COMPANY: WORLD OF SCIENCE, INC.
TICKER: WOSI
EXCHANGE: nms
FORM-TYPE: 10-Q
DOCUMENT DATE: April 29, 2000
FILING DATE: June 13, 2000
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 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.
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(Exact name of Registrant as specified in this charter)
NEW YORK 16-0963838
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
900 Jefferson Road, Building 4, Rochester, New York 14623
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (716)475-0100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Common stock outstanding as of May 31, 2000: 4,736,105 shares of common stock.
WORLD OF SCIENCE, INC.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations .....................3
Condensed Consolidated Balance Sheets................................4
Condensed Consolidated Statements of Cash Flows......................5
Notes to Condensed Consolidated Financial Statements.................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................7-10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk - None
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities and Use of Proceeds - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K ...................................11
SIGNATURE....................................................................12
2
WORLD OF SCIENCE, INC.,
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
----------------------
APRIL 29, MAY 1,
2000 1999
-------- -------
NET SALES $ 7,294 $ 8,839
COST OF SALES AND OCCUPANCY EXPENSES 7,288 7,475
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GROSS PROFIT 6 1,364
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 3,491 3,980
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OPERATING LOSS (3,485) (2,616)
INTEREST EXPENSE, NET 109 6
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LOSS BEFORE INCOME TAXES (3,594) (2,622)
INCOME TAX BENEFIT (1,437) (1,049)
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NET LOSS $ (2,157) $(1,573)
======== =======
NET LOSS PER SHARE (BASIC) $ (0.46) $ (0.33)
======== =======
NET LOSS PER SHARE (DILUTED) $ (0.46) $ (0.33)
======== =======
WEIGHTED AVERAGE SHARES (BASIC) 4,736 4,761
WEIGHTED AVERAGE SHARES (DILUTED) 4,736 4,783
See accompanying notes to condensed consolidated financial statements
3
WORLD OF SCIENCE, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
APRIL 29, JANUARY 29, MAY 1,
2000 2000 1999
(UNAUDITED) (AUDITED) (UNAUDITED)
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CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 71 $ 1,572 $ 87
ACCOUNTS RECEIVABLE 157 217 239
INVENTORIES 11,494 11,804 12,835
PREPAID EXPENSES AND OTHER CURRENT ASSETS 665 612 1,039
TAXES RECEIVABLE 1,795 1,266 1,049
DEFERRED INCOME TAXES 747 747 664
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TOTAL CURRENT ASSETS 14,929 16,218 15,913
PROPERTY, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS, NET 9,818 10,281 10,444
DEFERRED INCOME TAXES 1,262 1,262 872
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TOTAL ASSETS $26,009 $27,761 $27,229
======= ======= =======
CURRENT LIABILITIES:
LINE OF CREDIT $ 4,933 $ 4,678 $ 2,685
CURRENT INSTALLMENTS OF OBLIGATIONS
UNDER CAPITAL LEASES 117 122 119
ACCOUNTS PAYABLE 2,066 1,904 2,241
ACCRUED EXPENSES 732 867 814
ACCRUED INCOME TAXES - - 15
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TOTAL CURRENT LIABILITIES 7,848 7,571 5,874
OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING
CURRENT INSTALLMENTS 49 75 167
ACCRUED OCCUPANCY EXPENSE 991 837 938
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TOTAL LIABILITIES 8,888 8,483 6,979
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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 AT 4/29/00, 1/29/00, AND 5/1/99 51 51 51
ADDITIONAL PAID-IN CAPITAL 11,398 11,398 11,398
RETAINED EARNINGS 6,365 8,522 9,450
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TOTAL CAPITAL AND RETAINED EARNINGS 17,814 19,971 20,899
LESS: TREASURY STOCK, AT COST (693) (693) (649)
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TOTAL STOCKHOLDERS' EQUITY 17,121 19,278 20,250
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,009 $27,761 $27,229
======= ======= =======
See accompanying notes to condensed consolidated financial statements
4
WORLD OF SCIENCE, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
------------------------
APRIL 29, MAY 1,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(2,157) $(1,573)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 463 438
CHANGE IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN:
ACCOUNTS RECEIVABLE 60 204
INVENTORIES 310 (2,610)
PREPAID EXPENSES AND OTHER
CURRENTS ASSETS (53) (300)
TAXES RECEIVABLE (529) (1,049)
(DECREASE) INCREASE IN:
ACCOUNTS PAYABLE 162 879
ACCRUED EXPENSES (135) 167
INCOME TAXES PAYABLE - (1,230)
ACCRUED OCCUPANCY EXPENSE 154 27
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NET CASH USED IN OPERATING ACTIVITIES: (1,725) (5,047)
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CASH FLOWS FROM INVESTING ACTIVITIES--
CAPITAL EXPENDITURES, NET - (1,047)
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CASH FLOWS FROM FINANCING ACTIVITIES:
NET PROCEEDS FROM ON LINE OF CREDIT 255 2,685
PRINCIPAL PAYMENTS ON CAPITAL LEASES (31) (47)
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NET CASH PROVIDED BY INVESTING ACTIVITIES 224 2,638
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NET DECREASE IN CASH AND CASH EQUIVALENTS (1,501) (3,456)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 1,572 3,543
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END OF PERIOD $ 71 $ 87
======= =======
CASH PAID DURING PERIOD FOR:
INTEREST $ 108 $ 21
INCOME TAXES $ 10 $ 1,230
======= =======
NONCASH INVESTING AND FINANCING ACTIVITY:
ACQUISITION OF EQUIPMENT UNDER A CAPITAL LEASE $ - $ 157
======= =======
See accompanying notes to condensed consolidated financial statements
5
WORLD OF SCIENCE, INC.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1. - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements and are subject to year-end
adjustments. However, in the opinion of management, all known adjustments (which
consist primarily of normal recurring accruals) have been made to present fairly
the financial position and operating results for the unaudited periods. This
financial information should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Form 10-K as most
recently filed with the Securities and Exchange Commission.
Due to the seasonal nature of the Company's business, results for the first
quarter of fiscal 2000 are not necessarily indicative of the results to be
expected for the full fiscal year ending February 3, 2001.
6
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
The Company operated 85 permanent stores and 19 seasonal stores as of April 29,
2000, as compared to 78 permanent stores and 64 seasonal stores as of May 1,
1999. One new permanent store was opened in the first quarter of fiscal 2000 and
four new permanent stores were opened in the first quarter of fiscal 1999. The
Company had a net decrease of five seasonal stores in the first quarter of
fiscal 2000 as compared to a net decrease of seven seasonal stores in the first
quarter of fiscal 1999.
The Company's sales had been favorably impacted over the prior two years by the
popularity of particular plush products. For the first quarter of fiscal 2000,
plush sales accounted for 2.6% of total sales as compared to 18.4% in the first
quarter of fiscal 1999.
Comparison of Three Months Ended April 29, 2000 to Three Months Ended May 1,
1999.
Sales. Sales declined to $7.29 million from $8.84 million, or 17.5%. Of the
$1.55 million decrease in sales: $819,000 was attributable to a decline in
comparable stores sales and $1.53 million was attributable to a decline in
seasonal store sales due to 45 fewer seasonal stores in operation. Comparable
permanent store sales declined 13.3% for the thirteen-week period ended April
29, 2000. This was offset in part by sales of $693,000 attributable to one new
permanent store opened during the first quarter of fiscal 2000 and thirteen new
permanent stores not in operation as of the beginning of the prior year and an
increase in internet sales of $110,000.
Cost of Sales and Occupancy Expenses. Cost of sales and occupancy expenses,
which include distribution center costs and other expenses associated with
acquiring inventory, decreased to $7.29 million from $7.48 million, a decrease
of 2.5%. As a percentage of sales, it increased to 99.9% from 84.6%. The dollar
decrease was due to decreased store occupancy expenses from fewer stores in
operation in the first quarter of fiscal 2000 and decreased cost of sales due to
lower sales. The increase as a percentage of sales of 15.3% was attributable to
a 7.8% increase in occupancy and distribution center expenses caused by a
decrease in average permanent store sales, and a 7.5% increase in product costs
caused by the discounting of slower moving product categories.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $3.5 million from $4.0 million, a decrease
of 12.3%. Selling, general and administrative expenses decreased due to 45 fewer
seasonal stores in operation. As a percentage of sales, it increased to 47.9%
from 45.0% primarily as a result of a decrease in average permanent store sales.
Interest Expense, Net. Net interest expense amounted to $109,000 in the first
quarter of fiscal 2000, as compared to a net interest expense of $6,000 in the
first quarter of fiscal 1999. This fluctuation is primarily a result of earlier
borrowings required in the first quarter of fiscal 2000 due to lower cash
balances at the beginning of the year.
7
Net Loss. Net loss increased to $2.16 million, or 29.6% of sales in the first
quarter of fiscal 2000 from $1.57 million, or 17.8% of sales, in the first
quarter of fiscal 1999.
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 $1.73 million in the first quarter of fiscal 2000 as
compared to $5.05 million in the first quarter of fiscal 1999. This was due to
decreased levels of inventories and other working capital items in the first
quarter of fiscal 2000.
At the beginning of fiscal 2000, 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.
8
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
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 has repurchased 25,050 shares in the second and third
quarter of fiscal 1999 for $43,000.
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 old
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 (9.0% at April 29, 2000),
and borrowings under the over-advanced facility bears interest at the lender's
base commercial lending rate plus 2% per annum (11.0% at April 29, 2000). All
borrowings under the facility are 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. As of April 29, 2000, there was $4.9 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. As of May 1, 1999, there was $2.69 million outstanding under
the old revolving line of credit.
The Company did not incur any capital expenditures in the first quarter of
fiscal 2000, as compared to $1.05 million in the first quarter fiscal 1999. The
Company anticipates capital expenditures of approximately $200,000 in fiscal
2000.
In response to continued softness in sales activity within our product
segment, management has developed and updated a cash flow model projecting cash
proceeds for anticipated working capital needs through the balance of fiscal
2000. At June 13, 2000, the Company is on plan with its current 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 in the event that its projections should fall short, and into
fiscal 2001. There are no assurances that such financings will be available or,
if available, on terms favorable to the Company.
9
Year 2000 Matters
The Company's fiscal 1999 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.
Other Matters
On May 23, 2000 the Company announced that they had signed a letter of intent to
be acquired by Natural Wonders, Inc. (NATW) under which NATW would pay $6.25
million ($1.32 per share), in cash, for all the outstanding stock of the
Company. The parties have not yet executed a definitive agreement, and
consummation of the acquisition is subject to a number of pre-closing
conditions, including approval of the transaction by World of Science
stockholders, regulatory approval, and satisfactory completion of due diligence
by Natural Wonders. Assuming execution of a definitive agreement and the
conditions to completion of the transaction are satisfied, the deal is expected
to be completed at the beginning of the Company's third fiscal quarter.
Forward-Looking Information
This report contains forward-looking statements regarding, among other matters,
the acquisition of the Company by Natural Wonders, and cash flow projections and
working capital needs. 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
filings with the Securities and Exchange Commission for further discussion of
risks and uncertainties regarding the Company's business.
10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 11 Computation of Per Share Net Loss
Exhibit 27 Financial Data Schedule
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange Commission
during the first quarter of fiscal 2000.
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 12, 2000
WORLD OF SCIENCE, INC.
(Registrant)
/s/Charles A. Callahan
Charles A. Callahan
Vice President of Finance
Chief Financial Officer and Assistant
Secretary
(Signed on behalf of the registrant and
as Principal Accounting and Financial
Officer)
12