Exhibit 20.2
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Noodle Kidoodle, Inc.
We have audited the accompanying consolidated balance sheets of Noodle
Kidoodle, Inc. and Subsidiaries as of January 29, 2000 and January 30, 1999 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended January 29, 2000.
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 consolidated financial position of Noodle
Kidoodle, Inc. and Subsidiaries as of January 29, 2000 and January 30, 1999 and
the results of their operations and cash flows for each of the years in the
three year period ended January 29, 2000 in conformity with generally accepted
accounting principles.
As discussed in Note 12 to the Consolidated Financial Statements, the
Company changed its method of accounting for start-up costs.
Janover Rubinroit, LLC
/s/ Janover Rubinroit, LLC
Garden City, New York
March 15, 2000
1
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
January 29, January 30, April 29,
ASSETS 2000 1999 2000
------ ----------- ----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents................. $ 491 $10,188 $ 541
Merchandise inventories................... 33,610 21,074 34,470
Prepaid expenses and other current
assets................................... 3,244 3,780 3,093
Deferred income taxes..................... 1,448 -- 2,965
------- ------- -------
Total current assets..................... 38,793 35,042 41,069
Property, plant and equipment at cost..... 41,874 32,138 42,982
Less accumulated depreciation............ 12,943 9,238 14,051
------- ------- -------
28,931 22,900 28,931
Other assets...............................
Deferred income taxes..................... 4,992 -- 4,992
Other..................................... 166 20 163
------- ------- -------
5,158 20 5,155
------- ------- -------
Total Assets............................... $72,882 $57,962 $75,155
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt...... $ 4,019 $ 21 $ 8,955
Trade accounts payable.................... 9,498 8,576 10,403
Accrued expenses and taxes................ 9,976 9,738 8,876
Net liabilities of discontinued
operations............................... -- 1,303 --
------- ------- -------
Total current liabilities................ 23,493 19,638 28,234
Long-term debt............................. 689 712 684
Deferred income taxes...................... -- -- --
Minority interest.......................... -- -- --
Commitments and contingencies.............. -- -- --
Stockholders' equity:
Preferred stock-authorized 1,000,000
shares, par value $.001 (none issued).... -- -- --
Common stock-authorized 15,000,000 shares,
par value $.001; issued 8,506,901
shares................................... 9 9 9
Capital in excess of par value............ 43,097 43,087 43,098
Retained earnings (deficit)............... 9,291 (1,747) 6,815
------- ------- -------
52,397 41,349 49,922
Less treasury stock, at cost, 901,261,
910,861 and 898,261 shares,
respectively............................. 3,697 3,737 3,685
------- ------- -------
Total stockholders' equity............... 48,700 37,612 46,237
------- ------- -------
Total Liabilities and Stockholders'
Equity.................................... $72,882 $57,962 $75,155
======= ======= =======
The accompanying notes are an integral part of the financial statements.
2
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share data)
For the Fiscal Year Ended Thirteen Weeks Ended
----------------------------------- -----------------------
January 29, January 30, January 31, April 29, May 1,
2000 1999 1998 2000 1999
----------- ----------- ----------- ----------- ----------
(unaudited)
Net sales............... $135,038 $107,886 $81,664 $ 24,072 $ 22,890
Costs and expenses:
Cost of products sold
including buying and
warehousing costs..... 82,770 65,405 50,388 15,178 13,900
Selling and
administrative
expenses.............. 49,356 38,804 33,552 12,695 10,103
-------- -------- ------- ---------- ----------
132,126 104,209 83,940 27,873 24,003
-------- -------- ------- ---------- ----------
Operating income
(loss)................ 2,912 3,677 (2,276) (3,801) (1,113)
Interest income......... 116 269 448 1 80
Interest expense........ (616) (194) (90) (193) (21)
-------- -------- ------- ---------- ----------
Income (loss) from
continuing operations
before income taxes... 2,412 3,752 (1,918) (3,993) (1,054)
Income taxes (benefit).. (7,271) -- -- (1,517) --
Minority interest....... -- -- -- -- --
-------- -------- ------- ---------- ----------
Income (loss) from
continuing
operations............ 9,683 3,752 (1,918) (2,476) (1,054)
Gain on disposal of
discontinued operation,
net of income taxes of
$950................... 1,550 -- -- -- --
-------- -------- ------- ---------- ----------
Net income (loss)
before cumulative
effect of change in
accounting principle.. 11,233 3,752 (1,918) (2,476) (1,054)
Cumulative effect of
change in accounting
principle, net of
income taxes (benefit)
of $(119) and $0,
respectively........... (195) -- -- -- (314)
-------- -------- ------- ---------- ----------
Net income (loss)...... $ 11,038 $ 3,752 $(1,918) $ (2,476) $ (1,368)
======== ======== ======= ========== ==========
Basic income (loss) per
share:
Continuing operations.. $ 1.27 $ .49 $ (.25) $ (.33) $ (.14)
Discontinued
operations............ .20 -- -- -- --
Cumulative effect of
change in accounting
principle............. (.03) -- -- -- (.04)
-------- -------- ------- ---------- ----------
$ 1.45 $ .49 $ (.25) $ (.33) $ (.18)
======== ======== ======= ========== ==========
Diluted income (loss)
per share:
Continuing operations.. $ 1.25 $ .49 $ (.25) $ (.33) $ (.14)
Discontinued
operations............ .20 -- -- -- --
Cumulative effect of
change in accounting
principle............. (.03) -- -- -- (.04)
-------- -------- ------- ---------- ----------
$ 1.42 $ .49 $ (.25) $ (.33) $ (.18)
======== ======== ======= ========== ==========
The accompanying notes are an integral part of the financial statements.
3
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Treasury
Stock
Common Stock Capital in Retained (at Cost)
------------- Excess of Earnings -------------
Shares Amount Par Value (Deficit) Shares Amount
------ ------ ---------- --------- ------ ------
BALANCE, FEBRUARY 1, 1997... 8,504 $ 9 $43,063 $(3,581) 924 $3,792
Net loss for the year...... -- -- -- (1,918) -- --
----- --- ------- ------- --- ------
BALANCE, JANUARY 31, 1998... 8,504 9 43,063 (5,499) 924 3,792
Exercise of stock options.. 3 -- 24 -- (13) (55)
Net income for the year.... -- -- -- 3,752 -- --
----- --- ------- ------- --- ------
BALANCE, JANUARY 30, 1999... 8,507 9 43,087 (1,747) 911 3,737
Exercise of stock options.. -- -- 10 -- (10) (40)
Net income for the year.... -- -- -- 11,038 -- --
----- --- ------- ------- --- ------
BALANCE, JANUARY 29, 2000... 8,507 9 43,097 9,291 901 3,697
Thirteen weeks ended April
29, 2000 (unaudited):
Exercise of stock options.. -- -- 1 -- (3) (12)
Net loss for the period.... -- -- -- (2,476) -- --
----- --- ------- ------- --- ------
BALANCE, APRIL 29, 2000..... 8,507 $ 9 $43,098 $ 6,815 898 $3,685
===== === ======= ======= === ======
The accompanying notes are an integral part of the financial statements.
4
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Thirteen Weeks
For the Fiscal Year Ended Ended
----------------------------------- -----------------
January 29, January 30, January 31, April 29, May 1,
2000 1999 1998 2000 1999
----------- ----------- ----------- --------- -------
(Unaudited)
Continuing Operations:
Cash flows from
operating activities:
Net income (loss)
before cumulative
effect of change in
accounting principle
...................... $ 9,683 $ 3,752 $(1,918) $(2,476) $(1,054)
Adjustments to
reconcile to net cash
provided (used):
Depreciation........... 3,787 2,932 2,490 1,108 817
Deferred income taxes.. (6,440) -- -- (1,517) --
Loss on disposal of
fixtures and
equipment............. 17 -- 243 -- --
Cumulative effect of
accounting change..... (195) -- -- -- (314)
Decrease (increase) in
non-cash working
capital accounts:
Merchandise
inventories.......... (12,536) (4,253) 497 (860) (4,827)
Prepaid expenses and
other current
assets............... 536 (756) (272) 151 1,930
Trade accounts
payable.............. 922 2,528 999 905 2,661
Accrued expenses and
taxes................ 238 2,012 634 (1,103) (3,412)
(Increase) decrease in
other assets......... (146) -- -- 3 (7)
-------- ------- ------- ------- -------
Net cash provided by
(used in) continuing
operations............. (4,134) 6,215 2,673 (3,789) (4,206)
-------- ------- ------- ------- -------
Discontinued Operations:
Net gain from disposal
of discontinued
operating activities.. 1,550 -- -- -- --
Decrease (increase) in
non-cash working
capital accounts...... (1,303) 130 (1,252) -- --
Net cash provided by
(used in) discontinued
operations............ 247 130 (1,252) -- 30
-------- ------- ------- ------- -------
Net cash provided by
(used in) operating
activities............ (3,887) 6,345 1,421 (3,789) (4,176)
-------- ------- ------- ------- -------
Cash flows from
investing activities:
Property additions..... (9,835) (7,318) (1,664) (1,108) (1,244)
Other.................. -- 3 27 3 (7)
-------- ------- ------- ------- -------
Net cash used in
investing activities... (9,835) (7,315) (1,637) (1,105) (1,251)
-------- ------- ------- ------- -------
Cash flows from
financing activities:
Proceeds from line of
credit................ 53,326 -- -- 12,058 --
Payments on line of
credit................ (49,330) -- -- (7,122) --
Maturities of long-term
debt.................. (21) (20) (18) (5) (10)
Exercise of employee
options............... 50 79 -- 13 41
-------- ------- ------- ------- -------
Net cash provided by
(used in) financing
activities............ 4,025 59 (18) 4,944 31
-------- ------- ------- ------- -------
Net increase (decrease)
in cash and cash
equivalents........... (9,697) (911) (234) 50 (5,396)
Cash and cash
equivalents--beginning
of year............... 10,188 11,099 11,333 491 10,188
-------- ------- ------- ------- -------
Cash and cash
equivalents--end of
year.................. $ 491 $10,188 $11,099 $ 541 $ 4,792
======== ======= ======= ======= =======
Supplemental cash flow
information:
Net cash paid during
the year for:
Interest expense....... $ 617 $ 195 $ 91 $ 193 $ 21
-------- ------- ------- ------- -------
Income taxes, net...... -- -- -- -- --
-------- ------- ------- ------- -------
The accompanying notes are an integral part of the financial statements.
5
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
The following summary of the Company's major accounting policies is
presented to assist in the interpretation of the financial statements.
Principles of consolidation
The consolidated financial statements include the accounts of the parent
company and all majority owned subsidiary and partnership companies. All
significant intercompany balances and transactions are eliminated in
consolidation. The Company and its subsidiaries are on a 52-53 week accounting
period ending on the Saturday closest to January 31. The fiscal years for the
financial statements presented all consist of 52 week periods.
The Company has reported 100% of its majority owned partnership's loss for
the year since the minority interest is limited to the extent of its equity
capital. Should the losses reverse in subsequent years, the Company will be
credited with the amount of minority interest losses previously absorbed before
credit is made to the minority interest.
Interim Financial Statements
The accompanying consolidated financial statements as of April 29, 2000 and
for the 13 weeks ended May 1, 1999 and April 29, 2000 are unaudited and in the
opinion of management include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations for those interim periods. The results of
operations for the 13 weeks ended May 1, 1999 and April 29, 2000 are not
necessarily indicative of the results to be expected for any other interim
period or the full year.
Description of business
The Company is in one business segment, a specialty retailer of a broad
assortment of educationally oriented, creative and non-violent children's
products, including toys, books, games, video and audio tapes, computer
software, crafts, and other learning products, and follows the requirements of
SFAS No. 131.
Revenue recognition
Revenue is recognized at the point of sale to retail customers.
Cash and cash equivalents
All highly liquid investments purchased with a maturity of three months or
less are considered to be cash equivalents. The Company places its temporary
cash investments in high grade instruments with high credit quality financial
institutions and, by policy, limits the amount of credit exposure to any one
financial institution.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Earnings per share
Basic earnings per share has been computed based on the average number of
common shares outstanding. Diluted earnings per share reflects the increase in
average common shares outstanding that would result from the assumed exercise
of outstanding stock options, calculated using the treasury stock method.
Property, plant and equipment
Plant and equipment is stated at cost and is depreciated on a straight-line
basis over estimated useful lives. Repairs and maintenance are charged to
expense as incurred; renewals and betterments, which significantly extend the
useful lives of existing plant and equipment, are capitalized.
6
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:--(continued)
Leasehold improvements are amortized over the terms of the respective leases
or over their useful lives, whichever is shorter. Useful lives of other plant
and equipment vary among the classifications, but range for buildings and
improvements from 10-40 years and for fixtures and equipment from 4-10 years.
Store Pre-opening Costs
Pre-opening costs incurred at new store locations are charged to expense as
incurred in accordance with AICPA statement of position 98-5.
Income taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, 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. This method
also requires the recognition of future tax benefits such as net operating loss
carryforwards, to the extent that realization of such benefits is more likely
than not. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
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 at the
date of the financial statements and the reported amounts of revenue and
expense during the reporting period. Actual results could differ from those
estimates.
Fair value disclosures
The carrying amounts of cash and cash equivalents, other current assets,
accounts payable and other current liabilities approximates fair value because
of the short term maturity of these instruments. The stated value of long-term
debt, including current maturities, approximates fair value.
NOTE 2--DISCONTINUED OPERATIONS:
During the third quarter of fiscal 2000, the Company adjusted the estimated
gain on disposal of its discontinued wholesale operations recognized in fiscal
1996. The adjustment, resulting in an additional net gain on disposal of
discontinued operations of $1,550 net of income taxes of $950, arose from the
sale of the Company's leasehold interest in its former distribution center in
Birmingham, Alabama and the finalization of liabilities related to its
discontinued wholesale operations.
NOTE 3--PROPERTY, PLANT AND EQUIPMENT:
Thirteen
Fiscal Year Ended Weeks Ended
-------------------------- -----------
January 29, January 30, April 29,
2000 1999 2000
----------- -------------- -----------
(In thousands) (unaudited)
Land............................... $ 272 $ 272 $ 272
Building and improvements.......... 1,986 1,896 2,003
Fixtures and equipment............. 19,621 14,839 20,109
Leasehold improvements............. 19,995 15,131 20,598
-------- ------- -------
41,874 32,138 42,982
Less accumulated depreciation...... (12,943) (9,238) (14,051)
-------- ------- -------
$ 28,931 $22,900 $28,931
======== ======= =======
7
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 4--ACCRUED EXPENSES AND TAXES:
Thirteen
Fiscal Year Ended Weeks Ended
----------------------- -----------
January 29, January 30, April 29,
2000 1999 2000
----------- ----------- -----------
(In thousands) (unaudited)
Payroll and related benefits......... $1,372 $1,721 $1,159
Rent and occupancy................... 2,600 2,051 2,935
Insurance............................ 193 226 133
Advertising.......................... 1,286 2,103 771
Fixtures and equipment............... 256 302 155
Other................................ 4,269 3,335 3,723
------ ------ ------
$9,976 $9,738 $8,876
====== ====== ======
NOTE 5--LONG-TERM DEBT:
Long-term debt consists of the following:
Thirteen
Fiscal Year Ended Weeks Ended
----------------------- -----------
January 29, January 30, April 29,
2000 1999 2000
----------- ----------- -----------
(In thousands) (unaudited)
Revolving credit facility............ $3,996 $ -- $8,932
8% unsecured promissory note, due in
quarterly installments through
2016................................ 712 733 707
------ ------ ------
4,708 733 9,639
Less current maturities.............. 4,019 21 8,955
------ ------ ------
$ 689 $ 712 $ 684
====== ====== ======
The Company has a revolving credit agreement which provides for maximum
borrowings of up to $15 million until June 27, 2000. Borrowings may not exceed
certain percentages of, and are collateralized by, inventories, receivables,
and certain other assets. The agreement provides for an annual collateral
management fee and a commitment fee on the unused portion of the commitment.
Outstanding borrowings bear interest, at the option of the Company, based on
the prime rate or LIBOR. Interest rates on borrowings ranged from 7.75% to
8.50% during the year and from 8.50% to 9.00% during the thirteen weeks ended
April 29, 2000. The agreement contains certain covenants which among other
items, limits the payment of cash dividends when borrowings under the agreement
are outstanding.
On May 17, 2000, the Company amended its revolving credit facility to extend
the term until May 2003 and to increase the amount of available borrowings to
$50 million.
Annual maturities of long-term debt during the next five years are
$8,955,000, $25,000, $27,000, $29,000 and $31,000.
8
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 6--COMMITMENTS AND CONTINGENCIES:
Minimum annual commitments under non-cancelable leases in effect at January
29, 2000 and April 29, 2000 are as follows (in thousands):
January 29, April 29,
2000 2000
----------- -----------
(unaudited)
2001............................................... $ 14,821 $ 15,769
2002............................................... 14,936 16,002
2003............................................... 14,724 15,834
2004............................................... 14,714 15,818
2005............................................... 14,383 15,214
Thereafter......................................... 51,419 56,290
-------- --------
$124,997 $134,927
======== ========
The Company and its subsidiaries are lessees of office and warehouse space,
stores and transportation equipment under various leases. In addition to fixed
rents and rentals based on sales, certain of the leases require the payment of
taxes and other costs. Some leases include renewal options.
Rental expense (income) for operating leases was as follows:
Thirteen Weeks
Fiscal Year Ended Ended
----------------------------------- ----------------
January 29, January 30, January 31, April 29, May 1,
2000 1999 1998 2000 1999
----------- ----------- ----------- --------- ------
(In thousands) (Unaudited)
Minimum rentals......... $10,310 $ 7,853 $6,979 $2,752 $2,133
Taxes and other costs... 3,438 2,775 2,637 985 786
Sublease rentals........ (133) (73) -- (39) (24)
------- ------- ------ ------ ------
$13,615 $10,555 $9,616 $3,698 $2,895
======= ======= ====== ====== ======
Litigation
The Company is not party to any legal proceedings other than claims and
lawsuits arising in the normal course of its business which, in the opinion of
the Company's management, are not individually or in the aggregate material to
its business.
Employment agreements
The Company has employment agreements with certain officers. Those
agreements provide for minimum salary levels as well as for incentive bonuses
which are payable if specified performance goals are attained.
NOTE 7--CAPITAL STOCK:
Preferred stock
The Company has 1,000,000 authorized (none-issued) shares of preferred
stock, par value $0.001, consisting of 440,000 shares of Series A Junior
Participating Preferred reserved for use under the Stockholders' Rights Plan
and the remainder for other unspecified purposes.
9
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 7--CAPITAL STOCK:--(continued)
Stockholders' Rights Plan
On March 11, 1998, the Board of Directors of the Company adopted a new
Stockholder Rights Plan (the "Plan") to succeed the Stockholder Rights Plan
that expired on May 15, 1998. Under the terms of the Plan, which expires on May
15, 2008, the Company declared a dividend of one preferred stock purchase right
for every outstanding share of common stock to stockholders of record on May
15, 1998. The rights are exercisable, if not previously redeemed, under certain
circumstances involving actual or potential acquisitions of 15% or more of the
outstanding common stock of the Company. Each right represents a right to buy
from the Company 1/100th of a share of Series A Junior Participating Stock, par
value $.001, at a price of $25.00, subject to certain anti-dilution
adjustments. The rights are redeemable by the Company at a redemption price of
$.001 per right.
NOTE 8--STOCK OPTIONS:
Stock Incentive Plan
The Company's Stock Incentive Plan (the "Plan") for key employees, directors
and consultants provides for the granting of stock options, stock appreciation
rights (SAR's), dividend equivalent rights, restricted stock, unrestricted
stock and performance shares and is administered by the Compensation and Stock
Option Committee (the "Committee") of the Board of Directors of the Company.
The Plan provides for automatic increases in the number of shares available for
issuance under the plan of 2% per year of the total outstanding shares of
common stock at the end of the immediately preceding year. In no event may the
sum of the number of shares subject to then outstanding awards under all of the
Company's stock-based incentive plans ("Stock Plans") and the shares then
available for future awards under the Stock Plans exceed 15% of the number of
then outstanding shares of Common Stock, together with the shares subject to
the then outstanding awards under the Stock Plans and the shares then available
for future awards under the Stock Plans.
Under the terms of the Plan, options granted may be either non-qualified or
incentive stock options and the exercise price, determined by the Committee,
shall be at least 75% (100% in the case of an incentive stock option) of the
fair market value of a share on the date of grant. SAR's may be granted
(subject to specified restrictions) in connection with all or any part of, or
independently of, any option granted under the Plan. No SAR's, dividend
equivalent rights, restricted stock, unrestricted stock or performance shares
have been granted to date under the Plan. Options granted under the Plan are
exercisable in installments; however, no options are exercisable within one
year or later than ten years from the date of grant.
Stock option plan for outside directors
The Company's Outside Directors Stock Option Plan reserves 125,000 shares of
common stock for the issuance of stock options related to this plan. The Stock
Option Plan for Outside Directors provides that upon the initial election to
the Board, each eligible director is granted an option to purchase 5,000 shares
of common stock and 6,000 shares each year thereafter at the fair market value
on the date of grant. The options have a term of five years and become
exercisable 50% on the first anniversary of the date of grant and 50% on the
second anniversary of the date of grant. The Outside Directors Stock Option
Plan expired in April, 1999, and there will be no future grants under this
plan.
10
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 8--STOCK OPTIONS:--(continued)
The following summary sets forth the activity under the Company's stock
incentive plans:
Weighted Average
Shares Exercise Price
-------- ----------------
Outstanding at February 1, 1997.................. 630,859 $5.81
Granted......................................... 247,000 3.39
Exercised....................................... -- --
Terminated...................................... (358,034) 5.36
--------
Outstanding at January 31, 1998.................. 519,825 4.97
Granted......................................... 291,600 4.83
Exercised....................................... (16,400) 4.82
Terminated...................................... (67,900) 5.26
--------
Outstanding at January 30, 1999.................. 727,125 4.92
Granted......................................... 311,500 5.12
Exercised....................................... (9,600) 5.12
Terminated...................................... (97,200) 5.77
--------
Outstanding at January 29, 2000.................. 931,825 $4.90
Thirteen weeks ended April 29, 2000 (unaudited):
Granted......................................... 13,000 4.25
Exercised....................................... (3,000) 4.88
Terminated...................................... -- --
--------
Outstanding at April 29, 2000 (unaudited)........ 941,825 $4.90
========
Options exercisable at:
April 29, 2000 (unaudited)...................... 376,694 5.23
January 29, 2000................................ 358,944 5.16
January 30, 1999................................ 232,913 5.56
January 31, 1998................................ 141,406 6.01
Available for grant at:
April 29, 2000 (unaudited)...................... 224,770
January 29, 2000................................ 85,657
January 30, 1999................................ 198,036
January 31, 1998................................ 128,800
The following table summarizes information concerning currently outstanding
and exercisable options:
Outstanding Options Options Exercisable
---------------------------------------- -----------------------------------------
Weighted
Range of Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------- ----------- ---------------- -------------- ----------- --------------
January 29,
2000
$ 3.00 -
$ 5.00 609,825 3.57 $4.07 161,693 $3.64
$ 5.01 -
$10.00 317,000 3.20 6.39 192,251 6.23
$10.01 - Up 5,000 5.75 13.13 5,000 13.13
------- -------
931,825 358,944
======= =======
April 29,
2000
(unaudited)
$ 3.00 -
$ 5.00 619,825 3.37 $4.07 162,819 $3.61
$ 5.01 -
$10.00 317,000 2.95 6.39 208,875 6.30
$10.01 - Up 5,000 5.50 13.13 5,000 13.13
------- -------
941,825 376,694
======= =======
11
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 8--STOCK OPTIONS--(continued)
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting For Stock Based Compensation", and, accordingly, no compensation
cost has been recognized for the stock option plans. The fair value of options
at date of grant was estimated using the Black-Scholes model with the following
weighted average assumptions:
Fiscal Year Ended
-----------------------------------
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
Expected life (years).................. 5 5 5
Risk-free interest rate................ 6.77% 4.55% 6.0%
Expected volatility.................... 53.8% 50.1% 44.7%
Dividend yield......................... 0.0% 0.0% 0.0%
Had compensation for options granted in Fiscal 2000, 1999 and 1998 been
determined consistent with SFAS No. 123, the Company's net income (loss) and
net income (loss) per share would approximate the pro-forma amounts indicated
below.
Fiscal Year Ended
-----------------------------------
January 29, January 30, January 30,
2000 1999 1998
----------- ----------- -----------
(In thousands except share data)
Net income (loss)..................... $10,721 $3,546 $(2,042)
Basic income (loss) per share......... 1.41 .47 (.27)
Diluted income (loss) per share....... 1.38 .46 (.27)
The effects of applying SFAS No. 123 in this pro-forma disclosure are not
indicative of future effects. SFAS No. 123 does not apply to awards prior to
Fiscal 1996, and additional awards in future years are anticipated.
The weighted average fair value of options granted was $2.77, $2.27, and
$1.61 for Fiscal 2000, 1999 and 1998 respectively.
12
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 9--TAXES ON INCOME:
Income taxes (benefit) consist of the following:
Thirteen Weeks
Fiscal Year Ended Ended
----------------------------------- ----------------
January 29, January 30, January 31, April 29, May 1,
2000 1999 1998 2000 1999
----------- ----------- ----------- --------- ------
(In thousands) (unaudited)
Current:
Federal............... $ 20 $ 100 $-- $ -- $--
State and local....... -- -- -- -- --
------- ----- ---- ------- ----
20 100 -- -- --
Deferred................ (20) (100) -- (1,517) --
------- ----- ---- ------- ----
$ -- $ -- $-- $(1,517) $--
======= ===== ==== ======= ====
Continuing operations... $(7,271) $ -- $-- $(1,517) $--
Discontinued opera-
tions.................. 950 -- -- -- --
Cumulative effect of
change in accounting
principle.............. (119) -- -- -- --
------- ----- ---- ------- ----
$(6,440) $ -- $-- (1,517) $--
======= ===== ==== ======= ====
A reconciliation of the statutory federal income tax rate attributable to
income (loss) from continuing operations to the effective income tax rate is as
follows:
Thirteen Weeks
Fiscal Year Ended Ended
----------------------------------- ----------------
January 29, January 30, January 31, April 29, May 1,
2000 1999 1998 2000 1999
----------- ----------- ----------- --------- ------
(In thousands) (unaudited)
Federal at statutory
rates.................. 34 % 34% (34)% (34)% (34)%
State and local taxes
net of federal tax
benefits............... 4 4 (4) (4) (4)
Losses with no current
tax benefit............ -- -- 38 -- 38
Utilization of loss
carryforwards.......... (38) (38) -- -- --
(Decrease) increase in
valuation allowance.... (301) -- -- -- --
---- --- --- --- ---
(301)% -- % -- % (38)% -- %
==== === === === ===
13
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 9--TAXES ON INCOME--(continued)
Deferred income taxes result from temporary differences in the recognition
of revenue and expense for tax and financial statement purposes. The components
of deferred tax assets (liabilities) consist of the following:
Thirteen
Fiscal Year Ended Weeks Ended
----------------------- -----------
January 29, January 30, April 29,
2000 1999 2000
----------- ----------- -----------
(In thousands) (unaudited)
Net operating loss carryforward....... $6,042 $6,282 $7,559
Capitalizable inventory costs......... 566 342 566
Discontinued operations............... -- 711 --
Allowance for doubtful accounts....... -- 485 --
Restructured operations and other..... 487 680 487
------ ------ ------
Gross deferred tax assets........... 7,095 8,500 8,612
------ ------ ------
Depreciation.......................... (655) (827) (655)
------ ------ ------
Gross deferred tax liabilities...... (655) (827) (655)
------ ------ ------
Net deferred tax assets............... 6,440 7,673 7,957
Valuation allowance................... -- (7,673) --
------ ------ ------
Net tax assets........................ $6,440 $ -- $7,957
====== ====== ======
Valuation allowances, primarily attributable to the Federal net operating
loss carryforward, were established in fiscal 1996 through 1998 in accordance
with the provisions of SFAS No. 109, "Accounting for Income Taxes". The Company
reversed $6,440 of the valuation allowance in the current fiscal year based on
management's assessment that it is more likely than not that the net deferred
tax assets will be realized through future taxable earnings.
The Company has available net operating loss carryforwards of approximately
$16.0 million which expire between 2011 and 2013 and alternative minimum tax
credit carryovers of approximately $100 thousand which can be carried forward
indefinitely.
NOTE 10--EMPLOYEE RETIREMENT PLANS:
The Company has a 401-k savings plan designed to provide additional
financial security during retirement by providing eligible employees with an
incentive to make regular savings contributions. The Company previously matched
10% of the first 4% of compensation contributed by the employee. Effective
during fiscal year 2000, the Company's matching contribution increased to 25%
of the first 5% of compensation contributed.
The Company also has a non-qualified deferred compensation program which
permits key employees to defer a portion of their compensation until their
retirement.
14
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 11--EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted income
(loss) per share from continuing operations:
Fiscal Year Ended Thirteen weeks ending
----------------------------------- -----------------------
January 29, January 30, January 31, April 29, May 1,
2000 1999 1998 2000 1999
----------- ----------- ----------- ------------ ----------
(In thousands except share data) (unaudited)
Numerator
Net income (loss) from
continuing operations--
numerator for basic and
diluted income (loss)
per share.............. $9,683 $3,752 $(1,918) $ (2,476) $ (1,054)
------ ------ ------- ---------- ----------
Denominator
Denominator for basic
income (loss) per
share--weighted average
shares................. 7,603 7,588 7,580 7,605 7,599
Effect of dilutive
securities--employee
stock options.......... 158 134 7 106 253
------ ------ ------- ---------- ----------
Denominator for diluted
earnings per share--
weighted average
shares and dilutive
potential common
shares................ 7,761 7,722 7,587 7,711 7,852
------ ------ ------- ---------- ----------
Income (loss) per share--
continuing operations:
Basic................... $ 1.27 $ .49 $ (.25) $ (.33) $ (.14)
====== ====== ======= ========== ==========
Diluted................. $ 1.25 $ .49 $ (.25) $ (.33) $ (.14)
====== ====== ======= ========== ==========
In accordance with SFAS No. 128, as a result of losses from continuing
operations in fiscal 1998 and for the thirteen weeks ending April 29, 2000 and
May 1, 1999, the inclusion of stock options were antidilutive and, therefore,
were not utilized in the computation of diluted earnings per share.
NOTE 12--ACCOUNTING CHANGE:
In the first quarter of fiscal 2000, the Company adopted Statement of
Position ("SOP") 98-5, "Reporting on The Costs of Start-Up Activities". The
change involved expensing store pre-opening costs as incurred. Previously, the
Company capitalized such costs and amortized them over the first twelve months
of a store's operations.
15
NOODLE KIDOODLE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
NOTE 13--INTERIM FINANCIAL DATA (UNAUDITED):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands except share
data)
Fiscal Year Ended January 29, 2000:
Sales................................... $22,890 $20,795 $27,205 $64,148
Gross profit............................ 8,990 8,229 10,522 24,527
------- ------- ------- -------
Net income (loss):
Continuing operations.................. (1,054) (3,339) (2,996) 17,072
Discontinued operations................ -- -- 2,500 (950)
Accounting change...................... (314) -- -- 119
------- ------- ------- -------
Net income (loss)..................... $(1,368) $(3,339) $ (496) $16,241
Basic income (loss) per share:
Continuing operations.................. $ (.14) $ (.44) $ (.39) $ 2.24
Discontinued operation................. -- -- .33 (.12)
Accounting change...................... (.04) -- -- .02
------- ------- ------- -------
Net income (loss)..................... $ (.18) $ (.44) $ (.06) $ 2.14
Diluted income (loss) per share:
Continuing operations.................. $ (.14) $ (.44) $ (.39) $ 2.21
Discontinued operations................ -- -- .33 (.12)
Accounting change...................... (.04) -- -- .01
------- ------- ------- -------
Net income (loss)..................... $ (.18) $ (.44) $ (.06) $ 2.10
Weighted average shares:
Basic.................................. 7,599 7,604 7,604 7,605
Assuming dilution...................... 7,852 7,770 7,681 7,740
Fiscal Year Ended January 30, 1999:
Sales................................... $18,045 $18,431 $22,670 $48,740
Gross profit............................ 7,015 7,342 8,854 19,270
------- ------- ------- -------
Net income (loss)....................... $(1,049) $(1,525) $(1,554) $ 7,880
Net income (loss) per share:
Basic................................... $ (.14) $ (.20) $ (.20) $ 1.04
Assuming dilution....................... $ (.14) $ (.20) $ (.20) $ 1.00
Weighted Average Shares:
Basic................................... 7,580 7,587 7,592 7,594
Assuming dilution....................... 7,670 7,699 7,661 7,860
16