EXHIBIT 1
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SECURITIES AND EXCHANGE COMMISSION
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
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 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No:000-22679
WORLD OF SCIENCE, INC.
(Exact name of registrant as specified in its charter)
NEW YORK ▇▇-▇▇▇▇▇▇▇
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇, ▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (▇▇▇) ▇▇▇-▇▇▇▇
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 ▇▇▇▇ 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 ▇▇▇▇ if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to be the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the closing bid and ask
prices of the registrant's Common Stock as reported on NASDAQ on March 31, 1999
was $11,605,000. The number of shares of Common Stock, with $.01 par value,
outstanding on March 31, 1999 was 4,761,155 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 1999 Annual
Meeting of Stockholders, to be held June 10, 1999. Registrant's definitive Proxy
Statement will be filed with the Securities and Exchange Commission on or before
May 7, 1999.
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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 30, 1999, the Company operated
74 permanent stores and 71 seasonal stores in 29 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 1998, 36.0% of the Company's
total net sales were generated by seasonal stores, as compared to 44.6% in
fiscal 1997. 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 ▇▇▇▇▇ ▇▇▇▇-▇▇▇▇▇ and believes it uses
sales and ▇▇▇▇▇ ▇▇▇▇-▇▇▇▇▇ 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 78 permanent
World of Science stores, including four new permanent stores which have
opened since the beginning of fiscal 1999. The Company expects to open a
total of approximately 15 permanent stores in fiscal 1999 and approximately
20 permanent stores in fiscal 2000 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 1998 holiday selling season and currently
operates 64 seasonal stores. During the past three fiscal years, the
Company has only opened eight 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 1999 and fiscal 2000.
- INTERNET PRESENCE. The Company has maintained a web site since July, 1998,
which until recently, was used primarily to provide information on the
Company and its store locations. However, in the fall of 1998 the Company
began to offer a limited selection of its products for sale on the web
site. The Company has redesigned its web site and expanded its product
selection which, over the next several months, is expected to reach over
1,000 SKUs. The Company's web site will also be used for product
promotions, employment opportunities, corporate information and the
publication of a monthly newsletter. In April, 1999 the Company formed a
wholly-owned subsidiary named WOSI on the WEB, Inc. which will focus on the
operation of the web site.
- COMMITMENT TO STRONG INFRASTRUCTURE. The Company's expansion strategy
includes a commitment to make appropriate infrastructure investments. Over
the past three years, the Company has made significant investments in its
management information systems and distribution facilities, which have
contributed to efficiencies in inventory management and product
distribution. In the second quarter of fiscal 1997, the Company relocated
its distribution facility to a larger facility. The Company successfully
installed new point-of-sale software during the second and third quarter of
fiscal 1998. In the first quarter of fiscal 1999, the Company upgraded its
main computer which handles its financial and inventory management systems.
The Company periodically evaluates its store formats to maintain high
standards of attractiveness and an appropriate showcase for its science and
nature products.
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
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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.
- ACTIVITY KITS arts and crafts, behavioral science, archeology
and paleontology
- AMERICAN CRAFTSMAN limited production kaleidoscopes, glass and metal
sculptures, jewelry, pottery bowls, vases and
decorative pieces with natural images
- ANATOMY anatomical models, charts and books
- ANIMAL REPLICAS mammals, marine life, reptiles, amphibians and
insects represented in self- assembled, molded or
plush replicas
- APPAREL distinctive T-shirts, hats and kits for ties and
scarves
- ASTRONOMY telescopes, star finder charts, instructional models, solar
system charts and mobiles
- BIOLOGY microscopes, related labware, books for reference and science
projects, petri dishes, microscope sets and slide sets
- BIRD WATCHING binoculars, feeders, houses, field identification guides,
bird calls and books
- BOTANY & GARDEN fountains, seed kits, figurines, plant growing kits, garden
ACCESSORIES sculpture, wind chimes and bells
- CHEMISTRY experiment kits, science project resources, technical labware and
reference books
- DINOSAURS molded replicas, models, puzzles, games, books and 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
▇▇▇▇▇ ▇▇▇▇-▇▇▇▇▇ and it believes it uses sales and ▇▇▇▇▇ ▇▇▇▇-▇▇▇▇▇ to a lesser
degree than other retailers.
The price 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
1998 was $23.77 for the five-weeks ending December 26, 1998 and was $18.46 for
the entire fiscal year, as compared to $21.96 for the five-weeks ending December
27, 1997 and $17.18 for the entire fiscal 1997.
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 51.3% of total purchases in fiscal 1998, and 45.2% of total
purchases in fiscal 1997. There is currently one supplier, Ty, Inc., who
furnished product which represented 12.8% of sales in fiscal 1998. No single
supplier furnished products representing more than 6.2% of sales in fiscal 1997.
Inventory levels for each store, both on a SKU and dollar level, are
monitored weekly, with automatic replenishment orders made through the Company's
management information systems. This is accomplished based on a pre-determined,
maximum/minimum SKU stocking control system. Maximum/minimum SKU inventory
levels are reviewed and, if warranted, adjusted on a seasonal basis, most
notably in preparation for the year-end holiday selling season, and are closely
monitored for Company-wide stock reordering and initial holiday orders. The
Company typically ships products by ground freight for new store inventory
stocking or existing store replenishment orders. Replenishment orders are
typically filled within three days.
4
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 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, twelve
district managers and four area managers. The regional managers oversee the
Company's district managers, who, in turn, may supervise one or more area
managers. District managers also oversee specific stores that are not managed by
area managers. District and area managers are responsible for all aspects of the
operations of stores in defined market areas. World of Science stores are
generally staffed with one store manager, and permanent stores typically also
have an assistant store manager. Store managers are responsible for 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. Starting in 1997, the Company began updating its store format
to include more open storefronts and brighter interior spaces. Although the
Company generally ensures that all of its permanent stores employ the Company's
upscale decorative style, the Company may use less expensive facades and
fixtures to adapt to particular malls and markets. 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 620) for its management information
systems, which handles all major informational requirements of the Company's
business, including sales, warehousing and distribution, purchasing, inventory
control, merchandise planning and replenishment as well as various accounting
functions. At the store level, the Company uses a point-of-sale computer system
with the capability to provide sales data and to maintain perpetual inventory
data on a per-SKU basis. All software applications which run on the AS/400 are
licensed by World of Science and have been customized according to Company
specifications.
5
The Company tracks its inventory by electronic data interchange between the
AS/400 and the Company warehouse and its stores. All inventory is bar-coded
where practical. The system polls each of its stores each evening to upload
sales data, to update inventory status and to determine replenishment
requirements. Weekly sales information is retained for each store, allowing the
Company to analyze sales performance by store, market and SKU.
COMPETITION
Competition for consumer spending is highly intense among specialty
retailers, traditional department stores and mass merchants in regional shopping
malls and other high traffic retail locations. The Company competes against
other retailers for suitable real estate locations and qualified personnel. The
Company believes that its distinctive and traditional merchandise, educational
and entertaining shopping experience, superior customer service, use of seasonal
stores and price integrity distinguishes it from other specialty retailers. The
specialty retail business has few barriers to entry. In addition, as the Company
expands into new markets, its success may depend in part on its ability to gain
market share from established competitors. Many of the Company's competitors
have substantially greater financial, marketing and other resources than the
Company. There can therefore be no assurance that the Company will be able to
compete successfully with them in the future.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business is subject to substantial seasonal variations in
demand. Historically, a significant portion of the Company's sales and all of
its net income have been realized during the months of November and December,
and levels of sales and net income have generally been substantially lower from
January through October, resulting in losses in the first three fiscal quarters.
In preparation for its holiday selling season, the Company significantly
increases inventories and related indebtedness, hires an increased number of
temporary employees in its stores and distribution center, and incurs costs in
setting up seasonal store locations. If, for any reason, the Company's sales
were to be substantially below seasonal norms during the months of November and
December, or if the Company could not hire a sufficient number of qualified
employees during the peak periods, the Company's business, financial condition
and results of operations would be adversely affected. Quarterly results are
affected by the timing of new store openings and the amount of revenue
contributed by permanent and seasonal stores.
EMPLOYEES
As of January 30, 1999, the Company employed approximately 1,225 active
employees. The Company regularly supplements its work force with a significant
number of part-time employees during the holiday selling season. Substantially
all of the Company's part-time employees work at the store level. None of the
Company's employees are represented by labor unions and the Company believes its
employee relations are very good.
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.
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Management believes that the capacity of the corporate headquarters and
distribution center will be sufficient for the next 24 months.
At January 30, 1999, the Company operated 74 permanent stores and 71
seasonal stores in 29 states. The permanent stores occupied 170,321 gross square
feet of leased space, with the stores ranging in size from 1,000 to 3,200 square
feet. The Company's permanent stores typically have lease terms ranging from
seven to ten years, and the lease terms for existing permanent stores expire
between 2000 and 2009. 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 1998.
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
------- ------- ------- -------
1998 3 3/4 - 2 1/16 3 1/2 - 2 7/16 2 3/4 - 1 7/8 3 7/8 - 2 1/16
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 16, 1999, there were approximately 119 holders of record of the
Company's Common Stock and approximately 1,373 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 7 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 30, JANUARY 31, FEBRUARY 1, JANUARY 28, JANUARY 29,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AND STORE OPERATING DATA)
STATEMENT OF INCOME DATA:
Net sales ...................................... $ 60,709 $ 54,259 $ 44,563 $ 37,265 $ 31,335
Cost of sales and occupancy expenses ........... 40,473 35,922 28,630 23,957 20,788
----------- ----------- ----------- ----------- ------------
Gross profit ................................... 20,236 18,337 15,933 13,308 10,547
Selling, general and administrative
Expenses ..................................... 17,452 15,158 12,593 10,680 9,048
----------- ----------- ----------- ----------- ------------
Operating income ............................... 2,784 3,179 3,340 2,628 1,499
Interest expense, net .......................... 265 237 394 418 320
----------- ----------- ----------- ----------- ------------
Income before income taxes ..................... 2,519 2,942 2,946 2,210 1,179
Income tax expense ............................. 999 1,182 1,210 906 460
----------- ----------- ----------- ----------- ------------
Net income ..................................... $ 1,520 $ 1,760 $ 1,736 $ 1,304 $ 719
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Net income per share:
Basic ...................................... $ 0.31 $ 0.40 $ 0.50 $ 0.37 $ 0.21
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Diluted(2) ................................. $ 0.31 $ 0.40 $ 0.49 $ 0.35 $ 0.20
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
STORE OPERATING DATA:
Selected Permanent Store Data:
Number of stores at beginning of period ...... 56 44 37 33 27
Number of stores at end of period ............ 74 56 44 37 33
Total net sales .............................. $38,830,000 $30,055,000 $23,998,000 $20,241,000 $ 16,178,000
Percentage increase in comparable store
net sales(3)(4) ............................ 4.4% 1.5% 3.5% 3.1% 2.9%
Total square footage at end of period(5)...... 170,321 123,678 94,348 75,182 65,048
Average net sales per square foot(3)(5)....... $ 260 $ 262 $ 275 $ 272 $ 274
Average net sales per store(3)(5)...... $ 580,000 $ 572,000 $ 575,000 $ 544,000 $ 532,000
Selected Seasonal Store Data:
Number of stores at beginning of period....... 60 62 37 40 26
Peak number of stores during period(6) ....... 101 101 85 71 89
Total net sales .............................. $21,879,000 $24,204,000 $20,565,000 $17,019,000 $ 15,113,000
JANUARY 30, JANUARY 31, FEBRUARY 1, JANUARY 28, JANUARY 29,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ........................ $ 3,543 $ 6,742 $ 2,014 $ 1,620 $ 655
Working capital .................................. 12,266 14,819 5,818 4,972 4,479
Total assets ...................... 26,164 25,432 15,274 12,855 10,615
Total debt, including capital lease
Obligations .................................... 176 410 370 437 563
Stockholders' equity ............................. 21,823 20,952 10,480 8,745 7,441
(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 1994 and 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
$31.3 million in fiscal 1994 to $60.7 million in fiscal 1998, 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 74 permanent stores as of January 30, 1999.
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
1998 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 20 new permanent stores and closed two permanent stores in fiscal
1998, twelve new permanent stores were opened in fiscal 1997, and seven new
permanent stores were opened in fiscal 1996. The Company presently anticipates
opening a total of 15 new permanent stores in fiscal 1999, four of which had
been opened as of April 30, 1999. The Company operated 101 seasonal stores
during the fiscal 1998 holiday selling season and anticipates operating
approximately 100 seasonal stores during the fiscal 1999 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 1999 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 closed two
permanent stores in fiscal 1998.
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 1998, 1997, and
1996, were 4.4%, 1.5% and 3.5%, respectively. The number of comparable stores in
fiscal 1998, 1997, 1996, was 43, 37 and 33 respectively. Average net sales per
square foot declined in fiscal 1998 due to lower sales per square foot in new
permanent stores opened in fiscal 1997. Average sales per store increased in
fiscal 1998 due to the operation of larger stores opened in fiscal 1997.
The seasonal store program, which began in 1992, allows the Company to
expand its presence in the marketplace and take advantage of available in-line
mall retail space with minimal capital investment. Over the years the program
has made significant contributions to both sales and earnings while providing a
good testing ground for new permanent store locations. In fiscal 1997 and 1998
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 in July, 1997, 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.
The Company's sales were favorably impacted in fiscal 1998 and 1997 by
the popularity of particular plush products. For fiscal 1998 plush sales
accounted for 12.8% of total sales as compared to 4.4% in fiscal 1997. The
impact on fiscal 1998 was greater due in part to a special one-time purchase of
fast selling plush items which had a positive effect on both sales and operating
results during the third quarter of fiscal 1998.
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 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
---- ---- ----
Net Sales............................................................ 100.0% 100.0% 100.0%
Cost of sales and occupancy expenses................................. 66.7 66.2 64.2
----- ----- -----
Gross profit......................................................... 33.3 33.8 35.8
Selling, general and administrative expenses......................... 28.7 27.9 28.3
----- ----- -----
Operating income..................................................... 4.6 5.9 7.5
Interest expense, net................................................ 0.4 0.5 0.9
----- ----- -----
Income before income taxes........................................... 4.2 5.4 6.6
Income tax expense................................................... 1.7 2.2 2.7
----- ----- -----
Net income........................................................... 2.5% 3.2% 3.9%
----- ----- -----
----- ----- -----
COMPARISON OF FISCAL 1998 TO FISCAL 1997
SALES. Sales increased to $60.7 million from $54.3 million, an increase of $6.4
million, or 11.9%. Of this increase in sales: $7.6 million was attributable to
twenty new permanent stores opened during fiscal 1998 and twelve permanent
stores in operation for less than one year as of the beginning of fiscal 1997;
$1.1 million was attributable to increased comparable store sales. These
increases were partially offset by seasonal store sales declining $2.3 million
due to lower average seasonal store sales and the operation of fewer seasonal
stores. Comparable store sales for the Company's permanent stores increased 4.4%
in fiscal 1998.
COST OF SALES AND OCCUPANCY EXPENSES. Cost of sales and occupancy expenses
increased to $40.5 million from $35.9 million, an increase of 12.7%. As a
percentage of sales, it increased to 66.7% from 66.2%. The dollar increase was
due to increased store occupancy costs from more stores in operation in fiscal
1998 and increased costs of sales due to higher sales. The percentage of sales
increase was due to increased store occupancy costs being spread over a lower
than expected sales base caused by a decline in average seasonal store sales in
1998. Margins for products sold increased .7% due to favorable purchasing,
particularly of overseas products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $17.5 million from $15.2 million, an
increase of 15.1%. As a percentage of sales, it increased to 28.7% from 27.9%.
The dollar increase was due to supporting higher sales levels and an increased
number of stores in fiscal 1998. The percentage of sales increase was due to
increased selling, general and administrative expenses being spread over a lower
than expected sales base caused by a decline in average seasonal store sales in
1998.
INTEREST EXPENSE, NET. Net interest expense increased to $265,000 in fiscal 1998
from $237,000 in fiscal 1997, primarily as a result of higher average borrowings
during fiscal 1998.
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 of sales
increase was due to increased store occupancy costs being spread over a lower
than expected sales base caused by a decline in average seasonal 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.
10
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.
INFLATION AND SEASONALITY
The Company does not believe that inflation has had a material impact on
its operations during any of the periods presented above. There can be no
assurance; however, that its business will not be affected by inflation in the
future.
The Company's business is subject to substantial seasonal variations in
demand. Historically, a significant portion of the Company's sales and all of
its net income have been realized during the months of November and December,
and levels of sales and net income have generally been substantially lower from
January through October, resulting in losses in the first three fiscal quarters.
In preparation for its holiday selling season, the Company significantly
increases inventories and related indebtedness, hires an increased number of
temporary employees in its stores and distribution center, and incurs costs in
setting up seasonal store locations. If, for any reason, the Company's sales
were to be substantially below seasonal norms during the months of November and
December, or if the Company could not hire a sufficient number of qualified
employees during the peak periods, the Company's business, financial condition
and results of operations would be adversely affected. Quarterly results are
also affected by the timing of new store openings and the amount of revenue
contributed by permanent and seasonal stores.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's cash for working capital and capital
expenditures have been net cash flows from operating activities, capital lease
financings and bank borrowings. Seasonal working capital needs have been met
through short-term borrowings under a revolving line of credit.
The Company's primary capital requirements and working capital needs are
related to capital expenditures for new stores, purchase and upgrade of
management information systems and the purchase of inventory to meet seasonal
needs, particularly inventory for the holiday selling season. Cash flow from
operations amounted to $2.6 million in fiscal 1998 as compared to cash flow used
in operations of $1.2 million in fiscal 1997. This was due to decreased levels
of inventories and other working capital items. Inventory levels decreased in
fiscal 1998 to offset the significant increase incurred in fiscal 1997.
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 January 30, 1999, 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 line of credit peaked at
$13.6 million, $8.7 million, and $11.5 million during fiscal 1998, fiscal 1997,
and fiscal 1996, respectively, and averaged $3.9 million, $2.7 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, no amounts were outstanding at January 30, 1999. As of January 30,
1999, outstanding capital lease obligations and total debt amounted to $176,000,
all of which represented capital lease obligations. The capital lease
obligations have terms expiring in fiscal 2001.
In March, 1999 the Company received a three-year commitment from its lender
which provides for a revolving credit facility of up to $24.0 million to be used
for inventory financing, new store construction and general corporate purposes.
It is expected that the new bank agreement will be in place sometime in the
second quarter of fiscal 1999.
The capital expenditures associated with the opening of new permanent
stores range from $200,000 to $370,000 per store, before landlord build-out
allowances, if any, which vary from site to site. In addition, the Company
initially stocks each new permanent store with approximately $90,000 to $100,000
of inventory, with peak inventory levels during the holiday selling season
reaching approximately $150,000 per store. The capital expenditures associated
with opening a seasonal store are nominal as these stores require minimal
build-out and utilize reusable fixtures. Each seasonal store is initially
stocked with approximately $50,000 of inventory, with peak inventory levels
during the holiday selling season reaching approximately $80,000 per store. It
typically takes 4 to 6 months from the time a lease is executed to the opening
of a permanent store for business. The lead time for a seasonal store is
substantially shorter. Pre-opening expenses for both permanent and seasonal
stores are minimal, and are expensed as incurred.
11
Capital expenditures in fiscal 1998, net of landlord build-out allowances,
were $4.9 million, as compared to $2.6 million in fiscal 1997. The Company
anticipates capital expenditures of approximately $3.4 million in fiscal 1999.
In addition to the cost of new store construction, the Company expects to make
capital expenditures of approximately $200,000 to upgrade its main computer
system.
In April 1998, the Company's Board of Directors authorized a stock
repurchase program of up to $650,000 of the Company's common stock. The shares
may be repurchased, from time to time for a period of up to 24 months, through
open market purchases and privately negotiated transactions, subject to the
availability of shares and other market and financial conditions. In conjunction
with the stock repurchase program, the Company received approval under its
credit agreement to acquire up to $650,000 of the Company's common stock. The
Company repurchased 318,800 shares in the third quarter of fiscal 1998 for
$649,000. In December 1998, the Company's Board of Directors authorized and
received bank approval for a second repurchase program of up to $650,000 of the
Company's common stock under terms similar to the previous stock repurchase
program.
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.
YEAR 2000 MATTERS
THE YEAR 2000 ISSUE
Many existing computer programs utilized globally use only two digits to
identify a year in the date field. These programs, if not corrected, could fail
or create erroneous results after the century date changes on January 1, 2000 or
when otherwise dealing with dates later than December 31, 1999. This "Year 2000"
issue is believed to affect virtually all companies and organizations, including
the Company.
The Company relies on computer-based technology and utilizes a variety of
third-party hardware and software. The Company's retail functions, such as
merchandise procurement and distribution, inventory management, point of sale
systems and credit card account servicing exclusively use third-party software.
The Company's administrative functions, such as accounting, payroll and human
resource management also exclusively use third-party software. Third parties
with whom the Company has commercial relationships, including merchandise
vendors, banks, telecommunications services, and utilities are also highly
reliant on computer-based technology.
The Company has been in the process of resolving all significant Year 2000
issues since 1996. Since almost all the Company's information systems software
is licensed software from established software vendors, resolution is being
accomplished by means of upgrading existing software to versions which are Year
2000 compliant. At present, the Company expects to be fully Year 2000 compliant
with its own internal systems by the summer of 1999. All of the Company's
computer hardware is already Year 2000 compliant.
THE COMPANY'S COMPLIANCE PROGRAM
THIRD-PARTY INFORMATION TECHNOLOGY SYSTEMS
The Company has instituted a strategy of identifying and addressing Year 2000
issues affecting third-party information technology systems used by the Company
which includes contacting all third-party providers of computer hardware and
software to secure appropriate representations to the effect that such hardware
or software is or will timely be Year 2000 compliant. The Company has received
Year 2000 compliant versions of almost all third-party software and is currently
engaged in developing contingency plans as to third-party software used by the
Company in respect of which the Company has not received adequate assurance of
compliance to date.
NON-INFORMATION TECHNOLOGY (IT) SYSTEMS
The Company has undertaken a review of its non-IT Systems and is in the process
of implementing a remediation program in respect of such systems that are within
the control of the Company. The Company expects to complete this remediation
effort by June 30, 1999. In addition, the Company's centralized real estate
department will be communicating to the developers, landlords and property
managers of substantially all of the Company's properties. The Company's
expectation that the systems utilized in the management and operation of such
properties which are not within the Company's control are or will timely be Year
2000 compliant.
12
NON-INFORMATION TECHNOLOGY (IT) VENDORS AND SUPPLIERS
The Company procures its merchandise for resale and supplies for operational
purposes from a vast network of vendors located both within and outside the
United States. As a part of its contingency planning effort, the Company has
commenced making inquiries as to the Year 2000 readiness of selected vendors in
order to identify any significant exposures that may exist and establish
alternate sources or strategies where necessary.
COSTS
Since the cost of resolving the Year 2000 issue is included in most cases,
through existing software maintenance contracts, the incremental cost to the
Company is minimal and not material.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
The Company's Year 2000 compliance program is directed primarily towards
ensuring that the Company will be able to continue to perform three critical
functions: (i) effect sales, (ii) order, receive and distribute merchandise, and
(iii) pay its employees and vendors. It is difficult, if not impossible, to
assess with any degree of accuracy the impact on any of these three areas of the
failure of one or more aspects of the Company's compliance program.
The novelty and complexity of the issues presented and the proposed solutions
thereof and the Company's dependence on the technical skills of employees and
independent contractors and on the representations and preparedness of third
parties are among the factors that could cause the Company's efforts to be less
than fully effective.
Moreover, Year 2000 issues present a number of risks that are beyond the
Company's reasonable control, such as the failure of utility companies to
deliver electricity, the failure of telecommunications companies to provide
voice and data services, the failure of financial institutions to process
transactions and transfer funds, the failure of vendors to deliver merchandise
or perform services required by the Company and the collateral effects on the
Company of the effects of Year 2000 issues on the economy in general or on the
Company's business partners and customers in particular. Although the Company
believes that its Year 2000 compliance program is designed to appropriately
identify and address those Year 2000 issues that are subject to the Company's
reasonable control, there can be no assurance that the Company's efforts in this
regard will be fully effective or that Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition or results of
operations. While the Company expects to be fully compliant with the Year 2000
with its own systems well in advance of the Year 2000, a material financial risk
could result if the Company's vendors are unable to resolve such processing
issues in timely manner.
CONTINGENCY PLANS
The Company is in the process of accessing the readiness of all relevant parties
associated with its Year 2000 compliance program, and determining the risks
associated with Year 2000 non-compliance upon its operations. As the Company
gathers and analyzes the necessary information to make the proper assessment, a
contingency plan will be formulated to handle any foreseen potential problems
which may result. The Company will also formulate a back-up emergency plan of
action in case of any unforeseen problems which may occur on January 1, 2000.
These plans are expected to be in place by June 30, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................................................................................ 15
Balance Sheets as of January 30, 1999 and January 31, 1998.................................................................. 16
Statements of Income for the years ended January 30, 1999, January 31, 1998 and February 1, 1997............................ 17
Statements of Stockholders' Equity for the years ended January 30, 1999, January 31, 1998 and February 1, 1997.............. 18
Statements of Cash Flows for the years ended January 30, 1999, January 31, 1998 and February 1, 1997....................... 19
Notes to Financial Statements including supplementary data entitled
"Selected Quarterly Financial Data (Unaudited)"............................................................................. 20-28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
None
14
INDEPENDENT AUDITORS' REPORT
The Board of Directors
World of Science, Inc.:
We have audited the accompanying balance sheets of World of Science, Inc.
as of January 30, 1999 and January 31, 1998, and the related statements of
income, stockholders' equity and cash flows for each of the years in the
three-year period ended January 30, 1999. 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 30, 1999 and January 31, 1998, and the results of its operations and its
cash flows for each of the years in the three-year period ended January 30,
1999, in conformity with generally accepted accounting principles.
KPMG LLP
Rochester, New York
March 15, 1999
15
WORLD OF SCIENCE, INC.
BALANCE SHEETS
JANUARY 30, JANUARY 31,
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 3,543,028 $ 6,742,061
Accounts receivable........................................................... 442,883 113,488
Inventories................................................................... 10,224,528 10,404,033
Prepaid expenses and other current assets..................................... 739,326 532,631
Deferred income taxes......................................................... 664,000 551,000
----------- -----------
Total current assets..................................................... 15,613,765 18,343,213
Property, equipment and leasehold improvements, net................................ 9,678,485 6,430,674
Deferred income taxes.............................................................. 872,000 658,000
----------- -----------
Total assets............................................................. $26,164,250 $25,431,887
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt........................................ $ -- $ 68,695
Current installments of obligations under capital leases...................... 93,606 165,652
Accounts payable.............................................................. 1,362,163 1,319,534
Accrued expenses.............................................................. 496,606 408,838
Accrued sales taxes........................................................... 150,499 161,332
Income taxes payable.......................................................... 1,245,178 1,400,351
----------- -----------
Total current liabilities................................................ 3,348,052 3,524,402
Obligations under capital leases, excluding current installments................... 82,148 175,837
Accrued occupancy expense.......................................................... 911,049 779,451
----------- -----------
Total liabilities........................................................ 4,341,249 4,479,690
----------- -----------
Commitments and contingencies (notes 5, 7, 9 and 12)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 5,000,000 shares;
no shares issued and outstanding........................................... -- --
Common stock, $.01 par value. Authorized 10,000,000 shares;
issued 5,079,955 shares.................................................... 50,800 50,800
Additional paid-in capital.................................................... 11,398,143 11,398,143
Retained earnings............................................................. 11,023,483 9,503,254
Treasury stock, 318,800 shares at cost........................................ (649,425) --
----------- -----------
Total stockholders' equity............................................... 21,823,001 20,952,197
----------- -----------
Total liabilities and stockholders' equity............................... $26,164,250 $25,431,887
----------- -----------
----------- -----------
See accompanying notes to financial statements.
16
WORLD OF SCIENCE, INC.
STATEMENTS OF INCOME
YEAR ENDED
--------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
---- ---- ----
Net sales................................................................. $ 60,709,470 $ 54,259,279 $ 44,562,851
Cost of sales and occupancy expenses...................................... 40,472,690 35,922,111 28,629,721
------------ ------------ ------------
Gross profit......................................................... 20,236,780 18,337,168 15,933,130
Selling, general and administrative expenses.............................. 17,452,990 15,157,933 12,592,779
------------ ------------ ------------
Operating income..................................................... 2,783,790 3,179,235 3,340,351
Interest expense, net..................................................... 264,561 237,106 394,505
------------ ------------ ------------
Income before income taxes........................................... 2,519,229 2,942,129 2,945,846
Income tax expense........................................................ 999,000 1,182,000 1,210,000
------------ ------------ ------------
Net income........................................................... $ 1,520,229 $ 1,760,129 $ 1,735,846
------------ ------------ ------------
------------ ------------ ------------
Net income per share - basic......................................... $ 0.31 $ 0.40 $ 0.50
------------ ------------ ------------
------------ ------------ ------------
Net income per share - diluted....................................... $ 0.31 $ 0.40 $ 0.49
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to financial statements.
17
WORLD OF SCIENCE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Treasury Total
------------ Paid-In Retained Stock Stockholders'
Shares Amount Capital Earnings at Cost Equity
--------- ------- ----------- ----------- --------- ------------
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
Repurchase of common stock .................. -- -- -- -- (649,425) (649,425)
Net income .................................. -- -- -- 1,520,229 -- 1,520,229
--------- ------- ----------- ----------- --------- ------------
Balance at January 30, 1999 ................. 5,079,955 $50,800 $11,398,143 $11,023,483 $(649,425) $ 21,823,001
--------- ------- ----------- ----------- --------- ------------
--------- ------- ----------- ----------- --------- ------------
See accompanying notes to financial statements.
18
WORLD OF SCIENCE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED
-----------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income ........................................................... $ 1,520,229 $ 1,760,129 $ 1,735,846
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 1,654,838 1,349,662 1,280,266
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable ........................................... (329,395) (59,149) 11,155
Inventories ................................................... 179,505 (3,476,996) (955,196)
Prepaid expenses and other current assets ..................... (206,695) (146,450) (136,480)
Deferred income taxes ......................................... (327,000) (301,000) (292,000)
(Decrease) increase in:
Accounts payable .............................................. 42,629 (249,692) 215,353
Accrued expenses .............................................. 87,768 (227,466) (36,352)
Accrued sales taxes ........................................... (10,833) 69,662 7,153
Income taxes payable .......................................... (155,173) (63,076) 456,328
----------- ----------- -----------
Accrued occupancy expense ..................................... 131,598 116,561 107,788
----------- ----------- -----------
Net cash provided by (used in) operating activities ........ 2,587,471 (1,227,815) 2,393,861
----------- ----------- -----------
Cash flows from investing activities -- capital
expenditures, net of minor disposals ................................. (4,902,649) (2,584,079) (1,691,854)
Cash flows from financing activities:
Repurchase of common stock ........................................... (649,425) -- --
Net proceeds from issuance of common stock ........................... -- 8,711,693 --
Principal payments on long-term debt ................................. (68,695) (68,922) (63,918)
Principal payments on capital leases ................................. (165,735) (103,069) (243,879)
----------- ----------- -----------
Net cash provided by (used in) financing activities ..................... (883,855) 8,539,702 (307,797)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents .................... (3,199,033) 4,727,808 394,210
Cash and cash equivalents at beginning of year .......................... 6,742,061 2,014,253 1,620,043
----------- ----------- -----------
Cash and cash equivalents at end of year ................................ $ 3,543,028 $ 6,742,061 $ 2,014,253
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ........................................................... $ 353,429 $ 281,136 $ 405,624
Income taxes ....................................................... $ 1,481,173 $ 1,559,077 $ 1,045,671
----------- ----------- -----------
----------- ----------- -----------
Noncash investing and financing activity:
Acquisition of equipment under a capital lease ....................... $ -- $ 212,539 $ 240,345
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to financial statements.
19
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS
THREE-YEAR PERIOD ENDED JANUARY 30, 1999
(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.
The Company currently operates 74 permanent World of Science stores,
including 20 new permanent stores in fiscal 1998. Permanent stores typically
operate under 7 to 10 year leases in mall locations.
The Company also operated 101 World of Science seasonal stores during the
fiscal 1998 holiday season of which 71 were still open at the end of fiscal
1998. Seasonal stores operate under shorter-term lease agreements ranging from
month to month to three years. Although seasonal store leases do not include a
long-term commitment with mall owners, management fully expects to renew or
replace these leases for the fiscal 1999 holiday season.
FISCAL YEAR
Reference to a fiscal year refers to the calendar year in which such fiscal
year commences. Accordingly, fiscal 1998 ended on January 30, 1999, fiscal 1997
ended on January 31, 1998 and fiscal 1996 ended on February 1, 1997.
The Company's fiscal year ends on the Saturday closest to January 31. There
were 52 weeks in fiscal year 1998, 52 weeks in fiscal 1997 and 53 weeks in
fiscal 1996.
CASH EQUIVALENTS
Cash equivalents consist of amounts on deposit with banks and money market
funds.
INVENTORIES
Inventories, which consist of goods ready for retail sale are stated at the
lower of weighted average cost or market.
TREASURY STOCK
Treasury stock is reported using the cost method.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are stated at cost.
Depreciation is computed for book and tax purposes using straight-line and
accelerated methods over the following periods:
Furniture, equipment and temporary store fixtures................................ 4-9 years
Leasehold improvements........................................................... 4-10 years (or lease term, if shorter)
Truck............................................................................ 4 years
Construction allowances received from shopping mall operators, consisting
of cash payments and/or free rent periods, are deducted from the cost of
leasehold improvements.
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.
20
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period which includes the
enactment date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STORE OPENINGS AND CLOSINGS
The Company expenses all costs associated with the opening of a store in
the current period, with the exception of leasehold improvements and fixtures
which are capitalized. The Company accrues the anticipated cost of closing a
store, including remaining lease obligations, if any, and the undepreciated cost
of leasehold improvements in the period in which the decision to close the store
is made.
STOCK OPTION PLANS
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 Statement of Financial Accounting Standards (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.
Basic net income per share for fiscal 1998, 1997 and 1996 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.
21
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ACCOUNTING STANDARDS PRONOUNCEMENTS
During 1998, the Company adopted the provisions of SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. The adoption of SFAS No. 130
does not impact the Company's financial statements.
During 1998, the Company adopted SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 requires public companies to
report certain financial and other information about key revenue-producing
segments for which such information is available and utilized by the chief
operating decision maker.
Specific information to be reported for individual segments include profit
and loss, certain revenue and expense items, and total assets. As a specialty
retailer the Company's operations involve the marketing and distribution of
science and nature related products through its retail stores. Management makes
operating decisions and assesses performance based upon an ongoing review of
each retail store performance, which constitute the Company's only operating
segments for financial reporting purposes. Therefore, the adoption of SFAS No.
131 does not impact the Company's financial statements.
(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 an 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) TREASURY STOCK
During 1998, the Company's Board of Directors authorized two common stock
repurchase programs of up to $650,000 each of the Company's common stock. In
October 1998, the Company repurchased 318,800 shares of common stock for
$649,425.
(4) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of property, equipment and leasehold improvements follows:
JANUARY 30, JANUARY 31,
1999 1998
----- ----
Leasehold improvements--open stores.......................................... $ 10,706,098 $ 6,781,074
Furniture, equipment and temporary store fixtures............................ 4,689,580 4,046,452
Construction in progress - stores under construction......................... 611,112 434,249
------------ ------------
16,006,790 11,261,775
Less accumulated depreciation and amortization............................... 6,328,305 4,831,101
------------ ------------
$ 9,678,485 $ 6,430,674
============ ============
Construction allowances received from shopping mall developers totaling
$1,332,248 and $1,050,463 in fiscal 1998 and 1997, respectively, have been
recorded as reductions of leasehold improvements.
Construction in progress at January 30, 1999 consists of leasehold
improvements and fixtures for stores which will be opening in fiscal 1999. All
stores with construction in progress at January 31, 1998 were opened during the
year ended January 30, 1999.
22
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) 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 15, 1999 and the present value of future minimum capital
lease payments as of January 30, 1999 are as follows:
CAPITAL OPERATING
LEASES LEASES
------- ---------
Fiscal year:
1999........................................................................ $ 98,148 $ 7,764,261
2000........................................................................ 73,044 5,563,032
2001........................................................................ 11,768 5,440,340
2002........................................................................ -- 5,133,764
2003........................................................................ -- 4,475,454
After 2003.................................................................. -- 15,396,759
--------- -----------
Total minimum lease payments................................................ 182,960 $43,773,610
===========
Less amount representing interest................................................ 7,206
---------
Present value of net minimum capital lease payments.............................. 175,754
Less current installments of obligations under capital leases.................... 93,606
---------
Obligations under capital leases, excluding current installments................. $ 82,148
=========
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 $176,261, $257,739, and $212,559 for fiscal years
1998, 1997 and 1996, respectively.
Total rent expense under all leases amounted to $11,163,190, $9,596,122,
and $7,090,192 for fiscal years 1998, 1997 and 1996, respectively.
(6) INCOME TAXES
Income tax expense (benefit) for fiscal years 1998, 1997, and 1996,
consists of the following:
FEDERAL STATE TOTAL
------- ----- -----
1998
Current....................................................... $ 1,051,000 $ 275,000 $1,326,000
Deferred...................................................... (263,000) (64,000) (327,000)
----------- ---------- ----------
$ 788,000 $ 211,000 $ 999,000
=========== ========== ==========
1997
Current....................................................... $ 1,151,000 $ 332,000 $1,483,000
Deferred...................................................... (250,000) (51,000) (301,000)
----------- ---------- ----------
$ 901,000 $ 281,000 $1,182,000
=========== ========== ==========
1996
Current....................................................... $ 1,163,000 $ 339,000 $1,502,000
Deferred...................................................... (242,000) (50,000) (292,000)
----------- ---------- ----------
$ 921,000 $ 289,000 $1,210,000
=========== ========== ==========
23
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the expected tax expense, computed by applying the
statutory income tax rate of 34% to income before income taxes, to the actual
income tax expense follows:
1998 1997 1996
--------- ---------- ----------
Computed expected tax expense.................................... $ 852,000 $1,000,000 $1,002,000
State taxes, net of federal benefit.............................. 139,000 185,000 191,000
Other, net....................................................... 8,000 (3,000) 17,000
--------- ---------- ----------
$ 999,000 $1,182,000 $1,210,000
========= ========== ==========
Effective tax rate.......................................... 39.7% 40.2% 41.0%
========= ========== ==========
The significant components of deferred tax assets are presented below:
JANUARY 30, JANUARY 31,
1999 1998
----- ----
Deferred tax assets:
Inventory.................................................................. $ 619,000 $ 515,000
Accrued occupancy expense.................................................. 364,000 320,000
Depreciation............................................................... 535,000 339,000
Other...................................................................... 18,000 35,000
---------- ----------
Total gross deferred tax assets....................................... 1,536,000 1,209,000
Less valuation allowance................................................... -- --
---------- ----------
Net deferred tax assets............................................... $1,536,000 $1,209,000
========== ==========
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.
(7) LINES OF CREDIT
The Company has an available revolving 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 30, 1999 and January
31, 1998.
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 30, 1999 and
January 31, 1998 no banker acceptances were outstanding, and the Company was
contingently liable under outstanding letters of credit of $15,040 and $28,272,
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 $650,000 in aggregate in any fiscal year. The Company was in
compliance with such covenants at January 30, 1999.
The maximum outstanding balance under this line of credit during fiscal
years 1998 and 1997 was $13,600,000 and $8,705,000, respectively. The average
balance outstanding was $3,886,000 and $2,722,000 for fiscal 1998 and 1997,
respectively.
24
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On March 10, 1999, the Company received an increased revolving line of
credit commitment from its lender. The three-year commitment provides for a
revolving credit facility of $24,000,000, up from $16,000,000, to be used for
inventory financing, new store construction and general corporate purposes.
(8) 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. There were no borrowings
outstanding under this line at January 30, 1999. The increase in the Company's
revolving line of credit discussed in note 7 includes $4,000,000 for multiple
term loans to be used for leasehold improvements and equipment.
(9) BENEFIT PLANS
The Company does not currently offer and has not offered in the past,
postemployment or postretirement benefits to its current or former employees,
and accordingly, does not have a recorded liability for such benefits.
The Company sponsors a 401(k) plan for all employees who have met certain
eligibility requirements. The Company matches 50% of employee contributions to
the plan up to a maximum match of 2.5% of employee compensation. For fiscal
1998, 1997 and 1996, total expenses under the plan were $60,250, $71,027, and
$66,532, respectively.
(10) NET INCOME PER SHARE
Basic and diluted earnings per share for the years ended January 30, 1999,
January 31, 1998, and February 1, 1997 are as follows:
Weighted
Net Average Earnings
Income Shares per Share
------ ------ ---------
For the Year Ended January 30, 1999
-----------------------------------
Basic EPS............................................ $1,520,229 4,947,246 $0.31
=====
Dilutive effect of Outstanding Stock Options......... 16,646
---------
Diluted EPS.......................................... $1,520,229 4,963,892 $0.31
========== ========= =====
For the Year Ended January 31, 1998
-----------------------------------
Basic EPS............................................ $1,760,129 4,361,823 $0.40
=====
Dilutive effect of Outstanding Stock Options......... 83,246
---------
Diluted EPS.......................................... $1,760,129 4,445,069 $0.40
========== ========= =====
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
========== ========= =====
25
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(11) STOCK OPTIONS AND WARRANTS
The Company has two Stock Option Plans (the Plans) for employees and
directors. The Plans authorize the issuance of options to purchase up to 640,000
shares of the Company's common stock. The Plans provide for options which may be
issued as qualified incentive stock options under Section 422A of the Internal
Revenue Code of 1986, as amended, as well as nonqualified stock options.
Options under the Plans are granted at the discretion of the Board of
Directors. The exercise price of qualified incentive stock options under the
Plans will not be less than the fair market value of the Company's stock at the
date of grant, except in the case of an optionee owning more than 10% of the
total combined voting power of all classes of stock of the Company, the price at
which shares of stock may be purchased shall not be less than 110% of the fair
market value. Options to the extent vested can be exercised immediately. The
options expire five years from the date of grant for options granted to a person
then owning more than 10% of the voting power of all common stock and ten years
from the date of grant for all other non-employee directors, officers and
employees. Stock appreciation rights may be granted in connection with stock
options. Such rights are exercisable by the optionee at any time a related
option could be exercised, and are payable in cash, common stock or any
combination. The exercise of a stock appreciation right results in cancellation
of the related option. No stock appreciation rights have been granted under the
Plans.
Options granted to employees 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 30, 1999, there were 380,000 shares available for grant under
the Plans. No shares were granted during fiscal 1998. The per share
weighted-average fair value of stock options granted during fiscal 1997 and 1996
were $1.13 and $4.37. 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:
1998 1997 1996
---- ---- ----
Expected life (years)....................... -- 5.0 5.0
Dividend yield.............................. -- -- --
Risk-free interest rate..................... -- 6.00% 6.72%
Expected volatility......................... -- 73.31% 53.50%
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:
1998 1997
---- ----
Net income:
As reported............................................................. $ 1,520,229 $ 1,760,129
Pro forma............................................................... 1,464,362 1,700,529
Net income per share - basic:
As reported............................................................. $ 0.31 $ 0.40
Pro forma............................................................... 0.30 0.39
Net income per share - diluted:
As reported............................................................. $ 0.31 $ 0.40
Pro forma............................................................... 0.30 0.38
Proforma net income reflects only options granted subsequent to January 28,
1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of five years and compensation cost for options granted prior to fiscal
1996 is not considered.
26
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of the change in options outstanding for fiscal
1998, 1997 and 1996:
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
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
Granted..................................................................... -- --
Exercised................................................................... -- --
Terminated.................................................................. -- --
-------
Outstanding at January 30, 1999.................................................. 168,000 $ 2.89
======= ======
At January 30, 1999, 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 6 years $2.26 70,000 $2.13
$3.00 - 4.75 78,000 8 years 3.63 44,800 3.60
------- ------- ----- ------- -----
168,000 7 years $2.89 114,800 $2.73
======= ===== ======= =====
(12) 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
WORLD OF SCIENCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(13) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for fiscal 1998 and 1997 follows (in
thousands except per share data):
First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year
------------- -------------- ------------- -------------- -----------
FISCAL 1998
Net sales....................... $ 7,863 $ 8,593 $ 10,594 $ 33,659 $ 60,709
Gross profit ................... 1,526 1,513 2,313 14,884 20,236
Operating income (loss)......... (1,847) (1,934) (2,127) 8,691 2,783
Net income (loss)............... (1,079) (1,177) (1,384) 5,160 1,520
Net income (loss) per share:
Basic...................... (0.21) (0.23) (0.28) 1.08 0.31
Diluted ................... (0.21) (0.23) (0.28) 1.08 0.31
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)
(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
▇▇▇▇ ▇. ▇▇▇▇▇▇▇................................................. 62 Chairman of the Board of Directors, President and
Chief Executive Officer
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇............................................. 49 Vice President of Finance, Chief Financial Officer and
Assistant Secretary
▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇.............................................. 46 Vice President of Operations
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇............................................... 56 Secretary, Director
▇▇▇▇▇▇ ▇. ▇▇▇▇▇................................................. 56 Director
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ ............................................. 52 Director
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ 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.
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ has served as Vice President of Finance and Chief
Financial Officer of the Company since 1994, and as Assistant Secretary since
1992. ▇▇. ▇▇▇▇▇▇▇▇ joined the Company as Controller in 1992. He has over 25
years of experience in accounting and financial management including five years
with KPMG LLP.
▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ has served as Vice President of Operations of the
Company since 1996. ▇▇. ▇▇▇▇▇ joined the Company in 1990 as a Regional Manager.
From 1992 until 1996, ▇▇. ▇▇▇▇▇ served as Director of Operations. Prior to
joining the Company, ▇▇. ▇▇▇▇▇ 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. ▇▇. ▇▇▇▇▇ has additional consulting experience
in the areas of operations and sales training.
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ has served as Secretary and a Director of the Company
since 1969. ▇▇. ▇▇▇▇▇▇ is a partner in the law firm of Darweesh, Callen, ▇▇▇▇▇ &
▇▇▇▇▇▇▇▇▇, which is legal counsel to the Company.
▇▇▇▇▇▇ ▇. ▇▇▇▇▇ has served as a Director of the Company since 1992. Since
1969, ▇▇. ▇▇▇▇▇ has served as the Chairman of the Board of Directors and Chief
Executive Officer of both ▇▇▇▇▇▇▇ ▇▇▇▇▇ & Associates, Inc., and its parent
company, ▇▇▇▇▇▇▇ ▇▇▇▇▇ Financial, Inc. ▇▇. ▇▇▇▇▇ also serves as a Director of
Heritage Family of Funds, Inc.
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ has served as a Director of the Company since 1998.
Since 1996, ▇▇. ▇▇▇▇▇▇▇ has served as Vice President, Finance and Customer
Administration for Xerox Corporation's United States Customer Operations
Organization. Prior to assuming his current position, ▇▇. ▇▇▇▇▇▇▇ held various
positions with Xerox since 1970.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated by reference from the
definitive Proxy Statement for the registrant's 1999 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 1999 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 1999 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 are filed under Part II, Item 8.
PAGE
----
Independent Auditors' Report................................................................................................ 15
Balance Sheets as of January 30, 1999 and January 31, 1998.................................................................. 16
Statements of Income for the years ended January 30, 1999, January 31, 1998 and February 1, 1997............................ 17
Statements of Stockholders' Equity for the years ended January 30, 1999, January 31, 1998 and February 1, 1997.............. 18
Statements of Cash Flows for the years ended January 30, 1999, January 31, 1998 and February 1, 1997........................ 19
Notes to Financial Statements including supplementary data entitled
"Selected Quarterly Financial Data (Unaudited)"............................................................................. 20-28
2. FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because they
are not applicable or are not required.
3. EXHIBITS
A list of Exhibits required to be filed as part of this
report is incorporated by reference on page 32 of this
report.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the fourth quarter of fiscal 1998.
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 29, 1999 WORLD OF SCIENCE, INC.
(Registrant)
By: /S/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
-----------------------------------------------
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
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/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
--------------------------------------------------------------- Chairman of the Board, President
(▇▇▇▇ ▇. ▇▇▇▇▇▇▇) and Chief Executive Officer
/S/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ Vice President, Finance,
--------------------------------------------------------------- Chief Financial Officer, and Assistant
(▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇) Secretary (Principal Accounting
and Financial Officer)
/S/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
--------------------------------------------------------------- Director
(▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇)
/S/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
--------------------------------------------------------------- Director
(▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇)
/S/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇
--------------------------------------------------------------- Director
(▇▇▇▇▇▇ ▇. ▇▇▇▇▇)
Date: April 29, 1999
31
INDEX TO EXHIBITS
EXHIBIT INCORPORATED HEREIN FILED
NO. DESCRIPTION BY REFERENCE TO HEREWITH
--- ----------- --------------- --------
3.1 Form of Restated Certificate of Incorporation of the Company. Exhibit 3.1 to World of
Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
3.2 Form of Bylaws of the Company, as amended. Exhibit 3.2 to World of
Science, Inc's Fiscal
1997 Form 10-K Report
4 Specimen Certificate of Common Stock of the Company. Exhibit 4 to World of
Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.1* Employment Agreement dated February 1, 1996 by and between the Exhibit 10.1 to World
Company and ▇▇▇▇ ▇. ▇▇▇▇▇▇▇. of Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.2* Covenant Not-to-Compete and Non-Disclosure Agreement dated June, 1989 of Exhibit 10.2 to World
▇▇▇▇ ▇. ▇▇▇▇▇▇▇. of Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.3* 1993 Employee Stock Option Plan of the Company. Exhibit 10.3 to World
of Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.4* 1989 Incentive Stock Option Plan of the Company. Exhibit 10.4 to World
of Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.5 Lease Agreement dated as of September 11, 1968 between the Company and Exhibit 10.5 to World
Genesee Valley Regional Market Authority, together with all amendments of Science, Inc's
thereto. Registration Statement
on Form S-1 (No.
333-25031)
10.6 Lease Agreement dated as of March 29, 1994 between the Company and BF Exhibit 10.6 to World
Realty Investors Rochester II Limited Partnership. of Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
10.7 Sublease dated as of March 31, 1997 between the Company and Tertrac Exhibit 10.7 to World
Associates. of Science, Inc's
Registration Statement
on Form S-1 (No.
333-25031)
11.1 Computation of Earnings Per Share. X
23.1 Consent of KPMG LLP. X
27.1 Financial Data Schedule. X
* Plan or agreement pursuant to which the Company's officers or directors
have received compensation.
32