<PAGE>
- --------------------------------------------------------------------------------
PRELIMINARY COPY
These materials constitute preliminary proxy materials filed with respect to the
forthcoming special meeting of stockholders. Certain information is presented as
it is expected to exist when (and if) definitive proxy materials are mailed to
stockholders, and will be revised to reflect actual circumstances at that time.
- --------------------------------------------------------------------------------
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
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)(1) 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:
-------------------------------------------------------------------------
<PAGE>
THE RIGHT START, INC.
5388 Sterling Center Drive, Unit C
Westlake Village, California 91361
June __, 1998
DEAR SHAREHOLDERS:
Our Annual Meeting of Shareholders will be held on June 29, 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 June 29, 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 JUNE 29, 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 June 29, 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 Price Waterhouse 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 (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 (Proposal 3);
5. To approve an amendment to the Company's Amended and Restated
Articles of Incorporation to authorize 250,000 shares of "blank check"
preferred stock (Proposal 4);
6. To ratify the Company's Plan of Recapitalization as summarized in
the Amended Letter Agreement (Proposal 5); and
7. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The close of business on June __, 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
June __, 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 29th day of June, 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
Price Waterhouse 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 approve an
amendment to the Company's Amended and Restated Articles of Incorporation to
authorize 250,000 shares of "blank check" preferred stock, and FOR Proposal 5 to
ratify the Company's Plan of Recapitalization as summarized in the Amended
Letter Agreement. "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 June __, 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.
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 __, 1998 will be
entitled to vote at the meeting or any adjournment or postponement thereof. As
of May 12, 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 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.
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.
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 and
2
<PAGE>
Proposal 5 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
defined in Shareholder Proposal 5 below), as if the Recapitalization had been
approved by the Company's shareholders and fully consummated on May 4, 1998.
<TABLE>
<CAPTION>
Pro forma for
Recapitalization
---------------------------------
Amount and Amount and
Nature of Nature of
Beneficial Percent of Beneficial
Name and Address of Beneficial Owner Ownership (1) Class Ownership(1) Percent of Class
- ------------------------------------------- ------------- ----------- ------------- -----------------
<S> <C> <C> <C> <C>
Richard A. Kayne (2) 4,680,458 45.4% 8,848,354 61.9%
KAIM Non-Traditional, L.P.
1800 Avenue of the Stars
Second Floor
Los Angeles, CA 90067
Cahill, Warnock Strategic Partners Fund, 988,333 8.9% 746,667 6.9%
L.P. (3)
One South Street, Suite 2150
Baltimore, MD 21202
Travelers Group Inc. (4) 783,043 7.7% 771,376 7.6%
388 Greenwich Street
New York, NY 10013
Fred Kayne (5) 914,493 9.0% 1,391,577 13.0%
Fortune Fashions
6501 Flotilla Street
Commerce, CA 90040
Albert O. Nicholas 625,000 6.2% 625,000 6.2%
Nicholas Co., Inc.
700 North Water Street
Milwaukee, WI 53202
Howard Kaplan 610,000 6.0% 610,000 6.0%
99 Chauncy Street
Boston, MA 02111
Gerald E. Mitchell (6) 66,750 * 66,750 *
5388 Sterling Center Drive, Unit C
Westlake Village, CA 91361
Gina M. Shauer (7) 27,392 * 27,392 *
5388 Sterling Center Drive, Unit C
Westlake Village, CA 91361
Andrew Feshbach (8) 19,534 * 19,534 *
Big Dog Sportswear
121 Gray Avenue, Suite 300
Santa Barbara, CA 93101
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Robert R. Hollman (8) 19,534 * 19,534 *
Topa Management
1800 Avenue of the Stars
Suite 1400
Los Angeles, CA 90067
Jerry R. Welch (8)(9) 19,534 * 19,534 *
Kayne Anderson Investment Management,
Inc.
1800 Avenue of the Stars
Second Floor
Los Angeles, CA 90067
Howard M. Zelikow (8)(9) 19,534 * 19,534 *
Kayne Anderson Investment Management,
Inc.
1800 Avenue of the Stars
Second Floor
Los Angeles, CA 90067
Ronald J. Blumenthal (10) 55,608 * 55,608 *
5388 Sterling Center Drive, Unit C
Westlake Village, CA 91361
All executive officers and directors 5,866,564 55.2% 10,511,544 69.7%
as a group (twelve persons) (11)
</TABLE>
_________________________
* Less than one percent.
(1) Except as otherwise noted below, the persons named in the table have
sole voting power and investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to community
property laws where applicable.
(2) The 4,680,458 shares include (i) 199,034 shares held directly by Mr.
Kayne (including 19,534 shares which may be acquired within 60 days
upon exercise of options) and (ii) 4,481,424 shares held by managed
accounts of KAIM Non-Traditional, L.P. ("KAIM, LP"), a registered
investment adviser (including 190,000 share which may be acquired
within 60 days upon exercise of Existing Warrants). Mr. Kayne has
sole voting and dispositive power over the shares he holds directly.
He has shared voting and dispositive power along with Kayne Anderson
Investment Management, Inc. ("KAIM, Inc."), the general partner of
KAIM, LP, over the remaining shares. (Mr. Kayne is the President,
Chief Executive Officer and a Director 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) 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 Existing Warrants to
purchase common stock. SA owns Debentures currently convertible into
39,500 shares of common stock and 8,233 currently exercisable Existing
Warrants to purchase common stock. Each of Messrs. Warnock and
Cahill, CW, CWSP, SPF and SA may be deemed to beneficially own 988,333
shares of common stock. Messrs. Warnock and Cahill, CW and CWSP
disclaim beneficial ownership with respect to the shares held by SPF
and SA. SPF disclaims beneficial ownership with respect to the shares
underlying the Debentures and the Existing Warrants held by SA. SA
4
<PAGE>
disclaims beneficial ownership with respect to the shares underlying
the Debentures and the Existing Warrants held by SPF. The shares
reported above and in the table exclude 9,217 currently exercisable
options to purchase common stock held by Mr. Warnock.
(4) The amount and nature of beneficial ownership of 783,043 shares has
been taken from an Amendment No. 2 to Schedule 13G filed on January
23, 1998, which states that (i) Primerica Life Insurance Company,
Travelers Insurance Holdings Inc. and The Travelers Insurance Company
each report beneficial ownership of 631,376 shares and (ii) The
Travelers Insurance Group Inc., PFS Services, Inc., Associated Madison
Companies, Inc. and Travelers Group Inc. each report beneficial
ownership of 783,043 shares. The amount reported in the table and in
clause (ii) above includes currently exercisable Existing Warrants to
purchase 31,667 shares of common stock.
(5) Includes 855,376 shares, 39,583 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.
5
<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, and
for Jos. A. Bank Clothiers from 1985 until 1990, where he also served as Vice
President, Real Estate.
MICHELE IGLESIAS became Vice President - Human Resources of the Company in
December 1996 and served as Director of Human Resources from February 1994 to
December 1996. Ms. Iglesias' previous experience includes other human resources
management positions.
GERALD E. MITCHELL became Vice President-Merchandising of the Company in
July 1996. Mr. Mitchell previously served as Vice President-Merchandising for
Discovery Channel Stores in Dallas, Texas.
MARILYN PLATFOOT became Vice President-Retail Operations of the Company in
April 1996. Ms. Platfoot previously served as Western Regional Manager for
Brookstone Stores from 1992 to 1996. Prior to that, Ms. Platfoot spent 13 years
with the Foxmoor Casual chain, ultimately serving as West Coast Regional
Manager.
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.
6
<PAGE>
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 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.
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.
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>
7
<PAGE>
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 indepen dent 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.
8
<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 (1) Options (#)
- ------------------------------------- -------- ----------- ------- ---------------- -------------------------
<S> <C> <C> <C> <C> <C>
Jerry R. Welch (2) 1998 $ -0- $ -0- $ -0- 14,765
Chairman of the Board, President 1997 -0- -0- -0- 9,217
and Chief Executive Officer 1996 -0- -0- -0- 10,317(3)
Ronald J. Blumenthal 1998 135,000 -0- -0- 15,000
Senior Vice President 1997 90,865 -0- -0- -0-
1996 110,161 29,000 4,058 50,000
Gerald E. Mitchell 1998 155,000 -0- 8,048 15,000
Vice President - Merchandising 1997 80,481 -0- 3,875 75,000
Marilyn Platfoot 1998 115,000 -0- -0- 15,000
Vice President Retail Operations 1997 72,981 -0- -0- -0-
1996 6,365 -0- -0- 25,000
Gina M. Shauer 1998 105,000 -0- -0- 10,000
Chief Financial Officer and 1997 66,635 -0- 750 -0-
Secretary 1996 94,138 -0- 1,300 20,000
</TABLE>
(1) Amounts shown include Company contributions under the Company's Employee
Stock Ownership Plan and the Company's Employee Stock Purchase Plan, as
applicable for the listed executives.
(2) Mr. Welch receives no compensation for serving as Chief Executive Officer
or President.
(3) Granted under the 1995 Plan prior to Mr. Welch becoming President and Chief
Executive Officer.
9
<PAGE>
DIRECTORS' FEES
All of the Company's non-employee directors receive directors' fees of
$3,000 per quarter. All of the members of the Board of Directors have elected,
in lieu of such compensation, to receive options to purchase common stock of the
Company at the fair market value on the date the options are granted.
OPTION GRANTS IN THE FISCAL YEAR ENDED JANUARY 31, 1998
The following table provides certain information regarding stock options
granted to the Named Executive Officers during the fiscal year ended January 31,
1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------
NUMBER OF
SUECURITIES % OF TOTAL
NDERLYING OPTIONS
OPTIONS GRANTED TO POTENTIAL REALIZABLE VALUE AT
GRANTED EMPLOYEES EXERCISE OR ASSUMED ANNUAL RATES OF
--------- IN FISCAL BASE PRICE EXPIRATION STOCK PRICE APPRECIATION FOR
(#)(1) YEAR ($/SHARE) DATE OPTION TERM
------ ---------- ----------- ---------- -----------
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.
10
<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 Shareholder 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 cancelling all of his or her existing outstanding options to
purchase the Company's common stock. The Compensation Committee may from time
to time modify or amend the 1991 Plan as it deems necessary or desirable, but
generally may not change an option already granted thereunder without the
written consent of the holder of such option (or stock issued on exercise
thereof). Of the 880,000 New Option Shares granted, 600,000 option shares were
granted to executive officers of the Company in the following amounts: Gerald
Mitchell (125,000 option shares), Ron Blumenthal (75,000 option shares), Marilyn
Platfoot (125,000 option shares), Gina Shauer (100,000 option shares), Richard
Pollock (100,000 option shares), and Michele Iglesias (75,000 option shares).
The remaining 280,000 New Option Shares were granted to non-executive employees
of the Company.
The Board of Directors of the Company has proposed an amendment to the
1991 Plan to increase the maximum number of shares of common stock issuable
under such plan from 575,000 to 1,150,000 shares, subject to the approval of the
shareholders of the Company as provided 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 Shareholder Proposal 2 below.
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, 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
Shareholder Proposal 3 below.
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.
11
<PAGE>
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.
12
<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.
13
<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 was late in filing his
Form 4 for the September 1997 common stock transaction in which he purchased
224,000 shares of the Company's common stock.
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) (the "Existing
Securityholders"), of (a) the Company's Convertible Debentures dated October 11,
1996, as amended on May 30, 1997, in the aggregate principal amount of
$3,000,000 (the "Debentures") and (b) the Company's 11.5% Senior Subordinated
notes due May 6, 2000 in the aggregate principal amount of $3,000,000 (the
"Senior Notes" and together with the Debentures, the "Existing Debt") and
warrants to purchase 475,000 shares of the Company's common stock issued in
connection with the Senior Notes (the "Existing Warrants" and together with the
Senior Notes, the "Senior Securities") entered into a Letter Agreement dated
April 6, 1998 (the "Letter Agreement") and an Amendment to Letter Agreement
dated April 13, 1998 (the "Amendment", and together with the Letter Agreement,
the "Amended Letter Agreement) setting forth a plan of recapitalization (the
"Recapitalization").
The Recapitalization, as more fully set forth in Proposal 5 below, consists
of the following: (a) the issuance of $3,850,000 aggregate principal amount of
the Company's non-interest bearing Senior Subordinated Notes due May 6, 2000
(the "New Notes") and warrants to purchase 3,850,000 shares of the Company's
common stock (the "New Warrants", and together with the New Notes, the "New
Securities") to, among others, Fred Kayne ($350,000) and affiliates of KAIM
($3,383,333), (b) a waiver by the Existing Securityholders of all of their
rights to interest payments accrued and owing on the Existing Debt on or after
February 28, 1998, (c) an agreement by the Existing Securityholders to exchange
the Existing Debt and the Existing Warrants for either Series A or Series B
Preferred Stock within two-hundred forty days after the issuance of the New
Securities and (d) an agreement by the New Securityholders to exchange the New
Securities for Series C Preferred Stock simultaneous with the exchange of
Existing Debt for Series A and/or B Preferred Stock.
PROPOSAL ONE
------------
APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The firm of Price Waterhouse LLP, the Company's independent accountants for
the fiscal year ended January 31, 1998, was selected by the Board 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
14
<PAGE>
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 Price Waterhouse 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 PRICE WATERHOUSE.
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. 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. 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
-------------
APPROVAL OF AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED ARTICLES OF
INCORPORATION.
The Board of Directors has proposed to amend Article Three of the Company's
Amended and Restated Articles of Incorporation (the "Articles") to authorize
250,000 shares of "blank check" preferred stock ("Preferred Stock"). The
proposed amendment to the Articles reads as follows:
"THREE: This corporation is authorized to issue two classes of stock
-----
to be designated, respectively, as "Common Stock" and "Preferred
Stock". The total number of shares which the Corporation is
authorized to issue is 25,000,000, of which 24,750,000 shares shall be
Common Stock and 250,000 shares shall be Preferred Stock.
15
<PAGE>
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized to fix or alter
the rights, preferences, privileges and restrictions with respect to
the Preferred Stock, and the number of shares constituting any such
series and the designation thereof, or any of them; and to increase or
decrease the number of shares of any series subsequent to the issuance
of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the
status they had prior to the adoption of the resolution originally
fixing the number of shares of such series."
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 the proposed amendment to the Articles is 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 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 approved by the stockholders, this provision of the Articles will
authorize the Board of Directors to determine, among other things, with respect
to each series of 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 Proposal 5
hereof. 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 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.
16
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PROPOSED
AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED ARTICLES OF INCORPORATION.
PROPOSAL FIVE
-------------
RATIFY THE COMPANY'S PLAN OF RECAPITALIZATION.
With the recommendation of the Board of Directors, the Company is
submitting to Shareholders for their ratification a plan of Recapitalization of
the Company as summarized in the Amended Letter Agreement. The plan of
Recapitalization has been entered into by the Company, the purchasers of the New
Securities (the "New Securityholders"), the holders of the Company's Convertible
Debentures (the "Debenture Holders") and the holders of the Company's 11.5%
Senior Subordinated Notes and Existing Warrants (the "Senior Securityholders",
and together with the Debenture Holders, the "Existing Securityholders"). The
Company is undertaking the Recapitalization in order to improve it's capital
structure by the elimination of its indebtedness other than indebtedness
outstanding under the Company's bank credit facility. Additionally, the
proceeds generated by the Recapitalization will be used by the Company for new
store growth and working capital.
Approval of this Proposal 5 is subject to approval of Proposal 4 by the
Company's Shareholders which authorizes blank check Preferred Stock of the
Company and, if Proposal 4 is not so approved, Proposal 5 shall be withdrawn.
If Proposal 4 is approved by the Company's Shareholders, Proposal 5 shall not be
withdrawn and shall be subject to the vote of the Shareholders. Proposal 5
consists of multiple components, but approval of Proposal No. 5 by the requisite
vote of the Shareholders will constitute approval of each component, i.e. there
will be no separate vote on the individual components.
The plan of Recapitalization consists of the following:
1. Issuance of New Notes and New Warrants.
--------------------------------------
Pursuant to a Securities Purchase Agreement dated as of April 13, 1998 (the
"New Purchase Agreement"), for the purchase price of $3,850,000, the Company has
issued $3,850,000 aggregate principal amount of the Company's non-interest
bearing Senior Subordinated Notes due May 6, 2000 (the "New Notes"), together
with warrants to purchase 3,850,000 shares of the Company's common stock
exercisable at $1.00 per share (the "New Warrants," and together with the New
Notes, the "New Securities"). The New Securities have been issued to the
purchasers (the "Purchasers") in the following amounts: (a) parties affiliated
with KAIM purchased an aggregate principal amount of $3,383,333 of the New Notes
(and a proportional share of the New Warrants), (b) Fred Kayne purchased an
aggregate principal amount of $350,000 of the New Notes (and a proportional
share of the New Warrants), and (c) a party unaffiliated with the Company
purchased an aggregate principal amount of $116,667 of the New Notes (and a
proportional share of the New Warrants).
NEW NOTES
General Information. The New Notes are issued in the aggregate principal
amount of $3,850,000. Each New Note is a non-interest bearing unsecured
obligation of the Company. Principal repayment on the New Notes is due May 6,
2000. The New Notes may be transferred or exchanged on the books of the
Company, such books located at its principal offices, so long as the proposed
transaction does not require registration or qualification under federal or
state securities law or unless the proposed transaction is registered or
qualified as required.
The New Notes do not contain restrictions on the Company's ability to incur
additional indebtedness or issue securities. Additionally, the New Notes may
not be redeemed (except insofar as the New Notes may be repaid in full by the
Company as set forth below) and are not subject to any sinking fund.
17
<PAGE>
Subordination. The New Notes are subordinated in right of payment to the
prior payment in full of all Senior Debt of the Company. For purposes hereof,
"Senior Debt" means the principal and interest on (including any interest
accruing after the commencement of any bankruptcy proceeding or which would have
accrued but for such proceeding whether or not allowed) and other amounts due on
or with respect to (a) indebtedness of the Company, whether outstanding on the
date thereof or incurred, assumed or guaranteed by the Company, for money
borrowed from banks or other financial institutions and any refinancings or
refundings thereof; (b) indebtedness of the Company, whether outstanding on the
date thereof or thereafter created, incurred, assumed or guaranteed by the
Company, which is not subordinated in right of payment or in rights upon
liquidation to any Senior Debt; and (c) indebtedness of the company under
interest rate swaps, caps or similar hedging agreements and foreign exchange
contracts, currency swaps or similar agreements. As of April 15, 1998, the
Company had an aggregate amount of $3,000,000 of Senior Debt outstanding. There
is no limitation on the Company's incurrence of additional Senior Debt.
No payment or other distribution on account of principal or redemption
of, or other amounts due on the New Notes, and no redemption, purchase, or other
acquisition of the New Notes, shall be made by or on behalf of the Company (a)
unless full payment of amounts then due for principal and interest and of all
other amounts then due on all Senior Debt has been made or duly provided for in
cash pursuant to the terms of the instrument governing such Senior Debt, (b) if,
at the time of such payment, redemption, purchase or other acquisition, or
immediately after giving effect thereto, there shall exist under any Senior
Debt, or any agreement pursuant to which any Senior Debt is issued, any default,
which default shall not have been cured or waived and which default shall have
resulted in the full amount of such Senior Debt being due and payable, or (c)
if, at the time of such payment, redemption, purchase or other acquisition, the
New Securityholder shall have received written notice from the holder or holders
of any Senior Debt or their representative or representatives (a "Payment
Blockage Notice") that there exists under such Senior Debt, or any agreement
pursuant to which such Senior Debt is issued, any default, which default shall
not have been cured or waived, permitting the holders thereof to declare the
full amount of such Senior Debt due and payable but only for the period (the
"Payment Blockage Period") commencing on the date of receipt of the Payment
Blockage Notice and ending (unless earlier terminated by notice given to the
holder or holders of such Senior Debt) on the earlier of (x) the date on which
such event of default shall have been cured or waived or (y) 180 days from the
receipt of the Payment Blockage Notice unless payment or distribution with
respect to the New Notes are otherwise not then permitted. Upon termination of
the Payment Blockage Period, payments on account of principal of the New Notes
(other than amounts due and payable by reason of the acceleration of the
maturity of the New Notes) and redemptions, purchases or other acquisitions may
be made by or on behalf of the Company, if otherwise permitted thereunder.
So long as any Senior Debt remains unpaid, the New Securityholders will not
accelerate, or cause to be accelerated, the New Notes, or exercise any remedies
with respect to any event of default occurring with respect to the New Notes for
a period of no less than 180 days after the New Securityholders have delivered
to the holders of the Senior Debt notice of the occurrence of any default. As a
result of the subordination provisions described above, in the event of a
liquidation or insolvency, the New Securityholders may recover less ratably than
creditors of the Company who are holders of Senior Debt.
The New Notes rank pari passu with all other subordinated debt, including
the Senior Notes and the Debentures; provided however, that if the Company is
unable to effect the Preferred Stock Exchange (as set forth in section 4 below)
within two-hundred forty days of April 13, 1998, the Senior Notes and Debentures
will be subordinate to the New Notes.
Prepayment of New Notes at the Option of the Holder upon a Change of
Control. The Company may prepay all, or a portion thereof (at the election of
the New Securityholders), of the unpaid principal amount of the New Notes upon
30 days written notice to the New Securityholders, and acceptance by the New
Securityholders of such offer, upon a Change of Control defined as an event or
series of events by which (a) KAIM ceases to beneficially own (as beneficial
ownership is defined in Rule 13d-3 of the Exchange Act and control, directly or
indirectly, at least twenty-five percent (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; (2) any person or group (as
defined in Rule 13d-1 of the Exchange Act), other than a group which includes
KAIM, who obtains beneficial ownership (as defined in Rule 13d-3 of the Exchange
Act) or control of a majority of the securities of the Company ordinarily having
the right to vote in the election of directors; (3) during any two year period
commencing on April 13, 1998, individuals who at the beginning of such period
constituted the Board of Directors of the Company cease for any reason to
constitute a majority of the board of directors; (4) any sale, lease, exchange
or other transfer ( in one transaction or a series of related transactions) of
all, or substantially all, the assets of the Company; (5) the merger or
consolidation of the
18
<PAGE>
Company with another Person with the effect that immediately after such
transaction any beneficial owner of the Company shall have become the beneficial
owner of securities of the Person surviving such merger or consolidation
representing a majority of the combined voting power of the outstanding
securities of the surviving person ordinarily having the right to vote in the
election of directors; or (6) the adoption of a plan leading to the liquidation
or dissolution of the Company.
Events of Default and Remedies. The New Purchase Agreement governing each
of the New Notes defines an Event of Default to include the following: (a)
failure to pay any of the principal on the New Notes within ten (10) days after
written notice thereof has been given to the Company; (b) the Company's default
in the performance of any covenant contained in Article 5 of the New Purchase
Agreement if not cured in full within ten (10) days after written notice thereof
has been given to the Company; (c) a material incorrect representation or
warranty, as of the date of such representation or warranty made by the Company
of any officers of the Company in the New Purchase Agreement and any other
written instruments executed in connection therewith; (d) the Company's failure
to perform any other term or covenant contained in the New Purchase Agreement if
not cured in full within ten (10) days after written notice thereof has been
given to the Company; (e) certain events of bankruptcy, insolvency or
reorganization in respect of the Company; or (f) any judgment, writ, warrant of
attachment or similar process issued against the property of the Company in an
aggregate amount exceeding $2,500,000, if not released, vacated, stayed pending
appeal or fully bonded within sixty (60) days after its issue or levy.
Amendments. No amendment, modification or addition to the New Purchase
Agreement, and no waiver or consent to noncompliance with any covenant or other
provision of the New Purchase Agreement, or the New Notes shall be effective
unless set forth in writing and executed by the party against whom enforcement
of such amendment, modification, addition, waiver or consent is sought. Any
waiver or consent may be given subject to satisfaction of conditions stated
therein and any waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
NEW WARRANTS
In connection with the issuance of the New Notes, the Company has also
issued the New Warrants. However, upon approval of the Recapitalization, the
New Securities, including the New Warrants, shall be exchanged for the Series C
Preferred Stock (as described in section 4 below) at which time the New Warrants
shall no longer be outstanding. The exchange of the New Securities is required
to occur no later than December 19, 1998, pursuant to the terms of the
Recapitalization. The New Warrants are exercisable at any time prior to five
years from their date of issuance, subject to prior approval by the Shareholders
of the Company. The New Warrants authorize the purchase of 3,850,000 shares of
the Company's common stock at $1.00 per share subject to adjustments for (a) a
dividend paid of common stock or stock which is not preferred as to dividends or
assets and is not subject to redemption (collectively, "Nonpreferred Stock"),
(b) a subdivision of the outstanding shares of Nonpreferred Stock, or (c) a
combination of the outstanding shares of Nonpreferred Stock. In the case of a
merger, consolidation or disposition of all or substantially all of the
Company's property, assets or business to another corporation, and pursuant to
the terms of such event, shares of common stock of the successor or acquiring
corporation are to be received by or distributed to the holders of Nonpreferred
Stock of the Company, then each New Warrant shall have the right to receive,
upon exercise, the equivalent amount of stock of the successor or acquiring
corporation.
As of May 11, 1998, the Existing Warrants entitle the Senior
Securityholders to purchase an aggregate of 475,000 shares of the Company's
common stock. Upon the approval of this Proposal 5, there will be a total of
4,325,000 warrants to purchase the Company's common stock outstanding and, upon
consummation of the Recapitalization (as described herein), no warrants to
purchase the Company's common stock will remain outstanding.
2. Issuance of Series A Preferred Stock, Series B Preferred Stock and
------------------------------------------------------------------
Series C Preferred Stock.
------------------------
Subject to approval of Proposal 4 and as part of the Recapitalization, the
Company is seeking authority to issue three series of Preferred Stock, Series
A, Series B and Series C Preferred Stock, with the following rights,
preferences and privileges:
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
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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 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 (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, the Series A Preferred
Stock shall have no voting rights as a separate series except the right to vote
as a separate series with the class of Preferred Stock as to any matters
regarding the modification of the rights, privileges or terms of the Series A
Preferred Stock and otherwise in accordance with applicable law.
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. 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. 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.
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.
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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, the Series B Preferred
Stock shall have no voting rights as a separate series except the right to vote
as a separate series with the class of Preferred Stock as to any matters
regarding the modification of the rights, privileges or terms of the Series B
Preferred Stock and otherwise in accordance with applicable law.
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.
The Series B Preferred Stock shall be mandatorily redeemed by the Company
for cash (subject to the legal availability of funds therefor) at a price per
share equal to the Series B 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. In connection with such an event, the Company shall provide the holders
of the Series B Preferred Stock with prior written notice no later than 30 days
in advance of a mandatory redemption due to a Change of Control.
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. 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 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 (b) the fifth anniversary of the
Preferred Stock Exchange as set forth below.
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 (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
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<PAGE>
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, the
Series C Preferred Stock shall have no voting rights as a separate series
except the right to vote as a separate series with the class of Preferred Stock
as to any matters regarding the modification of the rights, privileges or terms
of the Series C Preferred Stock and otherwise in accordance with applicable
law.
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.
The Series C Preferred Stock shall be mandatorily redeemed by the Company
for cash (subject to the legal availability of funds therefor) at a price per
share equal to the Series C 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. In connection with such an event, the Company shall provide the holders
of the Series C Preferred Stock with prior written notice no later than 30 days
in advance of a mandatory redemption due to a Change of Control.
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. 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 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 (b) the fifth anniversary of the
Preferred Stock Exchange as set forth below.
3. Exchange of the Existing Securities for Series A and/or Series B
----------------------------------------------------------------
Preferred Stock.
- ---------------
Subject to approval of Proposal 4 and as part of the Recapitalization, the
Company is seeking authority to effect an exchange wherein the Debenture Holders
will exchange the Debentures, and the Senior Securityholders will exchange the
Senior Notes and the Existing Warrants for an aggregate of 30,000 shares of the
Series A Preferred Stock and an aggregate of 30,000 shares of the Series B
Preferred Stock at the exchange price of $1,000 principal amount of Existing
Debt per ten shares of Series A Preferred Stock or Series B Preferred Stock and,
simultaneously, the New Securityholders will exchange the New Securities (as
described in section 4 below), in an exchange transaction to occur no later
than December 19, 1998 (the "Preferred Stock Exchange"). The following is a
description of the material terms of the Debentures, the Senior Notes and the
Existing Warrants.
DEBENTURES
General. The Debentures in the aggregate principal amount of $3,000,000
mature on May 31, 2002. Each Debenture is an unsecured obligation of the
Company and bears interest at a rate of 8% per annum from October 11, 1996 until
maturity, payable quarterly on February 28, May 31, August 31 and November 30 of
each year. Under the terms of the Amended Letter Agreement, each Debenture
Holder has waived their right to receive any interest accrued and owing on or
after February 28, 1998 and, as of such date, there was no default in interest
or principal on the Debentures. Principal and interest on the Debentures is
payable at the principal office of each Debenture Holder
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<PAGE>
or at such other place as the holders may designate from time to time in writing
to the Company. The Debentures may be transferred or exchanged on the books of
the Company, such books located at its principal offices.
The Debentures do not contain restrictions on the Company's ability to
incur additional indebtedness or issue securities. Additionally, the Debentures
do not pay dividends, may not be redeemed (except in so for as the Debentures
may be prepaid in full by the Company as set forth below) and are not subject to
any sinking fund.
Conversion. Each Debenture Holder may at any time prior to their maturity
convert the entire principal amount of its outstanding Debentures (or any
portion thereof) into the number of shares of the Company's common stock
determined by dividing the principal amount so converted by the purchase price
of $4.00 per share, as adjusted from time to time in certain circumstances as
described therein. The Debentures shall be convertible by surrender of the
Debentures at the Company's principal offices of the Company accompanied by
written notice from the Debenture Holder to the Company stating the holder
thereof's election to convert.
Subordination. The Debentures are subordinated in right of payment to the
prior payment in full of all Senior Debt of the Company. For purposes hereof,
"Senior Debt" means the principal of, interest on (including any interest
accruing after the commencement of any bankruptcy proceeding or which would have
accrued but for such proceeding whether or not allowed) and other amounts due on
or with respect to (i) indebtedness of the Company, whether outstanding or
borrowed from banks or other financial institutions and any refinancings or
refundings thereof, (ii) indebtedness of the Company, whether outstanding on the
date of issuance of the Debentures or thereafter created, incurred, assumed or
guaranteed by the Company, which is not subordinated in right of payment or in
rights upon liquidation to any Senior Debt and (iii) indebtedness of the Company
under interest rate swaps, caps or similar hedging agreements and foreign
exchange contracts, currency swaps or similar agreements.
No payment or other distribution on account of principal of or redemption
of, interest on or other amounts due on the Debentures, and no redemption,
purchase or other acquisition of the Debentures may be made by or on behalf of
the Company unless (i) full payment of amounts then due on all Senior Debt of
the Company has been made or duly provided for in cash pursuant to the terms of
the instruments governing such Senior Debt, (ii) no default (except default
which have been cured or waived) shall exist under the terms of any Senior Debt
which shall have resulted in the full amount of such Senior Debt being due and
payable or (iii) no other default has occurred on the Company's Senior Debt as
to which such default relates to accelerate its maturity and the Company
receives notice of such default (a "Payment Blockage Notice") that there exists
under such Senior Debt any default that has not been cured or waived, permitting
the holders thereof to declare the full amount of such Senior Debt due and
payable, but only for the period (the "Payment Blockage Period") commencing on
the receipt of the Payment Blockage Notice and ending (unless earlier terminated
by the holders of the Senior Debt) on the earlier of (a) the date on which such
default shall have been cured or waived or (b) 180 days from the receipt of the
Payment Blockage Notice unless payment or distribution with respect to the
Debentures is otherwise permitted. Upon termination of the Payment Blockage
Period, payments on account of principal and interest on the Debentures (other
than amounts due an payable by reason of the acceleration of the maturity of the
Debentures) and redemptions, purchases or other acquisitions may then be made by
or on behalf of the Company.
So long as any Senior Debt remains unpaid, the holders of the Debentures
may not accelerate, or cause to be accelerated, the Debentures, or exercise any
remedies with respect to any default occurring with respect to the Debentures
for a period of no less than 180 days after the holders have delivered to the
holders of the Senior Debt notice of the occurrence of any event of default. As
a result of the subordination provisions described above, in the event of a
liquidation or insolvency, holders of the Debentures may recover less ratably
than creditors of the Company who are holders of Senior Debt.
The Debentures rank pari passu with all other subordinated dated; provided
however that if the Company is unable to effect the Preferred Stock Exchange
within two-hundred forty days of April 13, 1998, the Debentures will be
subordinate to the New Notes.
Prepayment. Commencing on October 11, 1999, the Company may prepay all,
but not less than all, the unpaid principal amount, and any outstanding interest
on, the Debentures upon 30 days written notice to the holders of the Debentures
upon the happening of (i) the Company's filing of a registration statement
covering, at the option of the holder, all or a portion of the shares of common
stock underlying the Debentures and such registration statement has been
declared effective on or before the date of prepayment, and (ii) the market
price of the Company's common stock on the date of such notice is at least $7.50
per share (as adjusted from time to time as provided in the Debentures).
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<PAGE>
Repurchase of Debentures at the Option of the Holder upon a Change of
Control. Upon the happening of a Change of Control, provided the initial
Purchasers (SPF and SA) of the Debentures have not transferred their Debentures
to a third party, the Company is required to send a notice to the initial
Purchasers offering to repurchase such Purchasers' Debentures (or at each
Purchaser's option, any portion thereof) at the par amount thereof, plus
interest accrued and unpaid thereon to the date of such repurchase. A "Change
of Control" is defined as an event or series of events by which (i) KAIM and its
affiliates cease to beneficially own and control at least 25% of the issued and
outstanding shares of each class of capital stock of the Company entitled to
vote for the election of a majority of the members of the Board of Directors of
the Company, (ii) any person or group (other than a group which includes KAIM or
its affiliates) gains control of a majority of the Company's shares entitled to
vote for the Board of Directors, (iii) during the two-year period commencing May
30, 1997, individuals who at the beginning of such period constituted the Board
of Directors of the Company cease for any reason to constitute a majority of the
Board of Directors, (iv) a sale, lease, exchange or other transfer of all or
substantially all the assets of the Company, (v) the merger or consolidation of
the Company with another corporation in which the majority of the voting power
of the surviving corporation is different from the current majority voting power
of the Company or (vi) the adoption of a plan leading to the dissolution or
liquidation of the Company.
Events of Default and Remedies. The Purchase Agreements governing each of
the Debentures (the "Debenture Purchase Agreements") defines an Event of Default
to include the following: (i) failure to pay an installment of principal or
interest on the Debentures within ten days after written notice thereof has been
given to the Company, (ii) the Company's default in the performance of any
covenant contained in Article V of each of the Purchase Agreements if not cured
in full within ten days after written notice thereof has been given to the
Company, (iii) an incorrect representation or warranty, as of the date of such
representation or warranty, made by the Company or its subsidiaries in the
Debenture Purchase Agreements, (iv) the Company's or any subsidiary's failure to
perform any other covenant contained in each of the Purchase Agreements if not
cured in full within ten days after written notice thereof has been given to the
Company, (v) certain events of bankruptcy, insolvency or reorganization in
respect of the Company or (vi) any judgment, writ, warrant of attachment or
similar process shall be issued against the property of the Company or any of
its subsidiaries in an aggregate amount which exceeds $2,500,000, if not
release, appealed or vacated within 60 days after its issue or levy.
Upon the occurrence of any event of default, any Debenture Holder may, by
notice to the Company, declare the entire unpaid principal amount of such
Debenture, all interest accrued and unpaid thereon and all other amounts payable
to such holder under such Debentures, if any, to be due and payable without
further presentment required. Each Debenture Holder, at its election, may waive
any default or event of default for itself only.
Amendments. No amendment of a Debenture shall be valid or binding unless
set forth in writing and executed by the party against whom enforcement of the
amendment or modification is sought.
SENIOR NOTES
The Company's Senior Notes are issued in the aggregate principal amount of
$3,000,000 on substantially the same terms as the New Notes (as set forth in
section 1 above) with the following exceptions: (a) each Senior note bears
interest at the rate of 11.5% per annum from May 6, 1997 until maturity on May
6, 2000 payable quarterly on January 31, April 30, July 31 and October 31 of
each year; (b) under the terms of the Amended Letter Agreement, each Senior
Securityholder has waived their right to receive any interest accrued and owing
on or after February 28, 1998 and, as of such date, there was no default on
interest or principal on the Senior Notes; and (c) under the terms of the
Amended Letter Agreement, if the Preferred Stock Exchange does not occur within
two-hundred forty days of April 13, 1998, the Senior Securityholders have agreed
to subordinate the Senior Notes to the New Notes.
EXISTING WARRANTS
The Company's Existing Warrants are exercisable at any time prior to five
years from their original date of issuance and authorize the purchase of an
aggregate of up to 475,000 shares of the Company's common stock at an exercise
price of $4.00 per share, subject to adjustments for (a) a dividend paid of
Nonpreferred Stock, (b) a subdivision of the outstanding shares of Nonpreferred
Stock, or (c) a combination of the outstanding shares of Nonpreferred Stock. In
case of a merger, consolidation or disposition of all or substantially all of
the Company's property, assets or business to another corporation, and pursuant
to the terms of such event, shares of common stock of the successor or acquiring
corporation are to be received by or distributed to the holders of Nonpreferred
Stock of the Company, then each Existing Warrant shall have the right to
receive, upon exercise, the equivalent amount of stock of the successor or
acquiring corporation.
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As of May 11, 1998, the Existing Warrants entitle the Senior
Securityholders to purchase an aggregate of 475,000 shares of the Company's
common stock. Upon the approval of this Proposal 5, there will be a total of
4,325,000 warrants to purchase the Company's common stock outstanding and, upon
consummation of the Recapitalization (as described herein), no warrants to
purchase the Company's common stock will remain outstanding.
4. Exchange of the New Securities for Series C Preferred Stock.
------------------------------------------------------------
Subject to approval of Proposal 4 and as part of the Recapitalization, the
Company is seeking authority to effect an exchange wherein the New
Securityholders will exchange the New Securities, consisting of the New Notes
and the New Warrants, for an aggregate of 38,500 shares of the Series C
Preferred Stock at the exchange price of $1,000 principal amount of New Notes
per ten shares of Series C Preferred Stock in the Preferred Stock Exchange.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
COMPANY'S RECAPITALIZATION PLAN.
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.
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<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 28, 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: June ___, 1998
26
<PAGE>
AVAILABILITY
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K AS 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 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.
27
<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 June 29, 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 AND FIVE.
<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 Price
Waterhouse LLP as auditors for fiscal 1998.
PROPOSAL 2. APPROVAL OF AMENDMENT TO 1991 EMPLOYEE STOCK OPTION PLAN
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 DIRECTORS OPTION PLAN
FOR [ ] AGAINST [ ] ABSTAIN [ ]--PROPOSAL 3 approval of amendment
to The Right Start, Inc. 1995 Non-Employee Directors Option Plan.
PROPOSAL 4. APPROVAL OF AMENDMENT TO AMENDED AND RESTATED ARTICLES OF
INCORPORATION
FOR [ ] AGAINST [ ] ABSTAIN [ ]--PROPOSAL 4 approval of amendment
to The Right Start, Inc. Amended and Restated Articles of Incorporation.
PROPOSAL 5. RATIFICATION OF PLAN OF RECAPITALIZATION
FOR [ ] AGAINST [ ] ABSTAIN [ ]--PROPOSAL 5 approval of The Right Start, Inc.
Plan of Recapitalization.
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 AND 5. THIS PROXY CONFERS DISCRETIONARY AUTHORITY TO CUMULATE VOTES FOR ANY
OR ALL OF THE NOMINEES FOR WHICH THE AUTHORITY TO VOTE HAS NOT BEEN WITHHELD.
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
