SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
Form 10-Q
--------------------------------------------------------------------------------
(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 28, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------- to -------------
Commission File Number 0-19536
THE RIGHT START, INC.
(Exact name of registrant as specified by its charter)
California 95-3971414
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 October 28, 2000 - 5,617,275 shares.
<PAGE>
THE RIGHT START, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN AND THIRTY NINE WEEK PERIODS
ENDED October 28, 2000
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
<PAGE>
<TABLE>
<CAPTION>
THE RIGHT START, INC.
BALANCE SHEETS
October 28, 2000 January 29, 2000
---------------- ----------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 259,000 $ 5,199,000
Accounts and other receivables 569,000 682,000
Due from RightStart.com, net 124,000
Merchandise inventories 11,954,000 9,694,000
Other current assets 1,231,000 1,849,000
------------------- ------------------
Total current assets 14,137,000 17,424,000
Noncurrent assets:
Property, fixtures and equipment, net 7,949,000 10,648,000
Deferred income taxes 1,400,000 1,400,000
Other noncurrent assets 170,000 1,255,000
------------------- ------------------
$ 23,656,000 $ 30,727,000
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,035,000 $ 9,566,000
Revolving line of credit 1,118,000 3,377,000
Term note payable 1,400,000
------------------- ------------------
Total current liabilities 11,553,000 12,943,000
------------------- ------------------
Term note payable 3,000,000
Senior subordinated convertible pay-in-kind notes 3,000,000
Deferred rent 1,398,000 1,378,000
Minority interest in consolidated subsidiary 3,397,000
Commitments and contingencies
Mandatorily redeemable preferred stock Series A,
$3,000,000 redemption value 2,346,000 2,088,000
Shareholders' equity:
Convertible preferred stock Series B 1,547,000 1,875,000
Convertible preferred stock Series C 3,733,000 3,850,000
Convertible preferred stock Series D 4,045,000
Common stock (25,000,000 shares authorized
at no par value; 5,617,275 and 5,417,666 issued and
outstanding at October 28, 2000 and January 29, 2000, respectively) 22,730,000 22,593,000
Paid in capital 16,481,000 16,142,000
Deferred compensation (49,000) (671,000)
Accumulated deficit (43,128,000) (35,868,000)
------------------- ------------------
Total shareholders' equity 5,359,000 7,921,000
------------------- ------------------
$ 23,656,000 $ 30,727,000
=================== ==================
See accompanying notes to financial statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
THE RIGHT START, INC.
STATEMENTS OF OPERATIONS
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------------------- ---------------------------------
October 28, 2000 October 30, 1999 October 28, 2000 October 30, 1999
---------------- ---------------- ---------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Retail store sales $ 9,865,000 $ 8,829,000 $ 30,951,000 $ 27,328,000
Online sales before promotional discounts 2,731,000 2,996,000
Catalog sales 492,000 3,050,000
Shipping and handling revenues 108,000 620,000
---------------- --------------- --------------- ---------------
Total sales 9,865,000 12,160,000 30,951,000 33,994,000
Promotional discounts related to online sales 499,000 543,000
---------------- ------------ --------------- ------------
Net sales 9,865,000 11,661,000 30,951,000 33,451,000
Costs and expenses:
Cost of goods sold - merchandise 4,947,000 6,262,000 15,428,000 16,585,000
Cost of goods sold - shipping and handling 532,000 1,105,000
Operating expense, includes non-cash compensation of
$65,000, $203,000, $85,000 and $1,973,000,
respectively 4,262,000 4,577,000 12,514,000 14,630,000
Marketing and advertising expense 233,000 2,831,000 779,000 3,269,000
General and administrative expense 954,000 1,257,000 2,864,000 3,154,000
Pre-opening costs 117,000 91,000 318,000 228,000
Depreciation and amortization expense 541,000 467,000 1,590,000 1,214,000
Store closing expense 46,000 387,000 151,000
---------------- --------------- --------------- ---------------
11,100,000 16,017,000 33,880,000 40,336,000
---------------- --------------- --------------- ---------------
Operating loss (1,235,000) (4,356,000) (2,929,000) (6,885,000)
Minority interest in consolidated subsidiary loss (384,000) (401,000)
(Gain) loss on investment in RightStart.com (2,554,000) 3,406,000
Interest expense (income), net 293,000 (18,000) 850,000 178,000
---------------- --------------- --------------- ---------------
Income (loss) before provision for income taxes 1,026,000 (3,954,000) (7,185,000) (6,662,000)
Provision for income taxes 19,000 20,000 58,000 48,000
---------------- --------------- --------------- ---------------
Net income (loss) $ 1,007,000 $ (3,974,000) $ (7,243,000) $ (6,710,000)
================ =============== =============== ===============
Basic income (loss) per share $ 0.16 $ (0.87) $ (1.35) $ (1.47)
================ =============== =============== ===============
Basic weighted average number of shares outstanding 5,615,435 5,357,682 5,590,822 5,156,127
================ =============== =============== ===============
Diluted income (loss) per share $ 0.15 $ (0.87) $ (1.35) $ (1.47)
================ =============== =============== ===============
Diluted weighted average number of shares outstanding 6,496,024 5,357,682 5,590,822 5,156,127
================ =============== =============== ===============
See accompanying notes to financial statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
THE RIGHT START, INC.
STATEMENTS OF CASH FLOWS
Thirty-nine Weeks Ended
-----------------------------------------------------
October 28, 2000 October 30, 1999
---------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,243,000) $ (6,710,000)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,590,000 1,214,000
Non-cash compensation expense 84,000 1,973,000
Amortization of issued warrants 75,000
Store closing expense 205,000 151,000
Loss on investment in RightStart.com 3,406,000
Minority interest in consolidated subsidiary loss (401,000)
Changes in assets and liabilities affecting operations (2,117,000) (625,000)
-------------------- ----------------------
Net cash used in operating activities (4,000,000) (4,398,000)
-------------------- ----------------------
Net cash used in investing activities:
Additions to property, fixtures and equipment (1,296,000) (2,607,000)
Loss on investment in RightStart.com (3,406,000)
-------------------- ----------------------
(4,702,000) (2,607,000)
Cash flows from financing activities:
Net proceeds from (paydowns on) revolving line of credit (2,259,000) 2,329,000
Net payments on term note payable (1,600,000) (500,000)
Issuance of senior subordinated convertible pay-in-kind notes 3,000,000
Net proceeds from issuance of Series D preferred stock 4,484,000
Sale of preferred stock in consolidated subsidiary, net 13,852,000
Proceeds from common stock issued upon exercise of
stock options 137,000 37,000
-------------------- ----------------------
Net cash provided by financing activities 3,762,000 15,718,000
-------------------- ----------------------
Net increase (decrease) in cash and cash equivalents (4,940,000) 8,713,000
Cash at beginning of period 5,199,000 626,000
-------------------- ----------------------
Cash and cash equivalents at end of period $ 259,000 $ 9,339,000
==================== ======================
See accompanying notes to financial statements
</TABLE>
5
<PAGE>
THE RIGHT START, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: Description of Business and Significant Accounting Policies
The Right Start, Inc. (the "Company" or "Parent") is a specialty
retailer of high quality developmental, educational and care products for
infants and children. Information presented as of January 29, 2000 and for the
period ended October 30, 1999 reflect the consolidated results of the Company
and RightStart.com Inc. ("RightStart.com") which previously was the Company's
majority-owned subsidiary.
RightStart.com was formed in April 1999 for the purpose of engaging in
electronic commerce over the Internet and, effective May 1, 1999, the Company
contributed its catalog assets to RightStart.com. On October 10, 2000,
RightStart.com issued 2 million shares of common stock which decreased the
Company's ownership interest in RightStart.com to 49.4% (see Note 2). The sale
of common stock and associated corporate actions resulted in RightStart.com
being accounted for under the equity method of accounting and no longer
consolidated with the Company. Accordingly, the Company has revised its
financial statements in order to present its results of operations for the
thirteen and thirty-nine weeks ended October 28, 2000 and its statement of cash
flows for the thirty-nine weeks ended October 28, 2000, on an unconsolidated
basis retroactive to the beginning of the current fiscal year.
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 29, 2000. These unaudited financial statements as of October 28, 2000
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 and the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These interim financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K/A for the year ended
January 29, 2000. 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 the current year presentation.
Operating results for the thirteen and thirty-nine week periods ended
October 28, 2000 are not necessarily indicative of the results that may be
expected for the year ending February 3, 2001.
NOTE 2: Investment in RightStart.com
On October 10, 2000, RightStart.com issued 1.6 million shares of common
stock to a new investor (the "October Investor") and 0.4 million shares of
common stock to an existing minority investor. The new issuance represented 18%
of the shares outstanding after the issuance. Consequently, the percentage of
common stock ownership of RightStart.com by the Company has been reduced from
60.2% to 49.4%. The October Investor received a seat on the Board of Directors
of RightStart.com. The current Board of Directors of RightStart.com is comprised
of the October Investor, a representative of one of RightStart.com's original
minority investors, an affiliate of the Company and the chief executive officer
of RightStart.com who is also the chief executive officer of the Company.
Additionally, the October Investor and existing investors other than the Company
received certain participatory rights in the management of RightStart.com. The
sale of common stock and the associated corporate actions result in
RightStart.com being accounted for under the equity method of accounting and no
longer consolidated with the Company.
Accordingly, the Right Start has revised its financial statements in
order to present its results of operations for the thirteen and thirty-nine
weeks ended October 28, 2000 and its statement of cash flows for the thirty-nine
weeks ended October 28, 2000 on an unconsolidated basis retroactive to the
beginning of the current fiscal year.
The operating losses of RightStart.com have been shown as a loss on
investment in a non-consolidated subsidiary through October 10, 2000 in the
Company's statement of operations. As of October 10, 2000, the Company recorded
losses in excess of its investment in RightStart.com of $2.7 million.
Additionally, due to the uncertainties surrounding the ongoing viability of
RightStart.com, the Company has provided an allowance for potential
uncollectibility of $700,000 in connection with amounts owed by RightStart.com
to the Company under the Management Services Agreement. In connection with the
deconsolidation of RightStart.com, the Company recorded a gain of $3.3 million
6
<PAGE>
which reversed the previously recorded loss in excess of its investment and
increased the Company's investment in RightStart.com to zero. The Company is not
obligated or committed to fund any operating losses or obligations of
RightStart.com.
Under the Equity Method, the carrying value of an investment is
normally adjusted on a periodic basis to recognize the investor's share of
earnings and losses of the investee; however, the carrying value generally is
not reduced below zero and in that situation the equity method is, in effect,
suspended. Accordingly, the Company will only make future adjustments to the
carrying value of its investment in RightStart.com if and when RightStart.com
reports net income in excess of its accumulated net losses during the period the
equity method of accounting has been suspended, or if the Company makes
additional advances to, or investments in, RightStart.com.
NOTE 3: Private Placements
In September and October 2000, the Company sold a total of $3.0 million
in aggregate principal amount of its Senior Subordinated Convertible Pay-in-Kind
Notes due 2005 (the "Convertible Notes") to affiliates. The Convertible Notes
bear interest at the rate of 8% per annum and are convertible into common stock
at a price of $2.375 per share of common stock. The Convertible Notes are
secured by a subordinated lien on substantially all of the Company's assets.
In October 2000 the Company sold 44,900 shares of its Series D
Convertible Pay-in-Kind Preferred Stock (the "Series D Convertible Preferred
Stock") for $4.5 million, a portion of which was purchased by affiliates. The
Series D Convertible Preferred Stock pays dividends at a rate of 8% per annum,
has a liquidation preference of $100 per share and is convertible into common
stock at the rate of $2.00 per share. The Company can cause the Series D
Convertible Preferred Stock to convert after October 6, 2001 if the Registrant's
common stock has traded at a price greater than $3.00 per share for twenty
consecutive trading days. In connection with the issuance of the Series D
Convertible Preferred Stock, the Company issued 449,000 warrants to purchase
common shares at an exercise price of $2.00. The fair value of the warrants was
estimated using the Black-Scholes option pricing model and has been recorded as
a reduction to retained earnings and a credit to paid in capital.
Each of the Convertible Notes and the Series D Convertible Preferred
Stock has a pay-in-kind feature that permits the Company to pay dividends and
interest, as the case may be, in additional securities. The Company paid its
first dividends and interest on December 1, 2000 in cash and may elect to do so
in the future as well.
NOTE 4: Per Share Data
Basic per share data is computed by dividing the Company's loss
available to common shareholders by the weighted average number of the Company's
common shares outstanding. Diluted per share data is computed by dividing the
Company'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.
7
<PAGE>
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
October 28, 2000 October 30, 1999 October 28, 2000 October 30, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,007,000 $ (3,974,000) $ (7,243,000) $ (6,710,000)
Less: Intercompany income (102,000) (132,000)
Preferred stock dividend (20,000) (525,000) (20,000) (525,000)
Preferred stock accretion (89,000) (77,000) (258,000) (221,000)
--------------- --------------- --------------- --------------
Basic income (loss) applicable
to common shareholders $ 898,000 $ (4,678,000) $ (7,521,000) $ (7,588,000)
============ ============= ============= =============
Weighted average shares, basic 5,615,435 5,357,682 5,590,822 5,156,127
Income (loss) per share, basic $ 0.16 $ (0.87) $ (1.35) $ (1.47)
Basic income (loss) applicable
to common shareholders $ 898,000 $ (4,678,000) $ (7,521,000) $ (7,588,000)
Plus: Interest on PIK notes 28,000
Preferred stock dividend 20,000
--------------- --------------- --------------- --------------
Income available to common share-
holders and assumed conversions $ 946,000 $ (4,678,000) $ (7,521,000) $ (7,588,000)
============ ============= ============= =============
Weighted average shares, basic 5,615,435 5,357,682 5,590,822 5,156,127
Plus incremental shares from
assumed conversions:
Options 5,530
Series D Preferred Stock 542,747
Warrants 26,933
Pay-in-kind notes 305,379
--------------- --------------- --------------- --------------
Weighted average shares, diluted 6,496,024 5,357,682 5,590,822 5,156,127
Income (loss) per share, diluted $ 0.15 $ (0.87) $ (1.35) $ (1.47)
</TABLE>
Additional securities that could potentially dilute EPS in the future
that were not included in the computation of diluted EPS include options
outstanding to purchase 1,050,442 and 988,138 shares of common stock at October
28, 2000 and October 30, 1999, respectively; Series B preferred stock
convertible into 549,995 and 684,167 shares of common stock at October 28, 2000
and October 30, 1999, respectively; Series C preferred stock convertible into
1,866,650 and 1,925,000 shares of common stock at October 28, 2000 and October
30, 1999, respectively; Series D Convertible Preferred Stock convertible into
1,702,253 shares of common stock at October 28, 2000 and warrants issued to
purchasers of the Series D Convertible Preferred Stock exercisable into 422,067
shares of common stock as of October 28, 2000 (see Note 3); and Convertible
Notes convertible into 957,779 shares of Common Stock as of October 28, 2000.
NOTE 5: Supplemental Disclosure of Cash Flow Information
Interest paid amounted to $546,000 and $314,000 for the thirty-nine
weeks ended October 28, 2000 and October 30, 1999, respectively. Cash paid for
income taxes was $8,000 and $11,000 for the thirty-nine weeks ended October 28,
2000 and October 30, 1999, respectively.
8
<PAGE>
Changes in assets and liabilities which increased (decreased) cash are as
follows:
<TABLE>
<CAPTION>
Thirty-nine weeks ended
-----------------------------------------------
<S> <C> <C>
October 28, 2000 October 30, 1999
Accounts and other receivables $ (706,000) $ (243,000)
Merchandise inventories (2,938,000) (3,067,000)
Other current assets (215,000) (1,534,000)
Other noncurrent assets (38,000) (291,000)
Accounts payable and accrued expenses 1,710,000 4,518,000
Deferred rent 70,000 (8,000)
----------- -----------
$ (2,117,000) $ (625,000)
============= =============
</TABLE>
Non-cash investing and financing activities
The following non-cash investing and financing activities have been
excluded from the statement of cash flows:
In the first quarter of fiscal 2000, holders converted $328,000 of
Series B Convertible Preferred Stock and $117,000 of Series C Preferred Stock to
common stock.
In the thirty-nine weeks ended October 28, 2000, the Company recorded
preferred dividends of $258,000 which were accreted to the outstanding amount of
the preferred stock outstanding.
In the second quarter of fiscal 2000, the Company issued warrants
valued at $70,000 using the Black-Scholes option pricing model in connection
with obtaining an amendment to the Company's credit facility.
In connection with two store closings in the second quarter, the
Company reduced accrued expenses by $50,000 and deferred rent by $50,000.
In the third quarter, the Company recorded $439,000 of dividends on the
fully vested warrants issued in connection with the sale of the Series D
Convertible Preferred Stock.
NOTE 6: New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS
No.133 "Accounting For Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company
currently does not have or use derivative instruments.
NOTE 7: Segment Information
The Company currently operates in one segment, which is the retail
segment. The results of operations for the thirteen and thirty-nine weeks ended
October 28, 2000 reflect only the retail stores. All operating results for the
thirteen and thirty-nine weeks ended October 28, 2000 of RightStart.com are
reflected as a gain (loss) on investment in RightStart.com.
The prior year consolidated financial statements included the Company
and its former majority-owned subsidiary which together had two reportable
segments; Direct-to-customers, which included online and catalog operations (the
subsidiary), and Retail (the parent), which included activities related to
retail stores. Both segments sold products to meet the needs of the parents of
infants and small children. The Direct-to-customers segment also sold products
directed to older children through age twelve. Current year financial statements
include only operating information of the Company which as a result of the
deconsolidation of RightStart.com, has only one reportable segment. Therefore
segment information is not presented below for the current year.
The accounting policies of the segments were the same as those
described in the summary of significant accounting policies. The Company
evaluated performance based on profit or loss from operations before income
taxes.
9
<PAGE>
The Company charges a management fee on inventory transferred from the
Retail segment to the Direct-to-customers segment. Additionally, charges for
services are exchanged between the two segments.
The Company's reportable segments for the prior year had operations
that offered the same or similar products but had a different method of delivery
to their customers.
Segment information for the thirteen weeks ended October 30, 1999 is as follows:
<TABLE>
<CAPTION>
Total
Online Catalog Direct-to-Customers Retail Total
------- -------- ------------------- ------ -----
<S> <C> <C> <C> <C> <C>
Net sales $2,340,000 $492,000 $2,832,000 $8,829,000 $11,661,000
Interest income (expense) 154,000 154,000 (136,000) 18,000
Depreciation 63,000 63,000 404,000 467,000
Non-cash compensation 179,000 179,000 24,000 203,000
Pre-opening costs 91,000 91,000
Minority Interest 384,000 384,000
Store Closing Expense
Pre-tax loss (2,893,000) (2,893,000) (1,061,000) (3,954,000)
Total assets 13,456,000 252,000 13,708,000 20,289,000 33,997,000
Fixed asset additions 908,000 908,000 124,000 1,032,000
</TABLE>
Segment information for the thirty-nine weeks ended October 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Total
Online Catalog Direct-to-Customers Retail Total
------- -------- ------------------- ------ -----
<S> <C> <C> <C> <C> <C>
Net sales $3,078,000 $3,045,000 $6,123,000 $27,328,000 $33,451,000
Interest income (expense) 155,000 155,000 (333,000) (178,000)
Depreciation 80,000 5,000 85,000 1,129,000 1,214,000
Non-cash compensation 179,000 179,000 1,794,000 1,973,000
Pre-opening costs 228,000 228,000
Minority Interest 401,000 401,000
Store Closing Expense 151,000 151,000
Pre-tax loss (3,046,000) (3,046,000) (3,616,000) (6,662,000)
Total assets 13,456,000 252,000 13,708,000 20,289,000 33,997,000
Fixed asset additions 1,700,000 1,700,000 907,000 2,607,000
</TABLE>
NOTE 8: Recent Developments
The Company's common stock is listed and traded on the Nasdaq National
Market. In July, the Nasdaq informed the Company that its consolidated net worth
had fallen below the Nasdaq National Market's minimum-listing requirement of
$4.0 million and consequently that its common stock was subject to de-listing.
The primary cause of the diminished consolidated net worth was attributable to
losses sustained by the Company's former subsidiary, RightStart.com. The Company
requested that it continue to be listed at an oral hearing on October 12, 2000.
The new capital received by the Company in the current fiscal quarter together
with the deconsolidation of the Company and RightStart.com resulted in the
Company's net worth exceeding the Nasdaq minimum-listing requirement. In
November, the Nasdaq notified the Company that it was in compliance with the
minimum-listing requirements and accordingly that the Company's common stock
would continue to be listed on the Nasdaq National Market so long as the Company
maintains compliance with the Nasdaq's listing requirements. Nasdaq noted,
however, that the Company had failed to evidence a market value of public float
of at least $5.0 million for several consecutive trading days. Nasdaq informed
the Company that should such failure continue for thirty consecutive trading
days (beginning November 16, 2000) that the Company would be provided a ninety
calendar day period in which to regain compliance for not less than ten
consecutive trading days. Failure would result in a transfer of the Company's
securities to the Nasdaq SmallCap market or delisting. Given the Company's
current public float, its common stock would need to trade above approximately
$1.50 per share to meet this compliance standard.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this report and elsewhere by management from time to time,
the words "believes," "anticipates," and "expects" and similar expressions are
intended to identify forward-looking statements with respect to our financial
condition, results of operations and business. Certain important factors could
cause actual results to differ materially from those expressed in our
forward-looking statements including but not limited to competition from other
children's product retailers and limitations on access to capital to fund the
expansion and the growth in the number of our retail stores. Further information
on potential factors that could affect our financial condition is included in
our filings with the Securities and Exchange Commission, including our Form
10-K/A for the year ended January 29, 2000 and our Registration Statement on
Form S-3 (No. 333-84319). We caution readers not to place undue reliance on
forward-looking statements, which speak only as of the date of this filing. We
undertake no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after that date.
Retail Store Operations
At October 28, 2000, the Company operated 53 retail stores in 16 states
throughout the United States. The stores' product mix includes a wide variety of
items to meet the needs of infants, small children and their care givers, all
presented within a store designed to provide a safe, baby-friendly environment
for the shopping ease of new parents.
Thirteen weeks ended October 28, 2000 compared with October 30, 1999
The following table sets forth the Company's unaudited statement of operations
data:
<TABLE>
<CAPTION>
Thirteen weeks ended
------------------------------------------------------------
October 28, 2000 October 30, 1999
------------------------------- -------------------------
<S> <C> <C> <C> <C>
Retail net sales $ 9,865,000 100.0% $ 8,829,000 100.0%
Cost of goods sold 4,947,000 50.1% 4,552,000 51.6%
Operating expense 4,197,000 42.5% 3,580,000 40.5%
Non-cash compensation 65,000 0.7% 24,000 0.3%
Marketing & advertising expenses 233,000 2.4% 270,000 3.1%
General & administrative expenses 954,000 9.7% 833,000 9.4%
Pre-opening costs 117,000 1.2% 91,000 1.0%
Store closing expense 46,000 0.5%
Depreciation & amortization expense 541,000 5.5% 404,000 4.6%
------------- --------------
Operating loss (1,235,000) -12.5% (925,000) -10.5%
Gain on investment (2,554,000) -25.9%
Interest expense 293,000 3.0% 136,000 1.5%
------------- --------------
Income (loss) before provision for income taxes 1,026,000 10.4% (1,061,000) -12.0%
Provision for income taxes 19,000 0.2% 20,000 0.2%
------------- --------------
Net income (loss) $ 1,007,000 10.2% $ (1,081,000) -12.2%
============= ==============
</TABLE>
Net Sales. Retail net sales consist of gross product sales to customers
net of returns. Retail net sales increased by $1.1 million, or 11.7%, from $8.8
million for the thirteen weeks ended October 30, 1999 to $9.9 million for the
thirteen weeks ended October 28, 2000. The net sales growth reflects an increase
in the store base from 43 stores to 53 stores and a 1.5% increase in same-store
sales.
Cost of goods sold. Cost of goods sold consists primarily of the cost
of products sold, inbound freight costs and inventory shrinkage costs. Retail
gross margin increased to 49.9% from 48.4% in the prior year period. This
increase is due in part to reduced freight costs and increased vendor
allowances.
Operating expense. Retail operating expense consists of store
operational expenses, retail personnel costs, and costs related to the
distribution and warehousing of our retail merchandise. Retail operating expense
was $4.2 million for the current period as compared to $3.6 million for the same
period last year. The $0.6 million or 17.2% increase primarily reflects the
addition of ten new store locations as well as costs related to increased retail
management staff and related costs. Expense related to charges under the
Management Services Agreement with RightStart.com amount to $13,000 for the
current quarter and $6,000 for the same period last year.
11
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Non-cash compensation. During the third quarter of 1999, the Company
recorded $24,000 of non-cash compensation expense associated with certain
non-employee director grants. The current year reflects $8,000 related to
non-employee director grants as well as $57,000 related to non-employee options.
Marketing and advertising expense. Retail marketing and advertising
expense generally consists of print advertising in national and regional
publications, as well as promotional mailings to our customers. Marketing and
advertising expense decreased slightly from $270,000 for the thirteen-week
period ended October 30, 1999 to $233,000 for the same period this year. This
decrease is primarily due to increased vendor cooperative advertising dollars.
General and administrative expense. General and administrative expense
consists primarily of the costs related to management, financial, merchandising,
inventory, professional service fees and other administrative support. General
and administrative expense increased by $0.2 million, or 14.5%, from $0.8
million for the thirteen week period ended October 30, 1999 to $1.0 million for
the thirteen week period ended October 28, 2000. The increase was due primarily
to increased staffing levels. General and administrative expense includes net
credits in the amount of $66,000 and $142,000 for the current and prior year
period, respectively. These credits are the result of net billings to
RightStart.com under the Management Services Agreement.
Pre-opening costs. Pre-opening costs consist primarily of non-recurring
marketing, advertising, and other expenses related to the opening of new store
locations. Pre-opening costs increased $26,000 from $91,000 for the thirteen
weeks ended October 30, 1999 to $117,000 for the current year. The primary
reason for the increase was the recording of $38,000 in expenses related to
three abandoned new store sites.
Store closing expense. Store closing expense consists primarily of the
write-off of non-recoverable assets and costs incurred in closing the store
locations. In the current period additional closing expenses of $46,000 were
recorded in relation to two stores closed in the previous quarter. There are no
other planned store closings contemplated for the remainder of Fiscal 2000.
Depreciation and amortization. Depreciation and amortization expense
increased $0.1 million from $0.4 million in the prior period to $0.5 million in
the current period. The increase was due to additional assets placed in service
related to new store openings.
Gain on investment. In connection with the deconsolidation of
RightStart.com, the Company recorded a gain of $3.3 million which reversed the
previously recorded loss in excess of its investment and increased the Company's
investment in RightStart.com to zero.
Interest expense. Interest expense increased from $0.1 million in the
thirteen weeks ended October 30, 1999 to $0.3 million for the same period this
year. The increase reflects an increase in our outstanding borrowings for the
current period over the prior period and higher interest rates in general.
Provision for income taxes. The provision for income taxes is related
to state income taxes. No federal or state income tax benefit was recorded for
either the current or prior period due to the uncertainty surrounding realizing
any further tax benefits in future years.
12
<PAGE>
Thirty-nine weeks ended October 28, 2000 compared with October 30, 1999
<TABLE>
The following table sets forth the Company's unaudited statement of operations data :
<CAPTION>
Thirty-nine weeks ended
------------------------------------------------------------
October 28, 2000 October 30, 1999
------------------------------- -------------------------
<S> <C> <C> <C> <C>
Retail net sales $ 30,951,000 100.0% $ 27,328,000 100.0%
Cost of goods sold 15,428,000 49.8% 13,634,000 49.9%
Operating expense 12,429,000 40.2% 10,514,000 38.5%
Non-cash compensation 85,000 0.3% 1,794,000 6.6%
Marketing & advertising expenses 779,000 2.5% 626,000 2.3%
General & administrative expenses 2,864,000 9.3% 2,535,000 9.3%
Pre-opening costs 318,000 1.0% 228,000 0.8%
Store closing expense 387,000 1.3% 151,000 0.6%
Depreciation & amortization expense 1,590,000 5.1% 1,129,000 4.1%
------------- --------------
Operating loss (2,929,000) -9.5% (3,283,000) -12.0%
Loss on investment 3,406,000 11.0%
Interest expense 850,000 2.7% 333,000 1.2%
------------- --------------
Income (loss) before provision for income taxes (7,185,000) -23.2% (3,616,000) -13.2%
Provision for income taxes 58,000 0.2% 48,000 0.2%
------------- --------------
Net income (loss) $ (7,243,000) -23.4% $ (3,664,000) -13.4%
============= ==============
</TABLE>
Net Sales. Retail net sales consist of gross product sales to customers
net of returns. Retail net sales increased by $3.6 million, or 13.3%, from $27.3
million for the thirty-nine weeks ended October 30, 1999 to $31.0 million for
the thirty-nine weeks ended October 28, 2000. The net sales growth reflects an
increase in the store base from 43 stores to 53 stores; offset somewhat by a
1.0% decline in same-store sales. The same store sales decline is due to some
cannibalization from the Company's Internet subsidiary as well as increased
competition at certain store locations.
Cost of goods sold. Cost of goods sold consists primarily of the cost
of products sold, inbound freight costs and inventory shrinkage costs. Retail
gross margin remained relatively unchanged for the thirty-nine weeks of this
year as compared to the prior year.
Operating expense. Retail operating expense consists of store
operational expenses, retail personnel costs, and costs related to the
distribution and warehousing of our retail merchandise. Retail operating expense
was $12.4 million for the current period as compared to $10.5 million for the
same period last year. The $1.9 million or 18.2% increase primarily reflects the
addition of ten new store locations as well as costs related to increased retail
management staff and related costs. Expense related to charges under the
Management Services Agreement with RightStart.com amount to $36,000 for the nine
months this year and $6,000 for the same period last year.
Non-cash compensation. For the thirty-nine weeks ended October 30,
1999, the Company recorded $1.8 million of non-cash compensation expense related
to the vesting of performance options granted to executive officers of the
Company. For the thirty-nine weeks ended October 28, 2000, non-cash compensation
expense reflects $28,000 related to non-employee director grants as well as
$57,000 related to non-employee options.
Marketing and advertising expense. Retail marketing and advertising
expense generally consists of print advertising in national and regional
publications, as well as promotional mailings to our customers. Marketing and
advertising expense increased from $0.6 million for the thirty-nine week period
ended October 30, 1999 to $0.8 million for the same period this year. This
growth reflects increased utilization of promotional mailings to our customers
as well as expenses incurred to increase brand awareness in our regional
markets.
General and administrative expense. General and administrative expense
consists primarily of the costs related to management, financial, merchandising,
inventory, professional service fees and other administrative support
attributable to Retail Store Operations. General and administrative expense
increased 12.9% to $2.9 million for the current period from $2.5 million for the
comparable period last year. The increase is due primarily to an increase in
staffing and related costs. General and administrative expense includes net
credits in the amount of $289,000 and $155,000 for the current and prior year
period, respectively. These credits are the result of net billings to
RightStart.com under the Management Services Agreement.
13
<PAGE>
Pre-opening costs. Pre-opening costs consist primarily of non-recurring
marketing, advertising, and other expenses related to the opening of new store
locations. Pre-opening costs increased $90,000 from $228,000 for the thirty-nine
weeks ended October 30, 1999 to $318,000 for the current fiscal period. The
increase was due to the five stores opened during the fiscal period and opening
costs related to five stores opened at the end of the prior year versus seven
stores opened in the prior period and costs related to two stores opened at the
end of fiscal year 1998.
Depreciation and amortization. Depreciation and amortization expense
increased $0.5 million from $1.1 million in the prior period to $1.6 million in
the current period. The increase was due to additional assets placed in service
related to new store openings.
Loss on investment. As of October 10, 2000, the Company recorded losses
in excess of its investment in RightStart.com of $2.7 million and recorded an
allowance for potential uncollectibility of $0.7 million in connection with
amounts owed by RightStart.com to the Company under the Management Services
Agreement.
Interest expense. Interest expense increased from $0.3 million for the
thirty-nine weeks ended October 30, 1999 to $0.9 million for the same period
this year. The increase reflects an increase in our outstanding borrowings for
the current period over the prior period and higher interest rates.
Provision for income taxes. The provision for income taxes is related
to state income taxes. No Federal or state income tax benefit was recorded for
either the current or prior period due to the uncertainty surrounding realizing
any tax benefits in future years.
Liquidity and Capital Resources
Our ability to fund our operations, open new stores on our planned
timeframe and maintain compliance with our Credit Facility is dependent on our
ability to generate sufficient cash flow from operations and secure financing.
Historically, we have incurred losses and may continue to incur losses,
depending on the success of our business strategy. Losses could negatively
affect working capital, the extension of credit by our suppliers and our
operations.
In the first thirty-nine weeks of Fiscal 2000, we used $4.0 million in
cash in our operating activities compared to $4.4 million in cash used in our
operating activities for the same period of Fiscal 1999. In the current period,
investing activity includes the loss on investment in RightStart.com of $3.4
million and $1.3 million for fixed asset additions compared to $2.6 million for
fixed asset additions for the same period last year. The primary source of funds
for the use of cash in financing activities in the current period were
borrowings under the Company's $13.0 million credit facility (the "Credit
Facility"), the sale of Series D Convertible Preferred Stock and warrants which
netted proceeds of $4.5 million and the issuance of $3.0 million of Convertible
Notes. The net proceeds of $7.5 million were used to reduce amounts outstanding
on the existing Credit Facility.
As of October 28, 2000, amounts outstanding under the Credit Facility
consist of a term loan of $1.4 million and $1.1 million under its revolving
credit line, which become due and payable in February 2001. The Company plans to
renew or replace the Credit Facility prior to such date. The Company is
currently in negotiations with potential lenders, however, there can be no
assurance that a new or replacement facility will be obtained.
During the first thirty-nine weeks of Fiscal 2000, our primary source
of liquidity for operations was from borrowings under the Credit Facility. The
Credit Facility consists of a $10.0 million revolving line of credit for working
capital (the "Revolving Line") and a $3.0 million capital expenditure facility
(the "Capex Line"), subject to reduction beginning May 1, 2000. Availability
under the Revolving Line is subject to a defined borrowing base. As of October
28, 2000 borrowings of $1.1 million were outstanding under the Revolving Line
and borrowings of $1.4 million were outstanding under the Capex Line; $5.2
million was available for borrowing at October 28, 2000 under the Revolving
Line. Interest accrues on the Revolving Line at prime plus 1.0% and at prime
plus 1.5% on the Capex Line. At October 28, 2000, the bank's prime rate of
interest was 9.5%. The Credit Facility terminates on February 19, 2001, and on
such date, all borrowings thereunder are immediately due and payable. Borrowings
under the Credit Facility are secured by substantially all of our assets
(including our stock in RightStart.com, but excluding the assets of
RightStart.com). We expect to either renew or replace the Credit Facility by
January 2001.
The Credit Facility, as amended through October 23, 2000, requires the
Company at all times during Fiscal 2000, to maintain net worth (defined to
include equity, additional paid-in capital, retained earnings (accumulated
deficit) and subordinated debt, "Net Worth") of $6,600,000 as of September 30,
2000 and $8,000,000 as of October 31, 2000 and for the balance of the term. At
October 28, 2000, Net Worth, as defined in the Credit Agreement, was
$10,705,000. The Credit Facility also requires that the Company's earnings
14
<PAGE>
before interest, taxes, depreciation, amortization and non-recurring charges
("EBITDA") be no less than zero for the twelve months ended October 28, 2000 and
$400,000 for the twelve months ending February 3, 2001. For the twelve months
ended October 28, 2000, EBITDA, as defined in the Credit Agreement, was $49,000.
In addition, the Company's capital expenditures are limited to $3,000,000 in
Fiscal 2000. The Company is required to make principal reductions of $100,000 on
the Capex Line per month beginning May 1, 2000. The Company believes that it
will be able to meet its financial covenants or be able to amend such covenants
as appropriate.
The Company's common stock is listed and traded on the Nasdaq National
Market. In July, the Nasdaq informed the Company that its consolidated net worth
had fallen below the Nasdaq National Market's minimum-listing requirement of
$4.0 million and consequently that its common stock was subject to de-listing.
The primary cause of the diminished consolidated net worth was attributable to
losses sustained by the Company's former subsidiary, RightStart.com. The Company
requested that it continue to be listed at an oral hearing on October 12, 2000.
The new capital received by the Company in the current fiscal quarter together
with the deconsolidation of the Company and RightStart.com resulted in the
Company's net worth exceeding the Nasdaq minimum-listing requirement. In
November, the Nasdaq notified the Company that it was in compliance with the
minimum-listing requirements and accordingly that the Company's common stock
would continue to be listed on the Nasdaq National Market so long as the Company
maintains compliance with the Nasdaq's listing requirements. Nasdaq noted,
however, that the Company had failed to evidence a market value of public float
of at least $5.0 million for several consecutive trading days. Nasdaq informed
the Company that should such failure continue for thirty consecutive trading
days (beginning November 16,2000) that the Company would be provided a ninety
calendar day period in which to regain compliance for not less than ten
consecutive trading days. Failure would result in a transfer of the Company's
securities to the Nasdaq SmallCap market or delisting. Given the Company's
current public float, its common stock would need to trade above approximately
$1.50 per share to meet this compliance standard.
Impact of Inflation
The impact of inflation on the results of operations has not been
significant during our last three fiscal years.
Seasonality
Our business is not significantly impacted by seasonal fluctuations,
when compared to many other specialty retail operations. Our products are for
the most part need-driven and the customer is often the end user of the product.
We do experience an increase in sales during the Christmas holiday season due
primarily to an increased demand for gifts and toys.
Other Matters
New Accounting Requirements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective beginning in the first quarter of
2000. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. SFAS No. 133 as amended by SFAS No. 137 and
SFAS 138, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. SFAS No. 133 is effective for our first fiscal quarter in the
year 2001 and is not expected to have a material effect on our financial
position.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
In the ordinary course of operations, we face no significant market
risk from derivative instruments. Our purchase of imported products subjects us
to a minimum amount of foreign currency risk. Foreign currency 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 United States dollar, the price of imported products could
increase. We have no commitments, however, for future purchases with foreign
vendors and, additionally, we have the ability to source many products
domestically in the event of significant 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 our debt obligations, the interest rates of which are linked to the prime
15
<PAGE>
rate. We have not entered into any derivative financial instruments to manage
interest rate risk, currency risk or for speculative purposes and we are
currently not evaluating the future use of these instruments.
16
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Company filed a report on Form 8-K on October 11, 2000, as
amended on October 19, 2000, with respect to its October 10, 2000 closing of a
private placement financing.
The following exhibits of The Right Start, Inc. are included herein:
Exhibit Number
10.1 Eleventh Amendment to Loan and Security Agreement and Waiver, dated
October 23, 2000, between Heller Financial, Inc. and the Company.
10.2 Common Stock Purchase Agreement, dated as of October 10, 2000 between
RightStart.com and Michael Targoff.
27 Financial Data Schedule.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.
THE RIGHT START, INC.
Date: December 12, 2000 /s/ JERRY WELCH
Jerry Welch
Chief Executive Officer
Date: December 12, 2000 /s/ RAYMOND P. SPRINGER
Raymond P. Springer
Chief Financial Officer
18
<PAGE>
