Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the thirteen week period ended May 2, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-19536
THE RIGHT START, INC.
(Exact name of registrant as specified by its charter)
California 95-3971414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organiztion) Identification No.)
5388 Sterling Center Drive, Unit C, Westlake Village, CA 91361
(Address of principal executive offices) (Zip Code)
(818) 707-7100
(Registrant's telephone number, including area code)
- -----------------------------------------------------------------------------
(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
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common Stock Outstanding as of May 28, 1998 - 10,103,639 shares
<PAGE>
THE RIGHT START, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN WEEK PERIOD
ENDED MAY 2, 1998
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheet 3
Statement of Operations 4
Statement of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
SIGNATURES 10
2
<PAGE>
<TABLE>
THE RIGHT START, INC.
BALANCE SHEET
(unaudited)
<CAPTION>
May 2, January 31,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 319,000 $ 240,000
Accounts and other receivables 413,000 405,000
Merchandise inventories 7,701,000 6,602,000
Prepaid catalog expenses 519,000 297,000
Other current assets 1,241,000 1,364,000
------------ ------------
Total current assets 10,193,000 8,908,000
Property, plant and equipment, net 7,840,000 8,115,000
Other non-current assets 71,000 39,000
Deferred income tax benefit 1,400,000 1,400,000
------------ ------------
$ 19,504,000 $ 18,462,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
and accrued expenses $ 2,836,000 $ 2,372,000
Accrued salaries and bonuses 370,000 380,000
Advance payments on orders 45,000 30,000
Note payable 2,014,000
------------ ------------
Total current liabilities 3,251,000 4,796,000
Note payable long term 3,000,000 3,000,000
Senior subordinated notes
due May 6, 2000 3,850,000
Senior subordinated notes
due May 6, 2000 2,754,000 2,734,000
Subordinated convertible
debentures due May 31, 2002 3,000,000 3,000,000
Deferred rent 1,604,000 1,625,000
Shareholders' equity:
Common stock (25,000,000
shares authorized at no par
value;10,103,639 issued and
outstanding) 22,337,000 22,337,000
Accumulated deficit (20,292,000) (19,030,000)
------------ ------------
$ 19,504,000 $ 18,462,000
============ ============
</TABLE>
3
<PAGE>
<TABLE>
THE RIGHT START, INC.
STATEMENT OF OPERATIONS
(unaudited)
<CAPTION>
Thirteen weeks ended
--------------------
May 2, 1998 May 3, 1997
------------ ------------
<S> <C> <C>
Net sales:
Retail $ 7,329,000 $ 7,414,000
Catalog 1,712,000 2,522,000
------------ ------------
9,041,000 9,936,000
Costs and expenses:
Cost of goods sold 4,585,000 4,898,000
Operating expense 4,213,000 5,048,000
General and administrative expense 922,000 1,136,000
Pre-opening cost amortization 31,000 217,000
Depreciation and
amortization expense 348,000 394,000
------------ ------------
10,099,000 11,693,000
------------ ------------
Operating loss (1,058,000) (1,757,000)
Interest and other expense, net 192,000 211,000
------------ ------------
Loss before income taxes (1,250,000) (1,968,000)
Income tax provision 12,000 10,000
------------ ------------
Net loss $ (1,262,000) $ (1,978,000)
============ ============
Loss per share $ (0.12) $ (0.23)
============ ============
Weighted average number
of shares outstanding 10,103,639 8,499,353
============ ============
</TABLE>
4
<PAGE>
<TABLE>
THE RIGHT START, INC.
STATEMENT OF CASH FLOWS
(unaudited)
<CAPTION>
Thirteen weeks ended
---------------------------------
May 2, 1998 May 3, 1997
------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,262,000) $(1,978,000)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 399,000 611,000
Changes in assets and liabilities
affecting operations (823,000) 515,000
----------- -----------
Net cash used in operating activities (1,686,000) (852,000)
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (71,000) (873,000)
----------- -----------
Cash flows from financing activities:
Net borrowings (payments) under
revolving line of credit (2,014,000) 488,000
Proceeds from issuance of
senior subordinated notes 3,850,000 1,320,000
----------- -----------
Net cash provided by financing activities 1,836,000 1,808,000
----------- -----------
Net increase in cash 79,000 83,000
Cash at beginning of period 240,000 313,000
----------- -----------
Cash at end of period $ 319,000 $ 396,000
=========== ===========
</TABLE>
5
<PAGE>
THE RIGHT START, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1: Description of Business and Significant Accounting Policies
The Right Start, Inc. is a specialty merchant offering unique, high-quality
juvenile products for infants and young children. The Company markets its
products through its retail stores and through The Right Start Catalog.
There have been no changes in the Company's significant accounting policies
as set forth in the Company's financial statements for the year ended
January 31, 1998. These unaudited financial statements as of May 2, 1998
and for the thirteen week period 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.
Operating results for the thirteen week period ended May 2, 1998 are not
necessarily indicative of the results that may be expected for the year
ending January 30, 1999.
NOTE 2: Per Share Data
Basic per share data is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding.
NOTE 3: Supplemental Disclosure of Cash Flow Information
Interest paid amounted to $193,000 and $142,000 for the thirteen weeks
ended May 2, 1998 and May 3, 1997, respectively. Cash paid for income
taxes was $5,000 and $12,000 for the thirteen weeks ended May 2, 1998 and
May 3, 1997, respectively.
Changes in assets and liabilities which increased (decreased) cash and
equivalents are as follows:
<TABLE>
<CAPTION>
Thirteen weeks ended
--------------------
May 2, 1998 May 3, 1997
----------- -----------
<S> <C> <C>
Accounts and other receivables $ (8,000) $ 547,000
Merchandise inventories (1,099,000) 276,000
Prepaid catalog expenses (222,000) (37,000)
Other current assets 92,000 (380,000)
Other non-current assets (34,000)
Accounts payable and
accrued expenses 464,000 154,000
Accrued salaries and bonuses (10,000) (161,000)
Advance payments on orders 15,000 32,000
Deferred rent (21,000) 84,000
----------- -----------
$ (823,000) $ 515,000
=========== ===========
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Thirteen weeks ended May 2, 1998 compared with May 3, 1997
Net sales for the thirteen weeks ended May 2, 1998 declined 9.0% to $9.0
million from $9.9 million for the same period last year. For the quarter, retail
net sales remained relatively flat at $7.3 million as compared to $7.4 million
last year, while catalog net sales decreased 32.1% to $1.7 million from $2.5
million last year. Retail sales reflect sales increases due to six store
openings during and since the first quarter of the prior fiscal year offset by
five store closings this quarter. The reduction in catalog net sales is due to
the Company's decision to significantly reduce circulation and operate the
catalog at a smaller and more profitable level.
Cost of goods sold decreased $.3 million or 6.4%, resulting in a gross
margin of 49.3% as compared to 50.7% last year. The decline in margin reflects
the impact of planned promotional programs introduced this quarter, both to
increase sales in stores with continued operations and to clear merchandise in
conjunction with store closures. In addition, the Company implemented several
marketing programs to build awareness in its new street front locations and to
encourage repeat business in all locations through well-targeted mailings to
existing customers.
Operating expense was $4.2 million in the first quarter of 1998 as compared
to $5.0 million in the first quarter of 1997, representing a 16.5% decrease.
Retail operating expenses decreased 9.0%, primarily due to reductions in
merchandise warehousing and handling costs and reduced labor costs.
Additionally, catalog operating expense decreased 40.4%, keeping in line with
the Company's decision to operate the catalog at a smaller, more profitable
level.
General and administrative expense decreased 18.8% to $922,000 during the
first quarter of 1998 from $1,136,000 during the same period last year. The
decrease results from certain cost saving measures implemented by management
during recent months.
Interest and other expense decreased to $192,000 from $211,000 in the first
quarter of the prior year. The 8.8% decrease results from lower outstanding
borrowings on interest-bearing debt. See Liquidity and Capital Resources.
Liquidity and Capital Resources
During the first quarter of Fiscal 1998, the Company's primary sources of
liquidity were from borrowings under its $13 million senior credit facility (the
"Credit Facility") and proceeds from the sale of approximately $3.9 million of
subordinated debentures with warrants. The Credit Facility 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 May 2,
1998, borrowings of $3,000,000 were outstanding under the Capex Line. There were
no borrowings and approximately $3.5 million 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 earnings before
interest, taxes, depreciation and amortization (EBITDA) to the following loss
amounts: $1.2 million for the three months ended May 2, 1998 and the six months
ended August 1, 1998, $900,000 for the nine months ended October 31, 1998 and
the twelve months ended January 31, 1999 and $500,000 for the twelve months
ended April 30, 1999. Minimum EBITDA of zero is required for the twelve months
ended July 31, 1999 and $400,000 for the twelve months ended October 31, 1999.
In addition, capital expenditures are limited to $1,750,000 in fiscal years 1998
and 1999.
7
<PAGE>
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 and the
extension of credit by the Company's suppliers and impact the Company's
operations.
In order to enhance the Company's liquidity and improve its capital
structure, the Company completed a private placement of non-interest bearing
senior subordinated notes in an aggregate principal amount of $3,850,000,
together with warrants to purchase an aggregate of 3,850,000 shares of common
stock exercisable at $1.00 per share. The new securities were sold for an
aggregate purchase price of $3,850,000 and were purchased principally by
affiliates of the Company. In connection with the sale of the new securities,
the Company entered into an agreement with all of the holders of the Company's
existing subordinated debt securities, representing an aggregate principal
amount of $6,000,000. Pursuant to the agreement, each holder agreed to exchange
all of its subordinated debt securities together with any warrants issued in
connection therewith, for newly issued preferred stock. Holders of $3,000,000
principal amount existing subordinated debt securities elected to receive Series
A Preferred Stock which will have no fixed dividend rights, will not be
convertible into common stock and will be mandatorily redeemable by the Company
in May 2002. Holders of $3,000,000 principal amount of existing subordinated
debt securities elected to receive Series B convertible preferred stock which
will have no fixed dividend rights, will be convertible into common stock at a
price per share of $1.50 and will not be mandatorily redeemable by the Company.
Holders of the $3,850,000 principal amount of new subordinated debt securities
elected to receive Series C convertible preferred stock which will have no fixed
dividend rights, will be convertible into common stock at a price per share of
$1.00 and will not be mandatorily redeemable by the Company. The issuance of the
shares of preferred stock upon exchange of the subordinated debt securities is
subject to the approval of the Company's shareholders, which approval the
Company expects to obtain at its annual meeting scheduled to be held on July 29,
1998.
In connection with the above restructuring, the holders of $6.0 million
principal amount of subordinated debt permanently waived their rights to receive
interest payments and agreed to exchange such debt for preferred stock,
resulting in the elimination of approximately $.6 million in annual interest
payments.
Other Matters
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits(rather that four) to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather that the year 2000 which
could result in miscalculations or system failures. Based on preliminary
information, costs of addressing potential problems are not currently expected
to have a material adverse impact on the Company's financial position, results
of operations or cash flows in future periods. The Company plans to devote the
necessary resources to resolve all significant year 2000 issues in a timely
manner.
8
<PAGE>
Part II
Item 6. Exhibits and Reports on Form 8-K
The Company filed a Report of Form 8-K on May 6, 1997, reporting the press
release dated April 23, 1998.
The Company filed no other Reports of Form 8-K during the first quarter of
fiscal 1998.
The following exhibits of The Right Start, Inc. are included herein.
Exhibit
Number
27 Financial Data Schedule
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.
THE RIGHT START, INC.
Date: June 12, 1998 /s/JERRY WELCH
-----------------------
Jerry Welch
Chief Executive Officer
Date: June 12, 1998 /s/GINA M.SHAUER
-----------------------
Gina M. Shauer
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> MAY-02-1998
<CASH> 319
<SECURITIES> 0
<RECEIVABLES> 413
<ALLOWANCES> 0
<INVENTORY> 7,701
<CURRENT-ASSETS> 10,193
<PP&E> 11,244
<DEPRECIATION> 3,404
<TOTAL-ASSETS> 19,504
<CURRENT-LIABILITIES> 3,251
<BONDS> 0
0
0
<COMMON> 22,337
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,504
<SALES> 9,041
<TOTAL-REVENUES> 9,041
<CGS> 4,585
<TOTAL-COSTS> 10,099
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> (1,250)
<INCOME-TAX> 12
<INCOME-CONTINUING> (1,262)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,262)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
