SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Form 10-Q
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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 quarterly period ended October 30, 1999
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
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(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)
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(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 October 30, 1999 - 5,375,036 shares
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THE RIGHT START, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN AND THIRTY - NINE WEEK PERIODS
ENDED OCTOBER 30, 1999
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
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<TABLE>
THE RIGHT START, INC.
CONSOLIDATED BALANCE SHEETS
October 30, January 30,
1999 1999
(unaudited)
--------------- ---------------
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ASSETS
Current assets:
Cash and cash equivalents $ 9,339,000 $ 626,000
Accounts and other receivables 828,000 585,000
Merchandise inventories 8,864,000 5,797,000
Prepaid catalog costs 578,000 363,000
Other current assets 2,751,000 929,000
--------------- ---------------
Total current assets 22,360,000 8,300,000
Property, plant and equipment, net 9,859,000 7,884,000
Deferred income taxes 1,400,000 1,400,000
Other noncurrent assets 378,000 87,000
--------------- ---------------
$ 33,997,000 $ 17,671,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,896,000 $ 3,349,000
Accrued salaries and bonuses 503,000 433,000
Advance payments on orders 40,000
Revolving line of credit 2,329,000
Term note payable 2,250,000 2,750,000
--------------- ---------------
Total current liabilities 12,978,000 6,572,000
Deferred rent 1,441,000 1,449,000
Minority interest in consolidated subsidiary 5,864,000
Mandatorily redeemable preferred stock Series A,
$3,000,000 redemption value 2,009,000 1,789,000
Shareholders' equity:
Convertible preferred stock Series B 1,925,000 2,813,000
Convertible preferred stock Series C 3,850,000 3,850,000
Common stock (25,000,000 shares authorized
at no par value; 5,375,036 and 5,051,820
issued and outstanding, respectively) 22,374,000 22,337,000
Additional paid-in capital 15,289,000 3,571,000
Accumulated deficit (31,733,000) (24,710,000)
--------------- ---------------
Total shareholders' equity 11,705,000 7,861,000
--------------- ---------------
$ 33,997,000 $ 17,671,000
=============== ===============
</TABLE>
See accompanying notes to financial statements
3
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<TABLE>
THE RIGHT START, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Thirteen weeks ended Thirty-nine weeks ended
------------------------------ -----------------------------
October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
<S> <C> <C> <C> <C>
Net sales:
Retail $ 8,829,000 $ 7,176,000 $ 27,328,000 $22,296,000
Internet 2,232,000 2,453,000
Catalog 492,000 897,000 3,050,000 3,573,000
------------ ------------- ------------- -------------
11,553,000 8,073,000 32,831,000 25,869,000
------------ ------------- ------------- -------------
Costs and expenses:
Cost of goods sold 6,262,000 4,076,000 16,585,000 13,232,000
Operating expense 4,798,000 3,308,000 13,142,000 11,188,000
Marketing and advertising expense 2,831,000 115,000 3,269,000 284,000
General and administrative expense 1,257,000 850,000 3,154,000 2,627,000
Pre-opening costs 91,000 68,000 228,000 118,000
Depreciation and amortization expense 467,000 471,000 1,214,000 1,145,000
Other (income) and expense:
Non-cash compensation 203,000 1,973,000
Store closing (income) expense 151,000 (113,000)
------------ ------------- ------------- -------------
15,909,000 8,888,000 39,716,000 28,481,000
Operating loss (4,356,000) (815,000) (6,885,000) (2,612,000)
Minority interest in
consolidated subsidiary (384,000) (401,000)
Interest (income) expense, net (18,000) 1,578,000 178,000 2,016,000
------------ ------------- ------------- -------------
Loss before income taxes and
extraordinary item (3,954,000) (2,393,000) (6,662,000) (4,628,000)
Income tax provision 20,000 5,000 48,000 22,000
------------ ------------- ------------- -------------
Loss before extraordinary item (3,974,000) (2,398,000) (6,710,000) (4,650,000)
Extraordinary gain on debt
restructuring, net 27,000
------------ ------------- ------------- -------------
Net loss $ (3,974,000) $ (2,398,000) $ (6,710,000) $ (4,623,000)
============= ============== ============= =============
Basic and diluted loss per share:
Loss before extraordinary item $ (0.87) $ (0.47) $ (1.47) $ (0.92)
Extraordinary item 0.01
============= ============== ============= =============
Net loss $ (0.87) $ (0.47) $ (1.47) $ (0.92)
============= ============== ============= =============
Weighted average number of shares
outstanding 5,357,682 5,051,820 5,156,127 5,051,820
</TABLE>
See accompanying notes to financial statements
4
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<TABLE>
THE RIGHT START, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Thirty-nine weeks ended
-------------------------------------
October 30, 1999 October 31, 1998
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Cash flows from operating activities:
Net loss $ (6,710,000) $ (4,623,000)
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,214,000 1,195,000
Non-cash compensation 1,973,000
Store closing expense 151,000 39,000
Minority interest in consolidated
subsidiary loss (401,000)
Amortization of discount on senior
subordinated notes 1,514,000
Extraordinary gain (27,000)
Change in assets and liabilities affecting
operations (625,000) 813,000
--------------- -----------------
Net cash used in operating activities (4,398,000) (1,089,000)
--------------- -----------------
Cash flows from investing activities:
Additions to property, plant and equipment (2,607,000) (666,000)
--------------- -----------------
Net cash used in investing activities (2,607,000) (666,000)
--------------- -----------------
Cash flows from financing activities:
Net proceeds from (payments on) revolving
line of credit 2,329,000 (2,014,000)
Payments on term note payable (500,000)
Proceeds from exercise of stock options 37,000
Sale of preferred stock in consolidated
subsidiary, net 13,852,000
Proceeds from sale of senior subordinated
notes, net 3,850,000
--------------- -----------------
Net cash provided by financing activities 15,718,000 1,836,000
--------------- -----------------
Net increase in cash and cash equivalents 8,713,000 81,000
Cash at beginning of period 626,000 240,000
--------------- -----------------
Cash and cash equivalents at end of period $ 9,339,000 $ 321,000
=============== =================
</TABLE>
See accompanying notes to financial statements
5
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THE RIGHT START, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Description of Business and Significant Accounting Policies
The Right Start, Inc. (the Company or Parent) is a specialty merchant
offering unique, high-quality juvenile products for infants and young children.
The Company markets its products through its retail stores, The Right Start
catalog and its Internet site, www.rightstart.com.
The consolidated financial statements include the results of The Right
Start, Inc. and its newly formed, majority-owned subsidiary, Rightstart.com Inc.
(the Subsidiary). Rightstart.com was formed in April 1999 for the purpose of
engaging in electronic commerce over the Internet. Effective May 1, 1999, the
Company contributed its catalog assets to Rightstart.com and in July 1999,
Rightstart.com issued preferred stock to certain investors then representing
33%, on a fully-diluted basis, of Rightstart.com's outstanding capital stock.
The preferred stock converted to common stock of Rightstart.com in October 1999.
The Company's ownership interest in Rightstart.com is currently 60.2% at
October 30, 1999. Because the Company has majority control of Rightstart.com it
consolidates its financial position and results of operation in the Company's
consolidated financial statements. If the Company's ownership in Rightstart.com
falls below 50%, Rightstart.com will no longer be consolidated with the
Company's operations but will be recorded on the equity method.
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 30, 1999. These unaudited financial statements as of October 30, 1999
and for the thirteen and thirty-nine week 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.
Operating results for the thirteen and thirty-nine week periods ended
October 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending January 29, 2000.
NOTE 2: Per Share Data
On December 15, 1998, the Company's shareholders approved a one-for-two
reverse split of the Company's common stock, which had previously been approved
by the Company's Board of Directors. The reverse split was effective December
15, 1998. All references in the consolidated financial statements to shares and
related prices have been adjusted to reflect the reverse split.
Basic per share data is computed by dividing the Parent's loss available
to common shareholders, plus the Parent's proportionate interest in the
Subsidiary's loss available to common shareholders, by the weighted average
number of the Parent's common shares outstanding. Diluted per share data is
computed by dividing the Parent's loss available to common shareholders, plus
the Parent's proportionate interest in the Subsidiary's loss available to common
shareholders, plus income associated with dilutive securities by the weighted
average number of shares outstanding plus any potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock in each period.
6
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<TABLE>
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
---- ---- ---- ----
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Net loss before extraordinary item $ (3,974,000) $(2,398,000) $ (6,710,000) $(4,650,000)
Intercompany income (102,000) (132,000)
Preferred stock dividend (525,000) (525,000)
Preferred stock accretion (77,000) (221,000)
---------- ---------- ---------- ----------
Loss before extraordinary item
available to common shareholders (4,678,000) (2,398,000) (7,588,000) (4,650,000)
Weighted average common shares
outstanding, basic and diluted 5,357,682 5,051,820 5,156,127 5,051,820
Loss before extraordinary item per
common share, basic and diluted $ (.87) $ (.47) $ (1.47) $(.92)
======= ======= ======== ======
</TABLE>
Securities that could potentially dilute EPS in the future that were not
included in the computation of diluted EPS because to do so would have been
antidilutive for the periods presented include options outstanding to purchase
988,138 and 652,000 shares of the Parent's common stock at October 30, 1999 and
October 31, 1998, respectively, and 2,295,000 options and warrants to purchase
shares of the Subsidiary's common stock at October 30, 1999, Series B preferred
stock convertible into 684,167 shares of common stock and Series C preferred
stock convertible into 1,925,000 shares of common stock at October 30, 1999.
NOTE 3: Minority Interest
In October, 1999 the holders of the Rightstart.com preferred stock
converted all of their shares into common stock of Rightstart.com at a
conversion price of $4.50 per share. Rightstart.com granted the holders of the
preferred stock warrants to purchase 165,000 additional shares of Rightstart.com
at $4.50 per share for a five year period. The value of the warrants calculated
using the Black-Sholes pricing model, has been reflected as a preferred stock
dividend in the Subsidiary's financial statements and as an increase in the
consolidated loss available for common shareholders for the thirteen and
thirty-nine weeks ended October 30, 1999 in the Company's loss per share. As a
result of the conversion of the preferred stock the Company's investment in
Rightstart.com was increased by approximately $9,030,000 with an offsetting
increase to additional paid in capital.
Effective October, 1999 the Company agreed to transfer 288,333 of
Rightstart.com shares it owned to a company that provides technology services
for Rightstart.com web operations. Approximately 171,000 shares were issued for
services rendered by the service provider through October 30, 1999.
Approximately 117,000 shares were sold for nominal consideration as an incentive
for the service provider to continue to provide services to Rightstart.com over
the next 10 months. The Company has recorded the shares at fair market value and
capitalized or expensed the pro rata value related to services performed through
October 30, 1999. The portion capitalized related to web site development and
was approximately $733,000. The value of approximately $503,000 related to the
117,000 shares has been capitalized as a prepaid cost and will be allocated to
the services provided over the remaining service period and amortized based on
the services. The capitalized amounts related to web site development
approximated $1,430,000 and are being amortized over 36 months.
The Company has recorded as additional paid in capital the increase in
its investment in its Subsidiary as a result of issuing the shares to the
service provider.
At October 30, 1999 the Company's ownership in Rightstart.com has been
reduced to approximately 60.2% and the minority interest has been increased
39.8% as a result of the conversion of the preferred stock and the issuance of
shares to a service provider.
NOTE 4: Recapitalization and Extraordinary Gain:
In order to enhance the Company's liquidity and improve its capital
structure, effective April 13, 1998 the Company completed a private placement of
non-interest bearing senior subordinated notes in an aggregate principal amount
7
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of $3,850,000, together with detachable warrants to purchase an aggregate of
1,925,000 shares of common stock exercisable at $2.00 per share (the "New
Securities"). 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 (the "Agreement") with all of the holders of the Company's
existing subordinated debt and warrant securities representing an aggregate
principal amount of $6,000,000. Pursuant to the Agreement, each holder (of new
and old securities) agreed to exchange all of its subordinated debt securities
together with any warrants issued in connection therewith, for newly issued
preferred stock. The issuance of the shares of preferred stock was subject to
the approval of the Company's shareholders, which approval was received on
December 15, 1998.
Ten shares of newly issued preferred stock were issued for each $1,000
principal amount of subordinated debt securities exchanged. The total number of
shares issued were 30,000, 30,000 and 38,500 for Series A, B and C Preferred
Stock, respectively.
Holders of $3,000,000 principal amount of existing subordinated debt
securities elected to receive Series A Preferred Stock which has no fixed
dividend rights, is not convertible into common stock, is mandatorily redeemable
by the Company in May 2002 and does not accrue dividends unless the Company is
unable to redeem the Series A Preferred Stock at the required redemption date,
at which point dividends would begin to accumulate and accrue at a rate of $15
per share per annum.
Holders of $3,000,000 principal amount of existing subordinated debt
securities elected to receive Series B convertible preferred stock which has no
fixed dividend rights and is convertible into common stock at a price per share
of $3.00.
Holders of the $3,850,000 principal amount of New Securities elected to
receive Series C convertible preferred stock which has no fixed dividend rights
and is convertible into common stock at a price per share of $2.00.
As the $3,850,000 of New Securities were issued in contemplation of the
exchange into convertible preferred stock, the accounting for the New Securities
is analogous to convertible debt. The New Securities were to be exchanged for
Series C preferred stock which were convertible into common stock at a price per
share of $2.00. As of the date of issue of the New Securities, the stock was
trading at $4.00 per share. Since the conversion feature was in the money at the
date of issue of the debt, the portion of the debt proceeds equal to the
beneficial conversion feature of $3,850,000 was allocated to additional paid-in
capital. The resulting debt discount of $3,850,000 was amortized to interest
expense over the period from the April issuance date to the date the New
Securities were first convertible. The date the New Securities were first
convertible was the exchange date when the New Securities were exchanged for
convertible preferred stock. No value was assigned to the warrants because the
requirement to exchange the warrants, together with the debt, for preferred
stock resulted in an assessment that the warrants had no independent value apart
from the exchange transaction.
The exchanges of the subordinated debt and warrant securities for the
preferred stock were recorded at the date of issuance of the preferred stock.
The fair value of each preferred stock series was determined as of the issuance
date of the stock. The difference between the fair value of the Series A
preferred stock granted of $1,769,000 and the carrying amount of the related
subordinated debt security's balance exchanged of $3,000,000 was recognized as a
gain on the extinguishment of debt, net of transaction expenses, in the amount
of $1,231,000 which was recorded in the fourth quarter of fiscal 1998. The
difference between the fair value of the Series B preferred stock granted of
$2,812,000 and the carrying amount of the related subordinated debt security's
balance plus accrued interest exchanged of $2,828,000 was recognized as a gain
on the extinguishment of debt, net of transaction expenses, in the amount of
$16,000 with $8,000 of the gain on the exchange of notes held by principal
shareholders recorded as a credit to additional paid-in capital. There was no
gain or loss recognized on the conversion of New Securities.
In connection with the above restructuring, effective April 13, 1998,
the holders of the Company's $3,000,000 subordinated notes and $3,000,000
subordinated convertible debentures agreed to waive their right to receive any
and all interest payments accrued and owing on or after February 28, 1998. This
modification of terms was accounted for prospectively, from the effective date,
under Statement of Financial Accounting Standards No. 15, "Accounting of Debtors
8
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and Creditors for Troubled Debt Restructurings," as follows. The carrying amount
of the subordinated notes as of April 14, 1998 was not changed as the carrying
amount of the debt did not exceed the total future cash payments of $3,000,000
specified by the new terms. Interest expense was computed using the interest
method to apply a constant effective interest rate to the payable balance
between the modification date of April 13, 1998, and the original maturity date
of the payable in May 2000. The total future cash payments specified by the new
terms of the convertible debentures of $3,000,000 is less than the carrying
amount of the liability to the debenture holders of $3,027,000, therefore, the
carrying amount was reduced to an amount equal to the total future cash payments
specified by the new terms and the Company recognized an extraordinary gain in
fiscal 1998 on restructuring of payables equal to the amount of the reduction as
of April 13, 1998. No interest expense was recognized on the payable for any
period between the modification date of April 13, 1998 and the date the
debentures were exchanged for preferred stock.
Proceeds from the Company's private placement of New Securities in the
amount of $3,850,000 were used to pay off the Company's revolving line of
credit. Further, the Company's lender amended the existing loan agreement to
provide more favorable terms which are consistent with management's financial
and operating plans.
NOTE 5: New Accounting Pronouncements
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 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 the Company as of
February 1, 2001. It is not expected that the adoption of this standard will
have an impact on the consolidated financial statements nor require additional
footnote disclosure since the Company does not currently utilize derivative
instruments or participate in structured hedging activities.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company adopted SOP 98-1 in the first quarter of
fiscal 1999 and the adoption of this standard did not have a material effect on
the Company's capitalization policy.
NOTE 6: Supplemental Disclosure of Cash Flow Information
Interest paid amounted to $314,000 and $392,000 for the thirty-nine
weeks ended October 30, 1999 and October 31, 1998, respectively. Cash paid for
income taxes was $11,000 and $4,000 for the thirty-nine weeks ended October 30,
1999 and October 31, 1998, respectively.
The Company recorded non-cash transactions totaling $1,973,000 related
to the vesting of certain employee stock options which occurred in May 1999 and
the granting of certain employee and director stock options in the first
thirty-nine weeks of 1999.
Rightstart.com issued stock for capitalized software costs and other
current assets totaling $733,000 and $503,000 respectively in the thirty-nine
weeks ended October 30, 1999.
The Company recorded its proportionate share of the preferred stock
dividend (see Note 3) in the amount of $316,000 as an increase in the
consolidated accumulated deficit and an increase in additional paid-in capital,
resulting in no net impact on consolidated shareholders' equity.
9
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Changes in assets and liabilities which increased (decreased) cash are
as follows:
Thirty-nine weeks ended
-----------------------
October 30, 1999 October 31, 1998
---------------- ----------------
Accounts and other receivables $ (243,000) $ 156,000
Merchandise inventories (3,067,000) (1,103,000)
Prepaid catalog expenses (215,000) (291,000)
Other current assets (1,319,000) 76,000
Other non-current assets (291,000) (32,000)
Accounts payable and accrued expenses 4,488,000 2,113,000
Accrued salaries and bonuses 70,000 (32,000)
Advance payments on orders (40,000) (6,000)
Deferred rent (8,000) (68,000)
----------- -----------
$ (625,000) $ 813,000
=========== ===========
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Results of Operations
The consolidated results of operations include the results of The Right
Start, Inc. and its newly formed, majority-owned subsidiary, Rightstart.com Inc.
Rightstart.com was formed in April 1999 for the purpose of engaging in
electronic commerce over the Internet. Effective May 1, 1999, the Company
contributed its catalog assets to Rightstart.com and in July 1999,
Rightstart.com issued Series A Convertible Preferred Stock to certain investors
representing 33%, on a fully-diluted basis, of Rightstart.com's outstanding
capital stock. The holders of such preferred stock converted their holdings to
common stock in October 1999.
This discussion should be read in conjunction with the information
contained in the consolidated financial statements and notes thereto of the
Company appearing elsewhere in this Form 10-Q.
Statements in this Form 10-Q that are not purely historical are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements with respect to
the financial condition and results of operations of the Company involve risks
and uncertainties which are detailed further in the filings of the Company with
the Securities and Exchange Commission, including, but not limited to, the
Company's Registration Statement on Form S-3 (File No. 333-08157) and its Annual
Report on Form 10-K/A for the year ended January 30, 1999.
Thirteen weeks ended October 30, 1999 compared with October 31, 1998
Net sales for the thirteen weeks ended October 30, 1999 increased 43.1%
to $11.6 million from $8.1 million for the same period last year. For the
quarter, retail net sales increased 23.0% to $8.8 million as compared to $7.2
million last year, while catalog net sales decreased 45.2% to $.5 million from
$.9 million last year. The Company's new Internet operations contributed $2.2
million to net sales for the quarter. Retail sales reflect sales increases due
to same-store sales increases of 5% for the quarter and 10 store openings during
and since the third quarter of the prior fiscal year, offset by one store
closing during the first half of the current fiscal year. The reduction in
catalog net sales is due to a shift in a portion of the direct-mail business
from catalog to Internet coupled with a reduction in circulation.
Cost of goods sold increased $2.2 million or 53.6%, resulting in a gross
margin of 46% as compared to 50% last year. While the gross margin generated
from both the retail and catalog operations remained relatively unchanged from
the prior year, the growth of the Internet operations caused an overall decline
in consolidated gross margin. Internet sales generated a much lower gross margin
due to heavy promotional (couponing) activities that were planned with the
site's launch, as well as the composition of product mix. A greater proportion
of "big-ticket" travel items, which generate lower gross margins, are sold
online.
Operating expense was $4.8 million in the third quarter of 1999 as
compared to $3.3 million in the third quarter of 1998. Included in consolidated
operating costs are Internet operating costs of $.9 million related to the
initial operations of the Internet site. Marketing expenses of $2.3 million were
incurred with Rightstart.com's radio, television and print advertising campaign
which began in October 1999. Retail operating expense increased 28.5%, primarily
due to additional occupancy and labor costs related to new stores and increases
in payroll and other operating costs in support of the higher retail sales
volume. Additionally, catalog operating expense decreased 2.5% due to the
decrease in catalog sales and circulation.
General and administrative expense increased 47.9% to $1.3 million
during the third quarter of 1999 from $.9 million during the same period last
year. These costs represent the Company's corporate overhead expenses which are
fixed in nature and do not vary directly with changes in sales. Included in
general and administrative expense is $424,000 related to the Company's Internet
operations. The remaining $833,000 represents general and administrative
expenses for the retail operations which are lower than the prior year.
During the third quarter of 1999, the Company recorded $203,000 of
non-cash compensation expense related to stock option grants for employees and
directors of the Company.
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The allocation of the loss to the minority interest in the amount of
$384,000 in the third quarter was due to the conversion of preferred stock (see
Note 3). The allocation of the loss was on a proportional basis from the date of
conversion.
Interest (income) expense, net represents income of $18,000 compared to
expense of $1.6 million in the third quarter of the prior year. In the third
quarter of 1999, the consolidated results include interest income of $154,000
earned on cash balances at Rightstart.com and expense of $136,000 related to
outstanding borrowings of The Right Start, Inc. In the third quarter of 1998,
the expense included a non-cash charge of $1,466,000 related to the amortization
of the discount associated with the $3.85 million of non-interest bearing senior
subordinated notes issued during the first quarter of fiscal 1998 and expense of
$112,000 related to outstanding borrowings. The senior subordinated notes were
exchanged for preferred stock in December 1998. See Liquidity and Capital
Resources.
Thirty-nine Weeks Ended October 30, 1999 Compared With October 31, 1998
Net sales for the thirty-nine weeks ended October 30, 1999 increased
26.9% to $32.8 million from $25.9 million for the same period last year. Retail
net sales increased 22.6% to $27.3 million as compared to $22.3 million last
year, while catalog net sales decreased 14.6% to $3.1 million from $3.6 million
last year. The Company's new Internet operations contributed $2.5 million to net
sales for the first thirty-nine weeks, reflecting e-commerce sales generated
since the launch of www.rightstart.com on June 29, 1999. Retail sales reflect
sales increases due to same-store sales increases of 14.5% for the first three
quarters of the year and 10 store openings during and since the third quarter of
the prior fiscal year. The reduction in catalog net sales is due to a shift in a
portion of the direct-mail business from catalog to Internet coupled with a
reduction in circulation.
Cost of goods sold increased $3.4 million or 25.3%, resulting in a gross
margin of 50% as compared to 49% last year. The improvement in gross margin
resulted from changes in product mix in the retail operations to include
significantly more developmental toys, books, videos and other media, which have
higher gross margins, and from lower markdowns due to higher inventory turns.
These improvements were offset by a decline caused by the growth of the Internet
business. Internet sales generate a much lower gross margin due to heavy
promotional (couponing) activities that were planned with the site's launch, as
well as the composition of product mix. A greater proportion of "big-ticket"
travel items, which generate lower gross margins, are sold online.
Operating expense was $13.1 million in 1999 as compared to $11.2 million
in 1998, representing a 17.5% increase. Included in consolidated operating costs
are Internet operating costs of $1.1 million related to the initial operations
of the Internet site. Marketing expenses of $2.6 million were incurred with
Rightstart.com's radio, television and print advertising campaign which began in
October 1999. Retail operating expense increased 13%, primarily due to a 30.5%
increase in payroll and other operating costs directly related to the increase
in net sales, offset by a 1.7% reduction in occupancy cost due to the shift to
street locations and an 18% reduction in merchandise warehousing costs.
Additionally, catalog operating expense decreased 10% due to the decrease in
catalog circulation, catalog production costs per catalog and those expenses
directly related to the decrease in catalog sales.
General and administrative expense increased 20.1% to $3.2 million
during 1999 from $2.6 million during the same period last year. These costs
represent the Company's corporate overhead expenses which are fixed in nature
and do not vary directly with changes in sales. Included in the 1999 expense is
$.5 million related to the Company's Internet operations. Excluding expenses
related to this new business, general and administrative expense remained
unchanged from the prior year.
During the second quarter of 1999, the Company recorded $1.8 million of
non-cash compensation expense associated with the vesting of performance options
that had been granted to executive officers of the Company. This expense results
from the increase in the price of the Company's common stock from the date of
grant of the options to the date on which vesting occurred. During the third
quarter of 1999, the Company recorded $203,000 of non-cash compensation expense
related to stock option grants for employees and directors of the Company. The
recording of these expenses had no net effect on consolidated shareholders'
equity, as an offset to the charge was required to be recorded directly to
shareholders' equity.
12
<PAGE>
Store closing expense in 1999 represents the net book value of assets
written off related to the store closed during the second quarter. Store closing
income in 1998 represents the net amount recognized from the sale of leaseholds
on closed stores, offset by costs directly related thereto.
The allocation of the loss to the minority interest in the amount of
$401,000 in the first thirty-nine weeks was due to the conversion of preferred
stock (see Note 3). The allocation of the loss was on a proportional basis from
the date of conversion.
Interest (income) expense, net decreased to $178,000 from $2.0 million
in the prior year. The consolidated results for 1999 include interest income of
$154,000 earned on cash balances at Rightstart.com and expense of $332,000
related to outstanding borrowings of The Right Start, Inc. In 1998, the expense
included a non-cash charge of $1,470,000 related to the amortization of the
discount associated with the $3.85 million of non-interest bearing senior
subordinated notes issued during the first quarter of fiscal 1998 and expense of
$546,000 related to outstanding borrowings. The senior subordinated notes were
exchanged for preferred stock in December 1998. See Liquidity and Capital
Resources.
The Company has a deferred tax asset of $9.9 million, which is reserved
by a valuation allowance of $8.5 million, for a net tax asset of $1.4 million.
Management expects that the Company will generate sufficient taxable income
within the next 15 years to realize the net deferred tax asset. The tax
provision represents state income taxes.
Liquidity and Capital Resources
During Fiscal 1999, the Company's primary sources of liquidity were from
borrowings under its $13 million senior credit facility (the "Credit Facility")
and the issuance of Series A Convertible Preferred Stock in Rightstart.com Inc.
which provided net proceeds of $13,852,000. 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 October
30, 1999 borrowings of $2,329,000 were outstanding and $1,882,000 was available
under the Revolving Line. The Company entered into a Sixth Amendment to Loan and
Security Agreement and First Amendment to Secured Capex Note dated November 8,
1999 that extended the term of the Credit Facility to February 18, 2000. At such
date all borrowings thereunder are immediately due and payable. Borrowings under
the Credit Facility are secured by substantially all of the assets of The Right
Start, Inc. The Company is currently working with other lenders to negotiate the
replacement of the Credit Facility. Management believes that adequate financing
will be available to replace the Credit Facility in a timely manner. The Company
is also negotiating a working capital line for Rightstart.com.
The Credit Facility, as amended, requires the Company at all times to
maintain net worth (defined to include equity, all classes of stock and
subordinated debt) of at least $8 million. In addition, unconsolidated capital
expenditures are limited to $4,750,000 in fiscal year 1999. The Company believes
that it will maintain compliance with these requirements.
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 and secure financing beyond
February 2000 as described above. 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.
Rightstart.com will need to raise additional capital to continue to
finance its buildout and marketing. Such financing will likely involve the sale
of equity securities which will dilute the ownership interest of the Company in
Rightstart.com. In addition, the Company may sell a portion of its common stock
of Rightstart.com to finance the expansion of the new retail stores.
13
<PAGE>
Impact of Inflation
The impact of inflation on results of operations has not been significant
during the Company's last three fiscal years.
Seasonality
The Company's business is not as significantly impacted by seasonal
fluctuations, when compared to many other specialty retail and catalog
operations. The Right Start's products are for the most part need-driven and the
customer is often the end user of the product. However, the Company does
experience increased sales during the Christmas holiday season.
Recent Developments
In November, the Company and its online subsidiary, Rightstart.com,
announced that it had reached an agreement in principle with Oxygen Media
regarding an advertising and marketing partnership. Under the proposed terms of
the agreement, Rightstart.com will advertise on and be a sponsor of certain
programs on the Oxygen cable channel, which is due to launch on February 2,
2000. In addition, Rightstart.com will operate a co-branded store in Mom's
Online, Oxygen's parenting site,and be a sponsor of Oxygen's home page and its
other websites. As part of the partnership, the Company and Rightstart.com will
promote Oxygen Media in its stores and catalog and on its website. The
partnership has a base term of three (3) years and provides for compensation
valued at approximately $15 million to Oxygen Media. Also, as part of the
agreement, Rightstart.com will issue warrants on 135,000 shares of its common
stock to Oxygen Media at an exercise price of $11.25 per share.
Other Matters
Year 2000 Compliance
The year 2000 problem is the result of computer programs being written
using two digits (rather than 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 than the year 2000 which could result in
miscalculations or system failures.
The Company is currently working to identify and resolve all potential
issues relating to the year 2000 on the processing of date-sensitive information
by the Company's computerized information system. For purposes of addressing the
issues and planning the appropriate resolutions, the Company has segregated its
internal systems and individually assessed their state of readiness as follows:
Phase of Planning ("x" indicates phase is complete)
---------------------------------------------------
System Awareness Assessment Renovation Validation Implementation
- ------ --------- ---------- ---------- ---------- --------------
Credit Card Processing x x x x x
Inventory Maintenance x x x x x
Accounting and Reporting x x x x x
Point of Sale
Transactions x x x x
Internet Transactions x x x x x
Non-computerized x x x x x
systems (none are
material to the
Company's
operations)
In addition to resolving any year 2000 issues on the Company's internal
systems, the Company is working with its third party vendors in implementing the
appropriate solutions. The Company estimates that the maximum cost of addressing
its year 2000 issues is approximately $125,000 for hardware and software.
The Company is currently working with its software vendor for inventory
maintenance systems to complete the installation of the upgraded, year 2000
compliant version of the system. The Company is working with its vendor for its
point of sale ("POS") system to complete the program changes required for this
system to be year 2000 compliant. If, in a worst-case scenario, the necessary
upgrades could not be completed in a timely manner, the Company's contingency
plans provide for the purchase and installation of replacement POS software. No
other systems are material to the Company's operations.
14
<PAGE>
New Accounting Pronouncements
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 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 the Company as of
February 1, 2001. It is not expected that the adoption of this standard will
have an impact on the consolidated financial statements nor require additional
footnote disclosure since the Company does not currently utilize derivative
instruments or participate in structured hedging activities.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company adopted SOP 98-1 in the first quarter of
fiscal 1999 and the adoption of this standard did not have a material effect on
the Company's capitalization policy.
Quantitative and Qualitative Disclosures about Market Risks
In the ordinary course of operations, the Company faces no significant
market risk. Its purchase of imported products subjects the Company to a minimum
amount of foreign currency risk. Foreign currency risk is that risk associated
with recurring transaction with foreign companies, such as purchases of goods
from foreign vendors. If the strength of foreign currencies increases compared
to the U.S. dollar, the price of imported products could increase. However, the
Company has no commitments for future purchases with foreign vendors and,
additionally, the Company has the ability to source products domestically in the
event of import price increases.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" above for a discussion
of debt obligations of the Company, the interest rates of which are linked to
the prime rate. The Company has not entered into any derivative financial
instruments to manage interest rate risk, currency risk or for speculative
purposes and is currently not evaluating the future use of such instruments.
15
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
The Company filed no reports on Form 8-K during the third quarter of 1999.
The following exhibits of The Right Start, Inc. are included herein.
Exhibit
Number
10.24 Waiver and Fifth Amendment to Loan and Security Agreement
10.25 Sixth Amendment to Loan and Security Agreement and First
Amendment to Secured Capex Note
27 Financial Data Schedule
16
<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: December 14, 1999 /s/ JERRY R.WELCH
- ------------------------ --------------------
Jerry R.Welch
President and Chief Executive
Officer
Date: December 14, 1999 /s/ GINA M. ENGELHARD
- ------------------------ --------------------
Gina M. Engelhard
Chief Financial Officer
WAIVER AND FIFTH AMENDMENT TO
LOAN AND SECURITY AGREEMENT
This Waiver and Fifth Amendment to Loan and Security Agreement
("Amendment") is dated as of December 9, 1998, and entered into by and between
HELLER FINANCIAL, INC. ("Lender"), and THE RIGHT START, INC. ("Borrower").
WHEREAS, Lender and Borrower have entered into a Loan and Security
Agreement dated November 14, 1996 (as amended, the "Loan Agreement"); and
WHEREAS, an Event of Default exists under subsection 8.1(C) of the
Agreement as a result of Borrower's breach of the EBITDA covenant contained in
subsection 6.3 of the Agreement for the three (3) fiscal quarters ended October
31, 1998 (the "Existing Event of Default"). Borrower has requested that Lender
waive the existing Event of Default and Lender has agreed to do so in accordance
with the terms of this Amendment.
WHEREAS, Lender and Borrower have agreed to amend the Agreement, subject
to the following terms and conditions.
NOW THEREFORE, in consideration of the mutual conditions and agreements set
forth in the Agreements and this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
1. Definitions. Capitalized terms used in this Amendment, to the extent not
otherwise defined herein, shall have the same meanings as in the Loan Agreement,
as amended hereby.
2. Amendments. The Agreement is hereby amended as follows:
Subsection 5.6(I) of the Agreement is amended by deleting said subsection
in its entirety and replacing it with the following:
(I) Appraisals. From time to time, upon the request of
Lender, Borrower at its own expense will obtain and deliver to Lender,
or will cooperate with Lender to provide, appraisal reports in form and
substance and from appraisers satisfactory to Lender, stating the then
current fair market and orderly liquidation values of all or any portion
of the Collateral; provided, however, that absent an Event of Default,
Borrower shall have ninety (90) days from the date of Lender's request
to appeal such request and provide alternative information which is
acceptable to Lender in its sole discretion.
3. Limited Waiver. Lender hereby waives the Event of Default. This is a
limited waiver and shall not be deemed to constitute a waiver of any other
existing Events of Default or any future breach of the Agreement or any of the
other Loan Documents (including, without limitation, a breach of subsection 6.3
of the Agreement) for any period other than that stated above. 4. Conditions.
The effectiveness of this Amendment is subject to the satisfaction of the
following conditions precedent (unless specifically waived in writing by
Lender):
(a) No Default or Event of Default, other than the Existing Event
of Default, shall have occurred and be continuing;
(b) Borrower shall have executed and delivered such other
documents and instruments as Lender may require; and
(c) all corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents,
instruments and other legal matters incident thereto shall be
satisfactory to Lender and its legal counsel.
5. Ratification. The terms and provisions set forth in this Amendment shall
modify and supersede all inconsistent terms and provisions set forth in the
Agreement and, except as expressly modified and superseded by this Amendment,
the terms and provisions of the Agreement, are ratified and confirmed and shall
continue in full force and effect.
6. Corporate Action. The execution, delivery and performance of this
Amendment have been authorized by all requisite corporate action on the part of
Borrower and will not violate the Articles of Incorporation or Bylaws of
Borrower.
7. Severability. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
8. Successors and Assigns. This Amendment is binding upon and shall inure
to the benefit of Lender and Borrower and their respective successors and
assigns.
9. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment on
the date first above written.
HELLER FINANCIAL, INC.
as Lender
By: /s/ BARRY S. ONEALL
--------------------------
Title: Sr. Vice President
THE RIGHT START, INC.
as Borrower
By: /s/ GINA M. SHAUER
-----------------------
Title: Chief Financial Officer
SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
AND FIRST AMENDMENT TO SECURED CAPEX NOTE
This SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT AND FIRST
AMENDMENT TO SECURED CAPEX NOTE (this "Amendment") is dated as of November 8,
1999, and entered into by and between THE RIGHT START, INC., a California
corporation ("Borrower"), and HELLER FINANCIAL, INC. ("Lender").
RECITALS
WHEREAS, Borrower and Lender have entered into that certain Loan
and Security Agreement dated as of November 14, 1996, as amended by that certain
First Amendment to Loan and Security Agreement and Limited Waiver and Consent
dated as of April 30, 1997, as further amended by that certain Second Amendment
to Loan and Security Agreement and Limited Waiver dated July 10, 1997, as
further amended by that certain Third Amendment to Loan and Security Agreement,
Limited Waiver and Consent dated September 3, 1997, as further amended by that
certain Fourth Amendment to Loan and Security Agreement and Limited Consent
effective as of January 30, 1998, as further amended by that certain Waiver and
Fifth Amendment to Loan and Security Agreement dated as of December 9, 1998 (as
so amended, the "Loan Agreement");
WHEREAS, in connection with the Loan Agreement, Borrower made
that certain Secured CAPEX Note dated November 14, 1996, in favor of Lender in
the principal amount of $3,000,000 (the "CAPEX Note");
WHEREAS, Borrower has requested that the term of each of the Loan Agreement
and the CAPEX Note be extended;
WHEREAS, Lender is willing to grant such extension, all upon the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of these premises, the
agreements, provisions and covenants contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Defined Terms. Capitalized terms used but not otherwise defined herein
shall have the meanings given in the Loan Agreement.
2. Amendment to Section 2.1(C) of the Loan Agreement. The reference to
"three equal quarterly installments of principal" in the fourth sentence of
Section 2.1(C) of the Loan Agreement is hereby deleted and "four equal quarterly
installments of principal and a fifth installment of principal on January 1,
2000, in each case" substituted therefor.
3. Amendment to Section 2.5 of the Loan Agreement. The first sentence of
Section 2.5 of the Loan Agreement is deleted in its entirety and the following
substituted therefor:
"This Agreement shall be effective until February 18, 2000 (the
"Termination Date")."
4. Amendment to Secured CAPEX Note. The reference to "November 18, 1999" in
the first paragraph of the CAPEX Note is hereby deleted and "February 18, 2000"
substituted therefor.
5. Representations and Warranties. Borrower represents and warrants to
Lender as follows:
a. Borrower has been duly organized and is validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, as well as in each jurisdiction in which Borrower is
required to be qualified to transact business.
b. Borrower has full power and authority and legal right
to execute and deliver this Amendment and to perform its obligations
under the Loan Agreement and the CAPEX Note, each as amended hereby, and
has taken all necessary action to authorize such execution, delivery and
performance.
c. This Amendment has been duly executed and delivered by
Borrower and such Amendment, and each of the Loan Agreement and the
CAPEX Note as amended hereby, each constitutes the legally valid and
binding obligations of Borrower, enforceable against Borrower in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally and subject to the
availability of equitable remedies.
6. Conditions to the Effectiveness of this Amendment. Each of the following
shall be conditions precedent to the effectiveness of this Amendment (the date
on which such conditions are met being the "Effective Date"):
a. Borrower shall have executed and delivered a
counterpart of this Amendment to Lender.
b. Before and after giving effect to this Amendment, (a)
no Default or Event of Default shall exist, (b) all of the
representations and warranties contained in the Loan Documents shall be
true and correct in all material respects, (c) Borrower shall have
performed in all material respects all agreements and satisfied all
conditions which any Loan Document provides shall be performed by it on
or prior to such date, and (d) Borrower shall have delivered to Lender a
certificate to such effect in the form attached hereto as Exhibit A.
c. Borrower shall have delivered to Lender a certificate
of its Secretary or an Assistant Secretary, certifying as to (i) the
resolutions of its Board of Directors authorizing this Amendment, (ii)
the incumbency of the officers executing this Amendment and any other
documents in connection herewith, (iii) the articles of incorporation of
Borrower and (iv) the bylaws of Borrower, each as in effect on the
Effective Date, together with a good standing certificate from the
Secretary of State of the State of California with respect to the
Borrower.
d. Lender shall have received a payment of $250,000 on the
CAPEX Note, which payment shall constitute the fourth quarterly payment
thereon pursuant to Section 2.1(c) of the Loan Agreement (as amended
hereby).
e. Lender shall have received for its own account a
$15,000 extension fee; provided that if, within thirty (30) days of the
date hereof, Borrower prepays the CAPEX Loan and all Revolving Loans
outstanding as of such date and terminates the Revolving Loan Commitment
in accordance with the Loan Agreement, such extension fee shall be
returned to Borrower, without interest.
7. Effect of Amendment; Ratification. From and after the Effective Date,
all references in the Loan Documents to the Loan Agreement shall mean the Loan
Agreement as amended hereby, and all references in the Loan Documents to the
CAPEX Note or the Secured CAPEX Note shall mean the CAPEX Note as amended
hereby. The terms and provisions set forth in this Amendment shall amend and
supersede all inconsistent terms and provisions set forth in the Agreement or
the CAPEX Note and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement and the CAPEX Note are
hereby ratified and confirmed and are and shall continue in full force and
effect.
8. No Waiver. Nothing contained herein or in any other instrument or
document executed in connection herewith, nor any action taken by Lender in
connection with this Amendment or any other action contemplated hereby shall in
any event be construed or deemed to constitute a waiver of any past, present or
future Default or Event of Default or a waiver or an estoppel of any cause of
action Lender may have against Borrower for any reason whatsoever, and Lender
hereby reserves all rights and remedies under the Agreement or the other Loan
Documents.
9. Fees and Expenses. Borrower acknowledges that all fees and expenses
(including reasonable attorneys fees) incurred by Lender in connection with this
Amendment are for the account of Borrower pursuant to the Loan Agreement.
10. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument.
11. Severability. The illegality or unenforceability of any provision of
this Amendment, the Loan Agreement (including as amended hereby), the CAPEX Note
(including as amended hereby) or any other document or any other instrument or
agreement required hereunder or thereunder shall not in any way affect or impair
the legality or enforceability of the remaining provisions of this Amendment,
the Loan Agreement (including as amended hereby), the CAPEX Note (including as
amended hereby) or such other document or any other instrument or agreement
required hereunder or thereunder.
12. Successors and Assigns. This Amendment shall be binding upon and shall
inure to the benefit of Lender and Borrower and their respective successors and
assigns.
13. Governing Law. This Amendment shall be governed by, and shall be
construed and enforced in accordance with, the internal laws of the State of
Illinois, without regard to conflicts of laws principles.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by a duly authorized officer as of the date first above written.
THE RIGHT START, INC.
By: /s/ GINA M. ENGELHARD
-------------------------
Name: Gina M. Engelhard
Its: Chief Financial Officer
HELLER FINANCIAL, INC.
By: /s/ BARRY S. ONEALL
-----------------------
Name: Barry S. Oneall
Its: Sr. Vice President
<PAGE>
Exhibit A
BORROWER'S CLOSING CERTIFICATE
This certificate is delivered pursuant to that certain Second
Amendment to Loan and Security Agreement and First Amendment to Secured CAPEX
Note dated as of November 8, 1999 (the "Amendment") between The Right Start,
Inc., a California corporation ("Borrower"), and Heller Financial, Inc.
("Lender"). Except as provided herein, all capitalized terms used herein which
are defined in the Loan Agreement shall have the meanings given therein. The
undersigned hereby certifies to Lender that he or she, as applicable, is the
duly elected, qualified and acting Chief Executive Officer or Chief Financial
Officer of Borrower, as applicable, and on behalf of Borrower, further certifies
to Lender that:
1. Each representation and warranty made in Section 4 of the Loan
Agreement and in the other Loan Documents is true, correct and complete in all
material respects as of the Effective Date (as defined in the Amendment) to the
same extent as though made on and as of that date, except for any representation
and warranty limited by its terms to a specific date.
2. No event has occurred and is continuing or would result from
the consummation of the transactions contemplated under the Amendment on the
Effective Date which event would constitute a Default or Event of Default.
3. Borrower has performed in all material respects all agreements
and satisfied all conditions which any Loan Document provides shall be performed
by it on or before the Effective Date.
4. No order, judgment or decree of any court, arbitrator or
governmental authority purports to enjoin or restrain Lender from making any
Loans or issuing any Lender Letters of Credit to Borrower, or to extend the
maturity date of any Loans or Letters of Credit outstanding on the date hereof.
5. There is not pending, or to my knowledge threatened, any
action, charge, claim, demand, suit, proceeding, petition, governmental
investigation or arbitration against or affecting Borrower or any of its
property that has not been disclosed by Borrower in writing, and there has
occurred no development in any such action, charge, claim, demand, suit,
proceeding, petition, governmental investigation or arbitration so disclosed
that could reasonably be expected to have a Material Adverse Effect.
6. No event or condition has occurred since the fiscal quarter
ending on August 31, 1999, which constitutes or could reasonably be expected to
constitute a Material Adverse Effect or which has not been previously and fully
disclosed to Lender in writing.
7. On the date hereof after giving effect to the transactions
contemplated by the Amendment on the date hereof and the payment by Borrower of
all costs, fees and expenses related thereto, Borrower (a) owns assets the fair
salable value of which are (i) greater than the total amount of its liabilities
(including contingent liabilities) and (ii) greater than the amount that will be
required to pay the probable liabilities of Borrower as they mature; (b) has
capital that is not unreasonably small in relation to its business as presently
conducted or any contemplated or undertaken transaction; and (c) does not intend
to incur and does not believe that it will incur debts beyond its ability to pay
such debts as they become due.
8. The conditions precedent set forth in Section 6 of the
Amendment have been satisfied.
IN WITNESS WHEREOF, the undersigned has duly executed this
Borrower's Closing Certificate on behalf of Borrower this 8 day of November,
1999.
THE RIGHT START, INC.
By: /s/ JERRY R. WELCH
-----------------------------
Name: Jerry R. Welch
Title: Chief Executive Officer
By: /s/ GINA M.ENGELHARD
-----------------------------
Name: Gina M. Engelhard
Title: Chief Financial Officer
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<EPS-BASIC> (1.47)
<EPS-DILUTED> (1.47)
</TABLE>
