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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
----------------------------
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 1, 1997
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
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Commission file number: 0-19536
The Right Start, Inc.
(Exact name of Registrant as specified in its charter)
----------------------------
California 95-3971414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5334 Sterling Center Drive
Westlake Village, California 91361
(Address of principal executive offices) (Zip code)
(818) 707-7100
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title: Common Stock Outstanding: 10,119,639 shares
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<PAGE>
THE RIGHT START, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS
ENDED NOVEMBER 1, 1997
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
<PAGE>
THE RIGHT START, INC.
BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
November 1, February 1,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 181,000 $ 313,000
Accounts receivable 539,000 938,000
Note receivable 108,000 200,000
Merchandise inventories 9,345,000 7,664,000
Prepaid catalog expenses 565,000 782,000
Deferred pre-opening costs, net 143,000 543,000
Other current assets 1,493,000 1,264,000
------------ ------------
12,374,000 11,704,000
------------ ------------
Property, plant and equipment, net 10,269,000 9,841,000
Other non-current assets 35,000 37,000
Deferred income tax benefit 1,400,000 1,400,000
------------ ------------
11,704,000 11,278,000
------------ ------------
$ 24,078,000 $ 22,982,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,738,000 $ 6,076,000
Accrued salaries and bonuses 385,000 517,000
Advance payments on orders 73,000 31,000
Note payable 1,594,000 1,833,000
------------ ------------
6,790,000 8,457,000
------------ ------------
Note payable long term 3,000,000 2,643,000
Senior subordinated notes, net of
unamortized discount of $295,000 2,705,000
Convertible subordinated debentures 3,000,000 3,000,000
Deferred rent 2,030,000 1,710,000
------------ ------------
10,735,000 7,353,000
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock (25,000,000 shares authorized at
no par value; 10,119,639 and 7,949,306 shares
issued and outstanding, respectively) 22,337,000 16,961,000
Accumulated deficit (15,784,000) (9,789,000)
------------ ------------
6,553,000 7,172,000
------------ ------------
$ 24,078,000 $ 22,982,000
============ ============
</TABLE>
3
<PAGE>
THE RIGHT START, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------- ---------------------------
November 2, November 1, November 2, November 1,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Retail $ 7,311,000 $ 5,976,000 $ 22,896,000 $ 17,486,000
Catalog 1,910,000 2,829,000 6,214,000 11,757,000
------------ ------------ ------------ ------------
9,221,000 8,805,000 29,110,000 29,243,000
Other revenues 194,000 175,000 354,000 571,000
------------ ------------ ------------ ------------
9,415,000 8,980,000 29,464,000 29,814,000
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 4,480,000 4,604,000 14,655,000 15,890,000
Operating expense 5,057,000 4,284,000 15,078,000 13,995,000
General and administrative expense 1,059,000 1,146,000 2,860,000 3,597,000
Depreciation and amortization expense 537,000 458,000 1,705,000 1,287,000
------------ ------------ ------------ ------------
11,133,000 10,492,000 34,298,000 34,769,000
------------ ------------ ------------ ------------
Operating loss (1,718,000) (1,512,000) (4,834,000) (4,955,000)
Interest expense (income), net 316,000 49,000 806,000 83,000
Other expense 35,000 286,000 328,000 736,000
------------ ------------ ------------ ------------
Loss before income taxes (2,069,000) (1,847,000) (5,968,000) (5,774,000)
Income tax provision (benefit) 7,000 27,000 (425,000)
------------ ------------ ------------ ------------
Net loss $ (2,076,000) $ (1,847,000) $ (5,995,000) $ (5,349,000)
============ ============ ============ ============
Loss per share $ (0.22) $ (0.23) $ (0.67) $ (0.84)
============ ============ ============ ============
Weighted average number of shares
outstanding 9,566,254 7,950,625 8,886,416 6,379,759
============ ============ ============ ============
</TABLE>
4
<PAGE>
THE RIGHT START, INC.
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks
Ended
--------------------------
November 1, November 2,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,995,000) $(5,349,000)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,705,000 1,287,000
Amortization of discount on senior subordinated notes 57,000
Change in assets and liabilities affecting operations (2,428,000) (983,000)
---------- ----------
Net cash used in operating activities (6,661,000) (5,045,000)
---------- ----------
Cash flows from investing activities:
Additions of property, plant and equipment (1,614,000) (3,399,000)
---------- ----------
Net cash used in investing activities (1,613,000) (3,399,000)
---------- ----------
Cash flows from financing activities:
Borrowings (repayments) under note payable to bank, net (239,000) 494,000
Proceeds from note payable, long term 357,000
Proceeds from private placement of common stock 3,705,000
Proceeds from common stock issued upon
exercise of stock options 1,320,000 182,000
Proceeds from common stock issued pursuant a
rights offering 4,906,000
Proceeds from sale of senior subordinated notes 3,000,000
Proceeds from sale of convertible subordinated debentures 3,000,000
---------- ----------
Cash provided by financing activities 8,143,000 8,582,000
---------- ----------
Net increase (decrease) in cash (132,000) 138,000
Cash at beginning of period 313,000 141,000
---------- ----------
Cash at end of period $ 181,000 $ 279,000
========== ==========
</TABLE>
5
<PAGE>
THE RIGHT START, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Description of Business and Significant Accounting Policies
The Right Start, Inc. is a leading merchant offering unique, high-quality
juvenile products for infants and young children. The Company markets its
products through its retail stores, located in major regional malls and street
locations across the nation, and through The Right Start Catalog.
Effective February 1, 1997, the Company changed its fiscal year end to the
Saturday closest to the last day of January. Previously, the Company reported on
a fiscal year ending the Saturday closest to the last day of May. This resulted
in a thirty-three week reporting period for the period June 2, 1996 through
February 1, 1997 (the "Transition Period").
There have been no changes in the Company's significant accounting policies as
set forth in the Company's consolidated financial statements for the Transition
Period. These unaudited consolidated financial statements as of November 1, 1997
and for the thirteen and thirty-nine periods then ended have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Certain reclassifications have been made to conform prior
year amounts to current year presentation.
Results of operations for the thirteen and thirty-nine week periods ended
November 1, 1997 are not necessarily indicative of the results that may be
expected for the year ending January 31, 1998.
NOTE 2: Per Share Data
Earnings per share is computed in accordance with the treasury stock method
based upon the weighted average number of common shares and dilutive common
stock equivalents outstanding. Common stock equivalents comprise stock options
outstanding to key executives, employees and directors.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS
128 is effective for the Company at January 31, 1998. The statement requires
that basic earnings per share ("EPS") be presented instead of primary EPS. It
also requires both basic and diluted EPS be presented on the face of the income
statement, if applicable, as well as additional disclosures on the components of
EPS. Had the Company adopted FAS 128 at November 1, 1997, there would be no
effect on the financial statements for the periods then ended.
6
<PAGE>
NOTE 3: Supplemental Disclosure of Cash Flow Information
Interest paid amounted to $670,000 and $59,000 for the thirty-nine weeks ended
November 1, 1997 and November 2, 1996, respectively. Cash paid for income taxes
was $5,000 and $12,000 for the thirty-nine weeks ended November 1, 1997 and
November 2, 1996, respectively.
Details of changes in assets and liabilities which increased (decreased) cash is
presented below:
<TABLE>
<CAPTION>
Thirty-nine weeks ended
--------------------------
November 1, November 2,
1997 1996
---- ----
<S> <C> <C>
Accounts receivable $ 399,000 $ (267,000)
Note receivable 92,000 (229,000)
Merchandise inventories (1,681,000) (2,192,000)
Prepaid catalog expenses 217,000 85,000
Other current assets (229,000) 675,000
Other non-current assets 2,000 (395,000)
Accounts payable and accrued expenses (1,339,000) 1,486,000
Accrued salaries and bonuses (132,000) (146,000)
Advance payments on orders 42,000 (68,000)
Deferred pre-opening costs (119,000) (582,000)
Deferred rent 320,000 650,000
----------- -----------
$(2,428,000) $ (983,000)
=========== ===========
</TABLE>
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Thirteen weeks ended November 1, 1997 compared with November 2, 1996
--------------------------------------------------------------------
Net sales for the thirteen weeks ended November 1, 1997 increased 5% to
$9,221,000 as compared to $8,805,000 for the same period last year. Retail net
sales increased 22% to $7,311,000 from $5,976,000 last year, while catalog net
sales decreased 33% to $1,910,000 from $2,829,000 last year. The increase in
retail sales results from an increase in the number of stores open from 30 at
November 2, 1996 to 40 at November 1, 1997, offset by a decline in average sales
per store. The catalog sales decline is in line with the reduced circulation
planned for this period as compared to the same period of the prior year. The
Company has reduced the circulation of The Right Start Catalog in order to
better position it to strategically support and complement the retail store
operations.
Cost of goods sold decreased 3% to $4,480,000 from $4,604,000, resulting in a
gross margin of 51.4% for the third quarter of fiscal 1997 compared to 47.7%
last year. Improved margins reflect the stronger initial margins on new products
being introduced.
Operating expense increased 18% or $773,000, primarily due to the additional
occupancy costs associated with the stores opened during and since the prior
year period.
General and administrative expense decreased 8% or $87,000 as compared with the
third quarter of the prior year. The expense reduction is reflective of
management's on-going efforts to reduce corporate overhead expenses.
Depreciation and amortization expense increased to $537,000 from $458,000 due to
opening of new stores during and since last year.
Interest expense, net was $316,000 for the quarter ended November 1, 1997 as
compared to $49,000 for the same period of the prior year. The increase is due
to the increased borrowings under the Company's credit facility and the issuance
of the subordinated notes and convertible debentures.
Other expense decreased $251,000 to $286,000 for the quarter ended November 1,
1997. The prior year expense reflects the severance accrual associated with the
resignation of one of the Company's key executives.
Thirty-nine weeks ended November 1, 1997 compared with November 2, 1996
-----------------------------------------------------------------------
Net sales for the fiscal 1997 period remained relatively flat as compared to the
same period last year. For the fiscal 1997 period, retail net sales increased
31% to $22,896,000 from $17,486,000 last year, while catalog net sales decreased
47% to $6,214,000 from $11,757,000 last year. The increase in retail sales
results from an increase in the number of stores open from 30 at November 2,
1996 to 40 at November 1, 1997, offset by a decline in average sales per store.
Contributing to the decline in average sales per store was the extensive amount
of promotional activity that occurred in 1996 not present in 1997. The catalog
sales decline is in line with the reduced circulation planned for this period as
compared to the same period of the prior year. The Company has reduced the
circulation of The Right Start Catalog in order to better position it to
strategically support and complement the retail store operations.
Cost of goods sold decreased 8% to $14,655,000 from $15,890,000, resulting in a
gross margin of 49.7% for the first three quarters of fiscal 1997 compared to
45.7% last year. Improved margins reflect the reduced promotional activity as
compared to the prior year and stronger initial margins on new products being
introduced.
Operating expense increased 8% due to the increases in payroll, occupancy and
other costs related to the new stores in operation, offset by reductions in
catalog production costs.
General and administrative expense decreased 21% or $737,000 for the nine month
period ended November 1, 1997 as compared with the same period last year. The
expense reduction is reflective of management's efforts to reduce corporate
overhead expenses.
Depreciation and amortization expense increased to $1,705,000 for the nine
months ended November 1, 1997 as compared to $1,287,000 for the same period of
the prior year due to opening of new stores during and since last year.
8
<PAGE>
Interest expense, net increased to $806,000 for the nine month period ended
November 1, 1997 as compared to $83,000 for the same period of the prior year.
The increase is due to the increased borrowings under the Company's credit
facility and the placement of the subordinated notes and convertible debentures.
Other expense of $328,000 for the nine months ended November 1, 1997 is
primarily attributed to severance expense recorded in conjunction with the
termination of certain management employees and costs incurred in relocating the
Company's catalog distribution facilities. This compares to $736,000 of
severance expense recorded in the same period of 1996.
Liquidity and Capital Resources
During the nine months ended November 1, 1997, the Company's primary source of
liquidity was from the sale of subordinated debentures, the private placement of
1,510,000 shares of common stock and the proceeds from the exercise of common
stock options. These sources funded cash used in operations of $6,662,000 and in
investing activities of $1,613,000. Capital expenditures represent amounts
incurred in the construction of new stores which were opened in late 1996 and in
the first three quarters of fiscal 1997. The Company opened six stores in fiscal
1997 through December 5, 1997.
Effective May 6, 1997, the Company raised $3,000,000 through the issuance and
sale of subordinated debt and warrants to purchase common stock to a limited
number of investors (some of whom are affiliates of the Company). The
subordinated notes bear interest at 11.5% and are due in full on May 6, 2000.
Warrants to purchase an aggregate of 475,000 shares of common stock at $3.00 per
share were issued in connection with the subordinated notes.
Effective September 4, 1997, the Company entered into a Securities Purchase
Agreement with a limited number of investors (some of whom are affiliates of the
Company), pursuant to which it issued 1,510,000 shares of common stock at $2.50
per share, generating proceeds of $3,705,000 for the Company.
The Company has a credit facility (the "Credit Facility") which consists of a
$10,000,000 revolving line of credit for working capital (the "Revolving Line")
and a $3,000,000 capital expenditure facility (the "Capex Line"). Availability
under the Revolving Line is subject to a defined borrowing base. As of November
1, 1997, borrowings of $1,594,000 and $3,000,000 were outstanding under the
Revolving Line and the Capex Line, respectively, and $3,205,000 was available
under the Revolving Line. The Credit Facility terminates on November 19, 1999
and on such date all borrowings thereunder are immediately due and payable.
Borrowings under the Credit Facility are secured by substantially all of the
Company's assets.
The Credit Facility, as amended, requires the Company at all times to maintain
net worth (defined to include equity and subordinated debt) of at least $8
million. The Credit Facility also limits the Company's EBITDA (as defined in the
Credit Facility) to losses of $3,000,000 during the three quarter period ending
November 1, 1997. Thereafter, the Credit Facility requires the Company's
interest coverage (as defined therein) to be at least (i) 1.5 to 1.0 for the
quarter ending January 31, 1998, (ii) 1.0 to 1.0 for the two quarter period
ending April 30, 1998, (iii) 1.5 to 1.0 for the three quarter period ending July
31, 1998, and (iv) 2.0 to 1.0 for the four quarter period at the end of each
subsequent quarter. Interest coverage is defined in the Credit Facility as
EBITDA divided by interest expense (each defined therein). During the first
three quarters of fiscal 1997, the Company's losses exceeded those permitted by
the Credit Facility. The lender subsequently waived the requirement for the
period ended November 1, 1997 and amended the Credit Facility to require minimum
availability on the Revolving Line of $400,000.
The Company's ability to fund its operations, open new stores and maintain
compliance with the Credit Facility is dependent on its ability to generate
sufficient cash flow from operations. Historically, the Company has incurred
losses and expects to continue to incur losses in the near term. Depending on
the success of its business strategy, the Company may continue to incur losses
beyond such period. Losses could negatively affect working capital, the
extension of credit by the Company's suppliers and the Company's ability to
maintain compliance with its debt covenants.
9
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
The Company filed no Reports on Form 8-K during the period ended November 1,
1997.
The following exhibits of The Right Start, Inc. are included herein.
Exhibit
Number
27 Financial Data Schedule
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
The Right Start, Inc.
December 15, 1997 By: \S\ Jerry R. Welch
- ----------------- -------------------
Date Jerry R. Welch
Chief Executive Officer
December 15, 1997 By: \S\ Gina M. Shauer
- ----------------- ------------------
Date Gina M. Shauer
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> AUG-03-1997
<PERIOD-END> NOV-01-1997
<CASH> 181
<SECURITIES> 0
<RECEIVABLES> 647
<ALLOWANCES> 0
<INVENTORY> 9,345
<CURRENT-ASSETS> 12,374
<PP&E> 14,142
<DEPRECIATION> 3,873
<TOTAL-ASSETS> 24,078
<CURRENT-LIABILITIES> 6,790
<BONDS> 0
0
0
<COMMON> 22,337
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 24,078
<SALES> 29,110
<TOTAL-REVENUES> 29,464
<CGS> 14,655
<TOTAL-COSTS> 34,298
<OTHER-EXPENSES> 328
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 806
<INCOME-PRETAX> (5,968)
<INCOME-TAX> 27
<INCOME-CONTINUING> (5,968)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,995)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
