COMPANY: WORLD OF SCIENCE, INC.
TICKER: WOSI
EXCHANGE: NMS
FORM-TYPE: 10-Q
DOCUMENT DATE: May 2, 1998
FILING DATE: June 16, 1998
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 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 incorporation (IRS Employer Identification No.)
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
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
Common stock outstanding as of May 31, 1998: 5,079,955 shares of common stock.
1
WORLD OF SCIENCE, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Statements of Operations...........................3
Condensed Balance Sheets.....................................4
Condensed Statements of Cash Flows...........................5
Notes to Condensed Financial Statements......................6-7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................8-10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk - None
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities and Use of Proceeds - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K...............................11
SIGNATURE..................................................... 12
2
WORLD OF SCIENCE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------
MAY 2, MAY 3,
1998 1997
------------ -----------
NET SALES $ 7,863 $ 7,287
COST OF SALES AND OCCUPANCY EXPENSES 6,337 5,730
--------------- ---------------
GROSS PROFIT 1,526 1,557
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 3,373 3,001
--------------- ---------------
OPERATING LOSS (1,847) (1,444)
INTEREST INCOME (EXPENSE), NET 49 (25)
--------------- ---------------
LOSS BEFORE INCOME TAXES (1,798) (1,469)
INCOME TAX BENEFIT (719) (602)
--------------- ---------------
NET LOSS $ (1,079) $ (867)
=============== ===============
NET LOSS PER SHARE (BASIC) $ (0.21) $ (0.25)
=============== ===============
NET LOSS PER SHARE (DILUTED) $ (0.21) $ (0.25)
=============== ===============
WEIGHTED AVERAGE SHARES (BASIC) 5,080 3,423
WEIGHTED AVERAGE SHARES (DILUTED) 5,080 3,423
See accompanying notes to condensed financial statements
3
WORLD OF SCIENCE, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
MAY 2, JANUARY 31, MAY 3,
1998 1998 1997
----------------- ---------------- ------------------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 1,880 $ 6,742 $ 63
ACCOUNTS RECEIVABLE 212 113 228
INVENTORIES 11,664 10,404 9,311
PREPAID EXPENSES AND OTHER CURRENT ASSETS 699 533 636
TAXES RECEIVABLE 719 - 602
DEFERRED INCOME TAXES 551 551 368
--------------------- -------------------- ----------------------
TOTAL CURRENT ASSETS 15,725 18,343 11,208
PROPERTY, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS, NET 7,252 6,431 5,144
DEFERRED INCOME TAXES 658 658 540
--------------------- -------------------- ----------------------
TOTAL ASSETS $ 23,635 $ 25,432 $ 16,892
===================== ==================== ======================
CURRENT LIABILITIES:
LINE OF CREDIT $ - $ - $ 2,665
CURRENT INSTALLMENTS OF LONG TERM DEBT 45 69 182
CURRENT INSTALLMENTS OF OBLIGATIONS
UNDER CAPITAL LEASES 175 166 103
ACCOUNTS PAYABLE 1,868 1,320 2,263
ACCRUED EXPENSES 640 570 580
INCOME TAXES PAYABLE 88 1,400 89
--------------------- -------------------- ----------------------
TOTAL CURRENT LIABILITIES 2,816 3,525 5,882
LONG TERM DEBT, EXCLUDING CURRENT INSTALLMENTS - - 603
OBLIGATIONS UNDER CAPITAL LEASES, EXCLUDING
CURRENT INSTALLMENTS 133 176 104
ACCRUED OCCUPANCY EXPENSE 813 779 690
--------------------- -------------------- ----------------------
TOTAL LIABILITIES 3,762 4,480 7,279
-------------------- -------------------- --------------------
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, 51 51 34
5,079,955 AND 3,422,955 SHARES
ADDITIONAL PAID-IN CAPITAL 11,398 11,398 2,703
RETAINED EARNINGS 8,424 9,503 6,876
--------------------- -------------------- ----------------------
TOTAL STOCKHOLDERS' EQUITY 19,873 20,952 9,613
--------------------- -------------------- ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,635 $ 25,432 $ 16,892
===================== ==================== ======================
See accompanying notes to condensed financial statements
4
WORLD OF SCIENCE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------
MAY 2, MAY 3,
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (1,079) $ (867)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 325 295
CHANGE IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN:
ACCOUNTS RECEIVABLE (99) (174)
INVENTORIES (1,260) (2,383)
PREPAID EXPENSES AND OTHER
CURRENTS ASSETS (166) (250)
TAXES RECEIVABLE (719) (602)
(DECREASE) INCREASE IN:
ACCOUNTS PAYABLE 548 693
ACCRUED EXPENSES 70 (148)
INCOME TAXES PAYABLE (1,312) (1,374)
ACCRUED OCCUPANCY EXPENSE 33 27
--------------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES: (3,659) (4,783)
--------------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES--
CAPITAL EXPENDITURES, NET (1,146) (456)
--------------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ADVANCES ON LINE OF CREDIT - 2,665
PROCEEDS FROM ISSUANCE OF LONG-TERM DEBT - 670
PRINCIPAL PAYMENTS ON LINE OF CREDIT - -
PRINCIPAL PAYMENTS ON LONG-TERM DEBT (24) (22)
PRINCIPAL PAYMENTS ON CAPITAL LEASES (33) (25)
------------------------ ----------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (57) 3,288
------------------------ ----------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,862) (1,951)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 6,742 2,014
======================== ===============
END OF PERIOD $ 1,880 $ 63
======================== ===============
CASH PAID DURING PERIOD FOR:
INTEREST $ 13 $ 30
INCOME TAXES $ 1,312 $ 1,374
======================== ===============
See accompanying notes to condensed financial statements
5
WORLD OF SCIENCE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1. - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. However, in the opinion of management, all
adjustments (which consist primarily of normal recurring accruals) have been
made to present fairly the financial position and operating results for the
unaudited periods. This financial information should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's Form 10-K as most recently filed with the Securities and Exchange
Commission.
Due to the seasonal nature of the Company's business, results for the first
quarter of fiscal 1998 are not necessarily indicative of the results to be
expected for the full fiscal year ending January 30, 1999.
NOTE 2. - Impact of New Accounting Standards
During the first quarter of 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. The adoption of this
standard did not have any material effect on the financial condition or results
of operations of the Company.
During the first quarter of 1998, the Company also adopted 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 did not 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 pensions 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 employees this statement does not
impact the financial statements.
6
NOTE 3. Forward Looking Information
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 filings
with the Securities and Exchange Commission for further discussion of risks and
uncertainties regarding the Company's business.
7
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
The Company operated 60 permanent stores and 57 seasonal stores as of May 2,
1998, as compared to 48 permanent stores and 63 seasonal stores as of May 3,
1997. Four new permanent stores were opened in the first quarter of both fiscal
1998 and 1997. The Company had a net decrease of five seasonal stores in the
first quarter of fiscal 1998 as compared to a net increase of one seasonal store
in the first quarter of fiscal 1997.
Comparison of Three Months Ended May 2, 1998 to Three Months Ended May 3, 1997.
Sales. Sales increased to $7.9 million from $7.3 million, or 7.9%. Of the
$600,000 increase in sales: $789,000 was attributable to four new permanent
stores opened during the first quarter of fiscal 1998 and twelve new permanent
stores not in operation as of the beginning of the prior year, and $285,000 was
attributable to increased comparable store sales. These factors were partially
offset by seasonal store sales declining $498,000 due to lower average seasonal
store sales and the operation of fewer seasonal stores. Comparable permanent
store sales increased 7.1% for the thirteen-week period ended May 2, 1998.
Cost of Sales and Occupancy Expenses. Cost of sales and occupancy expenses,
which include distribution center costs and other expenses associated with
acquiring inventory, increased to $6.3 million from $5.7 million, an increase of
10.6%. As a percentage of sales, it increased to 80.6% from 78.6%. The dollar
increase was due to increased store occupancy expenses from more stores in
operation in the first quarter of fiscal 1998, and increased cost of sales due
to higher sales. The increase as a percentage of sales of 2.0% was attributable
to a 0.7% increase in distribution center costs associated with the move to a
new distribution facility in May of 1997, and a 1.7% increase in occupancy
expenses caused by a decrease in average seasonal store sales. Cost of product
sold decreased 0.4%.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased to $3.4 million from $3.0 million, an increase
of 12.4%. Selling, general, and administrative expenses increased to support
higher sales levels and an increased number of permanent stores. As a
percentage of sales, it increased to 42.9% from 41.2%, primarily as a result of
a decrease in average seasonal store sales.
Interest Income (Expense), Net. Net interest income (expense) amounted to net
interest income of $49,000 in the first quarter of fiscal 1998, as compared to
net interest expense of $25,000 in the first quarter of fiscal 1997. This
fluctuation is primarily a result of investment of proceeds from the Company's
initial public offering in July, 1997.
Net Loss. Net loss increased to $1.1 million, or 13.7% of sales, in the first
quarter of fiscal 1998 from $867,000, or 11.9% of sales, in the first quarter of
fiscal 1997.
8
Seasonality
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. In July 1997,
the Company completed an initial public offering which provided net proceeds of
$8.7 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 $3.7 million in the first quarter of fiscal 1998 as
compared to $4.8 million in the first quarter of fiscal 1997. This was due to
increased levels of inventories and other working capital items in the first
quarter of each year.
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 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 May 2, 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.
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 $45,000 at
May 2, 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 May 2, 1998, outstanding capital lease
obligations and total debt amounted to $353,000, of which $308,000 represented
capital lease obligations. The capital lease obligations have terms expiring in
fiscal 2001.
9
Capital expenditures in the first quarter of fiscal 1998, net of landlord build-
out allowances, amounted to $1.1 million as compared to $456,000 in the first
quarter of fiscal 1997. The increase resulted from the construction of 8
additional permanent store locations in the first quarter of fiscal 1998.
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 period of up to 24 months, through open
market purchases and privately negotiated transactions, subject to the
availability of shares and other market and financial conditions. In
conjunction with the stock repurchase program, the Company received approval
under its credit agreement to acquire up to $650,000 of the Company's common
stock. The Company has not repurchased any shares as of June 12, 1998.
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.
10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 11 Computation of Per Share Net Loss
Exhibit 27 Financial Data Schedule
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange Commission
during the first quarter of fiscal 1998.
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 12, 1998
WORLD OF SCIENCE, INC.
(Registrant)
/s/Charles A. Callahan
Charles A. Callahan
Vice President of Finance
Chief Financial Officer and Assistant Secretary
(Signed on behalf of the registrant and as
Principal Accounting and Financial Officer)
12