<PAGE>
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
THE RIGHT START, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
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<PAGE>
THE RIGHT START, INC.
5388 Sterling Center Drive, Unit C
Westlake Village, California 91361
August __, 1998
DEAR SHAREHOLDERS:
Our Annual Meeting of Shareholders will be held on August 25, 1998, at 9:00
a.m., at The Right Start retail store located at 2001 North Sepulveda Boulevard,
Manhattan Beach, California. We urge you to attend this meeting to give us an
opportunity to meet you personally, to allow us to introduce to you the key
personnel responsible for management of your Company, to show you a Right Start
store and to answer any questions you may have.
The formal Notice of Meeting, the Proxy Statement and the proxy card are
enclosed. A copy of the Annual Report to Shareholders describing the Company's
operations during the fiscal year ended January 31, 1998 is also enclosed.
We hope that you will be able to attend the meeting in person. Whether or not
you plan to attend the meeting, please sign and return the enclosed proxy card
promptly. A prepaid return envelope is provided for this purpose. Your shares
will be voted at the meeting in accordance with your proxy.
If you have shares in more than one name or if your stock is registered in
more than one way, you may receive more than one copy of the proxy materials.
If so, please sign and return each of the proxy cards you receive so that all of
your shares may be voted. We look forward to meeting you at the August 25, 1998
Annual Meeting of Shareholders.
Very truly yours,
Jerry R. Welch
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
THE RIGHT START, INC.
5388 Sterling Center Drive, Unit C
Westlake Village, California 91361
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
___________________
TO BE HELD AUGUST 25, 1998
The Annual Meeting of The Right Start, Inc. (the "Company") will be held at
The Right Start retail store located at 2001 North Sepulveda Boulevard,
Manhattan Beach, California on August 25, 1998, at 9:00 a.m. for the following
purposes:
1. To elect six (6) directors to hold office until the next annual
meeting and until their successors are elected;
2. To ratify the appointment of PricewaterhouseCoopers LLP as independent
auditors for the fiscal year ending January 30, 1999 (Proposal 1);
3. To approve a proposed amendment to the Company's 1991 Employee Stock
Option Plan (the "1991 Plan") increasing the maximum aggregate number of
shares of the Company's common stock subject to the 1991 Plan from 575,000 to
1,150,000 shares, an increase of 575,000 shares (Proposal 2);
4. To approve a proposed amendment to the Company's 1995 Non-Employee
Director Plan (the "1995 Plan") increasing the maximum aggregate number of
shares of the Company's common stock subject to the 1995 Plan from 250,000 to
350,000 shares, an increase of 100,000 shares (Proposal 3);
5. To authorize "blank check" preferred stock of the Company (Proposal
4);
6. To authorize the issuance of Series A Preferred Stock in connection
with the Company's Recapitalization (Proposal 5);
7. To authorize the issuance of Series B Preferred Stock in connection
with the Company's Recapitalization (Proposal 6); and
8. To authorize the issuance of Series C Preferred Stock in connection
with the Company's Recapitalization (Proposal 7); and
9. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The close of business on June 26, 1998, is the date of record for the
determination of shareholders entitled to notice of and to vote at the Annual
Meeting.
All shareholders are urged to attend the meeting in person or by proxy.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE SIGN AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED PREPAID RETURN ENVELOPE.
The Proxy is revocable and will not affect your right to vote in person in the
event you attend the meeting.
By Order of The Board of Directors
Gina M. Shauer
Secretary
Westlake Village, California
August __, 1998
<PAGE>
THE RIGHT START, INC.
_____________
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
SOLICITATION AND REVOCATION OF PROXIES
The enclosed Proxy is solicited by and on behalf of the Board of Directors of
The Right Start, Inc. (the "Company") for use in connection with the Annual
Meeting of Shareholders to be held on the 25th day of August, 1998 at 9:00 a.m.
and at any and all adjournments thereof.
The persons named as proxies were designated by the Board of Directors and are
officers or directors of the Company. Any Proxy may be revoked or superseded by
executing a proxy bearing a later date or by giving notice of revocation in
writing prior to, or at, the Annual Meeting, or by attending the Annual Meeting
and voting in person. All proxies which are properly completed, signed and
returned to the Company prior to the meeting, and not revoked, will be voted in
accordance with the instructions given in the Proxy. If a choice is not
specified in the Proxy, the Proxy will be voted FOR the election of the director
nominees listed below, FOR Proposal 1 to ratify the appointment of
PricewaterhouseCoopers LLP as independent auditors for the Company, FOR Proposal
2 to approve a proposed amendment to the Company's 1991 Employee Stock Option
Plan (the "1991 Plan") increasing the maximum aggregate number of shares of the
Company's common stock subject to the 1991 Plan, FOR Proposal 3 to approve a
proposed amendment to the Company's 1995 Non-Employee Director Stock Option Plan
(the "1995 Plan") increasing the maximum aggregate number of shares of the
Company's common stock subject to the 1995 Plan, FOR Proposal 4 to authorize
"blank check" preferred stock of the Company, FOR Proposal 5 to authorize the
issuance of Series A Preferred Stock in connection with the Company's
Recapitalization, FOR Proposal 6 to authorize the issuance of Series B Preferred
Stock in connection with the Company's Recapitalization, and FOR Proposal 7 to
authorize the issuance of Series C Preferred Stock in connection with the
Company's Recapitalization. "Broker non-votes" will be counted for general
quorum purposes but will not be considered as present and entitled to vote.
This Proxy Statement and the accompanying Proxy are being mailed to
shareholders on or about August __, 1998. The entire cost of the solicitation
of proxies will be borne by the Company. Expenses will also include
reimbursements paid to brokerage firms and others for their expenses incurred in
forwarding solicitation material regarding the meeting to beneficial owners of
the Company's common stock. It is contemplated that this solicitation will be
primarily by mail. In addition, some of the officers, directors and employees
of the Company may solicit proxies personally or by telephone, facsimile,
telegraph or cable; such persons will not be compensated for such solicitation.
VOTING AT THE MEETING
The shares of common stock constitute the only class of securities of the
Company entitled to notice of, and to vote at, the Annual Meeting. Only
shareholders of record at the close of business on June 26, 1998 will be
entitled to vote at the meeting or any adjournment or postponement thereof. As
of June 26, 1998, there were 10,103,639 shares of common stock issued and
outstanding, each share being entitled to one vote on each matter to be voted
upon, except that voting for directors may be cumulative. A shareholder
intending to cumulate votes for directors must notify the Company of such
intention at the meeting prior to commencement of the voting for directors. If
any shareholder has given such notice, every shareholder attending the meeting
may cumulate votes for candidates in nomination and give one candidate a number
of votes equal to the number of directors to be elected multiplied by the number
of votes to which the shareholder's shares are entitled, or distribute the
shareholder's votes on the same principle among two or more candidates. A
shareholder who is not in attendance at the meeting may not invoke cumulative
voting.
Discretionary authority to cumulate votes represented by proxies is solicited
by the Board of Directors because, in the event nominations are made in
opposition to the nominees of the Board of Directors, it is the intention of the
persons named in the enclosed Proxy to cumulate votes represented by proxies for
individual nominees in accordance with their best judgment in order to assure
the election of as many of the nominees to the Board of Directors as possible.
-1-
<PAGE>
The election of directors will require the affirmative vote of a plurality of
the shares of common stock voting in person or by proxy at the Annual Meeting.
The approval of Proposal 1, Proposal 2, Proposal 3, Proposal 4, Proposal 5,
Proposal 6 and Proposal 7 will require the affirmative vote of a majority of the
shares of common stock present or represented at the Annual Meeting and entitled
to vote on such proposal.
PRINCIPAL SHAREHOLDERS 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 executive officer named in the Summary Compensation Table (the
"Named Executive Officers"), 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
described in "Proposals Regarding the Company's Recapitalization" below), as if
Proposals 5, 6 and 7 had been approved by the Company's shareholders and the
Recapitalization had been fully consummated on May 4, 1998.
<TABLE>
<CAPTION> Pro forma for Recapitalization
------------------------------
Amount and Amount and
Nature of Nature of Percent of
Name and Address of Beneficial Beneficial Percent of Beneficial --------
Owner Ownership (1) Class Ownership(1) 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
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Andrew Feshbach (8) 19,534 * 19,534 *
Big Dog Sportswear
121 Gray Avenue, Suite 300
Santa Barbara, CA 93101
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 share which may be acquired
within 60 days upon exercise of 1997 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 or KAIM, Inc., and the
principal stockholder 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-
<PAGE>
(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 Associates, L.P. ("SA"). SPF owns
Debentures currently convertible into 710,500 shares of common stock
and 150,100 currently exercisable 1997 Warrants to purchase common
stock. SA owns Debentures currently convertible into 39,500 shares of
common stock and 8,233 currently exercisable 1997 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 1997 Warrants held by SA. SA disclaims beneficial
ownership with respect to the shares underlying the Debentures and the
1997 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 1997 Warrants to
purchase 31,667 shares of common stock.
(5) Includes 855,376 shares, 39,583 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. Pollack.
-4-
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Executive
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 and 1994
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.
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.
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.
ELECTION OF DIRECTORS
The Board of Directors proposes the election of six (6) directors, each to
hold office until the next annual meeting and until their successors are elected
and qualified. Unless authority to vote for directors has been withheld in the
Proxy, the persons named in the enclosed Proxy intend to vote at the meeting for
the election of the nominees
-5-
<PAGE>
presented below. All nominees have consented to serve as a director for the
ensuing year. Although the Board of Directors does not contemplate that any of
the nominees will be unable to serve, if any nominee withdraws or otherwise
becomes unavailable to serve, the persons named in the enclosed Proxy will vote
for any substitute nominee designated by the Board of Directors.
The candidates in the election of directors receiving the highest number of
affirmative votes of the shares entitled to vote, up to the number of directors
to be elected by such shares, will be elected. Votes against a candidate and
votes withheld, including broker non-votes, have no legal effect on the
election, however all such votes count as a part of the quorum. The names and
certain information concerning the persons to be nominated as directors at the
Annual Meeting are set forth below.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION OF EACH
OF THE NOMINEES NAMED BELOW.
DIRECTORS AND NOMINEES
<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 & Co. Inc.
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" above.
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C> <C> <C>
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 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.
Your proxy cannot be voted for a greater number of persons than the number of
nominees named.
ATTENDANCE AT MEETINGS
During the fiscal year ended January 31, 1998, the Board of Directors held a
total of 5 meetings, the Compensation Committee held 2 meetings and the Audit
Committee held 1 meeting. No member of the Board of Directors, Compensation
Committee or Audit Committee attended fewer than 75% of the meetings of the
Board, Compensation Committee or Audit Committee.
-7-
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
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 ended 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 transition period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term
------------------- ---------
Compensation
------------
Fiscal Other Annual Securities Underlying
Name and Principal Position Year-End Salary Bonus Compensation Options (#)
- --------------------------- -------- ------ ------ ------------ -----------
(1)
<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 Plan prior to Mr. Welch becoming President and Chief
Executive Officer.
-8-
<PAGE>
DIRECTORS' FEES
All of the Company's non-employee directors receive directors' fees of $3,000
per quarter. All of the members of the Board of Directors have elected, in lieu
of such compensation, to receive options to purchase common stock of the Company
at the fair market value on the date the options are granted.
OPTION GRANTS IN THE FISCAL YEAR ENDED JANUARY 31, 1998
The following table provides certain information regarding stock options
granted to the Named Executive Officers during the fiscal year ended January 31,
1998.
<TABLE>
<CAPTION>
Individual Grants
---------------------
Number of % of Total
Securities Options Potential Realizable Value
Underlying Granted to at Assumed Annual Rates of
Options Employees Exercise or Stock Price Appreciation for
Granted in Fiscal Base Price Expiration Option Term
------- Year ($/Share) Date -----------
(#)(1) ---- -------- ----
NAME ------- 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% $2.50 7/22/07 41,175 67,676
</TABLE>
___________________
(1) Named Executive Officers receive options pursuant to the Company's stock
compensation plans described elsewhere in this Proxy Statement. The material
terms of that program related to recipients, grant timing, number of options,
option price and duration are determined by the Board of Directors, subject to
certain limitations.
AGGREGATE OPTION EXERCISES IN THE FISCAL YEAR ENDED JANUARY 31, 1998 AND OPTION
VALUES AT FISCAL YEAR END
The following table provides certain information regarding the exercise of
stock options held by the Named Executive Officers during the fiscal year ended
January 31, 1998 and the number and value of options held as of the end of such
fiscal year.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options
Fiscal Year End (#) At Fiscal Year End ($)(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.
-9-
<PAGE>
EMPLOYMENT AGREEMENTS
No employment agreements are currently in effect between the Company and any
of its employees.
STOCK COMPENSATION PROGRAMS
1991 Employee Stock Option Plan
The Company adopted the 1991 Plan, as amended to cover an aggregate of
575,000 shares of the Company's common stock, in October 1991, in order to
provide a means of encouraging certain officers and employees of the Company to
obtain a proprietary interest in the enterprise and 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 of Proposal 2 below, which
proposal increases 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 canceling 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 (an increase of 575,000 shares),
subject to the approval of the shareholders of the Company as provided herein.
The amendment to the 1991 Plan, as approved by the Board of Directors to be
effective as of May 5, 1998, is set forth in its entirety in Proposal 2 below.
The Company proposes to increase the aggregate number of shares of common stock
issuable under both the 1991 Plan and the 1995 Plan by 675,000 shares.
1995 Non-Employee Directors Option Plan
In October 1995, the Company adopted 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 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. 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 (an increase of 100,000 shares),
subject to the approval of the shareholders of the Company as provided herein.
The amendment to the 1995 Plan, as approved by the Board of Directors, is set
forth in its entirety in Proposal 3 below. The Company proposes to increase the
aggregate number of shares of common stock issuable under both the 1991 Plan and
the 1995 Plan by 675,000 shares.
-10-
<PAGE>
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.
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.
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
section "Certain Relationships and Related Transactions."
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for approving compensation
programs for the Company's management. During the fiscal year ended January 31,
1998, the Compensation Committee consisted of Messrs. Richard Kayne and Fred
Kayne.
Mr. Welch receives a fee for serving as a director, but receives no
additional compensation for serving as Chief Executive Officer or President.
The Compensation Committee believes that the compensation provided to
employees of the Company must be competitive for the Company to attract or
obtain highly qualified and experienced key employees. Based upon a preliminary
review, the Compensation Committee believes that, overall, the Company's
compensation programs are competitive with those of comparable companies.
-11-
<PAGE>
PERFORMANCE GRAPH
This graph compares the cumulative total return to shareholders of the
Company, the Nasdaq National Market (the "Broad Market") index and a peer group
of companies (the "Industry Index")(1).
<TABLE>
<CAPTION>
Fiscal Year Ending
-----------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Company $ 100 $ 88.75 $ 50.00 $130.00 $103.75 $ 35.00
Broad Market 100 117.56 120.03 169.42 188.23 221.71
Peer Group 100 109.66 136.31 197.29 156.90 164.92
</TABLE>
(1) The Industry Index chosen is an index of specialty retailers compiled
by Media General Group that includes forty-three publicly traded companies
offering a wide array of specialty retail goods. The Company formerly used an
industry index which included all of the companies with publicly traded
securities with the SIC code for Catalog and Mail-Order Houses. With the
Company's transition from primarily catalog and mail-order sales to primarily
retail sales, the Company believes a peer group index comprised of specialty
retailers is a more appropriate comparative measure.
Assumes $100 invested at the beginning of the periods presented and assumes
dividends have been reinvested.
-12-
<PAGE>
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 Pollack, Ms. Gina M.
Shauer and Mr. Jerry R. Welch each did not timely file one report with respect
to each of their annual option grants.
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 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), 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 "'1997 Notes") and warrants to purchase
475,000 shares of the Company's common stock issued in connection with the 1997
Notes (the "1997 Warrants" and together with the 1997 Notes, the "1997
Securities") entered into a Letter Agreement dated April 6, 1998 and an
Amendment to Letter Agreement dated April 13, 1998, and substantially all such
holders have entered into a Letter Agreement dated July 7, 1998 (collectively,
the "Amended Letter Agreement) setting forth a plan of recapitalization (the
"Recapitalization").
The Recapitalization, as described herein, 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
detachable 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 holders of all of their rights to interest payments accrued and
owing on the Debentures and the 1997 Notes on or after February 28, 1998, (c) an
agreement by the holders to exchange the Debentures and the 1997 Securities 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 holders to
exchange the New Securities for Series C Preferred Stock simultaneous with the
exchange of the Debentures and the 1997 Securities for Series A and/or B
Preferred Stock.
PROPOSAL ONE
------------
APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The firm of PricewaterhouseCoopers LLP, the Company's independent
accountants for the fiscal year ended January 31, 1998, was selected by the
Board
-13-
<PAGE>
of Directors, upon recommendation of the Audit Committee of the Board of
Directors, to act in the same capacity for the fiscal year ending January 30,
1999. Neither the firm nor any of its members has any relationship with the
Company or any of its affiliates except in the firm's capacity as the Company's
auditor. The Board of Directors is asking for ratification of such appointment
of the auditors by the Company's shareholders.
Representatives of PricewaterhouseCoopers LLP are expected to be present at
the Annual Meeting and will have the opportunity to make statements if they so
desire and respond to appropriate questions from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF PRICEWATERHOUSECOOPERS.
PROPOSAL TWO
------------
APPROVAL OF AMENDMENT TO 1991 EMPLOYEE STOCK OPTION PLAN
The Board of Directors has proposed to amend Article 3 of the Company's 1991
Plan to increase the maximum number of shares of the Company's common stock
subject to the 1991 Plan from 575,000 to 1,150,000 shares, an increase of
575,000 shares. The proposed amendment to the 1991 Plan reads as follows:
"3. Shares Subject to the Plan.
--------------------------
The stock issuable under this Plan shall be shares of the Company's
authorized but unissued or reacquired Common Stock ("Common Stock"). The
total number of shares of Common Stock that may be issued under this Plan
shall not exceed 1,150,000 shares in the aggregate, subject to adjustment as
provided in Section 8 below."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PROPOSED
AMENDMENT TO THE 1991 EMPLOYEE STOCK OPTION PLAN.
PROPOSAL THREE
--------------
APPROVAL OF AMENDMENT TO 1995 NON-EMPLOYEE DIRECTORS OPTION PLAN
The Board of Directors has proposed to amend section 12 of the Company's
1995 Plan to increase the maximum number of shares of the Company's common stock
subject to the 1995 Plan from 250,000 to 350,000 shares, an increase of 100,000
shares. The proposed amendment to the 1995 Plan reads as follows:
"12. Common Shares Subject to Options.
--------------------------------
The maximum aggregate number of shares of common stock with respect to
which Options may be granted from time to time under the Plan is 350,000
shares, subject to adjustment as provided in Section 6 of the Plan."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PROPOSED
AMENDMENT TO THE 1995 NON-EMPLOYEE DIRECTORS OPTION PLAN.
PROPOSAL FOUR
-------------
AUTHORIZE BLANK CHECK PREFERRED STOCK.
The Board of Directors has proposed to amend the Company's Amended and
Restated Articles of Incorporation to authorize, among other things, 151,500
shares of "blank check" preferred stock. The term "blank check" preferred stock
refers to stock for which the designations, preferences, conversion rights,
cumulative rights, relative, participating, optional and other rights, including
voting rights, qualifications, limitations, or restrictions thereof, are
determined by the Company's Board of Directors. The additional authorized
shares that would be available for issuance, if approved, may be issued for any
proper corporate purpose at any time without further stockholder approval
(subject, however, to applicable statutes or the rules of the Nasdaq National
Market which require stockholder approval for the issuance of shares in certain
circumstances). Each series of blank check
-14-
<PAGE>
preferred stock may rank senior to the Company's common stock with respect to
dividends and liquidation rights. No preferred stock is presently issued.
If blank check preferred stock is approved by the stockholders, the Board of
Directors may determine, among other things, with respect to each series of
blank check preferred stock which may be issued: (i) the distinctive
designation of such series and the number of shares constituting such series,
(ii) whether or not shares have voting rights and the extent of such voting
rights, if any, (iii) the election, term of office, filling of vacancies, and
other terms of the directorship of directors, if any, to be elected by the
holders of any one or more series of such preferred stock, (iv) the dividend
rights, if any, including the dividend rates, preferences with respect to other
series of classes of stock, the times of payment and whether dividends shall be
cumulative, (v) the redemption price, term of redemption, the amount of and
provisions regarding any sinking fund for the purchase or redemption thereof,
(vi) the liquidation preferences and the amounts payable on dissolution or
liquidation, (vii) the terms and conditions, if any, under which shares of the
series may be converted into any other series of class of stock or debt of the
Company, and (viii) preemptive rights to purchase or otherwise acquire any
preferred stock that may be issued in the future.
The Board of Directors believes it is desirable to give the Company this
flexibility in considering such matters as raising additional capital,
acquisitions, or other corporate purposes. The authorization of such shares
will enable the Company to act promptly and without additional expense if
appropriate circumstances arise which require the issuance of such shares. The
Company has no current agreements, commitments, plans or intentions to issue any
additional shares, other than in the Recapitalization as described in the
section titled "Proposals Regarding the Company's Recapitalization". Depending
upon the circumstances in which such additional shares of preferred stock are
issued, the overall effects of such issuance may be to render more difficult or
to discourage a merger, tender offer, proxy contest, or the assumption of
control by a holder of a large block of common stock and the removal of
incumbent management. For example, such shares could be used to create voting
or other impediments or to discourage persons seeking to gain control of the
Company. Such shares could be privately placed with purchasers favorable to the
Board of Directors in opposing such action. In addition, the Board of Directors
could authorize holders of a series of preferred stock to vote either separately
as a class or with the holders of the Company's common stock, on any merger,
sale, or exchange of assets by the Company or any other extraordinary corporate
transaction. The issuance of new shares also could be used to dilute the stock
ownership of a person or entity seeking to obtain control of the Company should
the Board of Directors consider an action of such entity or person not to be in
the best interests of the stockholders and the Company.
If any series of preferred stock authorized by the Board provides for
dividends, such dividends, when and as declared by the Board of Directors out of
any funds legally available therefor, may be cumulative and may have a
preference over the common stock as to the payment of such dividends. In
addition, if any series of preferred stock authorized by the Board of Directors
so provides, in the event of any dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, the holders of each such series of
the then outstanding preferred stock may be entitled to receive, prior to the
distribution of any assets or funds to the holders of common stock, a
liquidation preference established by the Board of Directors, together with all
accumulated and unpaid dividends. Depending upon the consideration paid for
preferred stock, the liquidation preference of preferred stock and other
matters, the issuance of preferred stock could therefore result in a reduction
in the assets available for distribution to the holders of common stock in the
event of liquidation of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AUTHORIZATION OF 151,500
SHARES OF BLANK CHECK PREFERRED STOCK.
PROPOSALS REGARDING THE COMPANY'S RECAPITALIZATION
--------------------------------------------------
BACKGROUND INFORMATION ABOUT THE RECAPITALIZATION
The Company entered into a Letter Agreement dated April 6, 1998, and an
Amendment to Letter Agreement dated April 13, 1998, and the Company has received
consent from substantially all parties thereto to a Letter Agreement dated July
7, 1998 (collectively, the "Amended Letter Agreement") setting forth a plan of
Recapitalization (the "Recapitalization") comprised of the following actions.
The Company completed a private placement 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 detachable 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"). The New Securities were sold for an aggregate
purchase price of $3,850,000 and were purchased principally by affiliates of the
Company. Subject to approval of Proposals 5, 6 and 7, holders of the New
-15-
<PAGE>
Securities have agreed to exchange all of the New Securities for an aggregate of
38,500 shares of Series C Preferred Stock, as more fully described below.
Holders of the Company's existing subordinated debt securities, representing
an aggregate principal amount of $6,000,000, permanently waived their rights to
receive interest payments after February 28, 1998, resulting in the elimination
of approximately $0.6 million in annual interest payments. Subject to approval
of Proposals 5, 6 and 7, holders of the Company's existing debt securities have
agreed to exchange all of their subordinated debt securities, together with any
warrants issued in connection therewith, for newly issued preferred stock per
the following:
1) holders of the Company's 11.5% Senior Subordinated Notes due May 6, 2000
(the "1997 Notes") with original face value of $3,000,000, original
discount of $351,500 and carrying value at May 2, 1998 of $2,758,000 and
warrants to purchase 475,000 shares of the Company's common stock issued
therewith (the "1997 Warrants" and, together with the 1997 Notes, the
"1997 Securities") have agreed to exchange the 1997 Securities for 29,995
shares of the Series B Preferred Stock and 5 shares of the Series A
Preferred Stock; and
2) holders of the Company's Convertible Debentures dated October 11, 1996, as
amended on May 30, 1997 (the "Debentures") with original face value of
$3,000,000 and carrying value at May 2, 1998 of $3,000,000, have agreed to
exchange the Debentures for 29,995 shares of Series A Preferred Stock and
5 shares of Series B Preferred Stock.
Also subject to approval of Proposals 5, 6 and 7, holders of the Company's New
Securities with original face value of $3,850,000, original discount of
$1,066,000 and carrying value at May 2, 1998 of $2,827,000, have agreed to
exchange the New Securities for 38,500 shares of the Series C Preferred Stock.
The proposed accounting for the anticipated future Recapitalization is as
follows:
Effective April 13, 1998, the holders of the 1997 Notes and Debentures agreed to
waive their right to receive any and all interest payments accrued and owing
after February 28, 1998, which waiver was not conditioned upon the consummation
of the plan of Recapitalization set forth in the Amended Letter Agreement. This
modification of terms will be accounted for prospectively, from the effective
date, under Statement of Financial Accounting Standards No. 15 (FAS 15) as
follows.
The carrying amount of the 1997 Notes as of April 13, 1998 of $2,754,000 will
not be changed as the carrying amount of the debt does not exceed the total
future cash payments of $3.0 million specified by the new terms. Interest
expense will be computed using the interest method to apply a constant effective
interest rate to the payable balance between the modification date of April 13,
1998 and maturity of the payable in May 2002.
The total future cash payments specified by the new terms of the Debentures of
$3.0 million is less than the carrying amount of the liability owed to the
Debenture holders of $3,027,000. Therefore, the carrying amount was reduced to
an amount equal to the total future cash payments specified by the new terms and
the Company will recognize a gain on restructuring of payables equal to the
amount of the reduction as of April 13, 1998. No interest expense shall be
recognized on the payable for any period between the modification date of April
13, 1998 and maturity of the payable in May 2002.
The anticipated future exchanges of the 1997 Securities, Debentures and New
Securities set forth above for the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, which exchanges were agreed in the Amended
Letter Agreement, will be accounted for at the date of issuance of the preferred
stock. The fair value of each series of preferred stock will be determined as
of its issuance date. The difference between the fair value of the preferred
stock granted and the carrying amount of the related subordinated debt balance
plus accrued interest is expected to result in a gain in accordance with FAS 15
"Accounting by debtors and creditors for troubled debt restructurings." The
expected gain on the exchange of notes held by the majority shareholder will be
recorded as a credit to additional paid in capital. The expected gain on the
exchange of debt held by third parties will be recorded as an extraordinary item
in the statement of operations as required by FAS 15. If the convertible Series
B Preferred Stock and Series C Preferred Stock is determined to have a
beneficial conversion feature at the date of issuance of the preferred stock, a
portion of the fair value of the preferred stock will be allocated to additional
paid in capital as required by Topic D-60. The portion if any allocated to paid
in capital will be recognized as a return similar to a dividend to the preferred
shareholders immediately through a charge to accumulated deficit and a credit to
preferred stock, as the Series B Preferred Stock and Series C Preferred Stock
has terms which allow the holder to exercise the
-16-
<PAGE>
conversion rights at any time. The fair value of each series of preferred stock
will be determined as of the issuance date.
PRO FORMA INFORMATION FOR THE RECAPITALIZATION
The following unaudited pro forma financial statements give effect to the
Recapitalization of the Company. The unaudited pro forma balance sheet has been
prepared to reflect the Recapitalization of the Company as of May 2, 1998. The
unaudited pro forma statement of operations presents the results of operations
of the Company for the year ended January 31, 1998 and the thirteen week period
ended May 2, 1998, as if the Recapitalization occurred on February 2, 1997.
These unaudited pro forma financial statements should be read in conjunction
with the historical financial statements and notes thereto of the Company
included in the Company's amended 10-K filed on _______, 1998.
The accounting for the Recapitalization is as follows: The exchange of the
1997 Securities, Debentures and the New Securities for the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock was recorded based
on estimated fair values of the Preferred Stock. The fair value of each series
of preferred stock was estimated based on an interim internal valuation prepared
in July 1998; the valuation will be finalized at a date approximate to the
actual exchange date. The difference between the fair value of such preferred
stock to be issued and the carrying amount of the related subordinated debt plus
accrued interest was recognized as a gain on the extinguishment of debt. The
gain calculated on the exchange of the 1997 Securities and New Securities held
by the majority shareholder will be recorded as a credit to additional paid in
capital. The gain calculated on the exchange of the 1997 Securities, Debentures
and New Securities held by third parties will be recorded as an extraordinary
item and, therefore, is not included in the unaudited pro forma statement of
operations. Such amount has been reflected in accumulated deficit in the
unaudited pro forma balance sheet. The conversion features of the Series B
Preferred Stock and the Series C Preferred Stock were "in the money" at the
assumed date of issuance of May 2, 1998. Therefore, a portion of the fair value
of the Series B Preferred Stock and Series C Preferred Stock was allocated to
additional paid in capital. The portions allocated to additional paid in
capital were recognized as a return to the holders of the Series B Preferred
Stock and Series C Preferred Stock immediately through a charge to accumulated
deficit and a credit to preferred stock as the Series B Preferred Stock and
Series C Preferred Stock is convertible immediately.
-17-
<PAGE>
PRO FORMA BALANCE SHEET (UNAUDITED)
-----------------------------------
May 2, 1998
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MAY 2, 1998
-------------------------------------------------------------------------------
AS REPORTED ADJUSTMENTS PRO FORMA
---------------------- --------------------- --------------------
Assets
Current assets:
<S> <C> <C> <C>
Merchandise inventories......................... $ 7,701,000 $ 7,701,000
Other current assets............................ 2,488,000 $ (60,000)(b) 2,428,000
Total current assets........................... 10,189,000 10,129,000
Property, plant and equipment, net............... 8,025,000 8,025,000
Other non-current assets......................... 1,471,000 1,471,000
------------ -------------- ------------
$ 19,685,000 $ (60,000) $ 19,625,000
============ ============== ============
Liabilities and Shareholders Equity
Current liabilities:
Accounts payable and accrued expenses........... $ 2,958,000 (85,000)(b) $ 2,873,000
Other current liabilities....................... 415,000 415,000
Total current liabilities....................... 3,373,000 3,288,000
Note payable long term........................... 3,000,000 3,000,000
Senior subordinated notes due May 6, 2000........ 2,827,000 (2,287,000)(c)
Senior subordinated notes due May 6, 2000........ 2,758,000 (2,758,000)(b)
Subordinated convertible debentures due
May 31, 2002.................................... 3,000,000 (3,000,000)(a)
Other liabilities................................ 1,604,000 1,604,000
Mandatorily redeemable preferred stock series A 1,769,000(a) 1,769,000
Mandatorily redeemable preferred stock series B 2,040,000(b)
(1,000,000)(e)
1,000,000(g) 2,040,000
Mandatorily redeemable preferred stock series C 3,850,000(c)
(3,850,000)(f)
3,850,000(g) 3,850,000
Shareholders' equity:
Common stock (25,000,000 shares authorized at
no par value; 10,103,639 issued and
outstanding).................................. 22,337,000 22,337,000
Paid in capital................................. 1,078,000 654,000(d)
(1,023,000)(d)
1,000,000(e)
3,850,000(f) 5,559,000
Accumulated deficit............................. (20,292,000) 1,231,000(h)
89,000(h)
(4,850,000)(g) (23,822,000)
------------ ------------------ ------------
$ 19,685,000 $ (60,000) $ 19,625,000
============ ================== ============
</TABLE>
Note 1 - The pro forma balance sheet has been prepared to reflect the
Recapitalization of the Company. Pro forma adjustments are made to reflect:
a. The issuance of the mandatorily redeemable Series A Preferred Stock at
estimated fair value in exchange for the Debentures. The fair value of the
mandatorily redeemable Series A Preferred Stock was estimated based on an
interim internal valuation. The valuation will be finalized at a date
approximate to the actual exchange date.
b. The issuance of the mandatorily redeemable convertible Series B Preferred
Stock at estimated fair value in exchange for the $3.0 million of the 1997
Securities including detachable warrants and accrued interest. The fair
value of the mandatorily redeemable convertible Series B Preferred Stock was
estimated based on an interim internal valuation. The valuation will be
finalized at a date approximate to the actual exchange date.
-18-
<PAGE>
c. The issuance of the mandatorily redeemable convertible Series C Preferred
Stock at estimated fair value in exchange for the $3.85 million of New
Securities including detachable warrants. The fair value of the mandatorily
redeemable Series C Preferred Stock was estimated based on an interim
internal valuation. The valuation will be finalized at a date approximate to
the actual exchange date.
d. Recording of the gain calculated on the exchange of the 1997 Securities and
New Securities held by the majority shareholder for Preferred Stock as a
credit to additional paid in capital.
e. Recording of the beneficial conversion feature amount associated with the
issuance of the mandatorily redeemable convertible Series B Preferred Stock
calculated as the difference between the $1.50 conversion price and the fair
value of the Company's common stock as of the balance sheet date of May 2,
1998.
f. Recording of the beneficial conversion feature amount associated with the
issuance of the mandatorily redeemable convertible Series C Preferred Stock
calculated as the difference between the $1.00 conversion price and the fair
value of the Company's common stock as of the balance sheet date of May 2,
1998.
g. Amortization of the entire beneficial conversion feature amount associated
with the mandatorily redeemable convertible Series B Preferred Stock and
Series C Preferred Stock through a charge to accumulated deficit and a
credit to preferred stock as the preferred stock is convertible immediately.
h. The gain of $1,320,000 calculated on the exchange of the 1997 Securities,
Debentures and New Securities held by third parties for the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock was
recorded as an extraordinary item.
Note 2 - Pursuant to a Letter Agreement dated July 7, 1998, the Company has
received consent from substantially all parties to the Amended Letter Agreement
to amend the Amended Letter Agreement to remove the mandatory redemption feature
in the Series B Preferred Stock and the Series C Preferred Stock upon the
occurrence of a change in control of the Company. The impact of this change on
the balance sheet will be to include the Series B Preferred Stock and the Series
C preferred stock in shareholders' equity which, if done at May 2, 1998, would
result in total shareholders' equity of $9,013,000.
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
---------------------------------------------
For the Fiscal Year ended January 31, 1998
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JANUARY 31, 1998
-------------------------------------------------------------------------------
AS REPORTED ADJUSTMENTS PRO FORMA
----------------------- ---------------------- ---------------------
Net sales:
<S> <C> <C> <C>
Retail........................................ $31,107,000 $31,107,000
Catalog....................................... 7,414,000 7,414,000
----------- -----------
38,521,000 38,521,000
Costs and expenses:
Cost of goods sold........................... 19,244,000 19,244,000
Operating expense............................ 19,212,000 19,212,000
General and administrative expense........... 5,817,000 5,817,000
Pre-opening cost amortization 711,000 711,000
Depreciation and amortization expense........ 1,608,000 1,608,000
----------- -----------
46,592,000 46,592,000
----------- -----------
Operating Loss................................ (8,071,000) (8,071,000)
Interest expense (income), net 1,143,000 $(594,000) 549,000
Loss before income taxes and extraordinary _____________ ____________ ____________
item......................................... (9,214,000) (594,000) (8,620,000)
Income tax provision (benefit)................ 27,000 27,000
----------- ____________ -----------
Loss before extraordinary item................ $(9,241,000) $(594,000) $(8,647,000)
Basic and diluted loss per share before
extraordinary item........................... ($1.01) ($.94)
Weighted average number of shares
outstanding................................... 9,188,172 9,188,172
=========== ===========
</TABLE>
-19-
<PAGE>
Note 1 - The above statement gives effect to the following pro forma adjustments
necessary to reflect the Recapitalization of the Company. Pro forma adjustments
are made to reflect the reduction of interest expense on the $3.0 million of the
1997 Notes and $3.0 million of Debentures to be exchanged in the
Recapitalization. There is no significant impact on income taxes related to
this adjustment.
Note 2 - The gain of $1,320,000 calculated on the exchange of the 1997
Securities, Debentures and New Securities held by third parties for the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock was
recorded as an extraordinary item.
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
---------------------------------------------
For the thirteen week period ended May 2, 1998
<TABLE>
<CAPTION>
THIRTEEN WEEK PERIOD ENDED
MAY 2, 1998
----------------------------------------------------------------------------------
AS REPORTED ADJUSTMENTS PRO FORMA
----------------------- ---------------------- ---------------------
Net sales:
<S> <C> <C> <C>
Retail........................................ $ 7,329,000 $ 7,329,000
Catalog....................................... 1,712,000 1,712,000
----------- -----------
9,041,000 9,041,000
Costs and expenses:
Cost of goods sold........................... 4,585,000 4,585,000
Operating expense............................ 4,213,000 4,213,000
General and administrative expense........... 770,000 770,000
Pre-opening cost amortization................ 31,000 31,000
Depreciation and amortization expense........ 348,000 348,000
----------- -----------
9,947,000 9,947,000
----------- -----------
Operating Loss................................ (906,000) (906,000)
Interest expense (income), net................ 371,000 $ (223,000)(a) 148,000
----------- ------------ -----------
Loss before income taxes...................... (1,277,000) (223,000) (1,054,000)
Income tax provision.......................... 12,000 ------------ 12,000
----------- -----------
Net loss...................................... $(1,289,000) $ (223,000) $(1,066,000)
=========== ----------- ===========
Basic and diluted loss per share.............. $(.13) $(.11)
Weighted average number of shares outstanding. 10,103,639 10,103,639
</TABLE>
Note 1 - The above statement gives effect to the following pro forma adjustments
necessary to reflect the Recapitalization of the Company. Pro forma adjustments
are made to reflect:
a. Reduction of interest expense on the $3.0 million of the 1997 Notes and
$3.85 million of New Notes and the $3.0 million of Debentures to be
exchanged in the Recapitalization. There is no significant impact on income
taxes related to this adjustment.
PROPOSAL FIVE
-------------
AUTHORIZE THE ISSUANCE OF SERIES A PREFERRED STOCK IN CONNECTION WITH THE
COMPANY'S RECAPITALIZATION.
The Board of Directors has proposed to adopt an amendment to the Company's
Amended and Restated Articles of Incorporation to authorize, among other things,
the issuance of 30,000 shares of Series A Preferred Stock. Provided below is a
description of the material terms of the Series A Preferred Stock.
The Series A Preferred Stock, par value $.01 per share (the "Series A
Preferred Stock") shall rank senior to the Company's common stock and pari passu
with the Company's Series B Preferred Stock and Series C Preferred Stock with
respect to liquidation, and shall be senior or pari passu with any other
preferred stock subsequently issued by the Company; provided however, that the
Series A Preferred Stock shall be senior with respect to liquidation to the
Series B Preferred Stock and the Series C Preferred Stock from and after June 1,
2002.
-20-
<PAGE>
The Series A Preferred Stock shall have a per share liquidation preference
of $100 (the "Series A Liquidation Value"). Consent of the holders of at least
a majority of the Series A, B and C Preferred Stock voting together as a single
class, will be required for (i) any sale by the Company of a substantial
portion of its assets, (ii) any merger of the Company with another entity,
(iii) each amendment of the Company's articles of incorporation, and (iv) any
action that (a) increases the authorized number of shares of preferred stock of
the Company of any series, (b) creates any new class or series of shares having
preference over or being on a parity with the Series A, B and C Preferred
Stock, or (c) creates any contractually subordinated debt of the Company. Such
consent shall not be unreasonably withheld. Except for such consent rights and
voting rights as may be provided by applicable law and the right to vote as a
separate series on all modifications of the rights, privileges or terms of the
Series A Preferred Stock, the Series A Preferred Stock shall have no voting
rights as a separate series.
The Series A Preferred Stock shall be redeemed by the Company on May 31,
2002 for cash (subject to the legal availability of funds therefor) at a price
per share equal to the Series A Liquidation Value. The Series A Preferred
Stock shall also be redeemed by the Company for cash (subject to the legal
availability of funds therefor) at a price per share equal to the Series A
Liquidation Value upon the occurrence of a Change of Control defined as (i) any
merger or consolidation of the Company where the Company is not the surviving
corporation or as a result of which KAIM and its affiliates cease to
beneficially own and control (as beneficial ownership is defined in Rule 13d-3
of the Securities Exchange Act of 1934, as amended), directly or indirectly, at
least twenty-five (25%) of the issued and outstanding shares of each class of
capital stock of the Company entitled (without regard to the occurrence of any
contingency) to vote for the election of a majority of the members of the Board
of Directors of the Company, or (ii) any sale or transfer of all or
substantially all of the Company's assets or stock.
The Series A Preferred Stock shall also be mandatorily redeemable by the
Company for cash (subject to the legal availability of funds therefor) at a
price per share equal to the Series A Liquidation Value if the Company shall
consummate the sale or a series of related sales for cash or equity securities,
the net proceeds to the Company from which (after deduction of discounts,
commissions and other offerings expenses) shall equal or exceed the sum of
$12,000,000, plus the amount of Series A Preferred Stock originally issued
pursuant to the Recapitalization.
There shall be no dividends on the Series A Preferred Stock prior to June
1, 2002, the mandatory redemption date of the Series A Preferred Stock.
Thereafter, dividends on the Series A Preferred Stock shall cumulate and accrue
on a daily basis without interest, at the rate of $15.00 per share per annum.
After June 1, 2002, the holders of the Series A Preferred Stock shall be
entitled to receive, out of funds legally available for such purpose, quarterly
payments of dividends on the Series A Preferred Stock. The cumulation and
accrual of dividends on the Series A Preferred Stock after June 1, 2002 shall
occur regardless of whether or not the Company shall have funds legally
available for the payment of dividends.
In no event, so long as any Series A Preferred Stock shall remain
outstanding, shall any dividend whatsoever be declared or paid upon, nor shall
any distribution be made upon, any common stock, other than a dividend or
distribution payable in shares of common stock, nor (without the written
consent of the holders of 50% of the outstanding shares of Series A Preferred
Stock) shall any shares of common stock be purchased or redeemed by the
Company, nor shall any moneys be paid to or made available for a sinking fund
for the purchase or redemption of any common stock.
The holders of Series A Preferred Stock shall receive from the Company the
annual, quarterly and monthly financial statements of the Company.
Representatives of the holders of the Series A Preferred Stock shall have the
right, upon reasonable notice, to inspect the books and records of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AUTHORIZATION OF THE
ISSUANCE OF THE SERIES A PREFERRED STOCK.
-21-
<PAGE>
PROPOSAL SIX
------------
AUTHORIZE THE ISSUANCE OF SERIES B PREFERRED STOCK IN CONNECTION WITH THE
COMPANY'S RECAPITALIZATION.
The Board of Directors has proposed to amend the Company's Amended and
Restated Articles of Incorporation to authorize, among other things, the
issuance of 30,000 shares of Series B Preferred Stock. Provided below is a
description of the material terms of the Series B Preferred Stock.
Pursuant to Section 4460(1)(D) of the NASD Manual Marketplace Rules with
respect to the Nasdaq National Market, the Company is seeking shareholder
approval to issue the Series B Preferred Stock.
The Series B Preferred Stock, par value $.01 per share (the "Series B
Preferred Stock") shall rank senior to the Company's common stock and pari
passu with the Company's Series A Preferred Stock and Series C Preferred Stock
with respect to liquidation, and shall be senior or pari passu with any other
preferred stock subsequently issued by the Company; provided however, that the
Series A Preferred Stock shall be senior with respect to liquidation to the
Series B Preferred Stock and the Series C Preferred Stock from and after June
1, 2002.
The Series B Preferred Stock shall have a per share liquidation preference
of $100 (the "Series B Liquidation Value"). Consent of the holders of at least
a majority of the Series A, B and C Preferred Stock voting together as a single
class, will be required for (i) any sale by the Company of a substantial
portion of its assets, (ii) any merger of the Company with another entity,
(iii) each amendment of the Company's articles of incorporation, and (iv) any
action that (x) increases the authorized number of shares of Preferred Stock of
the Company of any series, (y) creates any new class or series of shares having
preference over or being on a parity with the Series A, B and C Preferred
Stock, or (z) creates any contractually subordinated debt of the Company. Such
consent shall not be unreasonably withheld. Except for such consent rights and
voting rights as may be provided by applicable law and the right to vote as a
separate series on all modifications of the rights, privileges or terms of the
Series B Preferred Stock, the Series B Preferred Stock shall have no voting
rights as a separate series.
The Series B Preferred Stock shall be convertible in whole or in part at
any time, and from time to time, at the option of the holders into shares of
the Company's common stock at a rate equal to $1.50 per share (the "Series B
Conversion Price"). The Series B Preferred Stock will be subject to anti-
dilution provisions providing for adjustments to the Series B Conversion Price
upon (i) dividend or distribution of shares of common stock to holders of
common stock and (ii) subdivision or combination of the outstanding shares of
common stock.
There shall be no dividends paid on the Series B Preferred Stock.
The holders of Series B Preferred Stock shall receive from the Company the
annual, quarterly and monthly financial statements of the Company.
Representatives of the holders of the Series B Preferred Stock shall have the
right, upon reasonable notice, to inspect the books and records of the Company.
If the Company proposes to offer additional securities (other than employee
incentive stock or stock options, securities issued in a public offering or the
acquisition of another company, or shares issued upon conversion or exercise of
outstanding securities), the Company will first offer all such securities to
the holders of the Series B Preferred Stock and the Series C Preferred Stock
(or common stock issued upon conversion of the Series B Preferred Stock or
Series C Preferred Stock) on a pro rata basis. Such preemptive rights will not
be transferable and will terminate with respect to any shares of Series B
Preferred Stock or Series C Preferred Stock (or common stock issued upon
conversion of the Series B Preferred Stock or Series C Preferred Stock), as the
case may be, upon the earlier of the (i) transfer of such shares or (ii) the
fifth anniversary of the date on which the 1997 Securities, Debentures and New
Securities are exchanged for the Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock pursuant to the plan of Recapitalization.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AUTHORIZATION OF THE
ISSUANCE OF THE SERIES B PREFERRED STOCK.
-22-
<PAGE>
PROPOSAL SEVEN
--------------
AUTHORIZE THE ISSUANCE OF SERIES C PREFERRED STOCK IN CONNECTION WITH THE
COMPANY'S RECAPITALIZATION.
The Board of Directors has proposed to adopt the New Articles to authorize,
among other things, the issuance of 38,500 shares of Series C Preferred Stock.
Provided below is a description of the material terms of the Series C Preferred
Stock.
Pursuant to Section 4460(1)(D) of the NASD Manual Marketplace Rules with
respect to the Nasdaq National Market, the Company is seeking shareholder
approval to issue the Series C Preferred Stock.
The Series C Preferred Stock, par value $.01 per share (the "Series C
Preferred Stock") shall rank senior to the Company's common stock and pari passu
with the Company's Series A Preferred Stock and Series B Preferred Stock with
respect to liquidation, and shall be senior or pari passu with any other
preferred stock subsequently issued by the Company; provided however, that the
Series A Preferred Stock shall be senior with respect to liquidation to the
Series B Preferred Stock and the Series C Preferred Stock from and after June 1,
2002.
The Series C Preferred Stock shall have a per share liquidation preference
of $100 (the "Series C Liquidation Value"). Consent of the holders of at least a
majority of the Series A, B and C Preferred Stock voting together as a single
class, will be required for (i) any sale by the Company of a substantial portion
of its assets, (ii) any merger of the Company with another entity, (iii) each
amendment of the Company's articles of incorporation and (iv) any action that
(a) increases the authorized number of shares of preferred stock of the Company
of any series, (b) creates any new class or series of shares having preference
over or being on a parity with the Series A, B and C Preferred Stock, or (c)
creates any contractually subordinated debt of the Company. Such consent shall
not be unreasonably withheld. Except for such consent rights and voting rights
as may be provided by applicable law and the right to vote as a separate series
on all modifications of the rights, privileges or terms of the Series C
Preferred Stock, the Series C Preferred Stock shall have no voting rights as a
separate series.
The Series C Preferred Stock shall be convertible in whole or in part at
any time, and from time to time, at the option of the holders into shares of the
Company's common stock at a rate equal to $1.00 per share, (the "Series C
Conversion Price"). The Series C Preferred Stock will be subject to anti-
dilution provisions providing for adjustments to the Series C Conversion Price
upon (i) dividend or distribution of shares of common stock to holders of common
stock and (ii) subdivision or combination of the outstanding shares of common
stock.
There shall be no dividends paid on the Series C Preferred Stock.
The holders of Series C Preferred Stock shall receive from the Company the
annual, quarterly and monthly financial statements of the Company.
Representatives of the holders of the Series C Preferred Stock shall have the
right, upon reasonable notice, to inspect the books and records of the Company.
If the Company proposes to offer additional securities (other than employee
incentive stock or stock options, securities issued in a public offering or the
acquisition of another company, or shares issued upon conversion or exercise of
outstanding securities), the Company will first offer all such securities to the
holders of the Series C Preferred Stock and the Series B Preferred Stock (or
common stock issued upon conversion of the Series C Preferred Stock or Series B
Preferred Stock) on a pro rata basis. Such preemptive rights will not be
transferable and will terminate with respect to any shares of Series C Preferred
Stock or Series B Preferred Stock (or common stock issued upon conversion of the
Series B Preferred Stock or Series C Preferred Stock), as the case may be, upon
the earlier of the (i) transfer of such shares or (ii) the fifth anniversary of
the date on which the 1997 Securities, Debentures and New Securities are
exchanged for the Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock pursuant to the plan of Recapitalization.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE AUTHORIZATION OF THE ISSUANCE
OF THE SERIES C PREFERRED STOCK.
-23-
<PAGE>
ANNUAL REPORT
The Annual Report of the Company including financial statements for the
fiscal year ended January 31, 1998, is being forwarded to each shareholder with
this Proxy Statement.
OTHER MATTERS
The Board of Directors has no knowledge of any other matters which may come
before the Annual Meeting. If any other matters shall properly come before the
meeting, the persons named in the Proxies will have discretionary authority to
vote the shares thereby represented in accordance with their best judgment.
-24-
<PAGE>
PROPOSALS OF SHAREHOLDERS
Proposals of shareholders intended to be presented at the Company's next
Annual Meeting of Shareholders must be received by the Secretary of the Company
prior to May 1, 1999 for inclusion in the Proxy Statement for the Annual Meeting
of Shareholders scheduled to be held on or about June 29, 1999.
Please return your proxy as soon as possible. Unless a quorum consisting of
a majority of the outstanding shares entitled to vote is represented at the
Meeting, no business can be transacted. Therefore, please be sure to date and
sign your proxy exactly as your name appears on your stock certificate and
return it in the enclosed postage prepaid return envelope. Please act promptly
to insure that you will be represented at this important meeting.
Gina M. Shauer
Secretary
Dated: August __, 1998
-25-
<PAGE>
AVAILABILITY
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, AS AMENDED AND FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE PROVIDED TO SHAREHOLDERS
WITHOUT CHARGE UPON WRITTEN REQUEST TO THE CORPORATE SECRETARY, THE RIGHT START,
INC., 5388 STERLING CENTER DRIVE, UNIT C, WESTLAKE VILLAGE, CALIFORNIA 91361.
FORWARD-LOOKING STATEMENTS
This Proxy Statement 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. The forward-looking
statements in this Proxy Statement are intended to be subject to the safe harbor
protection provided by Sections 27A and 21E. All forward-looking statements
involve risks and uncertainties. Although the Company believes that its
expectations are based upon reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not materially differ from its expectations. For factors that may
cause actual results to materially differ from expectations and underlying
assumptions, see the Company's Registration Statement on Form S-3 (File No. 333-
08175) and periodic reports, including the Annual Report on Form 10-K, as
amended, for the fiscal year ended January 31, 1998, filed by the Company with
the Securities and Exchange Commission. Readers are cautioned not to place
undue reliance on any forward-looking statements, which speak only as of the
date thereof. The Company undertakes no obligation to publicly release any
revisions to such forward-looking statements to reflect events or circumstances
after the date hereof.
INCORPORATION BY REFERENCE
The financial and other information required pursuant to Item 13 (a) of
Proxy Rule 14a-101/Schedule 14a is hereby incorporated by reference in to this
proxy statement from the information provided in the Company's previously filed
Form 10-K, as amended.
-26-
<PAGE>
PROXY
THE RIGHT START, INC.
PROXY SOLICITED BY BOARD OF DIRECTORS
JERRY R. WELCH, with full power of substitution, is hereby appointed proxy
to vote the stock of the undersigned in The Right Start, Inc. at the Annual
Meeting of Shareholders on August 25, 1998, and at any adjournments, to be held
at The Right Start retail store located at 2001 North Sepulveda Boulevard,
Manhattan Beach, California.
MANAGEMENT RECOMMENDS THAT YOU VOTE "FOR" AUTHORITY ON ELECTION OF DIRECTORS AND
FOR THE BOARD'S PROPOSALS ONE, TWO, THREE, FOUR, FIVE, SIX AND SEVEN.
<TABLE>
<S> <C>
ELECTION OF DIRECTORS
[ ] FOR all Nominees listed below (except as indicated to the [ ] WITHHOLD AUTHORITY to vote
contrary below) for all Nominees listed below
</TABLE>
Jerry Welch, Richard Kayne, Fred Kayne, Andrew Feshbach, Robert Hollman and
Howard Zelikow.
INSTRUCTION: To withhold authority to vote for any individual Nominee, write
that Nominee's name in the space provided below.
- --------------------------------------------------------------------------------
PROPOSAL 1. RATIFICATION OF AUDITORS
FOR [ ] AGAINST [ ] ABSTAIN [ ]--PROPOSAL 1 appointment of
PricewaterhouseCoopers LLP as auditors for fiscal 1998.
PROPOSAL 2. APPROVAL OF AMENDMENT TO 1991 EMPLOYEE STOCK OPTION PLAN INCREASING
MAXIMUM AGGREGATE NUMBER OF SHARES OF THE COMPANY COMMON STOCK SUBJECT TO THE
PLAN FROM 575,000 TO 1,150,000 SHARES
FOR [ ] AGAINST [ ] ABSTAIN [ ]--PROPOSAL 2 approval of proposed
amendment to The Right Start, Inc. 1991 Employee Stock Option Plan.
PROPOSAL 3. APPROVAL OF AMENDMENT TO THE 1995 NON-EMPLOYEE DIRECTOR PLAN
INCREASING MAXIMUM AGGREGATE NUMBER OF SHARES OF THE COMPANY COMMON STOCK
SUBJECT TO THE PLAN FROM 250,000 TO 350,000 SHARES
FOR [ ] AGAINST [ ] ABSTAIN [ ]--PROPOSAL 3 approval of amendment
to The Right Start, Inc. 1995 Non-Employee Director Plan.
PROPOSAL 4. AUTHORIZE BLANK CHECK PREFERRED STOCK
FOR [ ] AGAINST [ ] ABSTAIN [ ]--PROPOSAL 4 authorize Blank
Check Preferred Stock.
PROPOSAL 5. AUTHORIZE THE ISSUANCE OF SERIES A PREFERRED STOCK IN CONNECTION
WITH THE COMPANY'S RECAPITALIZATION
FOR [ ] AGAINST [ ] ABSTAIN [ ]--PROPOSAL 5 approval of The Right Start, Inc.
Series A Preferred Stock.
PROPOSAL 6. AUTHORIZE THE ISSUANCE OF SERIES B PREFERRED STOCK IN CONNECTION
WITH THE COMPANY'S RECAPITALIZATION
FOR [ ] AGAINST [ ] ABSTAIN [ ]--PROPOSAL 6 approval of The Right Start, Inc.
Series B Preferred Stock
PROPOSAL 7. AUTHORIZE THE ISSUANCE OF SERIES C PREFERRED STOCK IN CONNECTION
WITH THE COMPANY'S RECAPITALIZATION
FOR [ ] AGAINST [ ] ABSTAIN [ ]--PROPOSAL 7 approval of The Right Start, Inc.
Series C Preferred Stock.
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment thereof,
including procedural and other matters relating to the conduct of the meeting.
<PAGE>
THE PROXY WILL BE VOTED AS DIRECTED. UNLESS OTHERWISE DIRECTED, THIS PROXY WILL
BE VOTED FOR THE ELECTION OF THE SIX DIRECTOR NOMINEES AND FOR PROPOSALS 1, 2,
3, 4, 5, 6 AND 7.
Please sign exactly as name appears
hereon.
_____________________________________
_____________________________________
Dated:________________________, 1998
When shares are held by joint
tenants, both should sign. When
signing as attorney, as executor,
administrator, trustee or guardian,
please indicate as such. If a
corporation, please sign in full
corporate name by President or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
PLEASE DATE, SIGN AND RETURN THIS CARD IN THE ENCLOSED ENVELOPE
