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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 31, 1998
( ) 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 this charter)
NEW YORK 16-0963838
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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 Stock 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 closing sale price of the registrant's
Common Stock as reported on NASDAQ on March 31, 1998 was $14,764,000. The
number of shares of Common Stock, with $.01 par value, outstanding on March 31,
1998 was 5,079,955 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 1998 Annual
Meeting of Stockholders, to be held June 9, 1998. Registrant's definitive Proxy
Statement will be filed with the Securities and Exchange Commission on or before
May 8, 1998.
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PART I
ITEM 1. BUSINESS
GENERAL
World of Science, Inc. (the "Company" or "World of Science") is a leading
specialty retailer of a variety of traditional and distinctive science and
nature products. 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 31, 1998, the Company operated
56 permanent stores and 67 seasonal stores in 27 states, primarily in enclosed
malls. The Company's fiscal year is the 52-week period ending on the Saturday
closest to January 31. The terms "fiscal" and "fiscal year" refer to the
calendar year in which the Company's fiscal year commences. Fiscal 1996
consisted of 53 weeks as compared to 52 weeks for all other years presented.
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.
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 1997, 44.6% of the Company's total net sales were generated
by seasonal stores, as compared to 46.1% in fiscal 1996. The Company's
flexible store formats, combined with its distinctive merchandise, make World
of Science stores attractive to mall operators.
. 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. The Company does not engage in frequent
storewide sales or price mark-downs and believes it uses sales and price mark-
downs to a lesser degree than other retailers. The Company believes that its
pricing strategy fosters customer trust and confidence.
2
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 60 permanent
World of Science stores, including four new permanent stores which have
opened since the beginning of fiscal 1998. The Company expects to open a total
of approximately 20 permanent stores in fiscal 1998 and approximately 24
permanent stores in fiscal 1999 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 101 World of Science
seasonal stores during the fiscal 1997 holiday selling season and currently
operates 58 seasonal stores. During the past three fiscal years, the Company
has only opened two permanent stores in pre-existing malls which were not
preceded by a seasonal store in the same mall. The Company plans to operate
approximately 100 seasonal stores during the holiday selling season in
fiscal 1998 and fiscal 1999.
. 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 is presently piloting new point-of-
sale software with the full roll-out to be completed in the second quarter of
fiscal 1998. The Company periodically evaluates its store formats to
maintain high standards of attractiveness and an appropriate showcase for its
science and nature products.
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 attends trade shows to 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. For example, the
Company's best-selling telescope product was designed by the Company to be more
user-friendly and to incorporate features not generally found in comparably
priced telescopes. 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 areas and seasonal stores generally feature approximately 20 different
product areas, focused upon specific merchandising themes. The Company's themes
follow a strategically planned layout which encourages customers to visit every
theme within the store. Although not all of the available merchandising themes
are included in each World of Science store, the following is a list of the
principal merchandising themes, together with a description of the typical
products included in these themes.
3
. 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
Accessories kits, garden sculpture, wind chimes and bells
. Chemistry experiment kits, science project resources,
technical labware and reference books
. Dinosaurs molded replicas, models, puzzles, games,
books and kits
. Flight model rocketry, kites, boomerangs and flight
discs
. Food Making kits for making chewing gum, chocolate, soda and
flavored vinegar
. Geography compasses, hiking staffs, educational
puzzles, games and maps
. Geology quality mineral and fossil collectibles
for the beginner to serious collectors
. Glow in the Dark astronomical and animal designs
. Impulse fascinating pick-up items, including spinning
tops, keychains, magnets and travel puzzles
. Jewelry natural gemstone, titanium, glass and nature
images
. 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
. 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, books, aromatherapy, reflexology
and stress management
. Weather weather instruments, solar kits, umbrellas and
reference books
Offering quality products at fair prices is a key element in the Company's
business strategy. The Company does not engage in frequent storewide sales or
price mark-downs and it believes it uses sales and price mark-downs to a lesser
degree than other retailers.
The prices range of products carried by World of Science stores generally
vary from less than $1.00 to $1,000. The average customer transaction in fiscal
1997 was $21.96 for the five-weeks ending December 27, 1997 and was $17.18 for
the entire fiscal year, as compared to $20.30 for the five-weeks ending December
28, 1996 and $16.42 for the entire fiscal 1996.
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 attend trade shows to
identify potential new product sources. The Company's top 20 product sources
accounted for 45.2% of total purchases in fiscal 1997, and 45.7% of total
purchases in fiscal 1996. No single supplier furnished products representing
more than 6.2% of sales in fiscal 1997, as compared to 6.4% of sales in fiscal
1996.
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 via 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 management system which incorporates real time radio
frequency ("RF") features to
4
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
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. 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, ten
district managers and five 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. All 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 many
aspects of store operations, including store staffing and development, visual
presentation and shrinkage control. However, merchandise replenishment is
controlled centrally, to ensure adequate inventory levels, consistent with the
rate of sale 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 2,000 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. In the case of the Company's newest
permanent stores, the Company updated 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. On average, the Company has refurbished its permanent stores
every three years.
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 presently rely
on advertising to generate sales and is dependent upon mall traffic to attract
customers.
MANAGEMENT INFORMATION SYSTEMS
The Company uses an IBM AS/400 (model 510) 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.
5
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 31, 1998, the Company employed approximately 1054 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.
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 10,000 square feet of office space and 25,000
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 of 37 months ending in the year 2000, and the
Company has two one-year renewal options. 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.
6
At January 31, 1998, the Company operated 56 permanent stores and 67
seasonal stores in 27 states. The permanent stores occupied 123,678 gross
square feet of leased space, with the stores ranging in size from 1,000 to 3,000
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 1998 and 2008. 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 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
The Company is a party to legal proceedings from time to time in the normal
course of its business. In the opinion of management, any liability that the
Company might incur upon the resolution of these proceedings will not, in the
aggregate, have a material adverse effect on the Company's business, financial
condition and results of operations. The Company maintains general liability
insurance coverage in amounts deemed to be 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 1997.
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 Stock 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
------- ------- ------- -------
1997 N/A 6 1/2 - 6(1) 6 19/32 - 4 17/64 5 1/4 - 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 20, 1998, there were approximately 124 holders of record of the
Company's Common Stock and approximately 1,825 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.
7
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED
-----------------
JANUARY 31, FEBRUARY 1, JANUARY 28, JANUARY 29, JANUARY 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AND STORE OPERATING DATA)
STATEMENT OF INCOME DATA:
Net sales.......................................... $ 54,259 $ 44,563 $ 37,265 $ 31,335 $ 23,153
Cost of sales and occupancy expenses............... 35,922 28,630 23,957 20,788 14,861
----------- ----------- ----------- ----------- -----------
Gross profit....................................... 18,337 15,933 13,308 10,547 8,292
Selling, general and administrative
expenses....................................... 15,158 12,593 10,680 9,048 6,785
----------- ----------- ----------- ----------- -----------
Operating income................................... 3,179 3,340 2,628 1,499 1,507
Interest expense, net.............................. 237 394 418 320 68
----------- ----------- ----------- ----------- -----------
Income before income taxes......................... 2,942 2,946 2,210 1,179 1,439
Income tax expense................................. 1,182 1,210 906 460 600
----------- ----------- ----------- ----------- -----------
Net income......................................... $ 1,760 $ 1,736 $ 1,304 $ 719 $ 839
=========== =========== =========== =========== ===========
Net income per share:
Basic.......................................... $ 0.40 $ 0.50 $ 0.37 $ 0.21 $ 0.25
=========== =========== =========== =========== ===========
Diluted(2)..................................... $ 0.40 $ 0.49 $ 0.35 $ 0.20 $ 0.23
=========== =========== =========== =========== ===========
STORE OPERATING DATA:
Selected Permanent Store Data
Number of stores at beginning of period........ 44 37 33 27 23
Number of stores at end of period.............. 56 44 37 33 27
Total net sales................................ $30,055,000 $23,998,000 $20,241,000 $16,178,000 $12,720,000
Percentage increase in comparable store
net sales(3)(4)............................ 1.5% 3.5% 3.1% 2.9% 1.7%
Total square footage at end of period(5)....... 123,678 94,348 75,182 65,048 50,843
Average net sales per square foot(3)(5)........ $ 262 $ 275 $ 272 $ 274 $ 280
Average net sales per store (3)(5)............. $ 572,000 $ 575,000 $ 544,000 $ 532,000 $ 495,000
Selected Seasonal Store Data
Number of stores at beginning of period........ 62 37 40 26 0
Peak number of stores during period(6)......... 101 85 71 89 79
Total net sales................................ $24,204,000 $20,565,000 $17,019,000 $15,113,000 $10,323,000
January 31, February 1, January 28, January 29, January 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 6,742 $ 2,014 $ 1,620 $ 655 $ 727
Working capital.................................... 14,819 5,818 4,972 4,479 4,579
Total assets....................................... 25,432 15,274 12,855 10,615 8,879
Total debt, including capital lease
obligations.................................... 410 370 437 563 369
Stockholders' equity............................... 20,952 10,480 8,745 7,441 6,640
(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 1993 through 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 those fiscal years.
(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.
8
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
$23.2 million in fiscal 1993 to $54.3 million in fiscal 1997, 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 56 permanent stores as of January 31, 1998. Since
opening its first seasonal store in fiscal 1992, the Company has increased the
use of this store format, operating 101 seasonal stores during the fiscal 1997
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. While
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 12 new permanent stores in fiscal 1997, seven new permanent stores in
fiscal 1996, and four new permanent stores in fiscal 1995. The Company
presently anticipates opening a total of 20 new permanent stores in fiscal 1998,
four of which had been opened as of April 1, 1998. The Company operated 101
seasonal stores during the fiscal 1997 holiday selling season and anticipates
operating approximately 100 seasonal stores during the fiscal 1998 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 planned expansion, management believes that the Company
may experience greater losses in the first three quarters of fiscal 1998 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. The Company has not
closed a permanent store since fiscal 1993.
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 for fiscal 1997, 1996, and 1995, were 1.5%,
3.5% and 3.1%, respectively. The number of comparable stores in fiscal 1997,
1996, 1995, was 37, 33 and 27 respectively. Average net sales per square foot
and average net sales per store declined in fiscal 1997 due to lower average
sales in new permanent stores opened in fiscal 1996.
The seasonal store program, which began in 1992, allowed 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 1997 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, along with the availability of proceeds of the
initial public offering, the Company has accelerated its plans to emphasize
more rapid growth 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.
9
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 31, FEBRUARY 1, JANUARY 28,
1998 1997 1996
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
Cost of sales and occupancy expenses........... 66.2% 64.2% 64.3%
---- ---- ----
Gross profit................................... 33.8% 35.8% 35.7%
Selling, general and administrative expenses... 27.9% 28.3% 28.7%
---- ---- ----
Operating income............................... 5.9% 7.5% 7.0%
Interest expense, net.......................... 0.5% 0.9% 1.1%
--- --- ---
Income before income taxes..................... 5.4% 6.6% 5.9%
Income tax expense............................. 2.2% 2.7% 2.4%
--- --- ---
Net income..................................... 3.2% 3.9% 3.5%
====== ===== =====
Comparison of Fiscal 1997 to Fiscal 1996
Sales. Sales increased to $54.3 million from $44.6 million, an increase of
$9.7 million, or 21.8%. Of this increase in sales: $5.9 million was
attributable to twelve new permanent stores opened during fiscal 1997 and seven
permanent stores in operation for less than one year as of the beginning of
fiscal 1997; $168,000 was attributable to increased comparable store sales; and
$3.6 million was attributable to sales derived from an increased number of
seasonal stores operated during fiscal 1997, which more than offset a decrease
of approximately 9% in average seasonal store sales during the holiday selling
season due to the change in the mix of seasonal stores operated and lower
customer traffic. Comparable store sales for the Company's permanent stores
increased 1.5% in fiscal 1997.
Cost of Sales and Occupancy Expenses. Cost of sales and occupancy expenses
increased to $35.9 million from $28.6 million, an increase of 25.5%. As a
percentage of sales, it increased to 66.2% from 64.2%. The dollar increase was
due to increased store occupancy costs from more stores in operation in fiscal
1997 and increased costs of sales due to higher sales. The percentage 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 stores sales in
1997. Margins for products sold were relatively unchanged.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $15.2 million from $12.6 million, an
increase of 20.6%, but decreased to 27.9% from 28.3% as a percentage of sales.
Although selling, general and administrative expenses increased in fiscal
1997 to support higher sales levels and an increased number of stores, the
Company was able to spread the fixed portion of corporate overhead over an
increased sales base.
Interest Expense, Net. Net interest expense decreased to $237,000 in fiscal
1997 from $394,000 in fiscal 1996, primarily as a result of proceeds from the
Company's initial public offering in July, 1997, which reduced average and
seasonal peak borrowings for fiscal 1997.
Comparison of Fiscal 1996 to Fiscal 1995
Sales. Sales increased to $44.6 million from $37.3 million, an increase of
$7.3 million, or 19.6%. Of this increase in sales: $2.9 million was attributable
to seven new permanent stores opened during fiscal 1996 and four permanent
stores in operation for less than one year as of the beginning of fiscal 1996;
$798,000 was attributable to increased comparable store sales; and $3.6 million
was attributable to sales derived from an increased number of seasonal stores
operated during fiscal 1996, which more than offset the slight decrease in
average seasonal store sales during the holiday selling season. Comparable store
sales for the Company's permanent stores increased 3.5% in fiscal 1996.
Cost of Sales and Occupancy Expenses. Cost of sales and occupancy expenses
increased to $28.6 million from $24.0 million, an increase of 19.2%. As a
percentage of sales, it decreased slightly to 64.2% from 64.3%. The dollar
increase was due to increased store occupancy costs from more stores in
operation in fiscal 1996 and increased costs of sales due to higher sales,
although these costs as a percentage of sales remained relatively constant.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $12.6 million from $10.7 million, an
increase of 17.8%, but decreased to 28.3% from 28.7% as a percentage of sales.
Although selling, general and administrative expenses increased to support
higher sales levels, the Company was able to spread the fixed portion of
corporate overhead over an increased sales base.
10
Interest Expense, Net. Net interest expense decreased to $394,000 in fiscal
1996 from $418,000 in fiscal 1995, primarily as a result of lower average
borrowing costs during fiscal 1996.
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.
During the second quarter of fiscal 1997, the Company completed an initial
public offering which provided net proceeds of $8.7 million. The Company used
approximately $6.8 million to pay down the balance on its existing credit
facilities which were used in the first six months of fiscal 1997 to finance
inventory and new store construction. As a result of the initial public
offering, cash and cash equivalents increased $4.7 million in 1997 to $6.7
million and working capital increased $9.0 million to $14.8 million.
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 $1.2 million in fiscal 1997 as compared to a cash flow
generated by operations of $2.4 million in fiscal 1996. This was due to
increased levels of inventories and other working capital items. Inventory
levels were increased to insure a greater supply of merchandise for the months
immediately following the 1997 holiday selling season.
The Company has a revolving line of credit for inventory financing, secured
by the Company's inventory. Under this line, the Company may borrow up to the
lesser of $16.0 million, or 40% to 70% of the Company's inventory book value
depending on the time of year. The Company's maximum borrowing capacity under
this line was $8.5 million in fiscal 1997, $10.7 million in fiscal 1996, and
$10.1 million in fiscal 1995, and its minimum borrowing capacity in those fiscal
years was $6.0 million, $4.8 million and $4.2 million, respectively. The line
expires on February 28, 2000 and bears interest at the bank's prime rate. The
credit agreement for this line of credit prohibits the payment of cash dividends
or purchase or redemption of the Company's capital stock in excess of $300,000
in the aggregate in any fiscal year. As of January 31, 1998, there were no
amounts 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.
Maximum borrowings under the Company's revolving credit facilities peaked
at $8.7 million, $11.5 million, and $8.9 million during fiscal 1997, fiscal
1996, and fiscal 1995, respectively, and averaged $2.7 million, $4.2 million,
and $4.2 million, respectively, for those fiscal years.
The Company also has an available line of credit for up to $2.0 million
for multiple term loans to be used for leasehold improvements and equipment.
Under this line, the Company has a term loan with a principal balance of $69,000
at January 31, 1998. The loan is payable in monthly installments over a term of
five years with interest payable at 7.4%, matures on November 1, 1998 and is
secured by the Company's equipment. As of January 31, 1998, outstanding capital
lease obligations and total debt amounted to $410,000, of which $342,000
represented capital lease obligations. The capital lease obligations have terms
expiring in fiscal 2001.
11
The capital expenditures associated with the opening of new permanent
stores range from $225,000 to $255,000 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 1997, net of landlord build-out allowances,
were $2.6 million, as compared to $1.7 million in fiscal 1996. The Company
anticipates capital expenditures of approximately $3.4 million in fiscal 1998.
In addition to the cost of new store construction, the Company expects to make
capital expenditures of approximately $200,000 on its point-of-sale systems and
$100,000 for equipment at its distribution center to support planned store
growth.
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.
Management believes that operating cash flow, borrowings under the
Company's existing credit facilities and cash on hand will be sufficient to
finance the Company's proposed expansion of its store base and to satisfy any
other capital requirements for the next 12 months.
Other Matters
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. However, if
the Company or its vendors are unable to resolve such processing issues in a
timely manner, it could result in a material financial risk. Accordingly, the
Company plans to devote the necessary resources to resolve all significant year
2000 issues in a timely manner.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors Report................................................................................................. 14
Balance Sheets as of January 31, 1998 and February 1, 1997.................................................................. 15
Statements of Income for the years ended January 31, 1998, February 1, 1997 and January 28, 1996............................ 16
Statements of Stockholders Equity for the years ended January 31, 1998, February 1, 1997 and January 28, 1996............... 17
Statements of Cash Flows for the years ended January 31, 1998, February 1, 1997 and January 28, 1996........................ 18
Notes to Financial Statements including supplementary data entitled "Selected Quarterly Financial Data (Unaudited)"......... 19-28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None
13
INDEPENDENT AUDITORS' REPORT
The Board of Directors
World of Science, Inc.:
We have audited the accompanying balance sheets of World of Science, Inc.
as of January 31, 1998 and February 1, 1997, and the related statements of
income, stockholders' equity and cash flows for each of the years in the three-
year period ended January 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of World of Science, Inc. as of
January 31, 1998 and February 1, 1997, and the results of its operations and its
cash flows for each of the years in the three-year period ended January 31,
1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Rochester, New York
March 6, 1998
14
WORLD OF SCIENCE, INC.
BALANCE SHEETS
JANUARY 31, FEBRUARY 1,
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 6,742,061 $ 2,014,253
Accounts receivable........................................................ 113,488 54,339
Inventories................................................................ 10,404,033 6,927,037
Prepaid expenses and other current assets.................................. 532,631 386,181
Deferred income taxes...................................................... 551,000 368,000
----------- -----------
Total current assets............................................... 18,343,213 9,749,810
Property, equipment and leasehold improvements, net............................. 6,430,674 4,983,718
Deferred income taxes........................................................... 658,000 540,000
----------- -----------
Total assets....................................................... $25,431,887 $15,273,528
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt..................................... $ 68,695 $ 69,161
Current installments of obligations under capital leases................... 165,652 101,620
Accounts payable........................................................... 1,319,534 1,569,226
Accrued expenses........................................................... 408,838 636,304
Accrued sales taxes........................................................ 161,332 91,670
Income taxes payable....................................................... 1,400,351 1,463,427
----------- -----------
Total current liabilities.......................................... 3,524,402 3,931,408
Long-term debt, excluding current installments.................................. -- 68,456
Obligations under capital leases, excluding current installments................ 175,837 130,399
Accrued occupancy expense....................................................... 779,451 662,890
----------- -----------
Total liabilities.................................................. 4,479,690 4,793,153
----------- -----------
Commitments and contingencies (notes 4, 6, 8 and 11)
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 and outstanding 5,079,955 shares and 3,422,955 shares... 50,800 34,230
Additional paid-in capital................................................. 11,398,143 2,703,020
Retained earnings.......................................................... 9,503,254 7,743,125
----------- -----------
Total stockholders' equity......................................... 20,952,197 10,480,375
----------- -----------
Total liabilities and stockholders' equity......................... $25,431,887 $15,273,528
=========== ===========
See accompanying notes to financial statements.
15
WORLD OF SCIENCE, INC.
STATEMENTS OF INCOME
YEAR ENDED
---------------------------------------
JANUARY 31, FEBRUARY 1, JANUARY 28,
1998 1997 1996
---- ---- ----
Net sales....................................... $54,259,279 $44,562,851 $37,265,071
Cost of sales and occupancy expenses............ 35,922,111 28,629,721 23,956,946
----------- ----------- -----------
Gross profit............................... 18,337,168 15,933,130 13,308,125
Selling, general and administrative expenses.... 15,157,933 12,592,779 10,680,612
----------- ----------- -----------
Operating income........................... 3,179,235 3,340,351 2,627,513
Interest expense, net........................... 237,106 394,505 417,846
----------- ----------- -----------
Income before income taxes................. 2,942,129 2,945,846 2,209,667
Income tax expense.............................. 1,182,000 1,210,000 906,000
----------- ----------- -----------
Net income................................. $ 1,760,129 $ 1,735,846 $ 1,303,667
=========== =========== ===========
Net income per share - basic............... $ 0.40 $ 0.50 $ 0.37
=========== =========== ===========
Net income per share - diluted............. $ 0.40 $ 0.49 $ 0.35
=========== =========== ===========
See accompanying notes to financial statements.
16
WORLD OF SCIENCE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TOTAL
------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- ------
Balance at January 29, 1995 3,422,955 $34,230 $ 2,703,020 $4,703,612 $ 7,440,862
Net income -- -- -- 1,303,667 1,303,667
--------- ------- ----------- ---------- -----------
Balance at January 28, 1996 3,422,955 34,230 2,703,020 6,007,279 8,744,529
Net income -- -- -- 1,735,846 1,735,846
--------- ------- ----------- ---------- -----------
Balance at February 1, 1997 3,422,955 34,230 2,703,020 7,743,125 10,480,375
Issuance of common stock at $6.00 per share,
net of offering costs of $1,164,000 1,640,000 16,400 8,659,593 -- 8,675,993
Shares issued in connection with the exercise
of stock options 17,000 170 35,530 -- 35,700
Net income -- -- -- 1,760,129 1,760,129
--------- ------- ----------- ---------- -----------
Balance at January 31, 1998 5,079,955 $50,800 $11,398,143 $9,503,254 $20,952,197
========= ======= =========== ========== ===========
See accompanying notes to financial statements.
17
WORLD OF SCIENCE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED
---------------------------------------
JANUARY 31, FEBRUARY 1, JANUARY 28,
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income........................................... $ 1,760,129 $ 1,735,846 $ 1,303,667
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization...................... 1,349,662 1,280,266 948,952
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable........................... (59,149) 11,155 79,628
Inventories................................... (3,476,996) (955,196) (613,027)
Prepaid expenses and other current assets..... (146,450) (136,480) 48,398
Deferred income taxes......................... (301,000) (292,000) (134,000)
(Decrease) increase in:
Accounts payable.............................. (249,692) 215,353 437,005
Accrued expenses.............................. (227,466) (36,352) 189,561
Accrued sales taxes........................... 69,662 7,153 (63,303)
Income taxes payable.......................... (63,076) 456,328 374,122
Accrued occupancy expense..................... 116,561 107,788 124,828
----------- ----------- -----------
Net cash provided by (used in) operating
activities................................ (1,227,815) 2,393,861 2,695,831
----------- ----------- -----------
Cash flows from investing activities--capital
expenditures, net of minor disposals................. (2,584,079) (1,691,854) (1,579,030)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock........... 8,711,693 -- --
Principal payments on long-term debt................. (68,922) (63,918) (59,349)
Principal payments on capital leases................. (103,069) (243,879) (92,545)
Net borrowings under line of credit.................. -- -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities....... 8,539,702 (307,797) (151,894)
----------- ----------- -----------
Net increase in cash and cash equivalents................. 4,727,808 394,210 964,907
Cash and cash equivalents at beginning of year............ 2,014,253 1,620,043 655,136
----------- ----------- -----------
Cash and cash equivalents at end of year.................. $ 6,742,061 $ 2,014,253 $ 1,620,043
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................... $ 281,136 $ 405,624 $ 430,873
Income taxes....................................... $ 1,559,077 $ 1,045,671 $ 665,878
=========== =========== ===========
Noncash investing and financing activity:
Acquisition of equipment under a capital lease....... $ 212,539 $ 240,345 $ 26,350
=========== =========== ===========
See accompanying notes to financial statements.
18
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS
THREE-YEAR PERIOD ENDED JANUARY 31, 1998
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
World of Science, Inc. (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.
Fiscal Year
Reference to a fiscal year refers to the calendar year in which such fiscal
year commences. Accordingly, fiscal 1997 ended on January 31, 1998, fiscal 1996
ended on February 1, 1997 and fiscal 1995 ended on January 28, 1996.
In fiscal 1996, the Company changed its fiscal year end to the Saturday
closest to January 31. Previously the Company's fiscal year ended on the Sunday
closest to January 31. There were 52 weeks in fiscal year 1997, 53 weeks in
fiscal 1996 and 52 weeks in fiscal 1995.
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.
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.
Occupancy Expense
Occupancy expense is recorded on the straight-line basis over the term of
the leases, 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.
19
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
Prior to fiscal 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, in
fiscal 1996 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 and provide pro forma net income and pro forma
earnings (loss) per share disclosures for employee stock option grants made in
fiscal 1995 and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company elected to continue to apply the
provisions of APB Opinion No. 25 and provides the pro forma disclosure
provisions of SFAS No. 123.
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 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.
Share and Per Share Amounts
During 1997, the Board of Directors approved a five-for-one stock split
effective April 18, 1997 as described in note 2. All shares and per share
amounts included in the financial statements retroactively reflect this split.
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
effective December 31, 1997. This statement simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15, "Earnings
Per Share", and makes them comparable to international earnings per share
("EPS") standards. Basic EPS excludes the effect of common stock equivalents
and is computed by dividing income available to common shareowners by the
weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could result if securities or other
contracts to issue common stock, such as options or warrants, were exercised or
converted into common stock. Stock options and warrants are not included in the
calculation of per share amounts in loss periods as the results would be anti-
dilutive. Historical earnings (loss) per share have been restated to conform
with the provisions of SFAS No. 128.
Basic net income per share for fiscal 1997, 1996 and 1995 was computed by
dividing net income by the total of weighted average number of common shares
outstanding during the period. Diluted net income per share reflects the
effects of common stock issuable upon exercise of dilutive stock options and
warrants.
20
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accounting Standards Pronouncements
During the first quarter of 1998, the Company will adopt 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
Company does not believe that the adoption of this standard will have a material
effect on the operations of the Company.
During 1998, the Company will also adopt the provisions of SFAS No. 131,
Disclosures About Segments of the Enterprise and Related Information. SFAS No.
131 requires disclosure of segments of a company's business based upon how a
company is organized for making operating decisions and assessing performance.
Adoption of this statement is not expected to have an impact on the financial
condition or results of operations of the Company.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. This Statement revised
disclosures about pension and other postretirement benefit plans. It does not
change the measurement of recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminate certain disclosures. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. As the Company does not provide
a pension or other postretirement benefits to employers this statement will not
impact the financial statements.
(2) INITIAL PUBLIC OFFERING
On April 4, 1997, the Company's Board of Directors authorized the filing of
a registration statement for the initial public offering of its common stock. In
connection with this offering, the Company's Board of Directors approved an
increase in the authorized number of shares of common stock to 10,000,000, a
reduction in the par value of common stock from $0.05 to $0.01 per share, a
five-for-one stock split, authorization of a new class of 5,000,000 shares of
preferred stock, none of which has been issued, and an increase in the number of
common shares reserved for issuance under the Stock Option Plans to 565,000
shares. On April 16, 1997 the Company's shareholders approved a restated
certificate of incorporation to effect this recapitalization which was filed and
became effective on April 18, 1997.
In July 1997, the Company completed its initial public offering issuing
1,640,000 common shares at a price of $6 per share. The proceeds from the
offering were $9,840,000 less offering expenses of approximately $1,164,000.
(3) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of property, equipment and leasehold improvements follows:
JANUARY 31, FEBRUARY 1,
1998 1997
---- ----
Leasehold improvements--open stores $6,781,074 $5,139,806
Furniture, equipment and temporary store fixtures 4,046,452 3,056,180
Construction in progress 434,249 314,931
---------- ----------
11,261,775 8,510,917
Less accumulated depreciation and amortization 4,831,101 3,527,199
---------- ----------
$6,430,674 $4,983,718
========== ==========
Construction allowances received from shopping mall developers totaling
$1,050,463, $981,035, and $575,712 in fiscal 1997, 1996 and 1995, respectively,
have been recorded as reductions of leasehold improvements.
Construction in progress at January 31, 1998 consists of leasehold
improvements and fixtures for stores which will be opening in fiscal 1998. All
stores with construction in progress at February 1, 1997 were opened during the
year ended January 31, 1998.
21
WORLD OF SCIENCE, INC.
NOTES TO 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 6, 1998 and the present value of future minimum capital
lease payments as of January 31, 1998 are as follows:
CAPITAL OPERATING
LEASES LEASES
------ ------
Fiscal year:
1998.......................................................... $175,759 $ 5,996,758
1999.......................................................... 98,776 4,681,816
2000.......................................................... 72,576 4,332,397
2001.......................................................... 11,693 4,206,366
2002.......................................................... -- 3,871,028
After 2002.................................................... -- 11,827,998
-------- ----------
Total minimum lease payments.................................. 358,804 $34,916,363
===========
Less amount representing interest.................................. 17,315
--------
Present value of net minimum capital lease payments................ 341,489
Less current installments of obligations under capital leases...... 165,652
--------
Obligations under capital leases, excluding current installments... $175,837
========
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 $257,739, $212,559, and $246,880 for fiscal years
1997, 1996 and 1995, respectively.
Total rent expense under all leases amounted to $9,596,122, $7,090,192, and
$5,768,239 for fiscal years 1997, 1996 and 1995, respectively.
22
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(5) INCOME TAXES
Income tax expense (benefit) for fiscal years 1997, 1996, and 1995,
consists of the following:
FEDERAL STATE TOTAL
------- ----- -----
1997
Current...................................... $1,151,000 $332,000 $1,483,000
Deferred..................................... (250,000) (51,000) (301,000)
------- ------ -------
$901,000 $281,000 $1,182,000
======== ======== ==========
1996
Current...................................... $1,163,000 $339,000 $1,502,000
Deferred..................................... (242,000) (50,000) (292,000)
------- ------ -------
$921,000 $289,000 $1,210,000
======== ======== ==========
1995
Current...................................... $808,000 $232,000 $1,040,000
Deferred..................................... (112,000) (22,000) (134,000)
------- ------ -------
$696,000 $210,000 $906,000
======== ======== ========
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:
1997 1996 1995
---- ---- ----
Computed expected tax expense.................... $1,000,000 $1,002,000 $751,000
State taxes, net of federal benefit.............. 185,000 191,000 139,000
Other, net....................................... (3,000) 17,000 16,000
-------- --------- --------
$1,182,000 $1,210,000 $906,000
========== ========== ========
Effective tax rate............................. 40.2% 41.0% 41.0%
========== ========== ========
The significant components of deferred tax assets are presented below:
JANUARY 31, FEBRUARY 1,
1998 1997
---- ----
Deferred tax assets:
Inventory........................................................ $515,000 $341,000
Accrued occupancy expense........................................ 320,000 272,000
Depreciation..................................................... 339,000 268,000
Other............................................................ 35,000 27,000
--------- --------
Total gross deferred tax assets.............................. 1,209,000 908,000
Less valuation allowance......................................... -- --
--------- --------
Net deferred tax assets...................................... $1,209,000 $908,000
========== ========
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.
23
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) LINES OF CREDIT
The Company has an available line of credit totaling $16,000,000 with
interest at the equivalent of the prime rate. Total amounts outstanding under
this facility are limited at all times to a maximum of the book value of
inventory ranging from 40% to 70% depending on the time of year. There were no
borrowings outstanding under this arrangement as of January 31, 1998 and
February 1, 1997.
The Company pays a commitment fee on the unused portion of the revolving
lines of credit which is calculated at a rate of 1/4 of 1.0%. The lines are
collateralized by warehouse and store inventory.
The revolving line of credit includes sublimits of $16,000,000 for banker
acceptances and $2,000,000 for import letters of credit. At January 31, 1998 and
February 1, 1997 no banker acceptances were outstanding, and the Company was
contingently liable under outstanding letters of credit of $28,272 and $181,193,
respectively.
The lines of credit contain restrictive covenants including requirements to
achieve certain financial ratios involving levels of net income, stockholders
equity, and inventory. The covenants restrict the Company from declaring any
dividends on common stock or purchasing, redeeming or retiring any of its common
stock in excess of $300,000 in aggregate in any fiscal year. The Company was in
compliance with such covenants at January 31, 1998.
The maximum outstanding balance under this line of credit during fiscal
years 1997 and 1996 was $8,705,000 and $11,515,000, respectively. The average
balances outstanding were $2,722,000 and $4,224,000 for fiscal 1997 and 1996,
respectively.
(7) LONG-TERM DEBT
The Company has an available $2,000,000 line for multiple term loans to be
used for leasehold improvements and equipment. Any multiple term loans under
this line will mature in 60 months and the available line expires in February
2000. Term loans originated under this line will bear interest at prime plus
0.5% or the Company may opt for a fixed rate.
Under this line, the Company has a term loan with an outstanding balance of
$68,695 at January 31, 1998, for office and warehouse renovation and equipment.
This loan is payable in monthly installments of approximately $6,400, including
interest at 7.4% through November 1, 1998 and is secured by equipment. The
remaining available amount under the line is approximately $1,931,000 as of
January 31, 1998.
(8) 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.
On January 29, 1996, the Company began sponsoring 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 1997 and 1996, total expenses under the plan
were $71,027 and $66,532, respectively.
24
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(9) Net Income Per Share
Basic and diluted earnings per share for the years ended January 31, 1998,
February 1, 1997 and January 28, 1996 are as follows:
Weighted
Net Average Earnings
Income Shares per Share
------ ------ ---------
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
========== ========= =====
For the Year Ended February 1, 1997
- -----------------------------------
Basic EPS............................................. $1,735,846 3,482,122 $0.50
=====
Dilutive effect of Outstanding Stock Options.......... 39,675
---------
Diluted EPS........................................... $1,735,846 3,521,797 $0.49
========== ========= =====
For the Year Ended January 28, 1996
- -----------------------------------
Basic EPS............................................. $1,303,667 3,482,122 $0.37
=====
Dilutive effect of Outstanding Stock Options.......... 11,435
Dilutive effect of Outstanding Stock Warrants......... 2,906
Dilutive effect of Chairman's options granted to
former President................................. 241,899(1)
---------
Diluted EPS........................................... $1,303,667 3,738,362 $0.35
========== ========= =====
(1) Reflects the dilutive effect of an option granted by the Company's Chairman
and Chief Executive Officer to purchase shares personally owned by him.
25
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(10) 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 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 in fiscal 1996 and thereafter 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 31, 1998, there were 380,000 shares available for grant under
the Plans. The per share weighted-average fair value of stock options granted
during fiscal 1997 and 1996 were $1.13 and $4.37, respectively. 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:
1997 1996
---- ----
Expected life (years)............... 5.0 5.0
Dividend yield...................... - -
Risk-free interest rate............. 6.00% 6.72%
Expected volatility................. 73.31% 53.5%
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 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:
1997 1996
---- ----
Net income:
As reported..................................... $1,760,129 $1,735,846
Pro forma....................................... 1,700,529 1,699,308
Net income per share - basic:
As reported..................................... $0.40 $0.50
Pro forma....................................... 0.39 0.49
Net income per share - diluted:
As reported..................................... $0.40 $0.49
Pro forma....................................... 0.38 0.48
Pro forma 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.
26
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following is a summary of the change in options outstanding for fiscal
1995, 1996 and 1997:
Weighted
Number of Average
Options Exercise Price
------- --------------
Outstanding at January 29, 1995........ 70,000 $1.92
Granted............................ -- --
Exercised.......................... -- --
Terminated......................... -- --
-------
Outstanding at January 28, 1996........ 70,000 1.92
Granted............................ 110,000 2.77
Exercised.......................... -- --
Terminated......................... (15,000 1.80
-------
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
======= =====
At January 31, 1998, 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 7 years $ 2.26 60,000 $ 2.13
$3.00 - 4.75 78,000 9 years 3.63 30,400 3.60
------ ------- ---- ------ -------
168,000 8 years $ 2.89 90,400 $ 2.63
======= ==== ====== ====
In fiscal 1989, the Company granted an investment group, of which one
member is a director and stockholder of the Company, warrants to purchase
102,500 shares of common stock at $2.10 per share. These warrants expired
unexercised in May 1995.
In September 1990, the Company's Chairman and Chief Executive Officer (CEO)
granted the Company's former President an option to purchase 654,550 shares of
stock personally owned by the CEO at a price of $1.45 per share subject to
certain conditions and restrictions. This option terminated upon the former
President's resignation on January 17, 1996. The option under this agreement is
included in the computation of diluted net income per share for fiscal 1995
using the treasury stock method. The treatment of the option in this manner
reduced net income per share by $.01 in fiscal 1995.
(11) Legal Matters
The Company is involved in routine litigation arising in the normal course
of business. In the opinion of management, an adverse outcome to any of this
litigation would not have a material effect on the financial condition or
results of operations of the Company.
27
(12) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for fiscal 1997 and 1996 follows (in
thousands except per share data):
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
Fiscal 1997
- -----------
Net sales......................... $7,287 8,287 8,209 30,476 54,259
Gross profit...................... 1,557 1,780 1,450 13,550 18,337
Operating income (loss)........... (1,444) (1,369) (2,327) 8,319 3,179
Net income (loss)................. (867) (864) (1,415) 4,906 1,760
Net income (loss) per share:
Basic........................ (0.25) (0.22)(1) (0.28)(1) 0.97(1) 0.40(1)
Diluted...................... (0.25) (0.22)(1) (0.28)(1) 0.96(1) 0.40(1)
Fiscal 1996
- -----------
Net sales......................... $5,562 6,370 6,925 25,706 44,563
Gross profit...................... 1,263 1,558 1,469 11,643 15,933
Operating income (loss)........... (951) (825) (1,655) 6,771 3,340
Net income (loss)................. (575) (545) (1,069) 3,925 1,736
Net income (loss) per share:
Basic........................ (0.17) (0.16) (0.31) 1.13 0.50
Diluted...................... (0.17) (0.16) (0.31) 1.10 0.49
(1) Basic and diluted net income (loss) per share includes the effect of the
initial public offering of securities in July 1997 as described in footnote
2. The weighted average shares associated with this offering are as
follows:
Second quarter 1997................ 457,143
Third quarter 1997................. 1,629,890
Fourth quarter 1997................ 1,640,000
Fiscal year 1997................... 931,759
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to directors and
executive officers of the Company.
Name Age Position(s) Held
---- --- ----------------
Directors and Executive Officers
Fred H. Klaucke..................... 61 Chairman of the Board of Directors, President and
Chief Executive Officer
Charles A. Callahan................. 48 Vice President of Finance, Chief Financial Officer and
Assistant Secretary
Christine M. Luchi.................. 45 Vice President of Operations
Richard B. Callen................... 55 Secretary, Director
Thomas A. James..................... 55 Director
David T. Della Penta................ 50 Director
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 Peat Marwick 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.
Richard B. Callen has served as Secretary and a Director of the Company
since 1969. Mr. Callen is a partner in the law firm of Darweesh, Callen, Lewis &
VonDohlen, which is legal counsel to the Company.
Thomas A. James has served as a Director of the Company since 1992. Since
1969, Mr. James has served as the Chairman of the Board of Directors and Chief
Executive Officer of both Raymond James & Associates, Inc., and its parent
company, Raymond James Financial, Inc.
David T. Della Penta has served as a Director of the Company since 1997.
Mr. Della Penta will become the President of Fisher Scientific International
effective May 1, 1998. Prior to assuming his new position, Mr. Della Penta
served as President of Nalge Nunc International, a subsidiary of Sybron
International Corporation since 1989. Mr. Della Penta also serves as a
director of Sear Brown Associates and Yellow Springs Instrument,
Incorporated.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated by reference from the definitive
Proxy Statement for the registrant's 1998 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 registrant's 1998 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 registrant's 1998 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 financial statements and supplementary data of the
registrant and independent auditors' report on such financial
statements filed under Part II, Item 8:
Page
----
Independent Auditors' Report............................................................................................ 14
Balance Sheets as of January 31, 1998 and February 1, 1997.............................................................. 15
Statements of Income for the years ended January 31, 1998, February 1, 1997 and January 28, 1996........................ 16
Statements of Stockholders' Equity for the years ended January 31, 1998, February 1, 1997 and January 28, 1996.......... 17
Statements of Cash Flows for the years ended January 31, 1998, February 1, 1997 and January 28, 1996.................... 18
Notes to Financial Statements including supplementary data entitled "Selected Quarterly Financial Data (Unaudited)"..... 19-28
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 1997.
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 30, 1998 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
- --------------------------------------------- and Chief Executive Officer
(Fred H. Klaucke)
/S/ CHARLES A. CALLAHAN Vice President, Finance,
- ---------------------------------------------- Chief Financial Officer, and
(Charles A. Callahan) Assistant Secretary (Principal
Accounting and Financial
Officer)
/S/ RICHARD B. CALLEN Director
- ----------------------------------------------
(Richard B. Callen)
/S/ DAVID T. DELLA PENTA Director
- ----------------------------------------------
(David T. Della Penta)
/S/ THOMAS A. JAMES Director
- ----------------------------------------------
(Thomas A. James)
Date: April 30, 1998
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. X
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 Exhibit 10.1 to World of
the Company and Fred H. Klaucke. Science, Inc's Registration
Statement on Form S-1 (No.
333-25031)
10.2* Covenant Not-to-Compete and Non-Disclosure Agreement dated Exhibit 10.2 to World of
June, 1989 of Fred H. Klaucke. 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 Exhibit 10.5 to World of
Company and Genesee Valley Regional Market Authority, Science, Inc's Registration
together with all amendments thereto. Statement on Form S-1 (No.
333-25031)
10.6 Lease Agreement dated as of March 29, 1994 between the Company Exhibit 10.6 to World of
and BF Realty Investors Rochester II Limited Partnership. 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 Exhibit 10.7 to World of
Tertrac Associates. Science, Inc's Registration
Statement on Form S-1 (No.
333-25031)
11.1 Computation of Earnings Per Share. X
23.1 Consent of KPMG Peat Marwick LLP. X
27 Financial Data Schedules. X
* Plan or agreement pursuant to which the Company's officers or directors
have received compensation.
32