10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 10-Q (Mark One) [ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 29, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period from __________________ to _________________ Commission file number 1-6083 NOODLE KIDOODLE, INC. (Exact name of Registrant as specified in its charter) DELAWARE 11-1771705 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 6801 JERICHO TURNPIKE, SYOSSET, NEW YORK 11791 (Address of Principal Executive Office) (Zip Code) Registrant's Telephone Number, Including Area Code (516) 677-0500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. YES X No ___ As of June 2, 2000, there were 7,608,640 outstanding shares of the issuer's common stock, par value $.001 per share (excluding 898,261 treasury shares). TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page Item 1. - Financial Statements (Unaudited) Condensed Consolidated Balance Sheets April 29, 2000, May 1, 1999 and January 29, 2000 3 Condensed Consolidated Statements of Operations Thirteen Weeks Ended April 29, 2000 and May 1, 1999 4 Condensed Consolidated Statements of Cash Flows Thirteen Weeks Ended April 29, 2000 and May 1, 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. - Quantitative and Qualitative Disclosures About 11 Market Risk PART II - OTHER INFORMATION 13 SIGNATURES 14
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS NOODLE KIDOODLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS UNAUDITED
April 29, January 29, May 1, 2000 2000 1999 (In thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 541 $ 491 $ 4,792 Merchandise inventories 34,470 33,610 25,901 Prepaid expenses and other current assets 3,093 3,244 1,850 Deferred income taxes 2,965 1,448 - Total current assets 41,069 38,793 32,543 Property, plant and equipment - net 28,931 28,931 23,327 Other assets Deferred income tax 4,992 4,992 - Other 163 166 27 5,155 5,158 27 Total Assets $75,155 $72,882 $55,897 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 8,955 $ 4,019 $ 21 Trade accounts payable 10,403 9,498 11,237 Accrued expenses and taxes 8,876 9,976 6,319 Net liabilities of discontinued operations - - 1,333 Total current liabilities 28,234 23,493 18,910 Long-term debt 684 689 702 Commitments and contingencies - - - Stockholders' equity: Preferred stock-authorized 1,000,000 shares, par value $.001,(none issued) - - - Common stock-authorized 15,000,000, par value $.001, issued 8,506,901 shares 9 9 9 Capital in excess of par value 43,098 43,097 43,098 Accumulated deficit 6,815 9,291 (3,115) 49,922 52,397 39,992 Less treasury stock, at cost, 898,261, 903,661 and 901,261 shares, respectively 3,685 3,697 3,707 Total stockholders' equity 46,237 48,700 36,285 Total Liabilities and Stockholders' Equity $75,155 $72,882 $55,897 See accompanying notes to Condensed Consolidated Financial Statements.
3 NOODLE KIDOODLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
Thirteen Weeks Ended April 29, May 1, 2000 1999 (In thousands, except per share data) Net sales $24,072 $22,890 Costs and expenses: Cost of product sold including buying and warehousing costs 15,178 13,900 Selling and administrative expenses 12,695 10,103 27,873 24,003 Operating loss (3,801) (1,113) Interest income 1 80 Interest expense (193) (21) Loss before income tax and cumulative effect of a change in accounting principle (3,993) (1,054) Income taxes (benefit) (1,517) - Loss before cumulative effect of a change in accounting principle (2,476) (1,054) Cumulative effect of a change in accounting principle - 314 Net loss $(2,476) $(1,368) Net loss per share basic and diluted: Before cumulative effect of a change in accounting principle $ (0.33) $ (0.14) Cumulative effect of a change in accounting principle - (0.04) Net loss per share $ (0.33) $ (0.18) Weighted average shares outstanding 7,605 7,599 See accompanying notes to Condensed Consolidated Financial Statements
4 NOODLE KIDOODLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
Thirteen Weeks Ended April 29, May 1, 2000 1999 (In thousands) Cash flows from operating activities: Net loss before cumulative effect of a change in accounting principle $(2,476) $(1,054) Adjustments to reconcile to net cash provided (used): Depreciation 1,108 817 Deferred income taxes (1,517) - Decrease (increase) in non-cash working capital accounts: Merchandise inventories (860) (4,827) Prepaid expenses, taxes and other current assets 151 1,616 Trade accounts payable, accrued expenses and taxes (195) (758) Net cash (used in) continuing operations (3,789) (4,206) Decrease (increase) in non-cash working capital accounts and other of discontinued operations - 30 Net cash provided by discontinued operations - 30 Net cash (used in)operating activities (3,789) (4,176) Cash flows from investing activities: Property additions (1,108) (1,244) Other 3 (7) Net cash (used in)investing activities (1,105) (1,251) Cash flows from financing activities: Proceeds from line of credit 12,058 - Payments on line of credit (7,122) - Proceeds from exercise of employee stock options 13 41 Reduction of long-term debt (5) (10) Net cash provided by financing activities 4,944 31 Net increase (decrease) in cash and cash equivalents 50 (5,396) Cash and cash equivalents - beginning of period 491 10,188 Cash and cash equivalents - end of period $ 541 $ 4,792 Supplemental cash flow information Interest expense $ 193 $ 21 Income taxes, net - - See accompanying notes to Condensed Consolidated Financial Statements
5 NOODLE KIDOODLE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 1. Basis of presentation. The accompanying interim unaudited consolidated financial statements include the accounts of Noodle Kidoodle, Inc. and subsidiaries (the "Company"). All intercompany accounts and transactions are eliminated in consolidation. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such interim statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. Due to the seasonal nature of the Company's business, results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's annual Report on Form 10-K and 10 K-A for the year ended January 29, 2000. NOTE 2. Cash and cash equivalents. All highly liquid investments with a maturity date of three months or less are considered to be cash equivalents. These investments are stated at cost which approximates market. NOTE 3. Income taxes. Income tax provisions are based on estimated annual effective tax rates. The effective income tax rate used for the period ended April 29, 2000 was 38%. For the period ended May 1, 1999 no tax benefit was provided. NOTE 4. Inventories. Inventories are stated at the lower of cost (first- in, first-out) or market. NOTE 5. Earnings per share. The Company calculates earnings per share in accordance with Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." We use the weighted-average number of common shares outstanding during each period to compute basic 6 earnings per common share. Diluted earnings per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares are additional common shares assumed to be exercised. Average common and common equivalent shares used in computing diluted earnings per share were 7,711,000 and 7,852,000 shares for the quarters ended April 29, 2000 and May 1, 1999, respectively, as a result of applying the treasury stock method to outstanding employee stock options. In accordance with FAS 128, as a result of losses from operations, the inclusion of employee stock options were antidilutive and, therefore, were not utilized in the computation of diluted earnings per share. NOTE 6. Accounting change. Effective January 31, 1999, the Company adopted Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities". The change involves expensing store pre-opening costs as incurred. Previously, the Company capitalized such costs and amortized them over the first twelve months of a store's operations. The cumulative effect of the change in accounting principle resulted in the write-off of $314,000 of unamortized costs for the quarter ended May 1, 1999 which is so reflected in the Statement of Operations. NOTE 7. Revenue Recognition. Revenue is recognized at the time that retail sales are made to customers. Returns and allowances are recorded at the time returns are received from or allowances made to customers. NOTE 8. Merger. On April 21, 2000, the Company entered into a merger agreement with Zany Brainy, Inc., a Pennsylvania corporation, and Night Owl Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of Zany Brainy. The merger agreement provides that Night Owl Acquisition will merge with and into the Company so that the Company will become a wholly- owned subsidiary of Zany Brainy. Each share of the Company's common stock outstanding immediately prior to the merger will be converted into 1.233 shares of Zany Brainy common stock. Completion of the merger is subject to stockholder approval. We expect to complete the merger by the end of the second quarter of fiscal 2001. The Company estimates that approximately $1.3 million after tax of merger-related costs will be expensed in the quarter that the merger is consummated. 7 NOTE 9. Financing Agreement. On May 17, 2000 the Company amended its revolving credit facility to extend the term until May 2003 and to increase the amount of available borrowings to $50 million. NOTE 10. Distribution Facility. On April 19, 2000 the Company signed a 10 year lease for a second distribution center in Murfreesboro, TN that is expected to become operational in the beginning of the third quarter of fiscal 2001.
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Thirteen Weeks Ended April 29, 2000 Compared With Thirteen Weeks Ended May 1, 1999 Results of Operations Net sales increased 5.2% to $24.1 million in the thirteen week period ended April 29, 2000 from $22.9 million in the comparable period in the prior year, primarily due to the addition of one store in the current quarter and sixteen stores during last year offset by decreases in comparable store sales of 15%. The Company had 42 comparable stores at April 29, 2000. The Company operated 59 Noodle Kidoodle stores at April 29, 2000 compared to 44 Noodle Kidoodle stores at May 1, 1999. Gross profit (derived from net sales less cost of products sold, which includes buying and warehousing costs) decreased 1.1% to $8.9 million in the first quarter ended April 29, 2000 from $9.0 million in the comparable period in the prior year. Gross profit as a percentage of net sales ("gross profit percentage") decreased to 36.9% for the thirteen week period ended April 29, 2000 from 39.3% in the comparable period in the prior year, primarily due to changes in product mix and increased distribution costs in the current quarter. Distribution costs increased because the Company leased for one year 65,000 square feet of additional warehousing space in the second quarter of last year to supplement the storage capacity of its Phillipsburg, NJ distribution center, and also because as our store base expands, freight costs to more distant store locations increase. Selling and administrative expenses increased $2.6 million to $12.7 million in the thirteen week period ended April 29, 2000 from $10.1 million in the comparable period in the prior year. Direct store expenses, which consist of payroll, occupancy, advertising and other store operating costs, increased $2.3 million as a result of a change in store base and higher sales levels. Home office expenses increased $0.4 million, offset by a decrease in pre-opening expenses of $0.1 million. Selling and administrative expenses, as a percent of net sales, increased to 52.7% in the current quarter ended April 29, 2000 from 44.1% in the comparable period in the prior year, primarily as a result of increased store base. Net interest expense for the first quarter ended April 29, 2000 was $192,000 as compared to net interest income of $59,000 in the comparable period in the prior year. The increase in interest expense of $251,000 in the current quarter resulted primarily from an increase in borrowing under the Company's revolving credit facility. Income tax provisions are based on estimated annual effective tax rates. The effective income tax rate used for the quarter ended April 29, 2000 was 38%. The Company did not 9 record a tax benefit for the losses for the thirteen-week period ended May 1, 1999. The cumulative effect of a change in accounting principle of $314,000 represents the write-off of unamortized pre-opening costs as a result of adopting SOP 98-5, "Reporting on the Costs of Start-Up Activities", for the quarter ended May 1, 1999. This accounting change requires the Company to expense on a current basis previously capitalized pre-opening costs. Net loss increased $1.1 million to $2.5 million ($.33 per share) for the quarter ended April 29, 2000 from $1.4 million ($.18 per share) in the comparable period in the prior year. Liquidity and Capital Resources. During the thirteen week period ended April 29, 2000 the Company's operating activities of its continuing operations used $3.8 million of cash. This use of cash resulted from the net loss of $2.5 million, an increase in working capital of $0.9 million, and an increase in deferred tax assets of $1.5 million, offset by an increase in non-cash charges of $1.1 million. The increase in working capital resulted primarily from an increased store base and the need for inventories for the Company's planned store openings in the second quarter. The Company also used cash to fund investing activities of $1.1 million primarily for the purchase of fixed assets for new stores. Borrowings under the Company's revolving credit facility increased by $4.9 million in the first quarter ended April 29, 2000. As a result of the foregoing, cash and cash equivalents increased during the period by $0.1 million. On April 21, 2000, the Company entered into a merger agreement with Zany Brainy, Inc., a Delaware corporation, and Night Owl Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of Zany Brainy. The merger agreement provides that Night Owl Acquisition will merge with and into the Company so that the Company will become a wholly-owned subsidiary of Zany Brainy. Each share of the Company's common stock outstanding immediately prior to the merger will be converted into 1.233 shares of Zany Brainy common stock. Completion of the merger is subject to stockholder approval. We expect to complete the merger by the end of the second quarter of fiscal 2001. The Company maintains a revolving credit facility, which was to expire in June 2000, with The CIT Group/Business Credit, Inc., which provided up to $15 million of available borrowings. This facility may be used for direct borrowings and letters of credit and may not exceed a certain percentage of, and is collateralized by, the Company's inventory, receivables and certain other assets. The agreement provides for an annual collateral management fee and commitment fee on the unused portion of the commitment. Outstanding borrowings bear interest, at the option of the Company, based on the prime rate or LIBOR. Interest rate on borrowings ranged from 8.50% to 9.00% during the current quarter. The agreement contains certain covenants which among other items, limits the payment of cash dividends when borrowings under the 10 agreement are outstanding. As of April 29, 2000, $8.9 million of borrowings and $1.3 million of letters of credit were outstanding under the revolving credit facility. On May 17, 2000 the Company amended its revolving credit facility to extend the term until May 2003 and to increase the amount of available borrowings to $50 million. The Company opened one store during the three months ended April 29, 2000 in Suffolk County, NY. A second store was opened in Westport, CT on May 6, 2000. Without reference to the merger, the Company expects to open six stores in the next two quarters of fiscal 2001. In addition, the Company plans to continue to make investments in its distribution center and for store remodels to improve operational efficiencies and customer service. On April 19, 2000 the Company signed a 10 year lease for a second distribution center in Murfreesboro, TN that is expected to become operational in the beginning of the third quarter of fiscal 2001. The Company's lease of a 65,000 square foot distribution facility in the second quarter of last year to support its peak seasonal inventory requirements expires in June 2000 and will not be renewed. The Company has available net operating loss carryforwards of approximately $16.0 million for income tax purposes, the use of which will be limited upon completion of the merger. Until completion of the merger, the Company expects to fund its near-term cash requirements principally by borrowing under its revolving credit facility. If the merger does not occur, the Company expects to finance its long-term expansion plan with internally and externally generated funds, which may include borrowings under future credit facilities, and through the sale of equity, equity-related or debt securities. There can be no assurance that financing will be available in amounts, or at rates or on terms and conditions acceptable to the Company. Seasonality The Company's operations are highly seasonal and a significant portion of its revenues occur in the fourth quarter which coincides with the Christmas selling season. New stores are expected to be opened throughout the year, but generally before the Christmas selling season, which will make the Company's fourth quarter revenues an even greater percentage of the total year's revenues. Operations during the first three quarters are not expected to be profitable for the foreseeable future. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not Applicable. 11 Cautionary statement pursuant to safe harbor provisions of the private securities litigation act of 1995 This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this report and the documents incorporated herein by reference, the words "anticipate", "believe", "estimate", and similar expressions are generally intended to identify forward-looking statements. Forward- looking statements include, among others, the statements about the following: our ability to provide a creative merchandise selection and superior customer service; our ability to service new and existing customers over the internet and the potential negative effects that selling our products on the internet could have on our existing store sales and on our existing base of customers; our ability to conduct our operations at a lower cost than that of our internet only competitors; our ability to profitably expand our store base; our ability to successfully bring our second distribution center on stream; and our ability to complete the merger with Zany Brainy. There are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements including, but not limited to, the following: a decline in general economic and business conditions and in the specialty retail or toy industry in particular; our inability to manage our growth, open new stores on a timely basis and expand in new and existing markets; our ability to successfully market and expand our internet shopping site; the availability of product and our ability to replenish product on a timely basis; our ability to successfully manage our inventory; unanticipated cash requirements to support current operations or expansion of our business; the availability and cost of additional capital to fund our operations and our ability to attract, train and retrain highly qualified associates. These and other risks and uncertainties affecting Noodle Kidoodle are discussed in greater detail in this report and in other fillings by the Company with the Securities and Exchange Commission. 12 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following exhibit is filed as part of this report: Exhibit 4.4 Amendment, dated May 17, 2000 to the Financing Agreement, dated June 27, 1997 between Noodle Kidoodle, Inc., and the CIT Group/Business Credit, Inc. is attached to this quarterly report on Form 10-Q for the period ended April 29, 2000. Exhibit 27 Financial Data Schedule (SEC/EDGAR only) (b)None. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NOODLE KIDOODLE, INC. (Registrant) Date: June 13, 2000 /s/ Stanley Greenman Stanley Greenman, Chairman of the Board, Chief Executive Officer, and Treasurer (Principal Executive Officer)