<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one) FORM 10-K/A
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required effective October 7, 1996)
For the fiscal year ended January 31, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
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.)
5388 Sterling Center Dr., Unit C, Westlake 91361
Village, California
- ------------------------------------------- -----
(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 April 15, 1998, approximately 3,134,963 shares of the Registrant's Common
Stock held by non-affiliates were outstanding and the aggregate market value of
such shares was approximately $6,662,000.
As of April 15, 1998 there were outstanding 10,103,639 shares of Common Stock,
no par value, with no treasury stock.
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
DIRECTORS
The directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Director Since Business Experience
---- --- -------------- -------------------
<S> <C> <C> <C>
Andrew Feshbach 37 1995 Mr. Feshbach is a Vice President of Fortune Financial, President
of Big Dog Sportswear and an Executive Vice President of
Fortune Fashions. Previously, Mr. Feshbach was a partner in
Maiden Lane, a merchant bank, and a Vice President in the
Mergers and Acquisitions Group of Bear Stearns.
Robert R. Hollman 54 1995 Mr. Hollman has been President and Chief Executive Officer of
Topa Management Company since 1971 and President and Chief
Executive Officer of Topa Savings Bank since 1989. He has
also been a Director and Officer of Topa Equities, Ltd., the
parent company of Topa Savings Bank, since 1969.
Fred Kayne 60 1995 Mr. Kayne is President and Chairman of Fortune Financial,
where he is responsible for directing all of its investment
activities. Mr. Kayne is also President of Fortune Fashions and
Chairman of Big Dog Sportswear. Mr. Kayne was a partner of
Bear, Stearns & Co. Inc. until its initial public offering in 1985
after which he was a Managing Director and a member of the
Board of Directors until he resigned in 1986. Fred Kayne and
Richard A. Kayne are brothers.
Richard A. Kayne 53 1995 Mr. Kayne currently serves as President and Chief Executive
Officer of Kayne Anderson Investment Management, Inc., and
its broker dealer affiliate, K.A. Associates, Inc. Mr. Kayne has
been with Kayne Anderson Investment Management, Inc. since
1985 when it was founded by Mr. Kayne and John E. Anderson.
He is also a Director of Foremost Corporation of America and
Glacier Water Services, Inc. Richard A. Kayne and Fred Kayne
are brothers.
Jerry R. Welch 47 1995 See "Business Experience of Executive Officers" below.
Howard M. Zelikow 64 1995 Mr. Zelikow has been a management and financial consultant
doing business at ZKA Associates since 1987 and has been a
Managing Director of Kayne Anderson Investment Management,
Inc. since 1988. Mr. Zelikow has been a director of Financial
Security Assurance Holdings Ltd. since 1996 and has served as a
director of Queensway Financial Holdings Limited since 1993.
Mr. Zelikow was Executive Vice President and Chief Financial
Officer of The Progressive Corporation from 1976 through 1987.
Mr. Zelikow was a director of Victoria Financial Corporation
from 1991 to 1995, a director of Capital Guaranty Corporation
from 1994 to 1995, and a director of Nobel Insurance Limited
from 1989 to 1993.
</TABLE>
The Directors of the Company serve until their successors are elected and
duly qualified at next year's Annual Meeting of Shareholders, which is to be
held on or about June 28, 1999. During the fiscal year ended January 31, 1998,
the Company's Audit Committee consisted of Messrs. Feshbach, Hollman and Zelikow
and the Company's Compensation Committee consisted of Messrs. Richard Kayne and
Fred Kayne. The Board of Directors does not have a standing Nominating
Committee. The Audit Committee reviews and reports to the Board of
-2-
<PAGE>
Directors with respect to various auditing and accounting matters, including the
selection of the Company's independent accountants. The Compensation Committee
reviews the Company's general compensation strategy and reviews and reports to
the Board of Directors with respect to compensation of officers and employee
benefit programs.
-3-
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company (the "Named Executive Officers") are as
follows:
<TABLE>
<CAPTION>
Name Age Position Officer Since
- ------- --- -------- -------------
<S> <C> <C> <C>
Jerry R. Welch 47 Chairman of the Board, 1996
President and Chief
Executive Officer
Gina M. Shauer 34 Chief Financial Officer 1994
and Secretary
Ronald J. Blumenthal 52 Senior Vice President 1994
Michele Iglesias 31 Vice President-Human Resources 1996
Gerald E. Mitchell 43 Vice President-Merchandising 1996
Marilyn Platfoot 43 Vice President-Retail Operations 1996
Richard Pollock 46 Vice President-Logistics 1996
</TABLE>
All officers serve at the discretion of the Board of Directors.
BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS
JERRY R. WELCH became Chief Executive Officer of the Company in March 1996,
assumed the position of President in September 1996 and has served as Chairman
of the Board since August 1995. Mr. Welch also serves as a Managing Director of
Kayne Anderson Investment Management, Inc. and has served in such capacity since
January 1993. Mr. Welch is also the Chairman of the Board and Chief Executive
Officer of Glacier Water Services, Inc. and has served in such capacities since
April 1993 and September 1994, respectively.
GINA M. SHAUER became Chief Financial Officer of the Company in May 1994
and Secretary in August 1995. Ms Shauer served as a Senior Manager with Price
Waterhouse in Woodland Hills, California from January 1986 until April 1994.
RONALD J. BLUMENTHAL became Senior Vice President of the Company in
September 1996 and served as Vice President-Retail Operations from December 1993
to September 1996. Prior to joining the Company, Mr. Blumenthal served as Vice
President of Store Operations for Cost Plus Imports, from 1990 until 1993, and
for Jos. A. Bank Clothiers from 1985 until 1990, where he also served as Vice
President, Real Estate.
MICHELE IGLESIAS became Vice President - Human Resources of the Company in
December 1996 and served as Director of Human Resources from February 1994 to
December 1996. Ms. Iglesias' previous experience includes other human resources
management positions.
GERALD E. MITCHELL became Vice President-Merchandising of the Company in
July 1996. Mr. Mitchell previously served as Vice President-Merchandising for
Discovery Channel Stores in Dallas, Texas.
MARILYN PLATFOOT became Vice President-Retail Operations of the Company in
April 1996. Ms. Platfoot previously served as Western Regional Manager for
Brookstone Stores from 1992 to 1996. Prior to that, Ms. Platfoot spent 13 years
with the Foxmoor Casual chain, ultimately serving as West Coast Regional
Manager.
-4-
<PAGE>
RICHARD POLLOCK became Vice President-Logistics of the Company in September
1996 and served as Director of Logistics from June to September 1996. Prior to
joining the Company, Mr. Pollock served as Regional Operations Manager with USCO
Distribution Services and has held several senior level distribution positions.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers, directors and persons
who own more than 10% of the Company's common stock to file reports of ownership
on Forms 3, 4 and 5 with the Commission. Executive officers, directors and 10%
stockholders are required by the Commission to furnish the Company with copies
of all Forms 3, 4 and 5 as filed.
Based solely on the Company's review of the copies of such forms it has
received, the Company believes that all of its executive officers, directors and
greater than 10% beneficial owners complied with all the filing requirements
applicable to them with respect to transactions during the fiscal year ended
January 31, 1998, except for the following: Fred Kayne did not timely file one
report covering a transaction in which he purchased 224,000 shares of the
Company's common stock. Mr. Ronald J. Blumenthal, Ms. Michele Iglesias, Mr.
Gerald E. Mitchell, Ms. Marilyn Platfoot, Mr. Richard Pollock, Ms. Gina M.
Shauer and Mr. Jerry R. Welch each did not timely file one report with respect
to each of their annual stock option grants.
-5-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- ------- ----------------------
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
paid or accrued by the Company for services rendered during the fiscal year
ended January 31, 1998, the transition period from June 2, 1996 to February 1,
1997 and the fiscal year ended June 1, 1996 to the Company's Chief Executive
Officer and the other executive officers who received compensation (on an
annualized basis) of at least $100,000 during the periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Fiscal Other Annual Securities Underlying
Name and Principal Position Year-End Salary Bonus Compensation (1) Options (#)
- --------------------------- -------- ------ ----- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Jerry R. Welch (2) 1998 $ -0- $ -0- $ -0- 14,765
Chairman of the Board, President 1997 $ -0- -0- -0- 9,217
and Chief Executive Officer 1996 -0- -0- -0- 10,317(3)
Ronald J. Blumenthal 1998 135,000 -0- -0- 15,000
Senior Vice President 1997 90,865 -0- -0- -0-
1996 110,161 29,000 4,058 50,000
Gerald E. Mitchell 1998 155,000 -0- 8,048 15,000
Vice President - Merchandising 1997 80,481 -0- 3,875 75,000
Marilyn Platfoot 1998 115,000 -0- -0- 15,000
Vice President Retail Operations 1997 72,981 -0- -0- -0-
1996 6,365 -0- -0- 25,000
Gina M. Shauer 1998 105,000 -0- -0- 10,000
Chief Financial Officer and 1997 66,635 -0- 750 -0-
Secretary 1996 94,138 -0- 1,300 20,000
</TABLE>
(1) Amounts shown include Company contributions under the Company's Employee
Stock Ownership Plan and the Company's Employee Stock Purchase Plan, as
applicable for the listed executives.
(2) Mr. Welch receives no compensation for serving as Chief Executive Officer
or President.
(3) Granted under the 1995 Non-Employee Director Plan prior to Mr. Welch
becoming President and Chief Executive Officer.
DIRECTORS' FEES
All of the Company's non-employee directors receive directors' fees of
$3,000 per quarter. All of the members of the Board of Directors have elected,
in lieu of such compensation, to receive options to purchase common stock of the
Company at the fair market value on the date the options are granted.
-6-
<PAGE>
OPTION GRANTS IN THE FISCAL YEAR ENDED JANUARY 31, 1998
The following table provides certain information regarding stock options
granted to the Named Executive Officers during the fiscal year ended January 31,
1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO POTENTIAL REALIZABLE VALUE AT
OPTIONS EMPLOYEES EXERCISE OR ASSUMED ANNUAL RATES OF
GRANTED IN FISCAL BASE PRICE EXPIRATION STOCK PRICE APPRECIATION FOR
NAME (#)(1) YEAR ($/SHARE) DATE OPTION TERM
- ---- ------ ---- -------- ---- -----------
5% ($) 10% ($)
------ -------
<S> <C> <C> <C> <C> <C> <C>
Jerry Welch 3,000 2.4% $2.50 7/22/07 $12,353 $ 20,303
Jerry Welch 11,765 9.6% $2.50 7/22/02 37,747 48,393
Gerald Mitchell 15,000 12.2% $2.50 7/22/07 61,763 101,514
Ron Blumenthal 15,000 12.2% $2.50 7/22/07 61,763 101,514
Marilyn Platfoot 15,000 12.2% $2.50 7/22/07 61,763 101,514
Gina Shauer 10,000 8.1% $2.50 7/22/07 41,175 67,676
Richard Pollock 10,000 8.1% $2.50 7/22/07 41,175 67,676
Michele Iglesias 10,000 8.1% $2.50 7/22/07 41,175 67,676
</TABLE>
___________________
(1) Named Executive Officers receive options pursuant to the Company's stock
compensation plans described elsewhere herein. The material terms of that
program related to recipients, grant timing, number of options, option
price and duration are determined by the Board of Directors, subject to
certain limitations.
AGGREGATE OPTION EXERCISES IN THE FISCAL YEAR ENDED JANUARY 31, 1998 AND OPTION
VALUES AT FISCAL YEAR END
The following table provides certain information regarding the exercise of
stock options held by the Named Executive Officers during the fiscal year ended
January 31, 1998 and the number and value of options held as of the end of such
fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END (#) AT FISCAL YEAR END ($)(1)
------------------------------- ---------------------------
SHARES ACQUIRED
NAME ON EXERCISE (#) VALUE REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ---------------- -------------------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jerry R. Welch -0- -0- 19,534 14,765 -0- -0-
Ronald J. Blumenthal -0- -0- 33,334 56,666 -0- -0-
Gerald E. Mitchell -0- -0- 37,500 52,500 -0- -0-
Marilyn Platfoot -0- -0- 8,333 31,667 -0- -0-
Gina M. Shauer -0- -0- 23,334 31,666 -0- -0-
</TABLE>
_________________________
(1) On January 29, 1998 (the last day the Company's common stock was traded in
the fiscal year ended January 31, 1998), the closing sale price of the
Company's common stock on the Nasdaq National Market System was $1.75 per
share.
STOCK COMPENSATION PROGRAMS
1991 Employee Stock Option Plan
In October 1991, the Company adopted the 1991 Employee Stock Option
Plan (the "1991 Plan"), as amended to cover an aggregate of 575,000 shares of
the Company's common stock, in order to provide a means of encouraging certain
officers and employees of the Company to obtain a proprietary interest in the
enterprise and
-7-
<PAGE>
thereby create an additional incentive for such persons to further the Company's
growth and development. The information regarding the 1991 Plan provided herein
is qualified in its entirety by the full text of such plan, copies of which have
been filed with the Securities and Exchange Commission. Options granted vest
over periods of up to five years (depending on the terms of the individual
grant) commencing on the grant date and expire 10 years thereafter. Options for
389,982 shares were outstanding as of January 31, 1998, 125,717 of which were
exercisable.
On May 5, 1998, the Compensation Committee granted options to purchase
an aggregate of 880,000 shares of the Company's common stock (the "New Option
Shares") to certain executive officers and employees of the Company (each a
"grantee") at an exercise price of $1.75 per share, the closing sale price per
share of the Company's common stock on the date of grant. Grant of the New
Option Shares is subject to shareholder approval to increase the number of
shares of the Company's common stock that may be issued under the 1991 Plan.
The Compensation Committee has also determined that grant of the New Option
Shares to a grantee is conditioned upon such grantee's cancelling all of his or
her existing outstanding options to purchase the Company's common stock. The
Compensation Committee may from time to time modify or amend the 1991 Plan as it
deems necessary or desirable, but generally may not change an option already
granted thereunder without the written consent of the holder of such option (or
stock issued on exercise thereof). Of the 880,000 New Option Shares granted,
600,000 option shares were granted to executive officers of the Company in the
following amounts: Gerald Mitchell (125,000 option shares), Ron Blumenthal
(75,000 option shares), Marilyn Platfoot (125,000 option shares), Gina Shauer
(100,000 option shares), Richard Pollock (100,000 option shares), and Michele
Iglesias (75,000 option shares). The remaining 280,000 New Option Shares were
granted to non-executive employees of the Company.
The Board of Directors of the Company has proposed an amendment to the
1991 Plan to increase the maximum number of shares of common stock issuable
under such plan from 575,000 to 1,150,000 shares, subject to the approval of the
shareholders of the Company as provided in the Company's 1998 annual proxy
statement.
1995 Non-Employee Directors Plan
In October 1995, the Company adopted the 1995 Non-Employee Director
Plan (the "1995 Plan"), as amended to cover an aggregate of 250,000 shares of
common stock. The information regarding the 1995 Plan provided herein is
qualified in its entirety by the full text of such plan, copies of which have
been filed with the Securities and Exchange Commission. The 1995 Plan provides
for the annual issuance, to each non-employee direc tor, 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. 191,029 options were issued under the plan,
117,204 of which were exercisable as of January 31, 1998.
The Board of Directors of the Company has proposed an amendment to the
1995 Plan to increase the maximum number of shares of common stock issuable
under such plan from 250,000 to 350,000 shares, subject to the approval of the
shareholders of the Company as provided in the Company's 1998 annual proxy
statement.
Company Employee Stock Purchase Plan
The Company matches employees' contributions to the Company Employee
Stock Purchase Plan at a rate of 50%. The Company's contributions amounted to
$24,000, $21,000 and $28,000 in fiscal 1998, the transition period ended
February 1, 1997 and fiscal 1996, respectively.
Company Employee Stock Ownership Plan
The Company Employee Stock Ownership Plan is funded exclusively by
discretionary contributions determined by the Board of Directors. No
contributions were authorized for fiscal 1998 or the transition period ended
February 1, 1997. The Board of Directors authorized contributions of $70,000 in
fiscal 1996.
-8-
<PAGE>
COMPENSATION COMMITTEES INTERLOCKS AND INSIDER PARTICIPATION
Richard Kayne and Fred Kayne are each members of the Company's Compensation
Committee and have participated in transactions requiring disclosure under the
Item 13: Certain Relationships and Related Transactions.
-9-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------- --------------------------------------------------------------
The following table sets forth certain information, as of May 4, 1998,
with respect to all those known by the Company to be the beneficial owners of
more than 5% of its outstanding common stock, each director who owns shares of
common stock, each Named Executive Officer, and all directors and executive
officers of the Company as a group. The following table also sets forth certain
information on a pro forma basis which information gives effect to the
Recapitalization (as defined in Item 13 below), as if the Recapitalization had
been approved by the Company's shareholders and fully consummated on May 4,
1998.
<TABLE>
<CAPTION>
Pro forma for
Recapitalization
-------------------------------
Amount and Amount and
Nature of Nature of
Beneficial Percent of Beneficial
Name and Address of Beneficial Owner Ownership (1) Class Ownership(1) Percent of Class
- ------------------------------------ ------------- ----- ------------ ----------------
<S> <C> <C> <C> <C>
Richard A. Kayne (2) 4,680,458 45.48% 8,848,354 61.9%
KAIM Non-Traditional, L.P.
1800 Avenue of the Stars
Second Floor
Los Angeles, CA 90067
Cahill, Warnock Strategic Partners Fund, 988,333 8.9% 746,667 6.9%
L.P. (3)
One South Street, Suite 2150
Baltimore, MD 21202
Travelers Group Inc. (4) 783,043 7.7% 771,376 7.6%
388 Greenwich Street
New York, NY 10013
Fred Kayne (5) 914,493 9.0% 1,391,577 13.0%
Fortune Fashions
6501 Flotilla Street
Commerce, CA 90040
Albert O. Nicholas 625,000 6.2% 625,000 6.2%
Nicholas Co., Inc.
700 North Water Street
Milwaukee, WI 53202
Howard Kaplan 610,000 6.0% 610,000 6.0%
99 Chauncy Street
Boston, MA 02111
Gerald E. Mitchell (6) 66,750 * 66,750 *
5388 Sterling Center Drive, Unit C
Westlake Village, CA 91361
Gina M. Shauer (7) 27,392 * 27,392 *
5388 Sterling Center Drive, Unit C
Westlake Village, CA 91361
Andrew Feshbach (8) 19,534 * 19,534 *
Big Dog Sportswear
121 Gray Avenue, Suite 300
Santa Barbara, CA 93101
</TABLE>
-10-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Robert R. Hollman (8) 19,534 * 19,534 *
Topa Management
1800 Avenue of the Stars
Suite 1400
Los Angeles, CA 90067
Jerry R. Welch (8)(9) 19,534 * 19,534 *
Kayne Anderson Investment Management,
Inc.
1800 Avenue of the Stars
Second Floor
Los Angeles, CA 90067
Howard M. Zelikow (8)(9) 19,534 * 19,534 *
Kayne Anderson Investment Management,
Inc.
1800 Avenue of the Stars
Second Floor
Los Angeles, CA 90067
Ronald J. Blumenthal (10) 55,608 * 55,608 *
5388 Sterling Center Drive, Unit C
Westlake Village, CA 91361
All executive officers and directors 5,866,564 55.2% 10,511,544 69.7%
as a group (twelve persons) (11)
</TABLE>
_________________________
* Less than one percent.
(1) Except as otherwise noted below, the persons named in the table have
sole voting power and investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to
community property laws where applicable.
(2) The 4,680,458 shares include (i) 199,034 shares held directly by Mr.
Kayne (including 19,534 shares which may be acquired within 60 days
upon exercise of options) and (ii) 4,481,424 shares held by managed
accounts of KAIM Non-Traditional, L.P. ("KAIM, LP"), a registered
investment adviser (including 190,000 shares which may be acquired
within 60 days upon exercise of Existing Warrants). Mr. Kayne has
sole voting and dispositive power over the shares he holds directly.
He has shared voting and dispositive power along with Kayne Anderson
Investment Management, Inc. ("KAIM, Inc."), the general partner of
KAIM, LP, over the remaining shares. (Mr. Kayne is the President,
Chief Executive Officer and a Director of KAIM, Inc., and the
principal shareholder of its parent company.) The shares held by
managed accounts of KAIM, LP include, among others, the following
shares held by investment funds for which KAIM, LP serves as general
partner or manager: 1,481,703 shares held by Kayne Anderson Non-
Traditional Investments, L.P.; 1,081,651 shares held by ARBCO
Associates, L.P.; 1,023,158 shares held of Offense Group Associates,
L.P.; 315,412 shares held by Opportunity Associates, L.P.; and 75,000
shares held by Kayne Anderson Offshore Limited. KAIM disclaims
beneficial ownership of the shares reported, except those shares
attributable to it by virtue of its general partner interests in the
limited partnerships holding such shares. Mr. Kayne disclaims
beneficial ownership of the shares reported, except those shares held
by him directly or attributable to him by virtue of his limited and
general partner interests in such limited partnerships and by virtue
of his indirect interest in the interest of KAIM in such limited
partnerships. The foregoing is based on information provided by Mr.
Kayne and KAIM, L.P. to the Company as of May 4, 1998.
(3) David L. Warnock and Edward L. Cahill are each managing members of
Cahill, Warnock & Company, LLC ("CW") and general partners of Cahill,
Warnock Strategic Partners, L.P. ("CWSP"). CWSP and CW are the
general partners, respectively, of Cahill, Warnock Strategic Partners
Fund, L.P. ("SPF") and Strategic
-11-
<PAGE>
Associates, L.P. ("SA"). SPF owns Debentures currently convertible
into 710,500 shares of common stock and 150,100 currently exercisable
Existing Warrants to purchase common stock. SA owns Debentures
currently convertible into 39,500 shares of common stock and 8,233
currently exercisable Existing Warrants to purchase common stock.
Each of Messrs. Warnock and Cahill, CW, CWSP, SPF and SA may be
deemed to beneficially own 988,333 shares of common stock. Messrs.
Warnock and Cahill, CW and CWSP disclaim beneficial ownership with
respect to the shares held by SPF and SA. SPF disclaims beneficial
ownership with respect to the shares underlying the Debentures and
the Existing Warrants held by SA. SA disclaims beneficial ownership
with respect to the shares underlying the Debentures and the Existing
Warrants held by SPF. The shares reported above and in the table
exclude 9,217 currently exercisable options to purchase common stock
held by Mr. Warnock.
(4) The amount and nature of beneficial ownership of 783,043 shares has
been taken from an Amendment No. 2 to Schedule 13G filed on January
23, 1998, which states that (i) Primerica Life Insurance Company,
Travelers Insurance Holdings Inc. and The Travelers Insurance Company
each report beneficial ownership of 631,376 shares and (ii) The
Travelers Insurance Group Inc., PFS Services, Inc., Associated
Madison Companies, Inc. and Travelers Group Inc. each report
beneficial ownership of 783,043 shares. The amount reported in the
table and in clause (ii) above includes currently exercisable
Existing Warrants to purchase 31,667 shares of common stock.
(5) Includes 855,376 shares, 39,583 shares underlying the Existing
Warrants and 19,534 currently exercisable options to purchase common
stock.
(6) Includes 9,000 shares, currently exercisable options to purchase
48,750 shares of common stock and 9,000 shares held by the Company's
Employee Stock Purchase Plan for the benefit of Mr. Mitchell.
(7) Includes 291 shares, currently exercisable options to purchase 26,667
shares of common stock and 434 shares held by the Company's Employee
Stock Ownership Plan for the benefit of Ms. Shauer.
(8) All shares consist of currently exercisable options to purchase
common stock.
(9) Messrs. Welch and Zelikow are Managing Directors of Kayne Anderson
Investment Management, Inc.; however, they disclaim beneficial
ownership with respect to shares held by KAIM or any of its
affiliates.
(10) Includes currently exercisable stock options to purchase 55,000
shares of common stock and 608 shares held by the Company's Employee
Stock Ownership Plan for the benefit of Mr. Blumenthal.
(11) Includes common stock beneficially owned by executive officers and
directors, including 21,667 with respect to Ms. Platfoot, 9,312 with
respect to Ms. Iglesias and 12,478 with respect to Mr. Pollock.
-12-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
In May 1997, certain investors, including Cahill Warnock Strategic
Partners Fund, L.P. ("SPF") ($948,000), Strategic Associates, L.P. ("SA")
($52,000), Fred Kayne ($250,000) and affiliates of KAIM Non-Traditional, L.P.
("KAIM") ($1,200,000) purchased an aggregate principal amount of $3,000,000 of
the Company's 11.5% Senior Subordinated Notes due 2000 and warrants to purchase
an aggregate of 475,000 shares of the Company's common stock at an exercise
price of $3.00 per share, subject to adjustment under certain circumstances.
In September 1997, certain investors, including SPF (75,800 shares), SA
(4,200 shares), Fred Kayne (224,000 shares) and affiliates of KAIM (800,000
shares), purchased an aggregate of 1,510,000 shares of the Company's common
stock at a price of $2.50 per share.
During the fiscal year ended January 31, 1998, Kayne Anderson Investment
Management, Inc. provided management, consulting and advisory services to the
Company for which it received a fee of $100,000.
In April 1998, each of the holders, including SPF ($3,749,000), SA
($210,000), Fred Kayne ($250,000) and KAIM ($1,200,000) (the "Existing
Securityholders"), of (a) the Company's Convertible Debentures dated October 11,
1996, as amended on May 30, 1997, in the aggregate principal amount of
$3,000,000 (the "Debentures") and (b) the Company's 11.5% Senior Subordinated
notes due May 6, 2000 in the aggregate principal amount of $3,000,000 (the
"Senior Notes" and together with the Debentures, the "Existing Debt") and
warrants to purchase 475,000 shares of the Company's common stock issued in
connection with the Senior Notes (the "Existing Warrants") entered into a Letter
Agreement dated April 6, 1998 (the "Letter Agreement") and an Amendment to
Letter Agreement dated April 13, 1998 setting forth a plan of recapitalization
(the "Recapitalization").
The Recapitalization consists of the following: (a) the issuance of
$3,850,000 aggregate principal amount of the Company's non-interest bearing
Senior Subordinated Notes due May 6, 2000 (the "New Notes") and warrants to
purchase 3,850,000 shares of the Company's common stock (the "New Warrants", and
together with the New Notes, the "New Securities") to, among others, Fred Kayne
($350,000) and affiliates of KAIM ($3,383,333), (b) a waiver by the Existing
Securityholders of all of their rights to interest payments accrued and owing on
the Existing Debt on or after February 28, 1998, (c) an agreement by the
Existing Securityholders to exchange the Existing Debt and the Existing Warrants
for either Series A or Series B Preferred Stock within two-hundred forty days
after the issuance of the New Securities and (d) an agreement by the New
Securityholders to exchange the New Securities for Series C Preferred Stock
simultaneous with the exchange of Existing Debt and Existing Warrants for Series
A and/or B Preferred Stock.
-13-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf the undersigned, thereunto duly authorized.
THE RIGHT START, INC.
Date: May 29, 1998 /s/ GINA M. SHAUER
----------------------------------------
Gina M. Shauer, Chief Financial Officer
(Principal Financial and Accounting Officer)
-14-
