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 April 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 _______________
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 April 29, 2000 - 5,614,175 shares.
<PAGE>
THE RIGHT START, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN WEEK PERIOD
ENDED April 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 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE> Page 2
THE RIGHT START, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
April 29, 2000 January 29, 2000
-------------- ----------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,386,000 $ 5,199,000
Accounts and other receivables 707,000 682,000
Merchandise inventories 11,157,000 9,694,000
Other current assets 1,957,000 1,849,000
-------------- ----------------
Total current assets 15,207,000 17,424,000
Noncurrent assets:
Property, fixtures and equipment, net 11,097,000 10,648,000
Deferred income taxes 1,400,000 1,400,000
Other noncurrent assets 468,000 1,255,000
-------------- ----------------
$ 28,172,000 $ 30,727,000
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,025,000 $ 9,566,000
Revolving line of credit 3,169,000 3,377,000
Term note payable 3,000,000
Secured bridge notes payable, net of
unamortized discount of $267,000 1,913,000
-------------- ----------------
Total current liabilities 20,107,000 12,943,000
Term note payable 3,000,000
Deferred rent 1,358,000 1,378,000
Minority interest in consolidated subsidiary 1,076,000 3,397,000
Commitments and contingencies
Mandatorily redeemable preferred stock Series A,
$3,000,000 redemption value 2,171,000 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
Common stock (25,000,000 shares authorized
at no par value; 5,614,175 and 5,417,666
issued and outstanding, respectively) 22,722,000 22,593,000
Paid in capital 16,013,000 15,471,000
Accumulated deficit (40,555,000) (35,868,000)
-------------- ----------------
Total shareholders' equity 3,460,000 7,921,000
-------------- ----------------
$ 28,172,000 $ 30,727,000
============== ================
See accompanying notes to consolidated financial statements
</TABLE>
Page 3
<PAGE>
<TABLE>
THE RIGHT START, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen Weeks Ended
--------------------------------------
April 29, 2000 May 1, 1999
------------------ ----------------
(unaudited) (unaudited)
<S> <C> <C>
Retail store sales $ 10,329,000 $ 9,035,000
Online sales before promotional discounts 4,733,000
Catalog sales 624,000 1,686,000
Shipping and handling revenues 188,000 351,000
------------------ ----------------
Total sales 15,874,000 11,072,000
Promotional discounts related to online sales 583,000
------------------ -------------
Net sales 15,291,000 11,072,000
Costs and expenses:
Cost of goods sold - merchandise 7,840,000 5,115,000
Cost of goods sold - shipping and handling 1,175,000 309,000
Operating expense 5,292,000 4,100,000
Non-cash compensation 52,000
Marketing and advertising expense 4,210,000 144,000
General and administrative expense 1,927,000 888,000
Pre-opening costs 156,000 62,000
Depreciation and amortization expense 772,000 349,000
------------------ ----------------
21,424,000 10,967,000
------------------ ----------------
Operating income (loss) (6,133,000) 105,000
Minority interest in consolidated subsidiary loss (2,479,000)
Write off of initial public offering costs 772,000
Interest expense, net 241,000 85,000
------------------ ----------------
Income (loss) before provision for income taxes (4,667,000) 20,000
Provision for income taxes 20,000 9,000
------------------ ----------------
Net income (loss) $ (4,687,000) $ 11,000
================== ================
Basic and diluted loss per share $ (0.86) $ (0.01)
================== ================
Basic and diluted weighted average number of shares
outstanding 5,542,856 5,051,820
================== ================
See accompanying notes to consolidated financial statements
</TABLE>
Page 4
<PAGE>
<TABLE>
THE RIGHT START, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirteen Weeks Ended
-----------------------------------------
April 29, 2000 May 1, 1999
----------------- -------------------
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (4,687,000) $ 11,000
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 772,000 349,000
Non-cash compensation expense 52,000
Non-cash advertising expense 27,000
Amortization of bridge note discount 19,000
Minority interest in consolidated subsidiary loss (2,479,000)
Changes in assets and liabilities affecting operations 1,623,000 193,000
----------------- -------------------
Net cash provided by (used in) operating activities (4,673,000) 553,000
----------------- -------------------
Net cash used in investing activities:
Additions to property, fixtures and equipment (1,241,000) (769,000)
----------------- -------------------
Cash flows from financing activities:
Net proceeds from (payments on) revolving line of credit (208,000) 94,000
Net payments on term note payable (250,000)
Net proceeds from issuance of secured bridge notes 2,180,000
Proceeds from common stock issued upon exercise of
stock options 129,000
----------------- -------------------
Net cash provided by (used in) financing activities 2,101,000 (156,000)
----------------- -------------------
Net decrease in cash and cash equivalents (3,813,000) (372,000)
Cash at beginning of period 5,199,000 626,000
----------------- -------------------
Cash and cash equivalents at end of period $ 1,386,000 $ 254,000
================= ===================
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 April 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 April 29, 2000 and for the thirteen week period 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 week period ended April 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 $2,180,000 (the "Bridge Notes"), and warrants
to purchase 109,000 shares of its common stock at an exercise price of $6.70
(the "Bridge Warrants") to provide funding until the Subsidiary can obtain
additional equity financing. 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 estimated 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 8,720,000 shares, or approximately 48.9% of the
outstanding common stock of the Subsidiary, at an exercise price of $0.25 per
share.
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. In accordance with the current accounting guidance, the Company has
expensed all deferred costs in the current period.
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.
Thirteen weeks ended
--------------------
April 29, 2000 May 1, 1999
-------------- -----------
Net income (loss) $(4,687,000) $ 11,000
Less: Preferred stock accretion (83,000) (70,000)
------------- -----------
Basic and diluted loss
applicable to common shareholders $(4,770,000) $ (59,000)
=========== ===========
Weighted average shares 5,542,856 5,051,820
Loss per share, basic and diluted $(0.86) $(0.01)
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
979,907 and 701,161 shares of common stock at April 29, 2000 and May 1, 1999,
respectively; Series B preferred stock convertible into 549,995 and 1,000,000
shares of common stock at April 29, 2000 and May 1, 1999, respectively; and
Series C preferred stock convertible into 1,866,650 and 1,925,000 shares of
common stock at April 29, 2000 and May 1, 1999, respectively.
NOTE 5: Supplemental Disclosure of Cash Flow Information
Interest paid amounted to $156,000 and $103,000 for the thirteen weeks
ended April 29, 2000 and May 1, 1999, respectively. Cash paid for income taxes
was $8,000 and $11,000 for the thirteen weeks ended April 29, 2000 and May 1,
1999, respectively.
Page 7
<PAGE>
Changes in assets and liabilities which increased (decreased) cash are as
follows:
Thirteen weeks ended
--------------------
April 29, 2000 May 1, 1999
---------- --------
Accounts and other receivables $ (25,000) $ (56,000)
Merchandise inventories (1,463,000) (243,000)
Other current assets (108,000) (309,000)
Other noncurrent assets 760,000 (24,000)
Accounts payable and accrued expenses 2,479,000 834,000
Deferred rent (20,000) (9,000)
---------- --------
$ 1,623,000 $ 193,000
============ ==========
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 preteen.
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 and a fee on services provided
by the Retail segment on behalf of the Direct-to-customers segment.
The Company's reportable segments have operations that offer the same or
similar products but have a different method of delivery to their customers.
<TABLE>
Segment information for the thirteen weeks ended April 29, 2000 is as follows:
Total
Online Catalog Direct-to-Customers Retail Total
------ ------- ------------------- ------ -----
<S> <C> <C> <C> <C> <C>
Net sales $4,198,000 $764,000 $4,962,000 $10,329,000 $15,291,000
Interest expense 241,000 241,000
Depreciation 232,000 232,000 540,000 772,000
Non-cash compensation 41,000 41,000 11,000 52,000
Pre-opening costs 156,000 156,000
Minority Interest 2,479,000 2,479,000
Pre-tax loss (3,674,000) (75,000) (3,749,000) (918,000) (4,667,000)
Total assets 5,816,000 252,000 6,068,000 22,104,000 28,172,000
Fixed asset additions 594,000 594,000 647,000 1,241,000
</TABLE>
Page 8
<PAGE>
<TABLE>
Segment information for the thirteen weeks ended May 1, 1999 is as follows:
Catalog Retail Total
------- ------ -----
<S> <C> <C> <C>
Net sales $2,037,000 $9,035,000 $11,072,000
Interest expense 85,000 85,000
Depreciation 5,000 344,000 349,000
Pre-opening costs 62,000 62,000
Pre-tax income (loss) 179,000 (159,000) 20,000
Total assets 252,000 18,110,000 18,362,000
Fixed asset additions 769,000 769,000
</TABLE>
Page 9
<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, 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, the
dependence of RightStart.com on its technology services provider, consumer
acceptance of online retailing and RightStart.com's online stores and the lack
of operating experience at RightStart.com, could cause actual results to differ
materially from those expressed in our forward-looking statements. 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 April 29, 2000, The Right Start, Inc. operated 53 retail stores in 15 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.
Page 10
<PAGE>
<TABLE>
The following table sets forth the unaudited statement of operations data
for Retail Store Operations:
Thirteen weeks ended
-----------------------------------------
April 29, 2000 May 1, 1999
-------------- -----------
<S> <C> <C> <C> <C>
Retail net sales $10,329,000 100.0% $9,035,000 100.0%
Cost of goods sold 5,061,000 49.0% 4,401,000 48.7%
Operating expense 4,034,000 39.1% 3,392,000 37.5%
Non-cash compensation 11,000 0.1%
Marketing and advertising expenses 249,000 2.4% 144,000 1.6%
General and administrative expenses 955,000 9.2% 766,000 8.5%
Pre-opening costs 156,000 1.5% 62,000 0.7%
Depreciation and amortization expense 540,000 5.2% 344,000 3.8%
----------- ----------
Operating loss (677,000) -6.6% (74,000) -0.8%
Interest expense 241,000 2.3% 85,000 0.9%
----------- ----------
Loss before provision for income taxes (918,000) -8.9% (159,000) -1.8%
Provision for income taxes 20,000 0.2% 9,000 0.1%
----------- ----------
Net loss ($938,000) -9.1% ($168,000) -1.9%
=========== ==========
</TABLE>
Thirteen weeks ended April 29, 2000 compared with May 1, 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 14.3%, from $9.0
million for the thirteen weeks ended May 1, 1999 to $10.3 million for the
thirteen weeks ended April 29, 2000. The net sales growth reflects an increase
in the store base from 41 stores to 53 stores, offset somewhat by a 1.7% decline
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 remained relatively flat at 51.0% and 51.3% for the current period and
prior year period, respectively.
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 $4.0 million
for the current period as compared to $3.4 million for the same period last
year. The $.6 million or 18.9% increase primarily reflects the addition of
twelve 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 $0.1 million for the thirteen-week period
ended May 1, 1999 to $0.2 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 24.7 % to $1.0 million for the current period from $0.8 million for
the comparable period last year. The increase is due primarily to an increase in
staffing and related costs.
Depreciation and amortization. Depreciation and amortization expense
increased $0.2 million from $0.3 million in the prior period to $0.5 million in
the current period. The increase was due to the additional assets placed in
service related to new store openings.
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 $94,000 from $62,000 in the thirteen
weeks ended May 1, 1999 to $156,000 for the current year. The increase was due
to the opening costs related to eleven stores reflected in the current period
versus six stores in the prior period.
Page 11
<PAGE>
Interest expense. Interest expense increased from $85,000 in the thirteen
weeks ended May 1, 1999 to $241,000 for the same period this year. The increase
reflects an increase in our outstanding borrowings for the current period over
the prior period.
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
quarter of the current fiscal year is comprised of 13 weeks of both catalog
operations and online store operations and the comparable period of the prior
year is comprised solely of 13 weeks of catalog operations and no online store
operations.
<TABLE>
The following table sets forth the unaudited statement of operations data
for the periods indicated for RightStart.com:
Thirteen weeks ended
--------------------
April 29, 2000 May 1, 1999
-------------- -----------
<S> <C> <C> <C> <C>
Catalog net sales $624,000 12.6% $1,686,000 82.8%
Online store sales before promotional discounts 4,733,000 95.4% 0.0%
Shipping and handling revenues 188,000 3.8% 351,000 17.2%
----------- --------
Total Sales 5,545,000 111.7% 2,037,000 100.0%
Promotional discounts related to online store sales 583,000 11.7% 0.0%
----------- --------
Net Sales 4,962,000 100.0% 2,037,000 100.0%
Cost of goods sold - merchandise 2,779,000 56.0% 714,000 35.1%
Cost of goods sold - shipping and handling 1,175,000 23.7% 309,000 15.2%
Operating expense 1,258,000 25.4% 708,000 34.8%
Non-cash compensation 41,000 0.8% 0.0%
Marketing and advertising expenses 3,961,000 79.8% 0.0%
General and administrative expenses 972,000 19.6% 122,000 6.0%
Depreciation and amortization expense 232,000 4.7% 5,000 0.2%
----------- --------
Operating income (loss) (5,456,000) -110.0% 179,000 8.8%
Minority Interest in consolidated subsidiary loss 2,479,000 50.0% 0.0%
Write off of initial public offering costs 772,000 15.6%
Interest expense 0.0% 0.0%
----------- --------
Income (loss) before provision for income taxes (3,749,000) -75.6% 179,000 8.8%
Provision for income taxes 0 0.0% 0.0%
----------- --------
Net income (loss) ($3,749,000) -75.6% $179,000 8.8%
=========== ========
</TABLE>
Sales. Gross sales consist of product sales to customers and are net of
product returns; net sales are net of promotional discounts. Net sales increased
by $3.1 million, or 183.0%, to $4.8 million for the thirteen weeks ended April
29, 2000 from $1.7 million for the comparable period of the prior year. This
growth in net sales was attributable to the launch of the online stores on June
29, 1999, partially offset by a decline in catalog sales. Online store net sales
were $4.2 million in the first quarter of the current year, compared to no sales
Page 12
<PAGE>
in the same quarter of the prior year. Online store net sales are net of
promotional discounts of $0.6 million for the current quarter. Catalog net sales
decreased $1.1 million, or 63.0%, to $0.6 million for the first quarter of this
year from $1.7 million in the comparable period of the prior year. The majority
of the decline in catalog net sales was attributable to a planned 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. Approximately 5% of
online customers paid for upgraded shipping during the period. In May, 2000 we
modified our free shipping policy so that free shipping applies only to orders
greater than $30. Accordingly, we expect future shipping and handling revenues
to increase somewhat from current levels.
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 41.8% this year from 57.7% in the prior
year. Merchandise gross margin on catalog net sales decreased to 54.6% this year
from 57.7% last year, due to a less favorable product mix. Merchandise gross
margin on online store net sales was 39.9% in the first quarter of this 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 introductory
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
first quarter of the current year were $1.2 million or 23.7% of sales as
compared to $0.3 million or 15.2% of sales last 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 $0.6 million to $1.3 million or 25.4% in the first quarter of this
year from $0.7 million or 34.8% in the same period of last year. Operating
expenses related to the online store were $1.0 million in the first quarter of
this year. Operating expenses related to the catalog decreased $0.4 million 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 $4.0 million or
83.0% of online store sales during the current quarter. There was no comparable
activity in the prior year period.
General and administration expenses. General and administration expenses
consist primarily of the costs related to website hosting and maintenance,
management and support personnel, 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 administration expenses increased $0.9 million to $1.0 million this year
from $0.1 million in the prior year period. As a percentage of net sales,
general and administration expenses increased to 20.4% in the first quarter of
this year from 7.2% in the comparable prior year period. Current quarter general
and administration expenses included direct fees paid to The Right Start, Inc.
of $0.1 million.
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Depreciation Expense. Depreciation expense increased $227,000 from $5,000
in the prior period to $232,000 in the current quarter. This increase was due
primarily to web site hardware and software additions which 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 $41,000 was
recorded in the first quarter of the current year. 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 thirteen weeks
ended April 29, 2000. The allocation of the loss to the minority interest in the
current quarter was $2.5 million.
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 has expensed all deferred
costs in the current period.
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.
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.
Liquidity and Capital Resources
In the first quarter of Fiscal 2000, we used $4.7 million in cash in our
operating activities compared to the $0.6 million in cash provided by our
operating activities in the first quarter of Fiscal 1999. In the first quarter
of Fiscal 2000, we used $1.2 million in cash in investing activities for fixed
asset additions compared to $0.8 million in the first quarter of Fiscal 1999.
The primary source of funds for the use of cash in the first quarter 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
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bridge notes and warrants which netted proceeds of $2.2 million and the
remaining proceeds of the sale by RightStart.com to third party investors of its
preferred stock in Fiscal 1999.
Retail Store Operations
-----------------------
During the first quarter 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"). Availability under the Revolving Line is subject to a
defined borrowing base. As of April 29, 2000 borrowings of $3.2 million were
outstanding under the Revolving Line and $3.0 million was outstanding under the
Capex Line; $5.5 million was available at April 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 April 29, 2000, the bank's prime rate of
interest was 9.0%. 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 plan to replace the Credit Facility by January 2001.
The Credit Facility, as amended in June 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 $6,500,000 through the end
of July 2000 and returning to $8,000,000 as of the end of August 2000 and for
the balance of the term. At April 29, 2000, Net Worth was $7,214,000. The Credit
Facility also requires that the Company's earnings before interest, taxes,
depreciation, amortization and non-recurring charges ("EBITDA") exceed $250,000
for the twelve months ending April 30, 2000 and $500,000 for the twelve months
ending July 31, 2000, October 31, 2000 and January 31, 2001. For the twelve
months ended April 29, 2000, EBITDA was $300,000. In addition, the Company's
capital expenditures are limited to $1,750,000 in Fiscal 2000. The Company is
required to pay $100,000 on the Capex Line per month beginning May 1, 2000.
RightStart.com
--------------
During the first quarter of Fiscal 2000, RightStart.com's primary sources
of liquidity were from the issuance of its secured bridge notes and warrants and
the remaining proceeds of the sale to third party investors of its preferred
stock in Fiscal 1999. The conversion of the preferred stock to common stock and
the purchase of website development and maintenance services for RightStart.com
from its technology services provider through the exchange of common stock for
these services has reduced the Parent's ownership of RightStart.com to
approximately 60% of its outstanding common stock. In April 2000, RightStart.com
sold secured bridge notes in the aggregate principal amount $2,180,000 (the
"Bridge Notes") and warrants to purchase 109,000 shares of its common stock at
an exercise price of $6.70 to affiliates, to provide funding until
RightStart.com can obtain additional equity financing. 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
8,720,000 shares, or approximately 48.9% of the outstanding common stock of
RightStart.com, at an exercise price of $0.25 per share. RightStart.com's
ability to 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.
RightStart.com is currently evaluating its financial alternatives. These
alternatives include, but are not limited to, completing a private equity
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transaction, selling RightStart.com or merging with another internet
participant, or severely reducing its operations until market conditions
improve. Additional bridge notes may be required in order to affect some or all
of these alternatives. The Company believes that such bridge note financing is
achievable. In the event that none of the alternatives can be completed, website
operations could have to be suspended.
RightStart.com entered into a term sheet in November 1999 with Oxygen
Media, LLC. The term sheet contemplates that over the three-year term of the
proposed agreement RightStart.com would provide consideration approximating
$13.7 million, including in-kind consideration provided by us.
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 forms a greater portion
of our financial results.
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
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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
------
4.1 Warrant dated April 18, 2000 issued in connection with Secured Bridge Note
issued to Fred Kayne. (1)
4.2 Secured Bridge Note dated April 18, 2000 issued to Fred Kayne. (2)
10.1 Eighth Amendment to Loan and Security Agreement and Waiver,
dated as of April 28, 2000, between Heller Financial, Inc. and the
Company.
10.2 Ninth Amendment to Loan and Security Agreement, dated as of June 9, 2000,
between Heller Financial, Inc. and the Company.
10.3 Secured Bridge Note and Warrant Purchase Agreement dated April 18, 2000 by
and among the Company, Fred Kayne, Richard Kayne and Palomar
Ventures I, L.P.
10.4 First Amendment to Secured Bridge Note and Warrant Purchase Agreement and
Security Agreement dated June 1, 2000 between the Company and Guidance
Solutions, Inc.
10.5 Security Agreement dated April 18, 2000 by and among the Company, Fred
Kayne, Richard Kayne and Palomar Ventures I, L.P.
27 Financial Data Schedule.
----------
(1) Substantially identical warrants were issued to Richard Kayne (for
50,000 shares), Palomar Ventures I, L.P. (for 9,000 shares) and Guidance
Solutions (for 4,753 shares on June 1, 2000).
(2) Substantially identical Bridge Notes were issued to Richard Kayne
($1,000,000), Palomar Ventures I, L.P. ($180,000) and Guidance
Solutions, Inc. ($95,055 on June 1,2000).
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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: June 12, 2000 /s/ JERRY WELCH
------------- ---------------
Jerry Welch
Chief Executive
Officer
Date: June 12, 2000 /s/ GINA M.ENGELHARD
------------- ---------------------
Gina M. Engelhard
Chief Financial Officer
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