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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one) FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee required)
For the fiscal year ended June 1, 1996
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the transition period from _______ to _______
Commission file no. 0-19536
THE RIGHT START, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3971414
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5334 Sterling Center Drive, Westlake Village, California 91361
-------------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(818) 707-7100
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of August 26, 1996, approximately 2,358,544 shares of the Registrant's Common
Stock held by non-affiliates were outstanding and the aggregate market value of
such shares was approximately $10,908,266.
As of August 26, 1996 there were outstanding 7,949,306 shares of Common Stock,
no par value, with no treasury stock.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on November 12, 1996 (the "1996 Proxy Statement") are
incorporated into Part III.
Total number of pages in this report: 31
----
(Exhibit index located on page 13 )
----
PART I
ITEM 1. BUSINESS
- ------- --------
GENERAL
- -------
The Right Start, Inc. ("Right Start" or "the Company") is a leading
merchant offering unique, high-quality products for infants and young children.
The Company markets its products through 24 retail stores, primarily located in
major regional malls across the nation, and The Right Start Catalog. The
Company is a market leader offering approximately 500 items targeting children
up to age four in such product categories as Baby on the Go, Nursery, Bath Time,
Kitchen and Health and Safety. The products offered are primarily the same for
both catalog and retail, with a number of items available as either "retail-
only" or "catalog-only."
HISTORY
- -------
The Company was formed in 1985 to capitalize upon growing trends
towards the use of mail order catalogs and the demand for high quality infants'
and children's goods. Until formation of the Company, new parents' alternatives
were low-service mass merchant stores or sparsely-stocked, high-priced infant
and children specialty stores. To counter this, The Right Start carefully
screened infant and toddler products in order to identify those considered to be
the most unique, safest, most durable, best designed and best valued items.
The Right Start then grew its operations beyond The Right Start
Catalog and into retail sales through The Right Start stores. Based on the
strong results of the retail stores coupled with the extensive challenges facing
the catalog industry, the Company's strategy evolved to include a reduction in
The Right Start Catalog circulation and plans for a major retail expansion.
Management has always made customer service the Company's highest
priority. By offering sales associates with extensive product knowledge,
carefully selected and tested products, fast shipment that is generally less
than 48 hours from receipt of catalog orders, and a 24 hour a day/365 day a year
ordering capability, The Right Start is able to differentiate itself from many
other infant and children merchants.
RETAIL OPERATIONS AND EXPANSION
- -------------------------------
The Company operates 24 retail stores. Twenty-two of these stores are
mall stores located in major regional malls throughout the United States; two
are non-mall locations in California. The Company has plans for continued
expansion of its retail operations with
2
18 stores planned for fiscal 1997.
New stores will be located primarily in high-traffic major regional
malls across the United States. Potential sites are evaluated based on mall
strength, relative strength of certain comparable specialty store operators in
the same mall, the extent of Right Start Catalog customer/brand development,
available census, demographic and psychographic data, as well as lease
economics. In many areas, store sites which otherwise meet the Company's
criteria may be difficult to lease on acceptable terms.
The Company's ability to open and operate new stores profitably is
dependent on the identification and availability of suitable locations, the
negotiation of acceptable lease terms, the Company's financial resources, the
successful hiring and training of store managers and the Company's ability to
control the operational aspects of growth. There can be no assurance that the
Company will be able to open and operate new stores on a timely and profitable
basis or that same store sales will increase in the future.
THE RIGHT START CATALOG
- -----------------------
The Right Start Catalog offers high quality infants' and children's
products through mail order catalogs targeted primarily to middle and upper
income new parents and the grandparents of their children. Several attractive
glossy issues are mailed each year, targeting the Company's principal customers,
educated, first-time parents from 23-40 years old, with average annual household
income in excess of $60,000. The Right Start Catalog has minimized the marketing
of children's clothing, furniture and bedding items, all of which require
different merchandising distribution and marketing strategies.
MERCHANDISING
- --------------
The Right Start's basic business strategy/concept is to provide
exemplary service to customers as a means of building strong loyalty,
3
to offer unique, hard-to-find items, and to increase market share and customer
awareness through new store openings and continuous new product introductions.
To accomplish its strategy, the Company offers a selection of brand
name and private label infant, toddler and preschool products through
strategically selected store locations and highly targeted catalog mailings.
Items are selected based on their quality, durability, uniqueness, historic
product demand, seasonality, appeal to target markets and value. The addition
of new products is key to keeping the stores and catalogs fresh and interesting
to the customer base.
ADVERTISING AND MARKETING
- -------------------------
The Right Start Catalog serves as the primary marketing tool for The
Right Start stores. Catalogs are distributed in existing and future retail
store markets through both direct mail and focused distribution to target groups
(e.g. day care centers, hospitals, doctor's offices and other children's
stores). In addition, the stores' point of sale system also provides a strong
marketing database. Customers' names and addresses are captured and are then
used for promotional mailings and other follow up.
The Company reaches its catalog customers through extensive mailings
of The Right Start Catalog to qualified segments of the Company's own customer
list and selected rented lists. In order to achieve this efficiently the
customer list is segmented by frequency, recency and size of purchase. Over the
past two years, the Company has experienced a decline in the Right Start Catalog
response rate. While the Company has made extensive circulation cuts to exclude
less profitable mailing lists, there can be no assurance that profitability of
the overall catalog business will increase or that the Company will not continue
to experience a declining response rate.
PURCHASING
- ----------
The Right Start purchases products from over 200 vendors. No single
vendor represents more than 3% of overall sales. The Company directly imports
approximately 5% of the products offered and this source is expected to grow
over time as the Company expands its private label and import programs. Imported
items have historically had higher gross profit margins and tend to be more
unique.
SEASONALITY
- -----------
The Company's business is not significantly impacted by seasonal
fluctuations, as compared to many other retail and catalog operations. The Right
Start customer often is the end user of the product so purchases are spread
throughout the year, rather than being concentrated between October and
December, as are traditional gift purchases.
4
EMPLOYEES
- ---------
As of August 20, 1996 the Company employed 397 employees,
approximately 41 percent of whom were part-time. During the retail holiday
season, additional temporary employees are hired. The Company has no collective
bargaining agreements nor any unions and considers its employee relations to be
good.
COMPETITION
- -----------
The specialty catalog and retail infants' and children's markets are
highly competitive. The Company's specialty mail order catalogs, retail stores
and products compete with other retail stores, including specialty stores, mass
merchants, discount chains, and department stores, and with a growing number of
other mail order catalogs. Some of the Company's competitors have substantially
greater financial, distribution and marketing resources than the Company. The
substantial sales growth in the mail order catalog industry has encouraged the
entry of many new competitors and continues to foster an increase in competition
from established companies. The catalog and retail businesses could become even
more competitive in the future.
The primary competition for The Right Start stores comes from "big
box" concept children's stores which are becoming more and more prevalent. This
type of operation offers customers an extensive variety of products (including
apparel, furniture, bedding, etc.) for children and is typically located in up
to 50,000 square feet, generally in lower real estate cost locations. In
addition, certain stores face competition from local specialty baby stores.
There are a variety of general and specialty catalogs selling infants'
and children's items in competition with The Right Start Catalog. The Company
considers its primary catalog competition, however, to be "One Step Ahead,"
"Kids Club" by Perfectly Safe, and "Sensational Beginnings." These catalogs
emerged several years after The Right Start Catalog and directly compete by
offering a very similar product line at comparable price points to the same
target market.
The Company's ability to continue to introduce innovative products to
customers, to locate its stores in strategic, high-traffic locations, and to
provide distinctive customer service is key to its ability to maintain or grow
its market share.
TRADEMARKS
- ----------
The Company has registered and continues to register, when deemed
appropriate, certain U.S. trademarks and trade names, including "The Right
Start" and "The Right Start Catalog". The Company considers these to be readily
identifiable with, and valuable to, its business.
RECENT DEVELOPMENTS
- -------------------
In July 1996, the Company sold its phone center operations to a
telemarketing services provider for approximately $500,000, $250,000 of which
was in cash and the remainder of which was in a two-year note secured by the
assets in the phone center. There was no gain or loss on the sale. In
conjunction with the sale, the Company entered into a telemarketing services
agreement for RSC.
In April 1996, the Company completed a rights offering which generated
approximately $4.9 million of net proceeds to the Company. Pursuant to the
rights offering, approximately 1.5 million shares of common stock were issued.
The offering was fully subscribed.
In February 1996, Lenny Targon, one of the co-founders of The Right
Start, resigned from his position as Chief Executive Officer and Director.
Jerry Welch, Chairman of the Board, assumed the title of Chief Executive
Officer.
In August 1995, an investor group led by Kayne, Anderson Investment
Management, Inc. acquired 3,937,000 shares of the Company's common stock,
representing approximately 62% of the then outstanding shares, from American
Recreation Centers, Inc. Richard A. Kayne, Jerry R. Welch and Howard M. Zelikow
of Kayne, Anderson and Robert R. Hollman, Fred Kayne and Andrew D. Feshbach were
appointed to The Right Start's Board of Directors. Robert Crist, Robert Feuchter
and Stanley Schneider resigned from the board, concurrent with the close of the
transaction.
ITEM 2. PROPERTIES
- ------- ----------
The Right Start leases all of its locations under operating leases.
Lease terms at the Company's retail locations range from six to ten years, with
provisions for early termination in most locations if certain sales levels are
not achieved and, at certain locations, the Company has options to extend the
term. In most cases, rent provisions include a fixed minimum rent plus a
contingent percentage rent based on net sales of the store in excess of a
certain threshold.
The Right Start currently leases approximately 39,000 square feet of
mixed use space in Westlake Village, California. The Company's
5
corporate office and first retail store reside in this space. The building is
leased and the agreement includes options to extend through 2001.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company is not party to any legal actions.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ----------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS'
- ------- ---------------------------------------------------------------
MATTERS
-------
The Company's common stock is traded on the Nasdaq National Market System
under the symbol RTST. The Company's stock is beneficially held by 1,535
shareholders.
6
ITEM 6. SELECTED FINANCIAL DATA - (Dollars in thousands except share data)
- ------- -----------------------
FISCAL YEAR
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
EARNINGS DATA
Revenues:
Net sales $ 40,368 $ 44,573 $ 49,204 $ 37,261 $ 23,896
Other revenues 1,418 1,168 1,311 992 868
----------------------------------------------------------------
41,786 45,741 50,515 38,253 26,764
Net income (loss) (3,899) (2,106) 176 1,032 820
Earnings (loss)per share (0.60) (0.33) 0.03 0.16 0.14
SHARE DATA
Weighted average
shares outstanding 6,536,813 6,300,000 6,637,142 6,494,133 5,739,670
BALANCE DATA SHEET
Current assets $ 8,353 $ 9,660 $ 12,002 $ 13,306 $ 12,975
Total assets 17,475 14,632 18,221 18,274 14,004
Current liabilities 4,649 3,690 4,979 5,650 2,412
Long-term debt
Shareholders' equity 11,902 10,694 12,800 12,624 11,592
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
FISCAL 1996 COMPARED WITH FISCAL 1995
- -------------------------------------
Revenues for fiscal 1996 were $41.8 million compared to $45.7 million in
1995. Catalog net sales declined $13.5 million or 37% reflecting the December
1994 sale of Children's Wear Digest (CWD) and reduced response rates and
circulation on The Right Start Catalog (RSC). CWD was a wholly owned subsidiary
of the Company selling children's apparel by catalog. For fiscal 1997, the
Company has further reduced the circulation of RSC and reduced the number of
editions from five to three.
7
Retail net sales increased over 100% from $7.8 million to $17.1 million.
The increase results from the additional eleven stores opened in fiscal 1996 and
the impact of a full year's sales for the eight stores opened in fiscal 1995.
All but the Company's two oldest stores are located in major upscale regional
malls across the United States.
Cost of goods sold decreased 8.7% or $2.0 million to $21.6 million in
fiscal 1996. The decrease is primarily due to the decrease in net sales.
Additionally, the Company's cost of goods sold was negatively impacted in fiscal
1996 by inventory write-downs and adjustments totalling approximately
$.5 million.
Operating expenses decreased $1.1 million or 5% from $19.9 million in
fiscal 1995 to $18.8 million in fiscal 1996. The decrease represents a
$3.4 million decrease in catalog production costs offset by retail and other
operating expense increases. The decrease in catalog production costs results
from the decrease in RSC circulation. Retail operating expenses increased due to
the additional payroll and occupancy costs associated with the new store
openings.
General and administrative expense increased to $4.8 million in fiscal 1996
from $3.0 million in fiscal 1995. This increase includes approximately $1.1
million in one-time charges related to employee severance and termination
expenses, hiring and relocation expenses for new key management personnel and
consulting fees related to the restructuring of the catalog operations. The
remaining increase reflects the investment in the Company's infrastructure to
position it to manage the accelerated store opening plans.
Pre-opening cost amortization increased $304,000 in fiscal 1996 as compared
to fiscal 1995. The Company amortizes its store opening costs over the first
twelve months of each store's operations. The fiscal 1996 increase reflects the
impact of both fiscal 1995 and 1996 store openings.
Depreciation and amortization increased $193,000 in fiscal 1996 as more
assets were employed in the retail operations due to new store openings.
The Company recognized $927,000 of income tax benefit for the year ended
June 1, 1996, net of a valuation allowance provided against the deferred tax
asset in the fourth quarter of the fiscal year. In evaluating the deferred tax
asset, management considered
8
the Company's projections and available tax planning strategies.
FISCAL 1995 COMPARED WITH FISCAL 1994
- -------------------------------------
Revenues for fiscal 1995 were $45.7 million, a decrease of $4.8 million or
9.5% from fiscal 1994. Catalog net sales declined $9.2 million or 20.1% as a
result of both the December 1994 sale of CWD and the decline in response rates
and circulation for RSC. Based on the decline in RSC response rates experienced
during the first half of the year, circulation cuts of up to 40% were taken for
the spring and summer catalogs.
Retail net sales increased over 100% to $7.8 million from $3.2 million in
fiscal 1994. The increase resulted from the fall 1994 openings of eight mall
stores, two of which were relocations from leased departments in Rich's
department stores, and 32% same-store-sales increases (28% as adjusted for the
additional week in fiscal 1995) for the remaining three stores experienced
during the second half of fiscal 1995.
Cost of goods sold decreased $2.4 million or 9.0% from fiscal 1994. The
decline is in line with the decrease in sales with a slight degradation in gross
margin due to the sale of CWD, typically a higher margin business than RSC and
retail.
Operating expense decreased $.6 million to $19.9 million from fiscal 1994
to fiscal 1995. The decrease was primarily the result of decreased costs
associated with the CWD and improved catalog delivery rates, offset by
additional retail selling expenses for the new stores opened in fiscal 1995.
General and administrative expenses increased $.3 million or 13.2% to $3.0
million in fiscal 1995 compared to $2.7 million in fiscal 1994. This is
primarily a result of increased costs incurred in support of the expanding
retail operations and the systems development and support related thereto.
These increases were offset by decreases resulting from the sale of CWD.
The loss on the sale of CWD of $1.7 million reflects the one-time charge
associated with the writedown of goodwill related to the sale of CWD in December
1994.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During fiscal 1996, the Company's primary sources of liquidity were from
borrowings under its credit facility and the issuance of common stock through a
rights offering. These sources financed the Company's operating losses and
capital expenditures. Capital expenditures of approximately $4.2 million were
incurred in opening
9
eleven new retail stores and installing the information systems necessary to
support the existing and planned retail growth.
The Company's existing credit facility provides for borrowings of up to $5
million, subject to a defined borrowing base. This agreement expires in June
1998. Outstanding borrowings are secured by all of the assets of the Company.
At June 1, 1996, there were no borrowings outstanding on the line and
approximately $2.8 million was available.
The Company opened eight new stores in fiscal 1995, 11 new stores in fiscal
1996, and currently expects to open up to 18 additional new stores in fiscal
1997. The Company expects to expend approximately $400,000 for each new store it
opens. The Company expects to fund store openings contemplated by its current
plan from borrowings under its credit facility and cash flow from operations.
The Company anticipates that it will be profitable in the future, however, there
can be no assurance that the Company's expansion strategy will be successful or
that the Company will not continue to incur operating losses. Losses could
negatively affect working capital, the extension of credit by the Company's
suppliers and the Company's ability to implement its expansion strategy.
IMPACT OF INFLATION
- -------------------
The impact of inflation on results of operations has not been significant
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The consolidated financial statements and supplementary data are as set
forth in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The information contained in the Company's 1996 Proxy Statement under
the captions "Principal Shareholders and Management" and "Election of Directors"
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information contained in the Company's 1996 Proxy Statement under
the caption "Executive Compensation and Other Information" is incorporated
herein by reference.
10
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The information contained in the Company's 1996 Proxy Statement under the
caption "Principal Stockholders and Management" is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information contained in the Company's 1996 Proxy Statement under the
caption "Certain Relationships and Related Transactions" is incorporated herein
by reference.
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Discussions
containing such forward-looking statements may be found in the material set
forth under Item 1. Business--Retail Operations and Expansion, --Seasonality,
- --Competition, and Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources, as well as
within this Annual Report generally (including any document incorporated by
reference herein). Also, documents subsequently filed by the Company with the
Securities and Exchange Commission will contain forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors identified herein or
in other public filings by the Company, including but not limited to, the
Company's Registration Statement on Form S-3 (File No. 333-08175).
11
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT.
PAGE
----
(1) FINANCIAL STATEMENTS:
Report of Independent Accountants F-1
Consolidated Balance Sheet--
June 1, 1996 and May 31, 1995 F-2
Consolidated Statement of Operations--
Years Ended June 1, 1996, May 31, 1995 and
May 25, 1994 F-3
Consolidated Statement of Changes in
Shareholders' Equity--
Years Ended June 1, 1996, May 31, 1995 and
May 25, 1994 F-4
Consolidated Statement of Cash Flows--
Years Ended June 1, 1996, May 31, 1995 and
May 25, 1994 F-5
Notes to Consolidated Financial Statements F-6
(2) FINANCIAL STATEMENT SCHEDULES:
Valuation Reserves F-15
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
12
(3) LISTING OF EXHIBITS
The following exhibits are filed as part of, or incorporated by reference
into, this annual report:
INDEX TO EXHIBITS
EXHIBIT
NUMBER
- ------
3.1 Amended and Restated Articles of Incorporation
of the Company, dated August 12, 1991*
3.1.1 Amendment to Articles of Incorporation, dated
August 20, 1991*
3.1.2 Form of Amendment to Articles of Incorporation,
dated August 24, 1991*
3.2 Bylaws of the Company, as amended*
3.3 Specimen Certificate of the Common Stock
(without par value)*
4.1 Warrant Certificate for Representative's
Warrants*
10.1 Lease between the Company and Westlake Industrial
Complex, a California Limited Partnership, dated
August 9, 1988, as amended February 6, 1991*
10.2 Employment Agreement between the Company and
Stanley Fridstein, dated May 30, 1991, as amended*
10.3 1991 Key Employee Stock Option Plan*
10.4 Stock Option Grant to Stanley Fridstein, dated
March 15, 1991, as amended (see Exhibit 10.2)*
10.5 Stock Option Grant to Lenny Targon, dated
March 15, 1991, as amended*
- -----------------
* Previously filed.
13
10.6 Form of Indemnification Agreement between
Registrant and its directors and executive
officers*
10.7 Westlake Industrial Complex Lease Agreement for
31333 Agoura Road, Westlake Village, CA*
10.8 Software License Agreement between the Registrant
and Marriner Systems, Inc., dated April 27, 1994*
10.9 1995 Non-employee Directors Option Plan
10.10 Registration Rights Agreement between Registrant and Kayne Anderson
Non-Traditional Investments LP, ARBCO Associates LP, Offense Group
Associates LP, Opportunity Associates LP, Fred Kayne, Albert O.
Nicholas and Primerica Life Insurance Company
10.11 Termination and Release Agreement by and between The Right Start, Inc.
and Lenny M. Targon dated February 28, 1996
10.12 Loan Agreement dated June 12, 1995 by and between Wells Fargo Bank,
National Association and The Right Start, Inc.
10.13 Asset Purchase Agreement dated as of July 29, 1996 by and between
Blasiar, Inc. (DBA Alert Communications Company) and The Right Start,
Inc.
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
- -----------------
* Previously filed.
(b) REPORTS ON FORM 8-K
Form 8-K dated March 27, 1996: The Right Start, Inc. issued a press
release reporting third quarter results.
(c) Not applicable
(d) Not applicable
14
SIGNATURES
Pursuant to the requirement of Sections 13 and 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
THE RIGHT START, INC.
(Registrant)
Dated: August 28, 1996 /s/ JERRY R. WELCH
--------------------------------------
Jerry R. Welch
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ JERRY R. WELCH August 28, 1996
- ---------------------------------------
Jerry R. Welch, Chairman of the Board
and Chief Executive Officer
/s/ STANLEY M. FRIDSTEIN August 28, 1996
- ---------------------------------------
Stanley M. Fridstein, President
and Director
/s/ RICHARD A. KAYNE August 28, 1996
- ---------------------------------------
Richard A. Kayne, Director
/s/ ANDREW D. FESHBACH August 28, 1996
- ---------------------------------------
Andrew D. Feshbach, Director
/s/ ROBERT R. HOLLMAN August 28, 1996
- ---------------------------------------
Robert R. Hollman, Director
/s/ FRED KAYNE August 28, 1996
- ---------------------------------------
Fred Kayne, Director
/s/ HOWARD M. ZELIKOW August 28, 1996
- ---------------------------------------
Howard M. Zelikow, Director
/s/ GINA M. SHAUER August 28, 1996
- ---------------------------------------
Gina M. Shauer, Chief Financial
Officer (Principal Financial and
Accounting Officer)
15
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors
and Shareholders of
The Right Start, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 12 present fairly, in all
material respects, the financial position of The Right Start, Inc. and
its subsidiary at June 1, 1996 and May 31, 1995, and the results of their
operations and their cash flows for each of the three fiscal years in the
period ended June 1, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Woodland Hills, California
July 3, 1996
F-1
THE RIGHT START, INC.
CONSOLIDATED BALANCE SHEET
--------------------------
June 1, May 31,
1996 1995
----------- -----------
ASSETS
------
Current assets:
Cash and equivalents $ 472,000 $ 1,567,000
Accounts receivable 609,000 483,000
Merchandise inventories 5,264,000 5,142,000
Prepaid catalog expenses 713,000 981,000
Income taxes receivable 472,000
Other current assets 1,295,000 878,000
Deferred income tax benefit 137,000
----------- -----------
Total current assets 8,353,000 9,660,000
----------- -----------
Noncurrent assets:
Property, plant and equipment, net (Note 2) 7,363,000 4,136,000
Other noncurrent assets 152,000 294,000
Deferred income tax benefit 1,607,000 542,000
----------- -----------
Total noncurrent assets 9,122,000 4,972,000
----------- -----------
$17,475,000 $14,632,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 3,976,000 $ 3,223,000
Accrued salaries and bonuses 530,000 238,000
Advance payments on orders 143,000 158,000
Amounts due to ARC (Note 9) 71,000
----------- -----------
Total current liabilities 4,649,000 3,690,000
----------- -----------
Deferred rent 924,000 248,000
Commitments and contingencies (Notes 10 & 11)
Shareholders' equity:
Common stock (25,000,000 shares authorized, no par
value, 7,939,306 and 6,300,000 shares issued and
outstanding) (Notes 5 & 8) 16,313,000 11,206,000
Retained deficit (4,411,000) (512,000)
----------- -----------
Total shareholders' equity 11,902,000 10,694,000
----------- -----------
$17,475,000 $14,632,000
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
THE RIGHT START, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
Fiscal Year Ended
-------------------------------------------
June 1, May 31, May 25,
1996 1995 1994
------------ ----------- ------------
Net sales:
Catalog $23,293,000 $36,790,000 $ 46,026,000
Retail 17,075,000 7,783,000 3,178,000
Other revenues 1,418,000 1,168,000 1,311,000
------------ ----------- ------------
41,786,000 45,741,000 50,515,000
------------ ----------- ------------
Costs and expenses:
Cost of goods sold 21,605,000 23,654,000 25,996,000
Operating expense 18,823,000 19,879,000 20,514,000
General and administrative expense 4,791,000 3,008,000 2,657,000
Pre-opening cost amoritization 418,000 114,000
Depreciation and amortization expense 938,000 745,000 654,000
Write off of Weebok catalog and
inventory costs 470,000
------------ ----------- ------------
46,575,000 47,400,000 50,291,000
------------ ----------- ------------
Operating income (loss) (4,789,000) (1,659,000) 224,000
Interest and other income (expense), net (37,000) 43,000 54,000
Loss on sale of Children's Wear Digest (1,744,000)
------------ ----------- ------------
Income (loss) before provision for
income taxes (4,826,000) (3,360,000) 278,000
Income tax benefit (provision) 927,000 1,254,000 (102,000)
------------ ----------- ------------
Net income (loss) ($ 3,899,000) ($2,106,000) $ 176,000
============ =========== ============
Earnings (loss) per share ($ 0.60) ($ 0.33) $ 0.03
============ =========== ============
Weighted average number of shares
outstanding 6,536,813 6,300,000 6,637,142
See accompanying notes to consolidated financial statements.
F-3
THE RIGHT START, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
--------------------
Common Stock Retained
--------------------------- Earnings
Shares Amount (Deficit)
------------- ----------- -------------
Balance, May 26, 1993 6,300,000 $11,206,000 $ 1,418,000
Net income 176,000
------------- ----------- -------------
Balance, May 25, 1994 6,300,000 11,206,000 1,594,000
Net loss (2,106,000)
------------- ----------- -------------
Balance, May 31, 1995 6,300,000 11,206,000 (512,000)
Issuance of shares pursuant
to the Rights Offering 1,578,806 4,906,000
Issuance of shares pursuant
to the exercise of stock options 60,500 201,000
Net loss ( 3,899,000)
------------- ----------- -------------
Balance, June 1, 1996 7,939,306 $16,313,000 ($4,411,000)
============= =========== =============
See accompanying notes to consolidated financial statements.
F-4
THE RIGHT START, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
Fiscal Year Ended
------------------------------------------
June 1, May 31, May 25,
1996 1995 1994
----------- ------------- ------------
Cash flows from operating activities:
Net income (loss) ($3,899,000) ($2,106,000) $ 176,000
Adjustments to reconcile net income (loss)
to net cash by operating
activities:
Depreciation and amortization 938,000 745,000 654,000
Pre-opening cost amortization 418,000 114,000
Unrealized loss on marketable securities 35,000
Loss on sale of Children's Wear Digest 1,744,000
Change in assets and liabilities affecting
operations (Note 12) 506,000 (2,256,000) (958,000)
---------- ------------ -----------
Net cash used in operating activities (2,037,000) (1,759,000) (93,000)
---------- ------------ -----------
Cash flows from investing activities:
Additions to property, plant and equipment (4,165,000) (2,417,000) (1,115,000)
Proceeds from sale of marketable securities 1,461,000 6,760,000
Purchase of marketable securities (4,789,000)
Proceeds from sale of Children's Wear Digest 2,437,000
Payment for Children's Wear Digest acquisition (399,000) (698,000)
---------- ------------ -----------
Net cash provided by (used in) investing
activities (4,165,000) 1,082,000 158,000
---------- ------------ -----------
Cash flows from financing activities:
Proceeds from common stock issued pursuant
to the Rights Offering 4,906,000
Proceeds from common stock issued upon
exercise of stock options 201,000
----------
Cash provided by financing activities 5,107,000
----------
Net increase (decrease) in cash and equivalents (1,095,000) (677,000) 65,000
Cash and equivalents at beginning of period 1,567,000 2,244,000 2,179,000
---------- ------------ -----------
Cash and equivalents at end of period $ 472,000 $ 1,567,000 $ 2,244,000
========== ============ ===========
See accompanying notes to consolidated financial statements.
F-5
THE RIGHT START, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
- ------------------------------------------------------------
The Company
- -----------
The Right Start, Inc. (the Company) is a specialty merchant of infants' and
children's products throughout the United States. In 1991, the Company
completed the sale of 2,300,000 shares of its common stock in an initial public
offering. Prior to that, it was a wholly owned subsidiary of American
Recreation Centers, Inc. (ARC). ARC maintained majority ownership of the
Company through July 1995. In August 1995, an investment group led by Kayne,
Anderson Investment Management, Inc. (KAIM) acquired the 3,937,000 shares of
common stock owned by ARC.
The Company's financial statements also include the accounts of its wholly owned
subsidiary, Children's Wear Digest (CWD) through the date the Company sold CWD
(see Note 6). All material intercompany balances and transactions have been
eliminated.
Fiscal Year
- -----------
The Company has a fiscal year consisting of fifty-two or fifty-three weeks
ending on the last Saturday (formerly Wednesday) in May. The fiscal year ended
May 31, 1995 is a fifty-three week period. The other fiscal years presented
consist of fifty-two week periods.
Revenue Recognition
- -------------------
Retail sales are recorded at time of sale or when goods are delivered. Catalog
sales are recorded at the time of shipment. The Company provides for estimated
returns at the time of the sale.
Cash and Equivalents
- --------------------
Cash and equivalents include demand deposits and marketable securities with
original maturities of three months or less. These investments are subject to
minimal credit and market risk. The carrying amount of cash and equivalents
approximates fair value.
F-6
NOTE 1: (Continued)
- ------
Merchandise Inventories
- -----------------------
Merchandise inventories consist of products purchased for resale and are stated
at the lower of cost or market value. Cost is determined on a first-in, first-
out basis.
Catalog Production Expenses
- ---------------------------
Prepaid catalog expenses consist of the costs to produce, print and distribute
catalogs. These costs are amortized over the expected sales life of each
catalog, which is three months. The Company adopted Statement of Position
Number 93-7 (SOP 93-7), "Reporting on Advertising Costs", in the fourth quarter
of fiscal year 1995. The adoption of SOP 93-7 did not result in a material
impact on the Company's consolidated financial position or results of
operations.
Catalog production expenses of $6,061,000, $9,457,000 and $10,068,000 were
recorded in fiscal 1996, 1995 and 1994, respectively.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight line method based upon the estimated
useful lives of the assets, generally three to ten years. Amortization of
leasehold improvements is based upon the term of the lease or the estimated
useful life of the leasehold improvements, whichever is shorter.
Store Opening Costs
- -------------------
Costs incurred in opening stores are deferred and included in other current
assets and are amortized over 12 months commencing with the store opening.
Unamortized store opening costs were $531,000 and $277,000 at June 1, 1996 and
May 31, 1995, respectively.
Deferred Rent
- -------------
The Company recognizes rent expense on a straight-line basis over the life of
the underlying lease. The benefit from tenant allowances and landlord
concessions are recorded as deferred rent and recognized over the lease term.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard No. 109 (FAS 109), "Accounting for Income Taxes." FAS 109
requires an asset and liability approach under which deferred tax liabilities
and assets are recognized for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other assets and
liabilities.
During the periods that the Company was majority owned by ARC, the Company
provided for income taxes as a separate taxpayer. State income taxes were
settled pursuant to an informal tax sharing agreement and the Company filed a
separate federal income tax return.
F-7
NOTE 1: (Continued)
- ------
Other Revenues
- --------------
Other revenues include rentals of customer mailing lists and revenues from order
fulfillment services.
Per Share Data
- --------------
Earnings per share has been computed in accordance with the treasury stock
method based upon the weighted average number of common shares and dilutive
common stock equivalents outstanding. Common stock equivalents comprise options
outstanding to key executives, employees and directors (see Note 5).
Reclassifications
- -----------------
Certain reclassifications have been made to conform prior year amounts to
current year presentation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT, NET:
- -------------------------------------------
June 1, May 31,
1996 1995
------------ ------------
Property, plant and equipment, at cost:
Machinery, furniture and equipment $ 3,761,000 $ 3,094,000
Leaseholds and leasehold improvements 5,316,000 2,465,000
Construction in progress 322,000 56,000
Computer software 570,000 225,000
----------- -----------
9,969,000 5,840,000
Accumulated depreciation and amortization (2,606,000) (1,704,000)
----------- -----------
$ 7,363,000 $ 4,136,000
=========== ===========
Depreciation and amortization expense for property, plant and equipment amounted
to $935,000, $645,000 and $484,000, for fiscal years 1996, 1995 and 1994,
respectively.
F-8
NOTE 3 - CREDIT AGREEMENTS:
- --------------------------
In June 1995, the Company entered into a revolving credit agreement with a bank
which expires in June 1998. The credit agreement provides for borrowings up to
$5,000,000, including letters of credit, the availability of which is subject to
a borrowing base, as defined in the agreement. Interest accrues at the bank's
prime lending rate plus 1%.
The agreement requires that the Company must comply with certain financial
and other covenants, and borrowings are secured by all of the assets of the
Company. The Company is required by the agreement to pay annual fees of $25,000
in addition to an unused line fee. The unused line fee is equal to .5% per
annum of the amount by which $3,500,000 exceeds the outstanding balance on the
line.
NOTE 4 - INCOME TAXES:
- ---------------------
The (benefit) provision for income taxes is comprised of the following:
Fiscal Year Ended
--------------------------------------
June 1, May 31, May 25,
1996 1995 1994
---------- ----------- -----------
Current (benefit) provision:
Federal ($ 424,000) ($ 91,000)
State $ 1,000 9,000
---------- ----------- ---------
1,000 (424,000) (82,000)
---------- ----------- ---------
Deferred provision:
Federal (928,000) (725,000) 175,000
State (105,000) 9,000
---------- ----------- ---------
(928,000) (830,000) 184,000
---------- ----------- ---------
($927,000) ($1,254,000) $102,000
========== =========== =========
The Company's effective income tax rate differed from the federal statutory rate
as follows:
Fiscal Year Ended
----------------------------------
June 1, May 31, May 25,
1996 1995 1994
--------- --------- --------
Federal statutory rate 34% 34% 34%
State income taxes, net of
federal benefit 3 2 4
Valuation allowance (19)
Other 1 1 (1)
--------- --------- --------
Effective tax rate 19% 37% 37%
========= ========= ========
F-9
NOTE 4: (Continued)
- ------
Deferred tax liabilities/(assets) are comprised of the following:
June 1, May 31, May 25,
1996 1995 1994
------------ ----------- ----------
Depreciation and amortization $ 112,000 $ 133,000 $ 274,000
Preopening costs 220,000 115,000
Other 11,000 8,000
------------ ---------- ---------
Deferred tax liabilities 343,000 256,000 274,000
------------ ---------- ---------
Deferred rent (380,000) (102,000)
Sales returns and other reserves (184,000) (43,000) (99,000)
Net operating loss carryforward (2,256,000) (763,000)
Federal tax credit carryforwards (70,000) (27,000) (24,000)
------------ ---------- ---------
Deferred tax assets (2,890,000) (935,000) (123,000)
Valuation allowance 940,000
------------ ---------- ---------
Net deferred tax (asset) liability ($1,607,000) ($679,000) $ 151,000
============ ========== =========
The Company's deferred tax asset is net of a valuation allowance of $940,000.
In evaluating the deferred tax asset, management considered the Company's
projections and available tax planning strategies.
The Company has federal and state net operating loss carryforwards at June 1,
1996 of $5,850,000 and $3,612,000, respectively. These carryforwards will
expire in fiscal years ending 2002 to 2011, and were not significantly impacted
by the August 1995 change in ownership.
NOTE 5 - CAPITAL STOCK:
- ----------------------
In April 1996, the Company issued 1,578,806 shares of common stock pursuant to a
rights offering. Net proceeds to the Company were $4,906,000.
In connection with its initial public offering, the Company granted the
representative of the underwriters 200,000 warrants to purchase the Company's
common stock at an exercise price of $7.19. The warrants provide for
registration rights and anti-dilution protection and expire in October 1996.
F-10
NOTE 6 - CHILDREN'S WEAR DIGEST:
- -------------------------------
Pursuant to an asset purchase agreement dated December 30, 1994 (the Agreement)
and a letter of intent agreement entered in November 1994, the Company and its
wholly owned subsidiary, Children's Wear Digest, Inc. (CWD), sold substantially
all of the assets of CWD to Small People, Inc. (SPI). A significant owner of
SPI was the president of CWD until his resignation effective December 30, 1994
and was also the owner of CWD at the time of its purchase by the Company. Under
the terms of the Agreement, CWD sold certain assets, consisting primarily of
inventory, fixed assets and intangible assets, in exchange for cash of
approximately $2,437,000. The transaction resulted in a loss of $1,744,000.
In connection with the Agreement, the parties also entered into a separate
Telemarketing Agreement, a Confidentiality and Noncompetition Agreement, and
termination agreements related to certain employment and management contracts
between CWD and its former owners which were entered when the Company purchased
CWD in September 1992. The acquisition was accounted for as a purchase and the
resultant goodwill was amortized over its estimated useful life.
NOTE 7 - WEEBOK CATALOG:
- -----------------------
In September 1992, the Company secured the exclusive mail order rights to the
Weebok line of children's clothing. Based on the results, management elected to
discontinue mailing the Weebok catalog in November 1993. As a consequence, the
Company recorded a charge of $470,000 comprised of prepaid catalog expenses and
inventory.
NOTE 8 - EMPLOYEE BENEFITS AND STOCK OPTIONS:
- --------------------------------------------
On March 15, 1991, two key executives were granted options to acquire up to
900,000 shares of the Company's common stock under a non-qualified stock option
plan. The options were granted at fair market value of $3.33 per share. These
options expire June 1, 2001. In August 1995, the terms of the options were
amended. The number of shares subject to such options was reduced to 776,000
with an exercise price of $3.00 per share. At June 1, 1996, 731,000 shares are
outstanding under this plan.
One of the executives covered by this plan was the Company's chief executive
officer who resigned in March 1996. In connection with his resignation, he is
entitled to salary and benefits through May 1997 and the cash surrender value of
a life insurance policy.
The Company adopted the 1991 Employee Stock Option Plan, covering an aggregate
of 300,000 shares of the Company's common stock, in October 1991. Options
granted vest either 20% or 33% (depending on the terms of the individual grant)
each year commencing on grant date and expire 10 years thereafter. In August
1995, those holding options under the 1991 Employee Stock Option Plan were given
the right to cancel their options (the "existing options") and have an equal
number of options (the "new options") reissued to them at the fair market value
of $3.00 per share. The vesting period on the existing options is 20% each year
and the new options vest 33% each year, both from date of grant. Options for
254,000 shares were outstanding as of June 1, 1996, 5,200 of which were
exercisable. Authorization for the amount by which the outstanding options
exceed the amount allowed in the plan is subject to ratification by the
Company's shareholders.
F-11
NOTE 8: (Continued)
- ------
On January 13, 1992, the Company adopted the 1992 Stock Option Plan for Non-
Employee Directors covering an aggregate of 50,000 shares. This plan provides
that all non-employee directors will automatically receive options to purchase
5,000 shares exercisable at the fair market value at the date of the grant. The
Company granted options to purchase 10,000 shares at $4.25 on April 22, 1992 and
5,000 shares at $3.25 on September 14, 1992. These options vest 20% at the
grant date and an additional 20% each year thereafter. Upon resignation of non-
employee directors from the Company's Board of Directors, all unvested options
expire. Of the 15,000 options granted under this plan, 8,000 were exercised in
January 1996 and the remaining options expired.
In October 1995, the Company adopted the 1995 Non-Employee Directors Option
Plan. This Plan provides for the annual issuance, to each non-employee
director, of options to purchase 3,000 shares of common stock. In addition,
each director is entitled to make an election to receive, in lieu of directors'
fees, additional options to purchase common stock. The amount of additional
options is determined based on an independent valuation such that the value of
the options issued is equivalent to the fees that the director would be
otherwise entitled to receive. Options issued under this plan vest on the
anniversary date of their grant and upon termination of Board membership. 61,902
options were issued under this plan, none of which were exercisable at June 1,
1996.
Prior to fiscal 1993, the employees of the Company participated in the ARC
Employee Stock Ownership Plan (ARC ESOP) and the ARC Employee Stock Purchase
Plan (ARC ESPP). In fiscal 1993, the Company adopted a separate employee stock
ownership plan (Company ESOP) and employee stock purchase plan (Company ESPP)
for the benefit of its employees. The employee balances in the ARC ESOP were
transferred to the Company ESOP. The employee balances in the ARC ESPP remain
in that plan.
The Company matches employees' contributions to the Company ESPP at a rate of
50%. The Company's contributions amounted to $28,000, $58,000 and $56,000 in
fiscal 1996, 1995 and 1994, respectively.
The Company ESOP is funded exclusively by discretionary contributions determined
by the Board of Directors. The Board of Directors authorized contributions of
$70,000 in fiscal 1996 and $50,000 for both fiscal 1995 and 1994.
The following table summarizes option activity through June 1, 1996:
Outstanding at May 26, 1993 987,500 $3.25 - 4.25
Granted 100,500 $4.38 - 6.00
Cancelled (3,500) $6.00
---------
Outstanding at May 25, 1994 1,084,500 $3.25 - 6.00
Granted 2,500 $2.50
Cancelled (45,000) $4.25 - 6.00
---------
Outstanding at May 31, 1995 1,042,000 $3.25 - 6.00
Granted 306,902 $3.00 - 6.50
Cancelled (241,000) $3.00 - 6.00
Exercised (60,500) $3.25 - 4.25
---------
Outstanding at June 1, 1996 1,047,402 $3.00 - 6.50
=========
F-12
NOTE 9 - RELATED PARTY TRANSACTIONS:
- -----------------------------------
KAIM receives a quarterly fee for providing certain management and advisory
services to the Company. Management fees of $75,000 were paid to KAIM in fiscal
1996.
ARC incurred certain expenses on behalf of the Company and charged the Company
for such expenses. These expenses include amounts allocated on an actual basis
for income taxes, insurance premiums, telephone charges and professional fees.
Corporate office overhead charges of $27,000 for each of fiscal 1995 and 1994
were allocated on the basis of estimated corporate staff effort on behalf of the
Company.
The Company provided telemarketing services through July 1996, to K.A.
Industries, a related party to KAIM. Revenues generated from this service amount
to $365,000 for fiscal 1996. Management believes that the terms of this
agreement are no less favorable than those that would have been negotiated with
an unrelated third party.
NOTE 10 - OPERATING LEASES:
- --------------------------
The Company leases real property and equipment under non-cancelable agreements
expiring from 1997 through 2007. Certain retail store lease agreements provide
for contingent rental payments if the store's net sales exceed stated levels
("percentage rents"). A majority of the leases contain escalation clauses
which provide for increases in base rental for increases in future operating
cost and renewal options at fair market rental rates. The Company's minimum
rental commitments are as follows:
Fiscal Year Ending
- ------------------
1997 $ 2,538,000
1998 2,761,000
1999 2,344,000
2000 2,272,000
2001 2,279,000
Thereafter 8,413,000
-----------
$20,607,000
===========
Net rental expense under operating leases was $1,959,000, $1,166,000 and
$667,000 for fiscal 1996, 1995 and 1994, respectively. Percentage rents
incurred in fiscal 1996 amounted to $82,000.
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
- ---------------------------------------
The Company is not party to any legal actions.
F-13
NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ----------------------------------------------------------
Changes in assets and liabilities, net of the effects of the acquisition and
subsequent disposition of CWD, which increased (decreased) cash and equivalents
are as follows:
Fiscal Year Ended
---------------------------------------
June 1, May 25, May 26,
1996 1995 1994
------------ ----------- ----------
Accounts receivable ($ 126,000) $ 300,000 ($274,000)
Merchandise inventories (122,000) (724,000) 144,000
Prepaid catalog expenses 268,000 731,000 (196,000)
Income taxes receivable 472,000 (280,000)
Other current assets (835,000) (699,000) (311,000)
Other noncurrent assets 142,000 (42,000) (47,000)
Accounts payable and accrued expenses 753,000 (491,000) (672,000)
Accrued salaries and bonuses 292,000 (84,000) 35,000
Advance payments on orders (15,000) (112,000) 192,000
Amounts due to ARC (71,000) (58,000) (121,000)
Income tax liability (31,000) (166,000)
Deferred income taxes (928,000) (830,000) 274,000
Other liabilities 676,000 64,000 184,000
----------- ----------- ---------
$ 506,000 ($2,256,000) ($958,000)
=========== =========== =========
Cash paid for income taxes was $552,000 for fiscal year 1994. Non-cash
investing activity consists of $57,000 accrued in conjunction with the CWD
acquisition in fiscal 1994 (see Note 6).
NOTE 13 - FOURTH QUARTER ADJUSTMENTS
- ------------------------------------
The Company recorded approximately $500,000 in inventory write-downs and
adjustments during the fourth quarter of fiscal 1996.
NOTE 14 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 will become effective for the Company in
fiscal 1997. The adoption of SFAS 123 is not expected to have a material effect
on the Company's consolidated financial position or results of operations.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
will become effective for the Company in fiscal 1997. This Statement requires
that long-lived assets and certain identifiable intangibles to be held and used
by the Company be reviewed for impairment whenever there is an indication that
the carrying amount of the asset may not be recoverable. Measurement of an
impairment loss should be based on the fair value of the asset. This Statement
also requires that any such assets that are to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell. Adoption of the
Statement is not expected to have a material impact on the Company's financial
position and results of operations.
F-14
THE RIGHT START, INC.
SCHEDULE II - VALUATION RESERVES
--------------------------------
Additional
Balance at charged Balance at
beginning to costs end
Classification of period and expenses Deductions of period
- --------------------------- ---------- ------------ ---------- -----------
Fiscal year ended
June 1, 1996
- -----------------
Allowance for deferred tax
asset $940,000 $ 940,000
Allowance for sales returns $103,000 103,000
-------- -------- -------- ----------
$103,000 $940,000 $1,043,000
======== ======== ======== ==========
Fiscal year ended
May 31, 1995
- -----------------
Allowance for sales returns $226,000 $123,000 $103,000
-------- -------- -------- --------
$226,000 $123,000 $103,000
======== ======== ======== ========
Fiscal year ended
May 25, 1994
- -----------------
Allowance for sales returns $290,000 $ 64,000 $226,000
-------- -------- -------- --------
$290,000 $ 64,000 $226,000
======== ======== ======== ========
F-15