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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 29, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No:000-22679
WORLD OF SCIENCE, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 16-0963838
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
900 Jefferson Road, Building 4, Rochester, New York 14623
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (716)475-0100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock. par value $0.01 per share The Nasdaq SmallCap Market
Indicate by check mark whether the registrant:(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to be the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the closing bid and ask
prices of the registrant's Common Stock as reported on NASDAQ on March 31, 2000
was $6,808,000. The number of shares of Common Stock, with $.01 par value,
outstanding on March 31, 2000 was 4,736,105 shares.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of Item 10 and Items 11, 12 and 13 of Part III are incorporated by
reference from the Company's definitive Proxy Statement for the 2000 Annual
Meeting of Stockholders, to be held June 8, 2000. Registrant's definitive Proxy
Statement will be filed with the Securities and Exchange Commission on or before
May 5, 2000.
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PART I
ITEM 1. BUSINESS
General
World of Science, Inc. is a leading specialty retailer of a variety of
traditional and distinctive science and nature products. In April 1999, the
Company formed a wholly-owned subsidiary named WOSI on the Web, Inc., which is a
New York corporation. The terms "Company" and "World of Science" refer to World
of Science Inc. and WOSI on the WEB, Inc. on a consolidated basis. The Company's
merchandising strategy emphasizes both the educational and entertainment values
of its products, which are offered at competitive prices in a stimulating retail
environment. World of Science has developed a broad customer base, as its
products appeal to customers of all ages for gift-giving, educational use and
entertainment. The Company operates both a permanent and seasonal store format.
At January 29, 2000, the Company operated 84 permanent stores and 24 seasonal
stores in 25 states, primarily in enclosed malls. The Company's fiscal year is
the 52-week period ending on January 29, 2000. The terms "fiscal" and "fiscal
year" refer to the calendar year in which the Company's fiscal year commences.
Permanent World of Science stores are open year-round under long-term leases,
contain an average of 2,000 square feet of selling space and maintain
approximately 2,600 stock-keeping units ("SKUs") of inventory. Permanent stores
are also generally characterized by an upscale store facade and interior fixture
package. Seasonal stores are open during the holiday selling season, or for an
extended period beyond that season, under leases with shorter terms. Seasonal
stores contain an average of 1,500 square feet of selling space, maintain
approximately 1,950 SKUs of inventory, occupy available in-line mall space,
require minimal store build-out and employ reusable fixtures.
The Company was founded in Rochester, New York and incorporated in 1969,
primarily to develop and manufacture science kits for school systems. In 1973,
the Company began selling science and nature products through a mail order
catalog and, in 1984, opened its first retail store in the Rochester Museum and
Science Center. Based upon the success of its science and nature retail concept
locally, the Company decided in the late 1980's to focus exclusively on the
retail store segment of its business and discontinued its manufacturing
operations. Its catalog operations were phased out commencing in fiscal 1991.
The Company launched its commerce-enabled web site, www.worldofscience.com, in
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late April 1999. The new home page is in the format of the periodic table of
the elements. The web site currently offers approximately 1,200 SKUs along with
added features to inform and entertain online shoppers. The Company expects to
expand its online product offerings to over 1,500 SKUs by the end of fiscal
2000. Product offerings on the site range from $10 to over $1,000 per item.
WOSI on the WEB, Inc. focuses on the operation of the web site.
Business Strategy
. Distinctive and Traditional Merchandise. World of Science stores offer a
variety of educationally and entertainment-oriented, distinctive science and
nature products, together with a broad assortment of more traditional science
and nature products. Many of the products offered in World of Science stores
are not widely available from other retailers within the malls occupied by the
Company's stores. The Company continually seeks new and distinctive products
and, accordingly, updates approximately one-third of its SKUs annually.
. Educational and Entertaining Shopping Experience. The Company's products are
displayed to encourage customers to browse, experiment with, and examine the
features and quality of the products as the store layout guides them through
up to 25 different product areas. This educational and entertaining shopping
experience places the customer in an environment where experimentation and
play are integral components of the buying experience.
. Superior Customer Service. The Company employs enthusiastic and friendly sales
personnel who are trained to highlight the benefits of the products offered
and encourage customers to browse at their leisure.
. Use of Seasonal Stores. The seasonal store program enables the Company to
reach a broader customer base during the holiday selling season, as well as to
test prospective locations for permanent stores before making the required
capital investment. The Company opportunistically seeks out available in-line
space in quality shopping malls which it can lease for several months around
the holiday selling season and, in some instances, for an extended period
thereafter. The cost of opening seasonal stores is substantially lower and the
lead time is substantially shorter than those associated with permanent
stores. In fiscal 1999, 30.4% of the Company's total net sales were generated
by seasonal stores, as compared to 36.0% in fiscal 1998. The Company's
flexible store formats, combined with its distinctive merchandise, make World
of Science stores attractive to mall operators.
2
. Price Integrity. The Company's pricing strategy is to offer quality products
at fair prices. World of Science stores sell merchandise generally ranging in
price from less than $1.00 to $1,000. Prior to 1999 the Company did not engage
in frequent storewide sales or price mark-downs. During late 1999 the Company
initiated regular sales promotions based on product themes to offer special
values to its customers and to provide an incentive to purchase its products.
Expansion Strategy
The Company has grown by opening new permanent stores, by operating seasonal
stores to capture sales during the holiday selling season, and by increasing
sales volume from its existing permanent stores. Although management does not
believe there are geographical constraints on the location of future stores, the
Company's expansion strategy will focus primarily on opening stores in new and
existing markets in the eastern half of the United States before expanding
elsewhere. The Company believes that this strategy will allow it to increase the
recognition of the "World of Science" name, enhance operating efficiencies and
manage growth. The principal elements of the Company's expansion strategy are as
follows:
. New Permanent Store Openings. The Company currently operates 84 permanent
World of Science stores, including 13 new permanent stores which have opened
since the beginning of fiscal 1999. The Company expects to open one permanent
store in fiscal 2000 and approximately 10 permanent stores in fiscal 2001 in
both new and existing markets. In many cases, permanent stores will replace
seasonal stores and, in appropriate circumstances, the Company may acquire or
assume pre-existing leases of other retail stores. Although the Company may
also evaluate opening stores in non-mall locations, such as airports and
museums, the Company has no commitments for new permanent stores in non-mall
locations.
. Active Seasonal Store Program. The Company operated 75 World of Science
seasonal stores during the fiscal 1999 holiday selling season and currently
operates 19 seasonal stores. During the past three fiscal years, the Company
has opened 29 permanent stores in pre-existing malls which were preceded by a
seasonal store in the same mall. The Company plans to operate approximately 65
seasonal stores during the holiday selling season in fiscal 2000 and fiscal
2001.
. Internet Presence. The Company launched its first commerce-enabled web site,
www.worldofscience.com, in the spring of 1999. Since then the Company has
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developed a number of partnerships with other web sites, including but not
limited to the following:
Amazon.com - The Company's products are available in Amazon's zShops.
Britannica.com - A list of products which include telescopes, microscopes,
science kits, weather stations and more are available on Britannica .com.
Yahoo! - World of Science products are available through Yahoo! Shopping. The
Company is designated as a "Top Service" supplier, which means that the
Company is a participating retailer in Yahoo!'s Customer Rating Program, and
that customers who have ordered World of Science products have given it the
highest ratings.
Celestron - Celestron is a leading telescope supplier. Its web site refers
customers to World of Science's retail locations and web site.
World of Science Affiliate Program - The Company currently has over 500 active
members in its Affiliate Program. World of Science pays a 10% sales commission
to partner sites that refer online shoppers. Approximately 18% of December
1999 Internet sales were derived from Affiliate Program web sites.
During December 1999, the Company's web site generated approximately $220,000
in sales and over 90,000 user sessions. This sales volume represented 3,275
orders with an average ticket of $64.77. On average, shoppers spend
approximately 18 minutes on the site each time they visit.
The Company also owns the rights to the following domain names: www.b-two-
b.com and www.ischoolathome.com. The online content for these web sites is
currently under development and the web sites are scheduled to launch in 2000.
b-two-b.com is intended to support the Company's larger initiative to create a
substantial wholesale distribution business serving independent garden, toy
and gift stores.
. Commitment to Strong Infrastructure. The Company's expansion strategy
includes a commitment to make appropriate infrastructure investments. Over the
past three years, the Company has made significant investments in its
management information systems and distribution facilities, which have
contributed to efficiencies in inventory management and product distribution.
In the second quarter of fiscal 1997, the Company relocated its distribution
facility to a larger facility. The Company successfully installed new point-
of-sale software during the second and third quarter of fiscal 1998. In the
first quarter of fiscal 1999, the Company upgraded its main computer which
handles its financial and inventory management systems. The Company
periodically evaluates its store formats to maintain high standards of
attractiveness and an appropriate showcase for its science and nature
products.
3
Merchandising
The Company's merchandising strategy emphasizes both the educational and
entertainment values of its products, which are offered at competitive prices in
a stimulating retail environment. The Company has a broad customer base and its
products appeal to customers of all ages for gift giving, educational use and
entertainment. Many of the products offered in World of Science stores are not
widely available from other retailers within the malls occupied by the Company's
stores. Each permanent store carries approximately 2,600 SKUs displayed in
separate product areas. The Company generally does not carry licensed products
or mass-market television advertised products. In most product categories, the
Company offers a variety of traditional science and nature products that
customers would expect to encounter in a science and nature store. These more
traditional products are displayed together with the Company's distinctive
items. The Company is continually seeking new, distinctive products consistent
with its merchandising strategy. Historically, the Company has updated
approximately one-third of the items in its merchandise assortment annually.
The Company's merchandising team uses a variety of means to create or identify
potential new products, and the Company evaluates all new products prior to
offering them for sale in its stores. In addition, the Company seeks input and
suggestions from its store personnel and customers, and product selections are
sometimes made based upon such recommendations. The Company occasionally
designs its own products, which are manufactured by third party sources. The
Company also employs a staff geologist, who is responsible for evaluating
mineral and fossil specimens for sale in World of Science stores.
A typical permanent World of Science store has approximately 25 different
product categories and seasonal stores generally feature 20 different product
categories, focused upon specific merchandising themes. The Company's stores
adhere to a planned layout, which encourages customers to visit every category
within the store. Although not all of the available merchandise categories are
included in each World of Science store, the following is a list of the
principal categories, together with a description of the typical products they
contain:
. Activity Kits arts and crafts, behavioral science, archeology
and paleontology
. American Craftsman limited production kaleidoscopes, glass and metal
sculptures, jewelry, pottery bowls, vases and
decorative pieces with natural images
. Anatomy anatomical models, charts and books
. Animal Replicas mammals, marine life, reptiles, amphibians and
insects represented in self-assembled, molded or
plush replicas
. Apparel distinctive t-shirts, hats and kits for ties and
scarves
. Astronomy telescopes, star finder charts, instructional
models, solar system charts and mobiles
. Biology microscopes, related labware, books for reference
and science projects, petri dishes, microscope
sets and slide sets
. Bird Watching binoculars, feeders, houses, field identification
guides, bird calls and books
. Botany & Garden fountains, seed kits, figurines, plant growing
kits, garden Accessories sculpture, wind chimes
and bells
. Chemistry experiment kits, science project resources,
technical labware and reference books
. Dinosaurs molded replicas, models, puzzles, games, books
and kit
. Flight model rocketry, kites, boomerangs and flight
discs
. Food Making kits for making chewing gum, chocolate, soda,
beer and wine
. Geography compasses, hiking staffs, educational puzzles,
games and maps
. Geology quality mineral and fossil collectibles for the
beginner to serious collector
. Glow in the Dark astronomical and animal designs
. Impulse fascinating pick-up items, including spinning
tops, keychains, magnets and travel puzzles
. Magnetism magnets, building kits, floating tops and science
project kits
. Nostalgia old-fashioned toys and games
. Optics magnifiers, a wide range of kaleidoscopes and
teleidoscopes
. Physics traditional construction sets and robotic models
. Plush stuffed animals (including Beanie Babies)
. Puzzles and Games jigsaw puzzles, brainteasers, travel games and
other board games
. Recorded Music music with enhancements of nature sounds, music
for relaxation and Celtic music
. Relaxation massage tools, reflexology, and stress management
. Weather weather instruments, solar kits, umbrellas and
reference books
4
Plush products (including Beanie Babies) represented approximately 7.2%, or
$4.4 million, of the Company's sales in fiscal 1999. Due to decreased available
supply from the manufacturer, plush sales declined from $8.3 million in fiscal
1998 to $4.4 million in fiscal 1999. Management projects that fiscal 2000 sales
of plush will decrease even further to approximately $2.5 million. Accordingly,
plush products will represent a much lower percentage of the Company's sales in
fiscal 2000.
The price range of products carried by World of Science stores generally vary
from less than $1.00 to over $1,000 per item. The average customer transaction
in fiscal 1999 was $24.00 for the five-weeks ending December 25, 1999 and was
$19.58 for the entire fiscal year, as compared to $23.77 for the five-weeks
ending December 26, 1998 and $18.46 for all of fiscal 1998.
Purchasing and Distribution
The Company purchases its products from over 450 sources and is continually in
search of additional suppliers. The Company's merchandising team includes the
Company's President, Vice President of Operations and Merchandising Manager.
This team and other representatives of the Company utilize various means to
identify potential new product sources. The Company's top 20 product suppliers
accounted for 52.7% of total purchases in fiscal 1999, and 51.3% of total
purchases in fiscal 1998. There is currently just one supplier, telescope
manufacturer Celestron, that furnished product that represented over 7.0% of
revenues in fiscal 1999.
Inventory levels for each store, both on a SKU and dollar level, are monitored
weekly, with automatic replenishment orders made through the Company's
management information systems. This is accomplished based on a pre-determined,
maximum/minimum SKU stocking control system. Maximum/minimum SKU inventory
levels are reviewed and, if warranted, adjusted on a seasonal basis, most
notably in preparation for the year-end holiday selling season, and are closely
monitored for Company-wide stock reordering and initial holiday orders. The
Company typically ships products by ground freight for new store inventory
stocking or existing store replenishment orders. Replenishment orders are
typically filled within three days.
The Company leases a 110,000 square foot distribution center in Rochester, New
York, less than one mile from the Company's corporate offices, from which it
conducts all of its inventory management, receiving and shipping. The current
geographic concentration of its stores enables the Company to make deliveries to
stores on a weekly basis and enables it to restock its stores' inventories
promptly and efficiently from its distribution center. Deliveries are generally
made through common carriers. The distribution center uses a personal computer
based inventory location system which utilizes radio frequency ("RF") technology
to enable distribution center personnel to receive, store, pick and check
incoming and outgoing orders by SKU in a paperless process. Because this system
tracks inventory by location, order pickers are directed by hand-held RF
terminals to bar-coded SKU locations in the sequence in which product is stored
in the warehouse. The order pickers are prompted to pick the proper quantity to
fill orders to replenish the stores, thus allowing orders to be efficiently
picked.
Store Operations
Store personnel encourage customers to browse, experiment with, and examine
the features and quality of the products as the store layout guides them through
up to 25 different product areas. World of Science stores offer customers an
educational and entertaining shopping environment where experimentation and play
are integral components of the buying experience. Management believes that
providing well-trained, knowledgeable and friendly store personnel is a key
aspect of its business strategy and contributes to the shopping experience. The
Company's products lend themselves to explanations and demonstrations, and store
personnel with product knowledge can assist customers with purchasing decisions.
All store personnel are trained in customer service, product features and the
store's point-of-sale system.
The Company's store operations are managed by its Vice President of
Operations, who oversees a staff consisting of two regional managers, eleven
district managers and four area managers. The regional managers oversee the
Company's district managers, who, in turn, may supervise one or more area
managers. District managers also oversee specific stores that are not managed
by area managers. District and area managers are responsible for all aspects of
the operations of stores in defined market areas. World of Science stores are
generally staffed with one store manager, and permanent stores typically also
have an assistant store manager. Store managers are responsible for most
aspects of store operations, including store staffing and development, visual
presentation and shrinkage control. However, merchandise replenishment is
controlled centrally, to ensure inventory levels appropriate for the rate of
sales at each store. All store management personnel are paid on a salary basis
and, as an incentive to increase sales, are eligible to receive bonuses based on
the store's sales performance during each fiscal year. World of Science stores
have a sales staff of approximately eight hourly employees in permanent stores
and approximately five hourly employees in seasonal stores. The number of
hourly employees increases to about 20 in permanent stores and 10 in seasonal
stores during the holiday selling season.
Permanent stores contain on average 2,300 square feet of selling space and
offer approximately 2,600 SKUs. The Company's permanent stores have an upscale
design which generally includes mahogany and brass fixturing, river-rock and
wood store facades and open product displays that encourage customers to
experiment and play with the merchandise. The Company periodically evaluates
its permanent store format to assure an upscale, modern appearance with eye-
catching window displays. Starting in 1997,
5
the Company began updating its store format to include more open storefronts and
brighter interior spaces. Although the Company generally ensures that all of its
permanent stores employ the Company's upscale decorative style, the Company may
use less expensive facades and fixtures to adapt to particular malls and
markets.
Seasonal stores are typically opened in sites requiring minimal build-out and
are fixtured with wall systems and merchandise displays that can be disassembled
and re-used in other seasonal store locations. Seasonal stores also carry lower
inventory levels than permanent stores. A typical seasonal store carries about
75% of the SKUs featured in the Company's permanent stores and averages
approximately 1,500 square feet of selling space. Seasonal stores operate on
month-to-month or short-term leases of up to three years. The lead-time in
opening a seasonal store is substantially shorter than the lead-time for
permanent stores, enabling the Company to react quickly to market opportunities.
World of Science stores are open seven days a week and the typical hours of
operation are from 10:00 a.m. to 9:00 p.m. Monday through Saturday and 11:00
a.m. to 6:00 p.m. on Sunday, with extended hours during the holiday selling
season. The Company's stores are generally open during the same business hours
as the enclosed malls in which they operate. Except with respect to advertising
required under certain of its mall leases, the Company does not utilize mass
media advertising to generate sales. World of Science relies upon mall traffic,
word of mouth, its Internet site and occasional promotions to attract customers.
Management Information Systems
The Company uses an IBM AS/400 (model 620) for its management information
systems, which handles all major informational requirements of the Company's
business, including sales, warehousing and distribution, purchasing, inventory
control, merchandise planning and replenishment as well as various accounting
functions. At the store level, the Company uses a point-of-sale computer system
with the capability to provide sales data and to maintain perpetual inventory
data on a per-SKU basis. All software applications which run on the AS/400 are
licensed by World of Science and have been customized according to Company
specifications.
The Company tracks its inventory by electronic data interchange between the
AS/400 and the Company warehouse and its stores. All inventory is bar-coded
where practical. The system polls each of its stores each evening to upload
sales data, to update inventory status and to determine replenishment
requirements. Weekly sales information is retained for each store, allowing the
Company to analyze sales performance by store, market and SKU.
Competition
Competition for consumer spending is highly intense among specialty retailers,
traditional department stores and mass merchants in regional shopping malls and
other high traffic retail locations. The Company competes against other
retailers for suitable real estate locations and qualified personnel. The
Company believes that its distinctive and traditional merchandise, educational
and entertaining shopping experience, superior customer service, use of seasonal
stores and price integrity distinguishes it from other specialty retailers. The
specialty retail business has few barriers to entry. In addition, as the Company
expands into new markets, its success may depend in part on its ability to gain
market share from established competitors. Many of the Company's competitors
have substantially greater financial, marketing and other resources than the
Company. There can therefore be no assurance that the Company will be able to
compete successfully with them in the future.
Seasonality and Quarterly Fluctuations
The Company's business is subject to substantial seasonal variations in
demand. Historically, a significant portion of the Company's sales and all of
its net income have been realized during the months of November and December,
and levels of sales and net income have generally been substantially lower from
January through October, resulting in losses in the first three fiscal quarters.
In preparation for its holiday selling season, the Company significantly
increases inventories and related indebtedness, hires an increased number of
temporary employees in its stores and distribution center, and incurs costs in
setting up seasonal store locations. If, for any reason, the Company's sales
were to be substantially below seasonal norms during the months of November and
December, or if the Company could not hire a sufficient number of qualified
employees during the peak periods, the Company's business, financial condition
and results of operations would be adversely affected. Quarterly results are
affected by the timing of new store openings and the amount of revenue
contributed by permanent and seasonal stores.
Employees
As of January 29, 2000 the Company employed approximately 975 active
employees. The Company regularly supplements its work force with a significant
number of part-time employees during the holiday selling season. Substantially
all of the Company's part-time employees work at the store level. None of the
Company's employees are represented by labor unions and the Company believes its
employee relations are very good.
6
Executive Officers
The executive officers of the Company and their ages as of January 29, 2000
are as follows:
Name Age Position(s) Held
---- --- ----------------
Fred H. Klaucke.................................................... 63 Chairman of the Board of Directors, President and
Chief Executive Officer
Charles A. Callahan................................................ 50 Vice President of Finance, Chief Financial Officer and
Assistant Secretary
Christine M. Luchi................................................. 47 Vice President of Operations
Fred H. Klaucke is the founder of the Company and has served as Chief
Executive Officer and Chairman of the Board of Directors of the Company since
its incorporation in 1969 and as President since 1996.
Charles A. Callahan has served as Vice President of Finance and Chief
Financial Officer of the Company since 1994, and as Assistant Secretary since
1992. Mr. Callahan joined the Company as Controller in 1992. He has over 25
years of experience in accounting and financial management including five years
with KPMG LLP.
Christine M. Luchi has served as Vice President of Operations of the Company
since 1996. Ms. Luchi joined the Company in 1990 as a Regional Manager. From
1992 until 1996, Ms. Luchi served as Director of Operations. Prior to joining
the Company, Ms. Luchi held retail positions with General Host Corporation,
where she served as training manager and district sales manager, and Tenneco
Corporation, where she held the positions of district and division manager and
franchise consultant. Ms. Luchi has additional consulting experience in the
areas of operations and sales training.
Future Results
This report contains forward looking statements regarding, among other
matters, the Company's future strategy, store opening plans, merchandising
strategy and growth. The forward looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Act of 1995.
Forward looking statements address matters which are subject to a number of
risks and uncertainties. In addition to the general risks associated with the
operation of specialty retail stores in a highly competitive environment, the
success of the Company will depend on a variety of factors, such as consumer
spending which is dependent on economic conditions affecting disposable consumer
income such as employment, business conditions, interest rates, and taxation.
The Company's continued growth also depends upon the demand for its products,
which in turn is dependent upon various factors, such as the introduction and
acceptance of new products and the continued popularity of existing products, as
well as the timely supply of all merchandise. Reference is made to the
Company's other filings with the Securities and Exchange Commission for further
discussion of risks and uncertainties regarding the Company's business.
ITEM 2. PROPERTY
The Company's corporate headquarters are located in a 35,000 square foot
facility which is comprised of 15,000 square feet of office space and 20,000
square feet of warehouse space. The facility is leased from the State of New
York at an annual rent of approximately $88,000. The term of this lease,
inclusive of two five-year renewal options, expires in 2013, and the lease
provides for rental increases for each renewal term based on increases in the
consumer price index, not to exceed 20% of the then current rent.
The Company entered into a sublease for a new distribution center in fiscal
1997. The facility, which is located within one mile of the Company's office,
contains approximately 110,000 square feet of warehouse space. The sublease is
triple net and is for a term, inclusive of two one-year renewal options,
expiring in 2002. The base monthly rental for this facility is approximately
$31,500.
Management believes that the capacity of the corporate headquarters and
distribution center will be sufficient for the next 24 months.
At January 29, 2000, the Company operated 84 permanent stores and 24 seasonal
stores in 25 states. The permanent stores occupied 195,753 gross square feet of
leased space, with the stores ranging in size from 1,000 to 3,200 square feet.
The Company's permanent stores typically have lease terms ranging from seven to
ten years, and the lease terms for existing permanent stores expire between 2000
and 2010. Seasonal stores have lease terms ranging from month-to-month to three
years. The Company's store leases generally provide for percentage rent based
upon sales.
World of Science stores are generally located in high traffic areas of
regional, enclosed shopping malls. The Company believes that the number of
desirable store sites likely to be available in the future will be adequate to
permit the Company to implement its
7
expansion strategy. In selecting new store locations, the Company evaluates the
market areas, mall locations, anchor stores, mall traffic patterns, mall sales
per square foot, performance of other specialty retail tenants, competition and
occupancy, construction and other costs associated with opening a store.
ITEM 3. LEGAL PROCEEDINGS
In November 1999, a lawsuit was filed against the Company by Native America
Arts, Inc. in the Federal District Court for the Northern District of Illinois.
The lawsuit, entitled Native American Arts, Inc. v World of Science, Inc.,
alleges that the Company sold products which were falsely represented to be made
by Native American Indians in violation of The Indian Arts and Crafts Act of
1990. The lawsuit seeks compensatory and punitive damages. The Company
disputes the allegations of wrongdoing in the complaint and believes there are
substantial defenses to the lawsuit.
From time to time, the Company is subject to other legal proceedings and
claims in the ordinary course of business. The Company currently is not aware
of any such other legal proceedings or claims that it believes will have,
individually or in the aggregate, a material adverse effect on its business,
financial condition and operating results. The Company maintains general
liability insurance coverage in amounts deemed adequate by management.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
World of Science, Inc. Common Stock, $.01 par value, is traded on The Nasdaq
SmallCap Market(sm) under the symbol WOSI. The following quotations are
furnished by Nasdaq for the periods indicated. These quotations reflect inter-
dealer quotations that do not include retail markups, markdowns or commissions
and may not represent actual transactions.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
High Low High Low High Low High Low
1999 4 13/16 2 1/8 3 5/16 2 2 5/16 3/4 2 5/32 1/2
1998 3 3/4 2 1/16 3 1/2 2 7/16 2 3/4 1 7/8 3 7/8 2 1/16
_______________________________
(1) Market prices reflected are for the period of July 8, 1997 (date Company's
initial public offering commenced) through August 2, 1997 (date second
quarter of fiscal 1997 ended).
As of April 14, 1999, there were approximately 123 holders of record of the
Company's Common Stock and approximately 1,620 beneficial holders.
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" in Item 7 of this Annual Report, and Note 6 to
our financial statements contained in Item 8 of this Annual Report, for a
description of certain restrictions on our ability to pay dividends. Subject to
such limitations, any future dividends will be at the discretion of our Board of
Directors and will depend upon, among other factors, our earnings, financial
condition and other requirements.
8
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended
-----------------
January 29, January 30, January 31, February 1, January 28,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except per share and store operating data)
Statement of Income Data:
Net sales..................................... $ 61,135 $ 60,709 $ 54,259 $ 44,563 $ 37,265
Cost of sales and occupancy expenses.......... 44,968 40,473 35,922 28,630 23,957
----------- ----------- ----------- ----------- -----------
Gross profit.................................. 16,167 20,236 18,337 15,933 13,308
Selling, general and administrative
Expenses.................................... 19,781 17,452 15,158 12,593 10,680
----------- ----------- ----------- ----------- -----------
Operating income (loss)....................... (3,614) 2,784 3,179 3,340 2,628
Interest expense, net......................... 556 265 237 394 418
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes............. (4,170) 2,519 2,942 2,946 2,210
Income tax expense (benefit).................. ( 1,668) 999 1,182 1,210 906
----------- ----------- ----------- ----------- -----------
Net income (loss)............................. ($2,502) $ 1,520 $ 1,760 $ 1,736 $ 1,304
=========== =========== =========== =========== ===========
Net income (loss) per share:
Basic....................................... ( $0.53) $0.31 $0.40 $0.50 $0.37
=========== =========== =========== =========== ===========
Diluted (2)................................. ( $0.53) $0.31 $0.40 $0.49 $0.35
=========== =========== =========== =========== ===========
Store Operating Data:
Selected Permanent Store Data:
Number of stores at beginning of period..... 74 56 44 37 33
Number of stores at end of period........... 84 74 56 44 37
Total net sales............................. $42,139,000 $38,830,000 $30,055,000 $23,998,000 $20,241,000
Percentage increase (decrease) in
comparable store net sales(3)(4)............ (9.4%) 4.4% 1.5% 3.5% 3.1%
Total square footage at end of period(5).... 195,753 170,321 123,678 94,348 75,182
Average net sales per square foot(3)(5)..... $ 221 $ 260 $ 262 $ 275 $ 272
Average net sales per store (3)(5).......... $ 512,000 $ 580,000 $ 572,000 $ 575,000 $ 544,000
Selected Seasonal Store Data:
Number of stores at beginning of period..... 71 60 62 37 40
Peak number of stores during period(6)...... 75 101 101 85 71
Total net sales............................. $18,602,000 $21,871,000 $24,204,000 $20,565,000 $17,019,000
Selected Internet Site Data
Total net sales............................. $ 394,000 $ 8,000 N/A N/A N/A
Average order............................... $ 69 N/A N/A N/A N/A
January 29, January 30, January 31, February 1, January 28,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Cash and cash equivalents..................... $ 1,572 $ 3,543 $ 6,742 $ 2,014 $ 1,620
Working capital............................... 8,647 12,266 14,819 5,818 4,972
Total assets.................................. 27,761 26,164 25,432 15,274 12,855
Total debt, including capital lease
Obligations................................. 4,874 176 410 370 437
Stockholders' equity.......................... 19,278 21,823 20,952 10,480 8,745
(1) The fiscal year ended February 1, 1997 consisted of 53 weeks as compared
with 52 weeks in all other years presented.
(2) Computed based on the weighted average number of shares of common stock and
common stock equivalents, calculated using the treasury stock method. For
fiscal 1995, the weighted average number of shares includes 654,550 shares
owned by the Company's Chairman which were subject to an option granted by
him to the Company's former President, which option terminated unexercised
on January 17, 1996. The 654,550 shares were considered in the diluted net
income per share calculation as common stock equivalents issued by the
Company for that fiscal year.
(3) Percentage increase in comparable store net sales, average net sales per
square foot and average net sales per store are adjusted to reflect a 52-
week year for all years presented.
(4) A comparable store is defined as a permanent store which was open as a
permanent store for at least one full fiscal year as of the beginning of
the fiscal year.
(5) Average net sales per square foot and average net sales per store include
only stores open for the entire fiscal period. Total square footage at end
of period reflects the gross leased space of permanent stores open at the
end of the period.
(6) Reflects the greatest number of seasonal stores open at any one time during
the period, which is historically during the fourth quarter of a fiscal
year.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is a leading specialty retailer of a variety of traditional and
distinctive science and nature products. The Company's sales have grown from
$37.3 million in fiscal 1995 to $61.1 million in fiscal 1999, primarily due to
the Company's store expansion program and, to a lesser extent, increases in
comparable store net sales. The Company's retail establishments consist of
permanent and seasonal stores. Permanent World of Science stores are open year-
round under long-term leases, contain an average of 2,000 square feet of selling
space, maintain approximately 2,600 SKUs in inventory, and are characterized by
an upscale store facade and interior package. Seasonal stores are open during
the holiday selling season, or for an extended period beyond the holiday selling
season, under shorter term leases with terms ranging from month-to-month to
three years. Seasonal stores contain an average of 1,500 square feet of selling
space, maintain approximately 1,950 SKUs in inventory and are typically located
in available in-line mall space. The cost of opening seasonal stores is
substantially lower and the lead time is substantially shorter than those
associated with permanent stores.
Since the Company's opening of its first World of Science store in 1984,
the Company has expanded to 84 permanent stores as of January 29, 2000. Since
opening its first seasonal store in fiscal 1992, the Company has increased the
use of this store format, operating 75 seasonal stores during the fiscal 1999
holiday selling season. The Company strives to maintain an appropriate balance
between permanent stores and seasonal stores, taking into account such factors
as management time demands, return on investment and site availability.
Although the Company will continue its active program of seasonal store
operations, it is placing greater emphasis on the opening of new permanent
stores. The Company opened 13 new permanent stores and closed three permanent
stores in fiscal 1999, opened 20 new permanent stores and closed two permanent
stores in fiscal 1998 and opened 12 new permanent stores in fiscal 1997. The
Company presently anticipates opening only one new permanent store in fiscal
2000. The Company operated 75 seasonal stores during the fiscal 1999 holiday
selling season and anticipates operating approximately 65 seasonal stores during
the fiscal 2000 holiday selling season.
The Company's business is subject to substantial seasonal variations.
Historically, a significant portion of the Company's sales and all of its net
income have been realized during the months of November and December, and net
sales have generally been significantly lower from January through October,
resulting in losses in the first three quarters. The Company expects that,
given its dependence on the holiday selling season, it will continue to
experience losses in the first three fiscal quarters. In addition, as a result
of the Company's expansion, management believes that the Company may experience
greater losses in the first three quarters of fiscal 2000 than it has
experienced over the past two years.
Sales consist almost entirely of merchandise purchased by customers in the
Company's stores. The Company's cost of sales and occupancy expenses include
the cost of operating the distribution center and other expenses associated with
acquiring inventory. Selling, general, and administrative expenses include non-
occupancy store expenses and administrative overhead expenses. The Company
recognizes all expense associated with the opening of new permanent and seasonal
stores as they are incurred, with the exception of leasehold improvements and
fixtures, which are capitalized. The cost of closing stores is expensed in the
period in which the decision to close the store is made.
A comparable store is a permanent store which has been open as a permanent
store for at least one full fiscal year as of the beginning of the fiscal year.
Comparable store net sales increases (decreases) for fiscal 1999, 1998, and
1997, were (9.4%), 4.4% and 1.5%, respectively. The number of comparable stores
in fiscal 1999, 1998, 1997, was 54, 43 and 37 respectively. Average net sales
per square foot declined in fiscal 1999 due to lower sales per square foot in
new permanent stores opened in fiscal 1998, reduced plush sales, liquidation by
a competitor and an overall sales decline in our industry. Average sales per
store decreased in fiscal 1999 due to a $3.9 million sales drop in plush sales
and lower comparable store sales.
The seasonal store program, which began in 1992, allows the Company to
expand its presence in the marketplace and take advantage of available in-line
mall retail space with minimal capital investment. Over the years the program
has made significant contributions to both sales and earnings while providing a
good testing ground for new permanent store locations. In fiscal 1998 and 1999
the Company experienced a decline in the quality of available space in its
seasonal store program due to a lack of space available in the better malls, and
increased competition from other retailers vying for available mall locations
during the holiday selling season. As a result of the recent trends associated
with its seasonal store program, the Company has placed greater emphasis in its
permanent store base in order to become less dependent on the availability of
seasonal store locations from year to year to achieve significant sales growth.
The Company's sales were negatively impacted in fiscal 1999 due to
decreased available supply of particular plush products. For fiscal 1999 plush
sales accounted for 7.2% of total sales as compared to 13.7% in fiscal 1998. The
impact on fiscal 1998 was greater due in part to a special one-time purchase of
fast selling plush items which had a positive effect on both sales and operating
results during the third quarter of fiscal 1998. Plush sales are expected to
decline further in fiscal 2000.
10
Results of Operations
The following table sets forth, for the fiscal years indicated, certain
financial data as a percentage of sales. Results for any one or more periods
are not necessarily indicative of future results.
Percentage of Net Sales
for Fiscal Year Ended
---------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
----- ----- -----
Net sales........................................................... 100.0% 100.0% 100.0%
Cost of sales and occupancy expenses................................ 73.6 66.7 66.2
----- ----- -----
Gross profit........................................................ 26.4 33.3 33.8
Selling, general and administrative expenses........................ 32.4 28.7 27.9
----- ----- -----
Operating income (loss)............................................. (5.9) 4.6 5.9
Interest expense, net............................................... 0.9 0.4 0.5
----- ----- -----
Income (loss) before income taxes................................... (6.8) 4.2 5.4
Income tax expense (benefit)........................................ (2.7) 1.7 2.2
----- ----- -----
Net income (loss)................................................... (4.1%) 2.5% 3.2%
===== ===== =====
Comparison of Fiscal 1999 to Fiscal 1998
Sales. Sales increased to $61.1 million from $60.7 million, an increase of
$400,000, or 0.7%. Of this increase in sales: $13.6 million was attributable to
thirteen new permanent stores opened during fiscal 1999 and twenty permanent
stores in operation for less than one year as of the beginning of fiscal 1998;
$386,000 was attributable to increased internet sales. These increases were
partially offset by comparable store sales declining $3.0 million due primarily
to decreased available supply of particular plush items, and seasonal store
sales declining $2.5 million due to lower average seasonal stores sales and the
operation of fewer seasonal stores. Comparable store sales for the Company's
permanent stores decreased 9.4% in fiscal 1999.
Cost of Sales and Occupancy Expenses. Cost of sales and occupancy expenses
increased to $45.0 million from $40.5 million, an increase of 11.1%. As a
percentage of sales, it increased to 73.6% from 66.7%. The dollar increase was
due to increased store occupancy costs from more permanent stores in operation
in fiscal 1999 and increased costs of sales due to higher sales. The percentage
of sales increase was due to increased store occupancy costs being spread over a
lower than expected sales base caused by a decline in seasonal store sales in
1999. Margins for products sold decreased 2.5% due to discounting of product in
the third and fourth quarters of fiscal 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $19.8 million from $17.5 million, an
increase of 13.3%. As a percentage of sales, it increased to 32.4% from 28.7%.
The dollar increase was due to supporting higher sales levels and an increased
number of permanent stores in fiscal 1999. The percentage of sales increase was
due to increased selling, general and administrative expenses being spread over
a lower than expected sales base caused by a decline in average store sales in
1999.
Interest Expense, Net. Net interest expense increased to $556,000 in fiscal
1999 from $265,000 in fiscal 1998, primarily as a result of higher average
borrowings during fiscal 1999.
Comparison of Fiscal 1998 to Fiscal 1997
Sales. Sales increased to $60.7 million from $54.3 million, an increase of $6.4
million, or 11.9%. Of this increase in sales: $7.6 million was attributable to
twenty new permanent stores opened during fiscal 1998 and twelve permanent
stores in operation for less than one year as of the beginning of fiscal 1997;
$1.1 million was attributable to increased comparable store sales. These
increases were partially offset by seasonal store sales declining $2.3 million
due to lower average seasonal store sales and the operation of fewer seasonal
stores. Comparable store sales for the Company's permanent stores increased
4.4% in fiscal 1998.
Cost of Sales and Occupancy Expenses. Cost of sales and occupancy expenses
increased to $40.5 million from $35.9 million, an increase of 12.7%. As a
percentage of sales, it increased to 66.7% from 66.2%. The dollar increase was
due to increased store occupancy costs from more stores in operation in fiscal
1998 and increased costs of sales due to higher sales. The percentage of sales
increase was due to increased store occupancy costs being spread over a lower
than expected sales base caused by a decline in average seasonal store sales in
1998. Margins for products sold increased .7% due to favorable purchasing,
particularly of overseas products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $17.5 million from $15.2 million, an
increase of 15.1%. As a percentage of sales, it increased to 28.7% from 27.9%.
The dollar increase was due to supporting higher sales levels and an increased
number of stores in fiscal 1998. The percentage of sales increase was due to
increased selling,
11
general and administrative expenses being spread over a lower than expected
sales base caused by a decline in average seasonal store sales in 1998.
Interest Expense, Net. Net interest expense increased to $265,000 in fiscal
1998 from $237,000 in fiscal 1997, primarily as a result of higher average
borrowings during fiscal 1998.
Inflation and Seasonality
The Company does not believe that inflation has had a material impact on its
operations during any of the periods presented above. There can be no
assurance; however, that its business will not be affected by inflation in the
future.
The Company's business is subject to substantial seasonal variations in
demand. Historically, a significant portion of the Company's sales and all of
its net income have been realized during the months of November and December,
and levels of sales and net income have generally been substantially lower from
January through October, resulting in losses in the first three fiscal quarters.
In preparation for its holiday selling season, the Company significantly
increases inventories and related indebtedness, hires an increased number of
temporary employees in its stores and distribution center, and incurs costs in
setting up seasonal store locations. If, for any reason, the Company's sales
were to be substantially below seasonal norms during the months of November and
December, or if the Company could not hire a sufficient number of qualified
employees during the peak periods, the Company's business, financial condition
and results of operations would be adversely affected. Quarterly results are
also affected by the timing of new store openings and the amount of revenue
contributed by permanent and seasonal stores.
Liquidity and Capital Resources
The primary sources of the Company's cash for working capital and capital
expenditures have been net cash flows from operating activities, capital lease
financings and bank borrowings. Seasonal working capital needs have been met
through short-term borrowings under a revolving line of credit.
The Company's primary capital requirements and working capital needs are
related to capital expenditures for new stores, purchase and upgrade of
management information systems and the purchase of inventory to meet seasonal
needs, particularly inventory for the holiday selling season. Cash flow used in
operations amounted to $4.1 million in fiscal 1999 as compared to cash flow
provided by operations of $2.6 million in fiscal 1998. This was due to the net
loss from operations combined with increased levels of inventories and other
working capital items.
During fiscal 1999 the Company had a revolving line of credit for inventory
financing, secured by the Company's inventory ("old revolving line of credit").
Under this line, the Company could borrow up to the lesser of $24.0 million, or
40% to 75% of the Company's inventory book value depending on the time of year.
The line bore interest at the bank's prime rate or LIBOR plus 150 basis points.
The credit agreement for this line of credit prohibited the payment of cash
dividends or purchase or redemption of the Company's capital stock in excess of
$650,000 in the aggregate in any fiscal year. As of January 29, 2000, there was
$4.7 million outstanding under this line of credit. Primarily as a result of
the holiday selling season, the Company experiences significant seasonal
fluctuations in its financing needs.
On March 21, 2000 the Company entered into a new credit facility agreement
with a lender specializing in retail finance. Proceeds from this new line of
credit were used to discharge in full the Company's indebtedness under its
revolving line of credit. The credit facility provides the lesser of $20.0
million, or 53% to 80% of the Company's eligible inventory depending on the time
of the year. Any borrowings in excess of a pre-defined inventory advance rate
will pay interest at the lender's over-advanced rate. The credit facility will
be used for inventory financing and other working capital needs. The facility
also includes a sublimit of $2,000,000 for letters of credit and expires on
March 31, 2003. The line of credit under the inventory advance rate bears
interest at the lender's base commercial lending rate (8.5% at January 29,
2000), and borrowings under the over-advanced facility bears interest at the
lender's base commercial lending rate plus 2% per annum (10.5% at January 29,
2000). All borrowings under the facility will be secured by a perfected
security interest in all assets of the Company. The Company is also required to
pay interest on the unused portion of the line of credit at a rate of 1/4 of 1%
per year. The lines of credit contain certain covenants and conditions relating
to cash management, weekly, monthly, quarterly and annual reports, mutually
satisfactory financial performance requirements, limitations on dividends and
distributions as well as common stock repurchases during any twelve month
period. If the facility is terminated prior to March 31, 2003, the Company will
pay any early termination fee between 0-2% of the maximum borrowing under the
line of credit depending on the reason for termination.
Maximum borrowings under the Company's old revolving line of credit peaked at
$16.2 million, $13.6 million, and $8.7 million during fiscal 1999, fiscal 1998,
and fiscal 1997, respectively, and averaged $7.2 million, $3.9 million, and $2.7
million, respectively, for those fiscal years.
12
As of January 29, 2000, outstanding capital lease obligations and total debt
amounted to $197,000, all of which represented capital lease obligations. The
capital lease obligations have terms expiring in fiscal 2002.
The capital expenditures associated with the opening of new permanent stores
range from $200,000 to $370,000 per store, before landlord build-out allowances,
if any, which vary from site to site. In addition, the Company initially stocks
each new permanent store with approximately $90,000 to $100,000 of inventory,
with peak inventory levels during the holiday selling season reaching
approximately $150,000 per store. The capital expenditures associated with
opening a seasonal store are nominal as these stores require minimal build-out
and utilize reusable fixtures. Each seasonal store is initially stocked with
approximately $50,000 of inventory, with peak inventory levels during the
holiday selling season reaching approximately $80,000 per store. It typically
takes 4 to 6 months from the time a lease is executed to the opening of a
permanent store for business. The lead time for a seasonal store is
substantially shorter. Pre-opening expenses for both permanent and seasonal
stores are minimal, and are expensed as incurred.
Capital expenditures in fiscal 1999, net of landlord build-out allowances,
were $2.4 million, as compared to $4.9 million in fiscal 1998. The Company
anticipates capital expenditures of approximately $500,000 in fiscal 2000. In
addition to the cost of new store construction, the Company expects to make
upgrades to its network and internet systems.
In April 1998, the Company's Board of Directors authorized a stock repurchase
program of up to $650,000 of the Company's common stock. The shares may be
repurchased, from time to time for a period of up to 24 months, through open
market purchases and privately negotiated transactions, subject to the
availability of shares and other market and financial conditions. In
conjunction with the stock repurchase program, the Company received approval
under its old credit agreement to acquire up to $650,000 of the Company's common
stock. The Company repurchased 318,800 shares in the third quarter of fiscal
1998 for $649,000. In December 1998, the Company's Board of Directors
authorized and received bank approval for a second repurchase program of up to
$650,000 of the Company's common stock under terms similar to the previous stock
repurchase program. The Company repurchased 25,050 in the second and third
quarter of fiscal 1999 for $43,000. The new credit agreement limits future
common stock repurchases during any twelve month period.
In response to softness in fiscal 1999 sales activity within our product
segment, management developed a cash flow model projecting cash proceeds against
working capital needs through fiscal 2000. At April 28, 2000 the Company
appears to be on plan with its cash flow estimates, however, management
continues to actively explore additional sources of financing opportunities for
potential working capital needs for the balance of the fiscal year and into
fiscal 2001. There are no assurances that such financings will be available.
Year 2000 Matters
The Company's fiscal 1998 form 10-K and fiscal 1999 10-Q's detailed the nature
and extent of the Company's efforts to prepare for the year 2000 (Y2K) date
changeover. By any measure, the efforts were a success. There were no major
Y2K incidents that affected the Company. The Company will continue to monitor
its internal and external resources for possible disruptions related to Y2K, but
anticipates none.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
--------
Independent Auditors' Report............................................................................................ 15
Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999................................................. 16
Consolidated Statements of Operations for the years ended January 29, 2000, January 30, 1999 and January 31, 1998....... 17
Consolidated Statements of Stockholders' Equity for the years ended January 29, 2000, January 30, 1999 and January 31,
1998................................................................................................................... 18
Consolidated Statements of Cash Flows for the years ended January 29, 2000, January 30, 1999 and January 31, 1998...... 19
Notes to Consolidated Financial Statements including supplementary data entitled
"Selected Quarterly Financial Data (Unaudited)"......................................................................... 20-28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
None
14
INDEPENDENT AUDITORS' REPORT
The Board of Directors
World of Science, Inc.:
We have audited the accompanying consolidated balance sheets of World of
Science, Inc. and subsidiary (Company) as of January 29, 2000 and January 30,
1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
January 29, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of World of
Science, Inc. and subsidiary as of January 29, 2000 and January 30, 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended January 29, 2000, in conformity with generally
accepted accounting principles.
KPMG, LLP
March 24, 2000
Rochester, New York
15
WORLD OF SCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
January 29, January 30,
2000 1999
----------- -----------
Assets
Current assets:
Cash and cash equivalents.......................................................... $ 1,571,856 $ 3,543,028
Accounts receivable................................................................ 216,983 442,883
Inventories........................................................................ 11,804,385 10,224,528
Prepaid expenses and other current assets.......................................... 612,008 739,326
Income taxes receivable............................................................ 1,265,946 --
Deferred income taxes.............................................................. 747,300 664,000
----------- -----------
Total current assets............................................................ 16,218,478 15,613,765
Property, equipment and leasehold improvements, net.................................. 10,280,529 9,678,485
Deferred income taxes................................................................ 1,261,500 872,000
----------- -----------
Total assets.................................................................... $27,760,507 $26,164,250
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Line of credit..................................................................... $ 4,677,862 $ --
Current installments of obligations under capital leases........................... 122,371 93,606
Accounts payable................................................................... 1,904,029 1,362,163
Accrued expenses................................................................... 718,559 496,606
Accrued sales taxes................................................................ 148,475 150,499
Income taxes payable............................................................... -- 1,245,178
----------- -----------
Total current liabilities....................................................... 7,571,296 3,348,052
Obligations under capital leases, excluding current installments..................... 74,196 82,148
Accrued occupancy expense............................................................ 837,014 911,049
----------- -----------
Total liabilities............................................................... 8,482,506 4,341,249
----------- -----------
Commitments and contingencies (notes 4, 6 and 10)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 5,000,000 shares;
no shares issued and outstanding................................................. -- --
Common stock, $.01 par value. Authorized 10,000,000 shares;
issued 5,079,955 shares.......................................................... 50,800 50,800
Additional paid-in capital......................................................... 11,398,143 11,398,143
Retained earnings.................................................................. 8,521,546 11,023,483
Treasury stock, 343,850 and 318,800 shares, at cost................................ (692,488) (649,425)
----------- -----------
Total stockholders' equity...................................................... 19,278,001 21,823,001
----------- -----------
Total liabilities and stockholders' equity...................................... $27,760,507 $26,164,250
=========== ===========
See accompanying notes to consolidated financial statements.
16
WORLD OF SCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
---------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
Net sales................................................................ $61,134,924 $60,709,470 $54,259,279
Cost of sales and occupancy expenses..................................... 44,968,377 40,472,690 35,922,111
----------- ----------- -----------
Gross profit........................................................... 16,166,547 20,236,780 18,337,168
Selling, general and administrative expenses............................. 19,780,936 17,452,990 15,157,933
----------- ----------- -----------
Operating (loss) income................................................ (3,614,389) 2,783,790 3,179,235
Interest expense, net.................................................... 555,548 264,561 237,106
----------- ----------- -----------
(Loss) income before income taxes...................................... (4,169,937) 2,519,229 2,942,129
Income tax (benefit) expense............................................. (1,668,000) 999,000 1,182,000
----------- ----------- -----------
Net (loss) income...................................................... $(2,501,937) $ 1,520,229 $ 1,760,129
=========== =========== ===========
Net (loss) income per share - basic.................................... $ (0.53) $ 0.31 $ 0.40
=========== =========== ===========
Net (loss) income per share - diluted.................................. $ (0.53) $ 0.31 $ 0.40
=========== =========== ===========
See accompanying notes to consolidated financial statements.
17
WORLD OF SCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Treasury Total
Common Stock Paid-In Retained Stock Stockholders'
------------------
Shares Amount Capital Earnings at Cost Equity
------ ------ ------- -------- ------- ------
Balance at January 31, 1998..................... 5,079,955 $ 50,800 $ 11,398,143 $ 9,503,254 $ -- $ 20,952,197
Repurchase of common stock...................... -- -- -- -- (649,425) (649,425)
Net income...................................... -- -- -- 1,520,229 -- 1,520,229
--------- -------- ------------ ----------- ---------- ------------
Balance at January 30, 1999..................... 5,079,955 50,800 11,398,143 11,023,483 (649,425) 21,823,001
Repurchase of common stock...................... -- -- -- -- (43,063) (43,063)
Net loss........................................ -- -- -- (2,501,937) -- (2,501,937)
--------- -------- ------------ ----------- ---------- ------------
Balance at January 29, 2000..................... 5,079,955 $ 50,800 $ 11,398,143 $ 8,521,546 $ (692,488) $ 19,278,001
========= ======== ============ =========== ========== ============
See accompanying notes to consolidated financial statements.
18
WORLD OF SCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
----------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net (loss) income.................................................... $(2,501,937) $ 1,520,229 $ 1,760,129
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization....................................... 1,944,447 1,654,838 1,349,662
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable.............................................. 225,900 (329,395) (59,149)
Inventories...................................................... (1,579,857) 179,505 (3,476,996)
Prepaid expenses and other current assets........................ 127,318 (206,695) (146,450)
Income taxes receivable.......................................... (1,265,946) -- --
Deferred income taxes............................................ (472,800) (327,000) (301,000)
(Decrease) increase in:
Accounts payable................................................. 541,866 42,629 (249,692)
Accrued expenses................................................. 221,953 87,768 (227,466)
Accrued sales taxes.............................................. (2,024) (10,833) 69,662
Income taxes payable............................................. (1,245,178) (155,173) (63,076)
Accrued occupancy expense........................................ (74,035) 131,598 116,561
----------- ----------- -----------
Net cash provided by (used in) operating activities............ (4,080,293) 2,587,471 (1,227,815)
----------- ----------- -----------
Cash flows from investing activities -- capital
expenditures, net of minor disposals................................. (2,389,990) (4,902,649) (2,584,079)
----------- ----------- -----------
Cash flows from financing activities:
Repurchase of common stock........................................... (43,063) (649,425) --
Net proceeds from issuance of common stock........................... -- -- 8,711,693
Net proceeds from line of credit..................................... 4,677,862 -- --
Principal payments on long-term debt................................. -- (68,695) (68,922)
Principal payments on capital leases................................. (135,688) (165,735) (103,069)
----------- ----------- -----------
Net cash provided by (used in) financing activities................... 4,499,111 (883,855) 8,539,702
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.................. (1,971,172) (3,199,033) 4,727,808
Cash and cash equivalents at beginning of year........................ 3,543,028 6,742,061 2,014,253
----------- ----------- -----------
Cash and cash equivalents at end of year.............................. $ 1,571,856 $ 3,543,028 $ 6,742,061
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................................ $ 560,512 $ 353,429 $ 281,136
Income taxes........................................................ $ 1,315,924 $ 1,481,173 $ 1,559,077
=========== =========== ===========
Noncash financing activity:
Acquisition of equipment under a capital lease....................... $ 156,501 $ -- $ 212,539
=========== =========== ===========
See accompanying notes to consolidated financial statements.
19
WORLD OF SCIENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three-Year Period Ended January 29, 2000
(1) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
World of Science, Inc. and subsidiary (the Company), a Rochester, New York
based corporation, markets and distributes a large variety of science and nature
related products through its World of Science(R) retail stores, generally
located in regional shopping malls in the eastern half of the United States, and
its Internet store located at www.worldofscience.com.
The Company currently operates 84 permanent World of Science stores,
including 13 new permanent stores in fiscal 1999. Permanent stores typically
operate under 7 to 10 year leases in mall locations.
The Company also operated 75 World of Science seasonal stores during the
fiscal 1999 holiday season of which 24 were still open at the end of fiscal
1999. Seasonal stores operate under shorter-term lease agreements ranging from
month to month to three years. Although seasonal store leases do not include a
long-term commitment with mall owners, management fully expects to renew or
replace these leases for the fiscal 2000 holiday season.
In April 1999, the Company formed a wholly-owned subsidiary named WOSI on
the WEB, Inc., which focuses on the operation of the web site. The site is
designed to facilitate business to customer sales transactions over the
Internet. Certain administrative costs of the subsidiary are supported through
World of Science, Inc. headquarters operations.
Fiscal Year
Reference to a fiscal year refers to the calendar year in which such fiscal
year commences. Accordingly, fiscal 1999 ended on January 29, 2000, fiscal 1998
ended on January 30, 1999 and fiscal 1997 ended on January 31, 1998.
The Company's fiscal year ends on the Saturday closest to January 31. There
were 52 weeks in fiscal year 1999, 1998 and 1997.
Cash Equivalents
Cash equivalents consist of amounts on deposit with banks and money market
funds.
Inventories
Inventories, which consist of goods ready for retail sale are stated at the
lower of weighted average cost or market.
Treasury Stock
Treasury stock is reported using the cost method.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost.
Depreciation is computed for book and tax purposes using straight-line and
accelerated methods over the following periods:
Furniture, equipment and temporary store fixtures....... 4-9 years
Leasehold improvements.................................. 4-10 years (or lease term, if shorter)
Truck................................................... 4 years
Construction allowances received from shopping mall operators, consisting
of cash payments and/or free rent periods, are deducted from the cost of
leasehold improvements.
20
WORLD OF SCIENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Occupancy Expense
Occupancy expense is recorded on the straight-line basis over the term of the
lease, including certain leases under which lease payments escalate over the
term of the lease. Accrued occupancy expense is recorded for the excess of
expense determined on a straight-line basis over cash payments during the
escalation period.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period which includes the
enactment date.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Store Openings and Closings
The Company expenses all costs associated with the opening of a store in the
current period, with the exception of leasehold improvements and fixtures which
are capitalized. The Company accrues the anticipated cost of closing a store,
including remaining lease obligations, if any, and the undepreciated cost of
leasehold improvements in the period in which the decision to close the store is
made.
Stock Option Plans
The Company accounts for its stock option plans in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25, which recognizes compensation on the
date of grant only if the current market price of the underlying stock is in
excess if the exercise price of the stock option. By electing to continue to
apply the provisions of APB Opinion No. 25 a company must also provide pro forma
net income and pro forma earnings (loss) per share disclosures for employee
stock option grants made as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company continues to apply the provisions of APB
Opinion No. 25 and provides the pro forma disclosure provisions of SFAS No. 123
in note 9.
Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net undiscounted cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
21
WORLD OF SCIENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Share and Per Share Amounts
Basic net income (loss) per share for fiscal 1999, 1998 and 1997 was
computed by dividing net income (loss) by the total of weighted average number
of common shares outstanding during the period. Diluted net income (loss) per
share reflects the effects of common stock issuable upon exercise of dilutive
stock options and warrants.
Accounting Standards Pronouncements
During 1998, the Company adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. The adoption of SFAS No. 130
does not impact the Company's financial statements.
During 1998, the Company adopted SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. SFAS No. 131 requires public companies to
report certain financial and other information about key revenue-producing
segments for which such information is available and utilized by the chief
operating decision maker.
Specific information to be reported for individual segments include profit
and loss, certain revenue and expense items, and total assets. As a specialty
retailer the Company's operations involve the marketing and distribution of
science and nature related products through its retail stores. Management makes
operating decisions and assesses performance based upon an ongoing review of
each retail store performance, which constitute the Company's only operating
segments for financial reporting purposes. Therefore, the adoption of SFAS No.
131 does not impact the Company's financial statements.
Principals of Consolidation
The accompanying consolidated financial statements include activity from
the Company's wholly owned subsidiary WOSI on the Web, Inc. All significant
intercompany accounts and transactions are eliminated in consolidation.
(2) Treasury Stock
During fiscal 1998 the Company's Board of Directors authorized two common
stock repurchase programs of up to $650,000 each of the Company's common stock.
In fiscal 1998, the Company repurchased 318,800 shares of common stock for
$649,425 and in fiscal 1999 the Company repurchased 25,050 shares of common
stock for $43,063.
(3) Property, Equipment and Leasehold Improvements
A summary of property, equipment and leasehold improvements follows:
January 29, January 30,
2000 1999
---- ----
Leasehold improvements--open stores.......................................... $12,751,179 $10,706,098
Furniture, equipment and temporary store fixtures............................ 5,278,676 4,689,580
Construction in progress - stores under construction......................... 384,674 611,112
----------- -----------
18,414,529 16,006,790
Less accumulated depreciation and amortization............................... 8,134,000 6,328,305
----------- -----------
$10,280,529 $ 9,678,485
=========== ===========
Construction allowances received from shopping mall developers totaling
$725,013 and $1,332,248 in fiscal 1999 and 1998, respectively, have been
recorded as reductions of leasehold improvements.
Construction in progress at January 29, 2000 consists of leasehold
improvements and fixtures for stores which will be opening in fiscal 2000 or
future years. All stores with construction in progress at January 30, 1999 were
opened during the year ended January 29, 2000.
22
WORLD OF SCIENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Lease Agreements
The Company leases retail space for stores, warehouse space, and vans. The
Company is granted concessions for certain leases related to retail space to
offset the cost of leasehold improvements. The Company records the concessions
as a reduction in the cost of leasehold improvements and charges gross rent
expense on a straight-line basis over the initial term of the lease.
The future minimum lease payments under noncancelable operating leases
executed as of March 24, 2000 and the present value of future minimum capital
lease payments as of January 29, 2000 are as follows:
Capital Operating
Leases Leases
------ ------
Fiscal year:
2000............................................................................ $127,584 $ 7,461,178
2001............................................................................ 66,701 6,350,778
2002............................................................................ 8,916 5,923,290
2003............................................................................ -- 5,284,159
2004............................................................................ -- 4,950,670
After 2004...................................................................... -- 15,910,818
-------- -----------
Total minimum lease payments.................................................... 203,201 $45,880,893
===========
Less amount representing interest.................................................. 6,634
--------
Present value of net minimum capital lease payments................................ 196,567
Less current installments of obligations under capital leases...................... 122,371
--------
Obligations under capital leases, excluding current installments................... $ 74,196
========
Certain lease agreements for retail space provide for contingent rental
payments in excess of the minimum required payments if the specific store
exceeds certain sales levels. Rent expense in excess of the minimum required
amounts for the stores was $83,888, $176,261, and $257,739, for fiscal years
1999, 1998, and 1997, respectively.
Total rent expense under all leases amounted to $13,194,445, $11,163,190,
$9,596,122 for fiscal years 1999, 1998, and 1997, respectively.
(5) Income Taxes
Income tax expense (benefit) for fiscal years 1999, 1998, and 1997,
consists of the following:
Federal State Total
------- ----- -----
1999
Current...................................................... $(1,153,600) $ (41,600) $(1,195,200)
Deferred..................................................... (99,300) (373,500) (472,800)
----------- --------- -----------
$(1,252,900) $(415,100) $(1,668,000)
=========== ========= ===========
1998
Current...................................................... $ 1,051,000 $ 275,000 $ 1,326,000
Deferred..................................................... (263,000) (64,000) (327,000)
----------- --------- -----------
$ 788,000 $ 211,000 $ 999,000
=========== ========= ===========
1997
Current...................................................... $ 1,151,000 $ 332,000 $ 1,483,000
Deferred..................................................... (250,000) (51,000) (301,000)
----------- --------- -----------
$ 901,000 $ 281,000 $ 1,182,000
=========== ========= ===========
23
WORLD OF SCIENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the expected tax expense, computed by applying the
statutory income tax rate of 34% to income before income taxes, to the actual
income tax expense follows:
1999 1998 1997
---- ---- ----
Computed expected tax expense.................................. $(1,417,800) $852,000 $1,000,000
State taxes, net of federal benefit............................ (274,000) 139,000 185,000
Other, net..................................................... 23,800 8,000 (3,000)
----------- -------- ----------
$(1,668,000) $999,000 $1,182,000
=========== ======== ==========
Effective tax rate.......................................... 40.0% 39.7% 40.2%
=========== ======== ==========
The significant components of deferred tax assets are presented below:
January 29, January 30,
2000 1999
---- ----
Deferred tax assets:
Inventory.................................................................... $ 697,000 $ 619,000
Accrued occupancy expense.................................................... 382,000 364,000
Depreciation................................................................. 741,000 535,000
Net operating loss carryover................................................. 138,300 --
Other........................................................................ 50,500 18,000
---------- ----------
Total gross deferred tax assets........................................... 2,008,800 1,536,000
Less valuation allowance..................................................... -- --
---------- ----------
Net deferred tax assets................................................... $2,008,800 $1,536,000
========== ==========
In assessing the realizability of deferred tax assets, management evaluates
whether it is more likely than not that some or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the projected
future taxable income and tax planning strategies in making this assessment.
Based on the level of historical taxable income and estimates of future taxable
income over the periods which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize the benefits
of these deductible differences. Accordingly, a valuation allowance against
total gross deferred tax assets is not considered necessary.
(6) Lines of Credit
During fiscal 1999 the Company had an available revolving line of credit
totaling $24,000,000 with interest at the equivalent of the prime rate or Libor
+ 1.5%. Total amounts outstanding under this facility were limited to a maximum
of the book value of inventory ranging from 40% to 75% depending on the time of
year. There was $4,677,862 and $-0- outstanding under this arrangement as of
January 29, 2000 and January 30, 1999, respectively.
During fiscal 1999 the Company paid a commitment fee on the unused portion
of the revolving line of credit which was calculated at a rate of 1/4 of 1.0%.
The line was collateralized by warehouse and store inventory.
At January 29, 2000 and January 30, 1999 no banker acceptances were
outstanding, and the Company was contingently liable under outstanding letters
of credit of $156,767 and $15,040, respectively.
The maximum outstanding balance under this line of credit during fiscal
years 1999 and 1998 was $16,153,000 and $13,600,000, respectively. The average
balance outstanding was $7,207,000 and $3,886,000 for fiscal 1999 and 1998,
respectively.
On March 21, 2000 the Company entered into a new credit facility agreement
with a lender specializing in retail finance. The credit facility provides the
lesser of $20 million, or 53% to 80% of the Company's eligible inventory
depending on the time of the year. Any borrowings in excess of a pre-defined
inventory advance rate will pay interest at the lender's over advanced rate. The
credit facility will be used for inventory financing and other working capital
needs. The facility also includes a sublimit of $2,000,000 for letters of credit
and expires on March 31, 2003. The line of credit under the inventory advance
rate bears interest at the lender's base commercial lending rate (8.5% at
January 29, 2000), and borrowings under the overadvanced facility bears interest
at the lender's base commercial lending rate plus 2% per annum (10.5% at January
29, 2000). All borrowings under the facility will be secured by a perfected
security interest in all assets of the Company. The Company is also required to
pay interest on the unused portion of the line of credit at a rate of 1/4 of
1.0% per year.
24
WORLD OF SCIENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The lines of credit contain certain covenants and conditions relating to
cash management, weekly, monthly, quarterly and annual reports, mutually
satisfactory financial performance requirements, limitations on dividends and
distributions as well as common stock repurchases during any twelve month
period. If the facility is terminated prior to March 31, 2003, the Company will
pay an early termination fee between 0-2% of the maximum borrowing under the
line of credit depending on the reason for termination.
(7) Benefit Plans
The Company does not currently offer and has not offered in the past,
postemployment or postretirement benefits to its current or former employees,
and accordingly, does not have a recorded liability for such benefits.
The Company sponsors a 401(k) plan for all employees who have met certain
eligibility requirements. The Company matches 50% of employee contributions to
the plan up to a maximum match of 2.5% of employee compensation. For fiscal
1999, 1998 and 1997, total expenses under the plan were $71,103, $60,250, and
$71,027, respectively.
(8) Net Income (Loss) Per Share
Basic and diluted earnings (loss) per share for the years ended January 29,
2000, January 30, 1999, and January 31, 1998 are as follows:
Weighted
Net (loss) Average Earnings (loss)
Income Shares per Share
------ ------ ---------
For the Year Ended January 29, 2000
- -----------------------------------
Basic EPS............................................ $(2,501,937) 4,749,285 $(0.53)
======
Dilutive effect of Outstanding Stock Options......... --
Diluted EPS.......................................... $(2,501,937) 4,749,285 $(0.53)
=========== ========= ======
For the Year Ended January 30, 1999
- -----------------------------------
Basic EPS............................................ $ 1,520,229 4,947,246 $ 0.31
======
Dilutive effect of Outstanding Stock Options......... 16,646
---------
Diluted EPS.......................................... $ 1,520,229 4,963,892 $ 0.31
=========== ========= ======
For the Year Ended January 31, 1998
- -----------------------------------
Basic EPS............................................ $ 1,760,129 4,361,823 $ 0.40
======
Dilutive effect of Outstanding Stock Options......... 83,246
---------
Diluted EPS.......................................... $ 1,760,129 4,445,069 $ 0.40
=========== ========= ======
25
WORLD OF SCIENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Stock Options and Warrants
The Company has two Stock Option Plans (the Plans) for employees and
directors. The Plans authorize the issuance of options to purchase up to 640,000
shares of the Company's common stock. The Plans provide for options which may
be issued as qualified incentive stock options under Section 422A of the
Internal Revenue Code of 1986, as amended, as well as nonqualified stock
options.
Options under the Plans are granted at the discretion of the Board of
Directors. The exercise price of qualified incentive stock options under the
Plans will not be less than the fair market value of the Company's stock at the
date of grant, except in the case of an optionee owning more than 10% of the
total combined voting power of all classes of stock of the Company, the price at
which shares of stock may be purchased shall not be less than 110% of the fair
market value. Options to the extent vested can be exercised immediately. The
options expire five years from the date of grant for options granted to a person
then owning more than 10% of the voting power of all common stock and ten years
from the date of grant for all other non-employee directors, officers and
employees. Stock appreciation rights may be granted in connection with stock
options. Such rights are exercisable by the optionee at any time a related
option could be exercised, and are payable in cash, common stock or any
combination. The exercise of a stock appreciation right results in cancellation
of the related option. No stock appreciation rights have been granted under the
Plans.
Options granted to employees vest 20% upon grant date with the remaining
80% vesting ratably over a four year period. Options granted to employees prior
to fiscal 1996 and options granted to directors vested 100% upon grant date.
At January 29, 2000, there were 302,500 shares available for grant under
the Plans, 128,500 shares were granted during fiscal 1999. The per share
weighted-average fair value of stock options granted during fiscal 1999 was
$2.31. No shares were granted in fiscal 1998. The fair value of options at the
date of grant was estimated using the Black Scholes option-pricing model with
the following weighted-average assumptions:
1999 1998 1997
---- ---- ----
Expected life (years).......................... 5.0 -- 5.0
Dividend yield................................. -- -- --
Risk-free interest rate........................ 6.00% -- 6.00%
Expected volatility............................ 134.83% -- 73.31%
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
1999 1998
---- ----
Net income (loss):
As reported................................................................. $(2,501,937) $1,520,229
Pro forma................................................................... (2,563,351) 1,464,362
Net income (loss) per share -basic:
As reported................................................................. $ (0.53) $ 0.31
Pro forma................................................................... $ (0.54) $ 0.30
Net income (loss) per share -diluted:
As reported................................................................. $ (0.53) $ 0.31
Pro forma................................................................... $ (0.54) $ 0.30
Proforma net income reflects only options granted subsequent to January 28,
1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of five years and compensation cost for options granted prior to fiscal
1996 is not considered. Proforma amounts for compensation cost may not be
indicative of the effects on earnings for future years.
26
WORLD OF SCIENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the change in options outstanding for fiscal
1999, 1998 and 1997:
Weighted
Number of Average
Options Exercise Price
------- --------------
Outstanding at February 1, 1997................................................ 165,000 $2.50
Granted..................................................................... 28,000 4.75
Exercised................................................................... (17,000) 2.10
Terminated.................................................................. (8,000) 3.00
-------
Outstanding at January 31, 1998................................................ 168,000 2.89
Granted..................................................................... -- --
Exercised................................................................... -- --
Terminated.................................................................. -- --
-------
Outstanding at January 30, 1999................................................ 168,000 2.89
Granted..................................................................... 128,500 2.31
Exercised................................................................... -- --
Terminated.................................................................. (51,000) 2.64
-------
Outstanding at January 29, 2000................................................ 245,500 2.64
=======
At January 29, 2000, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was as follows:
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------
Weighted Average
Range of Exercise Remaining Weighted Average Number Weighted Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------ ----------- ---------------- ---------------- ----------- ----------------
$1.80 - 2.50 90,000 5 years $2.26 80,000 $2.23
$3.00 - 4.75 56,000 7 years 3.81 41,200 3.73
$1.06 - 2.75 99,500 9 years 2.31 24,700 2.31
------- ------- ----- ------- -----
245,500 7 years $2.64 145,900 $2.66
======= ======= ===== ======= =====
27
WORLD OF SCIENCE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Legal Matters
In November 1999, a lawsuit was filed against the Company by Native America
Arts, Inc. in the Federal District Court for the Northern District of Illinois.
The lawsuit, entitled Native American Arts, Inc. v. World of Science, Inc.,
alleges that the Company sold products which were falsely represented to be made
by Native American Indians in violation of The Indian Arts and Crafts Act of
1990. The lawsuit seeks compensatory and punitive damages. The Company disputes
the allegations of wrongdoing in the complaint and believes there are
substantial defenses to the lawsuit.
From time to time, the Company is subject to other legal proceedings and
claims in the ordinary course of business. The Company currently is not aware of
any such other legal proceedings or claims that it believes will have,
individually or in the aggregate, a material adverse effect on its business,
financial condition and operating results. The Company maintains general
liability insurance coverage in amounts deemed adequate by management.
(11) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for fiscal 1999 and 1998 follows (in
thousands except per share data):
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
-------------- --------------- -------------- -------------- ------------
Fiscal 1999
- -----------
Net sales........................ $ 8,839 $ 9,074 $10,571 $32,651 $61,135
Gross profit..................... 1,364 1,070 1,302 12,431 16,167
Operating income (loss).......... (2,616) (3,156) (3,630) 5,788 (3,614)
Net income (loss)................ (1,573) (1,965) (2,326) 3,362 (2,502)
Net income (loss) per share:
Basic.......................... (0.33) (0.41) (0.49) 0.71 (0.53)
Diluted........................ (0.33) (0.41) (0.49) 0.71 (0.53)
Fiscal 1998
- -----------
Net sales........................ $ 7,863 $ 8,593 $10,594 $33,659 $60,709
Gross profit..................... 1,526 1,513 2,313 14,884 20,236
Operating income (loss).......... (1,847) (1,934) (2,127) 8,691 2,783
Net income (loss)................ (1,079) (1,177) (1,384) 5,160 1,520
Net income (loss) per share:
Basic.......................... (0.21) (0.23) (0.28) 1.08 0.31
Diluted........................ (0.21) (0.23) (0.28) 1.08 0.31
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors is incorporated by reference from the
section entitled "Election of Directors" in the World of Science definitive
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the Annual Meeting of Stockholders to be held on June 8, 2000
(the "Proxy Statement"). Information regarding Executive Officers is set forth
in Item 1 of Part I of this Report under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated by reference from the definitive
Proxy Statement for the Company's 2000 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required is incorporated by reference from the definitive
Proxy Statement for the Company's 2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is incorporated by reference from the definitive
Proxy Statement for the Company's 2000 Annual Meeting of Stockholders.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a). FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND EXHIBITS.
1. FINANCIAL STATEMENTS
The following consolidated financial statements and supplementary data
of the registrant and independent auditors' report on such financial
statements are filed under Part II, Item 8.
Page
-----
Independent Auditors' Report............................................................................................. 15
Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999.................................................. 16
Consolidated Statements of Operations for the years ended January 29, 2000, January 30, 1999 and January 31, 1998........ 17
Consolidated Statements of Stockholders' Equity for the years ended January 29, 2000, January 30, 1999 and January 31,
1998..................................................................................................................... 18
Consolidated Statements of Cash Flows for the years ended January 29, 2000, January 30, 1999 and January 31, 1998........ 19
Notes to Consolidated Financial Statements including supplementary data entitled
"Selected Quarterly Financial Data (Unaudited)".......................................................................... 20-28
2. FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because they are not
applicable or are not required.
3. EXHIBITS
A list of Exhibits required to be filed as part of this report is
incorporated by reference on page 32 of this report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the fourth quarter of fiscal 1999.
30
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: April 28, 2000 WORLD OF SCIENCE, INC.
(Registrant)
By: /s/ CHARLES A. CALLAHAN
----------------------------------------------
Charles A. Callahan
VICE PRESIDENT, FINANCE
CHIEF FINANCIAL OFFICER AND ASSISTANT SECRETARY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE
- ----------------------------------------- ----------------------------------------------------------
/s/ FRED H. KLAUCKE
- ----------------------------------------- Chairman of the Board, President
(Fred H. Klaucke) and Chief Executive Officer
/s/ CHARLES A. CALLAHAN Vice President, Finance,
- ----------------------------------------- Chief Financial Officer, and Assistant
(Charles A. Callahan) Secretary (Principal Accounting
and Financial Officer)
/s/ RICHARD B. CALLEN
- ----------------------------------------- Director
(Richard B. Callen)
/s/ PATRICK J. FULFORD
- ----------------------------------------- Director
(Patrick J. Fulford)
/s/ THOMAS A. JAMES
- ----------------------------------------- Director
(Thomas A. James)
Date: April 28, 2000
31
INDEX TO EXHIBITS
Exhibit Incorporated Herein Filed
No. Description By Reference To Herewith
----------- --------------- --------
3.1 Form of Restated Certificate of Incorporation of the Company. Exhibit 3.1 to World of
Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
3.2 Form of Bylaws of the Company, as amended. Exhibit 3.2 to World of
Science, Inc's Fiscal
1997 Form 10-K Report
4 Specimen Certificate of Common Stock of the Company. Exhibit 4 to World of
Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.1* Employment Agreement dated February 1, 1996 by and between the Exhibit 10.1 to World
Company and Fred H. Klaucke. of Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.2* Covenant Not-to-Compete and Non-Disclosure Agreement dated June, 1989 of Exhibit 10.2 to World
Fred H. Klaucke. of Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.3* 1993 Employee Stock Option Plan of the Company. Exhibit 10.3 to World
of Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.4* 1989 Incentive Stock Option Plan of the Company. Exhibit 10.4 to World
of Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.5 Lease Agreement dated as of September 11, 1968 between the Company and Exhibit 10.5 to World
Genesee Valley Regional Market Authority, together with all amendments of Science, Inc's
thereto. Registration Statement
on Form S-1 (No.
333-25031)
10.6 Lease Agreement dated as of March 29, 1994 between the Company and BF Exhibit 10.6 to World
Realty Investors Rochester II Limited Partnership. of Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.7 Sublease dated as of March 31, 1997 between the Company and Tertrac Exhibit 10.7 to World
Associates. of Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.8 Revolving Credit Agreement dated March 21, 2000 X
11.1 Computation of Earnings Per Share. X
21.1 Subsidiaries of the Company X
23.1 Consent of KPMG LLP. X
27.1 Financial Data Schedule. X
* Plan or agreement pursuant to which the Company's officers or directors have
received compensation.
32