and document is valid, binding and enforceable against
such additional parties. As to any facts material to this opinion, we have
relied upon statements, information and representations made to us by one or
more stockholders, officers and/or other representatives of the Seller and in
the certificates of public officials referred to above, and upon the
representations and warranties contained in the Agreement and we do not believe
we are not justified in relying upon such statements, information,
representations and certificates. As counsel to the Seller, we are in general
familiar with its legal affairs. We do not, however, serve as
<PAGE>
Natural Wonders, Inc.
__________________, 1997
Page 2
counsel to the Seller on all matters, and we are not called upon to review all
matters of a legal nature affecting its business. There exist matters of a legal
or factual nature relating to the Seller with respect to which we have not been
consulted by the Seller and concerning which we have no, or limited, knowledge.
Without limiting the generality of the foregoing, this letter does not relate to
(i) the Store Leases or (ii) trademark and other intellectual property matters.
Please be advised that phrases such as "to our knowledge", "known to
us," or similar language, means actual (i.e., not constructive) knowledge of
attorneys within our firm who have given substantive attention to the Seller
during the course of this firm's representation thereof after inquiring of
officers and representatives of the Seller and review of the documents referred
to in the officers' certificates provided to us by the Seller's President but
without independent investigation. We have not performed any litigation, lien,
judgment, tax, UCC or other search with respect to the Seller.
We are lawyers admitted to practice only in the State of New York, and
do not purport to be experts in the laws of any other jurisdiction other than
the federal laws of the United States of America. Although none of the members
of this firm is admitted to the bar of the State of Delaware, in rendering this
opinion we have considered the General Corporation Law of such state.
Accordingly, the following opinion is limited solely to matters covered by the
laws of New York, the federal laws of the United States of America and by the
General Corporation Law of the State of Delaware (except in each case as limited
by the foregoing paragraphs). Since the Seller is organized and existing under
the laws of the State of Delaware, we have relied, in part, upon our examination
of and experience with the General Corporation Law of the State of Delaware
without obtaining the opinion of counsel admitted to practice in such state.
Furthermore, to the extent this opinion addresses matters governed by the
contract laws of the State of Delaware, by which the Agreement is stated to be
governed, we have assumed that such laws are identical to the laws of the State
of New York.
Based on the foregoing, and subject to the qualifications set forth
below, we are of the opinion that:
1. The Seller is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware and has full power to
carry on its business as it is now being conducted. [To our knowledge, the
Seller is duly
<PAGE>
Natural Wonders, Inc.
__________________, 1997
Page 3
qualified to do business and is in good standing as a foreign corporation in all
jurisdictions in which the nature of its activities and of its properties makes
such qualification necessary and the failure to so qualify could have a material
adverse effect on the Seller's Business or Assets.]
2. The Seller has taken all required corporate actions necessary to
authorize the execution, delivery and performance of the Agreement and all
ancillary agreements attached thereto. The persons executing the Agreement on
behalf of the Seller have been duly authorized to do so by the Seller.
3. The execution, delivery, performance and compliance by the Seller
with the terms of the Agreement and the transactions contemplated therein by the
Seller will not result in a violation of, or conflict with any provision of the
Certificate of Incorporation or By-laws of the Seller and, to our knowledge, do
not conflict with or constitute a default under the provisions of any judgment,
writ, decree or order to which the Seller is bound or is a party. To our
knowledge, the execution, delivery and performance of the Agreement and the
transactions contemplated therein by the Seller will not result in a breach or
default under any Contract, other than Store Leases (as to which we render no
opinion), known to us to which the Seller is a party or by which the Seller or
any of its properties or assets are bound, except for any breach or default that
would not have a material adverse effect on the Seller's Business or Assets.
4. No action of or filing with any governmental or public body or
authority is required under the General Corporation Law of the State of Delaware
or federal securities laws to authorize or is otherwise required under such laws
for the validity of execution, delivery, and performance by the Seller of the
Agreement, except where the failure to take such action or make such filing
would not have a material adverse effect on the Seller's Business or Assets.
5. The Agreement has been duly authorized, executed and delivered by
the Seller and, subject to the limitations and qualifications set forth below,
constitutes the legal, valid and binding obligation of the Seller, enforceable
against the Seller in accordance with its terms.
6. Except as set forth in the Schedules to the Agreement, we do not
know of any pending suit, action, investigation or inquiry by any governmental
body, or arbitration
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Natural Wonders, Inc.
__________________, 1997
Page 4
proceedings or any material labor dispute relating to or affecting the Seller,
its assets or its business.
The opinions stated in this letter as to the enforceability of the
Agreement or any of the Buyer's rights and or remedies thereunder is limited by,
and subject to: (i) the applicability of bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance and similar laws generally affecting the
rights of creditors; (ii) the efficacy or availability of specific performance,
injunctive relief or any other equitable remedy, and the effect of general
principles of laws, judicial decisions and equitable principles that may
restrict or impair the enforcement of certain waivers, consents, or rights and
remedies provided for in the Agreement; and (iii) compliance with the implied
covenant of good faith and fair dealing.
This opinion is rendered only for the benefit of the Buyer in
connection with the Agreement, and may not be used, quoted or otherwise referred
to, and may not be filed with, or furnished to or relied upon by, any
governmental agency or entity or any other person, firm, corporation or other
entity without the prior written authorization of this firm. We assume no
obligation to inform you of any facts, circumstances, events or changes in the
law that may hereafter be brought to our attention that may alter, affect or
modify the opinions expressed herein.
Please be advised that James Martin Kaplan, a partner in this firm, is
a director and securityholder of the Seller.
Very truly yours,
Exhibit 4.9
NON COMPETITION AGREEMENT
This Non Competition Agreement (the "Agreement") is made as of March ,
1997 is entered into between Natural Wonders, Inc., a Delaware Corporation
(the "Buyer") and [ ] of [ ] (the "Individual") with reference to
the following.
What A World!, Inc., a Delaware corporation (the "Seller"), and the Buyer
entered into a Asset Purchase Agreement dated March , 1997 (the "Asset
Purchase Agreement"), pursuant to which the Seller agreed to sell, and the Buyer
agreed to buy certain of the assets and assume certain of the liabilities the
Seller.
The Individual is a stockholder, director and officer of the Seller.
Pursuant to the Asset Purchase Agreement, the Individual, as a stockholder
of the Seller, will receive valuable consideration as a result of the sale by
the Seller of certain of its assets to the Buyer.
The Individual acknowledges that the ability of the Buyer to successfully
exploit the assets of the business of the Seller which it is acquiring will be
materially jeopardized and its value reduced if the Individual competes with or
assists any other person in competing with the business of the Buyer as such
terms are used or contemplated herein.
The Individual acknowledges that this Agreement is separately bargained for
consideration, that it is a condition to the Closing that certain of the
directors who are principal stockholders of the Seller agree that they will not
compete with the business of the and that the execution of this Agreement is a
material inducement to the Buyer to enter into the Asset Purchase Agreement.
The parties agree as follows:
1. For the purpose of this Agreement the definition "Business" shall mean a
business entity whose primary business is the operating of a specialty retailer
selling nature and science products, including, without limitation, telescopes,
minerals, gardening and outdoor products, educational toys and games and
apparel.
2. For a period of two (2) years following the date of this Agreement (the
"Non-Compete Period") the Individual covenants and agrees that the Individual
will not become involved as an employee, consultant or investor (other than as
an investor of less than 5% of a publicly traded company) in any specialty
retailer within the United States of America which is directly or indirectly
competitive with the any material aspect of the Business.
3. During the Non-Compete Period, the Individual shall not, either on its
own account or in conjunction with or on behalf of any other person, employ,
solicit, or entice away or attempt
<PAGE>
to employ, solicit or entice away from the Buyer any person who to
Individual's knowledge after due inquiry, is an employee of the Buyer, either
at present or at any time in the future.
4. The Individual acknowledges that a breach of this Agreement is likely to
result in irreparable and unreasonable harm to the Buyer, and that injunctive
relief, as well as damages, would be appropriate. If the Individual breaches
this Agreement, the Individual shall be liable for all legal fees and costs
incurred by the Buyer to enforce this Agreement or pursue remedies arising as a
result of such breach.
5. This Agreement shall inure to the benefit of the Buyer and its successors
and assigns.
6. This Agreement shall be governed by and construed in accordance with the
laws of the State of California applicable to contracts entered into and to be
wholly performed in the State of California.
7. If any provision of this Agreement is held to be unenforceable for any
reason, it shall be adjusted rather than voided, if possible, in order to
achieve the intent of the parties to the fullest extent possible. In any event,
all other provisions of this Agreement shall be deemed valid and enforceable to
the fullest extent possible.
8. This Agreement may be executed in counterparts, each of which shall be
deemed to be an original, but all of which when taken together shall constitute
one and the same instrument.
9. In order to be effective, any notice or other communication required or
permitted hereunder must be in writing and may be transmitted by messenger,
delivery service, mail, telex, telegram, telecopy or cable to the appropriate
party at the address set out above or to such other address as notified to the
other party from time to time.
10. This Agreement constitutes and contains the entire agreement of the
parties and supersedes any and all prior negotiations, correspondence,
understandings and agreements between the parties respecting the subject matter
of hereof. This Agreement may only be amended by the written instrument signed
by the parties.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first set forth above.
NATURAL WONDERS, INC.
By :
Title:
[INDIVIDUAL]
