<PAGE>
As filed with the Securities and Exchange Commission on January 18, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RIGHTSTART.COM INC.
(Exact Name of Registrant as Specified in Its Charter)
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<TABLE>
<CAPTION>
Delaware 5945 95-4745350
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
5388 Sterling Center Drive, Unit C
Westlake Village, CA 91361
(818) 707-7100
</TABLE>
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
---------------
JERRY R. WELCH
Chief Executive Officer and President
RightStart.com Inc.
5388 Sterling Center Drive, Unit C
Westlake Village, California 91361
(818) 707-7100
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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Copies to:
<TABLE>
<S> <C>
KENNETH J. BARONSKY, ESQ. PETER LILLEVAND, ESQ.
Milbank, Tweed, Hadley & McCloy LLP IAIN MICKLE, ESQ.
601 South Figueroa Street, 30th Floor Orrick, Herrington & Sutcliffe LLP
Los Angeles, California 90017 Old Federal Reserve Bank Building
(213) 892-4000 400 Sansome Street
San Francisco, CA 94111-3143
(415) 392-1122
</TABLE>
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Approximate Date Of Commencement Of Proposed Sale To The Public: As Soon As
Practicable After The Effective Date Of This Registration Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed maximum
Title of each class of aggregate offering Amount of
securities to be registered price(1) registration fee
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<S> <C> <C>
Common stock, par value $0.01.............. $69,000,000 $18,216
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</TABLE>
(1) Pursuant to Rule 457(o), the proposed maximum aggregate offering price is
estimated solely for the purpose of calculating the registration fee.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated , 2000
[LOGO of RightStart.com(TM)]
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Shares
Common Stock
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This is the initial public offering of RightStart.com Inc. We are offering
shares of our common stock and the selling stockholder identified in
this prospectus is offering an additional shares of our common stock.
RightStart.com will not receive any of the proceeds from the sale of the
shares being sold by the selling stockholder. We anticipate that the initial
public offering price will be between $ and $ per share.
Application has been made for quotation of our common stock on the Nasdaq
National Market under the trading symbol "TOTS."
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
<TABLE>
<CAPTION>
Public Underwriting Proceeds
Offering Discounts and Proceeds to to Selling
Price Commissions RightStart.com Stockholder
---------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total $ $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to
additional shares to cover any over-allotments.
Deutsche Banc Alex. Brown J.P. Morgan & Co.
ING Barings
The date of this prospectus is , 2000
<PAGE>
[DESCRIPTION OF INSIDE COVER COLOR ARTWORK TO BE FILED BY AMENDMENT]
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and audited financial statements and accompanying notes appearing
in this prospectus. The terms "we," "us" and "our" as used in this prospectus
refer to RightStart.com Inc. References to "The Right Start" refer to The Right
Start, Inc.
RightStart.com
RightStart.com is the leading online specialty retailer of high quality
developmental, educational and care products for children. We are dedicated to
providing our customers with a unique online shopping experience by offering a
trusted assortment of products carefully selected with regard to quality,
safety and developmental value and by providing a high level of customer
service.
We believe our relationship with The Right Start, a specialty retailer with
50 stores throughout the United States, and our experience with our widely-
distributed catalog, which has been in existence since 1985, combined with our
online store provide us with a meaningful tri-channel marketing advantage
relative to online-only retailers in our market. We provide a number of
customer services aimed at bringing the specialty retail experience of The
Right Start's retail stores to our online customers, including free ground
shipping, free gift wrapping, guaranteed same-day shipping and in-stock
availability of products featured in our online store, 24-hour customer service
and live online help, product returns to any of The Right Start's retail stores
and editorial content, including parenting articles. We launched our online
store on June 29, 1999, and through January 1, 2000 we achieved $8.0 million in
online store sales before deducting promotional discounts.
We believe we have developed parental trust by offering a pre-selected
assortment of high quality developmental, educational and care products for
children. In adhering to our "best of breed" approach, we carefully select
products, based on test results and other criteria, to ensure that each of the
products we offer meets our standards for quality, safety and developmental
value. We believe that the aggregate market in the United States for our
product categories was approximately $19 billion in 1998. Our product offerings
include a full assortment of motherhood and childcare products, children's
developmental and educational toys, books, software, music, videos, sports
equipment, nursery and kids' room accessories safety items, bath accessories
and travel accessories. We offer products selected from well-known brands such
as Baby Trend(R), Graco(R), Safety 1st(R) and Kenneth Cole as well as niche
brands such as Britax(R), Peg Perego(R), Baby Bjorn(R), Kidco, Tiny Love(R),
Lamaze(R) and Medela(R). We carefully select these products from a highly-
fragmented group of over 350 vendors. Because our select product line of high
quality developmental, educational and care products for children excludes most
mass-market toys, we believe we achieve higher gross margins relative to
online-only retailers in our market.
We believe our relationship with The Right Start provides us with advantages
relative to other online retailers, including:
. Superior Brand Name Recognition. The "Right Start" brand name has been
associated with high quality developmental, educational and care
products for children and high levels of customer service for nearly 15
years.
. Established Relationships with Customers. The Right Start has built a
high level of trust and brand awareness among new parents.
3
<PAGE>
. Cross-Marketing Opportunities. The Right Start's existing network of 50
retail stores, its plans to open 30 additional stores in 2000 and our
own widely-distributed catalog provide us with substantial tri-channel
marketing opportunities.
. Vendor Relationships and Proven, Scalable Distribution Capabilities. We
are able to leverage an existing product procurement infrastructure
developed by The Right Start to carefully select products from a highly-
fragmented group of manufacturers and suppliers. In addition, we believe
our ability to leverage The Right Start's proven, scalable distribution
system and our fulfillment experience gained from long-term catalog
operations give us a significant advantage over online-only retailers in
our market.
. Customer Convenience. Products purchased online may be returned to any
of The Right Start's retail stores and customers may visit any of The
Right Start's retail stores to experience the touch and feel of a
selection of our products or view demonstrations for products that they
may later purchase on RightStart.com.
. Preferred Partnering Arrangements. We believe our relationship with The
Right Start gives us substantial advantages in developing marketing
arrangements with preferred partners by allowing us to offer extensive
cross-promotional opportunities such as retail store presence, access to
The Right Start's customer database and inclusion in The Right Start's
direct mail advertising.
. Outstanding Customer Care. We provide a number of services aimed at
bringing the specialty retail experience of The Right Start's retail
stores to online customers, including free ground shipping, guaranteed
same-day shipping and in-stock availability of products featured in our
online store and 24-hour customer service and live online help.
. Merchandising Expertise. We leverage the merchandising expertise of The
Right Start to select products that meet our standards for quality,
safety and developmental value. As a result, we offer a unique
assortment of products not offered by mass-market retailers.
We have created a multi-faceted growth strategy that is designed to leverage
our brand name and increase sales from existing as well as new customers. Key
components of our strategy include: expanding product offerings in existing
departments within our online store, launching new departments within our
online store, enhancing customer care, establishing additional strategic
alliances and expanding into select international markets.
As more women use the Internet to communicate and conduct commerce, we
believe we are well-positioned to be their online retailer of choice for
developmental, educational and care products for children. Jupiter
Communications estimates that the number of Internet users who are women in the
United States will increase from approximately 40 million in 1998 to
approximately 79 million in 2003. In addition, Jupiter Communications projects
that online spending by women will grow from approximately $3 billion in 1998
to approximately $41 billion in 2003.
Consistent with our strategy of developing strategic relationships, we
recently entered into a term sheet with Oxygen Media, LLC, a multi-platform
media company dedicated to women. We expect to provide Oxygen Media's online
users with products from all our departments and product categories.
RightStart.com may be accessed directly through MomsOnline, Oxygen Media's Web
site for parents. In addition, we expect to receive an average of seven minutes
of television advertising time daily through 2002 on the Oxygen Media cable
network, which is expected to launch nationwide in February 2000. Furthermore,
4
<PAGE>
both parties have agreed to prominently advertise each other and we expect to
be promoted across Oxygen Media's online properties. Our relationship also
provides us with access to Oxygen Media's proprietary online content.
RightStart.com was established for the purpose of engaging in online
commerce. As part of our initial capitalization, in April 1999, The Right Start
contributed to us certain assets comprising its catalog and online operations.
Immediately following this offering, The Right Start will own approximately
% of our common stock. In July 1999, we raised $15 million in a privately
placed financing to third-party investors, including affiliates of Sierra
Ventures Management Company and Palomar Ventures I, L.P. RightStart.com was
incorporated in Delaware on April 9, 1999. Our corporate offices are located at
5388 Sterling Center Drive, Unit C, Westlake Village, CA 91361. Our telephone
number is (818) 707-7100. Information contained on our Web site does not
constitute part of this prospectus.
Risk Factors
An investment in our common stock involves a high degree of risk. We have a
limited online operating history and, during the 48 weeks ended January 1,
2000, we incurred a net loss of $9.0 million. We expect our operating losses
and negative cash flow to continue for the foreseeable future. In addition, our
business is subject to a number of other risks, including intense competition,
the difficulty of entering into new market segments and our reliance on our
relationships with The Right Start, our technology partner and our product
vendors.
The Offering
<TABLE>
<C> <S>
Common stock offered by RightStart.com............. shares
Common stock offered by the selling stockholder.... shares
Common stock to be outstanding after the offering.. shares
Use of proceeds.................................... For marketing and
advertising, online store
development and other
general corporate
purposes, including
working capital and
capital expenditures. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol............. TOTS
</TABLE>
The number of shares of common stock to be outstanding after the offering as
set forth above is based on the number of shares actually outstanding as of
January 1, 2000. The number excludes, as of January 1, 2000, a total of
1,769,500 shares of common stock issuable upon exercise of outstanding stock
options at a weighted average exercise price of $1.18 per share, and a total of
483,500 shares of common stock issuable upon exercise of outstanding warrants
at a weighted average exercise price of $6.41 per share.
Unless otherwise specifically stated, information throughout this prospectus
assumes the underwriters' over-allotment option is not exercised.
"The Right Start" is a registered trademark of The Right Start, Inc. All
other product names, trade names, trademarks and service marks referred to in
this prospectus are the property of their respective owners.
5
<PAGE>
Summary Financial Information
(in thousands, except per share data)
The summary financial information below reflects that, prior to June 29,
1999, we had no online operations. We acquired our catalog operations in April
1999 from The Right Start. The adjusted balance sheet data below reflects the
estimated net proceeds from the sale of shares of common stock
offered by us at an assumed initial public offering price of $ per
share, after deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
Fiscal 1999 Quarters
Fiscal 1998 (unaudited) Fiscal 1999
----------- ----------------------------------------- -----------
52 Weeks Nine Weeks 13 Weeks 13 Weeks 13 Weeks 48 Weeks
Ended Ended Ended Ended Ended Ended
January 30, April 3, July 3, October 2, January 1, January 1,
1999 1999 1999 1999 2000 2000
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<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Online store sales..... $ -- $ -- $ 6 $ 1,463 $ 6,519 $ 7,988
Catalog sales.......... 4,736 1,165 1,250 398 654 3,467
------ ------ ------ ------- ------- -------
Total sales............ 4,736 1,165 1,256 1,861 7,173 11,455
Promotional discounts.. -- -- 1 267 1,211 1,479
------ ------ ------ ------- ------- -------
Net sales.............. 4,736 1,165 1,255 1,594 5,962 9,976
Gross profit........... 2,556 679 700 594 2,224 4,197
Operating income
(loss)................ (126) 181 (41) (1,268) (8,060) (9,188)
Net income (loss)...... (126) 181 (41) (1,153) (7,959) (8,972)
Net income (loss)
available to common
stockholders.......... $ (126) $ 181 $ (41) $(1,153) $(8,484) $(9,497)
====== ====== ====== ======= ======= =======
Basic and diluted net
income (loss) per
common share.......... $(0.02) $ 0.03 $(0.01) $ (0.20) $ (1.00) $ (1.42)
====== ====== ====== ======= ======= =======
Shares used to compute
basic and diluted net
income (loss) per
common share.......... 5,767 5,767 5,767 5,767 8,448 6,694
</TABLE>
<TABLE>
<CAPTION>
As of January 1, 2000
--------------------------
Actual As Adjusted
------------ -------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................... $ 6,620
Working capital..................................... 4,197
Total assets........................................ 10,495
Total stockholders' equity.......................... 6,773
</TABLE>
6
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RISK FACTORS
You should carefully consider the risks and uncertainties described below and
the other information in this prospectus before deciding whether to invest in
shares of our common stock. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition, results of operations and prospects could be materially
adversely affected. In such case, the trading price of our common stock could
decline and you may lose part or all of your investment.
Risks Related to Our Business
We have a limited operating history which makes it difficult to predict our
future performance.
We were founded in April 1999 and launched our online store in June 1999.
Accordingly, we have only a limited online operating history upon which to
evaluate our online operations. Our historical operating results may not be
indicative of our future quarterly or annual results because they are based
primarily on the catalog operation that was of decreasing importance to its
prior owner, and such operation will not be the focus of our business strategy.
Additionally, as a result of our limited online operating history, it is
difficult to accurately forecast our net sales and we have limited meaningful
historical financial data upon which to base planned operating expenses. We
base our current and future expense levels on our operating plans and estimates
of future net sales which are difficult to forecast because they generally
depend on the volume and timing of the orders we receive. As a result, we may
be unable to adjust our spending in a timely manner to compensate for any
unexpected order shortfall. This inability could cause our operating losses in
a particular quarter or in a series of quarters to be greater than expected.
We anticipate future losses and negative cash flow.
We have incurred operating losses and negative cash flow since our inception
and we expect operating losses and negative cash flow to continue for the
foreseeable future. We incurred a net loss of $9.0 million for the 48 weeks
ended January 1, 2000. We anticipate our operating losses will increase
significantly because we expect to incur substantial expenses related to:
. marketing and advertising activities;
. the expansion of our product offerings and editorial content in our
online store;
. the continued development of our online store and technology, as well as
the systems that we use to process customers' orders and payments, and
the costs associated with bringing certain of these functions in-house;
. the expansion of our inventory management and distribution operations;
and
. the hiring of additional staff to support growth.
7
<PAGE>
Our ability to become profitable depends on our ability to generate and
sustain substantially higher net sales while maintaining reasonable expense
levels. If we do achieve profitability, we cannot be certain that we will be
able to sustain or increase profitability on a quarterly or annual basis in the
future.
Our operating results are difficult to predict. If we fail to meet the
expectations of securities analysts and investors, the trading price of our
common stock may decline significantly.
Our quarterly operating results may fluctuate significantly in the future due
to a variety of factors, many of which are outside of our control. Because our
online business has been in operation for less than a year, our operating
results are difficult to predict. In addition, because our prior results
reflect a catalog business that was of decreasing importance to its prior owner
and such operation will not be the focus of our business strategy, we believe
that quarter to quarter comparisons of our historical operating results are not
a good indication of our future performance. In some future quarter our
operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock may decline
significantly.
Factors that may harm our business and cause our operating results to
fluctuate include the following:
. our inability to manage and control the distribution of our products;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our operations;
. technical difficulties, system downtime or Internet brownouts;
. the ability of our competitors to offer new or enhanced online stores,
services or products;
. fluctuations in the amount of consumer spending on developmental,
educational and care products for children;
. our inability to obtain new customers at reasonable cost or retain
existing customers;
. decreases in the number of visitors to our online store or our inability
to convert a sufficiently high percentage of visitors to our online
store into customers;
. the acceptance by our customers of our mix of products;
. increases in the level of our product returns;
. increases in the cost of online or offline advertising;
. the termination of existing, or the failure to develop new, strategic
marketing alliances;
. increases in shipping and delivery costs;
. price competition;
. the inability to hire and retain qualified management personnel and
employees;
. conditions or trends in the Internet and the online commerce industries;
. government regulations related to use of the Internet for commerce;
. our inability to adequately maintain, upgrade and develop our online
store, the systems that we use to process customers' orders and payments
or our computer network;
8
<PAGE>
. increased seasonality;
. our inability to manage and control inventory levels or control
inventory theft; and
. general economic conditions.
We may not be able to compete successfully against current and future
competitors.
The market for developmental, educational and care products for children is
intensely competitive. In particular, the online market for these products is
newly developing, rapidly evolving and intensely competitive. We expect
competition to intensify in the future because new competitors can enter our
market with little difficulty and can launch online stores at a relatively low
cost. Increased competition is likely to result in price reductions and reduced
gross margins, which could have a material adverse effect on our business,
financial condition, results of operations and prospects.
We compete with a variety of companies, including:
. traditional store-based retailers of children's products, such as Toys
"R" Us, Babies "R" Us, FAO Schwarz, Zany Brainy, Noodle Kidoodle,
BabyGap, Gymboree, Imaginarium and our parent, The Right Start;
. various online retailers of children's products, such as Amazon.com,
KBkids.com, eToys.com, iVillage, Women.com, Smarterkids.com and
Toysmart.com;
. major discount retailers of products for children, such as Target, Wal-
Mart and K-Mart;
. online efforts of traditional retailers, including the online stores
operated by Toys "R" Us, FAO Schwarz, Zany Brainy, Noodle Kidoodle,
BabyGap, Gymboree and Wal-Mart;
. Internet portals and online service providers that feature shopping
services, such as AOL, Yahoo!, Excite@Home and Lycos; and
. catalog retailers of products for children, babies, toddlers and
expectant mothers.
Most traditional store-based and online retailers have longer operating
histories, larger customer bases, greater brand name recognition and
significantly greater financial, marketing and other resources than we do, and
many of them sell a much broader range of products. Many of these competitors
can devote substantially more resources to online commerce than we can. Our
competitors may also be able to secure products from vendors on more favorable
terms, fulfill customer orders more efficiently and adopt more aggressive
pricing or inventory availability policies than we can.
If we enter new business categories that do not achieve market acceptance, our
brand name and reputation could be damaged.
The planned expansion of our business, including new departments and product
categories, will require significant additional expenses, and may strain our
management, financial and operational resources. This type of expansion will
also subject us to increased inventory risk. We recently launched a new
department within our online store featuring developmental, educational and
care products for children from ages two to six years old and we intend to
further expand our operations by offering products for children through age 12
years old. In addition, we plan to develop other new departments and product
categories, expand the breadth and depth of products and services we offer and
expand our market presence through relationships with third parties. Any such
expansion of our business that is not favorably received by consumers could
damage our brand name and reputation and could require us to take significant
inventory markdowns, either of which could cause our net sales to fall below
expectations.
9
<PAGE>
We are substantially dependent on our relationship with The Right Start.
We obtain products and services from The Right Start, including access to The
Right Start's inventory of products for children from birth to age three years
old. To date, we have obtained all of our inventory from The Right Start,
pursuant to a management services agreement. Our relationship with The Right
Start provides us with several benefits, including association with its brand
name, access to purchasing and other discounts that we would not otherwise be
able to obtain and promotion of our online store in The Right Start's 50 retail
stores nationwide. Under the management services agreement, we also receive
various services from The Right Start, including payroll processing, benefits
administration, insurance (property, casualty, medical, dental and life), tax,
merchandising, fulfillment and telecommunications. Our cost for these services
may increase if the management services agreement were terminated. The Right
Start may terminate the management services agreement (in full or in part):
. on continuing default by us;
. on a bankruptcy or liquidation event of The Right Start or us;
. on the sale of our business;
. at any time after December 31, 2000 on 120 days prior written notice if
our annual sales run rate is projected to be in excess of $40 million as
is currently the case; or
. at any time after December 31, 2000 on 120 days prior written notice if
The Right Start is required to make expenditures to provide continued
services under the agreement above a specified level if expenditures are
not subject to reimbursement by us.
There can be no assurance that if the management services agreement were
terminated we would be able to find comparable suppliers capable of providing
products and services on terms satisfactory to us or on terms as favorable to
us as provided in the management services agreement. To the extent that The
Right Start does not have sufficient capacity or is otherwise unable to satisfy
our requirements on a timely basis, our business, financial condition, results
of operations and prospects could be adversely impacted.
We have also entered into an intellectual property agreement with The Right
Start. Under the intellectual property agreement, The Right Start granted us
the right to use the name "Right Start," as well as all trademarks, service
marks, trade dress, trade names, domain names and other source designations
owned or used by The Right Start, in connection with our online and catalog
businesses. The Right Start has also granted us a non-exclusive license to use
its intellectual property and customer information. The intellectual property
agreement may be terminated by The Right Start upon a continuing default by us
and upon a change of control of RightStart.com if the acquiror is a direct
competitor of The Right Start.
Because we entered into the intellectual property agreement and the
management services agreement at the time that we were a wholly-owned
subsidiary of The Right Start, we believe that the terms of these agreements
are more favorable to us than terms we could have obtained in the absence of
such relationship. The termination of either of these agreements could have a
material adverse effect on our business, financial condition, results of
operations and prospects.
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<PAGE>
We are substantially dependent on our arrangements with our technology partner.
We are substantially dependent on the technology services that we receive
from Guidance Solutions, Inc. In lieu of developing our own in-house technology
group, we engaged Guidance Solutions to develop, host, maintain and enhance our
Web site. Although we own or lease the computer hardware and own or license the
software necessary to operate our Web site, Guidance Solutions and Level 3
Communications, Inc., a subcontractor of Guidance Solutions, operate and
maintain our Web site on a day-to-day basis. Guidance Solutions also provides
technological assistance to our third-party distribution facility and in-house
logistics team, including the monitoring of credit card verification services,
order shipment and inventory levels (to ensure that, to the extent practical,
only in-stock products are displayed on our Web site). Guidance Solutions also
helps us develop the online architecture for our new customer services, such as
our planned personal shopper service, children's wish list, gift registry,
message board, chat room and events calendar. Our relationship with Guidance
Solutions is governed by an ongoing fee-for-services agreement that may be
terminated upon material breach by either party (except that the licenses of
the software necessary to operate our Web site continue indefinitely). We
cannot assure you that if we were to lose the services of Guidance Solutions
for any reason that we would be able to locate and retain an adequate
replacement on commercially reasonable terms in a timely manner or at all.
Accordingly, the failure of Guidance Solutions or its subcontractors to provide
us with ongoing technology services could have a material adverse effect on our
business, financial condition, results of operations and prospects.
Our ability to improve the functionality of our Web site and support
increased traffic depends on our ability to cost-effectively ramp up our Web
site operations. Guidance Solutions currently is principally responsible for
determining the hardware and software required to maintain and expand the
functionality of our Web site. Since we believe our success is based in large
part on our high level of customer service, Guidance Solution's failure to
successfully anticipate the technology needs associated with our growth or its
failure to implement appropriate upgrades to our Web site operations on a
timely basis could have a material adverse effect on our business, financial
condition, results of operations and prospects.
We intend to develop our own in-house technology department and assume the
day-to-day operations and maintenance of our Web site after we locate, hire and
train our technology staff. We expect such in-house transition to be
substantially completed by the end of 2000. The competition for qualified
technology personnel is intense, particularly in the Internet sector. We may be
negatively impacted if we are unable to hire qualified individuals or fail to
successfully integrate and retain such individuals in our operation. We will be
dependent on Guidance Solutions to assist us in training these individuals. The
move of our Web site operations in-house also could initially result in
impaired response times to hardware or software problems as they arise, leading
to potential Web site down-time over the transition period.
We may be unable to meet our future capital requirements.
Since our inception, we have experienced negative cash flow from operations
and expect to experience significant negative cash flow from operations for the
foreseeable future. Although we have increased sales, our expenses also have
continued to increase and we expect to increase our expenses significantly in
future periods as we seek to build our market share. As a result, we do not
expect to be able to fund our operations from internally generated funds for
the foreseeable future. Unanticipated expenses, poor financial results or
unanticipated opportunities that require financial commitments could increase
our need for
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additional capital. If we raise additional funds through the issuance of
equity, equity-related or debt securities, such securities may have rights,
preferences or privileges senior to those of the rights of our common stock and
our stockholders may experience additional dilution. Additional financing may
not be available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of business opportunities, continue to develop our
online store or otherwise respond to competitive pressures would be
significantly limited.
The loss of the services of one or more of our key personnel, or our failure to
attract, assimilate and retain other highly qualified personnel in the future,
could disrupt our business.
The loss of the services of one or more of our key personnel could adversely
affect our business. We depend on the continued services and performance of our
senior management and other key personnel, particularly Jerry R. Welch, our
Chairman, President and Chief Executive Officer. Mr. Welch is also Chairman,
President and Chief Executive Officer of The Right Start and a Managing
Director of Kayne Anderson Investment Management, LLC. Our future success also
depends upon the continued service of our other executive officers and other
key sales, marketing and support personnel. The majority of our senior
management has joined us since October 1, 1999, including our Chief Financial
Officer, our Senior Vice President, Business Development, our Senior Vice
President and General Counsel, our Senior Vice President, Fulfillment and
Customer Service and our Vice President, Marketing. Our future success depends
on these officers effectively working together with our original management
team. We do not have "key person" life insurance policies or employment
agreements covering any of our employees.
If we or our suppliers are unable to obtain sufficient quantities of products
from our vendors in a timely manner, our net sales will decrease.
We do not own or operate any manufacturing facilities. Instead, we depend on
manufacturers and suppliers to provide us sufficient quantities of products at
competitive prices. We currently buy our products from over 350 vendors. During
the 48 weeks ended January 1, 2000, the products provided by three suppliers
accounted for more than 5.0% of our net sales, with Britax Child Safety Inc.
accounting for approximately 14.0%, Peg Perego accounting for approximately
7.5% and Regal Lager, Inc. accounting for approximately 5.9%. We do not have
long-term or exclusive arrangements with any vendor or distributor that
guarantee the availability of products to us. If we do not receive shipments in
a timely manner, we may miss delivery deadlines and our customers may
subsequently cancel orders, refuse to accept deliveries or demand discounts.
Additionally, certain vendors have limited or prohibited online sales of their
products. Our manufacturers may adopt similar or other policies that limit our
ability to execute our business plan. Any of these circumstances could have a
material adverse effect on our business, financial condition, results of
operations and prospects.
If we experience problems in distribution and fulfillment, we could lose
customers.
We rely upon third-party service and product fulfillment providers for
product shipments, including shipments to and from our distribution facility,
as well as fulfillment and inventory services. We are therefore subject to
risks, including employee strikes and inclement weather, associated with such
shipment carriers' ability to provide delivery services to meet our shipping
needs and such product fulfillment providers' ability to pick and pack orders.
In addition, if our primary shipment carriers or fulfillment providers fail to
devote a sufficient number of employees or amount of space to us, our ability
to deliver products in a timely manner could also be impaired. Our shipment
carriers and product fulfillment providers may
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also depend upon temporary employees to fulfill our needs during peak periods
and there can be no assurance that sufficient temporary employees will be
available to ensure timely deliveries. Failure to deliver products to our
customers in a timely manner could damage our reputation and brand name.
We are dependent on our marketing and partnering arrangements to drive traffic
to our online store to generate sales.
We rely on strategic alliances to attract users to our online store and
promote our brand name. We have entered into alliances with a variety of
companies, including Oxygen Media, Allpets.com, Inc. and MyEvents.com, Inc. We
believe that such alliances will result in increased traffic to our online
store. Our ability to generate net sales from our online store may depend on
the increased traffic and brand name promotion that we expect to receive
through these alliances. There can be no assurance that these alliances will be
maintained beyond their initial terms or that additional alliances will be
available to us on acceptable commercial terms or at all. The inability to
enter into new, or to maintain any one or more of our existing, significant
strategic alliances could have a material adverse effect on our business,
financial condition, results of operations and prospects.
If we do not successfully expand our online store and the systems that process
customer orders, we could lose customers and our net sales could be reduced.
Our success also depends on our ability to rapidly expand our operations in
order to accommodate significant increases in customer orders and traffic to
our online store. If we fail to upgrade our Web site in a timely manner in
order to accommodate increased traffic, we may lose customers, which would
reduce our online sales. Furthermore, if we fail to expand the computer systems
that we use to process and ship customer orders and process payments, we may
not be able to successfully distribute customer orders. We may experience
difficulty in improving and maintaining such systems if our employees or
contractors that develop or maintain our computer systems become unavailable to
us. We have experienced periodic systems interruptions while enhancing and
expanding these computer systems and we expect similar interruptions during
future expansion. We believe such interruptions have caused us to lose
customers in the past. If future interruptions are significant, our online
sales may decrease significantly.
Our affiliation with The Right Start may cause potential conflicts of interest.
Following this offering, The Right Start, together with affiliates of The
Right Start, will beneficially own approximately % of our outstanding
common stock. Jerry R. Welch serves as Chairman, President and Chief Executive
Officer of both RightStart.com and The Right Start. Additionally, both Richard
A. Kayne and Fred Kayne are members of the boards of directors of our company
and The Right Start. Mr. Welch and Richard A. Kayne are affiliates of Kayne
Anderson Investment Management, which beneficially owns approximately 64.6% of
The Right Start as of the date of this offering. Additionally, Mr. Welch holds
options to purchase 500,000 shares of our common stock and Richard A. Kayne and
Fred Kayne each hold options to purchase 40,000 shares of our common stock.
Although we have entered into binding agreements with The Right Start governing
many aspects of our relationship, The Right Start's continuing beneficial
ownership of our common stock, the ownership of The Right Start common stock by
directors and officers of our company and their service as directors or
officers of both our company and The Right Start could create conflicts of
interest when those directors and officers are faced with decisions that could
have different implications for our company and The Right Start, including
potential acquisitions of businesses, the issuance or disposition of
securities, the election of new or additional directors, the payment of
dividends and other matters.
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Our business relies on foreign product sources. We may expand our business
internationally and become subject to currency, political, tax and other
uncertainties.
During the 48 weeks ended January 1, 2000, approximately 8.5% of our net
sales represented products purchased by us from international suppliers. In
addition, a significant number of products we purchase from domestic suppliers
are manufactured abroad. We expect to become even more dependent on imported
items. In addition, during fiscal 2000 we plan to expand into Canada and the
United Kingdom, and we intend to explore additional international markets. As a
result, we are subject to risks associated with the purchase of products
manufactured abroad and the conduct of business abroad, such as:
. fluctuations in currency exchange rates that may impact price;
. economic and political instability in foreign countries that may impact
supply;
. transportation delays;
. actions by foreign governments that restrict the number or increase the
cost of exports;
. the laws and policies of the United States affecting importation of
goods, including duties, quotas and taxes;
. foreign trade and tax laws;
. foreign labor practices that may increase prices or impact supply;
. reduced protections for intellectual property rights in some countries;
. opening and managing distribution centers abroad; and
. developing customer lists and marketing channels.
Our operating results depend in part on our ability to manage such risks
while still offering an attractive product mix at profitable prices. The
realization of one or more of the risks listed above may interrupt or delay
imports, substantially increase the cost of our imports or materially adversely
effect our planned international business. If for any reason it becomes
necessary to locate alternative product sources, the products available through
those sources may be of lesser quality or more expensive than the products we
currently buy. Furthermore, expansion into international markets may present
competitive and merchandising challenges different from those we currently
face. We cannot assure you that we will expand internationally or that any such
expansion will result in profitable operations.
Our Internet sales could decrease if our online security measures fail.
Our relationships with our customers would be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. We rely on security and authentication
technology that we license from third parties. With this technology, we perform
real-time credit card authorization and verification with our credit card
processor. We cannot predict whether the technology we use to protect a
customer's personal information might fail. Under current credit card
practices, we are liable for fraudulent credit card transactions because we do
not obtain credit cardholders' signatures. Furthermore, our servers may be
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. We may need to expend significant additional capital and other
resources to protect against a security breach or to alleviate problems caused
by any breaches. There can be no assurance that we can prevent all security
breaches. To the extent that we or our third-party contractors store and
transmit proprietary information, such as credit card numbers, security
breaches could expose us to a risk of loss or litigation and possible
liability.
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Our online store is dependent on third-party software and services.
We have entered into a number of service agreements with third parties that
supply software to operate, maintain and provide other services for our online
store. We generally do not have long-term relationships with and have limited
control over the companies that provide these third-party services. Many
companies providing services to us, including Guidance Solutions and a number
of our software and Internet support systems providers do not have significant
operating histories. Although we believe that our service providers are
reputable and dependable, there can be no assurance that such parties will
continue to perform such services or that they could be replaced on
commercially acceptable terms, or at all.
The operation of our online store is currently dependent on third parties for
the following services:
. Internet and telecommunications systems (hosting);
. delivery services;
. inventory storage and handling;
. credit card processing;
. software services; and
. shopping cart and other Internet services.
Our facilities and systems are vulnerable to natural disasters and other
unexpected problems. The occurrence of a natural disaster or other unexpected
problem could damage our reputation and brand name and reduce our sales.
Our business and net sales greatly depend upon third party telecommunications
and our own computer systems, located primarily in Southern California, to
receive and fulfill customer orders. Our facilities and systems may be damaged
or interrupted due to fire, flood, power loss, telecommunications failure,
security breaches, earthquakes and similar events. A natural disaster or other
unanticipated problem could cause interruptions or delays in our business or
cause us to lose data or render us unable to accept or fulfill customer orders.
If any of these events occur, our business and property insurance may not
adequately compensate us for our resulting losses. In addition, our business,
financial condition, operating results and prospects could be adversely
affected.
Although we, along with our third-party service providers, are developing a
disaster recovery plan for our online store, we currently do not have a formal
disaster recovery plan to prevent delays arising from the failure of our
information systems.
Our intellectual property may not be safeguarded or we may be subject to
intellectual property infringement claims.
The steps we take to protect our proprietary rights may be inadequate or
insufficient to provide full protection. Our copyrights, service marks,
trademarks, trade dress, trade secrets and other forms of intellectual property
are critical to our success. We rely on trademark and copyright law, trade
secret protection and confidentiality or license agreements with our employees,
customers, business partners and others to protect our proprietary rights.
However, a third party could copy or otherwise obtain our intellectual property
without authorization. For example, employees, our business partners or
consultants could breach their confidentiality agreements. In such a situation,
we may not have adequate remedies for
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breach. Our inability to protect our proprietary rights may materially
adversely affect our business, financial condition, results of operations and
prospects.
We cannot predict whether third parties will assert infringement claims
against us, or whether any future assertions or prosecutions will harm our
business. If we are forced to defend against any such claims, even if they are
without merit, we may face costly litigation, diversion of technical and
management personnel or product shipment delays. As a result of such a dispute,
we may have to develop non-infringing technology or enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to us, or at all. If there is a successful
claim of intellectual property infringement against us and we are unable to
develop non-infringing technology or license the infringed or similar
technology on a timely basis, our business, financial condition, results of
operations and prospects could be adversely impacted.
The United States Patent and Trademark Office issued a federal trademark
registration to The Right Start for "The Right Start." The Right Start has
filed for but has not yet been issued a federal trademark registration for
"Right Start" for online retail sales of infants' and children's products and
other goods and services. Under the intellectual property agreement, The Right
Start granted us the right to use the marks it owns and uses, including the
trademark "The Right Start" and the related trade name. Our trademarks are not
registered in every country in which we sell or may sell products. We may be
unable to obtain trademark, service mark and copyright registration, or
otherwise obtain effective protection for our trademarks, service marks,
copyrights and trade secrets in every country in which we sell products and
render services online either because the mark is unavailable or because the
protective regimes are inadequate. Therefore, our efforts to protect our online
proprietary rights may not be adequate and our online business may be adversely
affected. Also, it may be difficult or impossible to obtain registration for
our mark for certain classes of goods and services because of the prior use and
registration of our mark by another party. While it may be possible in some
instances to obtain registration through consent and license agreements, these
may restrict the nature and extent of our business in certain countries. For
example, in the United Kingdom we are aware that it may be difficult to achieve
registration for our mark for certain clothing items because of the prior use
and registration of a "right start" mark for shoes.
If we are unable to acquire or maintain ownership of necessary Internet domain
names, our brand name and reputation could be damaged and we could lose
customers.
RightStart.com owns the web domain name www.rightstart.com. Governmental
agencies and their designees regulate the acquisition and maintenance of domain
names. Changes may occur in the regulation of domain names in the United States
and in foreign countries in the near future. In the United States, such changes
may include a transition from the current system to a system which is
controlled by one or more non-profit corporations. Governing bodies may
establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result, we
may not be able to acquire or maintain relevant domain names in all
jurisdictions in which we conduct business. Furthermore, the relationship
between regulations governing domain names and laws protecting trademarks and
similar proprietary rights is unclear. Therefore, we may not be able to prevent
third parties from using similar domain names that decrease the value of our
trademarks and other property rights and take customers away from our online
site.
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Risks Related to Our Industry
Our success in selling products online depends on the viability of the
Internet.
Our success depends on the acceptance of the Internet for commercial use. A
number of issues concerning the commercial use of the Internet remain
unresolved, including:
. transaction and data security;
. reliability;
. cost;
. ease of access;
. quality of service; and
. bandwidth availability.
Our business will be adversely affected if the Internet develops more slowly
than expected as a commercial medium. In addition, companies that control
access to Internet transactions through Internet connectivity, portal services
or Web browsers could promote our competitors over us or charge us a
substantial fee for providing traffic to our online store.
Because the Internet is still in a relatively early stage of development,
there is no guarantee that consumers will use the Internet extensively for
retail purchases. Consumer concerns about privacy and security may hinder the
growth of Internet retailing and use of our online store.
The success of our online store also largely depends on the development of an
infrastructure for providing Internet access and services. The Internet could
become an impracticable commercial medium due to delays in the development or
adoption of new methods to handle greater Internet activity or due to greater
governmental regulation. We are not certain that the infrastructure necessary
to make the Internet a viable, long-term commercial marketplace will be
developed. Even if such an infrastructure develops, we are not certain that the
Internet will become a viable marketing and sales channel for our products.
The recent growth in the use of the Internet has caused frequent periods of
impaired performance. As a result, routers and switches, telecommunications
links and other components of the infrastructure of Internet service providers
will need to be upgraded as use of the Internet continues to expand. Our
ability to provide products to customers more quickly and increase the scope of
our service ultimately depends on the speed and reliability of the networks
operated by third parties. Consequently, the growth of the market for the
products offered in our online store depends upon improvements being made to
the Internet to alleviate congestion. If the Internet does not continue as a
viable, long-term commercial marketplace, our business, financial condition,
results of operations and prospects will be materially adversely affected.
The rapid technological change and the emergence of new industry standards
and practices related to the Internet could render our existing online store
and related technology obsolete. Our performance will depend, in part, on our
ability to do the following:
. both license and internally develop leading technologies useful in our
business;
. enhance our existing services;
. enhance and improve the functionality of our online store;
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. develop new services and technologies to keep up with the increasingly
sophisticated and varied needs of prospective customers; and
. respond to technological advances and emerging industry standards and
practices in a cost effective and timely manner.
Developing our online store involves significant technical and business
risks. There can be no assurance that we will succeed in using new technologies
effectively or that we will succeed in adapting our online store, our systems
that process customers' orders and payments and our computer networks to
customer requirements or emerging industry standards. If for technical, legal,
financial or other reasons we cannot adapt in a timely manner to the changing
market conditions or customer requirements, or if our online store does not
achieve market acceptance, our business, financial condition, results of
operations and prospects may be materially adversely affected.
We are susceptible to changing economic conditions.
Our business depends substantially on middle- to upper-income individuals
whose income may be adversely affected by changes in economic conditions. A
prolonged economic downturn throughout the United States may decrease sales of
our products and have a material adverse effect on our business, financial
condition, results of operations and prospects.
We are liable for the content and products in our online store.
We believe that our future success partially depends on our ability to
deliver original and compelling descriptions about our products on the Internet
as well as other information relevant to parents and childcare providers. As a
publisher of online content, we face potential liability for defamation,
negligence, copyright, patent or trademark infringement, or other similar
claims. We may also face potential liability for product liability claims on
the merchandise we sell. Although we carry general liability insurance, our
insurance may not cover these types of claims or may not be adequate to
indemnify us for all our liability. If faced with liability that is not covered
by insurance or that exceeds our insurance coverage, our results of operation
will be materially adversely affected. In addition, our reputation and brand
name may also suffer if we are faced with liability for the content on, or
products in, our online store, even if such liability is covered by insurance.
We are subject to government regulation.
Our products are subject to provisions of the Consumer Safety Act and the
regulations issued thereunder. These laws authorize the Consumer Product Safety
Commission to protect the public from products which present a substantial risk
of injury. The CPSC can require the manufacturer of defective products to
repurchase or recall such products. The CPSC may also impose fines or penalties
on the manufacturer or retailer. Similar laws exist in some states, cities and
other countries in which we market our products. A recall of any of our
products may materially adversely affect our business, financial condition,
results of operations and prospects.
Laws and regulations directly applicable to Internet communications and
commerce are becoming more prevalent. The United States Congress recently
enacted Internet laws on children's privacy, copyrights and taxation. The
European Union recently enacted its own privacy regulations. Laws governing the
Internet, however, remain largely unsettled. It may take years to determine
whether and how existing laws, such as those governing intellectual
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property, privacy, libel and taxation, apply to the Internet. The growth of the
market for Internet commerce may result in more stringent consumer protection
laws, both in the United States and abroad, that place additional burdens on
companies conducting business over the Internet. The adoption of more laws may
decrease the growth of the Internet. Such a slowdown may decrease our net
sales, increase our cost of doing business or otherwise materially adversely
affect our business, financial condition, results of operations and prospects.
In order to comply with new or existing laws regulating Internet commerce, we
may need to modify the manner in which we do business, which may result in
additional expenses. For instance, we may need to spend time and money revising
the process by which we fulfill customers' orders to ensure that each shipment
complies with applicable laws. We may need to hire additional personnel to
monitor our compliance with applicable laws. We may also need to modify our
software to further protect our customers' personal information.
Our products and services are available over the Internet in multiple
jurisdictions. We may be required to qualify to do business as a foreign
corporation in these jurisdictions because we sell products to numerous
customers who reside there or because The Right Start has a retail store
located there. We are currently qualified to do business only in California and
Pennsylvania. We may be subject to taxes and penalties if we fail to qualify as
a foreign corporation in a jurisdiction where we are required to qualify. The
future application of laws and regulations of jurisdictions whose laws do not
currently apply to our business may have a material adverse effect on our
business, financial condition, results of operations and prospects.
Our sales could decrease if we become subject to sales and other similar taxes.
If one or more states or any foreign country successfully asserts that we
should collect sales or other similar taxes on the sale of our products for
which we have not already collected such taxes, our results of operations could
be materially adversely affected. We currently collect sales and other similar
taxes for physical shipments of goods into each state in which The Right Start
has a retail store. Sales in other jurisdictions, however, may subject our
shipments in such jurisdictions to sales taxes under current or future laws. If
we become obligated to collect additional sales taxes, we will need to update
our system that processes customers' orders to calculate the appropriate sales
tax for each customer order and to remit the collected sales taxes to the
appropriate authorities. These upgrades will increase our operating expenses.
In addition, our customers may be discouraged from purchasing products from us
because they have to pay sales taxes, potentially causing our net sales to be
lower than if we did not collect such taxes. We believe that many of our
competitors do not collect sales tax on as conservative a basis as we do. As a
result, we may need to offer our products at lower prices to offer the same
total cost to our customer, which may decrease our margins and reduce our
prospects for profitability in order to retain our market share.
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Risks Related to this Offering
If our stock price is volatile, we could face a securities class action
lawsuit.
In the past, following periods of volatility in the market price of their
stock, many companies have been the subject of securities class action
litigation. If we were sued in a securities class action, it could result in
substantial costs and a diversion of management's attention and resources and
could cause our stock price to fall.
Substantial sales of our common stock after the offering could cause our stock
price to fall.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. These sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Based on shares outstanding as of January 1, 2000, upon completion
of this offering, we will have shares of common stock
outstanding. Of these shares, the shares being offered by this
prospectus will be freely tradable, and the remaining 9,100,000 shares will
become eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ----
<C> <S>
, 2000 (180 days after the date of this prospectus)
At various times thereafter upon the expiration of holding
periods
</TABLE>
The above table reflects lock-up agreements in which all of our stockholders
have agreed not to offer or sell their shares until 180 days after the date of
this prospectus, without the prior consent of Deutsche Bank Securities Inc.
In addition, shortly after the effective date of this offering, we expect to
register for sale up to 1,818,000 shares of common stock reserved for issuance
under our 1999 Stock Option Plan. As of January 1, 2000, options to purchase
1,769,500 shares of common stock were outstanding. Shares acquired upon
exercise of these options will be eligible for sale in the public market from
time to time, beginning 180 days after the date of this prospectus, subject to
vesting. All holders of option shares outstanding as of the date of this
prospectus are subject to 180-day lock-up restrictions. These stock options
have exercise prices significantly below the assumed initial public offering
price of our common stock. Also, as of January 1, 2000, we had 483,500 shares
of common stock issuable upon the exercise of outstanding warrants. The
possible sale of a significant number of these shares may cause the price of
our common stock to decline.
Stockholders and warrant holders holding securities that represent
approximately 4,105,166 shares of common stock may have the right to include
their shares in registration statements relating to our securities. The
exercise of these registration rights will result in a larger number of shares
registered and sold in the public market. The sale of our common stock by these
additional holders could cause the price of our common stock to decline.
Investors in this offering will experience immediate dilution.
We expect the initial public offering price to be substantially higher than
the book value per share of the outstanding common stock immediately after this
offering. If you purchase common stock in this offering, you will experience
immediate dilution of approximately $ in the book value per share of the
common stock from the price you pay for the common stock (assuming an initial
public offering price of $ per share).
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Substantial portion of net proceeds allocated for general working capital.
A substantial portion of the net proceeds to us from this offering has been
allocated to working capital and other general corporate purposes. This amount
may increase substantially as other anticipated uses of net proceeds are
reduced. The net proceeds may be utilized at the discretion of our board of
directors. As a result, investors will not know in advance how such net
proceeds will be utilized by us.
Our charter and bylaws contain provisions that may make the acquisition of
control of RightStart.com more difficult.
Following this offering, our board of directors will have the authority to
issue up to 5.0 million shares of preferred stock without any further vote or
action by the stockholders, and to determine the price, rights, preferences,
privileges and restrictions, including voting rights of such shares. Since the
preferred stock could be issued with voting, liquidation, dividend and other
rights superior to those of our common stock, the rights of the holders of our
common stock will be subject to, and may be adversely affected by, the rights
of the holders of any such preferred stock. The issuance of preferred stock
could have the effect of making it more difficult for a third party to acquire
a majority of the outstanding voting stock of RightStart.com. Further, certain
provisions of our charter and Bylaws and of Delaware law could have the effect
of delaying or preventing a change in control of RightStart.com.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make many statements in this prospectus under the captions "Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" and elsewhere that are forward-
looking and are not based on purely historical facts. These statements relate
to our future plans, objectives, expectations and intentions. We may identify
these statements by the use of words such as "believe," "expect," "will,"
"anticipate," "intend" and "plan" and similar expressions. These forward-
looking statements involve a number of risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those we discuss in "Risk
Factors" and elsewhere in this prospectus. These forward-looking statements
speak only as of the date of this prospectus, and we caution you not to rely on
these statements without also considering the risks and uncertainties
associated with these statements and our business that are addressed in this
prospectus.
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USE OF PROCEEDS
We estimate the net proceeds to us from the sale of the shares of
common stock offered hereby by RightStart.com at an assumed initial public
offering price of $ per share, after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us, will
be $ million, or $ million if the underwriters' over-allotment
option is exercised in full. We will not receive any proceeds from the sale of
the shares being sold by the selling stockholder. See "Principal and Selling
Stockholders."
We intend to use at least $ million of the net proceeds from this offering
to significantly expand marketing and advertising. We expect to use the
remaining net proceeds of this offering for the development of our online store
and other general corporate purposes, including working capital and capital
expenditures. This allocation is only an estimate and we may adjust it as
necessary to address our operational needs in the future. For instance, we may
use a portion of the net proceeds to acquire complementary technologies or
businesses; however, we currently have no commitments or agreements and are not
involved in any negotiations with respect to any such transactions. Pending
such uses, we intend to invest the net proceeds of this offering in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
In October 1999, the holders of the RightStart.com preferred stock converted
all of their shares into 3,333,333 shares of our common stock. As an inducement
to convert the preferred stock, we granted the holders of the preferred stock
warrants to purchase 165,000 shares of our common stock at $4.50 per share,
exercisable for a five-year period. The value of these warrants has been
reflected as a preferred stock dividend in our financial statements for fiscal
1999 and in computing the net loss per common share.
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future. We may incur indebtedness in the
future that may prohibit or effectively restrict the payment of dividends,
although we have no current plans to do so.
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CAPITALIZATION
The following table sets forth our capitalization as of January 1, 2000 on an
actual basis and on an as adjusted basis. The "actual" column reflects our
historical capitalization as of January 1, 2000, without any adjustments to
reflect subsequent events or anticipated events. The "as adjusted" column
reflects our capitalization as of January 1, 2000, with adjustments for the
receipt of the estimated net proceeds from the sale of shares of
common stock by us in this offering at an assumed initial public offering price
of $ per share, after deducting underwriting discounts and commissions
and estimated offering expenses. These columns exclude, as of January 1, 2000,
a total of 1,769,500 shares of common stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $1.18 per
share, and a total of 483,500 shares of common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $6.41 per share.
The table below should be read in conjunction with our balance sheet as of
January 1, 2000, and the related notes, which are included in this prospectus.
<TABLE>
<CAPTION>
As of January 1,
2000
-------------------
Actual As Adjusted
------ -----------
(in thousands)
<S> <C> <C>
Stockholders' equity:
Common stock, $0.01 par value, 20,000,000 shares
authorized, 9,100,000 shares issued and outstanding,
actual; issued and outstanding, as adjusted....... $ 91 $
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, none issued and outstanding, actual and as
adjusted................................................ --
Additional paid-in capital............................... 16,968
Deferred compensation.................................... (609)
Accumulated deficit...................................... (9,677)
------
Total stockholders' equity............................. 6,773
------ -------
Total capitalization................................. $6,773 $
====== =======
</TABLE>
23
<PAGE>
DILUTION
Our net tangible book value as of January 1, 2000 was approximately $
million, or $ per share of common stock. Net tangible book value per share
represents the amount of our total tangible assets reduced by the amount of our
total liabilities and divided by the total number of shares of common stock
outstanding. After giving effect to the sale of the shares of common
stock offered by us in this offering at an assumed initial public offering
price of $ per share, and after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, our net tangible
book value as of January 1, 2000 would have been approximately $ million,
or $ per share of common stock. This represents an immediate increase in
net tangible book value of $ per share to existing stockholders and an
immediate dilution in net tangible book value of $ per share to new
investors. The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share as of January 1, 2000... $
Increase per share attributable to new investors..........
--------
Net tangible book value per share after this offering.......
--------
Dilution in net tangible book value per share to new
investors.................................................. $
========
</TABLE>
The following table summarizes on an as adjusted basis after giving effect to
this offering, as of January 1, 2000, the differences between existing
stockholders and new investors with respect to the number of shares of common
stock purchased from us, the total consideration paid to us and the average
price per share paid:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
----------------- ------------------- Per
Number Percent Amount Percent Share
--------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 9,100,000 % $15,382,000 % $1.69
New investors.....................
--------- ----- ----------- -----
Totals.......................... 100.0% $ 100.0%
========= ===== =========== =====
</TABLE>
The foregoing discussion and tables exclude, as of January 1, 2000, a total
of 1,769,500 shares of common stock issuable upon exercise of outstanding stock
options at a weighted average exercise price of $1.18 per share, and a total of
483,500 shares of common stock issuable upon exercise of outstanding warrants
at a weighted average exercise price of $6.41 per share. To the extent that any
of these options or warrants are exercised, there will be further dilution to
new investors. See "Management--1999 Stock Option Plan" and Notes 6 and 13 to
our audited financial statements included in this prospectus.
24
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial data are qualified in their entirety by
reference to, and you should read them in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our audited financial statements and accompanying notes included in this
prospectus. The selected financial data reflect that prior to June 29, 1999 we
had no online operations. We acquired our catalog operations on April 9, 1999,
in preparation for commencing online operations. Prior to that time, our
catalog operations were owned and operated by The Right Start. The statement of
operations data set forth below for the 52-week periods ended January 31, 1998
and January 30, 1999 and the 48-week period ended January 1, 2000 and the
selected balance sheet data as of January 30, 1999 and January 1, 2000 have
been derived from our audited financial statements included in this prospectus.
The statement of operations data set forth below for the 53-week period ended
May 31, 1995, the 52-week period ended June 1, 1996 and the 33-week period
ended February 1, 1997 and the selected balance sheet data as of May 31, 1995,
June 1, 1996, February 1, 1997 and January 3, 1998 are derived from unaudited
financial statements not included in this prospectus that have been prepared on
the same basis as the audited financial statements and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of our operating results for
such periods and our financial condition as of such dates. The historical
results are not necessarily indicative of results to be expected for any future
period.
<TABLE>
<CAPTION>
Fiscal 1995 Fiscal 1996 Fiscal 1997 Fiscal 1998 Fiscal 1999
----------- ----------- ----------- ----------- -----------
53 Weeks 52 Weeks 33 Weeks 52 Weeks Ended 48 Weeks
Ended Ended Ended ----------------------- Ended
May 31, June 1, February 1, January 31, January 30, January 1,
1995 1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Online store sales..... $ -- $ -- $ -- $ -- $ -- $ 7,988
Catalog sales.......... 31,335 23,293 7,635 7,414 4,736 3,467
------- ------- ------ ------- ------ -------
Total sales............ 31,335 23,293 7,635 7,414 4,736 11,455
Promotional discounts.. -- -- -- -- -- 1,479
------- ------- ------ ------- ------ -------
Net sales.............. 31,335 23,293 7,635 7,414 4,736 9,976
Cost of goods sold..... 16,825 12,555 4,054 3,535 2,180 5,779
------- ------- ------ ------- ------ -------
Gross profit........... 14,510 10,738 3,581 3,879 2,556 4,197
Sales and marketing
expenses.............. 16,293 10,883 3,238 4,110 2,226 10,491
General and
administrative
expenses.............. 2,288 2,538 1,053 834 456 1,933
Product development
expenses.............. -- -- -- -- -- 755
Non-cash compensation
expenses.............. -- -- -- -- -- 206
------- ------- ------ ------- ------ -------
Operating loss......... (4,071) (2,683) (710) (1,065) (126) (9,188)
Interest income........ -- -- -- -- -- 216
------- ------- ------ ------- ------ -------
Loss before income
taxes................. (4,071) (2,683) (710) (1,065) (126) (8,972)
Tax provision.......... -- -- -- -- -- --
------- ------- ------ ------- ------ -------
Net loss............... (4,071) (2,683) (710) (1,065) (126) (8,972)
Preferred dividends.... -- -- -- -- -- 525
------- ------- ------ ------- ------ -------
Net loss available to
common stockholders... $(4,071) $(2,683) $ (710) $(1,065) $ (126) $(9,497)
======= ======= ====== ======= ====== =======
Basic and diluted net
loss per common
share................. $ (0.71) $ (0.47) $(0.12) $ (0.18) $(0.02) $ (1.42)
======= ======= ====== ======= ====== =======
Shares used to compute
basic and diluted net
loss per common
share................. 5,767 5,767 5,767 5,767 5,767 6,694
<CAPTION>
May 31, June 1, February 1, January 31, January 30, January 1,
1995 1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents........... $ -- $ -- $ -- $ -- $ -- $ 6,620
Working capital........ 413 183 280 (17) 298 4,197
Total assets........... 2,154 1,629 1,514 583 604 10,495
Total stockholders'
equity................ 1,178 853 674 51 350 6,773
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
RightStart.com was formed in April 1999 to focus on online sales of
developmental and educational products for children. We launched our online
store on June 29, 1999. The Right Start owned approximately 60.2% of our common
stock as of January 1, 2000. The Right Start will own approximately % of our
common stock immediately after the completion of this offering ( % if the
underwriters' over-allotment option is exercised in full).
As part of our initial capitalization, we acquired the catalog operations of
The Right Start in April 1999. In 1995, The Right Start made a strategic
decision to focus on its retail stores and use its catalog primarily as a
marketing vehicle. As a result, financial performance of the catalog operations
has generally declined for the periods presented. We intend to focus on sales
of our online store and anticipate that catalog sales will continue to decline.
We acquired the catalog operations from The Right Start in order to obtain
existing fulfillment infrastructure and systems, as well as a significant, and
cost-effective, marketing vehicle for promoting our online store. In addition,
we believe that we will benefit from the merchandising and marketing experience
acquired through the catalog operations as well as our database of customer
information. We intend to continue to leverage our catalog to market and
promote our online store aggressively. Each of the approximately 2.6 million
catalogs we distributed in fiscal 1999 prominently promoted our online store.
We have presented our online sales on a gross basis, which is after product
returns but before promotional discounts, and on a net basis after promotional
discounts. Promotional discounts have been used to attract customers to our
recently launched online store. We expect to continue to offer promotional
discounts as we focus on continuing to rapidly develop our customer base and
expand our product offerings to additional age groups.
In July 1999, we entered into a management services agreement with The Right
Start. This agreement provides that The Right Start will supply Common
Inventory (as defined in the agreement) to RightStart.com for sale on both our
online store through our catalog at cost plus five percent and provide certain
Basic Services (as defined in the agreement) at cost plus five percent. The
agreement with respect to supplying Common Inventory is on an as-needed basis
to fill customer orders until January 31, 2000 and on a pre-ordered basis as
needed thereafter to meet expected customer demand. Inventory designated for
our business is stored separately from that of The Right Start after we place
an order and The Right Start fills it. The Right Start has also agreed to
supply us with Internet-Only Inventory (as defined in the agreement) on a pre-
ordered basis as needed to meet expected customer demand. The agreement with
respect to providing Basic Services (as defined in the agreement) may be
terminated in full or on a service-by-service basis after December 31, 2000, by
RightStart.com on 30 days written notice and by The Right Start in certain
circumstances upon 120 days prior written notice and by either party upon the
occurrence of uncured breaches and certain bankruptcy events. Expenses related
to our management services agreement with The Right Start are accounted for as
general and administrative expenses.
Our business has been operating at a loss and generating negative cash flow
since our inception in April 1999. After the completion of this offering, we
plan to increase further the level of our investment in marketing and
advertising as well as in the development and expansion of our online store. As
a result, our losses and negative cash flow are likely to continue to increase.
26
<PAGE>
Results of Operations
Our fiscal year ends on the Saturday closest to the end of December and The
Right Start's fiscal year ends on the Saturday closest to the end of January.
Since we acquired our catalog operations from The Right Start in April 1999,
our fiscal 1999 represents a 48-week period beginning on January 31, 1999, the
beginning of The Right Start's fiscal year, and ending on January 1, 2000.
We launched our online store on June 29, 1999. As a result, fiscal 1999 is
comprised of 48 weeks of catalog operations from January 31, 1999 through
January 1, 2000 and 27 weeks of online store operations from June 29, 1999
through January 1, 2000. Fiscal 1998 and fiscal 1997 are each comprised of 52
weeks of catalog operations and no online store operations.
Our financial statements for the periods prior to May 1, 1999 reflect the
assets and liabilities and the revenues, expenses and cash flow of the catalog
operations of The Right Start. Certain expenses of The Right Start were
allocated to us on a basis we believe reflects a reasonable allocation of
expenses to present the catalog operations we acquired as a stand-alone
company. However, these allocated expenses may not necessarily be indicative of
the expenses that would have been incurred had RightStart.com operated on a
stand-alone basis during the periods presented. See Note 1 to our audited
financial statements included in this prospectus.
The following table sets forth statement of operations data for the periods
indicated as a percentage of net sales:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Online store sales .................................. -- % -- % 80.1%
Catalog sales........................................ 100.0 100.0 34.7
----- ----- -----
Total sales........................................ 100.0 100.0 114.8
Promotional discounts ............................... -- -- 14.8
----- ----- -----
Net sales.......................................... 100.0 100.0 100.0
Cost of goods sold................................... 47.7 46.0 57.9
----- ----- -----
Gross profit....................................... 52.3 54.0 42.1
Sales and marketing expenses......................... 55.4 47.0 105.2
General and administrative expenses.................. 11.3 9.6 19.4
Product development expenses......................... -- -- 7.6
Non-cash compensation expenses....................... -- -- 2.1
----- ----- -----
Operating loss..................................... (14.4) (2.6) (92.2)
Interest income...................................... -- -- 2.2
----- ----- -----
Loss before income taxes........................... (14.4) (2.6) (90.0)
Tax provision........................................ -- -- --
----- ----- -----
Net loss........................................... (14.4) (2.6) (90.0)
Preferred dividends.................................. -- -- 5.2
----- ----- -----
Net loss available to common stockholders.......... (14.4)% (2.6)% (95.2)%
===== ===== =====
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Sales. Gross sales consist of product sales to customers and are net of
product returns. Net sales are net of promotional discounts. Net sales include
no revenues related to shipping charges. Our net sales increased by $5.2
million, or 110.6%, to $10.0 million in fiscal 1999 from $4.7 million in fiscal
1998. This growth in net sales was attributable to the launch of our online
store on June 29, 1999, partially offset by a decline in catalog sales. Online
store net sales were $6.5 million in fiscal 1999, compared to no sales in
fiscal 1998. Fiscal 1999 online store
27
<PAGE>
net sales are net of promotional discounts of $1.5 million. Catalog net sales
decreased $1.3 million, or 26.8%, to $3.5 million in fiscal 1999 from $4.7
million in fiscal 1998. The majority of the decline in catalog net sales was
attributable to a planned reduction in catalog
circulation and a shift of a portion of the sales from our catalog to our
online store operations. The difference in the 52 weeks of catalog operations
in fiscal 1998 versus the 48 weeks of catalog operations in fiscal 1999
accounted for $224,000, or 4.7%, of the decline.
Cost of goods sold. Cost of goods sold consists primarily of the cost of
products sold, inbound shipping costs and inventory shrinkage costs. Gross
profit as a percentage of net sales, or gross margin, decreased to 42.1% in
fiscal 1999 from 54.0% in fiscal 1998. Gross margin on catalog net sales
increased to 55.6% in fiscal 1999 from 54.0% in fiscal 1998, due to a more
favorable product mix. Gross margin on online store net sales was 34.8% in
fiscal 1999. Gross margin on online store net sales was lower than gross margin
on catalog net sales in fiscal 1999 due to the introductory promotional
discounting we offered customers during the initial start-up of our online
store operations as well as a different mix of products offered in our online
store.
Sales and marketing expenses. Sales and marketing expenses consist primarily
of advertising and marketing costs, net fulfillment expenses, credit card
processing fees and expenses related to catalog production and distribution,
product distribution and customer service, as well as related personnel costs.
Sales and marketing expenses increased by $8.3 million, or 371.3%, to $10.5
million in fiscal 1999 from $2.2 million in fiscal 1998. As a percentage of net
sales, sales and marketing expenses increased to 105.2% in fiscal 1999 from
47.0% in fiscal 1998. Sales and marketing expenses related to our catalog
decreased by $333,000, or 15.0%, to $1.9 million in fiscal 1999 from $2.2
million in fiscal 1998. As a percentage of net catalog sales, sales and
marketing expenses related to our catalog increased to 54.4% in fiscal 1999
from 47.0% in fiscal 1998. This increase was due to reduced sales leverage.
Sales and marketing expenses related to our online store were $8.6 million in
fiscal 1999. Of this amount, advertising and marketing costs were $6.2 million.
General and administrative expenses. General and administrative expenses
consist primarily of professional service fees, office lease expenses,
depreciation and fees paid to The Right Start for management, financial,
merchandising, inventory and administrative support services under a management
services agreement. General and administrative expenses increased $1.5 million,
or 323.9%, to $1.9 million in fiscal 1999 from $456,000 in fiscal 1998. As a
percentage of net sales, general and administrative expenses increased to 19.4%
in fiscal 1999 from 9.6% in fiscal 1998. Fiscal 1999 general and administrative
expenses included direct fees paid to The Right Start of $318,000.
Product development expenses. Product development expenses consist primarily
of costs related to software development, maintenance, Web site operations,
systems and telecommunications infrastructure and acquired content. Prior to
fiscal 1999 there were no online operations and accordingly there were no
associated expenses.
Non-cash compensation expenses. Non-cash compensation expenses relate to
stock options granted at exercise prices below the deemed fair value of our
common stock. We recorded a non-cash compensation expense of $206,000 in fiscal
1999. There were no non-cash compensation expenses in fiscal 1998.
Interest income. Interest income related to earnings on our cash generated
from the sale of preferred stock in July 1999 totaled $216,000 in fiscal 1999.
There was no interest income in fiscal 1998.
Tax provision. Tax provision has been computed as if RightStart.com had
operated as a separate entity for all periods presented. As a result of net
losses, no benefit for income taxes
28
<PAGE>
was recorded for fiscal 1999, fiscal 1998 or fiscal 1997. As of January 1,
2000, we had net operating loss carryforwards for federal tax purposes of $8.7
million and for state income tax purposes of $4.4 million. These carryforwards
expire in 2020 for federal tax purposes and 2005 for state tax purposes, if not
previously utilized. A tax benefit has not been recorded for any period
presented due to uncertainties surrounding the timing of realizing any benefits
in future tax returns. Utilization of the carryforwards may be subject to
limitations, which may inhibit our ability to use them in the future.
Fiscal 1998 Compared to Fiscal 1997
Net sales. Net sales for fiscal 1998 and fiscal 1997 were comprised of sales
from our catalog. Net sales decreased $2.7 million, or 36.1%, to $4.7 million
in fiscal 1998 from $7.4 million in fiscal 1997. The decline in net sales
resulted from the mailing of 44.9% fewer catalogs in accordance with The Right
Start management's operating plan to de-emphasize the catalog business in favor
of The Right Start's retail store operations.
Cost of goods sold. Gross margin increased to 54.0% in fiscal 1998 from 52.3%
in fiscal 1997 due to a more favorable mix of products sold.
Sales and marketing expenses. Sales and marketing expenses decreased by
$1.9 million, or 45.9%, to $2.2 million in fiscal 1998 from $4.1 million in
fiscal 1997. As a percentage of net sales, sales and marketing expenses
decreased to 47.0% in fiscal 1998 from 55.4% in fiscal 1997. The reduction is
attributable to the decrease in the number of catalogs produced and distributed
as well as improved cost controls. Distribution expenses of $45,000 in fiscal
1998 and $73,000 in fiscal 1997 were allocated from The Right Start. The
decrease in the allocations was due to a reduction in the ratio of net catalog
sales to total net sales between the periods.
General and administrative expenses. General and administrative expenses
decreased by $378,000, or 45.3%, to $456,000 in fiscal 1998 from $834,000 in
fiscal 1997. As a percentage of net sales, general and administrative expenses
decreased to 9.6% in fiscal 1998 from 11.3% in fiscal 1997. General and
administrative expenses of $402,000 in fiscal 1998 and $730,000 in fiscal 1997,
were allocated from The Right Start. The decrease in the allocations was due to
a reduction in the ratio of net catalog sales to total net sales between the
periods.
29
<PAGE>
Quarterly Results of Operations
The following table sets forth our unaudited quarterly statement of
operations data for the nine-week period ended April 3, 1999 and the 13-week
periods ended July 3, 1999, October 2, 1999 and January 1, 2000. In the opinion
of our management, this information was prepared on substantially the same
basis as our audited financial statements included in this prospectus and
include all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the unaudited quarterly results. You should read
this quarterly data in conjunction with our audited financial statements and
related notes included in this prospectus. Our operating results for any
quarter are not necessarily indicative of the operating results for any future
period.
<TABLE>
<CAPTION>
Nine Weeks 13 Weeks 13 Weeks 13 Weeks
Ended Ended Ended Ended
April 3, July 3, October 2, January 1,
1999 1999 1999 2000
---------- -------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Online store sales............... $ -- $ 6 $ 1,463 $ 6,519
Catalog sales.................... 1,165 1,250 398 654
------ ------ ------- -------
Total sales..................... 1,165 1,256 1,861 7,173
Promotional discounts............ -- 1 267 1,211
------ ------ ------- -------
Net sales....................... 1,165 1,255 1,594 5,962
Cost of goods sold............... 486 555 1,000 3,738
------ ------ ------- -------
Gross profit.................... 679 700 594 2,224
Sales and marketing expenses..... 414 584 1,257 8,236
General and administrative
expenses........................ 84 157 230 1,462
Product development expenses..... -- -- 206 549
Non-cash compensation expense.... -- -- 169 37
------ ------ ------- -------
Operating income (loss)......... 181 (41) (1,268) (8,060)
Interest income.................. -- -- 115 101
------ ------ ------- -------
Income (loss) before income
taxes.......................... 181 (41) (1,153) (7,959)
Tax provision.................... -- -- -- --
------ ------ ------- -------
Net income (loss)............... 181 (41) (1,153) (7,959)
Preferred dividends.............. -- -- -- (525)
------ ------ ------- -------
Net income (loss) available to
common stockholders............ $ 181 $ (41) $(1,153) $(8,484)
====== ====== ======= =======
<CAPTION>
Nine Weeks 13 Weeks 13 Weeks 13 Weeks
Ended Ended Ended Ended
April 3, July 3, October 2, January 1,
1999 1999 1999 2000
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
As a Percentage of Net Sales:
Online store sales............... -- % 0.5 % 91.8 % 109.3 %
Catalog sales.................... 100.0 99.6 25.0 11.0
------ ------ ------- -------
Total sales..................... 100.0 100.1 116.8 120.3
Promotional discounts............ -- 0.1 16.8 20.3
------ ------ ------- -------
Net sales....................... 100.0 100.0 100.0 100.0
Cost of goods sold............... 41.7 44.2 62.7 62.7
------ ------ ------- -------
Gross profit.................... 58.3 55.8 37.3 37.3
Sales and marketing expenses..... 35.5 46.5 78.9 138.1
General and administrative
expenses........................ 7.2 12.5 14.4 24.5
Product development expenses..... -- -- 12.9 9.2
Non-cash compensation expenses... -- -- 10.6 0.6
------ ------ ------- -------
Operating income (loss)......... 15.5 (3.3) (79.5) (135.2)
Interest income.................. -- -- 7.2 1.7
------ ------ ------- -------
Income (loss) before income
taxes.......................... 15.5 (3.3) (72.3) (133.5)
Tax provision.................... -- -- -- --
------ ------ ------- -------
Net income (loss)............... 15.5 (3.3) (72.3) (133.5)
------ ------ ------- -------
Preferred dividends.............. -- -- -- (8.8)
------ ------ ------- -------
Net income (loss) available to
common stockholders............ 15.5% (3.3)% (72.3)% (142.3)%
====== ====== ======= =======
</TABLE>
30
<PAGE>
We launched our online store on June 29, 1999. Prior statements of operations
data reflect the results of our catalog operations only. Our net sales
increased dramatically during the 13-week periods ended October 2, 1999 and
January 1, 2000 compared to the immediately preceeding periods as a result of
increased market acceptance of our online store. These increases in net sales
were partially offset by a decline in catalog sales compared to the immediately
preceeding periods. Since we intend to continue to focus on sales through our
online store, we anticipate that catalog sales will continue to decline. As a
percentage of net sales, gross profits were lower in the 13-week periods ended
October 2, 1999 and January 1, 2000 compared to the immediately preceeding
periods due to promotional discounting of products sold through our online
store. Sales and marketing expenses increased in each consecutive period
presented in the above table primarily as a result of increased advertising
expenditures. General and administrative expenses increased in each consecutive
period presented in the above table due to additional costs related to the
launch of our online store, including merchandising costs, support staff and
professional fees, software amortization expenses and payments to The Right
Start under the management services agreement. Product development expenses
during the 13-week periods ended October 2, 1999 and January 1, 2000 consisted
primarily of costs related to the development and maintenance of our Web site.
In light of the evolving nature of our business and limited online operating
history, we believe that period to period comparisons of our historical
operating results may not be meaningful and should not be relied upon as
indications of future performance. Although we have experienced sequential
quarterly sales growth for our online store since its launch, our historical
sales growth rates are not necessarily indicative of future sales growth rates.
We believe our business is not significantly impacted by seasonal
fluctuations, when compared to many other online and catalog retail operations.
Based on the experience of The Right Start, we believe our products are
primarily driven by customer need and our customer is often the end-user of our
products. However, we do experience an increase in sales during the Christmas
holiday season.
Liquidity and Capital Resources
During fiscal 1999, our primary source of liquidity came from the issuance of
preferred stock which provided net proceeds of approximately $13.7 million. The
preferred stock was converted to common stock in October 1999. During fiscal
1998 and fiscal 1997, The Right Start provided the required liquidity to
operate the catalog business which we acquired as part of our initial
capitalization in April 1999. As of January 1, 2000, we had approximately
$6.6 million in cash and working capital of $4.2 million. There are no material
commitments for capital expenditures although management expects to spend a
substantial portion of its cash balance to enhance our online store and for
advertising and marketing.
Net cash used in operating activities was $6.0 million in fiscal 1999,
$409,000 in fiscal 1998 and $561,000 in fiscal 1997. Net cash used in operating
activities during fiscal 1999 resulted primarily from net losses due to
marketing expenses, start-up costs and promotional discounts associated with
the June 1999 launch of our online store. Net cash used in fiscal 1998 and
fiscal 1997 resulted primarily from net losses associated with our catalog
operations.
Net cash used in investing activities was $1.0 million in fiscal 1999 and
consisted primarily of capitalized software and computer-related hardware
associated with our online store. There were no material investing activities
in fiscal 1998 or fiscal 1997.
Net cash provided by financing activities was $13.6 million in fiscal 1999
and resulted primarily from the issuance of capital stock. There were no
material financing activities in fiscal 1998 or fiscal 1997.
We entered into a term sheet with Oxygen Media in November 1999. The term
sheet contemplates that over the approximately three-year term of the proposed
agreement we will
31
<PAGE>
provide consideration totaling $13.7 million to Oxygen Media for
cross-promotional arrangements through the Oxygen network which is expected to
be launched nationwide in February 2000. The terms sheet contemplates that the
proposed agreement with Oxygen Media would expire on December 31, 2002 (with
two additional one-year renewal options). However, either we or Oxygen Media
would be able to terminate the proposed agreement earlier in the event there is
a material breach or bankruptcy, insolvency or similar adverse financial event
specified in the proposed agreement.
We believe our current cash, including the expected net proceeds of this
offering, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures through at least the next 12 months.
Thereafter, we expect we will need to raise additional capital to meet our
long-term operating requirements. Although we have increased sales, our
expenses also have continued to increase and we expect to increase our expenses
significantly in future periods as we seek to build our market share. As a
result, we do not expect to be able to fund our operations from internally
generated funds for the foreseeable future. Unanticipated expenses, poor
financial results or unanticipated opportunities that require financial
commitments could give rise to earlier financial requirements. If we raise
additional funds through the issuance of equity, equity-related or debt
securities, such securities may have rights, preferences or privileges senior
to those of the rights of our common stock and our stockholders may experience
additional dilution. Additional financing may not be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our expansion, take
advantage of business opportunities, continue to develop our online store or
otherwise respond to competitive pressures would be significantly limited.
Year 2000 Compliance
The year 2000 issue is the result of computer programs being written using
two digits (rather than four) to define the applicable year. We rely on The
Right Start and third parties to provide technology services. We believe that
all material systems are substantially year 2000 compliant. To our knowledge,
we have not experienced any significant problems as a result of year 2000
issues.
Recent Accounting Pronouncements
During 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and for Hedging Activities," which establishes new standards for reporting
derivative and hedging information. The standard is effective for periods
beginning after June 15, 2000 and will be adopted by RightStart.com as of
December 30, 2000. It is not expected that the adoption of this standard will
have an impact on the financial statements nor require additional footnote
disclosure since we do not presently use derivative instruments or participate
in structured hedging activities.
Quantitative and Qualitative Disclosures about Market Risks
We believe we do not have material market risk exposure due to the fact that
we own no derivative instruments, engage in no hedging transactions, have no
outstanding long-term debt and currently invest our excess cash in short-term
commercial paper. Our purchases of imported products subject us to a minimum
amount of foreign currency risk. Foreign currency risk is the risk associated
with recurring transactions with foreign companies, such as purchases of goods
from foreign vendors. If the strength of foreign currencies increase compared
to the United States dollar, the price of imported products could increase.
However, we have no commitments for future purchases with foreign vendors and
additionally, we believe we have the ability to source products domestically in
the event of import price increases.
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BUSINESS
Company Overview
RightStart.com is the leading online specialty retailer of high quality
developmental, educational and care products for children. We are dedicated to
providing our customers with a unique online shopping experience by offering a
trusted assortment of products carefully selected with regard to quality,
safety and developmental value and by providing a high level of customer
service.
We believe our relationship with The Right Start, a specialty retailer with
50 stores throughout the United States, and our experience with our widely-
distributed catalog, which has been in existence since 1985, combined with our
online store provide us with a meaningful tri-channel marketing advantage
relative to online-only retailers in our market. We believe our advantages
include brand name recognition, relationships with customers, cross-marketing
opportunities, vendor relationships, distribution capabilities, customer
convenience, preferred partnering arrangements, customer care and merchandising
expertise. We provide a number of customer services aimed at bringing the
specialty retail experience of The Right Start retail stores to our online
customers, including free ground shipping, free gift wrapping, guaranteed same-
day shipping and in-stock availability of products featured in our online
store, 24-hour customer service and live online help, product returns to any of
The Right Start's retail stores and editorial content, including parenting
articles. We launched our online store on June 29, 1999, and through January 1,
2000 we achieved $8.0 million in online store sales before deducting
promotional discounts.
We believe we have developed parental trust by offering a pre-selected
assortment of high quality developmental, educational and care products for
children. In adhering to our "best of breed" approach, we carefully select
products, based on test results and other criteria, to ensure that each of the
products we offer meets our standards for quality, safety and developmental
value. Our product offerings include a full assortment of motherhood and
childcare products, children's developmental and educational toys, books,
software, music, videos, sports equipment, nursery and kids' room accessories,
safety items, bath accessories and travel accessories. We offer products
selected from well-known brands such as Baby Trend(R), Graco(R), Safety 1st(R)
and Kenneth Cole as well as niche brands such as Britax(R), Peg Perego(R), Baby
Bjorn(R), Kidco, Tiny Love(R), Lamaze(R) and Medela(R). We carefully select
these products from a highly-fragmented group of over 350 vendors. Because our
select product line of high quality developmental, educational and care
products for children excludes most mass-market toys, we believe we achieve
higher gross margins relative to online-only retailers in our market.
Industry Overview
The Market for Developmental, Educational and Care Products for Children
The market for developmental, educational and care products for children
encompasses a wide selection of product categories. We believe that the
aggregate market in the United States for our product categories was
approximately $19 billion in 1998. This market includes a full assortment of
motherhood and childcare products, children's developmental and educational
toys, books, software, music, videos, sports equipment, nursery and kids' room
accessories, safety items, bath accessories and travel accessories. Within each
category, we sell only those products that are consistent with our mission to
provide high quality developmental, educational and care products for children.
Our initial focus has been on products in the birth-to-six age category, and we
believe that products in the seven-to-12 age category represent a significant
new opportunity for us.
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Current Retail Channel for Developmental, Educational and Care Products for
Children
We believe that the current retailers of developmental, educational and care
products for children can be categorized as follows:
. traditional store-based children's product retailers;
. various online retailers of children's products;
. major discount retailers of children's products;
. online efforts of traditional store-based retailers of children's
products;
. Internet portals and online service providers that feature shopping
services; and
. catalog retailers of products for children, babies, toddlers and
expectant mothers.
We believe that we distinguish ourselves from traditional store-based
retailers and online retailers of products for children by offering a full
assortment of children's developmental, educational and care products carefully
selected with regard to quality, safety and developmental value. As a specialty
retailer, we also focus on providing high levels of customer service. In
addition, we believe our relationship with The Right Start, a specialty
retailer with 50 retail stores throughout the United States, provides us with
meaningful advantages relative to online-only retailers in our market in terms
of brand name recognition, relationships with customers, cross-marketing
opportunities, vendor relationships, distribution capabilities, customer
convenience, preferred partnering arrangements, customer care and merchandising
expertise.
Growth of Internet Usage and Online Commerce
The Internet has emerged as a powerful global medium enabling people to
conduct commerce, communicate and exchange information. International Data
Corporation, or IDC, estimates that there were 142 million Web users worldwide
at the end of 1998 and anticipates this number will grow to over 500 million
users by the end of 2003. IDC also estimates that revenue generated worldwide
from consumer online commerce will increase from $15 billion in 1998 to
approximately $177 billion in 2003.
The growth of the Internet and online commerce can be attributed to a number
of advantages the Internet provides online retailers, including the following:
. increased merchandising flexibility as online retailers are able to
frequently adjust their product selections, editorial content and
pricing;
. the ability to provide complementary product information to facilitate
more informed consumer purchasing decisions;
. the ability to obtain demographic and behavioral data about customers,
increasing opportunities for targeted marketing and customized personal
services;
. the ability to reach a large group of consumers from a central location;
and
. enhanced consumer convenience due to the ability to access the Internet
at any time from almost any location.
As Internet usage and online commerce grow, women are becoming a more
powerful online demographic. Jupiter Communications estimates that the number
of Internet users who are women in the United States will increase from
approximately 40 million in 1998 to approximately 79 million in 2003,
representing over 50% of the United States online population. In addition,
Jupiter Communications projects that online spending by women will grow from
approximately $3 billion in 1998 to approximately $41 billion in 2003. As more
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women use the Internet to communicate and conduct commerce, we believe that we
are well-positioned to be their online retailer of choice for children's
developmental, educational and care products.
This prospectus contains estimates of market growth related to the Internet
and online commerce. These estimates have been included in studies published by
market research firms including Data Monitor, Jupiter Communications,
International Data Corporation and The NPD Group, Inc. These estimates have
been produced by industry analysts based on trends to date, their knowledge of
technologies and markets, and customer research, but these are forecasts only
and are subject to inherent uncertainty.
The RightStart.com Advantage
RightStart.com is the leading online specialty retailer of high quality
developmental, educational and care products for children. We are dedicated to
providing our customers with a unique shopping experience by offering a trusted
assortment of products carefully selected with regard to quality, safety and
developmental value and by providing a high level of customer service. In
addition, we believe our relationship with The Right Start, a specialty
retailer with 50 retail stores throughout the United States, and our experience
with our own widely-distributed catalog, which has been in existence since
1985, provide us with a meaningful tri-channel marketing advantage relative to
other online retailers in our market. We believe our advantages include:
Superior Brand Name Recognition. Through The Right Start's network of 50
retail stores and our own widely-distributed catalog, the "Right Start" brand
name has been associated with high quality developmental, educational and care
products for children and high levels of customer service for nearly 15 years.
We believe The Right Start has built a level of trust with mothers and that the
strength of the "Right Start" brand name is a significant motivating factor in
attracting customers, especially those who may be making their first online
purchases. We intend to leverage this existing brand name presence in marketing
our online store.
Established Relationships with Our Customers. Over the last 15 years, The
Right Start has built a high level of trust and brand awareness among new
parents. The Right Start's retail stores focus primarily on the infant to
three-year-old age category. We believe that our focus on mothers of infants
and young children allows us to capture our target customer at an early stage
in their child's development. This opportunity to establish first contact with
consumers allows us to develop a strong customer relationship with parents
before many of our competitors. Because we intend to offer developmental and
educational products for children through age 12 years old, we will be able to
continue to serve our customers as their children grow. Through our
relationship with The Right Start, we are able to leverage customer information
collected at The Right Start's retail stores, together with information
collected through our catalog operations, to efficiently identify new
RightStart.com customers. Since May 1993, The Right Start has collected
approximately 2.7 million names and addresses from retail and catalog
customers, of which over 450,000 purchased from us in the last two fiscal
years. We believe that we will be able to use this information to target a
focused group of potential customers for our new online stores for children
ages seven to 12 years old. We believe that this proprietary customer database
and our direct marketing expertise provide us with a competitive advantage by
allowing us to develop and nurture relationships with mothers from their
children's births through age 12 years old.
Cross-Marketing Opportunities. The Right Start's existing network of 50
retail stores, its plans to open 30 additional stores in 2000 and our own
widely-distributed catalog provide us
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with substantial tri-channel marketing opportunities. Through a unique bonus
structure, The Right Start's retail store employees are encouraged to promote
all three distribution channels for our products, including our online store
and catalog. Visitors to The Right Start's retail stores are greeted with
extensive in-store signage advertising RightStart.com and customers also
receive copies of our catalog as well as discount coupons and other incentives
to make online purchases from RightStart.com. In addition, RightStart.com is
promoted throughout our catalog.
Vendor Relationships and Proven, Scalable Distribution Capabilities. We rely
on obtaining products from a highly-fragmented group of manufacturers and
suppliers. The Right Start has nearly 15 years of experience in our market and
has developed a network of over 350 vendors. We are able to leverage this
existing product procurement infrastructure and experience through our
relationship with The Right Start. Our combined purchasing requirements also
provide us access to vendor promotions and discounts that would not otherwise
be available. In addition, through our relationship with The Right Start, we
have access to a proven, scalable distribution system. We believe our vendor
relationships and our ability to leverage The Right Start's distribution
system, combined with our experience gained from long-term catalog operations,
give us a significant advantage in competition with online-only retailers in
our market. In addition, through the integration of our distribution system
with The Right Start, we receive volume discounts from third-party distribution
service providers that we would not otherwise be able to obtain and we have
access to the inventory control and accounting systems developed for The Right
Start.
Customer Convenience. Products purchased online may be returned to any of The
Right Start's 50 retail stores, a convenience not offered by catalog only or
online-only retailers. Additionally, our customers may visit The Right Start's
retail stores to experience the touch and feel of a selection of our products
or view demonstrations for products that they may later purchase on
RightStart.com.
Preferred Partnering Arrangements. We believe The Right Start and
RightStart.com together will be one of the largest integrated retailers in the
specialty market for developmental, educational and care products for children.
We believe that our relationship with The Right Start gives us substantial
advantages in developing marketing arrangements with preferred partners. In
addition to exposure on our online store and in our catalog, our relationship
with The Right Start allows us to offer to our partners retail store presence,
access to The Right Start's customer database and inclusion in The Right
Start's direct mail advertising. Our online competitors who lack these offline
relationships cannot offer this type of extensive cross-promotion. Currently,
we have marketing arrangements with Oxygen Media in the women's media sector,
Allpets.com in the online pet supplies sector and MyEvents.com in the online
event planning sector.
Outstanding Customer Care. Key members of our management team have extensive
experience with The Right Start and other specialty retailers. As a result, we
understand the high level of customer service that specialty retail customers
expect. Our target customers are middle- to upper-income purchasers of
children's products who have high expectations about the quality of their
shopping experiences. At RightStart.com, we provide a number of services aimed
at bringing the specialty retail experience to our online customers, including:
. free ground shipping;
. free gift wrapping and gift cards;
. guaranteed same-day shipment on orders placed before 2 p.m., East Coast
time;
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. guaranteed in-stock availability of products featured in our online
store;
. knowledgeable customer service available 24 hours a day, seven days a
week via email and our toll-free phone number;
. live online help available 24 hours a day, seven days a week;
. online order tracking and email confirmation;
. product returns through the mail or through any of The Right Start's 50
retail stores;
. product selection services such as our Parent Shopping Guide; and
. editorial content, including our "Ask the Doctor" and "Ask the Teacher"
areas, as well as parenting articles from respected parenting
periodicals.
It is our long-term business strategy to continue to offer free ground
shipping and free gift wrapping services. A customer shopping in our online
store pays the same price she sees quoted next to an item upon checkout,
subject to adjustment only for applicable sales taxes. This "one price"
approach, together with the other services we offer, is intended to increase
the rate at which we convert visitors to our online store into RightStart.com
customers. We are currently developing additional customer care services, such
as a personal shopper service, a children's wish list and a gift registry.
Merchandising Expertise and Focused Product Selection. We believe we have
developed parental trust by offering a pre-selected assortment of high quality
developmental, educational and care products for children. In adhering to our
"best of breed" approach, we carefully select products from over 350 vendors,
based on test results and other criteria, to ensure that each of the products
we offer meets our standards for quality, safety and developmental value. As a
result, we offer an assortment of products not offered by mass-market
retailers. Our product offerings include a full assortment of motherhood and
childcare products, children's developmental and educational toys, books,
software, music, videos, sports equipment, nursery and kids' room accessories,
safety items, bath accessories and travel accessories.
Our Growth Strategy
We have created a multi-faceted growth strategy that is designed to leverage
our brand name and increase sales from existing as well as new customers. Key
components of our strategy include:
Expand Product Offerings in Existing Departments Within Our Online Store. We
are dedicated to providing our customers with a full assortment of high quality
developmental, educational and care products for children. As part of this
strategy, we plan to expand significantly the number of products sold in the
two existing departments within our online store, the Baby Store (which focuses
on children from birth to age two years old and their caregivers) and the Kids'
Development Store (which focuses on children from ages three to six years old).
In addition to selecting new items from existing suppliers, we also intend to
offer products from additional, high quality suppliers. We will continue to
adhere to our standards for quality, safety and developmental value as we
select new products.
Launch New Departments Within Our Online Store. We believe there is a
significant opportunity to leverage the "Right Start" brand name and our
customer base beyond products for children through age six years old. We have
designed our online store so that we can continue to grow as our customers'
children grow by adding new departments and categories within our online store.
We plan to launch two new departments in fiscal 2000, the Teachers' Store and
the Big Kids' Store. The Teachers' Store will feature teaching tools and
educational
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supplies for pre-school and elementary school-aged children. The Big Kids'
Store will specialize in unique, high quality developmental and educational
products for children ages seven to 12 years old, including music, books,
videos, computer software, science and nature learning products and unique
sporting goods. Additionally, we intend to form alliances with third parties to
develop online boutiques accessible from our online store that will offer
products in specialized categories such as children's apparel, top-line
furniture, wall art and online music.
Enhance Customer Care. We are committed to providing high levels of service
to our customers in order to enhance and personalize their shopping
experiences. In addition to the numerous services we currently offer, including
free ground shipping, free gift wrapping, guaranteed same-day shipping and in-
stock availability of products featured in our online store, 24-hour customer
service and live online help, product return to any of The Right Starts's 50
retail stores and editorial content including parenting articles, we intend to
add features to our online store such as a personal shopper service, a
children's wish list and a gift registry. We also plan to offer additional
services aimed at promoting repeat visits to our online store, including a
Mom's message board, a chat room and an events calendar. We believe that by
enhancing the online experience, we will increase the rate at which we convert
visitors to our online store into customers.
Establish Additional Strategic Alliances. We believe there is a significant
opportunity to gain new online customers and enrich our product offerings by
forming strategic alliances with companies that share a similar customer base,
especially companies that focus on providing goods or services to women. We
believe that strategic alliances provide us with a cost-effective method for
reaching new customers and generating additional sales. To date, we have
entered into arrangements with Oxygen Media in the women's media sector,
Allpets.com in the online pet supplies sector, and MyEvents.com in the online
event planning sector. We are currently exploring strategic alliances with
companies in the following sectors: online greeting cards, Internet portals,
financial service providers, personal health services, education, travel and
online music. We are also exploring opportunities to create boutiques within
our online store that would carry such items as flowers, children's art,
apparel, furniture and musical equipment.
Expand into Select International Markets. We intend to capitalize on the
demand for high quality developmental, educational and care products for
children outside the United States by expanding into select international
markets. We believe that there are significant opportunities for expansion due
to the vast size, highly-fragmented nature and early development stage of many
international retail markets for our products. We believe our advanced
merchandising, marketing and fulfillment capabilities will give us a
competitive advantage as these international Internet markets begin to develop.
During fiscal 2000, we plan to expand into Canada and the United Kingdom and we
have begun to develop marketing channels and a customized infrastructure for
these countries. We intend to explore additional international markets where we
believe demand for our products will be strong.
Our Online Store
Our online store provides our customers with an easy to use, convenient and
informative way to shop for developmental, educational and care products for
children. In addition to ordering products, a customer can browse the different
departments within our online store, conduct targeted searches, view
recommended products, read parenting and child-related articles, visit our Gift
Center, participate in promotions and check order status. Our online store
includes:
Our Departments. Our online store is organized into departments based on
children's ages. Currently, we offer the Baby Store (which focuses on children
from birth to age two years old and their caregivers) and the Kids' Development
Store (which focuses on children
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from ages three to six years old). Within each department, we organize products
into different categories (such as books, music and feeding). In addition, our
online store has advanced search technologies which make it easy for customers
to locate products based on selected criteria. For example, a customer can
search by any combination of age, category, brand name or keyword.
Customer Services. We believe that we offer our customers a number of
services that are not available through many other online retailers. For
example:
. We offer free ground shipping for online purchases, other than oversized
items. According to Data Monitor, an average of 78% of all Internet
purchases are abandoned in the checkout phase of an online transaction.
We believe that this is in part due to the potential customer's
dissatisfaction with the high shipping fees charged by many online
retailers. We believe that our free ground shipping has resulted in our
significantly lower abandonment rate.
. We provide free gift wrapping and gift cards for online purchases, other
than oversized items. Customers may select from a variety of gift wraps
and personalize their own gift cards for each of their purchases.
. We ship customer orders within 24 hours of order placement and we
guarantee that product orders placed before 2 p.m., East Coast time,
will be shipped from our distribution facility the same day that we
receive the order.
. We guarantee in-stock availability of products featured in our online
store. We believe there is a significant competitive advantage in being
able to consistently fulfill our customers' order requests on a timely
basis.
. We have knowledgeable customer service representatives that are
available 24 hours a day, seven days a week via email and our toll-free
phone number. In addition, the customer service area of our online store
provides extensive information about using the Web site and provides
answers to our customers' most frequently asked questions.
. We have a live online customer support service available 24 hours a day,
seven days a week.
. We provide online order tracking and product returns directly through
the mail and through The Right Start's retail stores. Our relationship
with The Right Start allows our online and catalog customers to return
their purchases to any of The Right Start's 50 retail stores. We also
have a store locator feature within our online store that allows
customers to easily find the store nearest to them.
. We provide product selection services to assist customers in making
purchases. Each category within a department features recommended
bestselling products. Also, the Baby Store offers a Parent Shopping
Guide designed for first-time parents which allows customers to browse
through lists organized by age or theme such as the New Parent
Checklist, the Flight Travel Essentials, the Park Visit Essentials and
the Perfect Toddler Bath.
Editorial Content. Our online store features select editorial content
designed to provide useful information that complements our products and
assists visitors to our online store with purchase decisions. We have partnered
with respected parenting publishers such as Time Warner, Prime Media and United
Parenting Publications of America and feature articles from publications such
as American Baby, Baby Talk and Parenting in an extensive article library
organized by topic area. In addition, we have two editorial features, "Ask the
Doctor" and "Ask
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the Teacher," which allow visitors to submit their questions to third-party
professionals who answer questions by posting relevant articles online. We
feature recommended products that complement the editorial pieces when
appropriate.
Products and Merchandising
We believe that our "best of breed" approach and extensive merchandising
expertise result in a unique product selection unmatched by other online or
traditional store-based retailers. Our goal is to develop parental trust by
providing a pre-selected assortment of high quality developmental, educational
and care products for children, including a full assortment of motherhood and
childcare products, developmental and educational toys, books, software, music,
videos, sports equipment, nursery and kids' room accessories, safety items,
bath accessories and travel accessories. We carefully select products, based on
test results and other criteria, to ensure that each of the products we offer
meets our standards for quality, safety and developmental value. As a result,
we offer an assortment of products not offered by mass-market retailers. We
offer products selected from well known brands such as Baby Trend(R), Graco(R),
Safety 1st(R) and Kenneth Cole as well as niche brands such as Britax(R), Peg
Perego(R), Baby Bjorn(R), Kidco, Tiny Love(R), Lamaze(R) and Medela(R). We
obtain these products from a highly-fragmented group of over 350 vendors. We
believe that our ability to leverage the existing strong, long-term vendor
relationships of The Right Start provides us with a competitive advantage.
Our product offerings will continue to expand as we serve a broader market.
With the planned opening of the Teachers' Store and the Big Kids' Store, we
will expand our product offerings by introducing additional product categories
for children through age 12 years old such as music, books, videos, computer
software, science and nature learning products and unique sporting goods.
RightStart.com's merchandising team works closely with The Right Start's
merchandising staff to locate, evaluate and market new products. We believe
that due to our strong brand presence and our established relationships with
our vendors, we often obtain new products ahead of our competitors and we are
able to regularly introduce new products and product lines to our customers. In
addition, we regularly update our online store and catalogs in order to
encourage repeat shopping, respond to customer demands and promote top-selling
products.
Marketing and Promotion
We have designed our marketing and promotional strategy to increase consumer
traffic to our online store, promote repeat purchases and develop strong
customer loyalty. We believe that our established brand name allows us to
engage in highly-targeted marketing and promotional activities directed at
purchasers of developmental, educational and care products for children and
minimizes our need to devote resources to general branding efforts. Our
marketing and promotional program includes strategic relationships, direct
marketing, offline and online advertising, our Preferred Partners Program and
cross-promotional activities with The Right Start and our catalog operations.
Strategic Relationship with Oxygen Media. We entered into a term sheet with
Oxygen Media in November 1999. We expect to provide Oxygen Media's online users
with products from all our departments and product categories. RightStart.com
may be accessed directly through MomsOnline, Oxygen Media's Web site for
parents. In addition, we expect to receive an average of seven minutes of
television advertising time daily through 2002 on the Oxygen Media cable
network, which is expected to launch nationwide in February 2000. Furthermore,
both parties have agreed to prominently advertise each other and we
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expect to be promoted across Oxygen Media's online properties. In addition to
our relationship with Oxygen Media, we plan to develop additional strategic
relationships with companies that have customer bases similar to our target
audience.
Direct Marketing. We engage in several forms of direct marketing, allowing us
to individually target potential customers and leverage our direct marketing
expertise. Our direct marketing initiatives include monthly mailings to our
customers and targeted non-customers, as well as periodic mailings to customers
of The Right Start's retail stores. Our direct marketing program also involves
the placement of promotional items such as RightStart.com branded mouse pads
and notepads in many product shipments. In addition, we engage in focused
online direct marketing, including sending periodic emails to all the customers
on our mailing list and selectively emailing targeted non-customers. We also
conduct cross-promotional marketing activities with consumer products companies
such as Clorox and financial services companies such as American Express.
Offline Advertising. We engage in numerous forms of offline advertising that
target our customer base, including broadcast and print media.
. Broadcast Media. Our broadcast marketing program includes targeted
television and radio advertisements. We generally advertise on
television and radio programs that focus on women, such as the Oxygen
Media cable network.
. Print Media. Our print marketing initiatives involve the placement of
promotional materials such as advertisements and inserts in parenting
and child-related publications. Print advertising allows us to
efficiently market our products to specific customer groups. For
example, we market our Baby Store in magazines such as Fit Pregnancy,
New Parent and American Baby, and we market our Kid's Development Store
in magazines such as Parents, Parenting and Healthy Kid. In addition, in
major markets we have advertised in less targeted publications such as
The Los Angeles Times, The New York Times, USA Today and The Chicago
Tribune that provide access to a broader female audience.
Online Advertising. We intend to enter into marketing relationships that
provide targeted online advertising primarily focused on women. For example, in
December 1999, we purchased services from GoTo.com to direct Internet users who
search for selected terms to our online store. In addition, our arrangement
with Oxygen Media provides substantial online advertising across Oxygen Media's
online properties, including MomsOnline, Oxygen Media's Web site for mothers.
Preferred Partner Program. We have entered into partnering agreements with
several companies such as Allpets.com in the online pet supplies sector and
MyEvents.com in the online event planning sector. We are currently exploring
strategic alliances with companies in the following sectors: online greeting
cards, Internet portals, financial service providers, personal health services,
education, travel and online music. We typically provide our preferred partners
with access to our customers through online links, direct marketing and catalog
mailings, advertising in The Right Start's retail stores and the placement of
promotional materials in product shipments. In exchange, we typically receive
online and offline promotional exposure from our preferred partners. We believe
that our preferred partner relationships provide us with a cost-effective way
to promote our online store.
Promotion Through The Right Start's Retail Stores and our Catalog. We
leverage our affiliation with The Right Start's retail stores and our award-
winning catalog to market and promote our online store aggressively. For
example, RightStart.com is advertised prominently in each of The Right Start's
50 retail stores and in all of our catalogs. In addition,
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RightStart.com inserts are currently placed in all shopping bags distributed
through The Right Start's retail stores. Our catalogs also feature promotions
offering coupons and other incentives to purchase products through
RightStart.com.
Fulfillment Operations
We believe our relationship with The Right Start and our experience with our
catalog operations, allows us to process our customers' orders more quickly and
accurately than many of our online competitors . We guarantee that any order we
receive by 2 p.m., East Coast time, will be delivered to a shipment carrier the
same day or the customer will receive a 50% discount on merchandise price.
Arnold Industries, Inc., a publicly traded company with revenues of
approximately $400 million in fiscal 1998, operates our primary distribution
facility in Camp Hill, Pennsylvania. Arnold Industries performs distribution
services for us 24 hours a day, seven days a week. Orders are automatically
transmitted from our online store several times each day to the distribution
facility over a secure connection and the Arnold Industries' warehouse
management system optimizes the pick, pack and ship process. Our online store
transmits to Arnold Industries the customer's gift wrap choices, gift messages
and delivery labels. Arnold Industries, in turn, uses this information to
fulfill our customers' orders. We offer three levels of shipping service: next-
day delivery, two-day delivery and ground delivery. Ground delivery is
complimentary on all products ordered online, except oversized items. We
provide service to all 50 states and United States territories through United
Parcel Service and the United States Postal Service. In addition, we offer an
order tracking service for our customers on our online store. We receive data
back from Arnold Industries regarding the receipt of new inventory, shipping,
inventory quantities and inventory location, which enables us to confirm the
availability of the products on our online store daily. Arnold Industries and
USCO Logistics, a nationwide distribution fulfillment company, process our
product returns.
We believe our relationships with Arnold Industries and USCO Logistics are
good. However, neither we nor The Right Start have long-term contracts with
them. We believe alternative distribution and fulfillment centers are available
to provide us with fulfillment services if necessary. However, there can be no
assurance that a termination of our relationship with either Arnold Industries
or USCO Logistics, or both, would not impair our ability to ship products and
manage our inventory levels.
Catalog and Call Center
Since 1985, we have offered high quality developmental, educational and care
products for children through our catalog. Our catalog not only sells our
products to customers directly by mail order, but also serves as a direct
marketing tool for our online operations. Our award-winning catalog was the
first national specialty catalog to offer developmental, educational and care
products for mothers, infants and young children and features a selection of
products offered in The Right Start's retail stores and in our online store.
Several issues of our catalog are mailed each year, targeting educated, first-
time parents from 23-40 years old, with an average annual income in excess of
$60,000. We mailed approximately 2.6 million catalogs in 1999. Our online store
and catalog share distribution and order fulfillment facilities and systems.
Items purchased through our catalog may be returned to any of The Right Start's
50 retail stores or through the mail to our central distribution center.
Arnold Industries provides call center services to process our catalog
orders, provide customer support for our online store and assist with product
returns for both our catalog and online store 24 hours a day, seven days a week
via email, live online help, a toll-free telephone number, facsimile and mail.
Online customers using our live online help service are connected
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<PAGE>
to customer service representatives at Arnold Industries via software provided
by AskJeeves.com. We give Arnold Industries product information and provide
back-up support through our own customer service representatives.
Operations and Technology
Guidance Solutions, Inc., an Internet consulting firm based in Marina del
Rey, California, has helped develop the look and feel of our online store and
the related back-end technology and systems. Through our ongoing relationship
with Guidance Solutions, we have implemented a broad array of scalable site
management, search, customer interaction and distribution services, as well as
systems used to process customers' orders and payments. These services and
systems use a combination of our own technologies, Guidance Solution's
proprietary technologies (for which we have obtained a perpetual non-exclusive
license) and commercially available, licensed technologies. The systems that we
use to process customers' orders and payments are integrated with our
accounting and financial systems.
Our systems have been developed based on industry standard architectures and
are designed to reduce downtime. Our online store is generally available 24
hours a day, seven days a week. Our system hardware is hosted at a third-party
facility operated by Level 3 Communications, Inc. in Los Angeles, California,
which provides redundant communications lines and emergency power backup. We
have implemented load balancing systems and our own redundant servers managed
by Guidance Solutions to provide for additional fault tolerance. Guidance
Solutions currently has a staff dedicated solely to developing and maintaining
our Web site. In addition, because Guidance Solutions owns 288,333 shares of
our common stock, we believe Guidance Solutions has a vested interest in the
successful operation of our Web site.
We incurred product development expenses of $755,000 in the 48 weeks ended
January 1, 2000. We anticipate that we will continue to devote significant
resources to Web site development in the future.
Competition
The market for developmental, educational and care products for children is
intensely competitive. In particular, the online market for these products is
newly developing, rapidly evolving and intensely competitive. We expect
competition to intensify in the future because new competitors can enter our
market with little difficulty and can launch online stores at a relatively low
cost. We principally compete with online and traditional store-based retailers
and catalog retailers that sell products for children, including specialty
stores, mass-market retailers, discount chains, department stores and a growing
number of mail-order catalogs.
We believe that competition in the online retail and catalog business is
based on brand name recognition, product selection, price, convenience,
customer service and the speed and reliability of fulfillment. We believe that
we distinguish ourselves from traditional store-based retailers and other
online retailers by offering a full assortment of children's developmental,
educational and care products carefully selected with regard to quality, safety
and developmental value. As a specialty retailer, we also focus on providing
the highest levels of customer service. In addition, we believe our
relationship with The Right Start, a specialty retailer with 50 retail stores
throughout the United States, provides us with advantages relative to online-
only retailers in our market, including cross-marketing opportunities, vendor
relationships, distribution capabilities and enhanced customer convenience.
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<PAGE>
Many of our online competitors have longer operating histories, larger
customer bases, greater brand name recognition and significantly greater
financial, marketing and other resources than we do. Many of these competitors
can devote substantially more resources to Web site development than we can.
Our competitors also may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Some of our
competitors have significantly greater experience in selling children's
products online. Finally, new technologies and the expansion of existing
technologies, such as price comparison programs, may increase competition.
Government Regulation
We are not currently subject to direct federal, state or local regulation
other than the Consumer Safety Act, the regulations issued thereunder and
regulations applicable to businesses generally or directly applicable to
electronic commerce. It is possible, however, that as the popularity of the
Internet grows, a number of laws and regulations may be adopted with respect to
the Internet. These laws may cover issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security.
Furthermore, the growth of electronic commerce may prompt calls for more
stringent consumer protection laws. Several states have proposed legislation to
limit the uses of personal user information gathered online or require online
services to establish privacy policies. The Federal Trade Commission has also
initiated action against at least one online service regarding the manner in
which personal information is collected from users and provided to third
parties. While we contact our customers on behalf of our preferred partners, we
do not currently provide personal information regarding our users to any third
parties. The adoption of such Internet laws and the increasing regulation of
electronic commerce could make our business more costly or reduce our ability
to leverage information we gain from our customers to increase sales.
We are not certain how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel and export
or import matters. The vast majority of such laws were adopted prior to the
advent of the Internet. As a result, they may not fully contemplate or address
the unique issues of the Internet and related technologies. Changes in laws
intended to address such issues could increase the cost of doing business as a
result of litigation costs or increased service delivery costs.
In addition, because our services are available over the Internet and through
our catalog distribution in multiple states and foreign countries and because
our products may be returned to any of The Right Start's retail stores,
multiple jurisdictions may claim that we are required to qualify to do business
there, be subject to litigation in their courts and comply with their laws. We
are qualified to do business only in California and Pennsylvania. Our failure
to qualify in a jurisdiction where we are required to do so could subject us to
taxes and penalties. It could also hamper our ability to enforce contracts or
our intellectual property rights in such jurisdictions. The application of laws
or regulations from jurisdictions whose laws do not currently apply to our
business could have a material adverse effect on our business, financial
condition, results of operations and prospects.
We currently collect sales and other similar taxes for physical shipments of
goods into each state in which The Right Start has a retail store because all
of our online and catalog products may be returned to any of The Right Start's
retail stores. Sales in other states, however, may subject our shipments in
such states to state sales taxes under current or future laws. If we become
obligated to collect additional sales taxes, we will need to update our
44
<PAGE>
system that processes customers' orders to calculate the appropriate sales tax
for each customer order and to remit the collected sales taxes to the
appropriate authorities. These upgrades will increase our operating expenses.
In addition, our customers in these states may be discouraged from purchasing
products from us because they have to pay sales tax, potentially causing our
net sales to be lower than if we did not collect such taxes. Many of our
competitors do not collect sales tax on as widespread a basis as we do. As a
result, in order to retain our market share, we may need to offer our products
at lower prices to offer the same total cost to our customers, which may
decrease our margins and reduce our profitability.
Intellectual Property
We regard the protection of our intellectual property as critical to our
future success and rely on various intellectual property laws and contractual
restrictions to protect our proprietary rights. These include confidentiality
and nondisclosure agreements with our employees, contractors, suppliers and
strategic and preferred partners. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our intellectual property
without our authorization. In addition, through our agreement with The Right
Start and independently, we have sought or will seek registration of our
trademarks and service marks in the United States and internationally, and have
applied for and obtained registration in the United States for certain of our
trademarks and service marks, including "Right Start" and have applied for
federal registration of "Right Start" as it is used for online sales of child-
related products. However, effective intellectual property protection may not
be available in every country in which our products are made available online.
We have licensed in the past, and expect that we may license to third parties
in the future, certain of our proprietary rights, such as trademarks or
copyrighted materials. We attempt to ensure that these licensees maintain the
quality of our brand name and the associated good will. However, these
licensees may nevertheless take actions that materially adversely affect the
value of our proprietary rights, good will, image and reputation.
We also rely on technologies that we license from third parties. These
licenses may not continue to be available to us on commercially reasonable
terms or at all. As a result, we may be required to obtain substitute
technology of lower quality or at greater cost, which may materially adversely
affect our business, financial condition, results of operations and prospects.
See "Related Party Transactions" for a description of our intellectual property
agreement with The Right Start. See "Risk Factors--We are substantially
dependent on our arrangements with our technology partner" and "Risk Factors--
Our Web site is dependent on third party software and services" for a
description of our relationship with our technology partners and providers.
To date, we have not been notified that our technologies infringe the
proprietary rights of third parties. However, there can be no assurance that
third parties will not claim infringement by us with respect to our current or
future technologies. We expect that participants in our markets will be
increasingly subject to infringement claims as the number of services and
competitors in our industry segment grows. Any such claim, with or without
merit, may be time-consuming, result in costly litigation, cause service
upgrade delays or require us to enter into royalty or licensing agreements.
Such royalty or licensing agreements might not be available on terms acceptable
to us or at all. As a result, any such claim of infringement against us may
have a material adverse effect upon our business, financial condition, results
of operations and prospects.
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<PAGE>
Employees
As of January 1, 2000, we had 27 full-time employees and one part-time
employee. In order to maintain flexibility, we have employed a strategy of
outsourcing functions essential to our business. Since the launch of our online
store in June 1999, we have outsourced our technology department, our
warehousing and logistics operations, certain of our customer service functions
and certain of our administrative functions. As a result, we have engaged our
employees primarily in managerial roles. None of our employees are represented
by labor unions and we consider our employee relations to be good.
Facilities
Our corporate offices are located in approximately 9,300 leased square feet
of space in a mixed-use building in Westlake Village, California. We lease
these facilities from The Right Start on a month to month basis for $12,500 per
month. We use third-party distribution and fulfillment providers and therefore
do not directly lease or own any space for our inventory. Our Web site's
servers are located in Level 3 Communications, Inc.'s hosting facilities.
Legal Proceedings
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not aware of any
material claims or actions pending or threatened against us at this time.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth specific information as of January 1, 2000
regarding our executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jerry R. Welch.......... 49 Chairman, President and Chief Executive Officer
Raymond P. Springer..... 49 Executive Vice President and Chief Financial Officer
Gerald E. Mitchell...... 45 Executive Vice President, Merchandising and
Marketing
Scott M. Harvey......... 38 Senior Vice President, Business Development
Kendrick F. Royer....... 36 Senior Vice President and General Counsel
Richard Pollock......... 48 Senior Vice President, Fulfillment and Customer
Service
Arlissa R. Mittleman.... 36 Vice President, Marketing
Richard A. Kayne........ 54 Director
Fred Kayne.............. 61 Director
David C. Schwab......... 42 Director
</TABLE>
Jerry R. Welch has served as our Chairman, President and Chief Executive
Officer since April 1999. In addition, Mr. Welch has served as Chairman of The
Right Start since August 1995, as its President since September 1996 and as
its, Chief Executive Officer since March 1996. Mr. Welch also serves as a
managing director of Kayne Anderson Investment Management, Inc., the principal
shareholder of The Right Start, and has served in such capacity since January
1993. Mr. Welch held the positions of Chairman from April 1993 to September
1999 and Chief Executive Officer from August 1994 to September 1999 of Glacier
Water Services, Inc., a retailer of vended water. Mr. Welch continues to serve
as a member of the board of directors of Glacier Water Services, Inc. and has
served in such capacity since April 1993.
Raymond P. Springer became our Executive Vice President and Chief Financial
Officer in December 1999. From August 1999 to December 1999, Mr. Springer
served as Senior Vice President and Chief Financial Officer of Payless Cashways
Inc., a retailer of building materials and home improvement products. From
April 1996 to June 1999, Mr. Springer was employed as Executive Vice President
and Chief Financial Officer of Jumbo Sports, Inc., a sporting goods retailer
located in Florida. Jumbo Sports filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code in December 1998. From 1987 to
1996, Mr. Springer was the Executive Vice President and Chief Financial Officer
of Kash n' Karry Food Stores, Inc., a grocery store chain located in Florida.
Gerald E. Mitchell has served as our Executive Vice President, Merchandising
and Marketing since August 1999. From April 1999 to August 1999, Mr. Mitchell
served as Senior Vice President, Merchandising and Marketing of The Right
Start. From July 1996 to April 1999, Mr. Mitchell served as Vice President,
Merchandising of The Right Start. From January 1994 to June 1996, Mr. Mitchell
served as Vice President-Merchandising for Discovery Channel Stores, a media-
related specialty chain. Mr. Mitchell's prior experience also includes senior
management roles in department store, specialty store, and chain store
merchandising and product development.
Scott M. Harvey has served as our Senior Vice President, Business Development
since October 1999. From May 1998 to September 1999, Mr. Harvey served as a
Senior Vice President for Tickets.com, a leading event ticketing company on the
Internet. Mr. Harvey served as Senior Vice President and Director for American
Professional Testing Service, a test preparation company, from April 1989 to
June 1995 and as Vice President for West Bar Review, a test preparation
company, from June 1995 to April 1998.
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Kendrick F. Royer joined us as Senior Vice President and General Counsel in
December 1999. From November 1995 to December 1999, Mr. Royer was an associate
at the law firm of Milbank, Tweed, Hadley & McCloy LLP in Los Angeles,
California, practicing general corporate, securities and mergers and
acquisition law. From November 1991 to September 1995, Mr. Royer was an
associate at the law firm of O'Melveny & Myers LLP in Los Angeles, California.
Richard Pollock has served as our Senior Vice President, Fulfillment and
Customer Service since August 1999. Mr. Pollock served as Vice President,
Logistics of The Right Start from September 1996 to August 1999. From June 1996
to September 1996, Mr. Pollock served as Director of Logistics at The Right
Start. Mr. Pollock previously served as Regional Operations Manager of USCO
Distribution Services, a fulfillment services provider, from 1989 to June 1996.
Arlissa R. Mittleman became our Vice President, Marketing in November 1999.
From June 1993 to November 1999, Ms. Mittleman served as director of marketing
for the Disney Entertainment Business Unit of Mattel Inc.
Richard A. Kayne has served as a director since June 1999. Mr. Kayne has also
served as President and Chief Executive Officer of Kayne Anderson Investment
Management, Inc., and its broker dealer affiliate, K.A. Associates, Inc. Mr.
Kayne co-founded Kayne Anderson Investment Management, Inc. in 1985. Mr. Kayne
is also a director of the Right Start, Foremost Insurance Corporation of
America and Glacier Water Services, Inc. Since September 1999, Mr. Kayne has
served as the Chief Executive Officer of Glacier Water Services, Inc. In
addition, Mr. Kayne has served as President and director of K.A. Holdings, Inc.
and K.A. Limited, Inc. and Administrative Manager of Kayne Anderson Investment
Management, LLC. On April 26, 1995, Mr. Kayne consented to a $5,000 civil money
penalty by the Office of Thrift Supervision in connection with proceedings
relating to a savings institution for which Mr. Kayne served as a director.
These proceedings related to the institution's sale of a security to a family
trust for which Mr. Kayne was a contingent beneficiary in which Mr. Kayne
failed to abstain from the approval of such transaction. Richard A. Kayne and
Fred Kayne are brothers.
Fred Kayne has served as a director since June 1999. Since 1986, Mr. Kayne
has also served as Chairman and President of Fortune Financial, a merchant bank
located in Los Angeles, California. In addition, Mr. Kayne has been Chairman
and President of Fortune Fashions a knitwear manufacturer, since 1991, and
Chairman of Big Dog Holdings, Inc., a specialty retail company, since 1992. Mr.
Kayne is also a director of The Right Start. Mr. Kayne was a partner of the
investment bank Bear, Stearns & Co. Inc. until its initial public offering in
1985, after which he was a managing director and a member of the board of
directors until he resigned in 1986. Fred Kayne and Richard A. Kayne are
brothers.
David C. Schwab has served as a director since July 1999. Since June 1996,
Mr. Schwab has served as a general partner of Sierra Ventures Management
Company, a venture capital investment firm. Mr. Schwab served as Vice President
of Scopes Technology from May 1991 to June 1996. Mr. Schwab serves as a
director of SalesLogix Corp., a software provider and serves as a director of
Micromuse Inc., a software developer.
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RightStart.com currently has authorized six director positions, for which
four directors have been elected. We expect to fill the vacancies on our board
with at least two independent members shortly after completion of this
offering. Each director is elected for a period of one year at our annual
meeting of stockholders and serves until the next annual meeting or until his
or her successor is duly elected and qualified. Our executive officers serve at
the discretion of the board of directors.
Board Committees
There are two standing committees of the board, an audit committee and a
compensation committee. Our board of directors established a compensation and
an audit committee in December 1999.
Compensation Committee. The compensation committee reviews and recommends to
the board of directors the compensation and benefits of all our officers and
establishes and reviews general policies relating to compensation and benefits
of our employees. Our compensation committee currently consists of Richard A.
Kayne and Fred Kayne, neither of whom has ever been an officer or employee of
RightStart.com. We expect that we will appoint an additional member to the
compensation committee after appointment of one or more independent directors.
Audit Committee. Our audit committee recommends the appointment of
independent public accountants for the annual audit of our financial statements
to the board of directors. The audit committee reviews the scope of the annual
audit and other services the auditors are asked to perform. The audit committee
also reviews the report on our financial statements prepared by the auditors
following the audit, and our accounting and financial policies in general. The
audit committee also reviews management's procedures and policies with respect
to our internal accounting controls. Our audit committee currently consists of
Richard A. Kayne, Fred Kayne and David C. Schwab, all of whom have past
employment experience in finance or accounting.
Compensation Committee Interlocks and Insider Participation
Prior to establishing the compensation committee in December 1999, the board
of directors as a whole performed the functions delegated to the compensation
committee. No interlocking relationship exists between our board of directors
or compensation committee and the board of directors or compensation committee
of any other company, nor has such interlocking relationship existed in the
past.
Director Compensation
Our directors currently do not receive any cash compensation from us for
their services as members of the board of directors, although they are
reimbursed for travel and lodging expenses in connection with attendance at
board and committee meetings. Under our 1999 Stock Option Plan, nonemployee
directors are eligible to receive stock option grants at the discretion of the
board of directors. In September 1999, the board of directors granted
Richard A. Kayne, Fred Kayne and David C. Schwab each an option to purchase
40,000 shares and Robert Simon an option to purchase 10,000 shares of common
stock at $0.45 per share in connection with their appointments as members of
the board of directors. These options, which were exercisable immediately upon
the date of grant, are fully vested. We have recorded a compensation charge of
approximately $159,000 for the difference between the option price and the fair
market value at the date of grant. In January 2000, Mr. Simon resigned as a
member of the board of directors.
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Executive Compensation
The following table sets forth the compensation received for services
rendered to RightStart.com by our Chief Executive Officer and our four other
most highly compensated executive officers during fiscal 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------- ------------
Other Securities
Annual Underlying
Name and Principal Position Salary(1) Bonus Compensation Options
--------------------------- --------- ----- ------------ ------------
<S> <C> <C> <C> <C>
Jerry R. Welch(2).................... $31,000 -- $ -- 500,000
Chairman, President and
Chief Executive Officer
Raymond P. Springer(3)............... 19,230 -- 22,085 150,000
Executive Vice President and
Chief Financial Officer
Gerald E. Mitchell(4)................ 91,100 -- 2,600 150,000
Executive Vice President,
Merchandising and Marketing
Scott M. Harvey(5)................... 40,000 -- 1,950 150,000
Senior Vice President,
Business Development
Kendrick F. Royer(6)................. 7,930 -- 650 100,000
Senior Vice President and
General Counsel
</TABLE>
- --------
(1) Salary information represents salary paid to employees from their date of
employment to our fiscal year end, January 1, 2000. Salary information for
each employee is presented on an annualized basis in the footnotes below.
(2) Mr. Welch became our Chairman, President and Chief Executive Officer in
April 1999. On an annual basis for fiscal 1999, Mr. Welch would have
received $100,000 in compensation. On June 1, 1999, Mr. Welch was granted
an option to purchase 364,000 shares of common stock at an exercise price
of $0.45 per share. On September 10, 1999, Mr. Welch was granted an
additional option to purchase 136,000 shares of common stock at an exercise
price of $0.45 per share. The option granted on June 1, 1999 is exercisable
immediately and is fully vested. The option granted on September 10, 1999
becomes exercisable at the rate of 1/4th of the total number of shares
underlying the option on September 10, 2000 and 1/48th of the total number
of shares underlying the option monthly from and after September 10, 2000.
(3) Mr. Springer became our Executive Vice President and Chief Financial
Officer in December 1999. On an annual basis for fiscal 1999, Mr.
Springer's salary would have been $250,000. Other annual compensation
consists of an expense allowance equal to $650 per month and the
reimbursement of moving expenses. On October 27, 1999, Mr. Springer was
granted an option to purchase 150,000 shares of common stock at an exercise
price of $3.75 per share. The option becomes exercisable at the rate of
1/4th of the total number of shares underlying the option on October 27,
2000 and 1/48th of the total number of shares underlying the option monthly
from and after October 27, 2000.
(4) Mr. Mitchell became our Executive Vice President, Merchandising and
Marketing in August 1999. On an annual basis for fiscal 1999, Mr.
Mitchell's salary would have been $182,000. Other annual compensation
consists of an expense allowance equal to $650 per month. On June 1, 1999
and September 10, 1999, Mr. Mitchell was granted options to purchase 91,000
and 59,000 shares of common stock, respectively, at an exercise price of
$0.45 per share. The option granted on June 1, 1999 becomes exercisable at
the rate of 1/4th of the total number of shares underlying the option on
June 1, 2000 and 1/48th of the total number of shares
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<PAGE>
underlying the option monthly from and after June 1, 2000. The option
granted on September 10, 1999 becomes exercisable at the rate of 1/4th of
the total number of shares underlying the option on September 10, 2000 and
1/48th of the total number of shares underlying the option monthly from and
after September 10, 2000.
(5) Mr. Harvey became our Senior Vice President, Business Development in
October 1999. On an annual basis for fiscal 1999, Mr. Harvey's salary would
have been $160,000. Other annual compensation consists of an expense
allowance equal to $650 per month. On September 10, 1999, Mr. Harvey was
granted an option to purchase 150,000 shares of common stock at an exercise
price of $0.45 per share. Mr. Harvey's option becomes exercisable at the
rate of 1/4th the total number of shares underlying the option on September
10, 2000 and 1/48th of the total number of shares underlying the option
monthly from and after September 10, 2000; provided that upon the happening
of the initial underwritten public offering of our common stock, 1/4th of
Mr. Harvey's then unvested shares will vest, in which case the remaining
unvested shares will become exercisable in equal monthly installments over
the period from the date of grant of the option to the date that is
48 months from the date of grant of such option.
(6) Mr. Royer became our Senior Vice President and General Counsel in December
1999. On an annual basis for fiscal 1999, Mr. Royer's salary would have
been $165,000. Other annual compensation consists of an expense allowance
equal to $650 per month. On October 27, 1999, Mr. Royer was granted an
option to purchase 100,000 shares of common stock at an exercise price of
$3.75 per share. The option becomes exercisable at the rate of 1/4th of the
total number of shares on October 27, 2000 and 1/48th of the total number
of shares monthly from and after October 27, 2000.
We did not pay to our Chief Executive Officer or any named executive officer
any compensation intended to serve as incentive for performance to occur over a
period longer than one year pursuant to a long-term incentive plan in fiscal
1999. We do not have any defined benefit or actuarial plan with respect to our
Chief Executive Officer or any executive officer under which benefits are
determined primarily by final compensation and years of service.
Option Grants
The following table provides summary information regarding stock options
granted to our Chief Executive Officer and our four other highest compensated
executive officers during fiscal 1999.
Option Grants in Fiscal 1999
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------
Potential
% of Realizable Value
Total at Assumed Annual
Number of Options Rates of Stock
Common Granted Price
Shares to Appreciation for
Underlying Employees Option Term(3)
Options in Fiscal Exercise Price Expiration ------------------
Name Granted(1) 1999 (per share)(2) Date 5% 10%
---- ---------- --------- -------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jerry R. Welch(4)....... 364,000 20.12% $0.45 6/1/09 $267,000 $ 425,000
136,000 7.52 0.45 9/10/09 97,000 159,000
Raymond P. Springer(5).. 150,000 8.29 3.75 10/27/09 916,000 1,459,000
Gerald E. Mitchell(6)... 91,000 5.03 0.45 6/1/09 67,000 106,000
59,000 3.26 0.45 9/10/09 43,000 69,000
Scott M. Harvey(7)...... 150,000 8.29 0.45 9/10/09 110,000 175,000
Kendrick F. Royer(8).... 100,000 5.53 3.75 10/27/09 611,000 973,000
</TABLE>
- --------
(1) We granted options for an aggregate of 1,769,500 shares to our employees
under the 1999 Stock Option Plan during fiscal 1999. See "1999 Stock Option
Plan" below.
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(2) All options were granted at an exercise price equal to the fair market
value of the common stock, as determined by the board of directors on the
date of grant, other than those options that expire on September 10, 2009
and October 27, 2009.
(3) The potential realizable value is calculated assuming the exercise price on
the date of grant appreciates at the indicated rate for the entire term of
the option and that the option is exercised at the exercise price and sold
on the last day of its term at the appreciated price. All options listed
have a term of 10 years. Stock price appreciation of 5% and 10% is assumed
pursuant to the rules of the Securities and Exchange Commission. There can
be no assurance that the actual stock price will appreciate over the 10-
year option term at the assumed 5% and 10% levels or at any other defined
level. Unless the market price of the common stock appreciates over the
option term, no value will be realized from the option grants made to the
named executive officers.
(4) Mr. Welch's option to purchase 364,000 shares of common stock was
immediately exercisable and fully vested on the date of grant. Mr. Welch's
option to purchase 136,000 shares of common stock becomes exercisable at
the rate of 1/4th of the total number of shares underlying the option on
September 10, 2000 and 1/48th of the total number of shares underlying the
option monthly from and after September 10, 2000.
(5) Mr. Springer's option becomes exercisable at the rate of 1/4th of the total
number of shares underlying the option on October 27, 2000 and 1/48th of
the total number of shares underlying the option monthly from and after
October 27, 2000.
(6) Mr. Mitchell's option to purchase 91,000 shares of common stock becomes
exercisable at the rate of 1/4th of the total number of shares underlying
the option on June 1, 2000 and 1/48th of the total number of shares
underlying the option monthly from and after June 1, 2000. Mr. Mitchell's
option to purchase 59,000 shares of common stock becomes exercisable at the
rate of 1/4th of the total number of shares underlying the option on
September 10, 2000 and 1/48th of the total number of shares underlying the
option monthly from and after September 10, 2000.
(7) Mr. Harvey's option becomes exercisable at the rate of 1/4th of the total
number of shares underlying the option on September 10, 2000 and 1/48th of
the total number of shares underlying the option monthly from and after
September 10, 2000; provided that upon the happening of the initial
underwritten public offering of the common stock, 1/4th of Mr. Harvey's
then unvested shares will become immediately exercisable, in which case any
remaining unvested shares underlying such option will become exercisable in
equal monthly installments over the period from the date of grant of the
option to the date that is 48 months from the date of grant of such option.
(8) Mr. Royer's option becomes exercisable at the rate of 1/4th of the total
number of shares underlying the option on October 27, 2000 and 1/48th of
the total number of shares underlying the option monthly from and after
October 27, 2000.
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Option exercises and holdings
The following table sets forth for our Chief Executive Officer and our four
other highest compensated executive officers the number of shares acquired upon
exercise of stock options as of January 1, 2000 and the number of shares
subject to exercisable and unexercisable stock options held at such date.
Aggregate Option Exercises and Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value Of Unexercised
Unexercised Options In-The-Money Options
At January 1, 2000(1) At January 1, 2000(2)
------------------------- -------------------------
Shares
Acquired Value
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jerry R. Welch.......... -- $ -- 364,000 136,000 $ $
Raymond P. Springer..... -- -- -- 150,000 --
Gerald E. Mitchell...... -- -- -- 150,000 --
Scott M. Harvey......... -- -- -- 150,000 --
Kendrick F. Royer....... -- -- -- 100,000 --
</TABLE>
- --------
(1) No options were exercised during fiscal 1999.
(2) Based on the estimated fair market value of $ for our common stock on
January 1, 2000, less the exercise price per share.
1999 Stock Option Plan
The board of directors adopted our 1999 Stock Option Plan (the "1999 Plan")
in April 1999 and our stockholders approved it in June 1999. We have reserved a
total of 1,818,000 shares of common stock for issuance under the 1999 Plan. As
of January 1, 2000, options to purchase 1,769,500 shares of common stock with a
weighted average exercise price of $1.18 had been granted, none of which has
been exercised as of the date hereof. Prior to completion of this offering, the
board intends to increase the number of shares issuable upon exercise of
options granted under the 1999 Plan.
The 1999 Plan provides for the granting to employees, including officers and
directors, of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and for the granting to employees,
consultants and nonemployee directors, of nonstatutory stock options. If an
optionee would have the right in any calendar year to exercise for the first
time incentive stock options for shares having an aggregate fair market value
(under all of our plans and determined for each share as of the date the option
to purchase the shares was granted) in excess of $100,000, any such excess
options will be treated as nonstatutory stock options.
The 1999 Plan may be administered by the board of directors or a committee of
the board of directors. The compensation committee of the board of directors
administers the 1999 Plan. The compensation committee determines the terms of
options and stock purchase rights granted under the 1999 Plan, including the
number of shares subject to an option or stock purchase right, the exercise or
purchase price, and the term and exercisability of options. The compensation
committee may also amend the terms of options and stock purchase rights granted
under the 1999 Plan, including changing or accelerating the date on which the
options become exercisable. The exercise price of all incentive stock options
granted under the 1999 Plan generally must be at least equal to the fair market
value of our common stock on the date of grant. The compensation committee has
the authority to grant non-qualified stock options at prices below fair market
value. Payment of the purchase price of options and stock
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purchase rights may be made in cash, by certified check, bank draft or money
order or as determined by the compensation committee.
Generally, options granted under the 1999 Plan have a term of ten years and
are nontransferable. Generally, options granted under the 1999 Plan vest 25% on
the first anniversary of grant and monthly thereafter over three years. The
compensation committee, however, has the flexibility to determine the vesting
terms of options at the time of grant.
Upon the happening of a Merger Event (as defined in the 1999 Plan), including
a merger, reorganization, business combination, the sale of all or
substantially all of our assets or if the composition of the board of directors
is altered as described in the 1999 Plan, options granted thereunder will
become immediately and fully exercisable. The holders of options may then
either exercise their options and participate in such transaction on
substantially the same terms as RightStart.com or receive substitute options
from the surviving corporation, if applicable.
Unless terminated earlier, the 1999 Plan will terminate on June 2009. The
board has the authority to amend or terminate the 1999 Plan as long as such
action does not materially and adversely affect any outstanding option and
provided that stockholder approval for any amendments to the Plan shall be
obtained to the extent required by applicable law. Amendment of the 1999 Plan,
however, will not affect the exercisability of options granted under the 1999
Plan prior to its expiration.
Limitation of Liability and Indemnification Matters
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
Such limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our Bylaws provide that we shall indemnify our directors and officers and
directors, officers, employees and other agents of any other enterprise serving
at our request to the fullest extent permitted by law. The Bylaws also provide
that we may indemnify our employees and agents to the fullest extent permitted
by law. We believe that indemnification under our Bylaws covers at least
negligence and gross negligence on the part of indemnified parties. Our Bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent of ours or of any other enterprise serving at our request for
any expense, liability or loss arising out of his or her actions in such
capacity, regardless of whether Delaware law would permit indemnification.
We have entered into agreements to indemnify our directors in addition to
indemnification provided for in our Bylaws. These agreements, among other
things, provide for indemnification of our directors and executive officers for
expenses specified in the agreements, including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding arising out of such person's services as a director
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or executive officer of RightStart.com, any subsidiary of RightStart.com or any
other entity to which the person provides services at our request. We believe
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership
of our common stock as of January 1, 2000, and as adjusted to reflect the sale
of shares of common stock in this offering for:
. each stockholder known by us to own beneficially more than 5% of the
common stock;
. each director;
. our Chief Executive Officer and our four other highest compensated
executive officers;
. all directors and executive officers as a group; and
. the selling stockholder.
<TABLE>
<CAPTION>
Shares Beneficially
Owned Before Shares Shares Beneficially
Offering(2) to be Owned After Offering
-------------------- sold in --------------------
Name of Beneficial Owner(1) Number Percentage Offering Number Percentage
--------------------------- --------- ---------- -------- ------ ----------
<S> <C> <C> <C> <C> <C>
Richard A. Kayne............ 5,518,334 60.4%
The Right Start, Inc. (3)
5388 Sterling Center Drive,
Unit C
Westlake Village, CA 91361
David C. Schwab............. 2,831,671 30.5 -- 2,831,671
Sierra Ventures VII, L.P.(4)
3000 Sand Hill Road,
Building 4, #210
Menlo Park, CA 94025
Palomar Ventures I,
L.P. (5)................... 699,666 7.6 -- 699,666
100 Wilshire Boulevard,
Suite 400
Santa Monica, CA 90401
Jerry R. Welch(6)........... 364,000 3.8 -- 364,000
Fred Kayne(7)............... 40,000 * -- 40,000
Raymond P. Springer(8)...... * * -- *
Gerald E. Mitchell(9)....... * * -- *
Scott M. Harvey(10)......... * * -- 37,500
Kendrick F. Royer(11)....... * * -- *
All directors and executive
officers as a group (10
persons)(12)............... 484,000 5.1% 521,500
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
(1) Each person's address is c/o RightStart.com Inc., 5388 Sterling Center
Drive, Unit C, Westlake Village, California 91361, unless otherwise noted.
(2) Includes shares over which the beneficial owner exercises voting and/or
investment power. Common stock subject to options or warrants that is
currently exercisable, or exercisable within 60 days of the date such
information is provided, to be included for purposes of computing
beneficial ownership.
(3) Richard A. Kayne is the President and Chief Executive Officer of Kayne
Anderson Investment Management, Inc., and is a director of The Right
Start. The Right Start holds 5,478,334 shares of common stock and Mr.
Kayne holds a currently exercisable option to purchase 40,000 shares of
common stock.
(4) David C. Schwab, is the general partner of Sierra Ventures VII, L.P. and
Sierra Ventures Associates VII, L.L.C. Sierra Ventures VII, L.P. holds
2,418,183 shares of common stock and a warrant currently exercisable for
119,700 shares of common stock. Sierra Ventures VII, L.L.C. holds 241,818
shares of common stock and a warrant currently exercisable for 11,970
shares of common stock. Mr. Schwab holds an option currently exercisable
to purchase 40,000 shares of common stock.
(5) Includes 666,666 shares of common stock held directly by Palomar Ventures
I, L.P. and a warrant currently exercisable for 33,000 shares of common
stock.
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<PAGE>
(6) Includes currently exercisable options to purchase 364,000 shares of
common stock.
(7) Includes a currently exercisable option to purchase 40,000 shares of
common stock.
(8) Mr. Springer has received an option to purchase 150,000 shares of common
stock. Such option will not become exercisable within 60 days.
(9) Mr. Mitchell has received options to purchase an aggregate of 150,000
shares of common stock. Such options will not become exercisable within 60
days.
(10) Mr. Harvey has received an option to purchase 150,000 shares of common
stock, of which 37,500 shares will become exercisable upon consummation of
this offering.
(11) Mr. Royer has received an option to purchase 100,000 shares of common
stock. Such option is not currently exercisable and will not become
exercisable within 60 days.
(12) Includes options beneficially owned by all executive officers and
directors.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Prior to the completion of this offering, we will amend our Certificate of
Incorporation to authorize the issuance of 200,000,000 shares of common stock,
$0.01 par value. The following description of our capital stock does not
purport to be complete and is subject to and qualified in its entirety by our
Certificate of Incorporation and Bylaws, which are included as exhibits to the
registration statement of which this prospectus forms a part, and by the
provisions of applicable Delaware law.
Common Stock
As of January 1, 2000, there were 9,100,000 shares of common stock
outstanding held of record by seven stockholders. In addition, as of that date,
there were 483,500 shares subject to outstanding warrants and 1,769,500 shares
of common stock subject to outstanding options. Upon completion of this
offering, there will be shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option or additional
exercise of outstanding options and warrants.
The holders of common stock are entitled to one vote per share on all matters
to be voted upon by stockholders. Subject to preferences that may be applicable
to any outstanding preferred stock, holders of common stock are entitled to
receive ratably such dividends as may be declared by the board of directors out
of funds legally available for that purpose. See "Dividend Policy." In the
event of our liquidation, dissolution or winding up, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any outstanding preferred stock.
The common stock has no preemptive or conversion rights, other subscription
rights, or redemption or sinking fund provisions. All outstanding shares of
common stock are fully paid and non-assessable, and the shares of common stock
to be issued upon completion of this offering will be fully paid and non-
assessable.
Preferred Stock
The board of directors is authorized, subject to Delaware law, without
further stockholder approval, from time to time to issue up to an aggregate of
five million shares of preferred stock in one or more series. The board of
directors can fix the designations, preferences and relative, participating,
optional and other special rights of the shares of each series and any
qualifications, limitations or restrictions of such shares. Issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of our outstanding voting
stock. We issued 3,333,333 shares of our Series A Convertible Preferred Stock
to affiliates of Sierra Ventures Management Company and Palomar Ventures I,
L.P. in July 1999. On October 22, 1999, all holders of our Series A Convertible
Preferred Stock converted to an equal number of shares of common stock in
accordance with the terms of the Series A Convertible Preferred Stock and such
converting holders received warrants to purchase an additional 165,000 shares
of our common stock (allocated on a pro rata basis) in exchange for such
conversion. As of the date hereof, we have no outstanding preferred stock. We
have no present plans to issue any shares of preferred stock.
Warrants
As of January 1, 2000 there were warrants outstanding to purchase a total of
483,500 shares of common stock at an average weighted conversion price of $6.41
per share. On July 9, 1999, we issued to the principals of Digital Coast
Partners, LLC (formerly CEA Montgomery
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<PAGE>
Media, L.L.C.) warrants to purchase 182,000 shares of common stock. On December
30, 1999, we issued to Oxygen Media, LLC a warrant to purchase 136,500 shares
of common stock. On October 22, 1999, we issued to affiliates of Sierra
Ventures Management Company warrants to purchase 132,000 shares of common
stock. On October 22, 1999, we issued to Palomar Ventures I, L.P. a warrant to
purchase 33,000 shares of common stock.
Registration Rights
Investors' Rights Agreement. Affiliates of Sierra Ventures Management Company
and Palomar Ventures I, L.P. and certain of their permitted transferees are
entitled to have 3,498,334 shares of common stock registered by us under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to the
terms of an Investors' Rights Agreement dated as of July 9, 1999, as amended.
Subject to the limitations specified in the Investors' Rights Agreement, these
registration rights include the following:
. The holders of at least 20% of the then outstanding registrable
securities (or the holders of any amount of registrable securities,
provided that the proposed aggregate selling price is at least $5.0
million) may require, on two occasions beginning 180 days after the date
of this prospectus, that we use our best efforts to register the
registrable securities for public resale.
. If we register any common stock, either for our own account or for the
account of other security holders, the holders of registrable securities
are entitled to include their shares of common stock in such
registration, subject to the ability of the underwriters or our board to
limit the number of shares included in the offering in view of market
conditions. Such holders of registrable securities shall be entitled to
sell shares equal to 30% of the total number of Shares to be included in
the offering unless no other shareholders' securities are included in
the offering and such offering is our initial public offering.
. The holders of at least 2% of the then outstanding registrable
securities under the agreement may, on one occasion within each 12-month
period, require us to register all or a portion of their registrable
securities on Form S-3 when use of such form becomes available to us,
provided that the proposed aggregate selling price of the securities to
be registered is at least $1.0 million.
. The right of any holder to request registration or inclusion in any of
the above registration rights terminates on the earlier of (i) closing
of the first registered public offering of common stock if all shares of
registrable securities held or entitled to be held upon conversion by
holders of registrable securities may immediately be sold under Rule 144
during any 90-day period, and (ii) five years after the closing of the
first registered public offering.
Registration Rights Agreement. Guidance Solutions and certain of its
permitted transferees are entitled to have 288,333 shares of common stock
registered by us under the Securities Act pursuant to the terms of a
Registration Rights Agreement dated October 30, 1999. Subject to the
limitations specified in the Registration Rights Agreement, these registration
rights include the following:
. The holders of at least 25% of the then outstanding registrable
securities under the agreement may require, on one occasion beginning
180 days after the date of this prospectus, that we use our best efforts
to register the registrable securities for public resale.
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<PAGE>
. If we register any common stock, either for our own account or for the
account of other security holders, the holders of registrable securities
are entitled to include their shares of common stock in such
registration, subject to the ability of the underwriters to limit the
number of shares included in the offering in view of market conditions.
. The right of any holder to request registration or inclusion in any
registration terminates on the earlier of (i) the closing of the first
registered public offering of common stock if all shares of registrable
securities held may immediately be sold under Rule 144 during any 90-day
period, and (ii) five years after the closing of the first registered
public offering.
Subscription Agreement. Affiliates of Digital Coast Partners, LLC (formerly
known as CEA Montgomery Media, L.L.C.) are entitled to have an aggregate of
182,000 shares of common stock under all such Subscription Agreements
underlying currently exercisable warrants registered by us under the Securities
Act pursuant to the terms of Subscription Agreements dated as of July 9, 1999.
Subject to the limitations specified in the Subscription Agreements, these
registration rights include the following:
. The holders of at least 100,000 shares of the then outstanding
registrable securities may require, on one occasion beginning 180 days
after the date of this prospectus, that we use our best efforts to
register the registrable securities for public resale.
. If we register any common stock, either for our own account or for the
account of other security holders, the holders of registrable securities
are entitled to include their shares of common stock in such
registration, subject to the ability of the underwriters to limit the
number of shares included in the offering in view of market conditions.
. The right of any holder to request registration or inclusion in any
registration does not terminate.
Warrant Subscription Agreement. Oxygen Media, LLC and its permitted
transferees are entitled to have an aggregate of 136,500 shares of common stock
registered by us under the Securities Act pursuant to the terms of a Warrant
Subscription Agreement dated as of December 30, 1999. Subject to the
limitations specified in the Warrant Subscription Agreement, these registration
rights include the following:
. If we register any common stock, either for our own account or for the
account of other security holders, the holder of registrable securities
is entitled to include its shares of common stock in such registration,
subject to the ability of the underwriters to limit the number of shares
included in the offering in view of market conditions.
. The right of any holder to request registration or inclusion in any
registration terminates on the earlier of (i) the closing of the first
registered public offering of common stock, if all shares of warrant
stock held by such holder (assuming exercise in full of the warrant) may
immediately be sold under Rule 144 during any 90-day period, and (ii)
five years after the closing of the first registered public offering we
initiate.
We will bear all registration expenses other than underwriting discounts and
commissions. All registration rights terminate with respect to each holder of
registrable securities, at such time as the holder is entitled to sell all of
its shares in any three-month period under Rule 144 of the Securities Act.
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<PAGE>
Anti-takeover Effects on Delaware Law and Our Certificate of Incorporation and
Bylaws
Provisions of Delaware law and our Certificate of Incorporation and Bylaws
could make our acquisition by a third party and the removal of our incumbent
officers and directors more difficult. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of us to first negotiate
with us. We believe that the benefits of increased protection of our ability to
negotiate with the proponent of an unfriendly or unsolicited acquisition
proposal outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
. the board of directors approved the business combination or the
transaction in which such stockholder became an interested stockholder
prior to the date the interested stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers and employee stock plans in which participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
. on or subsequent to such date the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock not owned by the interested stockholder.
A "business combination" generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
Our Certificate of Incorporation and Bylaws do not provide for cumulative
voting in the election of directors. In addition, our Certificate of
Incorporation permits the board of directors to issue preferred stock with
voting or other rights without any stockholder action. These provisions, which
require the vote of stockholders holding at least a majority of the outstanding
common stock to amend, may have the effect of deterring hostile takeovers or
delaying changes in our management.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is U.S. Stock Transfer
Corporation, 1745 Gardena Ave., Glendale, California 91204. Their telephone
number is (818) 502-1404.
Listing
Application has been made for the quotation of our common stock on the Nasdaq
National Market under the trading symbol "TOTS."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future
sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this
offering because of contractual restrictions on resale. Sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and impair our ability to
raise equity capital in the future.
Upon completion of this offering, we will have outstanding shares
of common stock, options to purchase 1,769,500 shares of common stock and
warrants to purchase 483,500 shares of common stock, each assuming no exercise
of the underwriters' over-allotment option and no additional option or warrant
grants or exercises after January 1, 2000. Of these shares, the
shares sold in the offering, plus any shares issued upon exercise of the
underwriters' over-allotment option, will be freely tradable without
restriction under the Securities Act, unless purchased by our "affiliates" as
that term is defined in Rule 144 under the Securities Act. In general,
affiliates include officers, directors or 10% stockholders.
The remaining outstanding shares and 2,253,000 shares subject to outstanding
options and warrants are "restricted securities" within the meaning of Rule
144. Restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k)
or 701 promulgated under the Securities Act, which are summarized below. Sales
of the restricted securities in the public market, or the availability of such
shares for sale, could adversely affect the market price of the common stock.
Our directors, officers and securityholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Deutsche Bank Securities
Inc. Notwithstanding possible earlier eligibility for sale under the provisions
of Rules 144, 144(k) and 701, shares subject to lock-up agreements will not be
salable until such lock-up agreements expire or are waived by Deutsche Bank
Securities Inc. Taking into account the lock-up agreements, and assuming
Deutsche Bank Securities Inc. does not release stockholders from these
agreements, the following shares will be eligible for sale in the public market
at the following times:
. Beginning on the effective date of this offering shares will be
immediately available for sale in the public market, assuming no
exercise of the underwriters' over-allotment option.
. Beginning 180 days after the effective date, approximately 729,500
shares will be eligible for sale pursuant to Rule 701, no additional
shares will be eligible for sale pursuant to Rule 144(k), and
approximately additional shares will be eligible for sale
pursuant to Rule 144. In addition, approximately shares
subject to options will be eligible for sale pursuant to Rule 701,
subject to vesting restrictions. All but of such shares and
of such shares subject to options and warrants are held by
affiliates.
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year
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<PAGE>
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding
which will equal approximately shares immediately after the
offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice, and the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at any
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
In general under Rule 701 of the Securities Act, as currently in effect, any
of our employees, directors or consultants who purchased shares pursuant to a
written compensatory plan or contract is eligible to resell such shares in
reliance upon Rule 144 but without compliance with specific restrictions. Rule
701 provides that affiliates may sell their Rule 701 shares under Rule 144
without complying with the holding period requirement and that non-affiliates
may sell such shares in reliance on Rule 144 without complying with the holding
period, public information, volume limitation or notice provisions of Rule 144.
In addition, we intend to file registration statements under the Securities
Act as promptly as possible after the effective date to register shares to be
issued pursuant to our 1999 Plan. As a result, any options or rights exercised
under the 1999 Plan and any other benefit plan after the effectiveness of the
registration statements will also be freely tradable in the public market. Such
shares held by affiliates will still be subject to the volume limitation,
manner of sale, notice and public information requirements of Rule 144 unless
otherwise resalable under Rule 701. As of January 1, 2000, there were
outstanding options for the purchase of 1,769,500 shares of common stock, of
which options to purchase 494,000 shares were exercisable. As of January 1,
2000, there were outstanding warrants for the purchase of 483,500 shares of
common stock, all of which were exercisable. See "Risk Factors--Risks Related
to this Offering--Substantial sales of our common stock after the offering
could cause our stock price to fall," "Management--1999 Stock Plan" and
"Description of Capital Stock--Registration Rights."
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RELATED PARTY TRANSACTIONS
Related Party Agreements with The Right Start
Management Services Agreement. We have entered into a management services
agreement, dated as of July 9, 1999, with The Right Start. Pursuant to the
management services agreement, The Right Start supplies corporate,
administrative and marketing services, promotional services and inventory to
RightStart.com as detailed below:
Basic Services. The Right Start has agreed to provide us with various
services from time to time, including, among others, services for
personnel/human resources, benefits administration, payroll processing,
insurance, tax, cash management, merchandising, advertising, inventory
management, employee relations, employee benefits, customer relations,
financial, legal, order fulfillment and collection, accounting,
telecommunications, catalog production assistance and credit card processing.
However, we are free at any time to perform any of these services ourselves or
contract with other third parties for their performance. In accordance with the
terms of the management services agreement, as consideration for such services,
we pay The Right Start an amount equal to Direct Cost (as defined below) plus
five percent. "Direct Cost" is defined with respect to each service as the
direct out-of-pocket expenses paid to third parties or incurred by The Right
Start in connection with providing such service and a proportionate share of
all overhead expenses directly attributable to providing such service,
including, without limitation, shipping, handling, travel expenses, personnel
costs, professional fees, printing and postage.
Inventory Supply Services. The Right Start has agreed to supply us with
Common Inventory (as defined below) on an as needed basis to fill customer
orders until January 31, 2000 and on a pre-ordered forward basis as needed
thereafter to meet expected customer demand. Our inventory is stored separately
from that of The Right Start after we place an order and The Right Start fills
it. The Right Start has also agreed to supply us with Internet-Only Inventory
(as defined below) on a forward basis as needed to meet expected customer
demand. However, we procure most of our Internet-Only Inventory without use of
the services of The Right Start. "Common Inventory" is defined as all inventory
purchased for us by The Right Start that is carried for sale in both The Right
Start stores and either on our Online store or through our catalog operations.
Common Inventory consists primarily of merchandise for children from birth to
age three years old and their caregivers. "Internet-Only Inventory" is defined
as the inventory of products sold or carried for sale only by us on our Web
site or through our catalog operations and not sold or carried for sale in The
Right Start stores. Internet-Only Inventory consists primarily of merchandise
for children ages four to 12 years old. The Right Start supplies us with Common
Inventory and Internet-Only Inventory at a price equal to 105% of the aggregate
of direct cost of the goods, the inbound freight charges and all other costs
charged to The Right Start by its suppliers. Through its third party
distributor, The Right Start supplied 100% of our inventory for the 48 weeks
ended January 1, 2000. We expect that we will continue to source a significant
portion of our merchandise for children from birth to age three years old and
their caregivers through The Right Start.
Promotional Services. The Right Start has agreed to promote us as its
exclusive online and catalog channel for products for parents, childcare
providers, infants and children under age seventeen. The Right Start also
provides us with the following promotional services: (i) prominent references
to RightStart.com on customer bags, customer receipts, labels, invoices,
counter cards, in-store audio programming, emails, letterhead, mailers,
advertising and on other items to the extent such reference can be made at a
low incremental cost and (ii) in-store signs promoting RightStart.com in all
The Right Start retail stores. In addition, The Right Start's marketing and
merchandising employees assist us in developing our marketing
64
<PAGE>
and merchandising programs. The Right Start's retail store employees are given
incentives to implement our marketing and merchandising programs.
We may terminate the Management Services Agreement in full or on a service-
by-service basis (a) upon 30 days prior written notice to The Right Start with
respect to services provided therein, (b) upon the occurrence of a material
breach by The Right Start which is not cured within 30 days of receipt of
written notice from us, (c) upon the occurrence of events relating to the
bankruptcy of The Right Start, (d) upon the liquidation, other termination,
sale or transfer of The Right Start's business or substantially all of its
assets or (e) if The Right Start becomes insolvent or unable to pay its debts
as they mature or makes an assignment for the benefit of its creditors. The
Management Services Agreement may be terminated by The Right Start in full or
on a service-by-service basis (a) at any time after January 31, 2000, upon
120 days prior written notice to us if (i) our annual sales run rate is
projected to be in excess of $40 million as is currently the case or (ii) The
Right Start is required to make expenditures of $15,000 or more in any month on
our behalf if such amount is not reimbursed or otherwise paid by us, (b) upon
the occurrence of a material breach by us which is not cured within 60 days of
receiving written notice from The Right Start (except that if the material
breach relates to our failure to pay for the services received in accordance
with the Management Services Agreement, it must be cured within 30 days), (c)
upon the occurrence of events relating to our bankruptcy, (d) upon the
liquidation, other termination, sale or transfer of our business or
substantially all of our assets or (e) if we make an assignment for the benefit
of our creditors. We believe that, due to our relationship with The Right
Start, the terms of the Management Services Agreements are more favorable to us
than terms we could have obtained in the absence of such relationship.
Intellectual Property Agreement. We have entered into an the Intellectual
Property Agreement, dated as of July 9, 1999, with The Right Start pursuant to
which The Right Start (i) assigned to us the Website IP (as defined below) and
User Information (as defined below), (ii) granted us a worldwide, non-
exclusive, non-transferable, fully-paid up and royalty-free license to use the
Right Start IP (as defined below) and (iii) granted us a perpetual, worldwide,
exclusive, fully-paid up and royalty-free, unrestricted sublicense and right to
use the source code and object code and certain other intellectual property
owned by Guidance Solutions, which The Right Start engaged to develop the Web
site located at www.rightstart.com. Pursuant to the Intellectual Property
Agreement, we granted to The Right Start a worldwide, non-exclusive, fully-paid
up and royalty-free license to use the Website IP and User Information solely
in connection with The Right Start's retail sales of parents', childcare,
infants' and children's products (other than through online or catalog sales).
"Website IP" is defined as all files, text, graphics, graphics files in any
file format, images, artwork, audio files, audiovisual materials and e-commerce
and database applications provided by third parties or The Right Start or
created by or for us in connection with the Web site and certain copyright
registrations, all domain names, all trademarks, all service marks, all trade
dress, all logos, all brands and designs, all trade names, all Internet domain
names, all metatags and hyperlinks used in connection with the Web site and the
online and catalog retailing of parents', childcare, infants' and children's
products. "Right Start IP" is defined as all lists of customers and prospective
customers used in connection with The Right Start's retail sales of infants'
and children's products other than through online or catalog sales. "User
Information" is defined as all information with respect to the use and users of
the Web site, including all catalog customer lists of The Right Start or
RightStart.com that existed on July 9, 1999, the date of the agreement.
The Intellectual Property Agreement is perpetual unless terminated. The
Intellectual Property Agreement may be terminated by The Right Start (a) upon
the occurrence of certain
65
<PAGE>
mergers, reorganizations, consolidations or other business combinations as a
result of which our stockholders hold less than 50% of the voting power over us
and in which the acquirer is a direct competitor of The Right Start by giving
us written notice within 30 business days of receiving written notice from us
of such change of control and (b) upon the occurrence of a material breach by
us which is not cured within 30 business days of receipt of written notice from
The Right Start. We may terminate the intellectual property agreement upon the
occurrence of a material breach by The Right Start which is not cured within 30
days of receipt of written notice from us. We believe that, due to our
relationship with The Right Start, the terms of the intellectual property
agreement are more favorable to us than terms we could have obtained in the
absence of such relationship.
Lease. Since May 1, 1999, we have subleased office space on a month-to-month
basis from The Right Start. Rent expense under this sublease totaled $18,000
for 1999. The monthly rent cost is approximately $12,500 effective January 1,
2000. We have no formal agreement with The Right Start to continue this
sublease, however, we believe we could obtain other space if our ability to
sublease this space were terminated.
Related Party Agreements with our Directors
We have entered into indemnification agreements with our directors which may
require us, among other things, to indemnify our directors against liabilities
that may arise by reason of their status or service as directors, other than
liabilities arising from willful misconduct of a culpable nature, and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. See "Management--Limitation of Liability
and Indemnification Matters."
66
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank
Securities Inc., J.P. Morgan Securities Inc. and ING Barings LLC, have
severally agreed to purchase from us and the selling stockholder the following
respective numbers of shares of common stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
prospectus.
<TABLE>
<CAPTION>
Number
of
Underwriter Shares
----------- ------
<S> <C>
Deutsche Bank Securities Inc. ........................................
J.P. Morgan Securities Inc. ..........................................
ING Barings LLC ......................................................
----
Total ..............................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to several conditions, including the absence of any material
adverse change in our business and the receipt of certificates, opinions and
letters from us, our counsel and our experts. The underwriting agreement also
provides for the allocation of expenses incurred in the offering. In addition,
the underwriting agreement provides that the underwriters will purchase all the
shares of common stock offered by this prospectus, other than those covered by
the over-allotment option described below, if any of such shares are purchased.
Pursuant to the underwriting agreement, we have agreed to indemnify the
underwriters against liabilities under the Securities Act, and to contribute to
payments the underwriters may be required to make with respect to liabilities
under the Securities Act.
We have been advised by the representatives that the underwriters propose to
offer the shares of common stock directly to the public at the offering price
set forth on the cover page of this prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The underwriters
may allow, and such dealers may re-allow, a concession not in excess of $
per share to certain other dealers. After the initial public offering, the
offering price and other selling terms may be changed by the representatives.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to
additional shares of common stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. The underwriters may exercise this option only to cover over-
allotments made in connection with the sale of the common stock offered in this
prospectus. To the extent the underwriters exercise the option, each of the
underwriters will become obligated, subject to certain conditions, to purchase
approximately the same percentage of additional shares of common stock as the
number of shares of common stock to be purchased by it in the above table bears
to the total listed above. We will be obligated, pursuant to the option, to
sell these shares to the underwriters to the extent the option is exercised. If
any additional shares of common stock are purchased, the underwriters will
offer such additional shares on the same terms as those on which the
shares are being offered.
67
<PAGE>
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us and the selling
stockholder per share of common stock. We anticipate that the total
underwriting fee will be approximately 7% of the aggregate initial public
offering price. The following table summarizes the underwriting compensation
that will be paid in connection with this offering.
<TABLE>
<CAPTION>
Total
-------------------
Without With
Per Over- Over-
Share allotment allotment
----- --------- ---------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by
us.............................................. $ $ $
Underwriting discounts and commissions paid by
the selling stockholder......................... $ $ $
Reimbursement of expenses to or on behalf of the
underwriters.................................... $ $ $
Fees and expenses of underwriters' counsel
relating to NASD review......................... $ $ $
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ .
The representatives have advised us that the underwriters do not intend to
confirm orders to any account over which they exercise discretionary authority.
All of our stockholders, including each of our officers and directors, have
agreed not to offer, sell, contract to sell, make any short sale, grant any
option to purchase or otherwise dispose of, or enter into any transaction that
is designed to, or could be expected to, result in the disposition of any
portion of our common stock for a period of 180 days after the date of this
prospectus, without the prior written consent of Deutsche Bank Securities Inc.
This consent may be given at any time without public notice. This restriction
on the disposition of our common stock does not apply in the event of a change
of control of RightStart.com. We have entered into a similar agreement, except
that we may, without the prior written consent of Deutsche Bank Securities
Inc., issue common stock pursuant to the exercise of outstanding options and
warrants and in connection with the issuance and exercise of options granted
under the 1999 Plan.
In order to facilitate the offering of the common stock, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the common stock. Specifically, the underwriters may over-allot shares
of the common stock in connection with this offering, thus creating a short
position in the common stock for their own account. Additionally, to cover
these over-allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of the common stock in the open
market. Finally, the representatives, on behalf of the underwriters, may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
At our request, the underwriters have reserved up to shares of
common stock for sale, at the initial public offering price, to our vendors,
employees, family members of employees and other third parties through a
directed share program. The number of shares of common stock available for sale
to the general public will be reduced to the extent these
68
<PAGE>
reserved shares are purchased. Any reserved shares that are not purchased by
these persons will be offered by the underwriters to the general public on the
same basis as the other shares in this offering.
Pricing of this Offering
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock will be
determined by negotiation among RightStart.com, the selling stockholder and the
representatives of the underwriters. Among the primary factors that will be
considered in determining the public offering price are:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalizations and stages of development of other companies
that we and the representatives believe to be comparable to us; and
. estimates of our business potential.
The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
69
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
RightStart.com by Milbank, Tweed, Hadley & McCloy LLP, Los Angeles, California.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Orrick, Herrington & Sutcliffe LLP, San Francisco,
California.
EXPERTS
The balance sheets of RightStart.com Inc. as of January 1, 2000 and January
30, 1999, and the statements of operations, stockholders' equity and cash flows
for the forty-eight weeks ended January 1, 2000 and the years ended January 30,
1999 and January 31, 1998 included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
WHERE YOU CAN OBTAIN MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedule thereto. For further information with respect to RightStart.com and
the common stock offered in this offering, we refer you to the registration
statement and to the attached exhibits and schedules. Statements made in this
prospectus concerning the contents of any document referred to in this
prospectus are not necessarily complete. With respect to each such document
filed as an exhibit to the registration statement, we refer you to the exhibit
for a more complete description of the matter involved.
You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, NY 10048, and the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may
obtain copies of all or any part of our registration statement from the
Securities and Exchange Commission upon payment of prescribed fees. You may
also inspect reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission without charge at a Web site maintained by the Securities and
Exchange Commission at http://www.sec.gov.
We intend to furnish our stockholders annual reports containing financial
statements audited by our independent accounts.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
RightStart.com Inc.
We have audited the accompanying balance sheets of RightStart.com Inc., a
Delaware corporation (the "Company"), as of January 1, 2000 and January 30,
1999, and the related statements of operations, stockholders' equity and cash
flows for the forty-eight weeks ended January 1, 2000 and the years ended
January 30, 1999 and January 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RightStart.com Inc. as of
January 1, 2000 and January 30, 1999, and the results of its operations and its
cash flows for the forty-eight weeks ended January 1, 2000 and the years ended
January 30, 1999 and January 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
January 17, 1999
F-2
<PAGE>
RIGHTSTART.COM INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
January 30, January 1,
1999 2000
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ -- $ 6,620,000
Accounts and other receivables....................... 189,000 123,000
Merchandise inventories.............................. -- 597,000
Prepaid catalog expenses............................. 363,000 251,000
Prepaid advertising and other current assets......... -- 328,000
-------- -----------
Total current assets................................ 552,000 7,919,000
Noncurrent assets:
Property and equipment, net.......................... 20,000 1,928,000
Other noncurrent assets.............................. 32,000 648,000
-------- -----------
52,000 2,576,000
$604,000 $10,495,000
======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $154,000 $ 1,715,000
Accrued liabilities.................................. 100,000 757,000
Due to The Right Start............................... -- 1,250,000
-------- -----------
Total current liabilities........................... 254,000 3,722,000
Commitments and contingencies -- --
Stockholders' equity:
The Right Start investment........................... 350,000 --
Preferred stock (5,000,000 shares authorized at $0.01
par value; none issued)............................. -- --
Common Stock (20,000,000 shares authorized at $0.01
par value; 9,100,000 shares issued and outstanding
as of January 1, 2000).............................. -- 91,000
Additional paid-in capital........................... -- 16,968,000
Deferred compensation................................ -- (609,000)
Accumulated deficit.................................. -- (9,677,000)
-------- -----------
Total stockholders' equity.......................... 350,000 6,773,000
$604,000 $10,495,000
======== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
RIGHTSTART.COM INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal
Fiscal 1997 1998 Fiscal 1999
----------- --------- -----------
52 Weeks Ended 48 Weeks
---------------------- Ended
January 31, January January 1,
1998 30, 1999 2000
----------- --------- -----------
<S> <C> <C> <C>
Online store sales....................... $ -- $ -- $ 7,988,000
Catalog sales............................ 7,414,000 4,736,000 3,467,000
----------- --------- -----------
Total sales.......................... 7,414,000 4,736,000 11,455,000
Promotional discounts.................... -- -- 1,479,000
----------- --------- -----------
Net sales.............................. 7,414,000 4,736,000 9,976,000
Cost of goods sold....................... 3,535,000 2,180,000 5,779,000
----------- --------- -----------
Gross profit............................. 3,879,000 2,556,000 4,197,000
Sales and marketing expenses............. 4,110,000 2,226,000 10,491,000
General and administrative expenses...... 834,000 456,000 1,933,000
Product development expenses............. -- -- 755,000
Non-cash compensation expenses........... -- -- 206,000
----------- --------- -----------
Operating loss........................... (1,065,000) (126,000) (9,188,000)
Interest income.......................... -- -- 216,000
----------- --------- -----------
Loss before income taxes................. (1,065,000) (126,000) (8,972,000)
Tax provision............................ -- -- --
----------- --------- -----------
Net loss................................. (1,065,000) (126,000) (8,972,000)
Preferred dividends...................... -- -- 525,000
----------- --------- -----------
Net loss available to common
stockholders............................ $(1,065,000) $(126,000) $(9,497,000)
=========== ========= ===========
Basic and diluted net loss per common
share................................... $ (0.18) $ (0.02) $ (1.42)
=========== ========= ===========
Shares used to compute basic and net
diluted loss per common share........... 5,767,000 5,767,000 6,694,000
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
RIGHTSTART.COM INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
The Right Common Stock Additional
Start Preferred ----------------- Paid-in Deferred Accumulated
Investment Stock Shares Amount Capital Compensation Deficit Total
----------- ------------ --------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 1,
1997................... $ 674,000 $ -- -- $ -- $ -- $ -- $ -- $ 674,000
Net loss................ (1,065,000) (1,065,000)
Net transfers from The
Right Start............ 442,000 442,000
----------- ------------ --------- ------- ----------- --------- ----------- -----------
Balance at January 31,
1998................... 51,000 -- -- -- -- -- -- 51,000
Net loss................ (126,000) (126,000)
Net transfers from The
Right Start............ 425,000 425,000
----------- ------------ --------- ------- ----------- --------- ----------- -----------
Balance at January 30,
1999................... 350,000 -- -- -- -- -- -- 350,000
Catalog net income from
January 31, 1999 to
April 30, 1999......... 179,000 179,000
Net transfers from The
Right Start............ (54,000) (54,000)
----------- ------------ --------- ------- ----------- --------- ----------- -----------
Balance at May 1, 1999.. 475,000 -- -- -- -- -- -- 475,000
Issuance of stock to The
Right Start............ (475,000) 5,767,000 58,000 417,000 --
Sale of preferred
stock.................. 15,000,000 (1,329,000) 13,671,000
Issuance of warrants.... 337,000 337,000
Deferred compensation
related to stock option
grants................. 815,000 (815,000) --
Amortization of deferred
stock compensation..... 206,000 206,000
Transfer from The Right
Start of stock for
services............... 1,236,000 1,236,000
Conversion of preferred
stock to common stock.. (15,000,000) 3,333,000 33,000 14,967,000 --
Issuance of warrants to
preferred stockholders
for conversion to
common stock........... 525,000 (525,000) --
Net loss from May 1,
1999 to January 1,
2000................... (9,152,000) (9,152,000)
----------- ------------ --------- ------- ----------- --------- ----------- -----------
Balance January 1,
2000................... $ -- $ -- 9,100,000 $91,000 $16,968,000 $(609,000) $(9,677,000) $ 6,773,000
=========== ============ ========= ======= =========== ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
RIGHTSTART.COM INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998 Fiscal 1999
----------- ----------- -----------
52 Weeks Ended 48 Weeks
------------------------ Ended
January 31, January 30, January 1,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(1,065,000) $(126,000) $(8,972,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 209,000 25,000 208,000
Non-cash compensation.................. -- -- 206,000
Change in assets and liabilities
affecting operations
Accounts and other receivables....... 137,000 29,000 66,000
Merchandise inventories.............. -- -- (597,000)
Prepaid catalog expenses............. 468,000 (66,000) 112,000
Prepaid advertising and other current
assets.............................. -- -- (204,000)
Other noncurrent assets.............. (2,000) 7,000 (7,000)
Accounts payable..................... (186,000) (212,000) 1,561,000
Accrued liabilities.................. (122,000) (66,000) 384,000
Due to The Right Start............... -- -- 1,250,000
----------- --------- -----------
Net cash used in operating
activities........................ (561,000) (409,000) (5,993,000)
----------- --------- -----------
Cash flows from investing activities:
Proceeds from sales of property and
equipment.............................. 119,000 -- --
Additions to property and equipment..... -- (16,000) (1,004,000)
----------- --------- -----------
Net cash used in investing
activities........................ -- (16,000) (1,004,000)
----------- --------- -----------
Cash flows from financing activities:
Proceeds from sale of preferred stock,
net.................................... -- -- 13,671,000
Net transfers from The Right Start...... 442,000 425,000 (54,000)
----------- --------- -----------
Net cash provided by financing
activities........................ 442,000 425,000 13,617,000
Net increase in cash..................... -- -- 6,620,000
Cash at beginning of period.............. -- -- --
----------- --------- -----------
Cash at end of period.................... $ -- $ -- $ 6,620,000
=========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
RIGHTSTART.COM INC.
NOTES TO FINANCIAL STATEMENTS
Note 1--Formation and Operation of the Company
Organization
RightStart.com Inc. (the "Company") is an online specialty retailer focused
on high quality developmental and educational products for children. The
Company is a majority-owned subsidiary of The Right Start, Inc. ("The Right
Start" or "Parent") and was formed in April 1999 for the purpose of engaging in
electronic commerce over the Internet (the "Online Store"). As part of its
initial capitalization, The Right Start contributed certain assets related to
its catalog operation to the Company, thus the Company serves customers through
a traditional catalog approach as well as through the Online Store. The
accompanying financial statements of the Company include all of its online and
catalog operations from the date of formation as well as catalog operations of
The Right Start prior to that date.
Predecessor Catalog Operation
The Right Start contributed the assets of its catalog operation to the
Company on April 9, 1999 and began operating as a separate company on May 1,
1999, the first day of the Parent's second fiscal quarter. The Right Start did
not operate the catalog business as a separate entity and did not maintain or
segregate the merchandise inventory sold in its catalog business from the
merchandise sold in its retail stores. The accompanying historical financial
statements of the catalog operation prior to May 1, 1999 were "carved out" from
The Right Start by identifying direct catalog-related accounts and determining
allocations of indirect costs and expenses. Management believes such
allocations are reasonable, however, the costs allocated to the Company may not
necessarily be indicative of the costs that would have been incurred if the
Company had operated on a stand-alone basis. (See Note 8)
Fiscal Year
The Company's fiscal year end is the Saturday closest to the last day of
December while its Parent's year end is the Saturday closest to the last day of
January. Therefore, fiscal 1999 is a 48 week period ending January 1, 2000.
Financial statements presented prior to May 1, 1999 follow the fiscal periods
of The Right Start. Fiscal 1998 is the 52 week period ended January 30, 1999
and fiscal 1997 is the 52 week period ended January 31, 1998.
Note 2--Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenues from product sales, net of discounts, coupon
redemptions and promotional allowances when products are shipped to customers.
Shipping and handling charges are included in sales and marketing expenses. The
Company provides for estimated returns at the time of sale. As part of the
initial start-up of the Online Store, the Company has offered certain
promotional discounts off its regular prices. The Company is the principal in
its transactions with customers. Specifically, the Company takes title to all
products sold to its customers prior to shipment. Furthermore, the Company
bears credit risk and inventory risk, however, these risks are mitigated
through relationships with credit card issuers and shippers.
F-7
<PAGE>
RIGHTSTART.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cash
The Company considers all highly liquid investments purchased with an
original maturity date of three months or less to be cash equivalents. At
various times the Company maintains cash accounts with financial institutions
in excess of federally insured amounts.
Concentrations of Credit Risks and Significant Customers
At January 1, 2000 and January 30, 1999 accounts receivable were due from
credit card companies and others. There were no single customers who accounted
for more than 10% of the revenues during any period.
Merchandise Inventories
Merchandise inventories at January 1, 2000 consisted solely of products
purchased and held for sale exclusively in the Online Store. Common inventory,
which represents products held for sale in both the Online Store and through
the catalog as well as through the Parent's retail stores, are owned by the
Parent and purchased in accordance with the management services agreement (See
Note 8). Because The Right Start did not maintain or segregate merchandise
inventory for the catalog business, the historical financial statements prior
to January 1, 2000 do not reflect any inventory owned by the Company.
Merchandise inventories are presented at the lower of cost or market value.
Cost is determined on a weighted average basis.
Prepaid Catalog Expenses
Prepaid catalog expenses consist of the costs to produce, print and
distribute catalogs. These costs are amortized over the expected sales life of
each catalog which typically does not exceed four months. Catalog production
expenses of $2,753,000, $1,363,000 and $1,240,000 were recorded in fiscal 1997,
fiscal 1998 and fiscal 1999, respectively.
Product Development Expenses
The Company uses a third party primarily to develop and maintain its Web
site. Expenses associated with the Web site consist of costs related to
software development, maintenance, Web site operations, systems and
telecommunications infrastructure and acquired content.
Long-lived Assets
The Company periodically evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful lives of long-lived
assets may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that the asset should be evaluated for
possible impairment, the Company uses an estimate of the assets' undiscounted
net cash flows over its remaining life in measuring whether the asset is
recoverable. There are no assets which have been determined to require an
impairment provision.
F-8
<PAGE>
RIGHTSTART.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method based upon the
estimated lives of the assets, generally three to five years. Software
capitalized in connection with the Company's Web site is being amortized over a
three year period.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
under which deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. A valuation allowance is
established against deferred tax assets when it is more likely than not that
all, or some portion, of such deferred tax assets will not be realized. Income
and deferred taxes have been calculated for the Company on a stand-alone basis
for all periods.
Advertising and Marketing
Marketing expense consists primarily of advertising and catalog production
and distribution expenses. Advertising costs are expensed as incurred or at the
time of the initial print or media broadcast. Catalog costs are typically
amortized over a four month period. Advertising expenses of $17,000 , $12,000
and $6,245,000 were recorded in fiscal 1997, fiscal 1998 and fiscal 1999,
respectively.
Stock-based Compensation
Stock options issued to employees, members of the Company's board of
directors and employees of The Right Start who provide services to the Company,
are accounted for in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"); accordingly,
compensation expense is recorded for options awarded to employees and directors
to the extent that the exercise prices are less than the fair market value of
the common stock on the date of grant where the number of options and the
exercise price are fixed. The difference between the fair value of the common
stock and the exercise price of the stock option is recorded as deferred
compensation which is charged to expense over the vesting period of the
underlying stock option. The Company follows the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123") (See Note 6).
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.
Comprehensive Income
The Company has not had any items of other comprehensive income during any
operating periods presented.
F-9
<PAGE>
RIGHTSTART.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1")." SOP 98-1 requires all costs related to
the development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. The Company adopted SOP-98-1
from its inception.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting For Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives ), and for hedging
activities. SFAS 133, as amended by SFAS 137, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company
currently does not have or use derivative instruments.
Loss Per Share
The Company computes earnings or loss per share in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS 128"). Under the provisions of SFAS 128, basic
net income or loss per common share is computed by dividing net income or loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Diluted per share data is computed by dividing income
available to common stockholders by the weighted average number of shares
outstanding plus any potential dilution that could occur if securities or other
agreements to issue common stock were exercised or converted into common stock
in each year. The calculation of diluted loss per common share for fiscal 1999
does not include 2,253,000 potential shares of common stock equivalents as
their inclusion would be anti-dilutive. For all periods prior to May 1, 1999,
basic and diluted earnings or loss per common share have been computed using
the number of shares issued to The Right Start on May 1, 1999.
Concentration of Product Fulfillment and Technology Risk
The Company has outsourced its distribution and fulfillment function to a
third-party product fulfillment provider under a short term agreement. Although
this arrangement creates a concentration in sourcing of distribution,
management believes alternatives are available on similar terms and conditions.
However, a failure of or a change in the Company's product fulfillment provider
could cause delays in the order fulfillment process and a possible loss of
sales which would affect operating results. The Company is substantially
dependent on the technology services it receives from Guidance Solutions, Inc.
("Guidance"). Failure of Guidance or any of its subcontractors to provide
ongoing technology services to the Company could have a material adverse effect
on the Company.
Note 3--Operating Results
For fiscal 1999, the Company had a net loss of $8,972,000 and a use of cash
from operating activities of approximately $5,993,000. The Company is currently
projecting to have operating losses for the foreseeable future. The Company
launched its Online Store in June
F-10
<PAGE>
RIGHTSTART.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
1999 and has incurred significant expenditures in developing and marketing its
Online Store through January 1, 2000 which has contributed significantly to its
loss in its first year of operations. The Company's current plans are to
continue to establish its brand name on the Internet through promotion of its
Online Store through advertising, strategic partnerships and alliances. To
accomplish management's plan to become a dominant online retailer in its market
segment, it will be necessary for the Company to obtain additional funding. The
Company plans to raise additional equity through an initial public offering of
its Common Stock. If a public offering is not consummated, the Company plans to
obtain other financing through private equity placements or new borrowings. In
the event such funds are not available, the Company would reduce its spending
on advertising, marketing, and other operating costs.
Note 4--Property and Equipment, net
The components of property and equipment at January 30,1999 and January 1,
2000 are as follows:
<TABLE>
<CAPTION>
January 30, January 1,
1999 2000
----------- ----------
<S> <C> <C>
Furniture and equipment.............................. $ 432,000 $ 922,000
Leasehold improvements............................... 8,000 34,000
Computer software.................................... 80,000 1,680,000
--------- ----------
520,000 2,636,000
Accumulated depreciation and amortization............ (500,000) (708,000)
--------- ----------
$ 20,000 $1,928,000
========= ==========
</TABLE>
In October 1999, approximately 288,333 shares owned by the Parent were issued
to Guidance for services rendered through October 30, 1999 and as an incentive
for Guidance to continue to provide services to the Company over the next ten
months. The Company has recorded the fair market value of the shares at the
date of transfer as a capital contribution and capitalized or expensed the pro
rata value related to services performed through January 1, 2000. The total
capitalized amounts related to Web site development approximated $1,680,000 and
are being amortized over 36 months. Capitalized costs and amounts expensed
related to the services provided by Guidance through January 1, 2000 were
approximately $1,516,000 and $766,000, respectively.
Note 5--Preferred Stock
In July 1999, the Company issued 3,333,333 shares of Series A convertible
preferred stock for approximately $15,000,000. In connection with the sale of
the preferred stock, the Company issued warrants to purchase 182,000 shares of
the Company's common stock at a strike price of $4.50 per share exercisable for
a five year period. The value of the warrants, calculated using the Black-
Sholes pricing model, of $161,000 has been recorded as a charge and credit to
additional paid in capital. The Series A convertible preferred stock had voting
rights equal to 3,333,333 shares of common stock on a one-for-one basis , was
convertible into shares of common stock at a strike price of $4.50 per share
and had a liquidation preference of $4.50 per share. The offering costs and the
value of the warrants have been offset against additional paid in capital.
F-11
<PAGE>
RIGHTSTART.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In October 1999, the holders of the preferred stock converted all of their
shares into 3,333,333 shares of common stock. As an inducement to convert the
preferred stock, the Company granted the holders of the preferred stock
warrants to purchase 165,000 common shares of the Company at $4.50 per share
exercisable for a five year period. The value of the warrants has been
reflected as a preferred stock dividend on the Company's financial statements
for fiscal 1999 and in computing the loss per common share.
Note 6--1999 Stock Option Plan
In April 1999, the board of directors adopted the 1999 Stock Option Plan and
it was approved by the Company's stockholders in June 1999. The total number of
shares that can be issued under the plan is 1,818,000. The 1999 Stock Option
Plan provides for the granting to employees, including officers and directors,
of incentive stock options ("ISO") and for the granting to employees,
consultants and non-employee directors of non-statutory stock options. Included
in the options granted through January 1, 2000 are 359,000 options to employees
of The Right Start. These employees provided services to the Company at the
time the options were granted. Generally, options granted under the 1999 Stock
Option Plan have a term of ten years, are nontransferrable, and vest 25% on the
first anniversary of grant and monthly thereafter over three years.
The following table summarizes the Company's stock option activity from
inception through January 1, 2000:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Price Per Exercise
Shares Share Price
--------- -------------- --------
<S> <C> <C> <C>
Granted.................................. 1,769,500 $0.45 to $4.50 $1.18
Exercised................................ --
Canceled................................. --
---------
1,769,500
=========
</TABLE>
Weighted average fair value of options granted in fiscal 1999 was $1.29. In
fiscal 1999, 535,500 options were granted at an exercise price of $0.45 and a
fair market value at date of grant of $1.67 and 300,000 options were granted at
an exercise price of $3.75 and a fair market value at date of grant of $4.29.
The estimated fair value of the stock at the grant dates were based on third
party appraisals or based on the conversion price of the preferred stock into
common stock. For fiscal 1999, the Company recorded $815,000 of deferred
compensation in connection with options granted under the 1999 Stock Option
Plan and recognized compensation expense in the amount of $206,000.
F-12
<PAGE>
RIGHTSTART.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Additional information with respect to the outstanding options as of January
1, 2000 was as follows:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------
Weighted Average
----------------
Number of Exercise Life in Options
Range of Exercise Prices Shares Price years Exercisable
------------------------ --------- -------- ------- -----------
<S> <C> <C> <C> <C>
$0.45........................... 1,396,000 $0.45 9.4 494,000
$3.75........................... 300,000 $3.75 9.8 --
$4.50........................... 73,500 $4.50 9.9 --
--------- ---
1,769,500 9.6
</TABLE>
Had compensation cost been determined based on the fair value of the options
at the date of grant consistent with the provisions of SFAS 123, the Company's
net loss and loss attributable to common stockholders would have been increased
to the pro forma amounts indicated below. Because options vest over several
years and option grants are expected to be made in future years, the pro forma
results for fiscal 1999 are not representative of the pro forma results for
future years.
<TABLE>
<CAPTION>
Fiscal 1999
-----------
<S> <C>
Net loss attributable to common stockholders:
As reported................................................ $(9,497,000)
Pro forma.................................................. $(9,949,000)
Net loss per common share:
As reported................................................ $ (1.42)
Pro forma.................................................. $ (1.49)
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Sholes option pricing model with the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rates............................................. 5.80%
Expected lives (in years)............................................ 7
Dividend yield....................................................... 0%
Expected volatility.................................................. 85%
</TABLE>
Note 7--Income Taxes
As of January 1, 2000, the Company had net operating losses for federal
income tax purposes of approximately $8,706,000 expiring in 2020 and
approximately $4,353,000 for state income tax purposes expiring in 2005. The
net operating losses can be carried forward to offset future taxable income.
Utilization of the above carryforwards may be subject to utilization
limitations, which may inhibit the Company's ability to use carryforwards in
the future.
F-13
<PAGE>
RIGHTSTART.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
An analysis of the expected tax benefit is as follows:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998 Fiscal 1999
----------- ----------- -----------
<S> <C> <C> <C>
Expected tax benefit.................. $ 362,000 $ 43,000 $ 3,124,000
Valuation allowance................... (362,000) (43,000) (3,124,000)
--------- -------- -----------
Actual tax benefit.................... $ -- $ -- $ --
========= ======== ===========
</TABLE>
The deferred income tax assets are:
<TABLE>
<CAPTION>
January 30, January 1,
1999 2000
----------- -----------
<S> <C> <C>
Net operating loss.................................. $ 548,000 $ 2,959,000
Inventory........................................... -- 28,000
Accounts receivable................................. 11,000 34,000
Accrued liabilities................................. 38,000 46,000
Deferred compensation............................... -- 82,000
--------- -----------
597,000 3,149,000
Valuation allowance................................. (597,000) (3,149,000)
--------- -----------
Deferred income tax asset........................... $ -- $ --
========= ===========
</TABLE>
Timing differences between financial reporting and income tax filings would
not have been significant for all periods presented. Since May 1, 1999, the
Company has been required to file separate federal and state income tax
returns. The Company is not entitled to any past operating losses for federal
or state income tax purposes.
Note 8--Transactions with the Parent Company
In July 1999, the Company entered into a management services agreement with
The Right Start in connection with the formation of the Company. This agreement
provides that The Right Start will supply Common Inventory (as defined in the
agreement) to the Company for sale on both the Company's Online Store and
through the Company's catalog at cost plus five percent and provide certain
Basic Services (as defined in the agreement) at cost plus five percent. The
agreement with respect to supplying Common Inventory is on an as-needed basis
to fill customer orders until January 31, 2000 and on a pre-ordered basis as
needed thereafter to meet expected customer demand. Inventory designated for
the Company's business is stored separately from that of The Right Start after
the Company places an order and The Right Start fills it. The Right Start has
also agreed to supply the Company with Internet-Only Inventory (as defined in
the agreement) on a pre-ordered basis as needed to meet expected customer
demand. The agreement with respect to providing Basic Services (as defined in
the agreement) may be terminated in full or on a service-by-service basis by
RightStart.com on 30 days written notice and by The Right Start in certain
circumstances after December 31, 2000, upon 120 days prior written notice and
by either party upon the occurrence of uncured breaches and certain bankruptcy
events. Expenses related to the management services agreement with The Right
Start are accounted for as general and administrative expenses. Total fees
incurred and paid or payable to The Right Start since inception amount to
$318,000. For purposes of developing the carve-out financial statements,
indirect costs such as accounting, management information services,
merchandising and other support service costs are allocated based on sales,
human resources expenses are allocated based on payroll costs
F-14
<PAGE>
RIGHTSTART.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
and depreciation expenses are allocated based on assets. These costs are
included in sales and marketing and general and administrative expenses in the
statement of operations and totaled $821,000 for fiscal 1997, $465,000 for
fiscal 1998 and $212,000 for fiscal 1999.
For the purpose of providing stand-alone financial statements for the
Company, no debt or interest expense has been allocated to the Company because
there were no borrowings specifically related to the Company's assets.
Note 9--Commitments and Contingencies
Future Advertising
The Company typically commits to run advertising approximately three months
in advance. As of January 1, 2000, the Company had commitments of $697,000 for
future advertising. In November 1999, the Company entered into a term sheet
with an integrated media company. The term sheet contemplates that over the
three year term of the proposed agreement the Company would provide
consideration approximating $13.7 million.
Leases
Since May 1, 1999, the Company has subleased office space on a month-to-month
basis. Rent expense under this sublease totaled $18,000 for fiscal 1999. The
monthly rent cost is approximately $12,500 effective January 1, 2000.
Legal Matters
The Company is involved in legal matters which arise in the normal course of
business. Management is aware of no material claims or actions pending or
threatened against the Company.
Note 10--Segment Reporting
The Company operates in a single operating segment: retail sales of consumer
products. The Company has no organization structure dictated by product lines,
geography or customer type.
Note 11--Statements of Cash Flows
The Company prepares its statements of cash flows using the indirect method
in accordance with SFAS 95, "Statement of Cash Flows".
Supplemental Disclosure of Cash Flow Information:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Cash paid for interest.................................. $ -- $ -- $ --
Cash paid for income taxes.............................. -- -- --
</TABLE>
F-15
<PAGE>
RIGHTSTART.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Non-cash Investing and Financing Activities:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998 Fiscal 1999
----------- ----------- -----------
<S> <C> <C> <C>
Issuance of common stock for Web site
development (See Note 4)............... $ -- $ -- $1,236,000
Issuance of warrant in connection with
strategic alliance (See Note 13)....... -- -- 337,000
Accrual of deferred offering costs...... -- -- 273,000
Issuance of common stock to parent for
contribution of net assets of its
catalog operations..................... -- -- 475,000
</TABLE>
Note 12--Common Stock
In December 1999, the board of directors authorized the Company to proceed
with an initial public offering of its common stock. The board of directors
also approved an increase in the number of authorized shares to 200,000,000
shares which would become effective prior to the completion of the offering.
Note 13--Warrants
At January 1, 2000, 347,000 warrants to purchase common stock at $4.50 per
share exercisable for five years and expiring in 2004 were outstanding. Also,
outstanding at January 1, 2000 were 136,500 warrants to purchase common stock
at $11.25 per share exercisable for five years and expiring in 2004. These
warrants were issued in connection with entering into a strategic alliance with
a third party. The value of the 136,500 warrants, using the Black-Sholes
pricing model, of approximately $337,000 will be amortized over the three-year
term of the agreement.
Note 14--Other Financial Data
Allowance for Doubtful Accounts
The activity in the allowance for doubtful accounts was as follows:
<TABLE>
<CAPTION>
Beginning Ending
Balance Provision Write-offs Balance
--------- --------- ---------- -------
<S> <C> <C> <C> <C>
Fiscal 1997........................... $14,000 $12,000 $(9,000) $17,000
Fiscal 1998........................... 17,000 15,000 (5,000) 27,000
Fiscal 1999........................... 27,000 60,000 -- 87,000
</TABLE>
Accrued liabilities
The details of accrued liabilities is:
<TABLE>
<CAPTION>
January 30, January 1,
1999 2000
----------- ----------
<S> <C> <C>
Sales returns and allowances.......................... $ 14,000 $ 61,000
Accrued professional fees............................. -- 307,000
Deferred sales........................................ 40,000 34,000
Sales taxes payable................................... 36,000 262,000
Accrued salaries...................................... 10,000 93,000
-------- --------
$100,000 $757,000
======== ========
</TABLE>
F-16
<PAGE>
You may rely only on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor sale of common stock
means that information contained in this prospectus is correct after the date
of this prospectus. This prospectus is not an offer to sell or solicitation of
an offer to buy these shares of common stock in any circumstances under which
the offer or solicitation is unlawful.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Special Note Regarding Forward Looking Statements........................ 21
Use Of Proceeds.......................................................... 22
Dividend Policy.......................................................... 22
Capitalization........................................................... 23
Dilution................................................................. 24
Selected Financial Data.................................................. 25
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations........................................................... 26
Business................................................................. 33
Management............................................................... 47
Principal And Selling Stockholders....................................... 56
Description Of Capital Stock............................................. 58
Shares Eligible For Future Sale.......................................... 62
Related Party Transactions............................................... 64
Underwriting............................................................. 67
Legal Matters............................................................ 70
Experts.................................................................. 70
Where You Can Obtain Additional Information.............................. 70
Index to Financial Statements............................................ F-1
</TABLE>
Dealer Prospectus Delivery Obligation:
Until , 2000 (25 days after the date of this prospectus), all
dealers that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
[LOGO OF RIGHTSTART.COM(TM)]
Shares
Common Stock
Deutsche Banc Alex. Brown
J.P. Morgan & Co.
ING Barings
Prospectus
, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by RightStart.com in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<CAPTION>
Amount
to be
Paid
-------
<S> <C>
SEC registration fee................................................ $18,216
NASD filing fee..................................................... 7,400
Nasdaq National Market listing fee..................................
Printing and engraving expenses.....................................
Legal fees and expenses.............................................
Accounting fees and expenses........................................
Blue Sky qualification fees and expenses............................
Transfer Agent and Registrar fees...................................
Miscellaneous fees and expenses.....................................
-------
Total.............................................................
=======
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Article Sixth of our
current Certificate of Incorporation (Exhibit 3.1 hereto) and Section 5.1 of
our current Bylaws (Exhibit 3.3 hereto) provide for indemnification of our
directors, officers, employees and other agents to the maximum extent permitted
by Delaware law. In addition, we have entered into Indemnification Agreements
(Exhibit 10.5 hereto) with our directors. The Underwriting Agreement (Exhibit
1.1) also provides for cross-indemnification among RightStart.com and the
Underwriters with respect to certain matters, including matters arising under
the Securities Act.
Item 15. Recent Sales of Unregistered Securities
Since our incorporation in April 1999, we have sold and issued the following
securities:
1. In April 1999, we issued 5,766,667 shares of common stock to The Right
Start in connection with the transfer of its assets related to its catalog and
online operations.
2. In July 1999, we issued 3,333,333 shares of Series A Convertible Preferred
Stock to affiliates of Sierra Ventures Management Company and Palomar Ventures
I, L.P. for an aggregate consideration of $15 million. The Series A Convertible
Preferred Stock converted into 3,333,333 shares of common stock on October 22,
1999, on a share-for-share basis.
3. In July 1999, we issued warrants to purchase an aggregate of 182,000
shares of common stock to principals of Digital Coast Partners (formerly known
as CEA Montgomery Media, L.L.C.) in consideration for services provided to us.
4. In October 1999, we issued warrants to purchase an aggregate of 165,000
shares of common stock at an exercise price of $4.50 per share to holders of
our Series A Convertible Preferred Stock as consideration for their conversion
thereof to common stock.
II-1
<PAGE>
5. In December 1999, we issued to Oxygen Media, LLC an immediately
exercisable warrant to purchase 136,500 shares of common stock at an exercise
price of $11.25 per share in consideration for online partnering and television
advertising of RightStart.com on the Oxygen network.
6. In June, September, October and December of 1999, we issued an aggregate
of 1,769,500 options to purchase common stock to employees and directors.
The issuances of the above securities except for Item 5 were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act as transactions by an issuer not involving any public
offering. In addition, certain issuances described in Item 7 were deemed exempt
from registration under the Securities Act in reliance upon Rule 701
promulgated under the Securities Act. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates, warrants and options issued in such transactions. All recipients
had adequate access, through their relationships with us, to information about
us.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement**
3.1 Certificate of Incorporation of RightStart.com
3.2 Certificate of Amendment of Certificate of Incorporation of
RightStart.com
3.3 Bylaws**
4.1 Specimen Common Stock Certificate**
4.2 Warrant to purchase 54,600 shares of common stock issued to Jonathan
Davidson(1)**
4.3 Warrant to purchase 119,700 shares of common stock issued to Sierra
Ventures VII, L.P.(2)**
4.4 Warrant to purchase 136,500 shares of common stock issued to Oxygen
Media, LLC**
5.1 Opinion of Milbank, Tweed, Hadley & McCloy LLP regarding the legality
of the Common Stock being registered**
10.1 Management Services Agreement dated July 9, 1999 between The Right
Start and RightStart.com
10.2 Intellectual Property Agreement dated July 9, 1999 between The Right
Start and RightStart.com
10.3 Series A Preferred Stock Purchase Agreement dated July 9, 1999**
10.4 Investors' Rights Agreement dated July 9, 1999 among RightStart.com,
Sierra Ventures VII, L.P., Sierra Ventures Associates VII, L.L.C., Ajit
Shah, Robert Simon and Palomar Ventures I, L.P.**
10.5 Form of Directors' Indemnification Agreement**
10.6 1999 RightStart.com Stock Option Plan**
10.7 Subscription Agreement dated July 9, 1999 between RightStart.com and
Jonathan Davidson(3)**
10.8 Term Sheet dated October 28, 1999 among RightStart.com, The Right Start
and Oxygen Media, LLC+**
10.9 Subscription Agreement dated December 30, 1999 between RightStart.com
and Oxygen Media, LLC**
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ ----------------------------------------------------------------------
<C> <S>
10.10 Services Agreement dated February 15, 1999 between The Right Start and
Guidance Solutions+**
10.11 Stock Grant Agreement dated October 30, 1999 between The Right Start,
RightStart.com and Guidance Solutions**
10.12 Registration Rights Agreement dated October 30, 1999 between
RightStart.com and Guidance Solutions**
10.13 Side Letter Agreement dated October 30, 1999 between The Right Start
and Guidance Solutions**
23.1 Consent of Accountants
23.3 Consent of Attorneys (see Exhibit 5.1)**
24.1 Power of Attorney**
27.1 Financial Data Schedule
</TABLE>
- --------
* Previously filed by the registrant with the Commission.
** To be filed by amendment.
+ Confidential treatment requested as to certain portions of this Exhibit.
(1) Substantially identical warrants have been granted to each of Janus W.
Montgomery (for 58,240 shares of common stock), Kim Enterprises, L.L.C.
(for 49,140 shares of common stock), Michael Holton (for 5,460 shares of
common stock), David P. Michaels (for 5,460 shares of common stock) and
David A Burns (for 9,100 shares of common stock).
(2) Substantially identical subscription agreements with respect to warrants
issued by RightStart.com exist for James W. Montgomery, Kim Enterprises,
L.L.C., Michael Holton, David P. Michaels and David A. Burns.
(3) Substantially identical warrants have been granted to Sierra Ventures
Associates VII, L.L.C. (for 11,970 shares of common stock), Ajit Shah (for
165 shares of common stock), Robert Simon (for 165 shares of common stock)
and Palomar Ventures I, L.P. (for 33,000 shares of common stock).
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court
II-3
<PAGE>
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned thereunto duly authorized, in Westlake Village, California on
January 18, 2000.
RightStart.com Inc.
/s/ Jerry R. Welch
By: ____________________________________
Jerry R. Welch
Chairman, President, and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Jerry R. Welch
and Raymond Springer, and each of them, as his attorney-in-fact, with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this registration statement (including post-effective
amendments), and any and all registration statements filed pursuant to Rule 462
under the Securities Act of 1933, as amended, in connection with or related to
the offering contemplated by this registration statement and its amendments, if
any, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said registration statement.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jerry R. Welch Chairman, President, and January 18, 2000
______________________________________ Chief Executive Officer
Jerry R. Welch
/s/ Raymond P. Springer Executive Vice President January 18, 2000
______________________________________ and Chief Financial
Raymond P. Springer Officer (Principal
Financial and
Accounting Officer)
______________________________________ Director January , 2000
Richard A. Kayne
/s/ Fred Kayne Director January 18, 2000
______________________________________
Fred Kayne
/s/ David Schwab Director January 18, 2000
______________________________________
David Schwab
</TABLE>
II-5
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
of
RightStart.com Inc.
The undersigned, for the purpose of organizing a corporation under the
General Corporation Law of the State of Delaware, certifies:
FIRST: The name of the corporation is RightStart.com Inc.
SECOND: The address of the corporation's registered office in the
State of Delaware is the Corporation Trust Center, 1209 Orange Street,
Wilmington, Delaware 19801, County of New Castle. The name of its registered
agent at such address is The Corporation Trust Company.
THIRD: The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which the corporation
shall have authority to issue is two hundred thousand (200,000) shares
consisting of one hundred thousand (100,000) shares of common stock, of the par
value of one cent ($0.01) each (the "Common Stock") and one hundred thousand
(100,000) shares of preferred stock, of the par value of one cent ($0.01) each
(the "Preferred Stock). The powers, designations, preferences and relative,
participating, optional or other special rights (and the qualifications,
limitations or restrictions thereof) of the Common Stock and the Preferred Stock
are as follows:
<PAGE>
(a) Common Stock.
------------
The Common Stock shall be subject to the express terms of any series
of Preferred Stock set forth in the Preferred Stock Designation relating
thereto. Each holder of Common Stock shall have one vote in respect of each
share of Common Stock held by such holder of record on the books of the
Corporation for the election of directors and on all other matters on which
stockholders of the Corporation are entitled to vote. The holders of shares of
Common Stock shall be entitled to receive, when and if declared by the Board of
Directors, out of the assets of the Corporation which are by law available
therefor, dividends payable either in cash, in stock or otherwise.
(b) Preferred Stock.
---------------
The Board of Directors of the Corporation (hereinafter referred to as
the "Board of Directors") is hereby expressly authorized at any time, and from
time to time, to create and provide for the issuance of shares of Preferred
Stock in one or more series and, by filing a certificate pursuant to the
Delaware General Corporate Law (hereinafter referred to as a "Preferred Stock
Designation"), to establish the number of shares to be included in each such
series, and to fix the designations, preferences and relative, participating,
optional or other special rights of the shares of each such series and the
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the issue thereof
adopted by the Board of Directors, including, but not limited to, the following:
(A) the designation of and the number of shares constituting such
series, which number the Board of Directors may thereafter (except as
otherwise provided in the Preferred Stock Designation) increase or decrease
(but not below the number of shares of such series then outstanding);
(B) the dividend rate for the payment of dividends on such series, if
any, the conditions and dates upon which such dividends shall be payable,
the preference or relation which such dividends, if any, shall bear to the
dividends payable on any other class or classes of or any other series of
capital stock, the conditions and dates upon which such dividends, if any,
shall be payable, and whether such dividends, if any, shall be cumulative
or non-cumulative;
(C) whether the shares of such series shall be subject to redemption
by the Corporation, and, if made subject to such redemption, the times,
prices and other terms and conditions of such redemption;
<PAGE>
(D) the terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series;
(E) whether or not the shares of such series shall be convertible
into or exchangeable for shares of any other class or classes of, any other
series of any class or classes of capital stock of, or any other security
of, the Corporation or any other corporation, and, if provision be made for
any such conversion or exchange, the times, prices, rates, adjustments and
any other terms and conditions of such conversion or exchange;
(F) the extent, if any, to which the holders of the shares of such
series shall be entitled to vote as a class or otherwise with respect to
the election of directors or otherwise;
(G) the restrictions, if any, on the issue or reissue of shares of
the same series or of any other class or series;
(H) the amounts payable on and the preferences, if any, of the shares
of such series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; and
(I) any other relative rights, preferences and limitations of that
series.
FIFTH: The name and mailing address of the incorporator is Gina
Engelhard, c/o The Right Start, Inc., 5388 Sterling Center Drive, Unit C,
Westlake Village, California 91361.
SIXTH: A director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived any
improper personal benefit. If the Delaware General Corporation Law is amended
after the date of the filing of this Certificate to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so amended.
No repeal or modification of this Article SIXTH shall apply to or have any
effect on the liability or alleged liability of any director of the corporation
for or with respect to any acts or omissions of such director occurring prior to
such repeal or modification.
<PAGE>
SEVENTH: The directors shall have power to make, alter or repeal by-
laws, except as may otherwise be provided in the by-laws.
EIGHTH: Elections of directors need not be by written ballot, except
as may otherwise be provided in the by-laws.
WITNESS my signature this 9th day of April, 1999.
/s/ Gina Engelhard
---------------------------------
Gina Engelhard
Sole Incorporator
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
RightStart.com Inc.
RightStart.com Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
I. FIRST: The amendment to the Corporation's Certificate of Incorporation
set forth below was duly adopted by the Board of Directors of the
Corporation in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware and has been consented
to in writing by the sole stockholder of the Corporation, in accordance
with Section 228 of the General Corporation Law of the State of
Delaware.
II. SECOND: Article "Fourth" of the Corporation's Certificate of
Incorporation is amended to read and shall be replaced by the
following:
" FOURTH: The total number of shares of stock which the corporation
shall have authority to issue is Twenty-five Million (25,000,000)
shares consisting of Twenty Million (20,000,000) shares of common
stock, of the par value of one cent ($0.01) per share (the "Common
Stock") and Five Million (5,000,000) shares of preferred stock, of the
par value of one cent ($0.01) per share (the "Preferred Stock). The
powers, designations, preferences and relative, participating, optional
or other special rights (and the qualifications, limitations or
restrictions thereof) of the Common Stock and the Preferred Stock are
as follows:
(a) Common Stock.
------------
The Common Stock shall be subject to the express terms of any
series of Preferred Stock set forth in the Preferred Stock Designation
relating
<PAGE>
thereto. Each holder of Common Stock shall have one vote in respect of
each share of Common Stock held by such holder of record on the books
of the Corporation for the election of directors and on all other
matters on which stockholders of the Corporation are entitled to vote.
The holders of shares of Common Stock shall be entitled to receive,
when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable
either in cash, in stock or otherwise.
(b) Preferred Stock.
---------------
The Board of Directors of the Corporation (hereinafter referred to
as the "Board of Directors") is hereby expressly authorized at any
time, and from time to time, to create and provide for the issuance of
shares of Preferred Stock in one or more series and, by filing a
certificate pursuant to the Delaware General Corporate Law (hereinafter
referred to as a "Preferred Stock Designation"), to establish the
number of shares to be included in each such series, and to fix the
designations, preferences and relative, participating, optional or
other special rights of the shares of each such series and the
qualifications, limitations or restrictions thereof, as shall be stated
and expressed in the resolution or resolutions providing for the issue
thereof adopted by the Board of Directors, including, but not limited
to, the following:
(A) the designation of and the number of shares constituting such
series, which number the Board of Directors may thereafter (except as
otherwise provided in the Preferred Stock Designation) increase or
decrease (but not below the number of shares of such series then
outstanding);
(B) the dividend rate for the payment of dividends on such
series, if any, the conditions and dates upon which such dividends
shall be payable, the preference or relation which such dividends, if
any, shall bear to the dividends
2
<PAGE>
payable on any other class or classes of or any other series of capital
stock, the conditions and dates upon which such dividends, if any,
shall be payable, and whether such dividends, if any, shall be
cumulative or non-cumulative;
(C) whether the shares of such series shall be subject to
redemption by the Corporation, and, if made subject to such redemption,
the times, prices and other terms and conditions of such redemption;
(D) the terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series;
(E) whether or not the shares of such series shall be convertible
into or exchangeable for shares of any other class or classes of, any
other series of any class or classes of capital stock of, or any other
security of, the Corporation or any other corporation, and, if
provision be made for any such conversion or exchange, the times,
prices, rates, adjustments and any other terms and conditions of such
conversion or exchange;
(F) the extent, if any, to which the holders of the shares of
such series shall be entitled to vote as a class or otherwise with
respect to the election of directors or otherwise;
(G) the restrictions, if any, on the issue or reissue of shares
of the same series or of any other class or series;
(H) the amounts payable on and the preferences, if any, of the
shares of such series in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation; and
(I) any other relative rights, preferences and limitations of
that series."
IN WITNESS WHEREOF, RightStart.com Inc. has caused this certificate to be
executed by Gina M. Engelhard, its authorized officer, on this 22nd day of June
1999.
/s/ Gina M. Engelhard
---------------------
Gina M. Engelhard
Vice President, Chief Financial Officer
and Secretary
3
<PAGE>
EXHIBIT 10.1
MANAGEMENT SERVICES AGREEMENT
This MANAGEMENT SERVICES AGREEMENT (this "Agreement") is dated as of
July 9, 1999, by and among The Right Start, Inc., a California corporation (the
"Company") and RightStart.com Inc., a Delaware Corporation ("Sub").
W I T N E S S E T H:
WHEREAS, Sub is a subsidiary of the Company formed for the purpose of
engaging in online retailing of the Company's products for infants and young
children;
WHEREAS, Sub desires to obtain and the Company desires to provide
administrative and other services to Sub in connection with its online retailing
business;
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Basic Services.
(a) During the term of this Agreement and subject to the ultimate
authority of Sub, the Company shall, either directly, through one or more of its
subsidiaries or through one or more of its third party service providers,
provide and/or arrange the following basic services and benefits to Sub (the
"Basic Services"):
(i) Personnel. The Company shall provide Sub with substantially
---------
the same personnel/human resource services that it performs for itself
including, without limitation, hiring, termination, personnel transfer, benefits
administration and employee relations services.
(ii) Payroll. The Company shall provide Sub with substantially
-------
the same payroll services that it performs for itself including, without
limitation, processing payroll, preparing payroll tax returns, mailing payroll
checks, participating in payroll related audits and preparing W-2 and 1099
forms.
(iii) Insurance. The Company shall obtain for Sub property,
---------
casualty (including general liability and workers' compensation), product
liability, crime and fiduciary insurance on an annual basis, and surety
insurance on an as needed basis, provided that Sub shall be solely liable for
workers' compensation claims of employees incurred after the date hereof, and
the discharge of any such workers' compensation liability by the Company shall
be considered a service rendered by the Company to Sub under this Section 1(a).
(iv) Employee Benefits. The Company shall provide all Sub
-----------------
employees with benefits substantially similar to benefits provided by the
Company to its employees.
<PAGE>
(v) General Corporate. The Company shall provide Sub with
-----------------
substantially the same general corporate services that it performs for itself
using Company employees or that it procures through third-party service
providers including, without limitation, tax services, cash management services,
merchandising services, advertising, inventory management services, customer
relations services, financial services and legal services.
(vi) Order Fulfillment and Collection. The Company's distribution
--------------------------------
centers located in Pennsylvania and California shall provide fulfillment and
collection services with respect to orders placed by Sub's customers in
substantially the same manner and with priority at least as high as it performs
for itself or any third party. Fulfillment and collection services shall consist
of, without limitation, receiving, quality control, storage, picking, packing,
shipping and handling of product, and processing customer returns, warranty
service, invoicing, collections, etc. and will include electronic integration of
such functions with Sub's Internet site(s).
(vii) General Accounting. The Company shall provide Sub with
------------------
substantially the same general accounting services that it performs for itself
including sales audit, accounts payable and general ledger services, receipt and
opening of all vendor mail, maintenance of a vendor master file, processing and
forwarding payment of all vendor invoices, invoice exception reporting and
resolution, periodic financial reporting and vendor relations.
(viii) Telecommunications. The Company shall provide Sub with
------------------
access to the Company's internet/telecommunications hardware and facilities
including access to data, networking and computing resources, telephone and
facsimile equipment and services, internet service providers providing
connectivity to internet over dedicated DS-3 line, internet traffic, data
routing and email services, relay services for Sub's back office operations and
hardware services.
(ix) Catalog Production. The Company shall provide Sub with
------------------
catalog production assistance, in substantially the same form as the Company
performed for itself prior to the date of this Agreement, including, without
limitation, catalog photography, copyrighting, catalog editing, catalog product
selection, production management, customer list and customer information
management, catalog circulation and mailing services.
(x) Credit Services. During the term of this Agreement, the
---------------
Company shall, either directly, through one or more of its subsidiaries or
through one or more of its third party service providers, provide credit
services to Sub including without limitation full credit checking and analysis
and credit card processing for customer orders.
(xi) Miscellaneous. The Company shall provide to Sub such other
-------------
services and benefits as the parties hereto shall mutually agree from time to
time.
2. Inventory Supply Services.
(a) During the term of this Agreement, the Company shall, either directly
or through one or more of its subsidiaries, supply inventory to Sub when and as
requested and solely for resale or promotion by Sub through its catalogs or
online Website (or Sub's other online or electronic mode or promotional methods)
(the "Inventory Supply Services") as follows:
2
<PAGE>
(i) Until January 31, 2000, Sub shall purchase Common Inventory
from the Company on an as needed basis in order to immediately fulfill
individual customer orders.
(ii) At all times after the date of this Agreement if Sub desires
to purchase Internet-Only Inventory from the Company, then Sub shall purchase
such inventory on a forward basis as needed to meet expected customer demand.
After January 31, 2000 if Sub desires to purchase Common Inventory from the
Company, then Sub shall also purchase Common Inventory to be sold by it on a
forward basis as needed to meet expected customer demand. In all cases under
this subsection (ii), Sub will be required to take delivery of such inventory
purchased on a forward basis and record it as inventory on its books.
For purposes of this Agreement, the term "Internet-Only Inventory" shall
mean inventory of products sold or carried for sale only by Sub in its Internet
or catalog operations and not sold or carried for sale by the Company in its
stores. The term "Common Inventory" shall mean all inventory purchased by the
Company on behalf of Sub that is sold or carried for sale in both the Company's
stores and in Sub's Internet or catalog operations.
(b) The Company agrees to accept any inventory originally purchased by
Sub from the Company returned by Sub's customer to Sub, a Right Start store or
their distribution centers ("Returned Inventory"), subject to the following:
(i) For Common Inventory (which for purposes of this Section 2(b)
shall also include inventory purchased by the Company on behalf of Sub that has
at any time been carried for sale in the Company's stores), the Company shall
accept the Returned Inventory and provide credit to the customer. In order to
properly reflect the accounting for such transactions on the books of each
company, the transaction shall be recorded as follows: (A) the amount refunded
to the customer will be charged to the account of Sub and (B) the Company's cost
of the inventory, including freight, will be credited to the account of Sub,
provided the inventory is saleable or a credit is obtained from the inventory's
vendor.
(ii) For Internet-Only Inventory, the Company shall accept the
Returned Inventory and provide a credit to the customer. In order to properly
reflect the accounting for such transactions on the books of each company, the
transactions shall be recorded as follows: (A) the amount refunded to the
customer will be charged to the account of Sub and (B) provided the returned
inventory is in salable condition, the Company will transfer the inventory to
Sub's Internet-Only Inventory balance at Sub's cost of the inventory, including
freight. If the returned Internet-Only Inventory is not in salable condition,
the Company will obtain a credit from the vendor, if available, and credit Sub's
account for such vendor credit. If the returned Internet-Only Inventory is not
salable and not returnable to its vendor for credit, no credit will be made to
Sub's account for such inventory.
(c) The Company shall not buy any inventory for Sub without the prior
approval of an officer of Sub.
(d) All vendor warranties with respect to inventory purchased by Sub
from the Company hereunder are hereby assigned to Sub.
3
<PAGE>
3. Promotional Services.
During the term of this Agreement the Company shall, either directly,
through one or more of its subsidiaries or through one or more of its third
party service providers, provide and/or arrange the following promotional
benefits to Sub at no additional cost to Sub (the "Promotional Services"):
(a) Until termination of the Intellectual Property Agreement dated as
of even date herewith between the Company and Sub (even after the term of this
Agreement): (a) Company will vigorously promote Sub as its exclusive online and
catalog channel for products for parents, childcare providers, infants and
children under age seventeen; (b) Company agrees that neither it nor any
affiliates it controls will promote in any way any other online or catalog
retailer that offers products, as a material part of its business, for parents,
childcare providers, infants and children under age seventeen; (c) Company
agrees that Company will include prominent reference to Sub where such reference
can be accomplished at a low incremental cost to the Company (by way of example,
and not limitation, all the following created or manufactured or obtained after
the Effective Date will contain a prominent reference to Sub: customer bags,
customer receipts, labels, invoices, counter cards, in-store audio programming,
emails, letterhead, and other stationary, mailers, print publications,
advertising (including, without limitation, print, radio, television, billboard
and the Internet, etc.)); and (d) Company agrees that it will have in-store
signs promoting Sub in all Company retail stores and any retail store controlled
or licensed by the Company.
(b) Company shall cause its marketing and merchandising employees to
assist Sub in the development of Sub's marketing and merchandising programs to
be implemented by the Company; Company shall also cause its retail store
personnel to execute and carry out reasonable marketing and merchandising
programs of Sub.
4. Payment.
(a) Basic Services. In full consideration for the Basic Services set
--------------
forth in Section 1 above, Sub shall pay the Company for each such service, an
amount equal to the Company's Direct Cost (as defined below) plus an additional
five percent (5%). "Direct Cost" means, with respect to each service provided
pursuant to this Agreement, the direct out-of-pocket expenses paid or incurred
to third parties or by the Company and a proportionate share of all overhead
expenses directly and demonstrably attributable to providing such service,
including, without limitation, shipping, handling, travel expenses, personnel
costs, professional fees, printing and postage.
(b) Inventory Supply Services. In full consideration for the Inventory
-------------------------
Supply Services referred to in Section 2(a) above, Sub shall pay the Company
105%, multiplied by the sum of (x) the direct cost of the goods supplied to Sub,
(y) the inbound freight charges, and (z) all other costs charged to the Company
by its suppliers.
(c) Invoices.
--------
(i) On or as soon as possible after the last day of each month and
in reasonable detail, the Company shall deliver an invoice to Sub setting forth
the Basic Services,
4
<PAGE>
and the amount of fees payable for such services rendered to Sub during such
month. Sub shall pay the invoiced amount to the Company for Basic Services
within ten (10) days after the date on which such invoice is received by
Sub.
(ii) On or prior to January 31, 2000 as to the Common Inventory
purchased for Sub, each week the Company shall deliver an invoice to Sub in
reasonable detail setting forth the Common Inventory purchased from the Company
for filling customer orders during such week. Sub shall pay the invoiced amount
to the Company for the Common Inventory of Sub under this provision within three
(3) days after the date on which such invoice is received by Sub.
(iii) On or as soon as possible after the last day of each month as
to the Common Inventory purchased for Sub at any time after January 31, 2000 and
at all times for the Internet-Only Inventory, the Company shall deliver an
invoice to Sub in reasonable detail setting forth the Common Inventory and the
Internet-Only Inventory purchased for Sub during the month. Sub shall pay the
invoiced amount within fifteen (15) days after the date on which such invoice is
received by Sub.
5. Inspection. Sub and its agents and representatives, at Sub's
----------
expense (unless a five percent (5%) or greater discrepancy is discovered), shall
have the right to examine the books and records of the Company that relate to
the costs and expenses referred to in this Agreement, provided, however, that
such examination may only be conducted during regular business hours and upon
reasonable prior written notice.
6. No Agency. The parties hereto are independent contractors and nothing
---------
in this Agreement is intended to, nor shall it, create any agency, partnership
or joint venture relationship between them. With respect to any third party, no
party hereto, or any of its officers, directors, employees or agents, shall have
the right or authority to bind or otherwise obligate the other party hereto in
any way as a consequence of this Agreement.
7. Termination.
-----------
(a) The term of this Agreement shall begin as of the date hereof and shall
continue for an indefinite period in full force and effect until it is
terminated in accordance with this Section 7.
(b) This Agreement may be terminated in full or on a service-by-service
basis at the option of either the Company or Sub as follows:
(i) Sub may terminate this Agreement or any of the Basic Services,
Inventory Supply Services or Promotional Services (or any other services under
this Agreement) at any time upon thirty (30) days prior written notice to the
Company; provided that if Sub terminates the Inventory Supply Services or this
--------
Agreement in full, Sub must pay for and take delivery of (in accordance with
this Agreement) all Common Inventory and Internet-Only Inventory purchased by
the Company at Sub's request prior to the termination date.
(ii) The Company may terminate this Agreement or any service(s) under
this Agreement at any time after January 31, 2000 upon one hundred twenty (120)
days
5
<PAGE>
prior written notice to Sub when the annual run rate of Sub's sales is projected
to be in excess of $40 million or, in order to meet demand for Sub's sales (even
if Sub's annual run rate is less than $40 million), the Company would be
required to make additional Expenditures in providing Basic Services or
Inventory Services that exceed $15,000 in any one-month period and that could
not be passed through to or reimbursed by Sub under this Agreement or that Sub
does not otherwise agree to pay. For purposes of this section, the term
"Expenditures" shall mean any capital expenditures made by the Company for
facilities, space, equipment or software.
(c) Notwithstanding the foregoing clause (b), the Company shall have
the right, but not the obligation, to terminate this Agreement immediately if:
(i) Sub is in material breach of any of this Agreement, which
breach is not cured within sixty (60) days of receipt of written notice from the
Company of such breach; except that any material breach relating to or arising
------
out of Section 4 of this Agreement must be cured within thirty (30) days of
receipt of written notice from the Company of such breach;
(ii) Sub is the subject of a voluntary petition in bankruptcy or
any voluntary proceeding relating to insolvency, receivership, liquidation, or
composition for the benefit of creditors, if such petition or proceeding is not
dismissed within ninety (90) days of filing, or becomes the subject of any
involuntary petition in bankruptcy or any involuntary proceeding relating to
insolvency, receivership, liquidation, or composition for the benefit of
creditors, if such petition or proceeding is not dismissed within ninety (90)
days of filing;
(iii) Sub's business, or all or substantially all of its assets,
are liquidated or otherwise terminated, sold or transferred due to insolvency or
any other basis; or
(iv) Sub makes an assignment for the benefit of its creditors.
(d) Notwithstanding the foregoing clause (b), Sub shall have the
right, but not the obligation, to terminate immediately this Agreement if:
(i) the Company is in material breach of any of its obligations
or representations hereunder, which breach is not cured within thirty (30) days
of receipt of written notice from Sub of such breach;
(ii) the Company is the subject of a voluntary petition in
bankruptcy or any voluntary proceeding relating to insolvency, receivership,
liquidation, or composition for the benefit of creditors, if such petition or
proceeding is not dismissed within sixty (60) days of filing, or becomes the
subject of any involuntary petition in bankruptcy or any involuntary proceeding
relating to insolvency, receivership, liquidation, or composition for the
benefit of creditors, if such petition or proceeding is not dismissed within
sixty (60) days of filing;
(iii) the Company's business, or substantially all of its assets,
are liquidated or otherwise terminated, sold or transferred due to insolvency or
any other basis; or
(iv) the Company becomes insolvent or unable to pay its debts as
they mature or Company makes an assignment for the benefit of its creditors.
6
<PAGE>
(e) If Sub wishes to obtain any inventory or services on its own
through third parties or in the event of a termination of this Agreement in
whole or in part, the Company shall use its best efforts to effect a smooth
transition and to assist Sub in establishing direct third party relationships on
reasonable terms. This obligation will continue after termination of this
Agreement for any reason with the intent that Sub will have the ability to
acquire for resale all products Company sells from time to time for a period of
at least three years after termination of this Agreement in whole.
(f) A party may exercise its right to terminate pursuant to this
Section 7 by sending appropriate notice to the other party pursuant to Section
8(f) hereof specifying the subsection of this Section 7 on which the party is
relying and, if this Agreement is not terminated in full, the specific services
to which such termination relates. No exercise by a party of its rights under
this Section 7 will limit its remedies by reason of the other party's default,
the party's rights to exercise any other rights under this Section 7, or any of
that party's other rights.
8. Miscellaneous.
-------------
(a) This Agreement shall be governed by the internal laws of the
State of California without giving effect to the conflict of law principles
thereof.
(b) This Agreement sets forth the entire agreement between the
parties hereto with respect to the subject matter hereof and is intended to
supersede all prior negotiations, understandings and agreements. No provision of
this Agreement may be waived or amended, except by a writing signed by the
Company and Sub.
(c) This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original and together which shall constitute one and
the same instrument.
(d) The failure of any party to exercise any right or remedy
provided for herein shall not be deemed a waiver of any right or remedy
hereunder.
(e) If any provision of this Agreement is determined by a court of
competent jurisdiction to be invalid or otherwise unenforceable, such
determination shall not affect the validity or enforceability of any remaining
provisions of this Agreement. If any provision of this Agreement is invalid
under any applicable statute or rule of law, it shall be enforced to the maximum
extent possible so as to effect the intent of the parties, and the remainder of
this Agreement shall continue in full force and effect.
(f) All notices, requests, demands, waivers and other communications
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been duly given if delivered personally, via overnight
courier, by facsimile transmission or mailed, certified or registered mail,
postage prepaid, return receipt requested:
7
<PAGE>
If to the Company: The Right Start, Inc.
5388 Sterling Center Drive, Unit C
Westlake Village, California 91361
Attn: President
Fax: (818) 707-7132
If to Sub: RightStart.com Inc.
5388 Sterling Center Drive, Unit C
Westlake Village, California 91361
Attn: President
Fax: (818) 707-7132
(g) This Agreement shall be binding upon and inure to the benefit of
each of the parties hereto and their respective, permitted successors and
assigns. Sub may not assign any of its rights hereunder without the prior
written consent of the Company, except to a successor to substantially all of
Sub's business or assets; provided, that if Sub assigns its rights under this
Agreement as permitted by the foregoing, the Company may terminate this
Agreement six (6) months following such assignment, unless earlier terminated
during such six-month period by Sub (notwithstanding anything to the contrary
set forth in Section 7 hereof).
(h) The section headings used herein are for the convenience of the
parties only, are not substantive and shall not be used to interpret or construe
any of the provisions contained herein.
8
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
The Right Start, Inc., a California corporation
/s/ Gina M. Engelhard
---------------------
Name: Gina M. Engelhard
Title: Chief Financial Officer and Secretary
RightStart.com Inc., a Delaware corporation
/s/ Jerry R. Welch
------------------
Name: Jerry R. Welch
Title: President
9
<PAGE>
EXHIBIT 10.2
INTELLECTUAL PROPERTY AGREEMENT
This INTELLECTUAL PROPERTY AGREEMENT, (the "Agreement"), dated as of
---------
July 9, 1999 (the "Effective Date"), is by and among The Right Start, Inc., a
--------------
California corporation (the "Company") and RightStart.com Inc., a Delaware
-------
Corporation ("Sub").
---
W I T N E S S E T H:
--------------------
WHEREAS, Company is the owner of all right, title and interest in the
Intellectual Property as defined herein; and
WHEREAS, Sub is a subsidiary of the Company formed for the purpose of
conducting the Company's catalog business, and engaging in the online retailing
of the Company's products for parents, infants and children and the other
activities more fully defined below as the Online Business;
WHEREAS, the Company desires to assign to Sub the Website IP, and to
grant Sub a non-exclusive, non-transferable, fully-paid up and royalty-free
license (except as otherwise set forth herein) to use the Right Start IP and the
goodwill associated therewith solely in connection with the Online Business, and
Sub desires to grant to the Company a non-exclusive, non-transferable, fully-
paid up and royalty-free license to use the Website IP and the goodwill
associated therewith solely in connection with the Retail Business.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINITIONS
1.01 Affiliate means any person or entity of any kind effectively
controlling, effectively controlled by or under common control with Company or
Sub.
1.02 Change in Control shall mean, and shall be deemed to have
occurred on the date the Sub enters into or is involved in any merger,
reorganization, consolidation or other business combination with any person or
entity other than an Affiliate or financial adviser, immediately after which
Sub's stockholders immediately prior to such transaction hold less than fifty
percent (50%) of the general voting power of Sub.
1.03 Confidential Information shall mean any information relating to
technical, marketing, product, customer and/or business affairs which is
disclosed in the course of this Agreement, including information relating to
products, trade secrets, software research and developments, inventions,
processes, techniques, designs or other technical and business information.
Confidential information shall not include any information which becomes
generally available to the public without breach of this Agreement, is in the
possession of the
<PAGE>
recipient party prior to its disclosure by the disclosing party or becomes
available from a third party not in breach of any obligations of confidentiality
to the disclosing party.
1.04 Content shall mean all information, marketing data, text, audio
files, video files, graphics or other material provided by Company for use in
connection with the Online Business.
1.05 Customer Information shall mean all lists of customers and
prospective customers and any other information regarding customers (and
prospective customers) of the Company's Retail Business in any format or medium
of expression existing on or after the Effective Date.
1.06 Derivative Work shall have the meaning in accordance with the
United States Copyright Act of 1976, as amended, 17 U.S.C. (S)101, namely, a
work based upon one or more pre-existing works that is embodied in any form in
which a work may be recast, transformed or adapted, including any work
consisting of editorial revisions, annotations, elaborations or other
modifications which, as a whole, represents an original work of authorship.
1.07 Guidance Solutions Content shall mean the source code (human
readable) and object code (machine readable), technology, methods, techniques,
software, algorithms, electronic commerce and database applications and rights
thereto owned by Guidance Solutions, Inc. which has been engaged by Company to
develop the Website.
1.08 Intellectual Property shall mean the Right Start IP and the
Website IP.
1.09 Marks refers to all trademarks, service marks, trade dress,
logos, brands and designs, trade names, Internet domain names, metatags, and
hyperlinks and any similar designation of source now known or hereafter devised
(and any combination thereof) owned or used by Company, including, without
limitation, those set forth on Exhibit A. Marks (excluding trade dress,
designs, domain names, metatags and hyperlinks) may also be referred to herein
as Trademarks.
1.10 Online Business shall mean the catalog and online retailing of
the Company's and Sub's products (including, without limitation, third party
products sold or distributed by either) or similar products for parents,
childcare providers, infants and children under age seventeen, together with
original or third party content presented or offered on the Website or otherwise
online or electronically by Sub, including, without limitation, the production,
procurement, sales, marketing, promotion and distribution of all of the
foregoing, and the collection, sale, and distribution of information regarding
the use and users of the Website and other customers.
1.11 Retail Business shall mean the retail sales of products for
parents, childcare providers, infants or children under age seventeen through
any sales medium except through online sales (or in any other electronic format)
or through catalog sales.
1.12 Right Start IP shall mean all Customer Information, and any
other information regarding customers of the Company's Retail Business, and all
Marks, and all goodwill associated therewith, copyrights and works subject to
copyright protection, patents,
2
<PAGE>
trade secrets and other proprietary and intangible property rights, and all
applications and registrations therefor and renewals and extensions thereof of
the Company, including, without limitation, those Marks set forth on Exhibit A
and the Patents set forth on Exhibit C; provided, however, that the term "Right
-----------------
Start IP" shall not include the Website IP (or anything else developed by or for
Sub on or after the Effective Date). Company shall use its best efforts to
provide to Sub Exhibits updated to reflect any after-acquired Right Start IP
which is necessary or useful to conduct, or material to, the Retail Business.
1.13 The Right Start Website Content shall include, without
limitation, all files (including all Hypertext Markup Language (HTML) files),
text, graphics, graphics files in any file format, images, artwork, audio files,
audiovisual materials, and electronic commerce and database applications
(including such Content utilizing or displaying the name "Right Start") which
are (i) provided by third parties or the Company or (ii) created by or for Sub
in connection with the Website and in accordance with the terms and conditions
of this Agreement.
1.14 User Information shall mean any and all information with respect
to the use and users of the Website, including, without limitation, all user
profiles, click streams, cookie files, and information regarding frequency of
use, page views, hits, purchase history and all demographic data collected by or
on behalf of the Company or Sub. User Information shall also include all
catalog customer lists of the Company or Sub in existence on the Effective Date.
1.15 Website shall mean all content of the interactive electronic
commerce website located at the domain name www.RightStart.com.
------------------
1.16 Website IP refers to the Right Start Website Content and all of
the following as they relate to the Website or the Online Business: the
copyright registrations set forth on Exhibit B, the domain names set forth on
Exhibit D, and all trademarks, service marks, trade dress, logos ,brands and
designs, trade names, Internet domain names, metatags, and hyperlinks and any
similar designation of source now known or hereafter devised (and any
combination thereof) used in connection with the Website or the Online Business
(the "Sub Marks"), and all goodwill associated therewith, copyrights and works
subject to copyright protection, patents, trade secrets, the Content and other
proprietary and intangible property rights, and all applications and
registrations therefor and renewals and extensions thereof, including all
intellectual property hereafter created, developed or acquired by or for the
Company or Sub in the conduct of the Online Business.
2. GRANT OF LICENSE.
----------------
2.01 (a) License to Sub. Company hereby grants to Sub a worldwide,
--------------
non-exclusive (except as provided below), non-transferable (except as provided
below) fully paid-up and royalty-free license to use and fully exploit the Right
Start IP (and the goodwill associated therewith) and the Customer Information,
solely in connection with the Online Business and in accordance with the terms
and conditions of the Agreement (subject to the provisions of Article 4). Such
---------
license will be exclusive with respect to the Online Business and such
exclusivity will exclude the Company or any Affiliate of the Company or
successor from (1) using, exploiting, exercising or licensing any rights to the
Right Start IP or Customer Information in connection with any online, e-commerce
or catalog business retailing products for parents,
3
<PAGE>
childcare providers, infants or children under age seventeen (provided that the
Company may maintain hyperlinks, sites or pages (that utilize domain names other
than those within the definition of Website IP) that provide access exclusively
to (A) corporate information regarding the Company, and (B) a list of the
Company's retail locations, so long as such hyperlink, site or page provides a
link to the Website) or (2) engaging in or promoting any online, e-commerce or
catalog business retailing products for parents, childcare providers, infants or
children under age seventeen (provided that the Company may maintain hyperlinks,
sites or pages (that utilize domain names other than those within the definition
of Website IP) that provide access exclusively to (A) corporate information
regarding the Company, and (B) a list of the Company's retail locations, so long
as such hyperlink, site or page provides a link to the Website).
(b) License to Company. Sub hereby grants to Company a worldwide,
------------------
non-exclusive, fully paid-up and royalty-free license to use and fully exploit
the User Information and the Website IP for any purpose of the Retail Business
other than an electronic or online presence (provided that the Company may
maintain hyperlinks, sites or pages (that utilize domain names other than those
within the definition of Website IP) that provide access exclusively to (A)
corporate information regarding the Company, and (B) a list of the Company's
retail locations, so long as such hyperlink, site or page provides a link to the
Website) (Subject to the provisions of Article 4 and Article 7).
-----------------------
2.02. Assignment. Company hereby assigns to Sub all of its right,
----------
title and interest in and to the User Information and the Website IP (and the
goodwill associated therewith), in accordance with the terms and conditions of
the Agreement.
2.03 Ownership by the Company. All right, title and interest in and
------------------------
to the Customer Information and the Right Start IP, including all goodwill
associated therewith, shall remain vested in Company. Sub covenants that it
will not in any way challenge (1) Company's ownership of the Right Start IP or
the Customer Information or (2) the validity of the Right Start IP.
2.04. Ownership by Sub. All right, title and interest in and to the
----------------
User Information and the Website IP (including all goodwill associated
therewith) shall be the property of Sub. The Company covenants that it will not
in any way challenge (1) Sub's ownership of the Website IP or User Information
or (2) the validity of the Website IP.
2.05. Transferability. (a) Neither party hereto shall have the
---------------
right to assign or sublicense its licenses or sublicenses under this Agreement
unless (1) such party obtains the other party's prior written consent to such a
transfer of rights, and (2) such assignee or sublicensee shall assume in writing
the obligations of the licensing or sub-licensing party under this Agreement and
agree to be bound hereunder for the benefit of the other party; provided that
without regard to such restrictions (A) either party may assign such licenses or
sublicenses to a successor to substantially all its assets and (B) either party
may sublicense its licenses and sublicenses in connection with a partnership,
alliance, joint venture, distribution, advertising or similar arrangement that
does not constitute a mere brokering of the license or sublicense.
(b) Notwithstanding the immediately foregoing paragraph, both the
Company and Sub shall be prohibited from assigning or sublicensing (or in the
case of the Company, a
4
<PAGE>
further licensing) the "Right Start" name in a particular circumstance if, in
the opinion of an independent arbitrator recognized by American Arbitration
Association (the "AAA") appointed by consensus of the Board of Directors of the
Company and the Board of Directors of Sub, such assignment or sublicense would
substantially harm the image or reputation of the non-assigning/non-
sublicensing/non-licensing party or otherwise substantially diminish the value
of the non-assigning/non-sublicensing/non-licensing party's Intellectual
Property rights or the "Right Start" name in a particular circumstance. The non-
prevailing party shall pay the costs and expenses of such arbitrator if utilized
hereunder, and the arbitrator shall allocate between the parties fees and
expenses of counsel in connection with any such arbitration.
(c) Notwithstanding Section 2.05(a) and (b) above, the Company shall
-----------------------
be permitted to assign, pledge and grant a security interest in its Intellectual
Property to its Senior Lender to secure its obligations under any loan or credit
agreement with its Senior Lender without the consent of Sub, and the Company's
Intellectual Property and rights may be assigned, transferred or sublicensed by
the Company or its Senior Lender, by foreclosure or transfer in lieu thereof, in
connection with such Senior Lender's exercise of any remedies with respect to
such indebtedness without the consent of Sub; provided that any transferee,
including Senior Lender, who acquires ownership of or a sublicense in such
Intellectual Property or rights shall have principal offices or branches located
within the United States and shall assume in writing the obligations of the
Company under this Agreement and agree to be bound hereby. No consent of Sub,
and no assumption of Company's rights under this Agreement, shall be required
for any Senior Lender of the Company to exercise its rights against any
inventory of the Company bearing the trademarks or tradenames included in the
Intellectual Property and the exercise of such rights shall not be a breach
hereunder. Notwithstanding Section 2.05(a) and (b) above, Sub shall be permitted
-----------------------
to assign, pledge and grant a security interest in its Intellectual Property to
its Senior Lender to secure its obligations under any loan or credit agreement
with its Senior Lender without the consent of the Company, and Sub's
Intellectual Property and rights may be assigned, transferred or sublicensed by
Sub or its Senior Lender, by foreclosure or transfer in lieu thereof, in
connection with such Senior Lender's exercise of any remedies with respect to
such indebtedness without the consent of the Company; provided that any
transferee, including Senior Lender, who acquires ownership of or a sublicense
in such Intellectual Property or rights shall have principal offices or branches
located within the United States and shall assume in writing the obligations of
Sub under this Agreement and agree to be bound hereby. No consent of the
Company, and no assumption of Sub's rights under this Agreement, shall be
required for any Senior Lender of Sub to exercise its rights against any
inventory of Sub bearing the trademarks or tradenames included in the
Intellectual Property and the exercise of such rights shall not be a breach
hereunder. For purposes of this section, "Senior Lender" shall mean one or more
major financial institutions of good repute with principal offices or branches
located in the United States.
After foreclosure by or transfer in lieu thereof to a Senior Lender as
set forth in the immediately preceding paragraph, if such Senior Lender
transfers its rights in or to any Intellectual Property under this Section
-------
2.05(c), it shall be released from any obligations under this Agreement upon
- -------
consummation of such transfer.
5
<PAGE>
3. GRANT OF SUB-LICENSE.
--------------------
3.01 Sub-License. Company hereby grants to Sub a perpetual,
-----------
worldwide, exclusive, fully paid-up and royalty-free, unrestricted sub-license
and right to use, reproduce, modify, transfer, maintain and otherwise fully
exploit the Guidance Solutions Content and all of its Derivatives. This
sublicense shall survive termination of this Agreement and shall include,
without limitation, all rights to:
(a) develop, use, reproduce, broadcast, distribute or transmit in any
fashion, display, perform or otherwise exploit the Guidance
Solutions Content, as well as all Derivatives, in and for all
forms, media, platforms, etc. now or hereafter known or invented
by anyone; and
(b) create Derivatives or otherwise modify the Guidance Solutions
Content and Derivatives.
4. FORM OF USE.
-----------
4.01 Notices, Legends and other Intellectual Property.
------------------------------------------------
(a) By Sub:
------
(i) Sub shall use the Right Start IP in connection with the
federal registration symbol, (R), or the "TM" symbol, the federal
copyright symbol (C), and "Reg'd Patent" or "Patent Pending", as
and if applicable, and such other customary symbols, notices and
legends as may be reasonably required by Company.
(ii) With the exception of the trademarks, service marks, trade
dress, logos, brands and designs, trade names, Internet domain
names, metatags, and hyperlinks of Sub and its affiliates, Sub
shall not use the Trademarks owned by the Company so as to create
composite or unitary trademarks consisting or comprised of the
Trademarks and any other third party trademarks, service marks,
trade dress, logos, brands and designs, trade names, Internet
domain names, metatags, or hyperlinks without the prior written
approval of Company.
(b) By the Company:
--------------
(i) The Company shall use the Website IP in connection with the
federal registration symbol, (R), or the "TM" symbol, the federal
copyright symbol (C), and "Reg'd Patent" or "Patent Pending", as
and if applicable, and such other customary symbols, notices and
legends as may be reasonably required by Sub.
(ii) With the exception of the trademarks, service marks, trade
dress, logos, brands and designs, trade names, Internet domain
names, metatags, and hyperlinks of the Company and its affiliates,
the Company shall not use the Sub Marks so as to create composite
or unitary trademarks consisting or comprised of the Trademarks
and any other third party trademarks, service marks, trade dress,
6
<PAGE>
logos, brands and designs, trade names, Internet domain names,
metatags, or hyperlinks without the prior written approval of Sub.
4.02 Quality Standards.
-----------------
(a) For Sub:
-------
(i) The Trademarks shall at all times be used in a form and manner
that is consistent with the registered or applied-for format of
the Trademarks or the then current practices of Company, and
otherwise in a form and manner that is reasonably in keeping with
the image, reputation and goodwill symbolized by and associated
with the Trademarks.
(ii) Sub shall only use the Trademarks in connection with the
Online Business, and goods and services that adhere to the
standard of quality exemplified by the then current practices of
Company provided by the Company to Sub in writing with reasonable
notice (if such practices are then actually followed by the
Company and also are enforced against its licensees other than
Sub, if any) and which must be in keeping with the image and
goodwill symbolized and associated with the Trademarks, the Retail
Business and the Company.
(iii) Sub's use of the Trademarks shall not injure, disparage,
demean, or tarnish the reputation of Company, the Retail Business,
the Trademarks or the image, reputation or goodwill associated
therewith; provided, however, that legal competitive business
practices of Sub against the Company or third parties (or the
effects thereof) shall not violate this subsection.
(b) For the Company:
---------------
(i) The Website IP and the Trademarks shall at all times be used
in a form and manner that is consistent with the registered or
applied-for format of the Website IP and the Trademarks or the
then current practices of Sub, and otherwise in a form and manner
that is reasonably in keeping with the image, reputation and
goodwill symbolized by and associated with the Website IP and the
Trademarks.
(ii) The Company shall only use the Website IP in connection with
the Retail Business, all of which must adhere to the standard of
quality exemplified by the then current practices of Sub provided
by Sub to the Company in writing with reasonable notice (if such
practices are then actually followed by Sub and also are enforced
against its licensees other than the Company, if any) and which
must be in keeping with the image and goodwill symbolized and
associated with the Website IP, the Online Business and Sub;
provided, however, that such standards and any criteria for
-----------------
approval will be applied to the Company on a nondiscriminating
basis.
(iii) The Company's use of the Website IP and the Trademarks shall
not injure, disparage, demean or tarnish the reputation of Sub, the
Online Business, the
7
<PAGE>
Website IP or the image, reputation or goodwill associated
therewith; provided, however, that legal competitive business
practices of the Company against Sub or third parties (or the
effects thereof) shall not violate this subsection.
4.03 Quality Control. (a) Sub shall submit to Company, for
----------------
Company's prior written approval, which approval shall not be unreasonably
withheld or delayed, three samples of any proposed use of the Trademarks (other
than for routine advertising or any other use consistent with previously
approved uses or consistent with Company's generally applicable TM guidelines or
any specific guidelines provided by the Company to Sub). Company shall provide
its written approval or disapproval of the proposed use of the Trademarks to
Sub. If Company does not provide its written approval within 10 days following
such submission, approval shall be deemed granted. Company shall provide, at
Sub's request, a written explanation of its reasons for withholding approval
within 10 days after notice of such request, in sufficient detail to enable Sub
to correct the basis for Company's rejection of the submitted material. Sub
shall ensure that representative samples of its use of the Trademarks are
periodically submitted to Company, in order to further enable Company to
exercise control over the nature and quality of the goods and services provided
under the Trademarks.
(b) The Company shall submit to Sub, for Sub's prior written approval,
which approval shall not be unreasonably withheld or delayed, three samples of
any proposed use of the Sub Marks (other than for routine advertising or any
other use consistent with previously approved uses or consistent with Sub's
generally applicable TM guidelines or any specific guidelines provided by Sub to
the Company). Sub shall provide its written approval or disapproval of the
proposed use of the Sub Marks to the Company. If Sub does not provide its
written approval within 10 days following such submission, approval shall be
deemed granted. Sub shall provide, at the Company's request, a written
explanation of its reasons for withholding approval within 10 days after notice
of such request, in sufficient detail to enable the Company to correct the basis
for Sub's rejection of the submitted material. The Company shall ensure that
representative samples of its use of the Sub Marks are periodically submitted to
Sub, in order to further enable Sub to exercise control over the nature and
quality of the goods and services provided under the Sub Marks.
4.04 Infringement Proceedings. (a) Subject to 4.4(b), each party shall
------------------------
promptly notify the other party in writing of any actual or suspected
unauthorized third party use of the Right Start IP, Confidential Information of
the Company and the Customer Information, as such use comes to a party's
attention. If the Company elects to defend or enforce its rights relating to
such alleged infringement, it shall be entitled to choose counsel for such
purpose and the Company shall afford Sub the opportunity to participate in (1)
the communication in writing or orally with the alleged infringer; and (2) the
enforcement or defense of their rights in, to and under the Right Start IP,
Confidential Information of the Company and the Customer Information; and (3)
the undertaking of infringement, unfair competition or other proceedings
involving the Right Start IP, Confidential Information of the Company or the
Customer Information; provided, however, that if the Company elects not to
defend or enforce its rights against such alleged infringer, Sub shall be
entitled to exercise any of the foregoing rights alone (including retention of
its choice of counsel) and the Company agrees to cooperate with Sub in the
exercise of such rights. Damages from such alleged infringer, if recovered by
either of the
8
<PAGE>
parties, shall be equitably apportioned between the Company and Sub in
accordance with relative damage suffered by the parties from such infringement.
(b) Subject to Section 4.4(a), each party shall promptly notify the other
party in writing of any actual or suspected unauthorized third party use of the
Website IP, the User Information and the Confidential Information of Sub, as
such use comes to a party's attention. If Sub elects to defend or enforce its
rights relating to such alleged infringement, it shall be entitled to choose
counsel for such purpose and Sub shall afford the Company the opportunity to
participate in the (1) communication in writing or orally with the alleged
infringer; and (2) the enforcement or defense of their rights in, to and under
the Website IP, the User Information and the Confidential Information of Sub;
and (3) the undertaking of infringement, unfair competition or other proceedings
involving the Website IP, the User Information or the Confidential Information
of Sub; provided, however, that if Sub elects not to defend or enforce its
rights against such alleged infringer, the Company shall be entitled to exercise
any of the foregoing rights alone (including retention of its choice of counsel)
and Sub agrees to cooperate with the Company in the exercise of such rights.
Damages from such alleged infringer, if recovered by either of the parties,
shall be equitably apportioned between the Company and Sub in accordance with
relative damage suffered by the parties from such infringement.
5. TERM AND TERMINATION.
--------------------
5.01 Term. The term of this Agreement (and all licenses hereunder) shall
----
commence on the date of this Agreement and shall continue until terminated in
accordance with the procedures set forth in this Agreement; provided, however,
that to the extent that any license or sub-license granted hereunder continues
upon termination of this Agreement (as specifically set forth in Section 5.04
below or otherwise herein) (a "Post-Term License") such Post-Term Licenses shall
continue but any particular activity under such Post-Term License shall be
subject to termination if, in the opinion of an independent recognized
arbitrator by the AAA appointed by the consensus of the Board of Directors of
the Company and the Board of Directors of Sub, such activity under such Post-
Term License would substantially harm the image of the owner of the Intellectual
Property to which the Post-Term License relates or otherwise substantially
diminish the value of such party's Intellectual Property rights or the "Right
Start" name. The non-prevailing party shall pay the costs and expenses of such
arbitrator if utilized, and the arbitrator shall allocate between the parties
the fees and expenses of counsel in connection with any such arbitration.
5.02 Termination for Change in Control of Sub. In the event of a Change in
----------------------------------------
Control of Sub in which the acquiror is a direct competitor of the Company, Sub
shall provide notice to the Company no less than 10 days prior to entering into
a definitive agreement giving effect to such Change of Control. Thereafter, the
Company may terminate this Agreement (in accordance with the terms of Section
5.01 and 5.04 hereof) within 30 days by giving Sub notice of termination due to
a Change of Control. If Sub fails to provide notice to the Company in
accordance with this paragraph, this Agreement may be terminated at the
Company's option at any time, within 60 days of the later of when the Change of
Control is actually consummated or the date on which the Company discovers that
a Change of Control has occurred.
9
<PAGE>
5.03 Termination for Cause. If either party materially breaches this
---------------------
Agreement and does not cure such failure within 30 business days after written
notice is given by the other party specifying the nature of the material breach,
the non-breaching party may, upon further notice to the breaching party within
10 days of the end of the 30-day period, terminate this Agreement as of the date
specified in such notice of termination.
5.04 Effect of Termination. Subject to Section 5.01 above, in the
---------------------
event of a termination of this Agreement for any reason, and with the exception
of licenses granted hereunder to the extent they relate to (A) Customer
Information used by Sub in the Online Business at the time of termination and
(B) the "Right Start" name and other Right Start IP actively used in the Online
Business at the time of termination, and selling out inventory, and excluding
any intellectual property owned by Sub, Sub shall (1) cease any and all use of
the Right Start IP and the Confidential Information of the Company; and (2)
deliver to Company all copies of the remaining stock of printed or other
material bearing the Right Start IP, any other designation which is the same or
confusingly similar to the Right Start IP or the Confidential Information of the
Company, and all other materials, files, goods and documentation relating or
referring to the Right Start IP or the Confidential Information of the Company
in Sub's possession. In the event of a termination of this Agreement for any
reason, and with the exception of licenses granted hereunder to the extent they
relate to User Information used by the Company in the Retail Business at the
time of termination, and selling out inventory, and excluding any intellectual
property owned by the Company, the Company shall (1) cease any and all use of
the Website IP, the User Information, and the Confidential Information of Sub,
and (2) deliver to Sub all copies of the remaining stock of printed or other
material bearing the Website IP, any other designation which is the same or
confusingly similar to the Website IP or the Confidential Information of Sub,
and all other materials, files, goods and documentation relating or referring to
the Website IP, the User Information or the Confidential Information of Sub in
the Company's possession.
6. REPRESENTATIONS AND WARRANTIES; DISCLAIMER.
------------------------------------------
6.01 Each party represents and warrants that, except as authorized
hereunder, neither it nor any Intellectual Property shall to its knowledge
infringe upon any third party intellectual property rights, including, without
limitation, trademarks, copyrights, patents and trade secrets.
6.02 DISCLAIMER. NEITHER PARTY MAKES ANY REPRESENTATIONS OR
----------
WARRANTIES, EXPRESS OR IMPLIED, REGARDING OR RELATING TO THE INTELLECTUAL
PROPERTY, AND EACH PARTY EXPLICITLY DISCLAIMS ALL OTHER REPRESENTATIONS AND
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A SPECIFIC PURPOSE.
7. COVENANTS.
---------
(a) Confidentiality. Each party agrees to hold in strict confidence,
---------------
and to use reasonable efforts to cause its employees and representatives to hold
in strict confidence all Confidential Information of the other party furnished
to or obtained by it in the course of this
10
<PAGE>
Agreement except to the extent that (i) such information has been in the public
domain through no fault of it, (ii) disclosure or release is compelled by
judicial or administrative process, or (iii) disclosure or release is necessary
pursuant to requirements of law or the requirements of any governmental entity
including, without limitation, disclosure requirements under the Securities
Exchange Act of 1934, as amended. This Section 7 shall survive termination of
this Agreement indefinitely.
(b) Promotion. The Management Services Agreement dated as of the date
---------
hereof between Parent and Sub contains a promotional covenant that continues in
effect until this Agreement is terminated in accordance with Section 5 herein
---------
(regardless of termination of such Management Services Agreement prior to the
date of termination of this Agreement).
8. MISCELLANEOUS PROVISIONS.
------------------------
8.01 Notices. Except as otherwise specified in this Agreement, all
-------
notices, requests, consents, approvals, agreements, authorizations,
acknowledgements, waivers and other communications required or permitted under
this Agreement shall be in writing and shall be deemed given when sent by
telecopy to the telecopy number specified below. A copy of any such notice shall
also be sent by express air mail on the date such notice is transmitted by
telecopy to the address specified below:
In the case of Company:
The Right Start, Inc.
5388 Sterling Center Drive - Unit C
Westlake Village, CA 91361
Attention: President
---------
Telecopy No. (818) 707-7132
with a copy to:
Milbank, Tweed, Hadley & McCloy LLP
601 South Figueroa Street, 30th Floor
Los Angeles, CA 90017
Attention: Kenneth Baronsky
---------
Telecopy No. 213-629-5063
In the case of Sub:
RightStart.com Inc.
5388 Sterling Center Drive - Unit C
Westlake Village, CA 91361
Attention: President
---------
Telecopy No. (818) 707-7132
11
<PAGE>
with a copy to:
Sierra Ventures VII LP
3000 Sand Hill Road
Building 4, #210
Menlo Park, CA 94025
Attn: Mr. Robert J. Simon
Telecopy No. (650) 854-5593
A party may change its address or telecopy number for notification purposes by
giving the other party notice of the new address or telecopy number and the date
upon which it shall become effective.
8.02 Headings. The article and section headings are for reference
--------
and convenience only and shall not be considered in the interpretation of this
Agreement.
8.03 Severability. If any provision of this Agreement is held by a
------------
court of competent jurisdiction to be contrary to law, then the remaining
provisions of this Agreement, if capable of substantial performance, shall
remain in full force and effect.
8.04 Third Party Beneficiaries. Each party intends that this
-------------------------
Agreement shall not benefit, or create and right or cause of action in or on
behalf of any person or entity other than the parties.
8.05 Waivers. No delay or omission by either party in the exercise
-------
of any right or power it has under this Agreement shall impair or be construed
as a waiver of such right or power. A waiver by any party of any breach or
covenant shall not be construed to be a waiver of any succeeding breach or any
other covenant. All waivers must be in writing and signed by the party waiving
its rights.
8.06 Entire Agreement. This Agreement represents the entire
----------------
agreement between the parties with respect to its subject matter, and there are
no other representations, understandings or agreements between the parties
relative to such subject matter.
8.07 Amendments. No amendment to, or change, waiver or discharge of,
----------
any provision of this Agreement shall be valid unless in writing and signed by
an authorized representative of each of the parties.
8.08 Governing Law. This Agreement and the rights and obligations of
-------------
the parties hereunder shall be governed by and construed in accordance with
United States trademark laws and the laws of the State of California, without
giving effect to the principles thereof relating to the conflicts of laws.
8.09 Covenant of Further Assurances. Company and Sub covenant and
------------------------------
agree that, subsequent to the execution and delivery of this Agreement and
without additional consideration, each of Company and Sub shall execute and
deliver any further legal instruments and perform any acts which are or may
become necessary to effectuate the purposes of this
12
<PAGE>
Agreement to perfect or otherwise preserve and maintain Company's rights in and
to the Intellectual Property.
13
<PAGE>
IN WITNESS WHEREOF, each of Company and Sub has caused this Agreement to be
signed and delivered by its duly authorized representative.
The Right Start, Inc.
By: /s/ Gina M. Engelhard
-----------------------
Name: Gina M. Engelhard
Title: Chief Financial Officer and Secretary
RightStart.com Inc.
By: /s/ Jerry R. Welch
------------------------
Name: Jerry R. Welch
Title: President
14
<PAGE>
STATE OF )
----------------
) SS.
COUNTY OF )
---------------
On this day of , 1999, there appeared before me ,
----- ------- ---------------
personally known to me, who acknowledged that he/she signed the foregoing
Intellectual Property Agreement as his/her voluntary act and deed with full
authority to do so.
----------------------------
Notary Public
15
<PAGE>
EXHIBIT A- Trademarks
---------------------
[Intentionally Omitted. Available upon request to the Company]
16
<PAGE>
EXHIBIT C- Patents
------------------
No patent applications or registrations as of the Effective Date
17
<PAGE>
EXHIBIT D- Domain Names
-----------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
DOMAIN NAMES
- -------------------------------------------------------------------------------
<S> <C>
THERIGHTSTART.COM
- -------------------------------------------------------------------------------
RIGHTSTART.COM
- -------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and all references to our Firm) included in or made part of this
registration statement.
/s/ Arthur Andersen LLP
Los Angeles, California
January 17, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-30-1999 JAN-01-2000
<PERIOD-START> FEB-01-1998 JAN-31-1999
<PERIOD-END> JAN-30-1999 JAN-01-2000
<CASH> 0 6,620,000
<SECURITIES> 0 0
<RECEIVABLES> 216,000 210,000
<ALLOWANCES> 27,000 87,000
<INVENTORY> 0 597,000
<CURRENT-ASSETS> 552,000 7,919,000
<PP&E> 520,000 2,636,000
<DEPRECIATION> 500,000 708,000
<TOTAL-ASSETS> 604,000 10,495,000
<CURRENT-LIABILITIES> 254,000 3,722,000
<BONDS> 0 0
0 0
0 0
<COMMON> 0 91,000
<OTHER-SE> 350,000 6,682,000
<TOTAL-LIABILITY-AND-EQUITY> 604,000 10,495,000
<SALES> 4,736,000 9,976,000
<TOTAL-REVENUES> 4,736,000 9,976,000
<CGS> 2,180,000 5,779,000
<TOTAL-COSTS> 2,682,000 13,179,000
<OTHER-EXPENSES> 0 206,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 (216,000)
<INCOME-PRETAX> (126,000) (8,972,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (126,000) (8,972,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (126,000) (8,972,000)
<EPS-BASIC> (0.02) (1.42)
<EPS-DILUTED> (0.02) (1.42)
</TABLE>
