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 thirteen week period ended May 1, 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 in 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 June 7, 1999 - 5,059,203 shares
<PAGE>
THE RIGHT START, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN WEEK PERIOD
ENDED MAY 1, 1999
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 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
<PAGE>
<TABLE>
THE RIGHT START, INC.
BALANCE SHEET
(unaudited)
May 1, January 30,
1999 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 254,000 $ 626,000
Accounts and other receivables 641,000 585,000
Merchandise inventories 6,040,000 5,797,000
Prepaid catalog costs 350,000 363,000
Other current assets 1,262,000 929,000
-------------- --------------
Total current assets 8,547,000 8,300,000
Property, plant and equipment, net 8,304,000 7,884,000
Deferred income taxes 1,400,000 1,400,000
Other noncurrent assets 111,000 87,000
-------------- --------------
$ 18,362,000 $ 17,671,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,281,000 $ 3,349,000
Accrued salaries and bonuses 396,000 433,000
Advance payments on orders 51,000 40,000
Revolving line of credit 94,000
Term note payable 2,500,000 2,750,000
-------------- --------------
Total current liabilities 7,322,000 6,572,000
Deferred rent 1,440,000 1,449,000
Mandatorily redeemable preferred stock Series A,
$3,000,000 redemption value 1,859,000 1,789,000
Shareholders' equity:
Convertible preferred stock Series B 2,813,000 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; 5,051,820 issued
and outstanding) 22,337,000 22,337,000
Additional paid-in capital 3,437,000 3,571,000
Accumulated deficit (24,696,000) (24,710,000)
-------------- --------------
$ 18,362,000 $ 17,671,000
============== ==============
See accompanying notes to financial statements
</TABLE>
3
<PAGE>
<TABLE>
THE RIGHT START, INC.
STATEMENT OF OPERATIONS
(unaudited)
Thirteen weeks ended
---------------------------
May 1, 1999 May 2, 1998
------------- ------------
<S> <C> <C>
Net sales:
Retail $ 9,035,000 $ 7,329,000
Catalog 1,686,000 1,712,000
------------- ------------
10,721,000 9,041,000
Costs and expenses:
Cost of goods sold 5,115,000 4,585,000
Operating expense 4,181,000 4,213,000
General and administrative expense 909,000 922,000
Pre-opening costs 62,000 31,000
Depreciation and amortization expense 349,000 348,000
Other income (152,000)
------------- ------------
10,616,000 9,947,000
------------- ------------
Operating income (loss) 105,000 (906,000)
Interest expense 85,000 316,000
------------- ------------
Income (loss) before income taxes
and extraordinary item 20,000 (1,222,000)
Income tax provision 9,000 12,000
------------- ------------
Income (loss) before extraordinary item 11,000 (1,234,000)
Extraordinary gain 27,000
------------- ------------
Net income (loss) $ 11,000 $(1,207,000)
============= ============
Basic and diluted loss per share:
Loss before extraordinary item $ (0.01) $ (0.24)
Extraordinary item
============= ============
Net loss $ (0.01) $ (0.24)
============= ============
Weighted average number of common shares
outstanding 5,051,820 5,051,820
============= ============
See accompanying notes to financial statements
</TABLE>
4
<PAGE>
<TABLE>
THE RIGHT START, INC.
STATEMENT OF CASH FLOWS
(unaudited)
Thirteen weeks ended
---------------------------------
May 1, 1999 May 2, 1998
------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 11,000 $ (1,207,000)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 349,000 348,000
Amortization of discount on senior
subordinated notes 24,000
Extraordinary gain (27,000)
Change in assets and liabilities
affecting operations 193,000 (395,000)
------------- ----------------
Net cash provided by (used in)
operating activities 553,000 (1,257,000)
------------- ----------------
Cash flows from investing activities:
Additions to property, plant and equipment (769,000) (256,000)
------------- ----------------
Net cash used in investing activities (769,000) (256,000)
------------- ----------------
Cash flows from financing activities:
Net proceeds from (payments on) revolving
line of credit 94,000 (2,014,000)
Payments on term note payable (250,000)
Proceeds from sale of senior subordinated
notes, net 3,606,000
------------- ----------------
Net cash provided by (used in)
financing activities (156,000) 1,592,000
------------- ----------------
Net increase (decrease) in cash (372,000) 79,000
Cash at beginning of period 626,000 240,000
------------- ----------------
Cash at end of period $ 254,000 $ 319,000
============= ================
See accompanying notes to financial statements
</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. (the Company) 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 30, 1999. These unaudited financial statements as of May 1, 1999 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 1, 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 financial statements to shares and related
prices, weighted average number of shares, per share amounts and stock plan data
have been adjusted to reflect the reverse split.
Basic per share data is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding.
Diluted per share data is computed by dividing income 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 year.
<TABLE>
Thirteen weeks ended
--------------------
May 1, 1999 May 2, 1998
----------- -----------
<S> <C> <C>
Income (loss) before extraordinary item $ 11,000 $(1,207,000)
Preferred stock accretion (70,000)
----------- -----------
Basic and diluted loss before extraordinary
item applicable to common shareholders $ (59,000) $(1,207,000)
=========== ===========
</TABLE>
Securities that could potentially dilute basic 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
701,161 and 652,011 shares of common stock at May 1, 1999 and May 2, 1998,
respectively, Series B preferred stock convertible into 1,000,000 shares of
common stock and Series C preferred stock convertible into 1,925,000 shares of
common stock at May 1, 1999.
NOTE 3: 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
of $3,850,000, together with detachable warrants to purchase an aggregate of
1,925,000 shares
6
<PAGE>
Note 3. Recapitalization and Extraordinary Gain (continued)
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. 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
and Creditors for Troubled Debt Restructurings," as follows.
7
<PAGE>
NOTE 3: Recapitalization and Extraordinary Gain (continued)
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 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. These plans include the closure of certain unprofitable
mall stores and opening of other store locations.
NOTE 4: Supplemental Disclosure of Cash Flow Information
Interest paid amounted to $103,000 and $201,000 for the thirteen weeks
ended May 1, 1999 and May 2, 1998, respectively. Cash paid for income taxes was
$11,000 and $5,000 for the thirteen weeks ended May 1, 1999 and May 2, 1998,
respectively.
Changes in assets and liabilities which increased (decreased) cash are as
follows:
<TABLE>
Thirteen weeks ended
--------------------
May 1, 1999 May 2, 1998
----------- -----------
<S> <C> <C>
Accounts and other receivables $ (56,000) $ (8,000)
Merchandise inventories (243,000) (1,099,000)
Prepaid catalog costs 13,000 (222,000)
Other current assets (333,000) 127,000
Other noncurrent assets (24,000) (34,000)
Accounts payable and accrued expenses 871,000 857,000
Accrued salaries and bonuses (37,000) (10,000)
Advance payments on orders 11,000 15,000
Deferred rent (9,000) (21,000)
----------- -----------
$ 193,000 $ (395,000)
=========== ===========
</TABLE>
NOTE 5: New Accounting Prounouncements
In April 1998, the American Institute of Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" ("SOP
98-5"). This statement requires that the costs of start-up activities and
organization costs be expensed as incurred. The statement was effective for the
Company beginning on January 31, 1999 and there was no effect on net income for
the period ended May 1, 1999 resulting from the adoption of SOP 98-5. Effective
October 1, 1997, the Company began expensing all store pre-opening costs as
incurred.
NOTE 6: Subsequent Event
In December 1998, the Company granted 275,000 options which vest
immediately upon the attainment of a closing stock price, as defined in the
grant agreements, of $6.50 for thirty consecutive trading days. On May 21, 1999,
the Company attained a closing stock price of $6.50 for thirty consecutive
trading days and as a result the 275,000 options outstanding became immediately
vested resulting in a non-cash compensation charge of $1.7 million to be
recorded in the Company's second quarter operating results.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Results of Operations
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 the 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 May 1, 1999 compared with May 2, 1998
Net sales for the thirteen weeks ended May 1, 1999 increased 18.6% to
$10.7 million from $9.0 million for the same period last year. Retail net sales
increased $1.7 million or 23.3%, reflecting the impact of same-store sales
increases of 26% and the opening of nine new street location stores, offset by
the impact of seven store closures. Catalog net sales remained relatively flat
at $1.7 million.
Cost of goods sold increased $.5 million or 11.6%, resulting in a gross
margin of 52.3% as compared to 49.3% last year. The improvement in margin
resulted from changes in product mix to include significantly more developmental
toys and books, which have higher gross margins, and from lower markdowns due to
higher inventory turns.
Operating expense remained flat at $4.2 million in the first quarter of
1999 and 1998 in spite of the 18.6% increase in net sales. Improved operating
efficiencies were experienced in both retail and catalog. Retail operating
expenses decreased as a percentage of sales to 39% in the first quarter of 1999
from 48% for the same period last year. This decrease resulted from reduced
payroll and reduced occupancy costs associated with the increase in street
locations and decrease in mall stores. Catalog operating costs decreased to 39%
of catalog sales in the first quarter of 1999 from 42% for the same period last
year. The catalog results continue the favorable trend in managing the catalog
at a more profitable level with reduced catalog production and other operating
costs.
General and administrative expense decreased 1.4% to $909,000 during the
first quarter of 1999 from $922,000 during the same period last year. The
components of this expense did not change significantly between the two periods.
Included in other income in the first quarter of 1998 is the net gain of
$152,000 associated with the closing of two stores. The gain resulted from the
collection of key money from an assignee and the write-off of deferred rent, net
of closing expenses.
Interest expense decreased to $85,000 from $316,000 in the first quarter
of the prior year. The decrease resulted from a decrease in total outstanding
borrowings, including the extinguishment of subordinated debt associated with
the Company's 1998 recapitalization.
The Company has a deferred tax asset of $9.2 million, which is reserved by
a valuation allowance of $7.8 million, for a net deferred tax asset of $1.4
million. Management expects that the Company will generate $4 million of taxable
income within the next 15 years to utilize the net deferred tax asset. The
taxable income will be generated through a combination of improved operating
results and tax planning strategies. Rather than lose the tax benefit, the
Company could implement certain tax planning strategies including the sale of
the Company's catalog operations, since such operations generally operate on a
profitable basis. Alternatively, the Company could also sell its catalog
operation's mailing lists in order to generate income to enable the Company to
realize its NOL carryforwards. Based on the above operating improvements
combined with tax planning strategies in place, management believes that
adequate taxable income will be generated over the next 15 years in which to
utilize the NOL carryforwards.
9
<PAGE>
In December 1998, the Company granted 275,000 options which vest
immediately upon the attainment of a closing stock price, as defined in the
grant agreements, of $6.50 for thirty consecutive trading days. On May 21, 1999,
the Company attained a closing stock price of $6.50 for thirty consecutive
trading days and as a result the 275,000 options outstanding became immediately
vested resulting in a non-cash compensation charge of $1.7 million to be
recorded in the Company's second quarter operating results.
Liquidity and Capital Resources
During the first quarter of Fiscal 1999, the Company's primary source of
liquidity was from operations, which generated $.6 million. In addition, the
Company had borrowings of $.1 million under its $13 million senior credit
facility (the "Credit Facility"). 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. During the quarter
ended May 1, 1999, $250,000 was paid down on the Capex Line. As of May 1, 1999,
borrowings of $2,500,000 and $.1 million were outstanding under the Capex Line
and the Revolving Line, respectively. Approximately $3.2 million 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 Company plans to replace the Credit Facility by November
1999, and believes that it could extend the Credit Facility to May 2000.
10
<PAGE>
The Credit Facility, as amended, requires the Company at all times to
maintain net worth (defined to include equity, subordinated debt and mandatorily
redeemable preferred stock) of at least $8 million. The Credit Facility also
limits the Company's earnings before interest, taxes, depreciation and
amortization (EBITDA) to a loss amount of $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 1999. The
Company believes that it will maintain compliance with these requirements.
The Company is in the process of developing an internet site, which
development will require a capital commitment of up to $1,000,000. The Company
has formed a subsidiary, Rightstart.com Inc., for purposes of operating and
maintaining the internet site. Proceeds from the planned sale of a minority
interest in Rightstart.com will fund the site's ongoing maintenance and
operations.
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 November 1999
as described above. Historically, the Company has incurred losses and could
again incur losses in the near term. Depending on the success of its business
strategy, the Company may continue to incur losses beyond such periods. Losses
could negatively affect working capital and the extension of credit by the
Company's suppliers and impact the Company's operations.
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.
Other Matters
Year 2000
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
Accounting and Reporting x x x x x
Point of Sale
Transactions x x
Non-computerized x x
systems (none are
material to the
Company's
operations)
11
<PAGE>
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, worst-case 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 these systems. 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.
New Accounting Pronouncements
In April 1998, the American Institute of Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" ("SOP
98-5"). This statement requires that the costs of start-up activities and
organization costs be expensed as incurred. The statement was effective for the
Company beginning on January 31, 1999 and there was no effect on net income for
the period ended May 1, 1999 resulting from the adoption of SOP 98-5. Effective
October 1, 1997, the Company began expensing all store pre-opening costs as
incurred.
Quantitative and Qualitative Disclosures about Market Risk
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 curency risk is that risk associated
with recurring transactions 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.
12
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
The Company filed no Reports on Form 8-K during the first quarter of fiscal
1999.
The following exhibits of The Right Start, Inc. are included herein.
Exhibit
Number
- ------
27 Financial Data Schedule
13
<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 14, 1999 /s/ JERRY WELCH
------------- ---------------
Jerry Welch
Chief Executive Officer
Date: June 14, 1999 /s/ GINA M. ENGELHARD
------------- ---------------------
Gina M. Engelhard
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 254
<SECURITIES> 0
<RECEIVABLES> 641
<ALLOWANCES> 0
<INVENTORY> 6,040
<CURRENT-ASSETS> 8,547
<PP&E> 12,921
<DEPRECIATION> 4,617
<TOTAL-ASSETS> 18,362
<CURRENT-LIABILITIES> 7,322
<BONDS> 0
1,859
6,663
<COMMON> 22,337
<OTHER-SE> 3,437
<TOTAL-LIABILITY-AND-EQUITY> 18,362
<SALES> 10,721
<TOTAL-REVENUES> 10,721
<CGS> 5,115
<TOTAL-COSTS> 10,616
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> 20
<INCOME-TAX> 9
<INCOME-CONTINUING> 11
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
