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 July 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-19536
THE RIGHT START, INC.
---------------------
(Exact name of registrant as specified 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
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(Address of principal executive offices) (Zip Code)
(818) 707-7100
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(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 July 29, 2000 - 5,614,175 shares.
<PAGE>
THE RIGHT START, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS
ENDED July 29, 2000
PART I - FINANCIAL INFORMATION
Item 1. 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
Page 2
<PAGE>
<TABLE>
<CAPTION>
THE RIGHT START, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
July 29, 2000 January 29, 2000
------------- ----------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,378,000 $ 5,199,000
Accounts and other receivables 638,000 682,000
Merchandise inventories 10,450,000 9,694,000
Other current assets 1,680,000 1,849,000
------------- ----------------
Total current assets 14,146,000 17,424,000
Noncurrent assets:
Property, fixtures and equipment, net 10,677,000 10,648,000
Deferred income taxes 1,400,000 1,400,000
Other noncurrent assets 435,000 1,255,000
------------- ----------------
$ 26,658,000 $ 30,727,000
============= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,315,000 $ 9,566,000
Revolving line of credit 4,343,000 3,377,000
Term note payable 2,700,000
Secured bridge notes payable, net of unamortized
discount of $130,000 3,805,000
------------- ----------------
Total current liabilities 23,163,000 12,943,000
Term note payable 3,000,000
Deferred rent 1,287,000 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 2,257,000 2,088,000
Shareholders' equity (deficit):
Convertible preferred stock Series B 1,547,000 1,875,000
Convertible preferred stock Series C 3,733,000 3,850,000
Common stock (25,000,000 shares authorized
at no par value; 5,614,175 and 5,417,666 issued and
outstanding at July 29, 2000 and January 29, 2000,
respectively 22,722,000 22,593,000
Paid in capital 16,673,000 16,142,000
Deferred compensation (570,000) (671,000)
Accumulated deficit (44,154,000) (35,868,000)
------------- ----------------
Total shareholders' equity (deficit) (49,000) 7,921,000
------------- ----------------
$ 26,658,000 $ 30,727,000
============= ================
</TABLE>
See accompanying notes to consolidated financial statements
Page 3
<PAGE>
<TABLE>
<CAPTION>
THE RIGHT START, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------------- ---------------------------------
July 29, 2000 July 31, 1999 July 29, 2000 July 31, 1999
(unaudited) (unaudited) (unaudited) (unaudited)
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Retail store sales $ 10,757,000 $ 9,464,000 $ 21,086,000 $ 18,499,000
Online sales before promotional discounts 3,915,000 265,000 8,648,000 265,000
Catalog sales 277,000 869,000 901,000 2,555,000
Shipping and handling revenues 144,000 161,000 332,000 512,000
--------------- -------------- --------------- ---------------
Total sales 15,093,000 10,759,000 30,967,000 21,831,000
Promotional discounts related to online sales 399,000 39,000 982,000 39,000
-------------- ------------- -------------- --------------
Net sales 14,694,000 10,720,000 29,985,000 21,792,000
Costs and expenses:
Cost of goods sold - merchandise 7,704,000 5,206,000 15,544,000 10,321,000
Cost of goods sold - shipping and handling 921,000 264,000 2,096,000 573,000
Operating expense, includes non-cash compensation of
$51,000, $1,770,000, $103,000 and $1,770,000,
respectively 5,329,000 6,078,000 10,735,000 10,178,000
Marketing and advertising expense, including $29,000
and $56,000 of non-cash expense for the thirteen
and twenty-six weeks ended July 29, 2000,
respectively 1,751,000 213,000 5,961,000 356,000
General and administrative expense 1,808,000 966,000 3,673,000 1,855,000
Pre-opening costs 45,000 75,000 201,000 137,000
Depreciation and amortization expense 782,000 399,000 1,554,000 748,000
Store closing expense 341,000 151,000 341,000 151,000
--------------- -------------- --------------- ---------------
18,681,000 13,352,000 40,105,000 24,319,000
--------------- -------------- --------------- ---------------
Operating loss (3,987,000) (2,632,000) (10,120,000) (2,527,000)
Minority interest in consolidated subsidiary loss (1,033,000) (17,000) (3,512,000) (17,000)
Write off of initial public offering costs 102,000 874,000
Interest expense, net, includes non-cash bridge
note discount of $150,000 and $169,000 for
the thirteen weeks and twenty-six weeks
ended July 29, 2000 524,000 112,000 765,000 197,000
--------------- -------------- --------------- ---------------
Loss before provision for income taxes (3,580,000) (2,727,000) (8,247,000) (2,707,000)
Provision for income taxes 19,000 20,000 39,000 29,000
--------------- -------------- --------------- ---------------
Net loss $ (3,599,000) $ (2,747,000) $ (8,286,000) $ (2,736,000)
=============== ============== =============== ===============
Basic and diluted loss per share $ (0.66) $ (0.56) $ (1.52) $ (0.57)
=============== ============== =============== ===============
Basic and diluted weighted average number of shares
outstanding 5,614,175 5,058,878 5,578,515 5,055,349
=============== ============== =============== ===============
See accompanying notes to consolidated financial statements
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
THE RIGHT START, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-six Weeks Ended
----------------------------------------
July 29, 2000 July 31, 1999
----------------- ----------------
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (8,286,000) $ (2,736,000)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,554,000 748,000
Non-cash compensation expense 103,000 1,770,000
Non-cash advertising expense 56,000
Amortization of issued warrants 27,000
Store closing expense 201,000 151,000
Amortization of bridge note discount 169,000
Minority interest in consolidated subsidiary loss (3,512,000) (17,000)
Changes in assets and liabilities affecting operations 3,041,000 64,000
----------------- ----------------
Net cash used in operating activities (6,647,000) (20,000)
----------------- ----------------
Net cash used in investing activities:
Additions to property, fixtures and equipment (1,904,000) (1,575,000)
----------------- ----------------
Cash flows from financing activities:
Net proceeds from revolving line of credit 966,000 2,332,000
Net payments on term note payable (300,000) (500,000)
Net proceeds from issuance of secured bridge notes 3,935,000
Sale of preferred stock in consolidated subsidiary, net 13,865,000
Proceeds from common stock issued upon exercise of
stock options 129,000 37,000
----------------- ----------------
Net cash provided by financing activities 4,730,000 15,734,000
----------------- ----------------
Net increase (decrease) in cash and cash equivalents (3,821,000) 14,139,000
Cash at beginning of period 5,199,000 626,000
----------------- ----------------
Cash and cash equivalents at end of period $ 1,378,000 $ 14,765,000
================= ================
See accompanying notes to consolidated financial statements
</TABLE>
Page 5
<PAGE>
THE RIGHT START, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED 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. The consolidated financial statements include the results of the
Company and its majority-owned subsidiary, RightStart.com Inc. ("RightStart.com"
or 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 was 60.2% at July 29, 2000.
There have been no changes in the Company's significant accounting policies
as set forth in the Company's consolidated financial statements for the year
ended January 29, 2000. These unaudited consolidated financial statements as of
July 29, 2000 and for the thirteen and twenty-six 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 consolidated 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 twenty-six week periods ended July
29, 2000 are not necessarily indicative of the results that may be expected for
the year ending February 3, 2001.
NOTE 2: Bridge Notes Payable
In April 2000, the Subsidiary sold secured bridge notes to affiliates in
the aggregate principal amount of $2,275,000 (the "Bridge Notes"), and warrants
to purchase 113,753 shares of its common stock at an exercise price of $6.70
(the "Bridge Warrants"). The Bridge Notes are secured by substantially all of
the assets of the Subsidiary. Using the Black-Scholes model, the estimated fair
value of the Bridge Warrants was calculated at $286,000 and has been recorded as
a reduction in the carrying amount of the Bridge Notes, with a corresponding
increase in shareholders' equity. The discount on the Bridge Notes is being
amortized over the term of the notes as additional interest expense. A default
on the Bridge Notes would permit such holders to foreclose on the assets of the
Subsidiary and require the Subsidiary, to the extent it has not already done so,
to issue to the holders of the notes, additional warrants to purchase an
aggregate of 8,740,220 shares, or approximately 48.9% of the outstanding common
stock of the Subsidiary, at an exercise price of $0.25 per share, payable in
cash or by surrender of Bridge Notes. The Bridge Notes are due and payable on
October 18, 2000.
In June 2000, the Subsidiary sold junior secured convertible bridge notes
to affiliates in the aggregate principal amount of approximately $1,660,000
("the Convertible Bridge Notes"). The Convertible Bridge Notes are subordinate
to the Bridge Notes, are convertible at anytime into common stock of the
Subsidiary at a price of $.25 per share and are due and payable on October 18,
2000.
NOTE 3: Write off of Initial Public Offering Costs
On January 18, 2000, RightStart.com filed a registration statement with the
Securities and Exchange Commission with respect to an offering of its common
stock. Costs of $0.8 million, incurred in connection with the offering,
including audit fees, legal fees, various filing fees and printer costs were
deferred pending the completion of the offering. On May 19, 2000, RightStart.com
filed to withdraw this registration statement because of adverse market
conditions and expensed the deferred costs in the first quarter. In addition,
the Company expensed $0.1 million of related legal costs in the current quarter.
Page 6
<PAGE>
NOTE 4: 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, 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 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.
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
29-Jul-00 31-Jul-99 29-Jul-00 31-Jul-99
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $(3,599,000) $(2,747,000) $(8,286,000) $(2,736,000)
Less: Preferred stock accretion (86,000) (73,000) (169,000) (143,000)
----------- ----------- ----------- -----------
Basic and diluted loss applicable
to common shareholders $(3,685,000) $(2,820,000) $(8,455,000) $(2,879,000)
=========== =========== =========== ===========
Weighted average shares 5,614,175 5,058,878 5,578,515 5,055,349
Loss per share, basic and diluted $ (0.66) $ (0.56) $ (1.52) $ (0.57)
</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
992,232 and 701,161 shares of common stock at July 29, 2000 and July 31, 1999,
respectively; Series B preferred stock convertible into 549,995 and 1,000,000
shares of common stock at July 29, 2000 and July 31, 1999, respectively; Series
C preferred stock convertible into 1,866,650 and 1,925,000 shares of common
stock at July 29, 2000 and July 31, 1999, respectively; and 113,753 Bridge
Warrants to purchase common stock of RightStart.com at July 29,2000 (see Note
2).
NOTE 5: Supplemental Disclosure of Cash Flow Information
Interest paid amounted to $352,000 and $191,000 for the twenty-six weeks
ended July 29, 2000 and July 31, 1999, respectively. Cash paid for income taxes
was $8,000 and $11,000 for the twenty-six weeks ended July 29, 2000 and July 31,
1999, respectively.
Page 7
<PAGE>
Changes in assets and liabilities which increased (decreased) cash are as
follows:
Twenty-six weeks ended
---------------------------------
July 29, 2000 July 31, 1999
------------- -------------
Accounts and other receivables $ 44,000 $ (106,000)
Merchandise inventories (756,000) (674,000)
Other current assets 212,000 (149,000)
Other noncurrent assets 764,000 (31,000)
Accounts payable and accrued expenses 2,818,000 1,044,000
Deferred rent (41,000) (20,000)
------------ ----------
$ 3,041,000 $ 64,000
=========== ==========
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 twenty-six weeks ended July 29, 2000, the Company recorded preferred
dividends of $169,000.
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.
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, 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 has two reportable segments; Direct-to-customers, which
includes online and catalog operations, and Retail, which includes activities
related to the Company's retail stores. Both segments sell products to meet the
needs of the parents of infants and small children. The Direct-to-customers
segment also sells products directed to older children through age twelve.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes.
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 have operations that offer the same or
similar products but have a different method of delivery to their customers.
Page 8
<PAGE>
Segment information for the thirteen weeks ended July 29, 2000 is as follows:
<TABLE>
<CAPTION>
Total Direct
Online Catalog to-Customers Retail Total
------ ------- ------------ ------ -----
<S> <C> <C> <C> <C> <C>
Net sales $3,597,000 $340,000 $3,937,000 $10,757,000 $14,694,000
Interest expense 208,000 208,000 316,000 524,000
Depreciation 273,000 273,000 509,000 782,000
Non-cash compensation 42,000 42,000 9,000 51,000
Pre-opening costs 45,000 45,000
Minority Interest 1,033,000 1,033,000
Store closing expense 341,000 341,000
Pre-tax Income (Loss) (2,028,000) (219,000) (2,247,000) (1,333,000) (3,580,000)
Total assets 4,830,000 252,000 5,082,000 21,576,000 26,658,000
Fixed asset additions 172,000 172,000 491,000 663,000
</TABLE>
Segment information for the thirteen weeks ended July 31, 1999 is as follows:
<TABLE>
<CAPTION>
Total Direct
Online Catalog to-Customers Retail Total
------ ------- ------------ ------ -----
<S> <C> <C> <C> <C> <C>
Net sales $228,000 $1,028,000 $1,256,000 $9,464,000 $10,720,000
Interest expense 112,000 112,000
Depreciation 18,000 18,000 381,000 399,000
Non-cash compensation 1,770,000 1,770,000
Pre-opening costs 75,000 75,000
Minority Interest 17,000 17,000
Store closing expense 151,000 151,000
Pre-tax loss (332,000) (332,000) (2,395,000) (2,727,000)
Total assets 15,455,000 252,000 15,707,000 18,111,000 33,818,000
Fixed asset additions 74,000 74,000 732,000 806,000
</TABLE>
Segment information for the twenty-six weeks ended July 29, 2000 is as follows:
<TABLE>
<CAPTION>
Total Direct
Online Catalog to-Customers Retail Total
------ ------- ------------ ------ -----
<S> <C> <C> <C> <C> <C>
Net sales $7,795,000 $1,104,000 $8,899,000 $21,086,000 $29,985,000
Interest expense 208,000 208,000 557,000 765,000
Depreciation 505,000 505,000 1,049,000 1,554,000
Non-cash compensation 83,000 83,000 20,000 103,000
Pre-opening costs 201,000 201,000
Minority Interest 3,512,000 3,512,000
Store closing expense 341,000 341,000
Pre-tax loss (5,702,000) (294,000) (5,996,000) (2,251,000) (8,247,000)
Total assets 4,830,000 252,000 5,082,000 21,576,000 26,658,000
Fixed asset additions 766,000 766,000 1,138,000 1,904,000
</TABLE>
Page 9
<PAGE>
Segment information for the twenty-six weeks ended July 31, 1999 is as follows:
<TABLE>
<CAPTION>
Total Direct
Online Catalog to-Customers Retail Total
------ ------- ------------ ------ -----
<S> <C> <C> <C> <C> <C>
Net sales $228,000 $3,065,000 $3,293,000 $18,499,000 $21,792,000
Interest expense 197,000 197,000
Depreciation 18,000 5,000 23,000 725,000 748,000
Non-cash compensation 1,770,000 1,770,000
Pre-opening costs 137,000 137,000
Minority Interest 17,000 17,000
Store closing expense 151,000 151,000
Pre-tax Income (Loss) (332,000) 179,000 (153,000) (2,554,000) (2,707,000)
Total assets 15,455,000 252,000 15,707,000 18,111,000 33,818,000
Fixed asset additions 74,000 74,000 1,501,000 1,575,000
</TABLE>
NOTE 8: Recent Developments
The Company's common stock is listed and traded on the Nasdaq National
Market. The Nasdaq has informed the Company that its consolidated net worth has
fallen below the Nasdaq minimum-listing requirement of $4 million and
consequently will be de-listed. The Company has requested that it continue to be
listed and has been notified that its request will be considered at an oral
hearing on October 12, 2000. The primary cause of the diminished consolidated
net worth is attributable to losses sustained by the Company's majority-owned
subsidiary, RightStart.com Inc. The Company expects that a sale, merger or an
additional equity infusion involving RightStart.com could decrease the Company's
ownership in its subsidiary to less than 50%. A subsidiary that is less than
majority-owned would not be included in the consolidated results of its parent.
Additionally, the Company is in the process of raising additional capital to
fund its expansion plans. The new capital together with a deconsolidation is
expected to result in substantially more net worth than the Nasdaq
minimum-listing requirement. However, if the Company is not successful in its
appeal, it is expected that the Company will be de-listed which could adversely
affect the marketability of its common stock and hinder the Company's ability to
raise funds.
Page 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 and that of our majority-owned
online subsidiary, RightStart.com, a Delaware corporation ("RightStart.com").
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, losses expected in the
online business, limitations on access to capital to fund the expansion and the
growth in the number of our physical stores and in RightStart.com's online
business, RightStart.com's lack of liquidity and capital resources, consumer
acceptance of online retailing and RightStart.com's online stores and the lack
of operating experience at RightStart.com. Further information on potential
factors that could affect our financial condition and that of RightStart.com, 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.
Overview
The Right Start, Inc. sells developmental, educational and care products
for infants and children through retail stores ("Retail Store Operations") and
holds a majority ownership in RightStart.com, which sells a similar type of
product to a broader age group on the Internet and through a mail order catalog.
To facilitate the analysis of our historical results, each of the two distinct
operations is discussed separately below.
Retail Store Operations
At July 29, 2000, The Right Start, Inc. 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.
The following table sets forth the unaudited statement of operations data for
Retail Store Operations:
<TABLE>
<CAPTION>
Thirteen weeks ended
----------------------------------------------
July 29, 2000 July 31, 1999
----------------------- --------------------
<S> <C> <C> <C> <C>
Retail net sales $ 10,757,000 100.0% $ 9,464,000 100.0%
Cost of goods sold 5,420,000 50.4% 4,681,000 49.5%
Operating expense 4,200,000 39.0% 3,541,000 37.4%
Non-cash compensation 9,000 0.1% 1,770,000 18.7%
Marketing and advertising expenses 296,000 2.8% 213,000 2.3%
General and administrative expenses 954,000 8.9% 935,000 9.9%
Pre-opening costs 45,000 0.4% 75,000 0.8%
Store closing expense 341,000 3.2% 151,000 1.6%
Depreciation and amortization expense 509,000 4.7% 381,000 4.0%
---------- ----------
Operating loss (1,017,000) -9.5% (2,283,000) -24.1%
Interest expense 316,000 2.9% 112,000 1.2%
---------- ----------
Loss before provision for income taxes (1,333,000) -12.4% (2,395,000) -25.3%
Provision for income taxes 19,000 0.2% 20,000 0.2%
---------- ----------
Net loss $ (1,352,000) -12.6% $ (2,415,000) -25.5%
========== ==========
</TABLE>
Page 11
<PAGE>
Thirteen weeks ended July 29, 2000 compared with July 31, 1999
Net Sales. Retail net sales consist of gross product sales to customers net
of returns. Retail net sales increased by $1.3 million, or 13.7%, from $9.5
million for the thirteen weeks ended July 31, 1999 to $10.8 million for the
thirteen weeks ended July 29, 2000. The net sales growth reflects an increase in
the store base from 43 stores to 53 stores, offset somewhat by a 2.5% 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 declined slightly to 49.6% from 50.5% in the prior year period. This
decline is due in part to a slight shift in sales mix and greater promotional
efforts.
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 $3.5 million for the same period last
year. The $.7 million or 18.6% increase primarily reflects the addition of ten
new store locations as well as costs related to increased retail management
staff and related costs.
Non-cash compensation. 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. The current year reflects $9,000 related to certain
non-employee director grants.
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 $0.2 million for the thirteen-week period ended July 31,
1999 to $0.3 million for the same period this year. This growth reflects
increased utilization of promotional mailings to our customer database, 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
remained relatively unchanged for the thirteen-week period.
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 decreased $30,000 from $75,000 in the thirteen
weeks ended July 31, 1999 to $45,000 for the current year. The decrease was due
to the opening costs related to two stores reflected in the current period
versus three stores in the prior period.
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 there were two store closures for a total of
$341,000. In the prior year, one store location was closed for a total of
$151,000. 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.
Interest expense. Interest expense increased from $112,000 in the thirteen
weeks ended July 31, 1999 to $316,000 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.
Page 12
<PAGE>
The following table sets forth the unaudited statement of operations data for
Retail Store Operations:
<TABLE>
<CAPTION>
Twenty-six weeks ended
---------------------------------------------
July 29,2000 July 31, 1999
--------------------- --------------------
<S> <C> <C> <C> <C>
Retail net sales $ 21,086,000 100.0% $ 18,499,000 100.0%
Cost of goods sold 10,481,000 49.7% 9,082,000 49.1%
Operating expense 8,233,000 39.0% 6,933,000 37.5%
Non-cash compensation 19,000 0.1% 1,770,000 9.6%
Marketing and advertising expenses 545,000 2.6% 356,000 1.9%
General and administrative expenses 1,910,000 9.1% 1,702,000 9.2%
Pre-opening costs 201,000 1.0% 137,000 0.7%
Store closing expense 341,000 1.6% 151,000 0.8%
Depreciation and amortization expense 1,049,000 5.0% 725,000 3.9%
---------- ----------
Operating loss (1,693,000) -8.0% (2,357,000) -12.7%
Interest expense 557,000 2.6% 197,000 1.1%
---------- ----------
Loss before provision for income taxes (2,250,000) -10.7% (2,554,000) -13.8%
Provision for income taxes 39,000 0.2% 29,000 0.2%
---------- ----------
Net loss $ (2,289,000) -10.9% $ (2,583,000) -14.0%
========== ==========
</TABLE>
Twenty-six weeks ended July 29, 2000 compared with July 31, 1999
Net Sales. Retail net sales consist of gross product sales to customers net
of returns. Retail net sales increased by $2.6 million, or 14.0%, from $18.5
million for the twenty-six weeks ended July 31, 1999 to $21.1 million for the
twenty-six weeks ended July 29, 2000. The net sales growth reflects an increase
in the store base from 43 stores to 53 stores; offset somewhat by a 2.2% 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 decreased to 50.3% for the current period from 50.9% for the prior year
period, due primarily to a shift in sales mix and greater promotional efforts.
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 $8.2 million
for the current period as compared to $6.9 million for the same period last
year. The $1.3 million or 18.8% increase primarily reflects the addition of ten
new store locations as well as costs related to increased retail management
staff and related costs.
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 $0.4 million for the twenty-six week period ended July
31, 1999 to $0.5 million for the same period this year. This growth reflects
increased utilization of promotional mailings to our customer database, 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 12.2% to $1.9 million for the current period from $1.7 million for the
comparable period last year. The increase is due primarily to an increase in
staffing and related costs.
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 $64,000 from $137,000 in the twenty-six
weeks ended July 31, 1999 to $201,000 for the current year. The increase was due
to the three stores opened during the fiscal period and opening costs related to
five stores opened at the end of the prior year versus four stores opened in the
prior period and costs related to two stores opened in the prior year.
Depreciation and amortization. Depreciation and amortization expense
increased $0.3 million from $0.7 million in the prior period to $1.0 million in
the current period. The increase was due to additional assets placed in service
related to new store openings.
Interest expense. Interest expense increased from $197,000 in the
twenty-six weeks ended July 31, 1999 to $557,000 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.
Page 13
<PAGE>
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.
RightStart.com Operations
RightStart.com was formed in April 1999 to engage in electronic commerce
over the Internet. As part of the initial capitalization, RightStart.com
acquired its catalog operations from The Right Start, Inc.
Online sales are presented on a gross basis, which is after product returns
but before promotional discounts.
The online stores were launched on June 29, 1999. As a result, the first
half of Fiscal 2000 ("Fiscal 2000") is comprised of 26 weeks of online store and
catalog operations from January 30, 2000 through July 29, 2000. RightStart.com
acquired the catalog operations from The Right Start, Inc. in April 1999 but we
have included the operating results as if the business had been acquired with
the beginning of The Right Start's fiscal year. Therefore, the first half of
Fiscal 1999 ("Fiscal 1999") is comprised of 26 weeks of catalog operations from
January 31, 1999 through July 31, 1999 and 32 days of online store operations
from June 29, 1999 to July 31, 1999.
The following table sets forth the unaudited statement of operations data
for the periods indicated for RightStart.com:
<TABLE>
<CAPTION>
Thirteen weeks ended
---------------------------------------------
July 29, 2000 July 31, 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
Catalog net sales $ 277,000 7.0% $ 869,000 69.2%
Online store sales before promotional discounts 3,915,000 99.4% 265,000 21.1%
Shipping and handling revenues 144,000 3.7% 161,000 12.8%
------------ -----------
Total sales 4,336,000 110.1% 1,295,000 103.1%
Promotional discounts related to online store sales 399,000 10.1% 39,000 3.1%
------------ -----------
Net sales 3,937,000 100.0% 1,256,000 100.0%
Cost of goods sold - merchandise 2,284,000 58.0% 525,000 41.8%
Cost of goods sold - shipping and handling 921,000 23.4% 264,000 21.0%
Operating expense 1,078,000 27.4% 767,000 61.1%
Non-cash compensation 42,000 1.1% -
Marketing and advertising expenses 1,455,000 37.0% -
General and administrative expenses 854,000 21.7% 31,000 2.5%
Depreciation and amortization expense 273,000 6.9% 18,000 1.4%
------------ -----------
Operating loss (2,970,000) -75.4% (349,000) -27.8%
Minority interest in consolidated subsidiary loss 1,033,000 26.2% 17,000 1.4%
Interest expense 208,000 5.3% -
Write off of initial public offering costs 102,000 2.6% -
------------ -----------
Loss before provision for income taxes (2,247,000) -57.1% (332,000) -26.4%
Provision for income taxes - -
------------ -----------
Net loss $ (2,247,000) -57.1% $ (332,000) -26.4%
============ ===========
</TABLE>
Page 14
<PAGE>
Thirteen weeks ended July 29, 2000 compared with July 31, 1999
Sales. Total sales consist of gross product sales to customers and are net
of product returns; net sales are net of promotional discounts. Net sales
increased by $2.7 million, or 213.5%, to $3.9 million for the thirteen weeks
ended July 29, 2000 from $1.3 million for the comparable period of the prior
year. This growth in net sales was attributable to an increase in online sales,
partially offset by a decline in catalog sales. Online store net sales were $3.5
million in the second quarter of the current year, compared to $0.2 million in
the same quarter of the prior year. Online store net sales are net of
promotional discounts of $0.4 million for the current quarter, compared to $0.04
million in the same quarter of the prior year. Catalog net sales decreased $0.6
million, or 68.1%, to $0.3 million for the second quarter of this year from $0.9
million in the comparable period of the prior year. The majority of the decline
in catalog net sales was attributable to a reduction in catalog circulation and
a shift of a portion of the Direct-to-customer business from the catalog to the
online stores.
Shipping and handling revenues. Catalog customers have traditionally been
charged a fee to cover the cost of shipping and handling. The Company has
historically offset the fees and expenses and reported the net number in
operating expense. When we entered the online business, we decided to offer free
shipping and handling for standard ground shipping. Customers desiring upgraded
shipping were charged a fee approximating the additional cost. These revenues
along with shipping and handling expenses were reported as operating expense in
the same manner in which the Company handled the catalog. New accounting
guidance (issued May 18, 2000) requires that shipping and handling revenues and
expenses be accounted for as revenues and cost of sales. In May 2000 we modified
our free shipping policy so that free shipping applies only to orders greater
than $30. Shipping and handling revenues were $0.14 million in the second
quarter compared to $0.16 million in the comparable period of the prior year.
The decrease is due to lower catalog sales offset by the fees received on online
store sales under $30.
Cost of goods sold- Merchandise. Cost of goods sold consists primarily of
the cost of products sold, inbound freight costs and inventory shrinkage costs.
Merchandise gross margin decreased to 39.8% this quarter from 52.1% in the prior
year due primarily to increased online store sales which carry a lower gross
margin than catalog sales. Merchandise gross margin on catalog net sales
decreased to 52.0% in the second quarter of this year, from 53.9% in the same
quarter of the prior year, due to a less favorable product mix. Merchandise
gross margin on online store net sales increased to 38.8% in the second quarter
of this year from 36.7% in the same quarter of the prior year. Merchandise gross
margin on online store net sales was lower than merchandise gross margin on
catalog net sales in the current quarter due to the promotional discounting
offered to customers of the online stores as well as a different mix of products
offered in the online stores.
Cost of goods sold- Shipping and handling. Shipping and handling expenses
include amounts paid to our third party distribution service, returns processing
costs, shipping supplies and actual shipping charges. These expenses for the
second quarter of the current year were $0.9 million or 23.4% of net sales as
compared to $0.3 million or 21.0% of net sales in the same quarter of the prior
year. The increase in shipping and handling is directly attributable to the
increase in sales from the new online stores and the mix of products offered.
Operating expenses. Operating expenses consist primarily of credit card
processing fees, expenses related to catalog production and distribution,
customer service, as well as related personnel costs. Operating expenses
increased by $0.3 million to $1.1 million or 27.4% of net sales in the second
quarter of this year from $0.8 million or 61.1% of net sales in the same period
of last year. Operating expenses related to the online store increased $0.5
million to $0.7 million this quarter from $0.2 million in the prior year period,
due to increased online sales. Operating expenses related to the catalog
decreased $77,000 to $360,000 this quarter from $437,000 in the prior year
period, due to reduced circulation and sales.
Marketing and advertising expense. Marketing and advertising expense
consists of magazines, direct mail, e-mail and on-line solicitations, including
all production and distribution, incurred in connection with promoting our
online store which amounted to $1.5 million or 41.4% of online store sales
during the current quarter. There was no comparable activity in the prior year
period.
General and administrative expenses. General and administrative expenses
consist primarily of the costs related to website hosting and maintenance,
management and support personnel, direct fees paid to The Right Start, Inc. for
accounting, payroll, and administrative support services under a management
services agreement, professional service fees and office lease expenses. General
and administrative expenses increased $0.87 million to $0.9 million this quarter
from $0.03 million in the prior year period. As a percentage of net sales,
general and administrative expenses increased to 21.7% in the second quarter of
this year from 2.5% in the comparable prior year period. Current quarter general
and administrative expenses included direct fees paid to The Right Start, Inc.
of $84,000.
Depreciation Expense. Depreciation expense increased $255,000 from $18,000
in the prior period to $273,000 in the current quarter. This increase was due
primarily to web site hardware and software additions that are being depreciated
over a three year period.
Non-cash compensation expense. Non-cash compensation expense relates to
stock options granted at exercise prices below the deemed fair value of
RightStart.com common stock. A non-cash compensation expense of $42,000 was
recorded in the second quarter of the current year. No non-cash compensation
expense was reported in the prior year period.
Page 15
<PAGE>
Provision for income taxes. The tax provision has been computed as if
RightStart.com had operated as a separate entity for all periods presented. A
tax benefit has not been recorded for any period presented due to uncertainties
surrounding the timing of realizing any benefits in future years.
Minority interest in consolidated subsidiary. Minority interest represents
minority shareholders' portion of RightStart.com losses for the thirteen weeks
ended July 29, 2000. The allocation of the loss to the minority interest in the
current quarter was $1.0 million as compared to $17,000 in the prior year
period.
Write off of initial public offering costs. On January 18, 2000,
RightStart.com filed a registration statement with the Securities and Exchange
Commission with respect to an offering of its common stock. Costs of $0.8
million, incurred in connection with the offering, including audit fees, legal
fees, various filing fees and printer costs, were deferred pending the
completion of the offering. On May 19, 2000, RightStart.com filed to withdraw
this registration statement because of adverse market conditions, and expensed
the deferred costs in the first quarter. In addition, the Company expensed $0.1
million of related legal costs in the current quarter. The following table sets
forth the unaudited statement of operations data for the periods indicated for
RightStart.com:
<TABLE>
<CAPTION>
Twenty-six weeks ended
---------------------------------------------
July 29,2000 July 31, 1999
--------------------- --------------------
<S> <C> <C> <C> <C>
Catalog net sales $ 901,000 10.1% $ 2,555,000 77.6%
Online store sales before promotional discounts 8,648,000 97.2% 265,000 8.0%
Shipping and handling revenues 332,000 3.7% 512,000 15.5%
------------ -----------
Total sales 9,881,000 111.0% 3,332,000 101.2%
Promotional discounts related to online store sales 982,000 11.0% 39,000 1.2%
------------ -----------
Net sales 8,899,000 100.0% 3,293,000 100.0%
Cost of goods sold - merchandise 5,063,000 56.9% 1,239,000 37.6%
Cost of goods sold - shipping and handling 2,096,000 23.6% 573,000 17.4%
Operating expense 2,399,000 27.0% 1,475,000 44.8%
Non-cash compensation 84,000 0.9% -
Marketing and advertising expenses 5,416,000 60.9% -
General and administrative expenses 1,763,000 19.8% 153,000 4.6%
Depreciation and amortization expense 505,000 5.7% 23,000 0.7%
------------ -----------
Operating loss (8,427,000) -94.7% (170,000) -5.2%
Minority Interest in consolidated subsidiary loss 3,512,000 39.5% 17,000 0.5%
Interest expense 208,000 2.3% -
Write off of initial public offering costs 874,000 9.8% -
------------ -----------
Loss before provision for income taxes (5,997,000) -67.4% (153,000) -4.6%
Provision for income taxes - -
------------ -----------
Net loss $ (5,997,000) -67.4% $ (153,000) -4.6%
============ ===========
</TABLE>
Twenty-six weeks ended July 29, 2000 compared with July 31, 1999
Sales. Total sales consist of gross product sales to customers and are net
of product returns; net sales are net of promotional discounts. Net sales
increased by $5.6 million, or 170.2%, to $8.9 million for the twenty-six weeks
ended July 29, 2000 from $3.3 million for the comparable period of the prior
year. This growth in net sales was attributable to an increase in online sales,
partially offset by a decline in catalog sales. Online store net sales were $7.7
million in the current period, compared to $0.2 million in the same period of
the prior year. Online store net sales are net of promotional discounts of $1.0
million for the current period compared to $39,000 in the same period of the
prior year. Catalog net sales decreased $1.7 million, or 64.7%, to $0.9 million
for current period from $2.6 million in the comparable period of the prior year.
The majority of the decline in catalog net sales was attributable to a reduction
in catalog circulation and a shift of a portion of the Direct-to-customer
business from the catalog to the online stores.
Shipping and handling revenues. Catalog customers have traditionally been
charged a fee to cover the cost of shipping and handling. The Company has
historically offset the fees and expenses and reported the net number in
operating expense. When we entered the online business, we decided to offer free
shipping and handling for standard ground shipping. Customers desiring upgraded
shipping were charged a fee approximating the additional cost. These revenues
along with shipping and handling expenses were reported as operating expense in
the same manner in which the Company handled the catalog. New accounting
guidance (issued May 18, 2000) requires that shipping and handling revenues and
expenses be accounted for as revenues and cost of sales. In May 2000 we modified
our free shipping policy so that free shipping applies only to orders greater
Page 16
<PAGE>
than $30. Shipping and handling revenues were $.3 million in the current quarter
versus $.5 in the prior year period. The decrease is due to lower catalog sales
offset by fees received from online sales under $30.
Cost of goods sold - Merchandise. Cost of goods sold consists primarily of
the cost of products sold, inbound freight costs and inventory shrinkage costs.
Merchandise gross margin decreased to 40.9% in the current period from 55.4% in
the comparable period of the prior year. Merchandise gross margin on catalog net
sales decreased to 53.8% this period from 57.1% in the prior year period, due to
a less favorable product mix. Merchandise gross margin on online store net sales
increased to 39.4% this period, compared to 36.7% in the prior year period due
to lower promotional discounts in the current period. Merchandise gross margin
on online store net sales was lower than merchandise gross margin on catalog net
sales in the current period due to the promotional discounting offered to
customers of the online stores as well as a different mix of products offered in
the online stores.
Cost of goods sold- Shipping and handling. Shipping and handling expenses
include amounts paid to our third party distribution service, returns processing
costs, shipping supplies and actual shipping charges. These expenses for the
current period were $2.1 million or 23.6% of net sales as compared to $0.6
million or 17.4% of net sales in the prior year period. The increase in shipping
and handling expenses is directly attributable to the increase in sales from the
new online stores and the mix of products offered.
Operating expenses. Operating expenses consist primarily of credit card
processing fees, expenses related to catalog production and distribution,
customer service, as well as related personnel costs. Operating expenses
increased by $0.9 million to $2.4 million or 27.0% of net sales in the current
period from $1.5 million or 44.8% of net sales in the prior year period.
Operating expenses related to the online store increased $1.4 million to $1.6
million this period from $0.2 million in the prior year period, due to increased
online sales. Operating expenses related to the catalog decreased $0.3 million
to $0.8 million this period from $1.1 million in the prior year period, due to
reduced circulation and sales.
Marketing and advertising expense. Marketing and advertising expense
consists of radio, television, magazines, newspaper, direct mail, e-mail and
on-line solicitations, including all production and distribution, incurred in
connection with promoting our online store which amounted to $5.4 million or
70.7% of online store sales during the current period. There was no comparable
activity in the prior year period.
General and administrative expenses. General and administrative expenses
consist primarily of the costs related to website hosting and maintenance,
management and support personnel, direct fees paid to The Right Start, Inc. for
accounting, payroll, and administrative support services under a management
services agreement, professional service fees and office lease expenses. General
and administrative expenses increased $1.6 million to $1.8 million in the
current period from $0.2 million in the prior year period. As a percentage of
net sales, general and administrative expenses increased to 19.8% in the current
period from 4.6% in the comparable prior year period. Current period general and
administrative expenses included direct fees paid to The Right Start, Inc. of
$0.2 million.
Depreciation Expense. Depreciation expense increased $482,000 from $23,000
in the prior period to $505,000 in the current period. This increase was due
primarily to web site hardware and software additions that are being depreciated
over a three year period.
Non-cash compensation expense. Non-cash compensation expense relates to
stock options granted at exercise prices below the deemed fair value of
RightStart.com common stock. A non-cash compensation expense of $84,000 was
recorded in the current period. No non-cash compensation expense was reported in
the prior year period.
Provision for income taxes. The tax provision has been computed as if
RightStart.com had operated as a separate entity for all periods presented. As a
result of net losses, no benefit for income taxes was recorded for either fiscal
period. A tax benefit has not been recorded for any period presented due to
uncertainties surrounding the timing of realizing any benefits in future years.
Minority interest in consolidated subsidiary. Minority interest represents
minority shareholders' portion of RightStart.com losses for the twenty-six weeks
ended July 29, 2000. The allocation of the loss to the minority interest in the
current period was $3.5 million as compared to $17,000 in the prior year period.
Write off of initial public offering costs. On January 18, 2000,
RightStart.com filed a registration statement with the Securities and Exchange
Commission with respect to an offering of its common stock. Costs of $0.8
million, incurred in connection with the offering, including audit fees, legal
fees, various filing fees and printer costs, were deferred pending the
completion of the offering. On May 19, 2000, RightStart.com filed to withdraw
this registration statement because of adverse market conditions. In accordance
with the current accounting guidance, the Company expensed the $0.8 million of
deferred costs and an additional $0.1 million of related legal costs in the
current twenty-six week period.
Page 17
<PAGE>
Net deferred tax asset. The Company has a net deferred tax asset of $1.4
million. Management expects that the Company will generate $4.0 million of
taxable income within the next 15 years to utilize a minimum of $1.4 million of
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 certain of the Company's operations or some of
its investment in RightStart.com. Based on the expected 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 portion of the net operating loss carryforwards not reserved
against.
Liquidity and Capital Resources
The Company's 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 half of Fiscal 2000, we used $6.6 million in cash in our
operating activities compared to the $20,000 in cash used in our operating
activities in the first half of Fiscal 1999. In the current period, we used $1.9
million in cash in investing activities for fixed asset additions compared to
$1.6 million for the same period last year. The primary source of funds for the
use of cash in financing activities in the first half of Fiscal 2000 were
borrowings under the Parent's $13 million credit facility (the "Credit
Facility"), the sale by RightStart.com to affiliated investors of its secured
bridge notes and warrants which netted proceeds of $3.9 million and the
remaining proceeds of the sale by RightStart.com to third party investors of its
preferred stock in Fiscal 1999. On September 1, 2000, the Company issued $2
million of senior subordinated convertible pay-in kind notes due 2005 and
received proceeds of $2 million that was used to reduce amounts outstanding on
the revolving line of the Credit Facility.
As of July 29, 2000, amounts outstanding under the Credit Facility consist
of a term loan of $2,700,000 and $4,343,000 under its revolving credit line,
both of which become due and payable in February 2001. The Company plans to
renew or replace the Credit Facility prior to such date.
At July 29, 2000, the Company had consolidated negative working capital of
$9,017,000. The Subsidiary had negative working capital of $5,868,000 and Right
Start, Inc. had negative working capital, on an unconsolidated basis, of
$3,149,000. The Subsidiary has $3,935,000 of Bridge Notes payable to affiliates
that are due on October 18, 2000. The Subsidiary will need to extend the due
date of the Bridge Notes or raise additional proceeds to repay the notes by the
current due date. In the event the Subsidiary is unable to do so, it would face
a severe liquidity crisis. In addition, the note holders have the ability to
foreclose on the assets of the Subsidiary and, as discussed below, require the
Subsidiary to issue additional warrants to certain of the note holders.
Retail Store Operations
During the first half of Fiscal 2000, our primary sources of liquidity for
Retail Store Operations were 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 July 29,
2000 borrowings of $4.3 million were outstanding under the Revolving Line and
$2.7 million was outstanding under the Capex Line; $900,000 was available at
July 29, 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 July 29, 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 in July 2000, requires the Company,
excluding any contribution from RightStart.com, 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 and to exclude the
operating results of RightStart.com) ("Net Worth") of $5,900,000 as of July 31,
2000, $5,700,000 as of August 31, 2000 and returning to $10,800,000 as of the
end of September 2000 and for the balance of the term. The September increase in
the required net worth was based upon the assumption that the Company would
raise approximately $6 million of additional equity in September. It now appears
that the additional capital will take the form of both convertible subordinated
debt as well as equity. It is the intention of the Company to seek to amend this
covenant once its plans are finalized. At July 29, 2000, Net Worth as defined in
the Credit Agreement was $5,940,000. The Credit Facility also requires that the
Company's earnings before interest, taxes, depreciation, amortization and
non-recurring charges ("EBITDA") be no less than $0 for the twelve months ended
July 29, 2000 and $500,000 for the twelve months ending October 31, 2000 and
February 3, 2001. For the twelve months ended July 29, 2000, EBITDA was $94,000.
In addition, the Company's capital expenditures are limited to $1,750,000 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 can
attract additional capital to fund its operations and ongoing expansion and that
it will be able to meet its financial covenants or be able to amend such
covenants as appropriate. On September 1, 2000 the Company issued $2 million in
the aggregate principal amount of Senior Subordinated Convertible Pay-in Kind
Notes, due 2005.
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The Company's common stock is listed and traded on the Nasdaq National
Market. The Nasdaq has informed the Company that its consolidated net worth has
fallen below the minimum Nasdaq listing requirement of $4 million and
consequently will be de-listed. The Company has requested that it continue to be
listed and has been notified that its request will be considered at an oral
hearing on October 12, 2000. The primary cause of the diminished consolidated
net worth is attributable to losses sustained by the Company's majority -owned
subsidiary, RightStart.com Inc. The Company expects that a sale, merger or an
additional equity infusion involving RightStart.com could decrease the Company's
ownership in its subsidiary to less than 50%. A subsidiary that is less than
majority-owned would not be included in the consolidated results of its parent.
Additionally, the Company is in the process of raising additional capital to
fund its expansion plans. The new capital together with a deconsolidation is
expected to result in substantially more net worth than the Nasdaq
minimum-listing requirement. However, if the Company is not successful in its
appeal, it is expected that the Company will be de-listed which could adversely
affect the marketability of its common stock.
RightStart.com
During the first half of Fiscal 2000, RightStart.com's primary sources of
liquidity were from the issuance of bridge notes and warrants and the remaining
proceeds of the sale to third party investors of its preferred stock in Fiscal
1999. In April 2000, RightStart.com sold senior secured bridge notes in the
aggregate principal amount $2,275,000 (the "Bridge Notes") and warrants to
purchase 113,753 shares of its common stock at an exercise price of $6.70 to
affiliates. The Bridge Notes are secured by substantially all of the assets of
RightStart.com. A default on the Bridge Notes would permit such holders to
foreclose on the assets of RightStart.com and require RightStart.com, to the
extent it has not already done so, to issue to the holders of the notes,
warrants to purchase an aggregate of 8,740,220shares, or approximately 48.9% of
the outstanding common stock of RightStart.com, at an exercise price of $0.25
per share. In June 2000, RightStart.com sold to affiliates junior secured
convertible bridge notes ("Convertible Bridge Notes") in the aggregate principal
amount of approximately $1,660,000 that are convertible at any time into common
stock at $.25 per share. Both sets of notes are due and payable on October 18,
2000.
RightStart.com's ability to satisfy certain obligations, fund its
operations and grow its market share is dependant upon its ability to raise
additional capital. On January 18, 2000, RightStart.com filed a registration
statement with the Securities and Exchange Commission with respect to an
offering of its common stock. On May 19, 2000, RightStart.com filed to withdraw
this registration statement because of adverse market conditions. In June 2000,
RightStart.com hired the investment-banking firm of Morgan Stanley & Co.
Incorporated to assist in evaluating its financial alternatives. These
alternatives include, but are not limited to selling RightStart.com or merging
with another entity, completing a private equity transaction, or severely
reducing its operations and restructuring its obligations, including the Bridge
Notes and the Convertible Bridge Notes.
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 and catalog operations. Our products are
for the most part need-driven and the customer is often the end user of the
product. We do, however, experience increased sales during the Christmas holiday
season and expect that this seasonality may increase as RightStart.com's
business for children through age twelve increases and constitutes a greater
portion of our financial results.
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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 was amended by SFAS No. 137, which
defers the effective date of the SFAS No. 133 to 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 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 our debt obligations, the interest rates of which are linked to the prime
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.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Company filed no Reports on Form 8-K during the first 13 weeks of
Fiscal 2000.
The following exhibits of The Right Start, Inc. are included herein:
Exhibit Number
10.1 Tenth Amendment to Loan and Security Agreement and Waiver, dated as of July
30, 2000, between Heller Financial, Inc. and the Company.
10.2 Secured Convertible Bridge Note Purchase Agreement among RightStart.com and
the purchasers named therein as of June 22, 2000.
10.3 First Amendment to Warrants of RightStart.com dated as of July 27, 2000.
10.4 Securities Purchase Agreement between The Right Start, Inc. and the
purchasers named therein dated as of September 1, 2000 with respect to its
Senior Subordinated Convertible Pay-in-Kind Notes due 2005.
27 Financial Data Schedule.
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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: September 12, 2000 /s/ JERRY WELCH
---------------
Jerry Welch
Chief Executive Officer
Date: September 12, 2000 /s/ RAYMOND P. SPRINGER
-----------------------
Raymond P. Springer
Chief Financial Officer
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