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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 January 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED) 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.)
P.O. Box 20125
Tampa, Florida 33622-0125
(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. [ ]
Issuer's revenues for its most recent fiscal year: $1,640,151
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (based on the price the stock closed at on May 11, 1998) was
approximately $595,723.
The number of shares outstanding of the registrant's Common Stock, par value
$.01 per share, as of May 12, 1998 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 JANUARY 31, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTIES 8
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 7. FINANCIAL STATEMENTS 12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 13
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT 14
ITEM 10. EXECUTIVE COMPENSATION 16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 19
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 20
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K 22
</TABLE>
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
What A World!, Inc. (the "Company") was incorporated under the laws of the
State of Delaware in July 1993 and, until May 1997, operated as a mall-based
specialty retailer of a wide assortment of products which targeted customers
having an active interest in nature, the environment, education, wildlife, the
outdoors and science. On May 22, 1997, at a special meeting of stockholders of
the Company to vote upon the sale of substantially all the operating assets of
the Company (the "Sale") to Natural Wonders, Inc. (the "Buyer"), the Sale was
approved by more than a majority of the outstanding shares and the closing of
the Sale took place on the same day. Under the terms of the Sale, the Buyer paid
the Company $500,000, subject to certain adjustments, in return for
substantially all the operating assets of the Company and the Buyer assumed
certain liabilities of the Company, including liabilities relating to all the
store leases. For accounting purposes, during the thirteen weeks ended May 2,
1997 (the "First Quarter of Fiscal 1997"), the Company recognized $517,795 in
cash and wrote down inventory by $1,009,000, fixed assets by $853,348, store
supplies (other current assets) by $47,516, and organizational costs (other
assets) by $12,994. The Company also reversed the $731,652 of deferred rent
liability that relates to the leases that were assigned. The Sale resulted in a
loss from discontinued operations of $673,411. Subsequently, during the thirteen
weeks ended August 2, 1997 (the "Second Quarter of Fiscal 1997"), the Company
recorded a change in the estimate of its accounts payable balance to better
reflect the realizable value related to discontinued operations as a result of
the Company's having negotiated debt concessions with substantially all of its
vendors and a lessor, resulting in a gain on discontinued operations for the
Second Quarter of Fiscal 1997 of $279,670. The gain on discontinued operations
for the Second Quarter of Fiscal 1997 was a one time, non-recurring revaluation
and similar results and adjustments can not be expected to recur. The total loss
on discontinued operations for the Twenty Six Weeks ended August 2, 1997 was
$393,741. There was no additional activity regarding discontinued operations for
the third or fourth quarters of fiscal 1997.
The assets transferred to the Buyer included all good and salable inventory
of the Company, fixed assets and tangible personal property located at each of
the Company's retail store locations (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 included, 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. Assumed liabilities
included certain obligations of the Company under its store leases (the "store
leases"). The Buyer assumed all liabilities under the store leases arising on or
after May 22, 1998 (the "Closing Date"), regardless of whether or not the
Company was able to obtain the requisite consent to assignment of any one or
more of the store leases. Liabilities not assumed by the Buyer included, 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.
The Sale Agreement contained 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;
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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 contained
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.
The Company 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. The Buyer agreed to indemnify the Company from and against 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.
The description contained herein of the Sale transaction is qualified in
its entirety by reference to the agreements included as exhibits to the 10-QSB
for the period ended May 2, 1997, as filed with the Securities and Exchange
Commission on June 20, 1997, and incorporated herein by reference.
Consummation of the Sale terminated the Company's specialty retail
operations. The Company presently has no operating business. The Company intends
to look for acquisition candidates for a new business for the Company.
Accordingly, the Company has a limited operating history upon which an
evaluation of its performance and prospects can be made.
The Company 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 merging 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. There can be no assurance any
acquisition will be accomplished.
The Company has used cash proceeds from the Sale to repay debt, fund
transactional expenses and pay ongoing general and administrative costs. The
Company intends to use the remainder of the net proceeds for general corporate
purposes and to seek acquisition candidates.
BUSINESS OF POST-SALE WHAT A WORLD!, INC.
Since the Sale, the Company has been seeking 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 objective of the Company
since the Sale has been to effect a Business Combination with an Acquired
Business which the Company believes has significant growth potential. The
Company currently intends to seek to utilize cash, equity, debt or a combination
thereof in effecting a Business Combination. While the Company 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
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stature matures, the Company may be able to effect only a single Business
Combination, in accordance with its business objectives, although there can be
no assurance that any such transaction will be effected.
Since the Sale, the Company has not entered into any agreements with any
potential Acquired Businesses regarding a Business Combination. No assurance can
be made that any transaction will be consummated or that future discussions with
any potential Acquired Businesses will result in definitive agreements, although
it is the Company's intention to proceed diligently with its business plan.
In view of the limited tangible net worth of the Company, consideration may
be given to additional private equity or debt placement to fund its possible
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,
the Company would use cash, equity, debt or a combination of these to achieve a
Business Combination.
The Company 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 the Company 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.
The Company's future operations are subject to various risk factors
including the following: funds available to the Company may not be adequate for
it to acquire an interest in any chosen property, business or opportunity and
there is no assurance funds will be available from any source and, if not
available, the Company will limit its operations to those that can be financed
from existing assets; any business activity the Company undertakes may require
substantial capital which may be difficult to obtain or not be available in
light of the Company's financial condition; the Company presently has no
business to generate income; the Company has no operating history in any new
line of business and there can be no assurance that any future activities will
be profitable; the success of the Company will depend on the operations,
financial condition and management of the company or companies, if any, with
which the Company may merge or which it may acquire; the consummation of a
business combination may involve a change in officers and directors of the
Company, and the issuance of securities of the Company to stockholders of any
target concern would result in substantial dilution of present stockholders of
the Company and may result in stockholders of a target company obtaining a
controlling interest in the Company; the loss of part or of the entirety of the
Company's management could have a material adverse effect on the viability of
the Company; any specific business opportunity may involve an unproven product,
technology or marketing strategy the ultimate success of which cannot be
assured; conflicts of interests may arise with respect to business activities
since directors and officers of the Company may be affiliated with businesses
which may in the future engage in various transactions with the Company; the
Company may engage outside advisors in order to supplement the business
experience of the Company's management; management does not anticipate that the
Company will pay dividends in the foreseeable future; other entities have
significantly greater financial resources, technical expertise and managerial
capabilities than the Company and consequently the Company is at a competitive
disadvantage in identifying possible merger or acquisition candidates; there can
be no assurance the Company will be successful in identifying and evaluating
suitable merger or acquisition candidates and in concluding a transaction on
terms favorable to the Company or, if concluded, whether any transaction will
result in a financial return to the Company's stockholders; the Company has not
engaged in market research to determine that demand exists for a merger or
acquisition transaction with the Company; the Company may be unable to diversify
and the Company may be subject to economic fluctuations within a particular
business or industry; the Board of Directors has the power to issue shares of
common stock, and any additional issuance would have the effect of further
reducing the percentage ownership of existing
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stockholders; and the Company, in the event it engages in business combinations
which result in it holding passive investments in a number of entities, could be
subject to regulation under the Investment Company Act of 1940 and any violation
of such Act would subject the Company to material adverse consequences.
This Annual Report on Form 10-KSB contains 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 factors described in the foregoing paragraph.
BUSINESS OF PRE-SALE WHAT A WORLD!, INC.
Until May 1997, the Company operated as a mall-based specialty retailer of
a wide assortment of products which targeted customers having an active interest
in nature, the environment, education, wildlife, the outdoors and science. The
merchandise offered by the Company included outdoor and garden merchandise,
recorded nature music, videotapes, statuary, telescopes, books, games and
puzzles and apparel, all of which emphasized nature, environmental, scientific
and/or educational themes. In May 1997, pursuant to an Asset Purchase Agreement
dated as of March 7, 1997 (the "Sale Agreement") between the Company and the
Buyer, the Company sold substantially all of its assets to the Buyer for an
aggregate cash consideration of $517,795 plus the assumption by the Buyer of
certain liabilities. In conjunction with the Sale Agreement and 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 and the Buyer entered into an agreement, effective March 10, 1997
through the closing of the Sale Agreement, pursuant to which the Buyer operated
the Company's specialty retail gift business (the "Management Agreement").
The Company opened its first store in August 1993 and, until the Sale,
operated twelve stores, which were located in major regional malls in Florida
(Bradenton, Clearwater, Jacksonville, Jensen Beach, Miami (two), Ocala, Orlando,
Tallahassee and Tampa), New York (Staten Island) and New Jersey (Eatontown). In
addition, the Company operated thirteen temporary holiday outlets in Florida,
Georgia and South Carolina during the 1996 Christmas selling season. The
Company's permanent stores generally ranged in size from approximately 2,200 to
3,300 square feet of space.
In November 1994, the Company completed its initial public offering (the
"Offering") whereby 1,000,000 shares of Common Stock and 1,150,000 Warrants were
sold. (See "Item 12 - Certain Relationships and Related Transactions - Warrant
Extensions.")
BUSINESS STRATEGY
Prior to the Sale, the Company's strategy had been to provide an
interactive, unique gift store environment which generated a sense of discovery
for its customers. All of the Company's stores operated for the period February
2, 1997 through May 22, 1997 (the date of the Sale to the Buyer.). Each store
typically stocked over 3,000 different items and offered products, at prices
generally ranging from $3 to $500, from the following merchandise categories:
home products, outdoor and gardening products, music and video items, statuary,
optical instruments, educational items, toys and games, rocks and minerals, and
apparel. All categories emphasized nature, environmental, scientific and/or
educational themes.
STORE OPERATIONS
Prior to the Sale, the Company's 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 varied depending on store volume. Store
management
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received compensation in the form of salaries and performance-based bonuses,
while sales associates were paid on an hourly basis plus performance incentives.
PURCHASING AND INVENTORY
Prior to the Sale, 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 January
31, 1998 (fiscal 1997), no supplier accounted for more than 5.0% of the
Company's total merchandise purchases during such period. In fiscal 1997, 100%
of the Company's merchandise was purchased from domestic vendors. The Company
currently maintains no working relationship with any of its inventory vendors as
all debts of the Company thereto have been satisfied.
PROMOTIONAL ACTIVITIES
Prior to the Sale, the Company did not rely on advertising to generate
sales but, rather, was substantially dependent upon mall traffic to attract new
customers.
COMPETITION
The specialty retail business is characterized by intense competition. The
Company believes that prior to the Sale it had competed with various retailers,
including 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.
PERSONNEL
Pursuant to the Sale Agreement and the Management Agreement, certain
employees of the Company had been retained by the Buyer and were evaluated by
the Buyer in accordance with its requirements. A significant portion of benefits
that had accrued prior to March 9, 1997 to then-current employees were paid by
the Company. Prior to the Sale, the Company had approximately 39 full-time
employees and 50 part-time sales associates. 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 programs were offered as incentives to both management and sales
associates to increase sales, including various sales contests. None of the
Company's employees were covered by any collective bargaining agreement. The
Company currently has one employee, its Vice President of Finance, who renders
his services on a part-time basis to the Company.
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. 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 is prevented by
the Sale 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.
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ITEM 2. DESCRIPTION OF PROPERTIES
All leases for the twelve permanent stores of the Company have been
assigned to, and assumed by, the Buyer in accordance with the Sale Agreement,
and the Buyer agreed as part of such assignment and assumption to secure
necessary consents or modifications from interested parties and has indemnified
the Company with regard to certain matters relating to the leases. Currently the
Company has received landlord consents with respect to ten of the assignments,
and is waiting to receive a response from a landlord with respect to an eleventh
assignment (The Falls, in Miami, Florida). One landlord (Monmouth Mall in
Eatontown, New Jersey) does not require consent provided that certain financial
conditions are met by the assignee, all of which the Company believes were met
by the Buyer. Although the Company has received the requisite landlord consents
(other than in connection with The Falls), the Company remains primarily liable
for certain obligations with respect to the assigned leases in all but one
instance (Monmouth Mall). 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 required
the Company to pay the cost of common area maintenance, insurance, taxes and
other expenses. 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)
- --------------------------------------------- ---------------------------
<S> <C>
Tampa Bay Center (Tampa, FL) 2,800
Countryside Mall (Clearwater, FL) 2,200
Governor's Square Mall (Tallahassee, FL) 2,600
DeSoto Square Mall (Bradenton, FL) 2,600
Orange Park Mall (Jacksonville, FL) 4,400
Paddock Mall (Ocala, FL) 3,300
Treasure Coast Square Mall (Jensen Bch, FL) 2,500
Aventura Mall (Miami, FL) 3,200
The Falls (Miami, FL) 3,200
Monmouth Mall (Eatontown, NJ) 2,700
Staten Island Mall (Staten Island, NY) 3,100
Fashion Square Mall (Orlando, FL) 3,000
</TABLE>
The Company had leased approximately 4,000 square feet for its corporate
office and distribution center in St. Petersburg, Florida, under a lease which
would have expired in 1998; however, the Sale eliminated the need for this
facility and the Company reached an agreement to terminate this lease and did so
at minimal cost to the Company.
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.
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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 January 31, 1998.
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".
<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 $ .7500 $ 1.75 $ 1.250
Second Quarter (May 5 through August 3, 1996) $ 1.625 $ .5000 $ 2.00 $ .7500
Third Quarter (August 4 through November 2, 1996) $ 1.000 $ 1.000 $ 1.125 $ 1.000
Fourth Quarter (November 3, 1996 through February 1, 1997) $ 1.4375 $ .6875 $ 1.4375 $ .6875
<CAPTION>
Closing Bid Closing Ask
For the Fiscal Year Ended January 31, 1998 High Low High Low
- --------------------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
First Quarter (February 2 through May 3, 1997) $ 0.2188 $ 0.0625 $ 0.5313 $ 0.4375
Second Quarter (May 4 through August 2, 1997) $ 0.1800 $ 0.0156 $ 0.5000 $ 0.0938
Third Quarter (August 3 through November 1, 1997) $ 1.1250 $ 0.1800 $ 1.5000 $ 0.3750
Fourth Quarter (November 2, 1997 through January 31, 1998) $ 0.7500 $ 0.2500 $ 1.2500 $ 0.4375
</TABLE>
On May 11, 1998, the last reported (closing) sale price of the Common Stock
in the over-the-counter "pink sheets' was $0.28125 bid and $0.50 asked 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.
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. As the Company was
unable to demonstrate, by the date specified by Nasdaq, compliance with Nasdaq's
listing requirements, Nasdaq issued a formal notice of deficiency for the
Company's securities in January 1997. As a result of such delisting, an investor
may 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 also result in lower prices for the Company's securities than
might otherwise prevail.
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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, which could materially adversely affect the market price and
severely limit liquidity of the securities and the ability of securityholders to
sell the Company's securities in the secondary market as well as 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 limited business
operations.
As of May 12, 1998, as reported by the Company's transfer agent, shares
were held by approximately 15 persons based on the number of record holders,
including at least one who is a nominee for an undetermined number of beneficial
owners.
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 stores had been in operation until
May 22, 1997, the date of the Sale. Consummation of the Sale terminated the
Company's specialty retail operations. The Company presently has no operating
business. The Company intends to look for acquisition candidates for a new
business for the Company. Accordingly, the Company has a limited operating
history upon which an evaluation of its performance and prospects can be made.
The fiscal year ended January 31, 1998 ("Fiscal 1997") and the fiscal year
ended February 1, 1997 ("Fiscal 1996") included 52 weeks of operations. The
quarterly period ended January 31, 1998 (the "Fourth Quarter of Fiscal 1997")
and the quarterly period ended February 1, 1997 (the "Fourth Quarter of Fiscal
1996") included 13 weeks of operations.
The Company did not operate any stores at January 31, 1998 due to the Sale,
but operated 12 stores for the period February 2, 1997 through May 22, 1997. The
stores were operated under the Management Agreement for the period of March 10,
1997 through May 22, 1997. The Company operated 12 stores at February 1, 1997
and throughout the entire fiscal year of 1996. The Company did not operate any
temporary stores in the Fourth Quarter of Fiscal 1997 as compared to operating
13 temporary stores during the Fourth Quarter of Fiscal 1996.
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RESULTS OF OPERATIONS
Net sales for the Fourth Quarter of Fiscal 1997 decreased to $0 from
$4,371,000 for the Fourth Quarter of Fiscal 1996. Net sales for Fiscal 1997
decreased to $1,640,000 from $8,167,000 for Fiscal 1996. The decreases are the
result of the Sale transaction.
Gross profit for the Fourth Quarter of Fiscal 1997 was $0 as compared to
approximately $2,050,000, or 46.9% of net sales, for the Fourth Quarter of
Fiscal 1996. Gross profit for Fiscal 1997 was approximately $708,000, or 43.2%
of net sales, as compared to approximately $3,858,000, or 47.2% of net sales,
for Fiscal 1996. The decrease in gross profit as a percentage of net sales was
principally a result of markdowns in light of the then-impending Sale
transaction. The decrease in gross profit volume is primarily a result of the
Company's discontinuing its retail operations.
Selling, general and administrative expenses ("SG&A") decreased to
approximately $74,000 in the Fourth Quarter of Fiscal 1997 and to approximately
$1,445,000 for the 52 weeks of Fiscal 1997 from approximately $1,777,000 and
$4,911,000 for the Fourth Quarter of Fiscal 1996 and the 52 weeks of Fiscal
1996, respectively. The primary components of SG&A prior to the Sale were 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 decreases in SG&A were, for the most part, the result
of decreases in store operating expenses and the reduction of corporate office
expenses prior to the Sale and the elimination of all selling expenses, coupled
with corporate office expense reductions following the Sale.
Interest and other income for the Fourth Quarter of Fiscal 1997 and in
Fiscal 1997 was approximately $4,000 and $24,000, respectively, as compared to
approximately $18,000 and $46,000 from comparable periods in 1996. The decreases
are due to the Company's reduced level of remaining cash due to operating losses
throughout Fiscal 1997 and repayment of outstanding debt.
Interest expense for the Fourth Quarter of Fiscal 1997 and in Fiscal 1997
was approximately $0 and $10,000, respectively, as compared to approximately
$14,000 and $37,000 from comparable periods in 1996. The decreases are due to
the Company's early retirement of substantially all its capital lease
obligations, virtually eliminating the Company's interest expense.
Net loss of approximately $70,000 was recorded for the Fourth Quarter of
Fiscal 1997 as compared to a net loss of approximately $1,209,000 for the Fourth
Quarter of Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary ongoing capital requirements are anticipated to be
for funding limited operations and exploring any opportunities to effect an
acquisition, whether by merger, exchange of capital stock or other business
combination. There can be no assurance that any such transaction will be
effected. In view of the limited resources of the Company, consideration may be
given to additional equity or debt placement to fund merger and acquisition
activities as well as to fund working capital for general corporate purposes
that might be required to effectuate the Company's business objective.
The Company had working capital of approximately $45,000 and $985,000 at
January 31, 1998 and February 1, 1997, respectively. In order to fund its
capital and operating requirements, the Company had in the past 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
11
<PAGE> 12
former President, each of whom is a director and founder of the Company
(collectively, the "Original Stockholders"), and (ii) on loans from others. The
Company has used cash proceeds from the Sale to repay debt, fund transactional
expenses and pay ongoing general and administrative costs. The Company will use
the remainder of the net proceeds for general corporate purposes and to seek
acquisition candidates.
During Fiscal 1997, cash decreased by approximately $1,363,000 to
approximately $131,000. The overall decrease in cash resulted primarily from the
Company's repayment of debt, its satisfaction of a majority of its liabilities
following the receipt of the proceeds from the Sale, and the loss of the
Company's main source of cash flow as a result of the Company's discontinuing
its retail operations. The Company repaid approximately $157,000 in indebtedness
during the period.
During 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 the temporary
stores of approximately $196,000. The Company repaid approximately $62,000 in
indebtedness during the period.
The Company currently does not maintain any lines of credit or cash
borrowings to finance its capital requirements. The Company had maintained a
$100,000 letter-of-credit to serve as collateral for primarily all of the
Company's capital lease obligations. The letter-of-credit expired in November
1997 as a result of the Sale.
During Fiscal 1997, the Company's inventories decreased to $0 from
approximately $1,207,000 at February 1, 1997. The decrease is primarily a result
of the Sale transaction and the Company's discontinuing its retail operations in
the second quarter of Fiscal 1997.
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 was primarily a result of the Company retaining unsold
inventory from the seasonal temporary stores.
The Company has used and expects to continue to use, to the extent
available, any remaining cash which was generated from operations and the Sale
to finance its losses from its remaining limited operations. The Company is not
presently generating any cash flow to support its current corporate overhead
expenses.
The Company has no current 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 portion of the Company's future
financing requirements. 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,
even if the Company effectuates a business combination, the Company will achieve
profitability or positive cash flow.
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".
12
<PAGE> 13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As reported in the Company's 8-K filed May 14, 1998, the Company
dismissed Arthur Andersen LLP (the "Former Accountant") on May 11, 1998 as the
Company's independent accountants. The Company's Board of Directors participated
in and approved the decision to change independent accountants.
The reports of the Former Accountant on the Company's financial
statements for the fiscal years ended February 3, 1996 and February 1, 1997
contained explanatory paragraphs as to uncertainty with respect to the
Registrant's ability to continue as a going concern. There were no disagreements
with the Former Accountant for the fiscal years ended February 3, 1996 and
February 1, 1997 on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of the Former Accountant, would have caused them to
make reference thereto in their reports on the financial statements for such
years. No events of the kind set forth in Item 304(a)(1)(iv)(B) of Regulation
S-B occurred during the fiscal years ended February 3, 1996 and February 1,
1997.
The Former Accountant has furnished the Company with a letter addressed
to the Securities and Exchange Commission stating that it agrees with the above
statements. A copy of this letter is included as an exhibit to this Report on
Form 8-K.
The Company has engaged Kirkland, Russ, Murphy & Tapp (the "New
Accountant") as its new independent accountants, effective May 11, 1998. During
the fiscal years ended February 3, 1996 and February 1, 1997 and the interim
periods subsequent to February 1, 1997, the Company did not (i) consult with the
New Accountant on the application of accounting principles to any specified
transaction, either completed or proposed, (ii) consult with the New Accountant
on the type of audit opinion that might be rendered on the Registrant's
financial statements, (iii) receive either written or oral advice from the New
Accountant that was an important factor in reaching a decision as to an
accounting, auditing or financial reporting issue or (iv) consult with the New
Accountant on any matter that was the subject of a disagreement or a reportable
event (each as described in Item 304(a)(1)(iv) of Regulation S-B).
13
<PAGE> 14
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:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- ------------- -------------------------------------------------------
<S> <C> <C>
David B. Cornstein 59 Chairman of the Board and Director
David F. Miller 68 President, Secretary, and Director
Brian S. Lappin 29 Vice President of Finance and Chief Financial Officer
James Martin Kaplan 53 Director
Hugh H. Jones, Jr. 68 Director
Edward J. Munley 66 Director
</TABLE>
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. Since May 1993, Mr. Cornstein has served as Chairman of the
Board of Finlay Enterprises, Inc. ("FEI") and has served as a director of FEI
and its wholly-owned subsidiary, Finlay Fine Jewelry Corporation ("FFJC"), since
their inception in December 1988. From December 1988 to January 1996, Mr.
Cornstein served as President and Chief Executive Officer of FEI, and from
December 1985 to December 1988, he served as President, Chief Executive Officer
and a director of a predecessor of FEI. FEI, through its subsidiary FFJC,
operates over 1,100 leased fine jewelry departments in major department stores
throughout the United States and France.
David F. Miller, a co-founder of the Company, has been Secretary and a
director of the Company since its inception and has been President of the
Company since March 1996. 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 also serves as Chairman of the Board of Quality Food Equipment
Distributors, Inc., a provider of equipment for the food and restaurant
industry. From 1983 to 1987, Mr. Miller served as President of JCPenney Stores
and Catalog and as a director of The JCPenney Company, Inc. ("JCPenney
Company"), and from 1987 to April 1990, he served as Vice Chairman of the Board
of JCPenney Company and Chief Operating Officer of JCPenney Stores and Catalog,
retiring from JCPenney Company in 1990 after 37 years of service. Mr. Miller is
also a director of Winn-Dixie Stores, Inc. and is President of Amelia Service
Center, a real estate management company in Fernandina Beach, Florida. In
fulfilling his duties as President, Secretary and a director of the Company, Mr.
Miller will devote such portion of his time to the affairs of the Company as he
deems appropriate.
Brian S. Lappin, who currently serves on a part-time basis as Vice
President of Finance and Chief Financial Officer of the Company, was appointed
to such position in August 1996 and served as Accounting Manager of the Company
from September 1993 through August 1996. From January 1993 through September
1993, Mr. Lappin was an Accounting Assistant for Padgett Business Services, an
accounting and financial services firm in Gainesville, Georgia. From June 1991
to December 1993, he was a staff accountant at Halls Tampa Wholesale Florist,
handling the daily reporting and accounting operations.
14
<PAGE> 15
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 his resignation in March 1996. Since December 1990, Mr. Munley has
been the President and sole stockholder of Handley Walker Incorporated, a
payroll processing firm. 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.
James Martin Kaplan has been a director of the Company since December
1994. Mr. Kaplan is a partner of the law firm of Tenzer Greenblatt LLP, counsel
to the Company, which he joined in 1998. From 1977 to 1998, Mr. Kaplan was a
partner of the law firm of Zimet, Haines, Friedman, & Kaplan, former counsel to
the Company. Mr. Kaplan also serves on the Board of Directors of FEI and FFJC.
Hugh H. Jones, Jr. has been a director of the Company since 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.
He served on the Board of Directors of The Barnett Bank of Jacksonville, N.A.
("Barnett Bank") from September 1980 to February 1996. From 1982 to 1993, Mr.
Jones served as Chairman and Chief Executive Office of Barnett Bank, and from
1980 to 1982, he served as Vice Chairman and director, retiring from Barnett
Bank in 1993 after 23 years of service.
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 an 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 January 31, 1998 all of the reporting persons complied with their
section 16(a) filing requirements, with the exception of Hugh Jones, whom the
Company believes sold 1,000 shares in December of 1997, as to which no report
has yet been filed.
15
<PAGE> 16
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation of the Company's
president for services rendered during the year-ended January 31, 1998. No other
executive officer earned an annual salary and bonus that exceeded $100,000
during Fiscal 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term Compensation
-----------------------------------
Annual Compensation Awards Payouts
---------------------------- ------------------------ -------
Other
Annual Restricted All Other
Compen- Stock LTIP Compen-
sation Award(s) Options/ Payouts sation
Name and Principal Position Year Salary($) Bonus $ $ $ SARs (#) $ $
- --------------------------- ---- --------- ------- ------- ---------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David F. Miller (1),
President 1997 -0- -0- -0- -0- -0- -0- -0-
1996 -0- -0- -0- -0- 100,000/-0- -0- -0-
1995 -0- -0- -0- -0- -0- -0- -0-
</TABLE>
(1) Mr. Miller is currently not compensated other than actual expenses incurred
while serving as President.
COMPENSATION OF DIRECTORS
The Company's directors are currently not compensated for serving as
members of the Board of Directors.
OPTION/SAR GRANTS TABLE
The following table shows information concerning stock options granted
during the year ended January 31, 1998 for the individual shown in the Summary
Compensation Table.
<TABLE>
<CAPTION>
Number of
Securities % of Total
Underlying Options Granted
Options Granted to Employees in Exercise or Base
Name (#) Fiscal Year Price ($/sh) Expiration Date
- ---------------------------- --------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
David F. Miller -0- N/A N/A N/A
</TABLE>
16
<PAGE> 17
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
No stock options were exercised by any of the Company's executive officers
during year-ended January 31, 1998. The following table shows information
concerning stock option values as of January 31, 1998.
<TABLE>
<CAPTION>
Aggregated Year-ended January 31, 1998 Option Values
----------------------------------------------------
Number of Securities Underlying Value of Unexercised
Unexercised Options at January 31, In-the-Money Options at
1998(#) January 31, 1998($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------------- ----------------------------------- -------------------------
<S> <C> <C>
David F. Miller* 100,000/-0- -0-/-0-
Edward J. Munley 75,000/-0- -0-/-0-
</TABLE>
* does not include additional warrants to purchase shares granted under the 1996
Working Capital Commitment (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 (as amended in 1996, the "Stock Option Plan"), pursuant to which
stock options covering an aggregate of 560,000 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
17
<PAGE> 18
of such shares 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.
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.
18
<PAGE> 19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the Record Date, 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 (iii) each named executive officer as defined under
applicable Securities and Exchange Commission rules and (iv) all of the
Company's current officers and directors as a group.
<TABLE>
<CAPTION>
Name and Address of Beneficial Amount and Nature of
Owner(1) Beneficial Ownership(2) Percent of Class
- -------------------------------------- ----------------------- ----------------
<S> <C> <C>
David B. Cornstein 745,352(3) 31.74%
David F. Miller 623,062(4) 26.97%
Edward J. Munley 280,000(5) 12.77%
Brian S. Lappin 12,667(6) *
James Martin Kaplan 14,000(7) *
Hugh H. Jones, Jr. 26,000(8) 1.21%
Elliot J. Smith 301,031(9) 12.97%
All officers and directors as a 1,701,281(3)(4)(5) 63.97%
group (6 persons) (6)(7)(8)
</TABLE>
* - Less than one percent
(1) The address of each person listed is c/o What A World!, Inc., P.O. Box
20125, Tampa Florida 33625
(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 225,000 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.
19
<PAGE> 20
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 12,667 shares of Common Stock but does not include an
aggregate of 7,333 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.
(9) The number of shares beneficially owned by Mr. Smith includes 96,942 shares
of Common Stock underlying certain Underwriter's Warrants issued in connection
with the Offering. In addition, the number of shares beneficially owned by Mr.
Smith includes (i) 90,500 shares of Common Stock beneficially owned by The
Elliot J. Smith SDRP Money Purchase Pension Plan (the "Smith Pension Plan"),
including 44,000 shares issuable upon exercise of warrants held by the Smith
Pension Plan, (ii) 65,460 shares of Common Stock beneficially owned by The
Elliot J. Smith IRA/Rollover (the "Smith IRA"), including 33,460 shares issuable
upon exercise of warrants held by the Smith IRA, (iii) 3,000 shares of Common
Stock issuable upon exercise of warrants held by Praefero Partners, a
partnership of which Mr. Smith is the sole general partner and (iv) an
additional 25,000 shares issuable upon exercise of warrants held by Mr. Smith.
Mr. Smith may be deemed to be the beneficial owner of shares of Common Stock
beneficially owned by the Smith Pension Plan, the Smith IRA and Praefero
Partners.
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 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 or 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 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.
20
<PAGE> 21
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 $300,000), 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 connection 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 or 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 Loans.
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
the assets of the Company. As partial consideration for the 1996 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, originally exercisable until
August 31, 2001 (See "-Warrant Extensions"). 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.
Warrant Extensions
On May 7, 1998, the Company announced that it has extended the exercise
period of its publicly-held Redeemable Common Stock Purchase Warrants (the
"Warrants") to May 17, 2000. The Warrants, which were originally scheduled to
expire on May 17, 1998, each entitle the holder thereof to purchase one share of
What A World!, Inc. Common Stock at a price of $5.00 per share, subject to
adjustment under certain circumstances. The Warrants are redeemable by the
Company, upon the consent of Whale Securities Co. L.P., the underwriter of the
Offering, upon notice of not less than 30 days, at a price of $.10 per Warrant,
provided that the closing bid quotation of the common stock on all 20 days
ending on the
21
<PAGE> 22
third day prior to the day on which the Company gives notice has been at least
150% of the then-effective exercise price of the Warrants.
Following such action, the Board of Directors also approved the extension
of the warrants pursuant to the 1996 Working Capital Commitment to August 31,
2003. The warrants were originally scheduled to expire on August 31, 2001 and
entitle the holder thereof to purchase one share of the Company's Common Stock
at a price of $1.00 per share.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
A. (1) The following financial statements of the Company and the reports
thereon of Kirkland, Russ, Murphy, & Tapp dated May 13, 1998 is being filed
as part of this Annual Report on Form 10-KSB.
Independent auditors' reports.
Balance Sheet as of January 31, 1998.
Statements of Operations for the year ended February 1, 1997 and for the
year ended January 31, 1998.
Statements of Stockholders Equity for the year ended February 1, 1997 and
for the year ended January 31, 1998.
Statements of Cash Flows for the year ended February 1, 1997 and for the
year ended January 31, 1998.
Notes to 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):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------------------------------------------------------------
<S> <C>
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).
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
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 SB-2).
10.4 1994 Stock Option Plan (incorporated by reference to exhibit
10.12 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).
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 SB-2).
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 Registrants 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. (incorporated by reference
to the Registrant's Form 10-KSB for the fiscal year ended
February 1, 1997 as filed May 16, 1997 ( the "Fiscal 1996
10-KSB")).
10.12 Management Agreement dated March 7, 1997 between the Registrant
and Natural Wonders, Inc. (incorporated by reference to the
Fiscal 1996 10-KSB).
10.13 Form of Non Competition Agreement dated March 7, 1997 by David B.
Cornstein and David F. Miller (incorporated by reference to the
Fiscal 1996 10-KSB).
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 May 13, 1998 from Arthur Andersen LLP in regard to
their review of the Current Report on Form 8-K dated May 14, 1998
which reports the dismissal of Arthur Andersen as the
Registrant's independent certified public accountants
(incorporated by reference from Exhibit 1 of the Current Report
on Form 8-K dated May 14, 1998 as filed with the Securities and
Exchange Commission).
27 Financial Data Schedule (For SEC Use Only).
</TABLE>
B. No reports on Form 8-K were filed with the Securities and Exchange
Commission during the fourth quarter of fiscal 1997.
23
<PAGE> 24
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
-----------------------------
David F. Miller 5/18/98
President -----------
Date
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.
<TABLE>
<S> <C>
/s/ David F. Miller 5/18/98
- ---------------------------------------------------------------------- ----------------------
David F. Miller, President, Secretary, and Director Date
(Principal Executive Officer)
/s/ David B. Cornstein 5/18/98
- ---------------------------------------------------------------------- ----------------------
David B. Cornstein, Chairman of the Board and Director Date
/s/ Brian S. Lappin 5/18/98
- ---------------------------------------------------------------------- ----------------------
Brian S. Lappin, Vice President of Finance and Chief Financial Date
Officer (Principal Financial and Accounting Officer)
/s/ James M. Kaplan 5/18/98
- ---------------------------------------------------------------------- ----------------------
James Martin Kaplan, Director Date
/s/ Hugh H. Jones, Jr. 5/18/98
- ---------------------------------------------------------------------- ----------------------
Hugh H. Jones, Jr., Director Date
- ---------------------------------------------------------------------- ----------------------
Edward J. Munley, Director Date
</TABLE>
24
<PAGE> 25
WHAT A WORLD!, INC.
FINANCIAL STATEMENTS
JANUARY 31, 1998 AND FEBRUARY 1, 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Board of Directors
What A World!, Inc.:
We have audited the accompanying balance sheet of What A World!, Inc. (a
Delaware corporation) as of January 31, 1998 and the related statements of
operations and accumulated deficit and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform our 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 audit provides 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
January 31, 1998 and the results of its operations and its cash flows for the
year then ended 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 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.
Clearwater, Florida /s/ Kirkland, Russ, Murphy, & Tapp
May 13, 1998
<PAGE> 27
WHAT A WORLD!, INC.
BALANCE SHEET
JANUARY 31, 1998
<TABLE>
<CAPTION>
ASSETS
JANUARY 31,
1998
-----------
<S> <C>
Current assets:
Cash and cash equivalents $ 130,713
Prepaid expenses and other current assets 6,873
-----------
Total current assets 137,586
Property and equipment, net 2,500
-----------
$ 140,086
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,000
Accrued expenses 60,950
Current maturities on capital lease obligations 1,518
-----------
Total current liabilities 92,468
Capital lease obligations 1,849
Stockholders' equity:
Common stock, $.01 par value; 10,000,000 shares
authorized, 2,118,125 shares issued and outstanding
at January 31, 1998 and February 1, 1997, respectively 21,181
Additional paid-in capital 4,538,782
Accumulated deficit (4,514,194)
-----------
Net stockholders' equity 45,769
-----------
$ 140,086
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 28
WHAT A WORLD!, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEARS ENDED JANUARY 31, 1998 AND FEBRUARY 1, 1997
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 1,640,151 8,166,755
Cost of sales 931,798 4,308,643
----------- -----------
Gross profit 708,353 3,858,112
Selling, general and administrative expenses 1,444,958 4,910,755
Loss from impairment -- 1,485,535
----------- -----------
Loss from operations (736,605) (2,538,178)
Interest and other income 23,701 46,356
Interest expense (10,186) (36,789)
----------- -----------
Loss from continuing operations (723,090) (2,528,611)
Loss from discontinued operations (393,741) --
----------- -----------
Net loss (1,116,831) (2,528,611)
Accumulated deficit, beginning of year (3,397,363) (868,752)
----------- -----------
Accumulated deficit, end of year $(4,514,194) (3,397,363)
=========== ===========
Net loss per weighted average common and common
equivalent share - basic and diluted $ (.53) (1.19)
=========== ===========
Weighted average common and common equivalent
shares outstanding - basic and diluted 2,118,125 2,118,125
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 29
WHAT A WORLD!, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1998 AND FEBRUARY 1, 1997
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,116,831) (2,528,611)
Adjustments to reconcile net loss to net cash and
cash equivalents from operating activities:
Depreciation and amortization 118,000 386,749
Loss on sale of equipment -- 4,114
Loss on discontinued operations 393,741 --
Loss on impairment -- 1,485,535
Changes in operating assets and liabilities:
Decrease in construction allowance receivable -- 267,000
(Increase) decrease in inventories 198,015 (228,786)
Decrease in prepaid expenses and other current assets 41,178 84,262
(Increase) decrease in other assets 14,812 (2,713)
Increase (decrease) in accounts payable (1,076,938) 834,192
Decrease in accrued expenses (196,829) (223,712)
Increase in deferred rent -- 87,479
----------- -----------
Net cash provided by (used in) operating
activities (1,624,852) 165,509
Cash flows from investing activities:
Purchases of property and equipment -- (212,391)
Proceeds from Sale Agreement 517,795 --
Proceeds from sale of equipment -- 15,900
Redemption of certificate of deposit 100,000 --
----------- -----------
Net cash provided by (used in) investing
activities 617,795 (196,491)
Cash flows from financing activities:
Borrowings under related party loan agreements -- 410,000
Repayment of related party loans -- (410,000)
Payments made on capital lease obligations (156,419) (61,827)
----------- -----------
Net cash used in financing activities (156,419) (61,827)
----------- -----------
Net decrease in cash (1,163,476) (92,809)
Cash and cash equivalents, beginning of year 1,294,189 1,386,998
----------- -----------
Cash and cash equivalents, end of year $ 130,713 1,294,189
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 10,186 36,789
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 30
WHAT A WORLD!, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998 AND FEBRUARY 1, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
What A World!, Inc. (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 1, 1997, which were located in major regional
malls. Ten of those stores were located in Florida and one
store each was 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 season, respectively.
(b) Discontinued Operations and Subsequent Sale of Operations
In February 1997, the Company's Board of Directors approved
the sale of substantially all of the Company's operating
assets and to discontinue the Company's retail business.
The Company operated its chain of mall-based specialty gift
retail stores until March 10, 1997. On March 7, 1997, the
Company and Natural Wonders, Inc. (the Buyer) entered into an
Asset Purchase Agreement (Sale Agreement) pursuant to which
the Company agreed, subject to stockholder approval, to
transfer to the Buyer substantially all of its operating
assets (including specified inventories, fixed assets and
tangible personal property, intangible personal property and
contract rights and store leases) in consideration for the
payment by Buyer of approximately $500,000 in cash, subject to
certain adjustments, and the assumption by the Buyer of
certain liabilities (including the Company's store leases)
(Sale). 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 and the Buyer entered into an agreement, effective
March 10, 1997 through the closing of the Sale Agreement,
pursuant to which the Buyer began to operate the Company's
specialty retail gift business. The Buyer agreed to fund
certain costs, expenses and liabilities associated with the
operation of the Company during the term of such agreement. On
May 22, 1997, the stockholders approved the sale transaction
and the Sale was completed.
(continued)
<PAGE> 31
WHAT A WORLD!, INC.
NOTES TO FINANCIAL STATEMENTS
The net losses of these operations related to the Sale for the
period from March 10, 1997 through May 22, 1997 are included
in the statement of operations and accumulated deficit under
"Discontinued Operations." The provision for the loss
reflected in the statement of operations and accumulated
deficit includes the write-down of the assets of the retail
operation to the net realizable values and the cost of
disposing these operations. In addition, during fiscal year
1997 the Company revalued its estimate of a majority of its
accounts payable and capital lease obligation balances
reducing the balances to reflect the realizable value of the
total debt based on the Company's negotiation of debt
concessions from its debtors which resulted in a loss on
discontinued operations of $393,741.
Upon closing of the Sale Agreement, the Company has been
paying its remaining liabilities and obligations with
available cash and the proceeds of the Sale Agreement. The
Company has since 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. Since the closing of the
sale transaction, the Company's ability to meet its general
and administrative cost obligations has become limited, and
the Company does not have an operating business to generate
income and may have limited excess cash, if any, upon 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 entered
into any arrangements in which it will attempt to obtain an
interest.
(c) Fiscal Year
The years ended January 31, 1998 and February 1, 1997 were
52-week years.
(d) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and investments
with original maturities of less than three months.
(continued)
<PAGE> 32
WHAT A WORLD!, INC.
NOTES TO FINANCIAL STATEMENTS
(e) 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 year
ended February 1, 1997.
(f) Net Loss Per Share of Common Stock
In the fourth quarter of fiscal 1998, the Company adopted
Statement of Financial Accounting Standards No. 128, Earnings
per Share (SFAS 128). Under SFAS 128, basic net loss per share
of common stock is computed by dividing income available to
common stockholders by the weighted average number of common
shares actually outstanding during the period. Diluted net
loss per share of common stock presents loss attributable to
common shares actually outstanding plus potential dilutive
common shares outstanding during the period. The Company's
options and warrants were not included in computing dilutive
net loss per common stock because their effects were
anti-dilutive.
(continued)
<PAGE> 33
WHAT A WORLD!, INC.
NOTES TO FINANCIAL STATEMENTS
(g) 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.
(h) Seasonality
The Company's business was 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 January 31,
1998:
<TABLE>
<CAPTION>
Estimated
useful lives Amount
------------ -------
<S> <C> <C>
Furniture, fixture and equipment 5 years 7,500
Less - accumulated depreciation and amortization (5,000)
-------
$ 2,500
=======
</TABLE>
The Company recorded a loss on impairment of equipment and leasehold
improvements at certain store locations to their net realizable value
in fiscal 1996. A majority of these assets represented improvements to
the property, which were revalued to zero, since they could not be sold
or used in other store locations.
(continued)
<PAGE> 34
WHAT A WORLD!, INC.
NOTES TO FINANCIAL STATEMENTS
(3) COMMITMENTS AND CONTINGENCIES
Prior to the Sale on May 22, 1997, the Company leased retail store
space and office space under operating leases set up to expire in
various years through 2005. These leases included fixed rent payments
that escalated 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 January 31, 1998 and
February 1, 1997.
As a result of the Sale Agreement, the Company agreed to assign their
existing operating leases to the Buyer. The Company received landlord
consent for all of the lease assignments except two. For one assigned
lease lacking landlord consent, the Buyer is negotiating on the
Company's behalf with the landlord for their consent. The other
remaining assigned lease did not require landlord consent for the
assignment; however, certain requirements for lease assignment were set
up by the landlord in the lease contract. The Company, as well as the
Buyer, believes that the Buyer has satisfactorily complied with the
landlord's requirements for assigning this lease obligation. The
Company may still be held liable under these lease obligations should
the Buyer default on the assigned leases.
Approximate minimum future rental payments under these noncancelable
operating leases (exclusive of common area maintenance charges) as of
January 31, 1998 were as follows:
<TABLE>
<CAPTION>
Assigned Unassigned
Fiscal Year Leases Leases
----------- ---------- ----------
<S> <C> <C>
1999 $ 819,000 81,000
2000 846,000 84,000
2001 871,000 89,000
2002 921,000 89,000
2003 981,000 89,000
Thereafter 1,842,000 278,000
---------- -------
$6,280,000 710,000
========== =======
</TABLE>
Total rent expense, including common area maintenance charges under the
Company's operating leases, was approximately $194,000 and $1,328,000 during the
years ended January 31, 1998 and February 1, 1997, respectively.
Through May 22, 1997, the Company maintained a $100,000 letter-of-credit to
serve as collateral for primarily all of the Company's capital lease
obligations. The letter-of-credit was set up to expire in November 1997,
however, as a result of the Sale the Company's letter-of-credit was no longer
applicable, therefore it was canceled.
(continued)
<PAGE> 35
WHAT A WORLD!, INC.
NOTES TO FINANCIAL STATEMENTS
Future minimum lease payments under capital lease obligations, together
with the present value of the future minimum lease payments, were as
follows as of January 31, 1998:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999 $ 1,779
2000 1,936
-------
Total minimum lease obligations 3,715
Less interest (348)
-------
Present value of capital lease obligations,
including current maturities of $1,518 $ 3,367
=======
</TABLE>
Effective March 26, 1996, the original president of the Company
resigned. The original president had an employment agreement
(Agreement) with the Company which, as amended, expired in February
1997. All amounts due to the original president under this Agreement
had been paid as of January 31, 1998. The Company does not have an
employment agreement with its current president.
The Company had a $55,000 corporate credit line as of February 1, 1997,
to facilitate employee expenses. The amount outstanding under this line
was minimal as of February 1, 1997. As a result of the Sale, this
corporate credit line was terminated and repaid.
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.
(4) INCOME TAXES
As of January 31, 1998, the Company had net deferred income tax assets
of approximately $819,000 which was fully offset by a valuation
allowance. The vast majority of net deferred income tax asset (before
allocation of the valuation allowance) consisted of net operating loss
(NOL) carryforwards as of January 31, 1998.
As of January 31, 1998, the Company had federal NOL carryforwards of
approximately $2,183,000. Approximately $90,000 of the NOL was
associated with the period January 1, 1995 through January 28, 1995,
and can be carried forward ratably over the next three fiscal years.
Approximately $2,093,000 of the NOL relates to the Company's C
corporation periods and can be carried forward through periods ranging
from 2009 to 2013. The benefit of the NOL carryforwards most likely
will not be realized due to the change in the Company's operations from
the specialty retail business to an acquisition company after the
closing of the sale transaction.
(continued)
<PAGE> 36
WHAT A WORLD!, INC.
NOTES TO FINANCIAL STATEMENTS
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 weighed average assumptions:
risk-free interest rates ranging from 5.9 to 6.4%, expected life of
three years, no expected dividends, and expected volatility of
approximately 60%. 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 (EPS) would have
been changed to the following pro forma amounts for the fiscal year
ended February 1, 1997. The Company did not grant any options during
the year ended January 31, 1998.
<TABLE>
<CAPTION>
February 1, 1997
----------------
<S> <C>
Net loss: As reported $(2,528,611)
Pro forma (2,570,863)
EPS: As reported $ (1.19)
Pro forma (1.21)
</TABLE>
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.
(continued)
<PAGE> 37
WHAT A WORLD!, INC.
NOTES TO FINANCIAL STATEMENTS
(5) 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% per annum, 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 6).
There were no similar related party transactions during the year ended
January 31, 1998.
(6) WARRANTS
As of January 31, 1998, the following warrants were outstanding:
<TABLE>
<CAPTION>
Aggregate
Title of issuance 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-
Warrants 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>
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
Underwriter's Warrants and Directors' Warrants are not redeemable by
the Company. The effect of warrants outstanding has not been included
in the 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.
(continued)
<PAGE> 38
WHAT A WORLD!, INC.
NOTES TO FINANCIAL STATEMENTS
(7) 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 date of the Company's initial public offering (Offering), reserving
40,000 unregistered shares of common stock for issuance under the
Directors' Plan. Options under Directors' Plan vest ratable over three
years and may be exercised for ten 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 January 31, 1998. 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 (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 ratable between
one and five years as stated and may be exercised for ten 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 the grant. No options were granted during the
year ended January 31, 1998, 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.
(continued)
<PAGE> 39
WHAT A WORLD!, INC.
NOTES TO FINANCIAL STATEMENTS
Aggregate Stock Option Activity
The following table summarizes information about the aggregate stock
option activity for the years ended January 31, 1998 and February 1,
1997:
<TABLE>
<CAPTION>
JANUARY 31, 1998 FEBRUARY 1, 1997
------------------------- ---------------------
Weighted- Weighted-
average average
Number exercise Number exercise
of shares price of shares price
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 540,000 $2.24 130,000 $4.54
Granted -- -- 410,000 1.51
Exercised -- -- -- --
Forfeited -- -- -- --
------- ----- ------- -----
Outstanding, end of year 540,000 $2.24 540,000 $2.24
======= ===== ======= =====
Options vested, end of year 356,667 $2.61 293,333 $2.85
======= ===== ======= =====
</TABLE>
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
January 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
Weighted-
Weighted- average Weighted-
average remaining average
Number exercise contractual Number exercise
Exercise Price outstanding price life (years) exercisable price
-------------- ----------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.00 70,000 $1.00 8 28,000 $1.00
1.50 110,000 1.50 8 106,667 1.50
1.68 230,000 1.68 8 92,000 1.68
4.25 80,000 4.25 6 80,000 4.25
5.00 50,000 5.00 6 50,000 5.00
------- ----- ---- ------- -----
540,000 $2.24 7.52 356,667 $2.61
======= ===== ==== ======= =====
</TABLE>
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 equivalent share.
(continued)
<PAGE> 40
WHAT A WORLD!, INC.
NOTES TO FINANCIAL STATEMENTS
(8) SUBSEQUENT EVENTS
Subsequent to January 31, 1998, the Company extended the exercise
period of its publicly-held Redeemable Common Stock Purchase Warrants
(Note 6) from May 17, 1998 to May 17, 2000.
Also, subsequent to January 31, 1998, the Company extended the exercise
period of its publicly-held Directors' Common Stock Purchase Warrants
(Note 6) from August 31, 2001 to August 31, 2003.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 130,713
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 137,586
<PP&E> 7,500
<DEPRECIATION> 5,000
<TOTAL-ASSETS> 140,086
<CURRENT-LIABILITIES> 92,468
<BONDS> 0
0
0
<COMMON> 21,181
<OTHER-SE> 24,588
<TOTAL-LIABILITY-AND-EQUITY> 140,086
<SALES> 1,640,151
<TOTAL-REVENUES> 1,640,151
<CGS> 931,798
<TOTAL-COSTS> 931,798
<OTHER-EXPENSES> 1,444,958
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,186
<INCOME-PRETAX> (723,090)
<INCOME-TAX> 0
<INCOME-CONTINUING> (723,090)
<DISCONTINUED> 393,741
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,116,831)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.53)
</TABLE>
