<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one) FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee required)
For the fiscal year ended June 1, 1996
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the transition period from _______ to _______
Commission file no. 0-19536
THE RIGHT START, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3971414
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5334 Sterling Center Drive, Westlake Village, California 91361
-------------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(818) 707-7100
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of August 26, 1996, approximately 2,358,544 shares of the Registrant's Common
Stock held by non-affiliates were outstanding and the aggregate market value of
such shares was approximately $10,908,266.
As of August 26, 1996 there were outstanding 7,949,306 shares of Common Stock,
no par value, with no treasury stock.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on November 12, 1996 (the "1996 Proxy Statement") are
incorporated into Part III.
Total number of pages in this report: 31
----
(Exhibit index located on page 13 )
----
<PAGE>
PART I
ITEM 1. BUSINESS
- ------- --------
GENERAL
- -------
The Right Start, Inc. ("Right Start" or "the Company") is a leading
merchant offering unique, high-quality products for infants and young children.
The Company markets its products through 24 retail stores, primarily located in
major regional malls across the nation, and The Right Start Catalog. The
Company is a market leader offering approximately 500 items targeting children
up to age four in such product categories as Baby on the Go, Nursery, Bath Time,
Kitchen and Health and Safety. The products offered are primarily the same for
both catalog and retail, with a number of items available as either "retail-
only" or "catalog-only."
HISTORY
- -------
The Company was formed in 1985 to capitalize upon growing trends
towards the use of mail order catalogs and the demand for high quality infants'
and children's goods. Until formation of the Company, new parents' alternatives
were low-service mass merchant stores or sparsely-stocked, high-priced infant
and children specialty stores. To counter this, The Right Start carefully
screened infant and toddler products in order to identify those considered to be
the most unique, safest, most durable, best designed and best valued items.
The Right Start then grew its operations beyond The Right Start
Catalog and into retail sales through The Right Start stores. Based on the
strong results of the retail stores coupled with the extensive challenges facing
the catalog industry, the Company's strategy evolved to include a reduction in
The Right Start Catalog circulation and plans for a major retail expansion.
Management has always made customer service the Company's highest
priority. By offering sales associates with extensive product knowledge,
carefully selected and tested products, fast shipment that is generally less
than 48 hours from receipt of catalog orders, and a 24 hour a day/365 day a year
ordering capability, The Right Start is able to differentiate itself from many
other infant and children merchants.
RETAIL OPERATIONS AND EXPANSION
- -------------------------------
The Company operates 24 retail stores. Twenty-two of these stores are
mall stores located in major regional malls throughout the United States; two
are non-mall locations in California. The Company has plans for continued
expansion of its retail operations with
2
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18 stores planned for fiscal 1997.
New stores will be located primarily in high-traffic major regional
malls across the United States. Potential sites are evaluated based on mall
strength, relative strength of certain comparable specialty store operators in
the same mall, the extent of Right Start Catalog customer/brand development,
available census, demographic and psychographic data, as well as lease
economics. In many areas, store sites which otherwise meet the Company's
criteria may be difficult to lease on acceptable terms.
The Company's ability to open and operate new stores profitably is
dependent on the identification and availability of suitable locations, the
negotiation of acceptable lease terms, the Company's financial resources, the
successful hiring and training of store managers and the Company's ability to
control the operational aspects of growth. There can be no assurance that the
Company will be able to open and operate new stores on a timely and profitable
basis or that same store sales will increase in the future.
THE RIGHT START CATALOG
- -----------------------
The Right Start Catalog offers high quality infants' and children's
products through mail order catalogs targeted primarily to middle and upper
income new parents and the grandparents of their children. Several attractive
glossy issues are mailed each year, targeting the Company's principal customers,
educated, first-time parents from 23-40 years old, with average annual household
income in excess of $60,000. The Right Start Catalog has minimized the marketing
of children's clothing, furniture and bedding items, all of which require
different merchandising distribution and marketing strategies.
MERCHANDISING
- --------------
The Right Start's basic business strategy/concept is to provide
exemplary service to customers as a means of building strong loyalty,
3
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to offer unique, hard-to-find items, and to increase market share and customer
awareness through new store openings and continuous new product introductions.
To accomplish its strategy, the Company offers a selection of brand
name and private label infant, toddler and preschool products through
strategically selected store locations and highly targeted catalog mailings.
Items are selected based on their quality, durability, uniqueness, historic
product demand, seasonality, appeal to target markets and value. The addition
of new products is key to keeping the stores and catalogs fresh and interesting
to the customer base.
ADVERTISING AND MARKETING
- -------------------------
The Right Start Catalog serves as the primary marketing tool for The
Right Start stores. Catalogs are distributed in existing and future retail
store markets through both direct mail and focused distribution to target groups
(e.g. day care centers, hospitals, doctor's offices and other children's
stores). In addition, the stores' point of sale system also provides a strong
marketing database. Customers' names and addresses are captured and are then
used for promotional mailings and other follow up.
The Company reaches its catalog customers through extensive mailings
of The Right Start Catalog to qualified segments of the Company's own customer
list and selected rented lists. In order to achieve this efficiently the
customer list is segmented by frequency, recency and size of purchase. Over the
past two years, the Company has experienced a decline in the Right Start Catalog
response rate. While the Company has made extensive circulation cuts to exclude
less profitable mailing lists, there can be no assurance that profitability of
the overall catalog business will increase or that the Company will not continue
to experience a declining response rate.
PURCHASING
- ----------
The Right Start purchases products from over 200 vendors. No single
vendor represents more than 3% of overall sales. The Company directly imports
approximately 5% of the products offered and this source is expected to grow
over time as the Company expands its private label and import programs. Imported
items have historically had higher gross profit margins and tend to be more
unique.
SEASONALITY
- -----------
The Company's business is not significantly impacted by seasonal
fluctuations, as compared to many other retail and catalog operations. The Right
Start customer often is the end user of the product so purchases are spread
throughout the year, rather than being concentrated between October and
December, as are traditional gift purchases.
4
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EMPLOYEES
- ---------
As of August 20, 1996 the Company employed 397 employees,
approximately 41 percent of whom were part-time. During the retail holiday
season, additional temporary employees are hired. The Company has no collective
bargaining agreements nor any unions and considers its employee relations to be
good.
COMPETITION
- -----------
The specialty catalog and retail infants' and children's markets are
highly competitive. The Company's specialty mail order catalogs, retail stores
and products compete with other retail stores, including specialty stores, mass
merchants, discount chains, and department stores, and with a growing number of
other mail order catalogs. Some of the Company's competitors have substantially
greater financial, distribution and marketing resources than the Company. The
substantial sales growth in the mail order catalog industry has encouraged the
entry of many new competitors and continues to foster an increase in competition
from established companies. The catalog and retail businesses could become even
more competitive in the future.
The primary competition for The Right Start stores comes from "big
box" concept children's stores which are becoming more and more prevalent. This
type of operation offers customers an extensive variety of products (including
apparel, furniture, bedding, etc.) for children and is typically located in up
to 50,000 square feet, generally in lower real estate cost locations. In
addition, certain stores face competition from local specialty baby stores.
There are a variety of general and specialty catalogs selling infants'
and children's items in competition with The Right Start Catalog. The Company
considers its primary catalog competition, however, to be "One Step Ahead,"
"Kids Club" by Perfectly Safe, and "Sensational Beginnings." These catalogs
emerged several years after The Right Start Catalog and directly compete by
offering a very similar product line at comparable price points to the same
target market.
The Company's ability to continue to introduce innovative products to
customers, to locate its stores in strategic, high-traffic locations, and to
provide distinctive customer service is key to its ability to maintain or grow
its market share.
TRADEMARKS
- ----------
The Company has registered and continues to register, when deemed
appropriate, certain U.S. trademarks and trade names, including "The Right
Start" and "The Right Start Catalog". The Company considers these to be readily
identifiable with, and valuable to, its business.
RECENT DEVELOPMENTS
- -------------------
In July 1996, the Company sold its phone center operations to a
telemarketing services provider for approximately $500,000, $250,000 of which
was in cash and the remainder of which was in a two-year note secured by the
assets in the phone center. There was no gain or loss on the sale. In
conjunction with the sale, the Company entered into a telemarketing services
agreement for RSC.
In April 1996, the Company completed a rights offering which generated
approximately $4.9 million of net proceeds to the Company. Pursuant to the
rights offering, approximately 1.5 million shares of common stock were issued.
The offering was fully subscribed.
In February 1996, Lenny Targon, one of the co-founders of The Right
Start, resigned from his position as Chief Executive Officer and Director.
Jerry Welch, Chairman of the Board, assumed the title of Chief Executive
Officer.
In August 1995, an investor group led by Kayne, Anderson Investment
Management, Inc. acquired 3,937,000 shares of the Company's common stock,
representing approximately 62% of the then outstanding shares, from American
Recreation Centers, Inc. Richard A. Kayne, Jerry R. Welch and Howard M. Zelikow
of Kayne, Anderson and Robert R. Hollman, Fred Kayne and Andrew D. Feshbach were
appointed to The Right Start's Board of Directors. Robert Crist, Robert Feuchter
and Stanley Schneider resigned from the board, concurrent with the close of the
transaction.
ITEM 2. PROPERTIES
- ------- ----------
The Right Start leases all of its locations under operating leases.
Lease terms at the Company's retail locations range from six to ten years, with
provisions for early termination in most locations if certain sales levels are
not achieved and, at certain locations, the Company has options to extend the
term. In most cases, rent provisions include a fixed minimum rent plus a
contingent percentage rent based on net sales of the store in excess of a
certain threshold.
The Right Start currently leases approximately 39,000 square feet of
mixed use space in Westlake Village, California. The Company's
5
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corporate office and first retail store reside in this space. The building is
leased and the agreement includes options to extend through 2001.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company is not party to any legal actions.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ----------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS'
- ------- ---------------------------------------------------------------
MATTERS
-------
The Company's common stock is traded on the Nasdaq National Market System
under the symbol RTST. The Company's stock is beneficially held by 1,535
shareholders.
6
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ITEM 6. SELECTED FINANCIAL DATA - (Dollars in thousands except share data)
- ------- -----------------------
<TABLE>
<CAPTION>
FISCAL YEAR
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Revenues:
Net sales $ 40,368 $ 44,573 $ 49,204 $ 37,261 $ 23,896
Other revenues 1,418 1,168 1,311 992 868
----------------------------------------------------------------
41,786 45,741 50,515 38,253 26,764
Net income (loss) (3,899) (2,106) 176 1,032 820
Earnings (loss)per share (0.60) (0.33) 0.03 0.16 0.14
SHARE DATA
Weighted average
shares outstanding 6,536,813 6,300,000 6,637,142 6,494,133 5,739,670
BALANCE DATA SHEET
Current assets $ 8,353 $ 9,660 $ 12,002 $ 13,306 $ 12,975
Total assets 17,475 14,632 18,221 18,274 14,004
Current liabilities 4,649 3,690 4,979 5,650 2,412
Long-term debt
Shareholders' equity 11,902 10,694 12,800 12,624 11,592
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
FISCAL 1996 COMPARED WITH FISCAL 1995
- -------------------------------------
Revenues for fiscal 1996 were $41.8 million compared to $45.7 million in
1995. Catalog net sales declined $13.5 million or 37% reflecting the December
1994 sale of Children's Wear Digest (CWD) and reduced response rates and
circulation on The Right Start Catalog (RSC). CWD was a wholly owned subsidiary
of the Company selling children's apparel by catalog. For fiscal 1997, the
Company has further reduced the circulation of RSC and reduced the number of
editions from five to three.
7
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Retail net sales increased over 100% from $7.8 million to $17.1 million.
The increase results from the additional eleven stores opened in fiscal 1996 and
the impact of a full year's sales for the eight stores opened in fiscal 1995.
All but the Company's two oldest stores are located in major upscale regional
malls across the United States.
Cost of goods sold decreased 8.7% or $2.0 million to $21.6 million in
fiscal 1996. The decrease is primarily due to the decrease in net sales.
Additionally, the Company's cost of goods sold was negatively impacted in fiscal
1996 by inventory write-downs and adjustments totalling approximately
$.5 million.
Operating expenses decreased $1.1 million or 5% from $19.9 million in
fiscal 1995 to $18.8 million in fiscal 1996. The decrease represents a
$3.4 million decrease in catalog production costs offset by retail and other
operating expense increases. The decrease in catalog production costs results
from the decrease in RSC circulation. Retail operating expenses increased due to
the additional payroll and occupancy costs associated with the new store
openings.
General and administrative expense increased to $4.8 million in fiscal 1996
from $3.0 million in fiscal 1995. This increase includes approximately $1.1
million in one-time charges related to employee severance and termination
expenses, hiring and relocation expenses for new key management personnel and
consulting fees related to the restructuring of the catalog operations. The
remaining increase reflects the investment in the Company's infrastructure to
position it to manage the accelerated store opening plans.
Pre-opening cost amortization increased $304,000 in fiscal 1996 as compared
to fiscal 1995. The Company amortizes its store opening costs over the first
twelve months of each store's operations. The fiscal 1996 increase reflects the
impact of both fiscal 1995 and 1996 store openings.
Depreciation and amortization increased $193,000 in fiscal 1996 as more
assets were employed in the retail operations due to new store openings.
The Company recognized $927,000 of income tax benefit for the year ended
June 1, 1996, net of a valuation allowance provided against the deferred tax
asset in the fourth quarter of the fiscal year. In evaluating the deferred tax
asset, management considered
8
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the Company's projections and available tax planning strategies.
FISCAL 1995 COMPARED WITH FISCAL 1994
- -------------------------------------
Revenues for fiscal 1995 were $45.7 million, a decrease of $4.8 million or
9.5% from fiscal 1994. Catalog net sales declined $9.2 million or 20.1% as a
result of both the December 1994 sale of CWD and the decline in response rates
and circulation for RSC. Based on the decline in RSC response rates experienced
during the first half of the year, circulation cuts of up to 40% were taken for
the spring and summer catalogs.
Retail net sales increased over 100% to $7.8 million from $3.2 million in
fiscal 1994. The increase resulted from the fall 1994 openings of eight mall
stores, two of which were relocations from leased departments in Rich's
department stores, and 32% same-store-sales increases (28% as adjusted for the
additional week in fiscal 1995) for the remaining three stores experienced
during the second half of fiscal 1995.
Cost of goods sold decreased $2.4 million or 9.0% from fiscal 1994. The
decline is in line with the decrease in sales with a slight degradation in gross
margin due to the sale of CWD, typically a higher margin business than RSC and
retail.
Operating expense decreased $.6 million to $19.9 million from fiscal 1994
to fiscal 1995. The decrease was primarily the result of decreased costs
associated with the CWD and improved catalog delivery rates, offset by
additional retail selling expenses for the new stores opened in fiscal 1995.
General and administrative expenses increased $.3 million or 13.2% to $3.0
million in fiscal 1995 compared to $2.7 million in fiscal 1994. This is
primarily a result of increased costs incurred in support of the expanding
retail operations and the systems development and support related thereto.
These increases were offset by decreases resulting from the sale of CWD.
The loss on the sale of CWD of $1.7 million reflects the one-time charge
associated with the writedown of goodwill related to the sale of CWD in December
1994.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During fiscal 1996, the Company's primary sources of liquidity were from
borrowings under its credit facility and the issuance of common stock through a
rights offering. These sources financed the Company's operating losses and
capital expenditures. Capital expenditures of approximately $4.2 million were
incurred in opening
9
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eleven new retail stores and installing the information systems necessary to
support the existing and planned retail growth.
The Company's existing credit facility provides for borrowings of up to $5
million, subject to a defined borrowing base. This agreement expires in June
1998. Outstanding borrowings are secured by all of the assets of the Company.
At June 1, 1996, there were no borrowings outstanding on the line and
approximately $2.8 million was available.
The Company opened eight new stores in fiscal 1995, 11 new stores in fiscal
1996, and currently expects to open up to 18 additional new stores in fiscal
1997. The Company expects to expend approximately $400,000 for each new store it
opens. The Company expects to fund store openings contemplated by its current
plan from borrowings under its credit facility and cash flow from operations.
The Company anticipates that it will be profitable in the future, however, there
can be no assurance that the Company's expansion strategy will be successful or
that the Company will not continue to incur operating losses. Losses could
negatively affect working capital, the extension of credit by the Company's
suppliers and the Company's ability to implement its expansion strategy.
IMPACT OF INFLATION
- -------------------
The impact of inflation on results of operations has not been significant
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The consolidated financial statements and supplementary data are as set
forth in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The information contained in the Company's 1996 Proxy Statement under
the captions "Principal Shareholders and Management" and "Election of Directors"
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information contained in the Company's 1996 Proxy Statement under
the caption "Executive Compensation and Other Information" is incorporated
herein by reference.
10
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The information contained in the Company's 1996 Proxy Statement under the
caption "Principal Stockholders and Management" is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information contained in the Company's 1996 Proxy Statement under the
caption "Certain Relationships and Related Transactions" is incorporated herein
by reference.
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Discussions
containing such forward-looking statements may be found in the material set
forth under Item 1. Business--Retail Operations and Expansion, --Seasonality,
- --Competition, and Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources, as well as
within this Annual Report generally (including any document incorporated by
reference herein). Also, documents subsequently filed by the Company with the
Securities and Exchange Commission will contain forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors identified herein or
in other public filings by the Company, including but not limited to, the
Company's Registration Statement on Form S-3 (File No. 333-08175).
11
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT.
<TABLE>
<CAPTION>
PAGE
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<S> <C>
(1) FINANCIAL STATEMENTS:
Report of Independent Accountants F-1
Consolidated Balance Sheet--
June 1, 1996 and May 31, 1995 F-2
Consolidated Statement of Operations--
Years Ended June 1, 1996, May 31, 1995 and
May 25, 1994 F-3
Consolidated Statement of Changes in
Shareholders' Equity--
Years Ended June 1, 1996, May 31, 1995 and
May 25, 1994 F-4
Consolidated Statement of Cash Flows--
Years Ended June 1, 1996, May 31, 1995 and
May 25, 1994 F-5
Notes to Consolidated Financial Statements F-6
(2) FINANCIAL STATEMENT SCHEDULES:
Valuation Reserves F-15
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
12
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(3) LISTING OF EXHIBITS
The following exhibits are filed as part of, or incorporated by reference
into, this annual report:
INDEX TO EXHIBITS
EXHIBIT
NUMBER
- ------
3.1 Amended and Restated Articles of Incorporation
of the Company, dated August 12, 1991*
3.1.1 Amendment to Articles of Incorporation, dated
August 20, 1991*
3.1.2 Form of Amendment to Articles of Incorporation,
dated August 24, 1991*
3.2 Bylaws of the Company, as amended*
3.3 Specimen Certificate of the Common Stock
(without par value)*
4.1 Warrant Certificate for Representative's
Warrants*
10.1 Lease between the Company and Westlake Industrial
Complex, a California Limited Partnership, dated
August 9, 1988, as amended February 6, 1991*
10.2 Employment Agreement between the Company and
Stanley Fridstein, dated May 30, 1991, as amended*
10.3 1991 Key Employee Stock Option Plan*
10.4 Stock Option Grant to Stanley Fridstein, dated
March 15, 1991, as amended (see Exhibit 10.2)*
10.5 Stock Option Grant to Lenny Targon, dated
March 15, 1991, as amended*
- -----------------
* Previously filed.
13
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10.6 Form of Indemnification Agreement between
Registrant and its directors and executive
officers*
10.7 Westlake Industrial Complex Lease Agreement for
31333 Agoura Road, Westlake Village, CA*
10.8 Software License Agreement between the Registrant
and Marriner Systems, Inc., dated April 27, 1994*
10.9 1995 Non-employee Directors Option Plan
10.10 Registration Rights Agreement between Registrant and Kayne Anderson
Non-Traditional Investments LP, ARBCO Associates LP, Offense Group
Associates LP, Opportunity Associates LP, Fred Kayne, Albert O.
Nicholas and Primerica Life Insurance Company
10.11 Termination and Release Agreement by and between The Right Start, Inc.
and Lenny M. Targon dated February 28, 1996
10.12 Loan Agreement dated June 12, 1995 by and between Wells Fargo Bank,
National Association and The Right Start, Inc.
10.13 Asset Purchase Agreement dated as of July 29, 1996 by and between
Blasiar, Inc. (DBA Alert Communications Company) and The Right Start,
Inc.
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
- -----------------
* Previously filed.
(b) REPORTS ON FORM 8-K
Form 8-K dated March 27, 1996: The Right Start, Inc. issued a press
release reporting third quarter results.
(c) Not applicable
(d) Not applicable
14
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SIGNATURES
Pursuant to the requirement of Sections 13 and 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
THE RIGHT START, INC.
(Registrant)
Dated: August 28, 1996 /s/ JERRY R. WELCH
--------------------------------------
Jerry R. Welch
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ JERRY R. WELCH August 28, 1996
- ---------------------------------------
Jerry R. Welch, Chairman of the Board
and Chief Executive Officer
/s/ STANLEY M. FRIDSTEIN August 28, 1996
- ---------------------------------------
Stanley M. Fridstein, President
and Director
/s/ RICHARD A. KAYNE August 28, 1996
- ---------------------------------------
Richard A. Kayne, Director
/s/ ANDREW D. FESHBACH August 28, 1996
- ---------------------------------------
Andrew D. Feshbach, Director
/s/ ROBERT R. HOLLMAN August 28, 1996
- ---------------------------------------
Robert R. Hollman, Director
/s/ FRED KAYNE August 28, 1996
- ---------------------------------------
Fred Kayne, Director
/s/ HOWARD M. ZELIKOW August 28, 1996
- ---------------------------------------
Howard M. Zelikow, Director
/s/ GINA M. SHAUER August 28, 1996
- ---------------------------------------
Gina M. Shauer, Chief Financial
Officer (Principal Financial and
Accounting Officer)
15
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REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors
and Shareholders of
The Right Start, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 12 present fairly, in all
material respects, the financial position of The Right Start, Inc. and
its subsidiary at June 1, 1996 and May 31, 1995, and the results of their
operations and their cash flows for each of the three fiscal years in the
period ended June 1, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Woodland Hills, California
July 3, 1996
F-1
<PAGE>
THE RIGHT START, INC.
CONSOLIDATED BALANCE SHEET
--------------------------
<TABLE>
<CAPTION>
June 1, May 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and equivalents $ 472,000 $ 1,567,000
Accounts receivable 609,000 483,000
Merchandise inventories 5,264,000 5,142,000
Prepaid catalog expenses 713,000 981,000
Income taxes receivable 472,000
Other current assets 1,295,000 878,000
Deferred income tax benefit 137,000
----------- -----------
Total current assets 8,353,000 9,660,000
----------- -----------
Noncurrent assets:
Property, plant and equipment, net (Note 2) 7,363,000 4,136,000
Other noncurrent assets 152,000 294,000
Deferred income tax benefit 1,607,000 542,000
----------- -----------
Total noncurrent assets 9,122,000 4,972,000
----------- -----------
$17,475,000 $14,632,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 3,976,000 $ 3,223,000
Accrued salaries and bonuses 530,000 238,000
Advance payments on orders 143,000 158,000
Amounts due to ARC (Note 9) 71,000
----------- -----------
Total current liabilities 4,649,000 3,690,000
----------- -----------
Deferred rent 924,000 248,000
Commitments and contingencies (Notes 10 & 11)
Shareholders' equity:
Common stock (25,000,000 shares authorized, no par
value, 7,939,306 and 6,300,000 shares issued and
outstanding) (Notes 5 & 8) 16,313,000 11,206,000
Retained deficit (4,411,000) (512,000)
----------- -----------
Total shareholders' equity 11,902,000 10,694,000
----------- -----------
$17,475,000 $14,632,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
THE RIGHT START, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------
June 1, May 31, May 25,
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Net sales:
Catalog $23,293,000 $36,790,000 $ 46,026,000
Retail 17,075,000 7,783,000 3,178,000
Other revenues 1,418,000 1,168,000 1,311,000
------------ ----------- ------------
41,786,000 45,741,000 50,515,000
------------ ----------- ------------
Costs and expenses:
Cost of goods sold 21,605,000 23,654,000 25,996,000
Operating expense 18,823,000 19,879,000 20,514,000
General and administrative expense 4,791,000 3,008,000 2,657,000
Pre-opening cost amoritization 418,000 114,000
Depreciation and amortization expense 938,000 745,000 654,000
Write off of Weebok catalog and
inventory costs 470,000
------------ ----------- ------------
46,575,000 47,400,000 50,291,000
------------ ----------- ------------
Operating income (loss) (4,789,000) (1,659,000) 224,000
Interest and other income (expense), net (37,000) 43,000 54,000
Loss on sale of Children's Wear Digest (1,744,000)
------------ ----------- ------------
Income (loss) before provision for
income taxes (4,826,000) (3,360,000) 278,000
Income tax benefit (provision) 927,000 1,254,000 (102,000)
------------ ----------- ------------
Net income (loss) ($ 3,899,000) ($2,106,000) $ 176,000
============ =========== ============
Earnings (loss) per share ($ 0.60) ($ 0.33) $ 0.03
============ =========== ============
Weighted average number of shares
outstanding 6,536,813 6,300,000 6,637,142
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE RIGHT START, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
--------------------
<TABLE>
<CAPTION>
Common Stock Retained
--------------------------- Earnings
Shares Amount (Deficit)
------------- ----------- -------------
<S> <C> <C> <C>
Balance, May 26, 1993 6,300,000 $11,206,000 $ 1,418,000
Net income 176,000
------------- ----------- -------------
Balance, May 25, 1994 6,300,000 11,206,000 1,594,000
Net loss (2,106,000)
------------- ----------- -------------
Balance, May 31, 1995 6,300,000 11,206,000 (512,000)
Issuance of shares pursuant
to the Rights Offering 1,578,806 4,906,000
Issuance of shares pursuant
to the exercise of stock options 60,500 201,000
Net loss ( 3,899,000)
------------- ----------- -------------
Balance, June 1, 1996 7,939,306 $16,313,000 ($4,411,000)
============= =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE RIGHT START, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------
June 1, May 31, May 25,
1996 1995 1994
----------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($3,899,000) ($2,106,000) $ 176,000
Adjustments to reconcile net income (loss)
to net cash by operating
activities:
Depreciation and amortization 938,000 745,000 654,000
Pre-opening cost amortization 418,000 114,000
Unrealized loss on marketable securities 35,000
Loss on sale of Children's Wear Digest 1,744,000
Change in assets and liabilities affecting
operations (Note 12) 506,000 (2,256,000) (958,000)
---------- ------------ -----------
Net cash used in operating activities (2,037,000) (1,759,000) (93,000)
---------- ------------ -----------
Cash flows from investing activities:
Additions to property, plant and equipment (4,165,000) (2,417,000) (1,115,000)
Proceeds from sale of marketable securities 1,461,000 6,760,000
Purchase of marketable securities (4,789,000)
Proceeds from sale of Children's Wear Digest 2,437,000
Payment for Children's Wear Digest acquisition (399,000) (698,000)
---------- ------------ -----------
Net cash provided by (used in) investing
activities (4,165,000) 1,082,000 158,000
---------- ------------ -----------
Cash flows from financing activities:
Proceeds from common stock issued pursuant
to the Rights Offering 4,906,000
Proceeds from common stock issued upon
exercise of stock options 201,000
----------
Cash provided by financing activities 5,107,000
----------
Net increase (decrease) in cash and equivalents (1,095,000) (677,000) 65,000
Cash and equivalents at beginning of period 1,567,000 2,244,000 2,179,000
---------- ------------ -----------
Cash and equivalents at end of period $ 472,000 $ 1,567,000 $ 2,244,000
========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE RIGHT START, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
- ------------------------------------------------------------
The Company
- -----------
The Right Start, Inc. (the Company) is a specialty merchant of infants' and
children's products throughout the United States. In 1991, the Company
completed the sale of 2,300,000 shares of its common stock in an initial public
offering. Prior to that, it was a wholly owned subsidiary of American
Recreation Centers, Inc. (ARC). ARC maintained majority ownership of the
Company through July 1995. In August 1995, an investment group led by Kayne,
Anderson Investment Management, Inc. (KAIM) acquired the 3,937,000 shares of
common stock owned by ARC.
The Company's financial statements also include the accounts of its wholly owned
subsidiary, Children's Wear Digest (CWD) through the date the Company sold CWD
(see Note 6). All material intercompany balances and transactions have been
eliminated.
Fiscal Year
- -----------
The Company has a fiscal year consisting of fifty-two or fifty-three weeks
ending on the last Saturday (formerly Wednesday) in May. The fiscal year ended
May 31, 1995 is a fifty-three week period. The other fiscal years presented
consist of fifty-two week periods.
Revenue Recognition
- -------------------
Retail sales are recorded at time of sale or when goods are delivered. Catalog
sales are recorded at the time of shipment. The Company provides for estimated
returns at the time of the sale.
Cash and Equivalents
- --------------------
Cash and equivalents include demand deposits and marketable securities with
original maturities of three months or less. These investments are subject to
minimal credit and market risk. The carrying amount of cash and equivalents
approximates fair value.
F-6
<PAGE>
NOTE 1: (Continued)
- ------
Merchandise Inventories
- -----------------------
Merchandise inventories consist of products purchased for resale and are stated
at the lower of cost or market value. Cost is determined on a first-in, first-
out basis.
Catalog Production Expenses
- ---------------------------
Prepaid catalog expenses consist of the costs to produce, print and distribute
catalogs. These costs are amortized over the expected sales life of each
catalog, which is three months. The Company adopted Statement of Position
Number 93-7 (SOP 93-7), "Reporting on Advertising Costs", in the fourth quarter
of fiscal year 1995. The adoption of SOP 93-7 did not result in a material
impact on the Company's consolidated financial position or results of
operations.
Catalog production expenses of $6,061,000, $9,457,000 and $10,068,000 were
recorded in fiscal 1996, 1995 and 1994, respectively.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight line method based upon the estimated
useful lives of the assets, generally three to ten years. Amortization of
leasehold improvements is based upon the term of the lease or the estimated
useful life of the leasehold improvements, whichever is shorter.
Store Opening Costs
- -------------------
Costs incurred in opening stores are deferred and included in other current
assets and are amortized over 12 months commencing with the store opening.
Unamortized store opening costs were $531,000 and $277,000 at June 1, 1996 and
May 31, 1995, respectively.
Deferred Rent
- -------------
The Company recognizes rent expense on a straight-line basis over the life of
the underlying lease. The benefit from tenant allowances and landlord
concessions are recorded as deferred rent and recognized over the lease term.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard No. 109 (FAS 109), "Accounting for Income Taxes." FAS 109
requires an asset and liability approach under which deferred tax liabilities
and assets are recognized for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other assets and
liabilities.
During the periods that the Company was majority owned by ARC, the Company
provided for income taxes as a separate taxpayer. State income taxes were
settled pursuant to an informal tax sharing agreement and the Company filed a
separate federal income tax return.
F-7
<PAGE>
NOTE 1: (Continued)
- ------
Other Revenues
- --------------
Other revenues include rentals of customer mailing lists and revenues from order
fulfillment services.
Per Share Data
- --------------
Earnings per share has been computed in accordance with the treasury stock
method based upon the weighted average number of common shares and dilutive
common stock equivalents outstanding. Common stock equivalents comprise options
outstanding to key executives, employees and directors (see Note 5).
Reclassifications
- -----------------
Certain reclassifications have been made to conform prior year amounts to
current year presentation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT, NET:
- -------------------------------------------
<TABLE>
<CAPTION>
June 1, May 31,
1996 1995
------------ ------------
<S> <C> <C>
Property, plant and equipment, at cost:
Machinery, furniture and equipment $ 3,761,000 $ 3,094,000
Leaseholds and leasehold improvements 5,316,000 2,465,000
Construction in progress 322,000 56,000
Computer software 570,000 225,000
----------- -----------
9,969,000 5,840,000
Accumulated depreciation and amortization (2,606,000) (1,704,000)
----------- -----------
$ 7,363,000 $ 4,136,000
=========== ===========
</TABLE>
Depreciation and amortization expense for property, plant and equipment amounted
to $935,000, $645,000 and $484,000, for fiscal years 1996, 1995 and 1994,
respectively.
F-8
<PAGE>
NOTE 3 - CREDIT AGREEMENTS:
- --------------------------
In June 1995, the Company entered into a revolving credit agreement with a bank
which expires in June 1998. The credit agreement provides for borrowings up to
$5,000,000, including letters of credit, the availability of which is subject to
a borrowing base, as defined in the agreement. Interest accrues at the bank's
prime lending rate plus 1%.
The agreement requires that the Company must comply with certain financial
and other covenants, and borrowings are secured by all of the assets of the
Company. The Company is required by the agreement to pay annual fees of $25,000
in addition to an unused line fee. The unused line fee is equal to .5% per
annum of the amount by which $3,500,000 exceeds the outstanding balance on the
line.
NOTE 4 - INCOME TAXES:
- ---------------------
The (benefit) provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
June 1, May 31, May 25,
1996 1995 1994
---------- ----------- -----------
<S> <C> <C> <C>
Current (benefit) provision:
Federal ($ 424,000) ($ 91,000)
State $ 1,000 9,000
---------- ----------- ---------
1,000 (424,000) (82,000)
---------- ----------- ---------
Deferred provision:
Federal (928,000) (725,000) 175,000
State (105,000) 9,000
---------- ----------- ---------
(928,000) (830,000) 184,000
---------- ----------- ---------
($927,000) ($1,254,000) $102,000
========== =========== =========
</TABLE>
The Company's effective income tax rate differed from the federal statutory rate
as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------
June 1, May 31, May 25,
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
State income taxes, net of
federal benefit 3 2 4
Valuation allowance (19)
Other 1 1 (1)
--------- --------- --------
Effective tax rate 19% 37% 37%
========= ========= ========
</TABLE>
F-9
<PAGE>
NOTE 4: (Continued)
- ------
Deferred tax liabilities/(assets) are comprised of the following:
<TABLE>
<CAPTION>
June 1, May 31, May 25,
1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Depreciation and amortization $ 112,000 $ 133,000 $ 274,000
Preopening costs 220,000 115,000
Other 11,000 8,000
------------ ---------- ---------
Deferred tax liabilities 343,000 256,000 274,000
------------ ---------- ---------
Deferred rent (380,000) (102,000)
Sales returns and other reserves (184,000) (43,000) (99,000)
Net operating loss carryforward (2,256,000) (763,000)
Federal tax credit carryforwards (70,000) (27,000) (24,000)
------------ ---------- ---------
Deferred tax assets (2,890,000) (935,000) (123,000)
Valuation allowance 940,000
------------ ---------- ---------
Net deferred tax (asset) liability ($1,607,000) ($679,000) $ 151,000
============ ========== =========
</TABLE>
The Company's deferred tax asset is net of a valuation allowance of $940,000.
In evaluating the deferred tax asset, management considered the Company's
projections and available tax planning strategies.
The Company has federal and state net operating loss carryforwards at June 1,
1996 of $5,850,000 and $3,612,000, respectively. These carryforwards will
expire in fiscal years ending 2002 to 2011, and were not significantly impacted
by the August 1995 change in ownership.
NOTE 5 - CAPITAL STOCK:
- ----------------------
In April 1996, the Company issued 1,578,806 shares of common stock pursuant to a
rights offering. Net proceeds to the Company were $4,906,000.
In connection with its initial public offering, the Company granted the
representative of the underwriters 200,000 warrants to purchase the Company's
common stock at an exercise price of $7.19. The warrants provide for
registration rights and anti-dilution protection and expire in October 1996.
F-10
<PAGE>
NOTE 6 - CHILDREN'S WEAR DIGEST:
- -------------------------------
Pursuant to an asset purchase agreement dated December 30, 1994 (the Agreement)
and a letter of intent agreement entered in November 1994, the Company and its
wholly owned subsidiary, Children's Wear Digest, Inc. (CWD), sold substantially
all of the assets of CWD to Small People, Inc. (SPI). A significant owner of
SPI was the president of CWD until his resignation effective December 30, 1994
and was also the owner of CWD at the time of its purchase by the Company. Under
the terms of the Agreement, CWD sold certain assets, consisting primarily of
inventory, fixed assets and intangible assets, in exchange for cash of
approximately $2,437,000. The transaction resulted in a loss of $1,744,000.
In connection with the Agreement, the parties also entered into a separate
Telemarketing Agreement, a Confidentiality and Noncompetition Agreement, and
termination agreements related to certain employment and management contracts
between CWD and its former owners which were entered when the Company purchased
CWD in September 1992. The acquisition was accounted for as a purchase and the
resultant goodwill was amortized over its estimated useful life.
NOTE 7 - WEEBOK CATALOG:
- -----------------------
In September 1992, the Company secured the exclusive mail order rights to the
Weebok line of children's clothing. Based on the results, management elected to
discontinue mailing the Weebok catalog in November 1993. As a consequence, the
Company recorded a charge of $470,000 comprised of prepaid catalog expenses and
inventory.
NOTE 8 - EMPLOYEE BENEFITS AND STOCK OPTIONS:
- --------------------------------------------
On March 15, 1991, two key executives were granted options to acquire up to
900,000 shares of the Company's common stock under a non-qualified stock option
plan. The options were granted at fair market value of $3.33 per share. These
options expire June 1, 2001. In August 1995, the terms of the options were
amended. The number of shares subject to such options was reduced to 776,000
with an exercise price of $3.00 per share. At June 1, 1996, 731,000 shares are
outstanding under this plan.
One of the executives covered by this plan was the Company's chief executive
officer who resigned in March 1996. In connection with his resignation, he is
entitled to salary and benefits through May 1997 and the cash surrender value of
a life insurance policy.
The Company adopted the 1991 Employee Stock Option Plan, covering an aggregate
of 300,000 shares of the Company's common stock, in October 1991. Options
granted vest either 20% or 33% (depending on the terms of the individual grant)
each year commencing on grant date and expire 10 years thereafter. In August
1995, those holding options under the 1991 Employee Stock Option Plan were given
the right to cancel their options (the "existing options") and have an equal
number of options (the "new options") reissued to them at the fair market value
of $3.00 per share. The vesting period on the existing options is 20% each year
and the new options vest 33% each year, both from date of grant. Options for
254,000 shares were outstanding as of June 1, 1996, 5,200 of which were
exercisable. Authorization for the amount by which the outstanding options
exceed the amount allowed in the plan is subject to ratification by the
Company's shareholders.
F-11
<PAGE>
NOTE 8: (Continued)
- ------
On January 13, 1992, the Company adopted the 1992 Stock Option Plan for Non-
Employee Directors covering an aggregate of 50,000 shares. This plan provides
that all non-employee directors will automatically receive options to purchase
5,000 shares exercisable at the fair market value at the date of the grant. The
Company granted options to purchase 10,000 shares at $4.25 on April 22, 1992 and
5,000 shares at $3.25 on September 14, 1992. These options vest 20% at the
grant date and an additional 20% each year thereafter. Upon resignation of non-
employee directors from the Company's Board of Directors, all unvested options
expire. Of the 15,000 options granted under this plan, 8,000 were exercised in
January 1996 and the remaining options expired.
In October 1995, the Company adopted the 1995 Non-Employee Directors Option
Plan. This Plan provides for the annual issuance, to each non-employee
director, of options to purchase 3,000 shares of common stock. In addition,
each director is entitled to make an election to receive, in lieu of directors'
fees, additional options to purchase common stock. The amount of additional
options is determined based on an independent valuation such that the value of
the options issued is equivalent to the fees that the director would be
otherwise entitled to receive. Options issued under this plan vest on the
anniversary date of their grant and upon termination of Board membership. 61,902
options were issued under this plan, none of which were exercisable at June 1,
1996.
Prior to fiscal 1993, the employees of the Company participated in the ARC
Employee Stock Ownership Plan (ARC ESOP) and the ARC Employee Stock Purchase
Plan (ARC ESPP). In fiscal 1993, the Company adopted a separate employee stock
ownership plan (Company ESOP) and employee stock purchase plan (Company ESPP)
for the benefit of its employees. The employee balances in the ARC ESOP were
transferred to the Company ESOP. The employee balances in the ARC ESPP remain
in that plan.
The Company matches employees' contributions to the Company ESPP at a rate of
50%. The Company's contributions amounted to $28,000, $58,000 and $56,000 in
fiscal 1996, 1995 and 1994, respectively.
The Company ESOP is funded exclusively by discretionary contributions determined
by the Board of Directors. The Board of Directors authorized contributions of
$70,000 in fiscal 1996 and $50,000 for both fiscal 1995 and 1994.
The following table summarizes option activity through June 1, 1996:
<TABLE>
<S> <C> <C>
Outstanding at May 26, 1993 987,500 $3.25 - 4.25
Granted 100,500 $4.38 - 6.00
Cancelled (3,500) $6.00
---------
Outstanding at May 25, 1994 1,084,500 $3.25 - 6.00
Granted 2,500 $2.50
Cancelled (45,000) $4.25 - 6.00
---------
Outstanding at May 31, 1995 1,042,000 $3.25 - 6.00
Granted 306,902 $3.00 - 6.50
Cancelled (241,000) $3.00 - 6.00
Exercised (60,500) $3.25 - 4.25
---------
Outstanding at June 1, 1996 1,047,402 $3.00 - 6.50
=========
</TABLE>
F-12
<PAGE>
NOTE 9 - RELATED PARTY TRANSACTIONS:
- -----------------------------------
KAIM receives a quarterly fee for providing certain management and advisory
services to the Company. Management fees of $75,000 were paid to KAIM in fiscal
1996.
ARC incurred certain expenses on behalf of the Company and charged the Company
for such expenses. These expenses include amounts allocated on an actual basis
for income taxes, insurance premiums, telephone charges and professional fees.
Corporate office overhead charges of $27,000 for each of fiscal 1995 and 1994
were allocated on the basis of estimated corporate staff effort on behalf of the
Company.
The Company provided telemarketing services through July 1996, to K.A.
Industries, a related party to KAIM. Revenues generated from this service amount
to $365,000 for fiscal 1996. Management believes that the terms of this
agreement are no less favorable than those that would have been negotiated with
an unrelated third party.
NOTE 10 - OPERATING LEASES:
- --------------------------
The Company leases real property and equipment under non-cancelable agreements
expiring from 1997 through 2007. Certain retail store lease agreements provide
for contingent rental payments if the store's net sales exceed stated levels
("percentage rents"). A majority of the leases contain escalation clauses
which provide for increases in base rental for increases in future operating
cost and renewal options at fair market rental rates. The Company's minimum
rental commitments are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
- ------------------
<S> <C>
1997 $ 2,538,000
1998 2,761,000
1999 2,344,000
2000 2,272,000
2001 2,279,000
Thereafter 8,413,000
-----------
$20,607,000
===========
</TABLE>
Net rental expense under operating leases was $1,959,000, $1,166,000 and
$667,000 for fiscal 1996, 1995 and 1994, respectively. Percentage rents
incurred in fiscal 1996 amounted to $82,000.
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
- ---------------------------------------
The Company is not party to any legal actions.
F-13
<PAGE>
NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ----------------------------------------------------------
Changes in assets and liabilities, net of the effects of the acquisition and
subsequent disposition of CWD, which increased (decreased) cash and equivalents
are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------
June 1, May 25, May 26,
1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Accounts receivable ($ 126,000) $ 300,000 ($274,000)
Merchandise inventories (122,000) (724,000) 144,000
Prepaid catalog expenses 268,000 731,000 (196,000)
Income taxes receivable 472,000 (280,000)
Other current assets (835,000) (699,000) (311,000)
Other noncurrent assets 142,000 (42,000) (47,000)
Accounts payable and accrued expenses 753,000 (491,000) (672,000)
Accrued salaries and bonuses 292,000 (84,000) 35,000
Advance payments on orders (15,000) (112,000) 192,000
Amounts due to ARC (71,000) (58,000) (121,000)
Income tax liability (31,000) (166,000)
Deferred income taxes (928,000) (830,000) 274,000
Other liabilities 676,000 64,000 184,000
----------- ----------- ---------
$ 506,000 ($2,256,000) ($958,000)
=========== =========== =========
</TABLE>
Cash paid for income taxes was $552,000 for fiscal year 1994. Non-cash
investing activity consists of $57,000 accrued in conjunction with the CWD
acquisition in fiscal 1994 (see Note 6).
NOTE 13 - FOURTH QUARTER ADJUSTMENTS
- ------------------------------------
The Company recorded approximately $500,000 in inventory write-downs and
adjustments during the fourth quarter of fiscal 1996.
NOTE 14 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 will become effective for the Company in
fiscal 1997. The adoption of SFAS 123 is not expected to have a material effect
on the Company's consolidated financial position or results of operations.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
will become effective for the Company in fiscal 1997. This Statement requires
that long-lived assets and certain identifiable intangibles to be held and used
by the Company be reviewed for impairment whenever there is an indication that
the carrying amount of the asset may not be recoverable. Measurement of an
impairment loss should be based on the fair value of the asset. This Statement
also requires that any such assets that are to be disposed of be reported at the
lower of carrying amount or fair value less cost to sell. Adoption of the
Statement is not expected to have a material impact on the Company's financial
position and results of operations.
F-14
<PAGE>
THE RIGHT START, INC.
SCHEDULE II - VALUATION RESERVES
--------------------------------
<TABLE>
<CAPTION>
Additional
Balance at charged Balance at
beginning to costs end
Classification of period and expenses Deductions of period
- --------------------------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Fiscal year ended
June 1, 1996
- -----------------
Allowance for deferred tax
asset $940,000 $ 940,000
Allowance for sales returns $103,000 103,000
-------- -------- -------- ----------
$103,000 $940,000 $1,043,000
======== ======== ======== ==========
Fiscal year ended
May 31, 1995
- -----------------
Allowance for sales returns $226,000 $123,000 $103,000
-------- -------- -------- --------
$226,000 $123,000 $103,000
======== ======== ======== ========
Fiscal year ended
May 25, 1994
- -----------------
Allowance for sales returns $290,000 $ 64,000 $226,000
-------- -------- -------- --------
$290,000 $ 64,000 $226,000
======== ======== ======== ========
</TABLE>
F-15
<PAGE>
EXHIBIT 10.9
THE RIGHT START, INC.
1995 NON-EMPLOYEE DIRECTORS OPTION PLAN
SECTION 1. PURPOSE.
The purpose of The Right Start, Inc. 1995 Non-Employee Directors Option
Plan (the "Plan") is to promote the interests of The Right Start, Inc., a
California corporation (the "Company") and its shareholders by strengthening the
Company's ability to attract and retain the services of experienced and
knowledgeable non-employee directors through formula grants and deferral
elections of non-qualified stock options to acquire shares of the Company's
Common Stock (as defined below). In addition, such grants will encourage the
closer alignment of the interests of such directors with those of the Company's
shareholders.
SECTION 2. DEFINITIONS.
For purposes of the Plan, the following terms shall have the meanings set
forth below:
2.1. "Annual Meeting" means the annual meeting of the Company's
shareholders for any fiscal year held in accordance with the Company's Articles
of Incorporation and By-Laws.
2.2. "Board" means the Board of Directors of the Company as constituted
from time to time.
2.3. "Change of Control" shall mean:
(i) The acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the
Company, Kayne, Anderson Investment Management, Inc., any group (as heretofore
defined) of which any of them is a member, any affiliate of any of the foregoing
or any person who on the effective date of this Plan is an officer or director
of the Company, of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of more than 50% of either (A) the shares of
the Common Stock, or (B) the combined voting power of the voting securities of
the Company entitled to vote generally in the election of directors (the "Voting
Securities"); provided, however, that the following acquisitions shall not
constitute a Change of Control: (x) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any Subsidiary, or
(y) any acquisition by any corporation if, immediately following
<PAGE>
such acquisition, more than 50% of the outstanding shares of common stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation (entitled to vote generally in the election of
directors), is beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who, immediately prior to such
acquisition, were the beneficial owners of the Common Stock and the Voting
Securities in substantially the same proportions, respectively, as their
ownership, immediately prior to such acquisition, of the Common Stock and Voting
Securities; or
(ii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation, other than a reorganization, merger or
consolidation with respect to which all or substantially all of the individuals
and entities who were the beneficial owners, immediately prior to such
reorganization, merger or consolidation, of the Common Stock and Voting
Securities beneficially own, directly or indirectly, immediately after such
reorganization, merger or consolidation more than 50% of the then outstanding
common stock and voting securities (entitled to vote generally in the election
of directors) of the corporation resulting from such reorganization, merger or
consolidation in substantially the same proportions as their respective
ownership, immediately prior to such reorganization, merger or consolidation, of
the Common Stock and the Voting Securities; or
(iii) Approval by the shareholders of the Company of (A) a complete
liquidation or substantial dissolution of the Company, or (B) the sale or other
disposition of all or substantially all of the assets of the Company, other than
to a Subsidiary, wholly-owned, directly or indirectly, by the Company.
2.4. "Code" means the Internal Revenue Code of 1986, as in effect and as
amended from time to time, or any successor statute thereto, together with any
rules, regulations and interpretations promulgated thereunder or with respect
thereto.
2.5. "Committee" means the Compensation Committee of the Board, which
Committee shall administer the Plan.
2.6. "Common Stock" means the common stock, no par value, of the Company
or any security of the Company issued in substitution or exchange therefor.
2.7. "Company" means The Right Start, Inc., a California corporation, or
any successor corporation to The Right Start, Inc.
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2.8. "Deferral Election" means the election to receive Deferral Election
Options by an Eligible Director pursuant to and in accordance with this Plan.
2.9. "Deferral Election Option" means any Option granted to an Eligible
Director pursuant to a Deferral Election.
2.10. "Disability" means any physical or mental disability which is deemed
to be total and permanent by a physician selected in good faith by the Company.
2.11. "Eligible Director" means any director of the Company who is not,
and who for at least one year preceding the commencement of his or her
membership on the Board has not been, an employee of the Company or any
Subsidiary of the Company.
2.12. "Exchange Act" means the Securities Exchange Act of 1934, as in
effect and as amended from time to time, or any successor statute thereto,
together with any rules, regulations and interpretations promulgated thereunder.
2.13. "Fair Market Value" means on, or with respect to, any given date,
the closing per share market trading price for the Common Stock as reported on
the consolidated transaction reporting system for any domestic stock exchange
or, if the Common Stock is not then listed, on Nasdaq ("Nasdaq") or, if the
Common Stock is not then so reported, the average of the closing bid and asked
prices quoted on Nasdaq or, if the Common Stock shall not be quoted on Nasdaq,
the average of the closing bid and asked prices in the domestic over-the-counter
market as reported by the National Quotation Bureau, Incorporated, or any
similar successor organization for such date, or, if the Common Stock was not
traded on such date, on the next preceding day on which the Common Stock was
traded.
2.14. "Grant Date" means the date of any Annual Meeting on which an
Eligible Director is entitled to receive an Annual Grant or has elected to
receive Deferral Election Options pursuant to and in accordance with this Plan.
2.15. "Initial Election Date" means, for each member of the Board of
Directors, the later of (i) the date the Plan is adopted by the Board of
Directors or (ii) the date of such member's initial election or appointment to
the Board of Directors.
2.16. "Option" means any option issued to an Eligible Director pursuant an
Annual Grant or Deferral Election.
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2.17. "Option Agreement" means a written agreement between the Company and
an Eligible Director setting forth the terms and conditions of an Option.
2.18. "SEC" means the Securities and Exchange Commission, or any successor
governmental agency.
2.19. "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations, including and beginning with the Company, if
each of such corporations, other than the last corporation in the unbroken
chain, owns, directly or indirectly, more than fifty percent of the voting stock
of one of the other corporations in such chain.
SECTION 3. OPTIONS.
3.1. Nature of Options. All Options granted under the Plan shall be
nonstatutory stock options and are not intended to qualify under Section 422 of
the Code as "incentive stock options."
3.2. Annual Grant. An Option to purchase 3,000 shares of Common Stock (as
adjusted pursuant to Section 6 of the Plan) shall be granted (an "Annual Grant")
automatically to each Eligible Director on the date of the Annual Meeting for
such year.
3.3. Deferral Election. In addition to any Options that an Eligible
Director may be entitled to receive pursuant to an Annual Grant, each Eligible
Director shall be entitled to make an irrevocable election (a "Deferral
Election") each year, at least six months prior to the Company's next scheduled
annual meeting of shareholders (the "Next Meeting") (or with respect to any
Eligible Director whose Initial Election Date falls within the period of six
months prior to the Next Meeting, on prior to such Initial Election Date), to
receive, in lieu of all or any portion of the compensation to which such
Eligible Director would otherwise be entitled to receive as a member of the
Board of Directors (other than reimbursement for expenses) (the "Director Fee")
for the period from the Next Meeting to the day prior to the annual meeting
subsequent to the Next Meeting, Deferral Election Options. Deferral Election
Options shall be granted on the day of the Annual Meeting in each year for which
a Deferral Election has been made. The number of shares of Common Stock covered
by a Deferral Election Option shall be determined by an independent valuation
expert, retained by the Committee, such that the value of the Deferral Election
Option is equivalent on the Grant Date to the Director Fee which the Eligible
Director would otherwise have been entitled to receive for such year. No
Eligible Director shall be entitled to receive Deferral Election
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Options having a value greater than the amount of the Director Fee that such
director would have been entitled to receive on the date of the adoption of the
Plan, unless, in the event that the amount of the Director Fee is increased
subsequent to the date of the adoption of the Plan, such increase has been
approved by a majority of the shareholders of the Company. Each Deferral
Election shall be set forth in a written notice delivered to the Secretary of
the Company. Such election shall remain in effect until terminated or modified
by written notice to the Secretary of the Company, in which case such
termination or modification shall become effective six months after the receipt
of such notice by the Company.
3.4. Exercise Price. The exercise price per share of Common Stock for any
Option issued to an Eligible Director pursuant to this Plan shall be the Fair
Market Value of the Common Stock on the first trading day (that is, a day on
which Nasdaq or any other exchange or association on or through which the stock
is traded is open for trading and during which at least one share of Common
Stock is traded) preceding the Grant Date of such Option.
3.5. Notice. Upon becoming exercisable in accordance with Section 4 of
the Plan, the exercisable portion of an Option may be exercised in whole or in
part, at any time, and from time to time, during the Option Period (as defined
in Section 3.7 of the Plan) by giving written notice, signed by the person
entitled to exercise the Option, to the Secretary of the Company stating the
number of shares of Common Stock in respect of which the Option is being
exercised, accompanied by payment in full of the aggregate exercise price for
the shares of Common Stock to be purchased. The date both such notice and
payment are received by the office of the Secretary of the Company shall be the
date of exercise of the Option as to such number of shares of Common Stock. No
Option may be exercised at any time in respect of a fractional share.
3.6. Payment. Payment of the aggregate option exercise price may be made
in cash or by certified or cashier's check, bank draft or money order payable to
the order of the Company or, if permitted by the Committee and applicable law,
by delivery of, alone or in conjunction with a partial cash or instrument
payment (i) shares of Common Stock already owned by the Eligible Director for at
least six (6) months and having a Fair Market Value equal to all or a portion of
the option exercise price at the time of such exercise, or (ii) some other form
of payment acceptable to the Committee. The Committee may also permit Eligible
Directors to simultaneously exercise Options and sell the shares of Common Stock
thereby acquired, pursuant to a "cashless exercise"
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<PAGE>
arrangement or program, selected by and approved in all respects in advance by
the Committee.
3.7. Option Period. Each Option shall expire ten years after its Grant
Date (the "Option Period") unless terminated earlier in accordance with Section
3.8 below.
3.8. Rights Upon Termination of Board Membership. In the event that an
Eligible Director ceases to be a director of the Company or its Subsidiaries for
any reason, all Options held by an Eligible Director shall immediately and fully
vest and the Eligible Director or his or her successor shall have the right to
exercise any such Option during its term within a period of one year after such
Eligible Director ceased to be a director; provided, however, that unless the
Eligible Director ceases to be a director of the Company or its Subsidiaries by
reason of death or Disability, the number of shares of Common Stock covered by
any Deferral Election Options which are not exercisable immediately prior to the
date such Eligible Director ceased to be a director shall be reduced to reflect
the amount of the Director Fee actually earned in such year.
3.9. Shareholder and Other Rights. Neither the Eligible Director, nor an
Eligible Director's successor or successors in interest, shall have any rights
as a stockholder of the Company with respect to any shares of Common Stock
subject to an Option granted to any such Eligible Director until the date of
issuance of a stock certificate in respect of such shares. No shares shall be
required to be issued and delivered upon exercise of any Option unless and until
all of the requirements of law and of all regulatory agencies having
jurisdiction over the issuance and delivery of the securities have been fully
complied with. Neither the Plan, nor the granting of an Option, nor any other
action taken pursuant to the Plan shall constitute or be evidence of any
agreement or understanding, express or implied, that an Eligible Director has a
right to continue as a director of the Company for any period of time or at any
particular rate of remuneration.
SECTION 4. VESTING.
Subject to Section 3.7 of the Plan, an Option shall become exercisable in
respect of the aggregate number of underlying shares of Common Stock, determined
as of the Grant Date, on the first anniversary of the Grant Date (or such longer
period as the Committee may set on or prior to the Grant Date).
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SECTION 5. BOARD AUTHORITY.
The existence of the Plan, any Option Agreement and/or the Annual Grants
and Deferral Elections made hereunder shall not limit, affect or restrict in any
way the right or power of the Board or the shareholders of the Company to make
or authorize (a) any adjustment, recapitalization, reorganization or other
change in the Company's or any Subsidiary's capital structure or its business,
(b) any merger, consolidation or change in the ownership of the Company or any
Subsidiary, (c) any issue of bonds, debentures, capital, preferred or prior
preference stocks ahead of or affecting the Company's or any Subsidiary's
capital stock or the rights thereof, (d) any dissolution or liquidation of the
Company or any Subsidiary, (e) any sale or transfer of all or any part of the
Company's or any Subsidiary's assets or business, or (f) any other corporate act
or proceeding by the Company or any Subsidiary. An Eligible Director, any
beneficiary(ies) of any such Eligible Director and/or any other person shall not
have any claim against any member of the Board or any committee thereof, the
Company or any Subsidiary, or any employees, officers or agents of the Company
or any Subsidiary, as a result of any such action.
SECTION 6. RECAPITALIZATION ADJUSTMENTS.
If the outstanding shares of Common Stock are increased, decreased, changed
into, or exchanged for a different number or kind of shares or securities
through merger, consolidation, combination, exchange of shares, other
reorganization, recapitalization, reclassification, stock dividend, stock split
or reverse stock split, an appropriate and proportionate adjustment shall be
made in the maximum number and kind of shares as to which Options may be granted
under this Plan. A corresponding adjustment changing the number and kind of
shares allocated to unexercised Options or portions thereof, which shall have
been granted prior to any such change, shall likewise be made. Any such
adjustment in outstanding Options shall be made without change in the aggregate
purchase price applicable to the unexercised portion of the Option, but with a
corresponding adjustment in the price for each share or other unit of any
security covered by the Option.
SECTION 7. CERTAIN MERGERS.
7.1. The Company as Surviving Corporation. If the Company enters into or
is involved in any merger, reorganization or other business combination with any
person or entity (such merger, reorganization or other business combination to
be referred to herein as a "Merger Event") and as a result of any such Merger
Event, the Company will be or is the surviving corporation, an
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<PAGE>
Eligible Director shall be entitled, as of the date of the execution of the
agreement evidencing the Merger Event (the "Execution Date") and with respect to
both exercisable and non-exercisable Options (but only to the extent not
previously exercised), to receive substitute stock options in respect of the
shares of the surviving corporation on such terms and conditions, as to the
number of shares, pricing and otherwise, which shall substantially preserve the
value, rights and benefits of any affected Option granted hereunder as of the
date of the consummation of the Merger Event. Notwithstanding anything to the
contrary in this Section, if any Merger Event occurs, the Company shall have the
right, but not the obligation, to pay to each affected Eligible Director an
amount in cash or certified check equal to the excess of the Fair market Value
of the Common Stock underlying any affected unexercised Options as of the
Execution Date (whether then exercisable or not) over the aggregate exercise
price of such unexercised Options; provided, however, that if the Company
chooses to make such a payment to any Eligible Director, it must make such a
payment to all Eligible Directors.
7.2. The Company Not the Surviving Corporation. In the case of a Merger
Event in which the Company will not be, or is not, the surviving corporation,
and the Company determines not to make the cash or certified check payment
described in Section 7.1 of the Plan, the Company shall compel and obligate, as
a condition of the consummation of the Merger Event, the surviving or resulting
corporation and/or the other party to the Merger Event, as necessary, or any
parent, Subsidiary or acquiring corporation thereof, to grant, with respect to
both exercisable and non-exercisable Options (but only to the extent not
previously exercised), substitute options in respect of the shares of common or
other capital stock of such surviving or resulting corporation on such terms and
conditions, as to the number of shares, pricing and otherwise, as shall
substantially preserve the value, rights and benefits of any affected Options
previously granted hereunder as of the date of the consummation of the Merger
Event.
7.3. Cancellation of Previous Awards. Upon receipt by an affected
Eligible Director of any such cash, certified check, or substitute options as a
result of any such Merger Event, such Eligible Directors' affected Options for
which such cash, certified check or substitute options was received shall be
thereupon canceled without the need for obtaining the consent of any such
affected Eligible Director.
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SECTION 8. CHANGE OF CONTROL.
8.1. Acceleration of Awards. Anything in the Plan to the contrary
notwithstanding, if a Change of Control of the Company occurs, all Options then
unexercised and outstanding shall become fully vested and exercisable as of the
date of the Change of Control. The immediately preceding sentence shall apply
to only those Eligible Directors who are directors of the Company and/or one of
its Subsidiaries as of the date of the Change of Control.
8.2. Payment After Change of Control. Anything in the Plan to the
contrary notwithstanding, within thirty (30) days after a Change of Control
under subsection (i) of the definition of Change of Control any Eligible
Director who holds Options shall have the right, but not the obligation, to
elect, within ten (10) business days after the Eligible Director has actual or
constructive knowledge of the occurrence of such Change of Control, to require
the Company to purchase such Options from the Eligible Director for an aggregate
amount equal to the then aggregate Fair Market Value of the Common Stock
underlying such Options tendered, less the aggregate exercise price of such
tendered Options.
SECTION 9. OPTION AGREEMENTS.
Each Eligible Director shall enter into an Option Agreement with the
Company in a form specified by the Company. Each such Eligible Director shall
agree therein to the restrictions, terms and conditions set forth in such Option
Agreement and/or the Plan.
SECTION 10. BENEFICIARIES.
Each Eligible Director may designate a beneficiary or beneficiaries to
receive any payment which under the terms of the Plan and the relevant Option
Agreement may become payable on or after the Eligible Director's death. At any
time, and from time to time, any such designation may be changed or canceled by
the Eligible Director without the consent of any such beneficiary. Any such
designation, change or cancellation must be on a form provided for that purpose
by the Company and shall not be effective until received by the Company. If no
beneficiary has been designated by a deceased Eligible Director, or if the
designated beneficiaries have predeceased the Eligible Director, the beneficiary
shall be the Eligible Director's estate. If the Eligible Director designates
more than one beneficiary, any payments under the Plan to such beneficiaries
shall be made in equal shares unless the Eligible Director has expressly
designated otherwise, in which case the payments shall be made in the shares
designated by the Eligible Director.
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SECTION 11. ADMINISTRATION OF THE PLAN.
11.1. General. The Plan shall be administered by the Committee, and
construed, governed, and amended in accordance with its terms; provided,
however, in no case shall any action be taken by any member of the Committee if
such action would result in the loss of "disinterested administrator" status,
within the meaning of Rule 16b-3, as promulgated by the SEC under Section 16(b)
of the Exchange Act, or any successor rule or regulation thereto, as such Rule
is amended or applied from time to time (the "SEC Rule 16b-3"), of any director
who is a member of the Committee.
11.2. Committee Membership. The Committee shall consist of not less than
two "disinterested" directors within the meaning of SEC Rule 16b-3. The Board
may from time to time remove members from the Committee, fill vacancies on the
Committee and may select one of the members of the Committee as the Committee's
chairman.
11.3. Plan Administration. The Committee may designate persons other than
members of the Committee to carry out the day-to-day ministerial administration
of the Plan and may seek independent advice and counsel from such professional
advisors as it deems necessary. The Committee shall report all actions taken by
it to the Board.
11.4. Limitation of Liability. Neither the Board nor the Committee, nor
any member of either or other employees designated to help administer the Plan,
shall be liable for any act, omission, interpretation, construction or
determination made in good faith in connection with the Plan and the members of
the Board and the Committee and such other employees shall be entitled to
indemnification and reimbursement by the Company in respect of any claim, loss,
damage or expense (including without limitation attorneys' fees) arising or
resulting therefrom to the fullest extent permitted by law and/or any directors
and officers liability insurance coverage which may be in effect from time to
time.
SECTION 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 125,000 shares,
subject to adjustment as provided in Section 6 the Plan. The Common Stock
issued under the Plan may be either previously authorized but unissued shares or
treasury shares acquired by the Company. In the event that any Option expires,
lapses, is forfeited, is settled in cash in lieu of Common Stock or otherwise
terminates, any shares of Common Stock
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allocable to the terminated portion of such Option may again be made subject to
an Option under the Plan; provided, however, if an individual has received the
benefits of ownership with respect to the securities underlying any option
granted under the Plan, including without limitation, the right to receive
dividends, such shares may not again be made subject to an Option under the
Plan.
SECTION 13. ELIGIBILITY AND PARTICIPATION.
Only Eligible Directors may receive Options under the Plan.
SECTION 14. EFFECTIVE DATE AND TERM OF THE PLAN.
The Plan shall be effective upon its adoption by the Board, subject to the
approval of the Plan by the Company's shareholders in accordance with SEC Rule
16b-3 and Sections 162(m) and 422 of the Code. The Plan shall remain in effect
until all Options granted thereunder have been satisfied by the issuance of
Common Stock or the payment of cash (unless sooner terminated under Section 15
of the Plan).
SECTION 15. TERMINATION AND AMENDMENT OF THE PLAN.
In general, the Plan shall terminate 10 years from the date it is adopted
by the Board of Directors, or the date it is approved by the shareholders,
whichever is earlier, or shall terminate at such earlier time as the Board of
Directors may so determine. No options shall be granted under the Plan after
that date. Subject to the limitation contained in Section 16 of the Plan, the
Committee may at any time amend or revise the terms of the Plan, including the
form and substance of the Option Agreements to be used hereunder; provided,
however, that the terms and provisions of the Plan which determine the
eligibility of Eligible Directors to receive grants and the amount, price and
timing of the Annual Grants and Deferral Elections shall not be amended more
than once every six months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder; provided further, however, that without approval by the shareholders
of the Company representing a majority of the shares entitled to vote thereon
(as described in Section 14 of the Plan) no amendment or revision shall (i)
except as provided in Section 6 of the Plan, materially increase the maximum
number of shares that may be issued under this Plan; (ii) change the minimum
purchase price for shares under Section 3 of the Plan; (iii) increase the
maximum term established under the Plan for any Option; (iv) materially modify
the requirements as to eligibility for participation in the Plan; (v) change the
term of the Plan described in Section 14; or (vi) materially increase the
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benefits accruing to participants under the Plan. In addition, no such
amendment or revision shall be effective if it would disqualify the Plan from
the exemptions provided by SEC Rule 16b-3.
SECTION 16. PRIOR RIGHTS AND OBLIGATIONS.
No amendment, suspension, or termination of the Plan shall, without the
consent of the individual who has received an Option, alter or impair any of
that person's rights or obligations under any Option granted under the Plan
prior to that amendment, suspension, or termination.
SECTION 17. RESERVATION OF SHARES OF COMMON STOCK.
The Company, during the term of this Plan, will at all times reserve and
keep available such number of shares of Common Stock as shall be sufficient to
satisfy the requirements of the Plan. In addition, the Company will from time
to time, as is necessary to accomplish the purposes of this Plan, seek or obtain
from any regulatory agency having jurisdiction any requisite authority in order
to issue and sell shares of Common Stock hereunder. The inability of the
Company to obtain from any regulatory agency having jurisdiction the authority
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any shares of its stock hereunder shall relieve the Company of any liability
in respect of the non-issuance or sale of the stock as to which the requisite
authority shall not have been obtained.
SECTION 18. TAX WITHHOLDING.
The Company shall have the right to deduct from any payment or settlement
under the Plan, including, without limitation, the exercise of any Option, or
the delivery, transfer or vesting of any Common Stock, any federal, state, local
or other taxes of any kind which the Committee, in its sole discretion, deems
necessary to be withheld to comply with the Code and/or any other applicable
law, rule or regulation. If the Committee in its sole discretion, permits
shares of Common Stock to be used to satisfy any such tax withholding, such
Common Stock shall be valued based on the Fair Market Value of such stock as of
the date the tax withholding is required to be made, such date to be determined
by the Committee. The Committee may establish rules limiting the use of Common
Stock to meet withholding requirements by Eligible Directors who are subject to
Section 16 of the Exchange Act.
SECTION 19. SEC COMPLIANCE.
With respect to persons subject to Section 16 of the Exchange Act,
transactions under the Plan are intended to comply
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with all applicable conditions of SEC Rule 16b-3. To the extent any provision
of the Plan or any action of the Committee fails to comply with such rule, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee. If a person subject to Section 16 of the Exchange
Act exercises his or her rights under an Option grant under the Plan before six
months have passed from the date of the grant, the Company shall hold in its
custody any resulting stock certificate until six months has passed from the
date of the grant; provided, however, that upon the occurrence of any Change of
Control all such stock certificates which have been withheld shall immediately
be delivered to such person.
SECTION 20. GOVERNING LAW.
The Plan and all actions taken thereunder shall be governed by and
construed in accordance with the laws of the State of California (without
reference to the principles of conflict of laws thereof), except to the extent
preempted by federal law which shall govern to that extent.
SECTION 21. LISTING, REGISTRATION AND OTHER LEGAL COMPLIANCE.
No Options or shares of Common Stock shall be required to be granted or
issued under the Plan unless legal counsel for the Company shall be satisfied
that such issuance or grant will be in compliance with all applicable federal
and state securities laws and regulations and any other applicable laws or
regulations. The Committee may require, as a condition of any payment or share
issuance, that such agreements, undertakings, representations, certificates,
and/or information as the Committee may deem necessary or advisable, be executed
or provided to the Company to assure compliance with all such applicable laws or
regulations. Certificates for shares of Common Stock delivered under the Plan
may be subject to such stock transfer orders and such other restrictions as the
Committee may deem advisable under the rules, regulations, or other requirements
of the SEC, or any stock exchange upon which the Common Stock is then listed,
and any applicable federal or state securities law. In addition, if, at any
time specified herein (or in any Option Agreement or otherwise) for, (i) the
granting of any Option or the making of any determination, (ii) the issuance or
other distribution of Common Stock, or (iii) the payment of amounts to or
through any Eligible Director with respect to any Option, any law, rule,
regulation or other requirement of any governmental authority or agency shall
require either the Company, any Subsidiary or any Eligible Director (or any
estate, designated beneficiary or other legal representative thereof) to take
any action in connection therewith, the granting of such Option, the making of
such
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determination, the issuance or distribution of Common Stock or such payment, as
the case may be, shall be deferred until such required action is taken.
SECTION 22. TRANSFER OF OPTIONS.
Options granted under the Plan and any Option Agreement, and any rights or
interests herein or therein, shall not be assigned, transferred, sold,
exchanged, or otherwise disposed of in any way at any time by any Eligible
Director (or any beneficiary(ies) of any Eligible Director), other than by
testamentary disposition by the Eligible Director or intestate succession. Any
such Option, Option Agreement, rights or interests shall not be pledged,
encumbered or otherwise hypothecated in any way at any time by any Eligible
Director (or any beneficiary(ies) of any Eligible Director). Any such Option,
Option Agreement, rights or interests shall not be subject to execution,
attachment or similar legal process. Any attempt to sell, exchange, transfer,
assign, pledge, encumber, or otherwise dispose of or hypothecate in any way any
such Options, rights or interests, or the levy of any execution, attachment or
similar legal process thereon, contrary to the terms of this Plan shall be null
and void and without legal force or effect.
IN WITNESS WHEREOF, this Plan is adopted by The Right Start, Inc. on this
____ day of _____________, 1995.
THE RIGHT START, INC.
By: ____________________________
Name:
Title:
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EXHIBIT 10.10
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (the "Agreement"), dated as of
August 3, 1995, is entered into between The Right Start, Inc., a California
corporation (the "Company") and the Purchasers (the "Initial Holders") listed in
Schedule A to that certain Stock Purchase Agreement, dated as of August 3, 1995,
between American Recreation Centers, Inc., a California corporation ("ARC") and
the Initial Holders (the "Purchase Agreement") relating to the sale by ARC to
the Initial Purchasers of an aggregate of 3,937,000 shares of the Company's
common stock (the "Shares"). In order to induce the Initial Purchasers to enter
into the Purchase Agreement, the Company has agreed to provide the registration
rights set forth in this Agreement for the equal benefit of the Initial Holders
and their respective direct and indirect transferees.
The parties hereby agree as follows:
1. Definitions
-----------
As used in this Agreement, the following terms shall have the
following meanings:
Closing Date shall mean the Closing Date as defined in the Purchase
------------
Agreement.
Company shall mean The Right Start, Inc., a California corporation.
-------
Effectiveness Date shall mean the 120th day after the Filing Date.
------------------
Exchange Act shall mean the Securities Exchange Act of 1934, as
------------
amended, and the rules and regulations of the SEC promulgated thereunder.
Filing Date shall mean the 45th day after the Closing Date.
-----------
Holder shall mean any holder of Registrable Shares.
------
Initial Holders shall have the meaning set forth in the forepart of
---------------
this Agreement.
Initial Shelf Registration shall have the meaning set forth in Section
--------------------------
2 of this Agreement.
<PAGE>
Person shall mean an individual, trustee, corporation, partnership,
------
joint stock company, trust, unincorporated association, union, business
association, firm or other legal entity.
Prospectus shall mean the prospectus included in any Registration
----------
Statement (including, without limitation, any prospectus subject to completion
and a prospectus that includes any information previously omitted from a
prospectus filed as part of an effective registration statement in reliance upon
Rule 430A promulgated under the Securities Act), as amended or supplemented by
any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Shares covered by such Registration Statement, and
all other amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.
Registrable Shares shall mean the Shares originally issued to the
------------------
Initial Holders and at all times subsequent thereto until (i) a Registration
Statement covering such Shares has been declared effective by the SEC and such
Shares have been disposed of in accordance with such effective Registration
Statement, (ii) such Shares are sold in compliance with Rule 144 or (iii) such
Shares cease to be outstanding.
Registration Statement shall mean any registration statement of the
----------------------
Company that covers any of the Registrable Shares pursuant to the provisions of
this Agreement, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits, and
all material incorporated by reference or deemed to be incorporated by reference
in such registration statement.
Rule 144 shall mean rule 144 under the Securities Act, as such Rule
--------
may be amended from time to time, or any similar rule (other than Rule 144A) or
regulation hereafter adopted by the SEC providing for offers and sales of
securities made in compliance therewith resulting in offers and sales by
subsequent holders that are not affiliates of an issuer of such securities being
free of the registration and prospectus delivery requirements of the Securities
Act.
Rule 415 shall mean rule 415 under the Securities Act, as such Rule
--------
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC.
SEC shall mean the Securities and Exchange Commission.
---
-2-
<PAGE>
Securities Act shall mean the Securities Act of 1933, as amended, and
--------------
the rules and regulations of the SEC promulgated thereunder.
Shares shall have the meaning set forth in the forepart of this
------
Agreement.
Shelf Registration shall have the meaning set forth in Section 2 of
------------------
this Agreement.
Subsequent Shelf Registration shall have the meaning set forth in
-----------------------------
Section 2 of this Agreement.
Underwritten registration or underwritten offering shall mean a
--------------------------------------------------
registration in which securities of the Company are sold to an underwriter for
reoffering to the public.
2. Shelf Registration
------------------
(a) The Company shall carefully prepare and file with the SEC as soon
as practicable after the Closing Date, but in no event later than the Filing
Date, a Registration Statement for an offering to be made on a continuous basis
pursuant to Rule 415 covering all of the Registrable Shares (the "Initial Shelf
Registration"). The Initial Shelf Registration shall be on Form S-3 or another
appropriate form permitting registration of such Registrable Shares for resale
by the Holders in the manner or manners designated by them (including, without
limitation, one or more underwritten offerings). The Company shall not permit
any securities other than the Registrable Shares to be included in the Initial
Shelf Registration or any Subsequent Shelf Registration; provided that the
Company may permit the inclusion of securities entitled to be included in the
Initial Shelf Registration or any Subsequent Shelf Registration pursuant to
registration rights in effect prior to the Closing Date. No Holder may include
any of its Registrable Shares in any Shelf Registration pursuant to this
Agreement unless and until such Holder furnishes to the Company in writing,
within 15 business days after receipt of a request therefor, such information as
the Company may reasonably request for use in connection with any Shelf
Registration or Prospectus or preliminary prospectus included therein. Each
Holder as to which any Shelf Registration is being effected agrees to furnish
promptly to the Company all information to be disclosed in order to make the
information previously furnished to the Company by such Holder not materially
misleading. The Company shall use its best efforts to cause the Initial Shelf
Registration to be declared effective under the Securities Act on or prior to
the Effectiveness Date and to keep the Initial Shelf Registration continuously
effective under the Securities Act until (i) all Registrable Shares covered by
the
-3-
<PAGE>
Initial Shelf Registration have been sold in the manner set forth and as
contemplated in the Initial Shelf Registration, (ii) a Subsequent Shelf
Registration covering all of the Registrable Shares has been declared effective
under the Securities Act or (iii) all Registrable Shares may be sold pursuant to
Rule 144(k) under the Securities Act.
(b) Subsequent Shelf Registrations. If the Initial Shelf
------------------------------
Registration or any Subsequent Shelf Registration ceases to be effective for any
reason at any time (except as provided in clauses (i), (ii) and (iii) of Section
2(a) above), the Company shall use its best efforts to obtain the prompt
withdrawal of any order suspending the effectiveness thereof, and in any event
shall within 30 days of such cessation of effectiveness amend the Shelf
Registration in a manner reasonably expected to obtain the withdrawal of the
order suspending the effectiveness thereof, or file an additional Registration
Statement pursuant to Rule 415 covering all of the Registrable Shares (a
"Subsequent Shelf Registration"). If a Subsequent Shelf Registration is filed,
the Company shall use its best efforts to cause the Subsequent Shelf
Registration to be declared effective as soon as practicable after such filing
and to keep such Registration Statement continuously effective (except as
provided in clauses (i), (ii) and (iii) of Section 2(a) above). As used herein
the term "Shelf Registration" means the Initial Shelf Registration and any
Subsequent Shelf Registration.
(c) Supplements and Amendments. The Company shall promptly
--------------------------
supplement and amend the Shelf Registration if required by the rules,
regulations or instructions applicable to the registration form used for such
Shelf Registration, if required by the Securities Act, or if requested by the
holders a majority in aggregate principal amount of the Registrable Shares
covered by such Registration Statement or by any underwriter of such Registrable
Shares.
3. Incidental Registration
-----------------------
If the Company at any time after the Closing Date proposes to register
any of its equity securities (as defined in the Exchange Act) under the
Securities Act (other than pursuant to a registration statement on Form S-4 or
S-8, or any successor forms), whether or not for sale for its own account, and
the registration form to be used may be used for the registration of the
Registrable Shares, it will each time give prompt written notice to the Holders
of its intention to do so and, upon the written request of any such Holder to
the Company made within 15 days after the receipt of any such notice (which
request shall specify the Registrable Shares intended to be disposed of by such
Holder and the intended method of disposition thereof), the
-4-
<PAGE>
Company shall use its reasonable efforts to effect the registration under the
Securities Act of all Registrable Shares which the Company has been so requested
to register by the Holders thereof, to the extent required to permit the
disposition (in accordance with the intended methods thereof as aforesaid) of
the Registrable Shares so to be registered, provided that:
--------
(1) if, at any time after giving written notice of its intention
to register any securities and, prior to the effective date of the
registration statement filed in connection with such registration, the
Company shall determine for any reason not to register such securities, the
Company may, at its election, give written notice of such determination to
each Holder and, thereupon, the Company shall be relieved of its obligation
to register any Registrable Shares in connection with such registration
(but not of its obligation to pay the registration expenses in connection
therewith); and
(2) if such registration shall be in connection with an
underwritten public offering and the managing underwriters shall advise the
Company in writing that in their opinion the number of Registrable Shares
requested to be included in such registration exceeds the number of such
securities which can be sold in such offering, the Company shall include in
such registration the number (if any) of Registrable Shares so requested to
be included which in the opinion of such underwriters can be sold and shall
not include in such registration any securities (other than securities
being sold by the Company, which shall have priority in being included in
such registration and Securities entitled to be included in such
registration pursuant to registration rights in effect prior to the Closing
Date) so requested to be included other than Registrable Shares unless all
Registrable Shares requested to be so included are included therein (and if
in the opinion of such underwriters, some but not all of the Registrable
Shares may be so included, all Holders of Registrable Shares requested to
be included therein shall share pro rata in the number of shares of
Registrable Shares included in such underwritten public offering on the
basis of the number of Registrable Shares requested to be included
therein).
4. Registration Procedures
-----------------------
In connection with the registration of any Registrable Shares
hereunder, the Company shall effect such registrations to permit the sale of
such Registrable Shares in accordance with the
-5-
<PAGE>
intended method or methods of disposition thereof, and pursuant thereto the
Company shall:
(a) Prepare and file with the SEC a Registration Statement or
Registration Statements as prescribed herein and to use its best efforts to
cause each such Registration Statement to become effective and remain effective
as provided herein; provided that, before filing any Registration Statement or
--------
Prospectus or any amendments or supplements thereto, the Company shall, if
requested, furnish to and afford the Holders of the Registrable Shares, one
special counsel for the Holders (the "Holders Counsel") and the managing
underwriters, if any, a reasonable opportunity to review copies of all such
documents (including copies of any documents to be incorporated by reference
therein and all exhibits thereto) proposed to be filed (at least 5 business days
prior to such filing). The Company shall not file any Registration Statement or
Prospectus or any amendments or supplements thereto in respect of which the
Holders must be afforded an opportunity to review prior to the filing of such
document, if the Holders of a majority in aggregate principal amount of the
Registrable Shares covered by such Registration Statement, the Holders Counsel,
or the managing underwriters, if any, shall reasonably object.
(b) Prepare and file with the SEC such amendments and post-effective
amendments to each Registration Statement as may be necessary to keep such
Registration Statement effective and to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
Registration Statement until such time as all of the securities have been
disposed of in accordance with the intended methods of disposition by the seller
or sellers thereof set forth in such Registration Statement, but (except in the
case of a Shelf Registration Statement) in no even for a period of more than six
months after the Registration Statement becomes effective; cause the related
Prospectus to be supplemented by any required Prospectus supplement, and as so
supplemented to be filed pursuant to Rule 424 (or any similar provisions then in
force) under the Securities Act; and comply with the provisions of the
Securities Act, the Exchange Act and the rules and regulations of the SEC
promulgated thereunder applicable to it with respect to the disposition of all
securities covered by such Registration Statement as so amended or in such
Prospectus as so supplemented; the Company shall be deemed not to have used its
best efforts to keep a Registration Statement effective during the Effectiveness
Period if it voluntarily takes any action that would result in the Holders of
the Registrable Shares covered thereby not being able to sell such Registrable
Shares during that period unless such action is required by applicable law.
-6-
<PAGE>
(c) Notify the Holders of Registrable Shares, the Holders Counsel and
the managing underwriters, if any, promptly (but in any event within two
business days), and confirm such notice in writing, (i) when a Prospectus or any
Prospectus supplement or post-effective amendment has been filed, and, with
respect to a Registration Statement or any post-effective amendment, when the
same has become effective (including in such notice a written statement that any
Holder may, upon request, obtain, without charge, one conformed copy of such
Registration Statement or post-effective amendment including financial
statements and schedules, documents incorporated or deemed to be incorporated by
reference and exhibits), (ii) of the issuance by the SEC of any stop order
suspending the effectiveness of a Registration Statement or of any order
preventing or suspending the use of any preliminary prospectus or the initiation
of any proceedings for that purpose, (iii) if at any time when a prospectus is
required by the Securities Act to be delivered in connection with sales of the
Registrable Shares the representations and warranties of the Company contained
in any agreement (including any underwriting agreement) contemplated by Section
4(l) below cease to be true and correct, (iv) of the receipt by any of the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of a Registration Statement or any of the
Registrable Shares for offer or sale in any jurisdiction, or the initiation or
threatening of any proceeding for such purpose, (v) of the happening of any
event or any information becoming known that makes any statement made in such
Registration Statement or related Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in such Registration Statement,
Prospectus or documents so that, in the case of the Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the Prospectus, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, and
(vi) of the Company's reasonable determination that a post-effective amendment
to a Registration Statement would be appropriate.
(d) Use its best efforts to prevent the issuance of any order
suspending the effectiveness of a Registration Statement or of any order
preventing or suspending the use of a Prospectus or suspending the qualification
(or exemption from qualification) of any of the Registrable Shares for sale in
any jurisdiction, and, if any such order is issued, to use its best
-7-
<PAGE>
efforts to obtain the withdrawal of any such order at the earliest possible
moment.
(e) If requested by the managing underwriters, if any, or the Holders
of a majority in aggregate principal amount of the Registrable Shares being sold
in connection with an underwritten offering, (i) promptly incorporate in a
prospectus supplement or post-effective amendment such information as the
managing underwriters, if any, or such Holders or counsel reasonably request to
be included therein, (ii) make all required filings of such prospectus
supplement or such post-effective amendment as soon as practicable after the
Company has received notification of the matters to be incorporated in such
prospectus supplement or post-effective amendment, and (iii) supplement or make
amendments to such Registration Statement.
(f) Furnish to each Holder of Registrable Shares and to the Holders
Counsel and each managing underwriter, if any, without charge, one conformed
copy of the Registration Statement or Registration Statements and each post-
effective amendment thereto, including financial statements and schedules, and,
if requested, all documents incorporated or deemed to be incorporated therein by
reference and all exhibits.
(g) Deliver to each Holder of Registrable Shares, their counsel, and
the underwriters, if any, without charge, as many copies of the Prospectus or
Prospectuses (including each form of preliminary prospectus) and each amendment
or supplement thereto and any documents incorporated by reference therein as
such Persons may reasonably request; and, subject to the last paragraph of this
Section 4, the Company hereby consents to the use of such Prospectus and each
amendment or supplement thereto by each of the Holders of Registrable Shares and
the underwriters or agents, if any, and dealers (if any), in connection with the
offering and sale of the Registrable Shares covered by such Prospectus and any
amendment or supplement thereto.
(h) Prior to any public offering of Registrable Shares, to use its
best efforts to register or qualify, and to cooperate with the Holders of
Registrable Shares, the underwriters, if any, and their respective counsel in
connection with the registration or qualification (or exemption from such
registration or qualification) of such Registrable Shares for offer and sale
under the securities or Blue Sky laws of such jurisdictions within the United
States as any Holder or the managing underwriters, if any, reasonably request in
writing as are reasonably necessary to permit the offer and sale of such Shares
in such jurisdictions, provided that where Registrable Shares are offered other
--------
than through an underwritten offering, the Company agrees to cause its counsel
to perform Blue Sky
-8-
<PAGE>
investigations and file registrations and qualifications required to be filed
pursuant to this Section 4(h); keep each such registration or qualification (or
exemption therefrom) effective during the period such Registration Statement is
required to be kept effective and do any and all other acts or things reasonably
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Shares covered by the applicable Registration Statement, provided
--------
that the Company shall not be required to (A) qualify generally to do business
in any jurisdiction where it is not then so qualified, (B) take any action that
would subject it to general service of process in any such jurisdiction where it
is not then so subject or (C) subject itself to taxation in excess of a nominal
dollar amount in any such jurisdiction.
(i) Cooperate with the Holders of Registrable Shares and the managing
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing Registrable Shares to be sold, which certificates
shall not bear any restrictive legends; and enable such Registrable Shares to be
in such denominations and registered in such names as the managing underwriters,
if any, or Holders may reasonably request.
(j) Use its best efforts to cause the Registrable Shares covered by
the Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the seller or
sellers thereof or the underwriters, if any, to consummate the disposition of
such Registrable Shares, except as may be required solely as a consequence of
the nature of such Holder's business, in which case the Company will cooperate
in all reasonable respects with the filing of such Registration Statement and
the granting of such approvals.
(k) Upon the occurrence of any event contemplated by Section 4(c)(v)
or 4(c)(vi) above, as promptly as practicable prepare and (subject to Section
4(a) above) file with the SEC, at the expense of the Company, a supplement or
post-effective amendment to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Shares being sold thereunder any
such Prospectus will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
-9-
<PAGE>
(l) In the event of an underwritten offering of Registrable Shares,
enter into an underwriting agreement as is customary in underwritten offerings
and take all such other actions as are reasonably requested by the managing
underwriters in order to expedite or facilitate the registration or the
disposition of such Registrable Shares, and in such connection, (i) make such
representations and warranties to the underwriters, with respect to the business
of the Company and its subsidiaries and the Registration Statement, Prospectus
and documents, if any, incorporated or deemed to be incorporated by reference
therein, in each case, as are customarily made by issuers to underwriters in
underwritten offerings, and confirm the same if and when requested; (ii) obtain
opinions of counsel to the Company and updates thereof in form and substance
reasonably satisfactory to the managing underwriters, addressed to the
underwriters covering the matters customarily covered in opinions requested in
underwritten offerings and such other matters as may be reasonably requested by
underwriters; (iii) obtain "cold comfort" letters and updates thereof in form
and substance reasonably satisfactory to the managing underwriters from the
independent certified public accountants of the Company (and, if necessary, any
other independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements and
financial data are, or are required to be, included in the Registration
Statement), addressed to each of the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in "cold
comfort" letters in connection with underwritten offerings and such other
matters as reasonably requested by underwriters; and (iv) if an underwriting
agreement is entered into, the same shall contain indemnification provisions and
procedures no less favorable than those set forth in Section 6 hereof (or such
other provisions and procedures acceptable to Holders of a majority in aggregate
principal amount of Registrable Shares covered by such Registration Statement
and the managing underwriters or agents) with respect to all parties to be
indemnified pursuant to said Section. The above shall be done at each closing
under such underwriting agreement, or as and to the extent required thereunder.
(m) Make available for inspection by any Holder of such Registrable
Shares being sold, any underwriter participating in any such disposition of
Registrable Shares, if any, and any attorney, accountant or other agent retained
by any such Holder, or underwriter (collectively, the "Inspectors"), at the
offices where normally kept, during reasonable business hours, all financial and
other records, pertinent corporate documents and properties of the issuers and
their respective subsidiaries (collectively, the "Records") as shall be
reasonably necessary to enable them to exercise any applicable due diligence
-10-
<PAGE>
responsibilities, and cause the officers, directors and employees of the Company
and its subsidiaries to supply all information in each case reasonably requested
by any such Inspector in connection with such Registration Statement. Records
which the Company determines, in good faith, to be confidential and any Records
which it notifies the Inspectors are confidential shall not be disclosed by the
Inspectors unless (i) the disclosure of such Records is necessary to avoid or
correct a misstatement or omission in such Registration Statement, (ii) the
release of such Records is ordered pursuant to a subpoena or other order from a
court of competent jurisdiction or (iii) the information in such Records has
been made generally available to the public. Each Holder of such Registrable
Shares will be required to agree that information obtained by it as a result of
such inspections shall be deemed confidential and shall not be used by it as the
basis for any market transactions in the securities of the Company unless and
until such is made generally available to the public. Each Holder of such
Registrable Shares will be required to further agree that it will, upon learning
that disclosure of such Records is sought in a court of competent jurisdiction,
give notice to the Company and allow the Company to undertake appropriate action
to prevent disclosure of the Records deemed confidential at their expense.
(n) Comply with all applicable rules and regulations of the SEC and
make generally available to its securityholders earnings statements satisfying
the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder
(or any similar rule promulgated under the Securities Act) no later than 45 days
after the end of any 12-month period (or 90 days after the end of any 12-month
period if such period is a fiscal year) (i) commencing at the end of any fiscal
quarter in which Registrable Shares are sold to underwriters in a firm
commitment or best efforts underwritten offering and (ii) if not sold to
underwriters in such an offering, commencing on the first day of the first
fiscal quarter of the Company after the effective date of a Registration
Statement, which statements shall cover said 12-month periods.
(o) Cooperate with each seller of Registrable Shares covered by any
Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Shares and their respective counsel in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc. (the "NASD").
(p) Use its best efforts to take all other steps necessary to effect
the registration of the Registrable Shares covered by a Registration Statement
contemplated hereby.
-11-
<PAGE>
Each Holder of Registrable Shares agrees by acquisition of such
Registrable Shares that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 4(c)(ii), 4(c)(iv),
4(c)(v), or 4(c)(vi), such Holder will forthwith discontinue disposition of such
Registrable Shares covered by such Registration Statement or Prospectus until
such holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 4(k), or until it is advised in writing by the Company
that the use of the applicable Prospectus may be resumed, and has received
copies of any amendments or supplements thereto.
5. Registration Expenses
---------------------
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall be borne by the Company,
whether or not a Registration Statement is filed or becomes effective,
including, without limitation, (i) all registration and filing fees (including,
without limitation, (A) fees with respect to filings required to be made with
the NASD in connection with an underwritten offering and (B) fees and expenses
of compliance with state securities or Blue Sky laws (including, without
limitation, reasonable fees and disbursements of its counsel in connection with
Blue Sky qualifications of the Registrable Shares and determination of the
eligibility of the Registrable Shares for investment under the laws of such
jurisdictions as provided in Section 4(h), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable Shares and
of printing prospectuses if the printing of prospectuses is requested by the
managing underwriters, if any, (iii) messenger, telephone and delivery expenses,
(iv) fees and disbursements for the Company and fees and disbursements of the
Holders Counsel (subject to the provisions of Section 5(b)), (v) fees and all
independent certified public accountants referred to in Section 4(l)(iii)
(including, without limitation, the expenses of any special audit and "cold
comfort" letters required by or incident to such performance), (vi) the fees and
expenses of any "qualified independent underwriter" or other independent
appraiser participating in an offering pursuant to Section 2 of Schedule E to
the By-laws of the National Association of Securities Dealers, Inc., (vii)
Securities Act liability insurance, if the Company desires such insurance,
(viii) fees and expenses of all other Persons retained by the Company, (ix)
internal expenses of the Company (including, without limitation, all salaries
and expenses of officers and employees of the Company performing legal or
accounting duties), (x) the expense of any annual audit, (xi) the fees and
expenses incurred in connection with the listing of the securities to be
registered on any securities exchange and (xii) the expenses relating to
printing, word processing and
-12-
<PAGE>
distributing all Registration Statements, underwriting agreements, securities
sales agreements, indentures and any other documents necessary in order to
comply with this Agreement. Notwithstanding the foregoing, the Company shall
not be liable for any underwriting discounts or commissions incident to the sale
of any Registrable Shares pursuant to this Agreement.
(b) In connection with any registration hereunder, the Company shall
reimburse the Holders of the Registrable Shares being registered in such
registration for the reasonable fees and disbursements of the Holders Counsel
(in addition to appropriate local counsel) chosen by the Holders of a majority
in aggregate principal amount of the Registrable Shares to be included in such
Registration Statement and other out-of-pocket expenses of the Holders of
Registrable Shares incurred in connection with the registration of the
Registrable Shares.
6. Indemnification
---------------
(a) The Company will indemnify and hold harmless each Holder of
Registrable Shares, the directors, officers, employees and agents of each
Person, and each Person, if any, who controls any such Person within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act (each a
"Participant") from and against any and all losses, claims, liabilities,
expenses and damages (including any and all investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted), to which
they, or any of them, may become subject under the Act, the Exchange Act or
other Federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, liabilities, expenses or damages arise out of or
are based on any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement or Prospectus or any amendment or
supplement thereto or any preliminary prospectus or the omission or alleged
omission to state in such document a material fact required to be stated in it
or necessary to make the statements in it not misleading, provided that a
Participant will not be entitled to any such indemnification hereunder to the
extent that such loss, claim, liability, expense or damage arises from and is
based on an untrue statement or omission or alleged untrue statement or omission
made in reliance on and in conformity with information relating to such
Participant furnished in writing to the Company by such Participant expressly
for inclusion therein.
(b) Each Participant will indemnify and hold harmless the Company,
each Person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, each director of the Company and
each officer of
-13-
<PAGE>
the Company to the same extent as the foregoing indemnity from the Company to
each Participant, but only insofar as losses, claims, liabilities, expenses or
damages arise out of or are based on any untrue statement or omission or alleged
untrue statement or omission made in reliance on and in conformity with
information relating to such Participant furnished in writing to the Company by
such Participant expressly for use in any Registration Statement or Prospectus
or any amendment or supplement thereto or any preliminary prospectus. The
liability of any Participant under this paragraph shall in no event exceed the
proceeds received by such Participant from sales of Registrable Shares giving
rise to such obligations.
(c) Any party that proposes to assert the right to be indemnified
under this Section 6 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 6, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
the foregoing provisions of this Section 6 unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by the
indemnifying party. If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the indemnifying
party will be entitled to participate in and, to the extent that it elects by
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of
the action, with counsel satisfactory to the indemnified party, and after notice
from the indemnifying party to the indemnified party of its election to assume
the defense, the indemnifying party will not be liable to the indemnified party
for any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified party
in connection with the defense. The indemnified party will have the right to
employ its own counsel in any such action, but the fees, expenses and other
charges of such counsel will be at the expense of such indemnified party unless
(1) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based on advice of counsel) that there may be legal defenses
available to it or other indemnified parties that are different from or in
addition to those available to the indemnifying party, (3) a conflict or
potential conflict exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
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<PAGE>
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (4) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be at
the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees,
disbursements and other charges of more than one separate firm admitted to
practice in such jurisdiction at any one time for all such indemnified party or
parties. All such fees, disbursements and other charges will be reimbursed by
the indemnifying party promptly as they are incurred. An indemnifying party
will not be liable for any settlement of any action or claim effected without
its written consent (which consent will not be unreasonably withheld).
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 6 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company or any Participant, the
Company and each Participant will contribute to the total losses, claims,
liabilities, expenses and damages (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company from Persons other than a
Participant, such as Persons who control the Company within the meaning of the
Act, officers of the Company and directors of the Company, who also may be
liable for contribution) to which the Company and each Participant may be
subject in such proportion as is appropriate to reflect the relative fault of
the Company on the one hand and each Participant on the other, with respect to
the statements or omissions which resulted in such loss, claim, liability,
expense or damage, or action in respect thereof, as well as any other relevant
equitable considerations with respect to such offering. Such relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or a Participant, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
each Participant shall agree that it would not be just and equitable if
contributions pursuant to this Section 6(d) were to be determined by pro rata
allocation or by any other method of allocation which does not take into account
the
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<PAGE>
equitable considerations referred to herein. The amount paid or payable by an
indemnified party as a result of the loss, claim, liability, expense or damage,
or action in respect thereof, referred to above in this Section 6(d) shall be
deemed to include, for purpose of this Section 6(d), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 6(d), a Participant shall not be required to contribute any amount in
excess of the amount by which proceeds received by such Participant from sales
of Registrable Shares exceeds the amount of any damages that such Participant
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission, and no Person found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
will be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 6(d), any Person who
controls a party to this Agreement within the meaning of the Act will have the
same rights to contribution as that party, and each officer of the Company will
have the same rights to contribution as the Company, subject in each case to the
provisions hereof. Any party entitled to contribution, promptly after receipt
of notice of commencement of any action against such party in respect of which a
claim for contribution may be made under this Section 6(d), will notify any such
party or parties from whom contribution may be sought, but the omission so to
notify will not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have under this Section 6(d).
No party will be liable for contribution with respect to any action or claim
settled without its written consent (which consent will not be unreasonably
withheld).
(e) The indemnity and contribution agreements contained in this
Section 6 will be in addition to any liability which the indemnifying Persons
may otherwise have to the indemnified Persons referred to above.
7. Rule 144
--------
The Company covenants that it will file the reports required to be
filed by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the SEC thereunder in a timely manner and, if at any time
the Company is not required to file such reports, it will, upon the request of
any Holder of Registrable Shares, make publicly available other information so
long as necessary to permit sales pursuant to Rule 144 under the Act. The
Company further covenants that it will take such further action as any Holder of
Registrable Shares may reasonably request, all to the extent required from time
to time
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<PAGE>
to enable such holder to sell Registrable Shares without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144
under the Act, as such Rules may be amended from time to time, or (b) any
similar rule or regulation hereafter adopted by the SEC.
8. Underwritten Registrations
--------------------------
If any of the Registrable Shares are to be sold in an underwritten
offering (other than an incidental registration pursuant to Section 3 hereof),
the investment banker or investment bankers and manager or managers that will
manage the offering will be selected by the Holders of a majority in aggregate
principal amount of such Registrable Shares included in such offering and
reasonably acceptable to the Company.
No Holder of Registrable Shares may participate in any underwritten
registration hereunder unless such Holder (a) agrees to sell such Holder's
Registrable Shares on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements.
9. Miscellaneous
-------------
(a) Remedies. In the event of a breach by the Company of any of its
--------
obligations under this Agreement, each Holder of Registrable Shares, in addition
to being entitled to exercise all rights provided herein or, in the case of the
Initial Holders, in the Purchase Agreement or granted by law, including recovery
of damages, will be entitled to specific performance of its rights under this
Agreement. The Company agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company has not, as of the date
--------------------------
hereof, and the Company shall not, after the date of this Agreement, enter into
any agreement with respect to any of its securities that is inconsistent with
the rights granted to the Holders of Registrable Shares in this Agreement or
otherwise conflicts with the provisions hereof.
(c) Adjustments Affecting Registrable Shares. The Company shall not,
----------------------------------------
directly or indirectly, take any action with respect to the Shares as a class
that would adversely affect the
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<PAGE>
ability of the Holders of Registrable Shares to include such Registrable Shares
in a registration undertaken pursuant to this Agreement.
(d) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of Holders
of at least a majority of the then outstanding Registrable Shares.
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the rights of
Holders of Registrable Shares whose securities are being sold pursuant to a
Registration Statement and that does not directly or indirectly affect, impair,
limit or compromise the rights of other Holders of Registrable Shares may be
given by Holders of at least a majority of the Registrable Shares being sold by
such Holders pursuant to such Registration Statement, provided that the
--------
provisions of this sentence may not be amended, modified or supplemented except
in accordance with the provisions of the immediately preceding sentence.
(e) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, registered first-
class mail, next-day air courier or telecopier:
(i) if to an Initial Holder, at the address set forth below such
Initial Holder's signature on the signature pages attached hereto;
(ii) if to a Holder of Registrable Shares, at the most current address
given by such Holder to the Company; and
(iii) if to the Company, at:
The Right Start, Inc.
5334 Sterling Center Drive
Westlake Village, CA 91361
Telecopy No.: (818) 707-7132
Attention: Mr. Lenny R. Targon
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five business days after
being deposited in the postage prepaid, if mailed; one business day after being
timely delivered to a next-day air courier; and when receipt is acknowledged by
the addressee, if telecopied.
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<PAGE>
(f) Successors and Assigns. This Agreement shall inure to the benefit
----------------------
of and be binding upon the successors and assigns of each of the parties,
including without limitation and without the need for an express assignment,
subsequent Holders of Registrable Shares; provided, that, with respect to the
indemnity and contribution agreements in Section 6, each Holder of Registrable
Shares subsequent to the Initial Holders shall be bound by the terms thereof if
(i) such Holder elects to include Registrable Shares in a Registration Statement
and (ii) such Holder is advised expressly by the Company of the provisions
contained in Section 6 and that such Holder's election to include Registrable
Shares shall be deemed such Holder's agreement to be bound by such provisions.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, AS APPLIED TO CONTRACTS
MADE AND PERFORMED WITHIN THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF THE STATE OF CALIFORNIA IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.
(j) Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(k) Entire Agreement. This Agreement, together with the Purchase
----------------
Agreement, is intended by the parties as a final expression of their agreement,
and is intended to be a complete
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<PAGE>
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein and therein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
THE RIGHT START, INC.
By:________________________________
Lenny M. Targon
Chief Executive Officer
THE INITIAL HOLDERS:
Arbco Associates, L.P.
Kayne, Anderson Non-Traditional
Investments, L.P.
Opportunity Associates, L.P.
Offense Group Associates, L.P.
By: KAIM Non-Traditional, L.P.,
its General Partner
By: Kayne, Anderson Investment
Management, Inc., its General Partner
By: _____________________________
Jerry R. Welch
Senior Vice President
Address:
c/o Kayne Anderson Investment
Management, Inc.
1800 Avenue of the Stars
Los Angeles, CA 90067
Telecopy No.: (310) 203-8348
Attention: Mr. Jerry R. Welch
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<PAGE>
__________________________________
Albert O. Nicholas
Address:
Nicholas Co., Inc.
700 North Water Street
Milwaukee, WI 53202
Telecopy No.: (414) 272-4650
__________________________________
Fred Kayne
Address:
Fortune Fashions
6501 Flotilla Street
Commerce, CA 90040
Telecopy No.: (213) 721-0718
PRIMERICA LIFE INSURANCE COMPANY
By: _____________________________
Name:
Title:
Address:
388 Greenwich Street
New York, NY 10013
Telecopy No.: (212) 816-3204
Attn: Harvey Eisen
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<PAGE>
EXHIBIT 10.11
TERMINATION AND RELEASE AGREEMENT
---------------------------------
THIS TERMINATION AND RELEASE AGREEMENT (this "Agreement") is made and
entered into as of this 28th day of February, 1996 by and between The Right
Start, Inc., a California corporation (the "Company"), and Lenny M. Targon (the
"Executive").
W I T N E S E T H:
-----------------
WHEREAS, the Executive is employed by the Company as its Chief
Executive Officer and Co-Vice Chairman and also serves as a member of its Board
of Directors, and
WHEREAS, rights and obligations of the Executive and the Company with
respect to such employment are subject to an employment agreement entered into
between the Executive and the Company, dated as of May 30, 1991, as amended on
July 28, 1994 and August 3, 1995 (the "Employment Agreement"), and
WHEREAS, the parties hereto desire to set forth the rights and
obligations of the Company and the Executive in connection with the resignation
of the Executive, the cancellation of the Employment Agreement and the
termination of the Executive's employment effective March 8, 1996.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, and for other good and valuable consideration, the
parties hereto agree as follows:
1. Resignation and Termination of Employment. Effective March 8,
-----------------------------------------
1996, (i) the Executive resigns as a director and officer of the Company and
from all positions held with any subsidiary of the Company and on any corporate
committee or board of the Company and its subsidiaries and (ii) the Executive's
employment with the Company shall terminate. The Executive waives any rights to
future employment with the Company except as specifically set forth herein.
2. Consulting Services.
-------------------
(a) Services. On and after March 8, 1996 through May 31, 1997 (the
--------
"Effective Period"), the Executive shall become an independent consultant and
shall provide consulting services to the Company, including management advisory,
marketing and financial services (the "Consulting Services"). The Consulting
Services shall be provided by the Executive on a project-by-project basis as
shall be reasonably requested by the Company. The Company hereby acknowledges
that the Consultant shall not be
<PAGE>
required to commit any specific periods of time with respect to the provision of
such Consulting Services.
(b) Compensation. As consideration for the provision of such
------------
Consulting Services:
(i) the Executive shall be entitled to receive from the Company
through the Effective Period (x) all base salary amounts that the Executive
was entitled to receive under the Employment Agreement, (y) if the
Executive elects to receive COBRA coverage in connection with the
termination of his employment hereunder, the Company shall make payments on
the Executive's behalf in an amount equal to all COBRA payments which
otherwise would be payable by the Executive to the Company, and (z) if the
Executive elects not to receive COBRA coverage in connection with the
termination of his employment hereunder, the Company shall make payments to
the Executive in an amount equal to all COBRA payments which would be
payable by the Executive to the Company if the Executive had elected to
receive such coverage;
(ii) effective March 8, 1996, the Executive's options (the
"Stock Options") to purchase 388,000 shares of the Company's common stock
shall be fully vested and may be exercised at any time through June 1,
2001, subject to the terms and conditions of such Stock Options which,
except as set forth herein, are not amended or modified in any way hereby;
and
(iii) the Company agrees to continue to participate in the
split-dollar insurance program pursuant to the Employment Agreement, and
upon completion by the Executive of the Consulting Services through the end
of the Effective Period or, if earlier, the termination of such Consulting
Services pursuant to Section 2(e) hereof, the Company shall (A) assign to
the Executive all of its interest in that certain $1 million face amount
split dollar life insurance policy insuring the life of the Executive (the
"Policy"), (B) forgive all indebtedness associated with or outstanding
against the Policy, and (C) make a cash payment to the Executive (or his
estate) such that the amount of the cash payment shall equal the
Executive's federal and California income tax liability resulting from the
assignment of the Policy, the forgiveness of such indebtedness and the
making of such payment.
The Company acknowledges and agrees that the Executive may seek and obtain other
employment during the Effective Period and the payments and benefits provided
for herein will not be affected by
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<PAGE>
reason of any salary or other compensation received by the Executive by reason
of such other employment.
(c) Expenses. All reasonable out-of-pocket expenses incurred by the
--------
Executive in performance of the Consulting Services to be rendered hereunder
shall be borne by the Company and reimbursed to the Executive upon presentation
of appropriate documentation provided, however, that such expenses shall require
the prior written approval of the Company.
(d) Relationship. Nothing herein shall be deemed to constitute an
------------
employment or agency relationship between the Executive and the Company. Except
as expressly agreed in writing, the Executive shall not have the authority to
obligate, bind or commit the Company in any manner whatsoever. The Executive
acknowledges that he is an independent contractor and, as such, shall be liable
to pay any taxes or assessments with respect to any consideration received under
this Agreement.
(e) Termination. The rights and obligations of the Company and the
-----------
Executive set forth in this Section 2 may be terminated (i) by the Executive, at
any time, for any reason whatsoever or (ii) by the Company, if the Executive
breaches this Agreement in any material respect and fails to cure such breach
within 15 days after written notice by the Company. Notwithstanding the
foregoing, any such termination shall not affect the Executive's rights with
respect to the Stock Options or the Policy.
3. Inventions and Confidentiality.
------------------------------
(a) Inventions. The Executive agrees that he shall fully inform and
----------
disclose to the Company all products, ideas, designs, improvements and processes
(collectively, "Inventions") which he has obtained during his employment with
the Company or during the Effective Period and which relate to or are useful in
the business of the Company or the subsidiaries or affiliates of the Company,
which resulted from tasks assigned to him by the Company or which resulted from
the use of premises owned, leased or contracted by, or on behalf of, the
Company, whether conceived by the Executive alone or with others and whether or
not conceived during regular working hours. All such Inventions, and all
patents, copyrights and other rights in connection therewith, shall be the
exclusive property of the Company or the subsidiaries or affiliates of the
Company, as applicable. The Executive further agrees that he will fully inform
and disclose to the Company, and the Company hereby agrees to receive all
disclosures in confidence, all Inventions made or conceived or reduced to
practice or learned by him, either alone or jointly with others, during the
course of his employment with the Company
-3-
<PAGE>
or during the course of providing the Consulting Services to the Company during
the Effective Period, for the purposes of determining whether they constitute
Inventions relating to the business of the Company or the subsidiaries or
affiliates of the Company, as described above.
The Executive shall assist the Company or the subsidiaries or
affiliates of the Company to obtain and enforce patents, copyrights, and other
rights and protections against infringement by others relating to the Inventions
in any and all states and countries, and shall execute all documents and do all
things necessary to vest the Company or the subsidiaries or affiliates of the
Company, as appropriate, with full and exclusive title thereto.
In the event that the Company is unable, after reasonable effort to
secure the signature of the Executive on any document or documents needed to
apply for or prosecute any patent, copyright, or other right or protection
relating to an Invention, for any reason whatsoever, the Executive hereby
irrevocably designates and appoints the Company and its duly authorized officers
and agents as his agent and attorney-in-fact, to act for and in his behalf and
to execute and file any such application or applications and to do all other
acts to further the prosecution and issuance of patents, copyrights, or similar
protections thereon with the same legal force and effect as if executed by the
Executive.
(b) Confidentiality. The Executive understands and agrees that as an
---------------
executive officer and director of the Company, he was privy and had access to
certain information which is confidential to the Company and which would put the
Company at a competitive disadvantage, if known to its competitors. The
Executive represents and warrants that he has returned all Company property,
including without limitation Company files, records, drawings and documents,
confidential or otherwise, and copies thereof to the Company. Except as may be
required in the performance of this Agreement, pursuant to subpoena or other
legal process, or otherwise as required by law, for a period of five years from
the date hereof, the Executive will not use for his own benefit or to the
benefit of anyone other than the Company any Company confidential or trade
secret information, including (by way of illustration and not limitation), but
only to the extent confidential and not publicly available, the identity of
their customers, service providers and suppliers; their arrangements with
customers, service providers and suppliers; their data, records, compilations of
information, processes, programs, knowhow, improvements, marketing plans,
strategies, forecasts, financial statements, budgets, projections, licenses,
prices, costs, files, documents, drawings,
-4-
<PAGE>
memoranda, notes, or other documents relating to the business of the Company and
the subsidiaries or affiliates of the Company or the business of any customer,
service provider or supplier of the Company or the subsidiaries or affiliates of
the Company; and the specifications relating to their customers, service
providers, suppliers, products and services.
4. Release.
-------
(a) The Executive hereby releases and discharges the Company and its
respective past and present agents, employees, managers, representatives,
officers, directors, attorneys, accountants, trustees, shareholders, partners,
insurers, heirs, predecessors-in-interest, advisors, partnerships, successors,
assigns, and affiliated persons, organizations, and companies (hereinafter
"Released Parties") from any and all suits, causes of action, demands, claims,
charges, complaints, obligations, liabilities, costs, losses, damages, injuries,
rights, judgments, attorneys' fees, expenses, bonds, bills, penalties, fines,
and all other legal responsibilities in any form whatsoever in law or in equity,
whether known or unknown, whether suspected or unsuspected, arising out of his
employment relationship with Released Parties, or the termination of that
relationship, including but not limited to claims of wrongful termination of
employment, breach of an implied covenant of good faith and fair dealing, breach
of contract, defamation, slander, negligent misrepresentation, fraud,
intentional or negligent interference with business relations, and employment
discrimination (including, but not limited to discrimination under the Fair
Employment and Housing Act, discrimination under Title VII of the Civil Rights
Act of 1964, and Civil Rights Act of 1991 and discrimination under the Equal Pay
Act). Hereinafter these shall collectively be referred to as the "Released
Actions."
(b) The Executive shall not file any actions against Released Parties
in any court, governmental administrative agency, or private organization with
respect to the Released Actions.
(c) The Executive shall make no assignment of any Released Actions and
the Executive represents that no such assignment has been made.
(d) The Executive represents and agrees that he has been given the
opportunity to, has been advised to, and has discussed all of the aspects of
this Agreement with his attorneys, that he has carefully read and fully
understands all of the provisions of this Agreement, and that he is voluntarily
entering into this Agreement.
-5-
<PAGE>
(e) The Executive understands and agrees that the nature, extent and
result of the Released Actions hereby released may not now be known or
anticipated and declares that he nevertheless desires, and hereby agrees, to
release in full all possible Released Actions against the Released Parties
arising from or related to any and all acts or omissions of any of the Released
Parties arising from or relating to any event or transaction occurring on or
before the date hereof. The Executive acknowledges that this release shall be
effective as a full and final accord, satisfaction and settlement of and as a
bar to each and every claim and cause of action referred to and released by
virtue of Paragraph 6(a) above. The Executive acknowledges his familiarity with
Section 1542 of the California Civil Code which provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release which if known by him must have materially affected his
settlement with the debtor."
The Executive expressly waives and relinquishes any and all rights and benefits
which he has or may have under Section 1542 of the California Civil Code to the
full extent that he may lawfully waive all such rights and benefits pertaining
to the Released Actions hereinabove specified. The Executive further
acknowledges that he is aware that he or his attorneys may hereafter discover
facts different from or in addition to the facts of which he or his attorneys
now are aware with respect to the subject matter of this release and that he
nevertheless intends hereby fully, finally, absolutely and forever to settle the
matters released by virtue of Paragraph 6(a) above notwithstanding the discovery
of any such different or additional facts.
5. Statements. The parties agree that neither shall make any
----------
disparaging comments about the other to anyone. The Executive specifically
agrees that he will not disparage the Company to its investors, customers, or to
anyone, and that if asked, he will advise only that he left to pursue other
opportunities. The parties acknowledge and agree that this Section 5
constitutes a material provision of this Agreement.
6. No Admissions. Neither the execution nor the performance of this
-------------
Agreement shall constitute or be construed as an admission of liability or
wrongdoing whatsoever by the Released Parties or by the Executive.
-6-
<PAGE>
7. Rights Relating to Employment and Termination. This Agreement
---------------------------------------------
integrates and embodies all understandings and agreements between the Executive
and the Company in connection with the Executive's employment and termination of
employment from the Company and its subsidiaries and affiliates and supersedes
any other agreements, oral or written, concerning the Released Actions. Except
as specifically provided in this Agreement, the Executive shall not be entitled
to any payments on account of his having been employed by, or having terminated
his employment with, the Company and its subsidiaries and affiliates.
Notwithstanding anything to the contrary contained herein, the Executive shall
be entitled to such limitation on liability and rights of indemnification as may
be provided under applicable law, the Company's articles of incorporation and
bylaws or any agreements between the Executive and the Company with regard to
any action or omission of the Executive prior to the termination of his
employment with the Company.
8. Withholding. The Company may withhold from any amounts payable
-----------
to the Executive hereunder any amounts which, in the opinion of its accounting
officer or other tax counsel to the Company, are required to be withheld for
federal, state or local taxes.
9. Notice. Any notice required or permitted to be given under this
------
Agreement shall be in writing and shall be deemed to have been given when
delivered personally, sent by registered or certified mail, postage prepaid,
return receipt requested, addressed to the party concerned at the address
indicated below or to such changed address as such party may subsequently give
notice of:
If to the Company:
The Right Start
5334 Sterling Center Drive
Westlake Village, CA 91361
Attention: Mr. Jerry Welch
If to the Executive:
Mr. Lenny M. Targon
4058 Mariner Circle
Westlake Village, CA 91361
10. Binding Agreement; Assignment. In entering into this Agreement,
-----------------------------
each party assumes the risk of any misrepresentation, concealment, or mistake.
If any party shall subsequently discover that any fact relied upon it in
entering into this Agreement was untrue or that any fact was concealed
-7-
<PAGE>
from it, or that its understanding of the facts or the law was incorrect, such
party shall not be entitled to relief in connection herewith and, including
without limitation of the generality of the foregoing, no party shall have any
right or claim to set aside or rescind this Agreement. This Agreement is
intended to be and is final and binding between the parties hereto and their
respective successors, heirs and assigns regardless of any claims of
misrepresentation made without the intention to perform, concealment of fact,
mistake in fact, or in law, or any other circumstance whatsoever. No rights or
obligations of the Executive under this Agreement may be assigned or transferred
by the Executive except that his rights to compensation and benefits hereunder,
which rights shall remain subject to the limitations of this Agreement, may be
transferred by will or operation of law. The Executive's heirs by will or law
shall be entitled to the payments hereunder upon the Executive's death. No
rights or obligations of the Company under this Agreement may be assigned or
transferred except that such rights or obligations may be assigned or
transferred in the event of a merger or consolidation in which the Company is
not the continuing entity, or the sale or liquidation of all or substantially
all of the assets of the Company, provided that the assignee or transferee is
the successor to all or substantially all of the assets of the Company and such
assignee or transferee assumes the liabilities, obligations and duties of the
Company, as contained in this Agreement either contractually or as a matter of
law. The Company further agrees that in the event of a merger, consolidation,
sale of assets, or liquidation as described in the preceding sentence it shall
take whatever action it legally can in order to cause such assignee or
transferee to assume the liabilities, obligations, and duties of the Company
hereunder.
11. Amendment or Waiver. No provision in this Agreement may be
-------------------
amended or waived unless such amendment or waiver is agreed to in writing,
signed by the Executive and by a duly authorized officer of the Company. No
waiver by either party hereto or any breach by the other party of any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of a similar or dissimilar provision or condition at the same or
any prior or subsequent time.
12. Severability and Interpretation. In the event that any provision
-------------------------------
of this Agreement shall be held to be invalid or unenforceable for any reason,
in whole or in part, the remaining provisions of this Agreement shall be
unaffected thereby and shall remain in full force and effect to the fullest
extent permitted by law. No provision of this Agreement shall be modified or
construed by any practice that is inconsistent with such provision, and failure
by either the Company or the
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<PAGE>
Executive to comply with any provision, or to require the other to comply with
any provision, should not affect the rights of either to thereafter comply or
require the other to comply.
13. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of California without reference to the principles
of conflict of laws.
14. Attorney Fees. The parties shall be responsible for their own
-------------
attorneys' fees and costs associated with this Agreement and with the Released
Actions. Should any action be brought by the Executive or the Released Parties
to enforce any of the terms of this Agreement, the prevailing party shall be
entitled to recover all costs and expenses in the prosecution or defense of this
action, including reasonable attorneys' fees.
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
THE RIGHT START, INC.
By:_____________________________
Jerry R. Welch
Chairman of the Board
______________________________
Lenny M. Targon
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<PAGE>
EXHIBIT 10.12
LOAN AGREEMENT
--------------
(LINE OF CREDIT)
This Loan Agreement dated June 12, 1995 is entered into by and between
----
Wells Fargo Bank, National Association, a national banking association
("Lender") and The Right Start, Inc., a California Corporation ("Borrower").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Borrower has requested that Lender enter into certain financing
arrangements with Borrower pursuant to which Lender may make loans and provide
other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
Section 1. DEFINITIONS
-----------
All terms used herein which are defined in Article 1 or Article 9 of the
Uniform Commercial Code shall have the meanings given therein unless otherwise
defined in this Agreement. Any accounting term used herein unless otherwise
defined or set forth in this Agreement shall have the meanings customarily given
to such term in accordance with GAAP. For purposes of this Agreement, the
following terms shall have the respective meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of Borrower to
payment of or goods sold or leased for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 "Availability Reserves" shall mean, as of any date of determination,
such amounts as Lender may from time to time establish and revise in good faith
reducing the amount of Revolving Loans and Letters of Credit which would
otherwise be available to Borrower under the lending formula(s) provided for
herein: (a) to reflect events, conditions, contingencies or risks which, as
determined by Lender in good faith, do or may affect either (i) the Collateral
or its value, (ii) the assets, business or prospects of Borrower or any Obligor
or (iii) the security interests and other rights of Lender in the Collateral
(including the enforceability, perfection and priority thereof) or (b) to
reflect Lender's good faith belief that any collateral report or financial
information furnished by or on behalf of Borrower or any Obligor to Lender is or
may have been incomplete, inaccurate or misleading in any material respect or
(c) in respect of any state of facts which Lender determines in good faith
constitutes an Event of Default or may, with notice or passage of time or both,
constitute an Event of Default. Without restricting Lender's rights under the
preceding portion of this paragraph,
<PAGE>
Lender shall establish an availability reserve of 5% of Revolving Loans and
Letter of Credit Obligations available under this Agreement until Lender
determines that less than 10% of the items test counted by Lender (based on
Lender's quarterly test count of at least 40 SKU's) have variances in excess of
10% of the amounts indicated in Borrower's then most recent perpetual inventory
report submitted to Lender and that the aggregate variance of all such items
counted is less than 2% of the amount indicated therefor in such perpetual
inventory report as adjusted for any book reserves established by Borrower
against such Inventory.
1.3 "Cash Collateral Account" shall have the meaning set forth in Section
-------
6.1 hereof.
- ---
1.4 "Collateral" shall mean all the property in which Borrower or an
Obligor grants or is required to grant to Lender a security interest or lien, as
described in Section 5 hereof.
---------
1.5 "Eligible Inventory" shall mean Inventory owned by Borrower which is
and remains acceptable to Lender for lending purposes and is located at one of
the addresses set forth in Schedule I to this Agreement, provided however, that
if any such location is owned by a party other than Borrower, Lender shall have
obtained from the owner thereof an agreement relative to Lender's rights with
respect to such Inventory, in form and content satisfactory to Lender. In no
event however shall Eligible Inventory include (a) work-in-process; (b)
Inventory subject to a security interest or lien in favor of any person other
than Lender except those permitted in this Agreement; and (c) Inventory which is
not subject to the first priority, valid and perfected security interest of
Lender. General criteria for Eligible Inventory may be established and revised
from time to time by Lender in good faith. Any Inventory which is not Eligible
Inventory shall nevertheless be part of the Collateral.
1.6 "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.7 "Event of Default" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.8 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Boards which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 8.10 hereof, GAAP shall be determined on the basis of
------------
such principles in effect on the date hereof and consistent with those used in
the preparation of the audited financial statements delivered to Lender prior to
the date hereof.
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<PAGE>
1.9 "General Intangibles" shall mean general intangibles (including, but
not limited to, tax and duty refunds, registered and unregistered patents,
trademarks, service marks, copyrights, trade names, applications for the
foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer
lists, mailing lists, licenses, whether as licensor or licensee, choses in
action and other claims and existing and future leasehold interests in
equipment).
1.10 "Information Certificate" shall mean the Information Certificate of
Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Loan Documents and the financing arrangements provided for herein.
1.11 "Inventory" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.12 "Letters of Credit" shall mean commercial or standby letters of
credit issued by Lender from time to time under the Line of Credit.
1.13 "Letter of Credit Agreement" shall have the meaning set forth in
Section 2.2(c) hereof.
1.14 "Letter of Credit Obligations" shall mean at any time, the aggregate
amount available to be drawn, plus amounts drawn and not yet reimbursed, under
Letters of Credit.
1.15 "Line of Credit" shall mean a revolving line of credit under which
Lender agrees to make Revolving Loans and issue Letters of Credit, subject to
the terms and conditions of this Agreement.
1.16 "Line of Credit Note" shall have the meaning set forth in Section
2.1.
1.17 "Loan Documents" shall mean, collectively, this Agreement and all
notes, guarantees, security agreements, subordination agreements, and other
agreements, documents and instruments now or at any time hereafter executed
and/or delivered by Borrower or any Obligor in connection with this Agreement,
as the same now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
1.18 "Maximum Amount" shall mean Five Million Dollars ($5,000,000.00).
1.19 "Obligor" shall mean any guarantor, endorser, acceptor, surety, party
to a Support Agreement, or other person liable on or with respect to the Line of
Credit or who is the owner of any property which is security for the Line of
Credit, or any of them, other than Borrower.
1.20 "Records" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and
-3-
<PAGE>
other shipping evidence, statements, correspondence, memoranda, credit files and
other data relating to the Collateral or any account debtor, together with the
tapes, disks, diskettes and other data and software storage media and devices,
file cabinets or containers in or on which the foregoing are stored (including
any rights of Borrower with respect to the foregoing maintained with or by any
other person).
1.21 "Revolving Loans" shall mean advances made by Lender to Borrower on a
revolving basis under the Line of Credit, as set forth in Section 2.1 hereof.
1.22 "Rights to Payment" shall mean all Accounts, General Intangibles,
contract rights, chattel paper, documents, instruments, letters of credit,
bankers acceptances and guaranties, and all present and future liens, security
interests, rights, remedies, title and interest in, to and in respect of
Accounts and other Collateral (including, without limitation, (a) rights and
remedies under or relating to guaranties, contracts of suretyship, letters of
credit and credit and other insurance related to the Collateral, (b) rights of
stoppage in transit, replevin, repossession, reclamation and other rights and
remedies of an unpaid vendor, lienor or secured party, (c) goods described in
invoices, documents, contracts or instruments with respect to, or otherwise
representing or evidencing, Accounts or other Collateral, including, without
limitation, returned, repossessed and reclaimed goods, and (d) deposits by and
property of account debtors or other persons securing the obligations of account
debtors), monies, securities, credit balances, deposits, deposit accounts and
other property of Borrower now or hereafter held or received by or in transit to
Lender or its affiliates or at any other depository or other institution from or
for the account of Borrower, whether for safekeeping, pledge, custody,
transmission, collection or otherwise.
1.23 "Tangible Net Worth" shall mean, at any time, the aggregate of total
stockholders' equity plus subordinated debt less any intangible assets.
1.24 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed on a first-in-first-out
basis in accordance with GAAP or (b) market value.
1.25 "Working Capital" shall mean, at any time, total current assets less
total current liabilities.
Section 2. CREDIT FACILITIES
-----------------
2.1 Line of Credit
--------------
(a) Lending Formula. Subject to and upon the terms and conditions
---------------
contained herein, Lender agrees to make Revolving Loans (pursuant to Section 2.1
hereof) and issue Letters of Credit (pursuant to Section 2.2 hereof) under a
line of credit (the "Line of Credit") from time to time in amounts requested by
Borrower up to an aggregate outstanding principal amount equal to the lesser of
(1) the Maximum Amount; or (2) the sum of: (A) sixty (60%) percent of the Value
of Eligible Inventory consisting of finished goods, plus (B) sixty percent (60%)
percent of the
-4-
<PAGE>
then outstanding Letter of Credit Obligations incurred for the purpose of
importing inventory, less 100% of the then outstanding Letter of Credit
----
Obligations, less any Availability Reserves.
----
(b) Discretionary Reduction of Lending Formula. Lender may, in its
------------------------------------------
discretion, from time to time, upon not less than five (5) days prior notice to
Borrower, reduce the lending formula(s) with respect to Eligible Inventory to
the extent that Lender determines that: (A) the number of days of the turnover
of the Inventory for any period has changed in any material respect or (B) the
liquidation value of the Eligible Inventory, or any category thereof, has
decreased, or (C) the nature and quality of the Inventory has deteriorated. In
determining whether to reduce the lending formula(s), Lender may consider
events, conditions, contingencies or risks which are also considered in
determining Eligible Inventory or in establishing Availability Reserves.
(c) Overadvance. In the event that the outstanding amount of any
-----------
component of the Revolving Loans, or the aggregate amount of the outstanding
Revolving Loans and Letter of Credit Obligations, exceed the amounts available
under the lending formulas, the sublimits for Letters of Credit set forth in
Section 2.2(b) or the Maximum Amount, as applicable, such event shall not limit,
waive or otherwise affect any rights of Lender in that circumstance or on any
future occasions and Borrower shall, upon demand by Lender, which may be made at
any time or from time to time, immediately repay to Lender the entire amount of
any such excess(es) for which payment is demanded.
(d) Line of Credit Note. Borrower's obligation to repay Revolving
-------------------
Loans made under the Line of Credit shall be evidenced by a promissory note
executed by Borrower, substantially in the form of Exhibit B hereto.
2.2 Letters of Credit.
------------------
(a) Issuance. Subject to, and upon the terms and conditions
--------
contained herein, at the request of Borrower, Lender agrees from time to time
during the term of this Agreement to issue Letters of Credit for the account of
Borrower containing terms and conditions acceptable to Lender, provided however
that no Letter of Credit shall have an expiration date beyond sixty (60) days
following the maturity date of the Line of Credit set forth in Section 11.1
hereof.
(b) Letter of Credit Sublimits. Except in Lender's discretion, the
--------------------------
amount of all Letter of Credit Obligations shall not at any time exceed
$400,000.00. At any time an Event of Default exists or has occurred and is
continuing, upon Lender's request, Borrower shall furnish cash collateral to
Lender for the Letter of Credit Obligations.
(c) Letter of Credit Agreement. Each Letter of Credit shall be
--------------------------
subject to the additional terms and conditions of the Letter of Credit Agreement
and related documents, if any, required by Lender in connection with the
issuance thereof (each, a "Letter of Credit Agreement"). Each draft paid by
Lender under a Letter of Credit shall be deemed a Revolving Loan under the Line
of Credit and shall be repaid by Borrower in accordance with the terms and
conditions of this Agreement applicable to such Revolving Loans; provided
however, that if the Line of Credit is
-5-
<PAGE>
not available, for any reason whatsoever, at the time any draft is paid by
Lender, or if Revolving Loans are not available under the Line of Credit at such
time due to any limitation on borrowings set forth herein, then the full amount
of such draft shall be immediately due and payable, together with interest
thereon, from the date such amount is paid by Lender to the date such amount is
fully repaid by Borrower, at the rate of interest applicable to Revolving Loans.
In such event, Borrower agrees that Lender, at Lender's sole discretion, may
debit Borrower's deposit account with Lender for the amount of any such draft.
2.3 Availability Reserves. All Revolving Loans and Letters of Credit
---------------------
otherwise available to Borrower pursuant to the lending formulas, sublimits and
subject to the Maximum Amount, and other applicable limits hereunder shall be
subject to Lender's continuing right to establish and revise Availability
Reserves.
Section 3. INTEREST AND FEES
-----------------
3.1 Interest. The outstanding principal balance of Revolving Loans shall
--------
bear interest at the rate set forth in the Line of Credit Note.
3.2 Letter of Credit Fees. Borrower shall pay to Lender fees upon the
---------------------
issuance or amendment of each Letter of Credit and upon the payment by Lender of
each draft under any Letter of Credit determined in accordance with Lender's
Commercial Finance Division's standard fees and charges in effect at the time
any Letter of Credit is issued or amended or any draft is paid.
3.3 Closing Fee. Borrower shall pay to Lender as a closing fee the
-----------
amount of $50,000.00, which shall be fully earned as of and payable on the date
hereof.
3.4 Facility Fee. Borrower shall pay to Lender annually a facility fee
------------
in an amount equal to $25,000.00 while this Agreement is in effect and for so
long thereafter as any of the Revolving Loans or Letter of Credit Obligations
are outstanding, which fee shall be fully earned as of and payable in advance on
each anniversary of the date hereof.
3.5 Unused Line Fee. Borrower shall pay to Lender monthly an unused line
---------------
fee for the Line of Credit equal to a rate per annum of one-half percent (0.50%)
of the amount by which $3,500,000.00 exceeds the average daily principal balance
of the outstanding Revolving Loans and Letter of Credit Obligations during the
immediately preceding month (or part thereof) while this Agreement is in effect,
which fee shall be payable on the first day of each month in arrears.
3.6 Computation and Payment. Interest and fees shall be computed on the
-----------------------
basis of a 360-day year, actual days elapsed. Interest shall be payable at times
and place set forth in the Line of Credit Note.
Section 4. CONDITIONS PRECEDENT
--------------------
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<PAGE>
4.1. Initial Credit. The obligation of Lender to extend any credit
--------------
contemplated by this Agreement is subject to the fulfillment to Lender's
satisfaction of all of the following conditions:
(a) Approval of Lender Counsel. All legal matters incidental to the
--------------------------
extension of credit by Lender shall be satisfactory to counsel of Lender.
(b) Documentation. Lender shall have received, in form and
-------------
substance satisfactory to Lender, each of the following, duly executed:
(i) This Agreement
(ii) The Line of Credit Note
(iii) The Letter of Credit Agreement
(iv) UCC-1 Financing Statement(s)
(v) Security Agreement(s)
(vi) Borrowing Resolution
(vii) Trademark Mortgage Agreement
(c) Insurance. Borrower shall have delivered to Lender evidence of
---------
insurance coverage on all Borrower's property, covering risks, in amounts,
issued by companies and in form and substance satisfactory to Lender, with loss
payable endorsements in favor of Lender.
(d) Financial Condition. There shall have been no material adverse
-------------------
change, as determined by Lender, in the financial condition or business of
Borrower, nor any material decline, as determined by Lender, in the market value
of any collateral required hereunder or a substantial or material portion of the
assets of Borrower.
(e) Security Interests. Lender shall have received evidence, in
------------------
form and substance satisfactory to Lender, that Lender has valid perfected and
first priority security interests in and liens upon the Collateral and any other
property which is intended to be security for the Line of Credit, subject only
to the security interests and liens permitted herein or in the other Loan
Documents.
(f) Field Review. Lender shall have completed a field review of the
------------
Records and such other information with respect to the Collateral as Lender may
require to determine the amount of Revolving Loans available to Borrower, the
results of which shall be satisfactory to Lender.
(g) Other Documents. Lender shall have received, in form and
---------------
substance satisfactory to Lender, all consents, waivers, acknowledgments and
other agreements from third persons which Lender may deem necessary or desirable
in order to permit, protect and perfect its security interests in and liens upon
the Collateral or to effectuate the provisions or purposes of this Agreement and
the other Loan Documents, including, without limitation, acknowledgments by
lessors, mortgagees and warehousemen of Lender's security interests in the
Collateral, waivers by such persons of any security interests, liens or other
claims by such persons to the Collateral and agreements permitting Lender access
to, and the right to remain on, the
-7-
<PAGE>
premises to exercise its rights and remedies and otherwise deal with the
Collateral.
(h) Availability. Borrower shall have a minimum of $1,000,000.00 of
------------
availability for Revolving Loans in addition to the amount paid or to be to
Borrower's prior lender to retire Borrower's line of credit with such prior
lender and bringing all other obligations to a current status.
4.2. Subsequent Credit. The obligation of Lender to make each extension
-----------------
of credit requested by Borrower hereunder shall be subject to the fulfillment to
Lender's satisfaction of each of the following conditions:
(a) Compliance. The representations and warranties contained herein
----------
shall be true on and as of the date of the signing of this Agreement and on the
date of each extension of credit by Lender pursuant hereto, with the same effect
as though such representations and warranties had been made on and as of each
such date, and on each such date, no Event of Default as defined herein, and no
condition, event or act which with the giving of notice or the passage of time
or both would constitute such an Event of Default, shall have occurred and be
continuing or shall exist.
(b) Documentation. Lender shall have received all additional
-------------
documents which may be required in connection with such extension of credit.
Section 5. GRANT OF SECURITY INTEREST
--------------------------
As security for all indebtedness of Borrower to Lender pursuant to this
Agreement, Borrower grants to Lender security interests of first priority in the
following property and interests in property, whether now owned or hereafter
acquired or existing, and wherever located: all Rights to Payment, Inventory,
Equipment, Records and all products and proceeds of the foregoing, in any form,
including, without limitation, insurance proceeds and all claims against third
parties for loss or damage to or destruction of any or all of the foregoing.
All of the foregoing shall be evidenced by and subject to the terms of such
documents as Lender shall reasonably require, all in form and substance
satisfactory to Lender. Borrower shall reimburse Lender, immediately upon
demand, for all costs and expenses incurred by Lender in connection with any of
the foregoing security, including without limitation filing and recording fees
and costs of environmental studies, appraisals, audits and title insurance.
Section 6. COLLECTION AND ADMINISTRATION
-----------------------------
6.1 Cash Collateral Account.
-----------------------
(a) Cash Collateral Account. Borrower shall maintain with Lender,
-----------------------
and Borrower hereby grants to Lender a security interest in, a non-interest
bearing deposit account over which Borrower shall have no control ("Cash
Collateral Account") and into which the proceeds of all Borrower's accounts and
other
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<PAGE>
rights to payment in which Lender has a security interest shall be deposited
immediately upon their receipt. Borrower shall cooperate with Lender and execute
all necessary documentation to ensure that all credit card collections are
deposited directly by the merchant bank into the Cash Collateral Account.
(b) Calculations. For purposes of calculating interest on the Line
------------
of Credit, such payments or other funds received will be applied (conditional
upon final collection) as a principal reduction on the Line of Credit two (2)
business days following the date of receipt by Lender's Commercial Finance
Division of the inter-branch advice of deposit that such payments or other funds
have been deposited in the Cash Collateral Account. For purposes of calculating
the amount of the Revolving Loans available to Borrower such payments will be
applied (conditional upon final collection) to the Line of Credit on the
business day of receipt by the Commercial Finance Division, if such advices are
received within sufficient time (in accordance with Lender's usual and customary
practices as in effect from time to time) to credit Borrower's loan account on
such day, and if not, then on the next business day.
(c) Immediate Deposit. Borrower and all of its affiliates,
-----------------
subsidiaries, shareholders, directors, employees or agents shall, acting as
trustee for Lender, receive, as the property of Lender, any monies, checks,
notes, drafts, or any other payment (collectively "Cash Receipts") relating to
and/or proceeds of Accounts or other Collateral which come into their possession
or under their control and immediately upon receipt thereof, shall deposit or
cause the same to be deposited in the Cash Collateral Account, or remit the same
or cause the same to be remitted, in kind, to Lender, provided however that,
notwithstanding the foregoing, Borrower shall remit, not later than Wednesday of
each week, all Cash Receipts in excess of $5,000.00 per retail store received by
its retail stores during the preceding calendar week. In no event shall Cash
Receipts be commingled with Borrower's own funds, except for Cash Receipts
generated by retail stores until the same are remitted to Lender.
6.2 Statements. Lender shall render to Borrower each month a statement
----------
setting forth the balance in Borrower's loan account(s) maintained by Lender for
Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account stated except to the extent that Lender receives a
written notice from Borrower of any specific exceptions of Borrower thereto
within thirty (30) days after the date such statement has been mailed by Lender.
Until such time as Lender shall have rendered to Borrower a written statement as
provided above, the balance in Borrower's loan account(s) shall be presumptive
evidence of the amounts due and owing to Lender by Borrower.
6.3 Payments. All amounts due under Loan Documents shall be payable to
--------
the Cash Collateral Account as provided in Section 6.1 or such other place as
Lender may designate from time to time. Lender shall apply payments received or
collected from Borrower or for the account of Borrower (including, without
-9-
<PAGE>
limitation, the monetary proceeds of collections or of realization upon any
Collateral) to the Line of Credit, whether or not then due, in such order and
manner as Lender determines. At Lender's option, all principal, interest, fees,
costs, expenses and other charges provided for in this Agreement or the other
Loan Documents may be charged directly to the loan account(s) of Borrower.
Borrower shall make all payments due Lender free and clear of, and without
deduction or withholding for or on account of, any setoff, counterclaim,
defense, duties, taxes, levies, imposts, fees, deductions, withholding,
restrictions or conditions of any kind. If after receipt of any payment of, or
proceeds of Collateral applied to the payment of, any of Borrower's obligations
to Lender under this Agreement, Lender is required to surrender or return such
payment or proceeds to any person or entity for any reason, then the obligations
intended to be satisfied by such payment or proceeds shall be reinstated and
continue and this Agreement shall continue in full force and effect as if such
payment or proceeds had not been received by Lender. Borrower shall be liable
to pay to Lender, and does hereby indemnify and hold Lender harmless for the
amount of any payments or proceeds surrendered or returned. This Section 6.3
shall survive the payment of Borrower's obligations under the Loan Documents and
the termination of this Agreement.
6.4 Use of Proceeds. All Revolving Loans made or Letters of Credit
---------------
provided by Lender to Borrower pursuant to the provisions hereof shall be used
by Borrower only for general operating, working capital and other proper
corporate purposes of Borrower not otherwise prohibited by the terms of this
Agreement. None of the proceeds will be used, directly or indirectly, for the
purpose of purchasing or carrying any margin security or for the purposes of
reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of
the Revolving Loans to be considered a "purpose credit" within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System, as
amended.
Section 7. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower makes the following representations and warranties to Lender,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to
Lender subject to this Agreement.
7.1 Legal Status. Borrower is a corporation duly organized and existing
------------
and in good standing under the laws of the State of California, and is qualified
or licensed to do business, and is in good standing as a foreign corporation, if
applicable, in all jurisdictions in which such qualification or licensing is
required or in which the failure to so qualify or to be so licensed could have a
material adverse effect on Borrower.
7.2 Authorization and Validity. The Loan Documents have been duly
--------------------------
authorized, and upon their execution and delivery in accordance with the
provisions hereof will constitute legal, valid and binding agreements and
obligations of Borrower or the
-10-
<PAGE>
party which executes the same, enforceable in accordance with their respective
terms.
7.3 No Violation. The execution, delivery and performance by Borrower of
------------
each of the Loan Documents do not violate any provision of any law or
regulation, or contravene any provision of Borrower's Articles of Incorporation,
or result in a breach of or constitute a default under any contract, obligation,
indenture or other instrument to which Borrower is a party or by which Borrower
may be bound.
7.4 No Claims. As of the date of this Agreement, there are no pending,
---------
or to the best of Borrower's knowledge threatened, actions, claims,
investigations, suits or proceedings before any governmental authority,
arbitrator, court or administrative agency which may adversely affect the
financial condition or operation of Borrower other than those disclosed by
Borrower to Lender in the Information Certificate.
7.5 Correctness of Financial Statement. The financial statement of
----------------------------------
Borrower dated April 26, 1995, heretofore delivered by Borrower to Lender is
complete and correct and presents fairly the financial condition of Borrower;
discloses all liabilities of Borrower that are required to be reflected or
reserved against under GAAP, whether liquidated or unliquidated, fixed or
contingent; and has been prepared in accordance with generally accepted
accounting principles consistently applied. From the date of such financial
statement to the date of this Agreement, there has been no material adverse
change in the financial condition of Borrower, nor has Borrower mortgaged,
pledged or granted a security interest in or encumbered any of its assets or
properties except as disclosed by Borrower to Lender in writing in the
Information Certificate or as permitted by this Agreement.
7.6 Income Tax Returns. Except as set forth in the Information
------------------
Certificate, Borrower has no knowledge of any pending assessments or adjustments
of its income tax payable with respect to any year.
7.7 No Subordination. There is no agreement, indenture, contract or
----------------
instrument to which Borrower is a party or by which Borrower may be bound that
requires the subordination in right of payment of any of Borrower's obligations
subject to this Agreement to any other obligation of Borrower.
7.8 Permits, Franchises. Borrower possesses, and will hereafter possess,
-------------------
all permits, memberships, franchises, contracts and licenses required and all
trademark rights, trade names, trade name rights, patents, patent rights and
fictitious name rights necessary to enable it to conduct the business in which
it is now engaged without conflict with the rights of others.
7.9 ERISA. Borrower is in compliance in all material respects with all
-----
applicable provisions of the Employee Retirement Income Security Act of 1974, as
amended from time to time (ERISA); Borrower has not violated any provision of
any defined employee pension benefit plan (as defined in ERISA) maintained or
contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in
ERISA has occurred and is continuing with respect to any Plan initiated by
Borrower;
-11-
<PAGE>
Borrower has met its minimum funding requirements under ERISA with respect to
each Plan; and each Plan will be able to fulfill its benefit obligations as they
come due in accordance with the Plan documents and under generally accepted
accounting principles.
7.10 Other Obligations. Borrower is not in default on any obligation for
-----------------
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
7.11 Environmental Matters. Except as disclosed by Borrower to Lender in
---------------------
writing prior to the date hereof, Borrower is in compliance in all material
respects with all applicable environmental, hazardous waste, health and safety
statutes and regulations governing its operations and/or properties, including
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA), the Superfund Amendments and Reauthorization Act
of 1986 (SARA), the Federal Resource Conservation and Recovery Act of 1976, the
Federal Toxic Substances Control Act and the California Health and Safety Code.
None of the operations of Borrower is the subject of any federal or state
investigation evaluating whether any remedial action involving a material
expenditure is needed to respond to a release of any toxic or hazardous waste or
substance into the environment. Borrower has no material contingent liability
in connection with any release of any toxic or hazardous waste or substance into
the environment.
Section 8. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants that so long as Lender remains committed to extend
credit to Borrower pursuant to the terms of this Agreement or any liabilities
(whether direct or contingent, liquidated or unliquidated) of Borrower to Lender
under any of the Loan Documents remain outstanding, and until payment in full of
all obligations of Borrower subject hereto, Borrower shall:
8.1 Punctual Payments. Punctually pay the interest and principal on each
-----------------
of the Loan Documents requiring any such payments at the times and place and in
the manner specified therein, and any fees or other liabilities due under any of
the Loan Documents at the times and place and in the manner specified therein,
and immediately upon demand by Lender, the amount by which the outstanding
principal balance of the Line of Credit is at any time in excess of any
limitation on borrowings hereunder.
8.2 Records and Premises. Maintain proper books and records in which
--------------------
true and complete entries shall be made of all dealings or transactions of or in
relation to Collateral and the business of Borrower in accordance with GAAP.
From time to time as requested by Lender, at the cost and expense of Borrower,
allow Lender or its designee complete access to all of Borrower's premises
during normal business hours and after notice to Borrower, or at any time and
without notice to Borrower if an Event of Default exists or has occurred and is
continuing, for the purposes of inspecting, verifying and auditing the
Collateral and all of Borrower's books and records, including, without
limitation, the Records, and promptly furnish to Lender such copies of such
books and records or extracts therefrom as Lender
-12-
<PAGE>
may request, and allow Lender during normal business hours to use such of
Borrower's personnel, equipment, supplies and premises as may be reasonably
necessary for the foregoing and if an Event of Default exists or has occurred
and is continuing for the collection of Accounts and realization of other
Collateral.
8.3 Collateral Reporting. Borrower shall provide Lender with the
--------------------
following in a form satisfactory to Lender:
(a) on the first business day of each week and as of the last
business day of the preceding week (or more frequently as Lender may request)
perpetual inventory report by location;
(b) on or before the 10th day after and as of the end of each month,
(or more frequently as Lender may request), agings of accounts receivable and
of accounts payable;
(c) upon Lender's request, (i) copies of customer statements and
credit memos, remittance advices and reports, and copies of deposit slips and
bank statements, (ii) copies of shipping and delivery documents, and (iii)
copies of purchase orders, invoices and delivery documents for Inventory and
Equipment acquired by Borrower;
(d) upon Lender's request, Borrower shall, at its expense, no more
than once in any twelve (12) month period, but at any time or times as Lender
may request on or after an Event of Default, deliver or cause to be delivered to
Lender written reports or appraisals as to the Collateral in form, scope and
methodology acceptable to Lender and by an appraiser acceptable to Lender,
addressed to Lender or upon which Lender is expressly permitted to rely; and
(e) such other reports as to the Collateral as Lender shall request
from time to time. If any of Borrower's records of the Collateral are prepared
or maintained by an accounting service, contractor, shipper or other agent,
Borrower hereby irrevocably authorizes such service, contractor, shipper or
agent to deliver such records, reports, and related documents to Lender and to
follow Lender's instructions with respect to further services at any time that
an Event of Default exists or has occurred and is continuing.
8.4 Financial Statements. Provide to Lender all of the following, in
--------------------
form and detail satisfactory to Lender:
(a) not later than ninety (90) days after and as of the end of each
fiscal year, an audited financial statement of Borrower, prepared by an
independent certified public accountant acceptable to Lender, to include balance
sheet, income statement, statement of cash flows and footnotes, if any, and
within ten (10) days after filing, but in no event later than each February 25,
copies of Borrower's filed federal and state income tax returns for such year,
together with a filed SEC Schedule 10K and all exhibits thereto;
(b) not later than twenty (20) days after and as of the end of each
month, an income statement.
(c) not later than forty-five (45) days after and as of the end of
each fiscal quarter, a financial statement of
-13-
<PAGE>
Borrower, prepared by Borrower, to include balance sheet and income statement
together with a filed SEC Schedules 10Q and all exhibits thereto;
(d) contemporaneously with each annual and quarterly financial
statement of Borrower required hereby, a certificate of the chief executive
officer, president or chief financial officer of Borrower that the financial
statements delivered pursuant thereto are accurate and that there exists no
Event of Default nor any condition, act or event which with the giving of notice
or the passage of time or both would constitute an Event of Default; and
(e) from time to time such other information as Lender may reasonably
request, which may include, without limitation, budgets, forecasts, projections
and other information respecting the Collateral and the business of Borrower
8.5 Compliance. Maintain all licenses, permits, governmental approvals,
----------
rights, privileges and franchises necessary for the conduct of its business;
conduct its business in an orderly and regular manner; and comply with the
provisions of all documents pursuant to which Borrower is organized and/or which
govern Borrower's continued existence and with the requirements of all laws,
rules, regulations and orders of any governmental authority applicable to
Borrower or its business.
8.6 Insurance. Maintain and keep in force insurance of the types and in
---------
amounts customarily carried in lines of business similar to Borrower's,
including but not limited to fire, extended coverage, public liability, property
damage and workers' compensation, carried with companies and in amounts
satisfactory to Lender, and deliver to Lender from time to time at Lender's
request schedules setting forth all insurance then in effect. At its option,
Lender may apply any insurance proceeds received by Lender at any time to the
cost of repairs or replacement of Collateral and/or to payment of the Borrower's
Obligations to Lender under this Agreement, whether or not then due, in any
order and in such manner as Lender may determine or hold such proceeds as cash
collateral for such Obligations.
8.7 Facilities. Keep all Borrower's properties useful or necessary to
----------
Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that Borrower's
properties shall be fully and efficiently preserved and maintained.
8.8 Taxes and Other Liabilities. Pay and discharge when due any and all
---------------------------
indebtedness, obligations, assessments and taxes, both real or personal and
including federal and state income and payroll taxes, except such as Borrower
may in good faith contest or as to which a bona fide dispute may arise, provided
provision is made to the satisfaction of Lender for eventual payment thereof in
the event that it is found that the same is an obligation of Borrower.
8.9 Litigation. Promptly give notice in writing to Lender of any
----------
litigation pending or threatened in writing against Borrower where the damages
claimed against Borrower exceed $100,000.00 with respect to any single
litigation, or $250,000.00 in the aggregate with respect to all litigation.
-14-
<PAGE>
8.10 Financial Condition. Maintain Borrower's financial condition as
-------------------
follows:
(a) Working Capital excluding the outstanding principal balance of
Revolving Loans not at any time less than $3,000,000.00.
(b) Tangible Net Worth not at any time less than $7,000,000.00.
8.11 Notice to Lender. Promptly (but in no event more than five (5) days
----------------
after the occurrence of each such event or matter) give written notice to Lender
in reasonable detail of: (a) the occurrence of any Event of Default, or any
condition, event or act which with the giving of notice or the passage of time
or both would constitute such an Event of Default; (b) the occurrence and nature
of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or
any funding deficiency with respect to any Plan; (c) any termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any loss through liability or property damage, or through fire, theft or any
other cause affecting Borrower's property. Provide no less than thirty (30)
days prior notice of any change in the name or the organizational structure of
Borrower
8.12 Further Assurances. At the request of Lender at any time and from
------------------
time to time, duly execute and deliver, or cause to be duly executed and
delivered, such further agreements, documents and instruments, and do or cause
to be done such further acts as may be necessary or proper to evidence, perfect,
maintain and enforce the security interests and the priority thereof in the
Collateral and to otherwise effectuate the provisions or purposes of this
Agreement or any of the other Loan Documents, at Borrower's expense. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing that all conditions precedent to the making of Revolving
Loans and issuing Letters of Credit contained herein are satisfied. In the
event of such request by Lender, Lender may, at its option, cease to make any
further Revolving Loans or provide any further Letters of Credit until Lender
has received such certificate and, in addition, Lender has determined that such
conditions are satisfied. Where permitted by law, Borrower hereby authorizes
Lender to execute and file one or more UCC financing statements signed only by
Lender.
Section 9. NEGATIVE COVENANTS
------------------
Borrower further covenants that so long as Lender remains committed to
Borrower pursuant to the terms of this Agreement or any liabilities (whether
direct or contingent, liquidated or unliquidated) of Borrower to Lender under
any of the Loan Documents remain outstanding, and until payment in full of all
obligations of Borrower subject hereto, Borrower will not without the prior
written consent of Lender:
9.1 Other Indebtedness. Create, incur, assume or permit to exist any
------------------
indebtedness or liabilities resulting from borrowings, loans or advances
(excluding unsecured trade payables incurred in the ordinary course of
business), whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except the liabilities of Borrower to Lender
-15-
<PAGE>
and any other liabilities of Borrower existing as of, and disclosed to Lender
prior to, the date hereof in the Information Certificate. This covenant shall
not apply to advances made to Borrower by landlords for tenant improvements or
to advances made to Borrower by customers as prepayment for purchases of
inventory.
9.2 Merger, Consolidation, Transfer of Assets. Merge into or consolidate
-----------------------------------------
with any corporation or other entity, unless (a) Borrower is the surviving
entity, (b) Borrower is, following such merger or consolidation, in compliance
with all terms and conditions of this Agreement, and (c) Lender has or has been
granted a first priority security interest in all personal property assets of
Borrower following such merger or consolidation; make any substantial change in
the conduct or nature of Borrower's business; acquire all or substantially all
of the assets of any corporation or other entity; nor sell, lease, transfer or
otherwise dispose of all or a substantial or material part of its assets except
in the ordinary course of business. Borrower shall provide Lender at least 45
days prior written notice of any merger or consolidation permitted under this
Section 9.2, together with such supporting documentation (including without
limitation pro-forma financial statements and projections) as Lender may
require.
9.3 Guaranties. Guarantee or become liable in any way as surety,
----------
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except as
disclosed in the Information Certificate.
9.4 Loans, Advances, Investments. Make any loans or advances to or
----------------------------
investments in any person or entity, except for loans or advances to employees
in ordinary cause of business, not to exceed $5,000.00 per employee and
$25,000.00 in the aggregate, outstanding at any time.
9.5 Dividends, Distributions. Declare or pay any dividend or
------------------------
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding; nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's stock now or hereafter outstanding.
9.6 Pledge of Assets. Mortgage, pledge, grant or permit to exist a
----------------
security interest in, or lien upon, any of its assets of any kind, now owned or
hereafter acquired, except any of the foregoing in favor of Lender and except as
set forth in the Information Certificate.
9.7 New Collateral Location. Open any new location unless Borrower (a)
-----------------------
gives Lender thirty (30) days prior written notice of the intended opening of
any such new location and (b) executes and delivers, or causes to be executed
and delivered, to Lender such agreements, documents, and instruments as Lender
may deem reasonably necessary or desirable to protect its interests in the
Collateral at such location, including, without limitation, UCC financing
statements.
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<PAGE>
Section 10. EVENTS OF DEFAULT
-----------------
10.1 Events of Default. The occurrence of any of the following shall
-----------------
constitute an "Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest, fees
or other amounts payable under this Agreement or any of the Loan Documents.
(b) Any financial statement or certificate (including the Information
Certificate) furnished to Lender in connection with this Agreement or any
representation or warranty made by Borrower hereunder shall prove to be false,
incorrect or incomplete in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained in this Agreement or any of
the Loan Documents (other than those referred to in (a) or (b)).
(d) Any default in the payment or performance of any obligation, or
any defined event of default, under the terms of any contract or instrument
(other than any of the Loan Documents) pursuant to which Borrower has incurred
any debt or other liability to any person or entity, including Lender, subject
to applicable cure and/or grace periods set forth in such contracts or
instruments.
(e) The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like process, against the
assets of Borrower; or the entry of a judgment against Borrower; and with
respect to any of the foregoing, the amount in dispute is in excess of
$250,000.00, and the proceeding in question is not vacated or dismissed within
30 days after its occurrence, provided that Lender shall not be required to make
Revolving Loans or issue Letters of Credit during such 30 day period. Mechanics'
liens recorded against Borrower's real property (other than 5334 Sterling Center
Drive, West Lake Village) shall be deemed not to be covered by paragraph (e),
provided however that Lender may, in its discretion, declare to be ineligible
Inventory located in any real property which is subject to a mechanics' lien
pursuant to which any steps to foreclose have been initiated, whether or not
such mechanics' lien or steps to foreclose constitutes an Event of Default.
(f) Borrower or any Obligor shall become insolvent, or shall suffer
or consent to or apply for the appointment of a receiver, trustee, custodian or
liquidator of itself or any of its property, or shall generally fail to pay its
debts as they become due, or shall make a general assignment for the benefit of
creditors; Borrower or any Obligor shall file a voluntary petition in
bankruptcy, or seeking reorganization, in order to effect a plan or other
arrangement with creditors or any other relief under the Bankruptcy Reform Act,
Title 11 of the United States Code, as amended or recodified from time to time
("Bankruptcy Code"), or under any state or federal law granting relief to
debtors, whether now or hereafter in effect; or any
-17-
<PAGE>
involuntary petition or proceeding pursuant to said Bankruptcy Code or any other
applicable state or federal law relating to bankruptcy, reorganization or other
relief for debtors is filed or commenced against Borrower or any Obligor and is
not dismissed within 45 days after such involuntary proceeding is filed,
provided that Lender shall not be required to make advances during such 45 day
period; or Borrower or any Obligor shall file an answer admitting the
jurisdiction of the court and the material allegations of any involuntary
petition; or Borrower or any Obligor shall be adjudicated a bankrupt, or an
order for relief shall be entered by any court of competent jurisdiction under
said Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors.
(g) There shall exist or occur any event or condition which Lender in
good faith and reasonably believes impairs, or is substantially likely to
impair, the prospect of payment or performance by Borrower of its obligations
under any of the Loan Documents.
(h) The death or incapacity of any Obligor. The dissolution or
liquidation of Borrower; or Borrower or any of its directors, stockholders or
members, shall take action seeking to effect the dissolution or liquidation of
Borrower.
(i) Any change in ownership during the term of this Agreement of an
aggregate of twenty-five percent (25%) or more of the common stock of Borrower
in a single or in affiliated transaction which results in an individual or
entity unacceptable to Bank, in its reasonable discretion, owing or controlling
such common stock.
(j) Any Obligor revokes or terminates its support agreement,
guarantee, endorsement or other agreement in favor of Lender. Any creditor of
Borrower which has executed a subordination in favor of Lender revokes or
terminates such subordination.
(k) The indictment or threatened indictment of Borrower or any
Obligor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against Borrower or any Obligor, pursuant to
which statute or proceedings the penalties or remedies sought or available
include forfeiture of any of the property of Borrower.
(l) Any two (2) members of Borrower's Senior Management shall cease,
for any reason and at any time, to be employed by Borrower on a full-time basis.
Senior Management means Stanley M. Fridstein, Lenny M. Targon, Gina M. Shauer,
Ronald J. Blumenthal.
10.2 Remedies. If an Event of Default shall occur, (a) any indebtedness
--------
of Borrower under any of the Loan Documents, any term thereof to the contrary
notwithstanding, shall at Lender's option and without notice become immediately
due and payable without presentment, demand, protest or notice of dishonor, all
of which are hereby expressly waived by Borrower; (b) the obligation, if any, of
Lender to permit further borrowings hereunder shall immediately cease and
terminate; and (c) Lender shall have all rights, powers and remedies available
under each
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<PAGE>
of the Loan Documents, or accorded by law, including without limitation the
right to resort to any or all security for any credit accommodation from Lender
subject hereto and to exercise any or all of the rights of a beneficiary or
secured party pursuant to applicable law. All rights, powers and remedies of
Lender in connection with each of the Loan Documents may be exercised at any
time by Lender and from time to time after the occurrence of an Event of
Default, are cumulative and not exclusive, and shall be in addition to any other
rights, powers or remedies provided by law or equity.
Section 11. TERM OF AGREEMENT AND MISCELLANEOUS
-----------------------------------
11.1 Term.
----
(a) Maturity Date. This Agreement and the other Loan Documents shall
-------------
become effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on the date three (3) years
from the date hereof. Upon the date of termination of the Loan Documents,
Borrower shall pay to Lender, in full, all outstanding and unpaid obligations
under this Agreement and the other Loan Documents and shall furnish cash
collateral to Lender in such amounts as Lender determines are reasonably
necessary to secure Lender from loss, cost, damage or expense, including
attorneys' fees and legal expenses, in connection with any contingent
obligations, including issued and outstanding Letters of Credit and checks or
other payments provisionally credited to the obligations and/or as to which
Lender has not yet received final and indefeasible payment. Interest shall be
due until and including the next business day, if the amounts so paid by
Borrower to the bank account designated by Lender are received in such bank
account later than 12:00 noon, California time.
(b) Continuing Obligations. No termination of this Agreement or the
----------------------
other Loan Documents shall relieve or discharge Borrower of its respective
duties, obligations and covenants under this Agreement or the other Loan
Documents until all Borrower's obligations under this Agreement and the other
Loan Documents have been fully and finally discharged and paid, and Lender's
continuing security interest in the Collateral and the rights and remedies of
Lender hereunder, under the other Loan Documents and applicable law, shall
remain in effect until all such obligations have been fully and finally
discharged and paid.
(c) Early Termination Fee. If for any reason (other than as set
---------------------
forth in paragraph 11.1(d)) this Agreement is terminated prior to the end of the
then current term of this Agreement, in view of the impracticality and extreme
difficulty of ascertaining actual damages and by mutual agreement of the parties
as to a reasonable calculation of Lender's lost profits as a result thereof,
Borrower agrees to pay to Lender, upon the effective date of such termination,
an early termination fee in the amount set forth below if such termination is
effective in the period indicated:
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<PAGE>
Amount Period
-------------------- --------------------
(i) 5% of Maximum Amount June 12, 1995 to and
including June 11, 1996
(ii) 3% of Maximum Amount June 12, 1996 to and
including June 11, 1997
(iii) 1% of Maximum Amount June 12,1997 to and
including June 12, 1998
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing.
(d) No Early Termination Fee. No early termination fee shall be
------------------------
payable if a group or division of Wells Fargo Bank, (other than the Commercial
Finance Division or the workout group), or an affiliate of Wells Fargo Bank
extends credit to Borrower, which credit refinances and/or replaces in full the
credit facilities granted under this Agreement.
11.2 No Waiver. No delay, failure or discontinuance of Lender in
---------
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Lender of any breach of or default under any of the Loan Documents must
be in writing and shall be effective only to the extent set forth in such
writing.
11.3 Notices. All notices, requests and demands which any party is
-------
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
BORROWER: THE RIGHT START, INC.
5334 Sterling Center Drive
West Lake Village, CA 91361
Attn: Gina M. Shauer, C.F.O.
LENDER: WELLS FARGO BANK, NATIONAL ASSOCIATION
Commercial Finance Division
9000 Flair Drive, Third Floor
El Monte, CA 91731
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
11.4 Costs, Expenses and Attorneys' Fees. Borrower shall pay to Lender
-----------------------------------
immediately upon demand the full amount of all costs and expenses, including
reasonable attorneys' fees (to
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<PAGE>
include outside counsel fees and all allocated costs of Lender's in-house
counsel), incurred by Lender in connection with (a) the negotiation and
preparation of this Agreement and each other of the Loan Documents, Lender's
continued administration hereof and thereof, and the preparation of any
amendments and waivers hereto and thereto, (b) all out-of-pocket expenses and
costs heretofore and from time to time hereafter incurred by Lender during the
course of periodic field examinations of the Collateral and Borrower's
operations, plus a per diem charge for Lender's examiners in the field and
office at Lender's Commercial Finance Division's rate in effect from time to
time, (c) the enforcement of Lender's rights and/or the collection of any
amounts which become due to Lender under any of the Loan Documents, and (d) the
prosecution or defense of any action in any way related to any of the Loan
Documents, including without limitation any action for declaratory relief.
11.5 Successors, Assignment. This Agreement shall be binding on and inure
----------------------
to the benefit of the heirs, executors, administrators, legal representatives,
successors and assigns of the parties; provided however, that Borrower may not
assign or transfer its interest hereunder without the prior written consent of
Lender. Lender reserves the right to sell, assign, transfer, negotiate or grant
participations in all or any part of, or any interest in, Lender's rights and
benefits under each of the Loan Documents. In connection therewith, Lender may
disclose all documents and information which Lender now has or may hereafter
acquire relating to any credit extended by Lender to Borrower, Borrower or its
business, any Obligor or the business of any Obligor, or any collateral required
hereunder.
11.6 Entire Agreement, Amendment. This Agreement and each other of the
---------------------------
Loan Documents constitute the entire agreement between Borrower and Lender with
respect to any extension of credit by Lender subject hereto and supersede all
prior negotiations, communications, discussions and correspondence concerning
the subject matter hereof. This Agreement may be amended or modified only by a
written instrument executed by each party hereto. In the event of an express
conflict or inconsistency between the terms of this Agreement and the terms of
any other Loan Document, the terms of this Agreement shall prevail.
11.7 No Third Party Beneficiaries. This Agreement is made and entered
----------------------------
into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
11.8 Time. Time is of the essence of each and every provision of this
----
Agreement and each other of the Loan Documents.
11.9 Severability of Provisions. If any provision of this Agreement shall
--------------------------
be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of this
Agreement.
-21-
<PAGE>
11.10 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, except to the extent that
Lender has greater rights or remedies under Federal law, whether as a national
bank or otherwise, in which case such choice of California law shall not be
deemed to deprive Lender of such rights and remedies as may be available under
Federal law.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK,
THE RIGHT START, INC. NATIONAL ASSOCIATION
By: __________________________ By: __________________________
Gina M.Shauer Scott James Lorimer
Title: Chief Financial Officer Title: Vice President
-22-
<PAGE>
REVOLVING LINE OF CREDIT NOTE
$5,000,000.00 Westlake Village, California
June 12, 1995
--
FOR VALUE RECEIVED, the undersigned THE RIGHT START, INC. ("Borrower")
promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
at its office at 9000 Flair Drive, El Monte, California, or at such other place
as the holder hereof may designate, in lawful money of the United States of
America and in immediately available funds, the principal sum of Five Million
Dollars ($5,000,000.00), or so much thereof as may be advanced and be
outstanding, with interest thereon, to be computed on each advance from the date
of its disbursement (computed on the basis of a 360-day year, actual days
elapsed) at a fluctuating rate per annum one percent (1.00%) above the Prime
Rate in effect from time to time. Each change in the rate of interest hereunder
shall become effective on the date each Prime Rate change is announced within
Bank.
A. INTEREST:
1. Payment of Interest. Interest accrued on this Note shall be payable on
-------------------
the first day of each month, commencing July 1, 1995.
2. Default Interest. During the continuance of an Event of Default under
----------------
this Note, the outstanding principal balance of this Note shall bear interest
until paid in full at an increased rate per annum (computed on the basis of a
360-day year, actual days elapsed) equal to three percent (3.00%) above the rate
of interest from time to time applicable to this Note.
B. BORROWING AND REPAYMENT:
1. Borrowing and Repayment. Borrower may from time to time during the
-----------------------
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with this Note; provided
however, that the total outstanding borrowings under this Note shall not at any
time exceed the principal amount stated above. The unpaid principal balance of
this obligation at any time shall be the total amounts advanced hereunder by the
holder hereof less the amount of principal payments made hereon by or for any
Borrower, which balance may be endorsed hereon from time to time by the holder.
The outstanding principal balance of this Note shall be due and payable in full
on June 12, 1998.
--
2. Advances. Advances hereunder, to the total amount of the principal sum
--------
stated above, may be made by the holder at the oral or written request of (a)
President , CEO, CFO or Asst.Secretary , any one
- ----------------------------- --------------------------------
acting alone, who are authorized to request advances and direct the disposition
of any advances until written notice of the revocation of such authority is
received by the holder at the office designated above, or (b) any person, with
respect to advances deposited to the credit of any account of any Borrower with
the holder, which advances, when so deposited, shall be conclusively presumed to
have been made to or for the benefit of each Borrower regardless of the fact
that
<PAGE>
persons other than those authorized to request advances may have authority to
draw against such account. The holder shall have no obligation to determine
whether any person requesting an advance is or has been authorized by any
Borrower.
3. Application of Payments. Each payment made on this Note shall be
-----------------------
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
4. Prepayment. Borrower may prepay principal on any portion of this Note
----------
which bears interest determined in relation to the Prime Rate at any time, in
any amount and without penalty.
C. EVENTS OF DEFAULT:
This Note is the Line of Credit Note made pursuant to and is subject to the
terms and conditions of that certain Loan Agreement between Borrower and Bank
dated as of June 12, 1995, as amended from time to time. Any default in the
---
payment or performance of any obligation, or any defined event of default, under
said Credit Agreement shall constitute an "Event of Default" under this Note.
D. MISCELLANEOUS:
1. Remedies. Upon the occurrence of any Event of Default, the holder of
--------
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, protest or notice of dishonor, all of which are expressly
waived by each Borrower, and the obligation, if any, of the holder to extend any
further credit hereunder shall immediately cease and terminate. Each Borrower
shall pay to the holder immediately upon demand the full amount of all payments,
advances, charges, costs and expenses, including reasonable attorneys' fees (to
include outside counsel fees and all allocated costs of the holder's in-house
counsel), incurred by the holder in connection with the enforcement of the
holder's rights and/or the collection of any amounts which become due to the
holder under this Note, and the prosecution or defense of any action in any way
related to this Note, including without limitation, any action for declaratory
relief, and including any of the foregoing incurred in connection with any
bankruptcy proceeding relating to any Borrower.
2. Obligations Joint and Several. Should more than one person or entity
-----------------------------
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
3. Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of California, except to the extent Bank
has greater rights or remedies under
<PAGE>
Federal law, whether as a national bank or otherwise, in which case such choice
of California law shall not be deemed to deprive Bank of any such rights and
remedies as may be available under Federal law.
THE RIGHT START, INC.
By: /s/ Gina M. Shauer
-----------------------------
Gina M.Shauer
Title: Chief Financial Officer
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered into
as of 7/24/96, by and between THE RIGHT START, INC., a California corporation
("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Lender").
RECITALS
--------
<PAGE>
WHEREAS, Borrower is currently indebted to Lender pursuant to the terms and
conditions of that certain Loan Agreement between Borrower and Lender dated as
of June 12, 1995, as amended from time to time ("Loan Agreement").
WHEREAS, Lender and Borrower have agreed to certain changes in the terms
and conditions set forth in the Loan Agreement and have agreed to amend the Loan
Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree that the Loan Agreement
shall be amended as follows:
1. Section 2.2 (b) is hereby amended by deleting "Four Hundred Thousand
Dollars ($400,000.00)" as the maximum amount of all Letter of Credit Obligations
under the subfeature therefor under the Line of Credit, and by substituting for
said amount "Six Hundred Fifty Thousand Dollars ($650,000.00)."
2. Except as specifically provided herein, all terms and conditions of the
Loan Agreement remain in full force and effect, without waiver of modification.
All terms defined in the Loan Agreement shall have the same meaning when used in
this Amendment. This Amendment and the Loan Agreement shall be read together, as
one document.
3. Borrower hereby remakes all representations and warranties contained in
the Loan Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Loan Agreement, nor any condition, act or event which
with the giving of notice or the passage of time or both would constitute any
such Event of Default.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK,
<PAGE>
THE RIGHT START, INC. NATIONAL ASSOCIATION
By:___________________________ By:__________________________
Gina M. Shauer Scott J. Lorimer
Title: Chief Financial Officer Vice President
<PAGE>
EXHIBIT 10.13
ASSET PURCHASE AGREEMENT
dated as of July 29, 1996
by and between
BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY)
and
THE RIGHT START, INC.
with respect to certain of its assets
<PAGE>
TABLE OF CONTENTS
-----------------
This Table of Contents is not part of the Agreement to which it is
attached but is inserted for convenience only.
<TABLE>
<CAPTION>
Page
No.
----
ARTICLE I
SALE OF ASSETS AND CLOSING
<C> <S>
1.01 Assets................................................... 1
1.02 Liabilities.............................................. 3
1.03 Purchase Price; Allowance for Continued Use.............. 4
1.04 Closing.................................................. 4
1.05 Third-Party Consents..................................... 5
1.06 Proration of Taxes....................................... 5
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
2.01 Corporate Existence of Seller............................ 5
2.02 Authority................................................ 6
2.03 No Conflicts............................................. 6
2.04 Governmental Approvals and Filings....................... 7
2.05 Legal Proceedings........................................ 7
2.06 Compliance With Laws and Orders.......................... 7
2.07 Real Property Lease...................................... 7
2.08 Tangible Personal Property............................... 8
2.09 Business Contracts....................................... 8
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
3.01 Corporate Existence...................................... 8
3.02 Authority................................................ 8
3.03 No Conflicts............................................. 9
3.04 Governmental Approvals and Filings....................... 9
3.05 Legal Proceedings........................................ 10
ARTICLE IV
CONDITIONS TO OBLIGATIONS OF PURCHASER
4.01 Representations and Warranties........................... 10
4.02 Performance.............................................. 10
4.03 Orders and Laws.......................................... 10
4.04 Regulatory Consents and Approvals........................ 10
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION> Page
No.
----
<C> <S> <C>
4.05 Deliveries.............................................. 11
ARTICLE V
CONDITIONS TO OBLIGATIONS OF SELLER
5.01 Representations and Warranties.......................... 11
5.02 Performance............................................. 11
5.03 Orders and Laws......................................... 11
5.04 Regulatory Consents and Approvals....................... 11
5.05 Deliveries.............................................. 12
5.06 Telemarketing Agreement................................. 12
ARTICLE VI
SURVIVAL; NO OTHER REPRESENTATIONS
6.01 Survival of Representations, Warranties,
Covenants and Agreements................................ 12
6.02 No Other Representations................................ 12
ARTICLE VII
DEFINITIONS
7.01 Definitions............................................. 12
ARTICLE VIII
MISCELLANEOUS
8.01 Notices................................................. 17
8.02 Entire Agreement........................................ 18
8.03 Expenses................................................ 18
8.04 Waiver.................................................. 18
8.05 Amendment............................................... 19
8.06 No Third Party Beneficiary.............................. 19
8.07 No Assignment; Binding Effect........................... 19
8.08 Headings................................................ 19
8.09 Invalid Provisions...................................... 19
8.10 Governing Law........................................... 20
8.11 Counterparts............................................ 20
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
No.
----
SCHEDULES
<C> <S>
1.01(a)(i) Real Property Lease
1.01(a)(ii) Tangible Personal Property
1.01(a)(iii) Personal Property Leases
1.01(a)(iv) Business Contracts
1.01(b)(iv) Excluded Personal Property
1.01(b)(ix) Excluded 800 Numbers
EXHIBITS
Exhibit A Form of Promissory Note
Exhibit B General Assignment and Bill of Sale
Exhibit C Assumption Agreement
Exhibit D Form of Telemarketing Agreement
Exhibit E Form of Security Agreement
</TABLE>
iii
<PAGE>
This ASSET PURCHASE AGREEMENT dated as of July 29, 1996, is made and
entered into by and between Blasiar, Inc. (DBA Alert Communications Company)., a
California corporation ("Purchaser"), and The Right Start, Inc., a California
---------
corporation ("Seller"). Capitalized terms not otherwise defined herein have the
------
meanings set forth in Section 7.01.
------------
WHEREAS, Seller is engaged, among other things, in the business of
providing telemarketing services of various types, including telemarketing
services for the receipt of incoming calls (the "Business"); and
--------
WHEREAS, Seller desires to sell, transfer and assign to Purchaser, and
Purchaser desires to purchase and acquire from Seller, certain of the assets of
Seller relating to the operation of the Business, and in connection therewith,
Purchaser has agreed to assume certain of the liabilities of Seller relating to
the Business, all on the terms set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
SALE OF ASSETS AND CLOSING
1.01 Assets. (a) Assets Transferred. On the terms and subject to
------ ------------------
the conditions set forth in this Agreement, Seller will sell, transfer, convey,
assign and deliver to Purchaser, and Purchaser will purchase and pay for, at the
Closing, free and clear of all Liens other than Permitted Liens, all of Seller's
right, title and interest in, to and under the following Assets and Properties
of Seller used in connection with the Business, except as otherwise provided in
Section 1.01(b), as the same shall exist on the Closing Date (collectively, the
- ---------------
"Assets"):
------
(i) Real Property Lease. The lease of real property described in Section
------------------- -------
1.01(a)(i) of the Disclosure Schedule as to which Seller is the lessee (the
- -------------------------------------
"Real Property Lease");
- --------------------
(ii) Tangible Personal Property. All furniture, fixtures, equipment,
--------------------------
machinery and other tangible personal property used solely in the conduct of the
Business at the location at which the Business is conducted (including but not
limited to those items listed in Section 1.01(a)(ii) of the Disclosure Schedule
----------------------------------------------
(the "Tangible Personal Property");
--------------------------
<PAGE>
(iii) Personal Property Leases. The leases of Tangible Personal
------------------------
Property described in Section 1.01(a)(iii) of the Disclosure Schedule as to
-----------------------------------------------
which Seller is the lessee, together with any options to purchase the
underlying property (the "Personal Property Leases");
------------------------
(iv) Business Contracts. The Contracts described in Section
------------------ -------
1.01(a)(iv) of the Disclosure Schedule as to which Seller is a party and
--------------------------------------
which are utilized solely in the conduct of the Business (the "Business
--------
Contracts");
---------
(v) Intangible Personal Property. All Intellectual Property used
----------------------------
solely in the conduct of the Business (including Seller's goodwill therein)
and all rights, privileges, claims, causes of action and options relating
or pertaining to the Business or the Assets (the "Intangible Personal
Property");
(vii) Books and Records. All Books and Records used solely in the
-----------------
conduct of the Business or otherwise relating solely to the Assets, other
than the minute books, stock transfer books and corporate seal of Seller
(the "Business Books and Records").
--------------------------
(b) Excluded Assets. Notwithstanding anything in this Agreement to
---------------
the contrary, the following Assets and Properties of Seller (the "Excluded
--------
Assets") shall be excluded from and shall not constitute Assets:
- ------
(i) Cash. Cash, commercial paper, certificates of deposit and other
----
bank deposits, treasury bills and other cash equivalents;
(ii) Accounts Receivable. All trade accounts receivable and all
notes, bonds and other evidences of Indebtedness of and rights to receive
payments arising out of services rendered in the conduct of the Business
prior to the Closing Date (the "Accounts Receivable");
-------------------
(iii) Insurance. All insurance policies relating to the operation of
---------
the Business;
(iv) Personal Property. The personal property described in Section
----------------- -------
1.01(b)(iv) of the Disclosure Schedule;
- --------------------------------------
(v) Corporate Records. The minute books, stock transfer books and
-----------------
corporate seal of Seller;
(vi) Litigation Claims. Any rights (including indemnification) and
-----------------
claims and recoveries under litigation
2
<PAGE>
of Seller against third parties arising out of or relating to events prior
to the Closing Date;
(vii) Excluded Obligations. The rights of Seller in, to and under all
--------------------
Contracts of any nature, the obligations of Seller under which expressly
are not assumed by Purchaser pursuant to Section 1.02(b); and
---------------
(viii) Tradename and Logo. All of Seller's right, title and interest
------------------
in, to and under all tradenames, service marks, source names, copyrights
and all pending applications therefor and registrations thereof and rights
related thereto, including, without limitation, the names "Right Start" and
"Right Answer" .
(ix) 800 Numbers. All of Seller's right, title and interest in, to
-----------
and under the 800 numbers listed in Section 1.01(b)(ix) of the Disclosure
-------------------
Schedule.
1.02 Liabilities. (a) Assumed Liabilities. In connection with the
----------- -------------------
sale, transfer, conveyance, assignment and delivery of the Assets pursuant to
this Agreement, on the terms and subject to the conditions set forth in this
Agreement, at the Closing, Purchaser will assume and agree to pay, perform and
discharge when due the following obligations of Seller arising in connection
with the operation of the Business, as the same shall exist on the Closing Date
(the "Assumed Liabilities"), and no others:
-------------------
(i) Real Property Lease Obligations. All obligations of Seller under
-------------------------------
the Real Property Lease arising and to be performed on or after the Closing
Date, and excluding any such obligations arising or to be performed prior
to the Closing Date;
(ii) Personal Property Lease Obligations. All obligations of Seller
-----------------------------------
under the Personal Property Leases arising and to be performed on or after
the Closing Date, and excluding any such obligations arising or to be
performed prior to the Closing Date; and
(iii) Obligations under Contracts. All obligations of Seller under the
---------------------------
Business Contracts arising and to be performed on or after the Closing
Date, and excluding any such obligations arising or to be performed prior
to the Closing Date.
(b) Retained Liabilities. Except for the Assumed Liabilities,
--------------------
Purchaser shall not assume by virtue of this Agreement or the transactions
contemplated hereby, and shall have
3
<PAGE>
no liability for, any Liabilities of Seller (including, without limitation,
those related to the Business) of any kind, character or description whatsoever
(the "Retained Liabilities"). Seller shall discharge in a timely manner or
--------------------
shall make adequate provision for all of the Retained Liabilities, provided that
--------
Seller shall have the ability to contest, in good faith, any such claim of
liability asserted in respect thereof by any Person other than Purchaser and its
Affiliates.
1.03 Purchase Price; Allowance for Continued Use. (a) Purchase
------------------------------------------- --------
Price. The aggregate purchase price for the Assets is $498,255 (the "Purchase
- ----- --------
Price"), of which $250,000 shall be payable in immediately available United
- -----
States funds at the Closing in the manner provided in Section 1.04 and the
------------
remainder of which shall be paid pursuant to the terms of a promissory note, in
the form attached hereto as Exhibit A (the "Promissory Note"), executed by
---------
Purchaser and delivered to Seller at the Closing.
(b) Allowance for Continued Use. Seller and Purchaser acknowledge
---------------------------
that, notwithstanding Purchaser's assumption of or the assignment to Purchaser
of the AT&T Lease (as defined herein), or Purchaser's assumption of Seller's
payment obligations thereunder, Seller will continue to use certain of the
equipment described in the AT&T Lease. Seller and Purchaser agree that Seller
shall pay or credit to Purchaser monthly for such use the sum of $5,000. Seller
agrees that, for so long as such monthly payments are required to be paid to
Purchaser, Seller shall indemnify Purchaser for any and all damage sustained to
such equipment resulting from Seller's use of such equipment as contemplated by
this Section 1.03(b).
---------------
1.04 Closing. The Closing will take place at the offices of Milbank,
-------
Tweed, Hadley & McCloy, 601 South Figueroa Street, Los Angeles, CA 90017, or at
such other place as Purchaser and Seller mutually agree, at 10:00 A.M. local
time, on the Closing Date. At the Closing, (a) Seller will assign and transfer
to Purchaser good and valid title in and to the Assets (free and clear of all
Liens, other than Permitted Liens) by delivery of a General Assignment and Bill
of Sale substantially in the form of Exhibit B hereto (the "General
--------- -------
Assignment"), duly executed by Seller, and such other instruments of conveyance,
- ----------
assignment and transfer, in form and substance reasonably acceptable to
Purchaser's counsel, as shall be effective to vest in Purchaser good title to
the Assets (the General Assignment and such other instruments being collectively
referred to herein as the "Assignment Instruments"), and (b) Purchaser will
----------------------
assume from Seller the due payment, performance and discharge of the Assumed
Liabilities by delivery of an Assumption Agreement substantially in the form of
Exhibit C hereto (the "Assumption Agreement"),
- --------- --------------------
4
<PAGE>
duly executed by Purchaser, and such other instruments of assumption, in form
and substance reasonably acceptable to Seller's counsel, as shall be effective
to cause Purchaser to assume the Assumed Liabilities as and to the extent
provided in Section 1.02(a) (the Assumption Agreement and such other instruments
---------------
being collectively referred to herein as the "Assumption Instruments").
----------------------
1.05 Third-Party Consents. To the extent that any Business Contract
--------------------
is not assignable without the consent of another party, this Agreement shall not
constitute an assignment or an attempted assignment thereof if such assignment
or attempted assignment would constitute a breach thereof. Seller and Purchaser
shall use commercially reasonable efforts to obtain the consent of such other
party to the assignment of any such Business Contract to Purchaser in all cases
in which such consent is or may be required for such assignment.
Notwithstanding the foregoing, Purchaser and Seller understand and agree that
AT&T Credit Corporation ("AT&T") has not yet consented to the assignment to and
assumption by Purchaser of that certain Master Equipment Lease Agreement dated
as of August 15, 1990 by and between AT&T and Seller (the "AT&T Lease") or the
release of Seller from all obligations thereunder. To induce Seller to close
nonetheless, Purchaser hereby agrees: (i) to cooperate with Seller to use its
best efforts to cause AT&T to consent to such assignment, assumption and
release; (ii) to make all payments due under the AT&T Lease; and (iii) to
indemnify Seller for any damages, claims, losses or liabilities (including legal
fees) related to the failure of Purchaser to comply with clause (ii) of this
sentence. Purchaser further agrees that, until such time as AT&T consents to
the assignment to and assumption by Purchaser of the AT&T Lease, Purchaser shall
indemnify Seller for any and all damage sustained to the equipment which is the
subject of the AT&T Lease resulting from Purchaser's use and operation of such
equipment.
1.06 Proration of Taxes. Any taxes not yet due as of the Closing
------------------
Date with respect to the Assets shall be prorated, with Seller liable to the
extent such taxes relate to any time period prior to the Closing Date and
Purchaser liable to the extent such taxes relate to periods beginning with and
subsequent to the Closing Date. Except as otherwise agreed by the parties, the
net amount of any such proration will be settled and paid on or before the date
such tax payment is due, provided that prior written notice of such payment has
been received.
5
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Purchaser as follows :
2.01 Corporate Existence of Seller. Seller is a corporation duly
-----------------------------
incorporated, validly existing and in good standing under the Laws of the State
of California, and has full corporate power and authority to conduct the
Business as and to the extent now conducted and to own, use and lease the
Assets.
2.02 Authority. Seller has full corporate power and authority to
---------
execute and deliver this Agreement and the Operative Agreements to which it is a
party, to perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby, including without limitation to
sell and transfer (pursuant to this Agreement) the Assets. The execution and
delivery by Seller of this Agreement and the Operative Agreements to which it is
a party, and the performance by Seller of its obligations hereunder and
thereunder, have been duly and validly authorized by the Board of Directors of
Seller, no other corporate action on the part of Seller or its stockholders
being necessary. This Agreement has been duly and validly executed and delivered
by Seller and constitutes, and upon the execution and delivery by Seller of the
Operative Agreements to which it is a party, such Operative Agreements will
constitute, legal, valid and binding obligations of Seller enforceable against
Seller in accordance with their terms.
2.03 No Conflicts. The execution and delivery by Seller of this
------------
Agreement do not, and the execution and delivery by Seller of the Operative
Agreements to which it is a party, the performance by Seller of its obligations
under this Agreement and such Operative Agreements and the consummation of the
transactions contemplated hereby and thereby will not:
(a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the articles of incorporation or by-laws of
Seller;
(b) conflict with or result in a violation or breach of any term or
provision of any Law or Order applicable to Seller or any of its Assets and
Properties (other than such conflicts, violations or breaches which could not in
the aggregate reasonably be expected to adversely affect the validity or
enforceability of this Agreement or any of such Operative Agreements or to have
a material adverse effect on the Condition of the Business); or
6
<PAGE>
(c) except as could not, individually or in the aggregate,
reasonably be expected to be materially adverse to the Condition of the Business
or to adversely affect the ability of Seller to consummate the transactions
contemplated hereby or by any such Operative Agreements or to perform its
obligations hereunder or thereunder, (i) conflict with or result in a violation
or breach of, (ii) constitute (with or without notice or lapse of time or both)
a default under, (iii) require Seller to obtain any consent, approval or action
of, make any filing with or give any notice to any Person as a result or under
the terms of, or (iv) result in the creation or imposition of any Lien upon
Seller or any of its Assets or Properties under, any Contract or License to
which Seller is a party or by which any of its Assets and Properties is bound.
2.04 Governmental Approvals and Filings. No consent, approval or
----------------------------------
action of, filing with or notice to any Governmental or Regulatory Authority on
the part of Seller is required in connection with the execution, delivery and
performance of this Agreement or any of the Operative Agreements to which it is
a party or the consummation of the transactions contemplated hereby or thereby,
except (i) where the failure to obtain any such consent, approval or action, to
make any such filing or to give any such notice could not reasonably be expected
to adversely affect the ability of Seller to consummate the transactions
contemplated by this Agreement or any of such Operative Agreements or to perform
its obligations hereunder or thereunder, or to have a material adverse effect on
the Condition of the Business, and (ii) those as would be required solely as a
result of the identity or the legal or regulatory status of Purchaser or any of
its Affiliates.
2.05 Legal Proceedings. (a) there are no Actions or Proceedings
-----------------
pending or, to the Knowledge of Seller, threatened against, relating to or
affecting Seller with respect to the Business or any of its Assets and
Properties which could reasonably be expected (i) to result in the issuance of
an Order restraining, enjoining or otherwise prohibiting or making illegal the
consummation of any of the transactions contemplated by this Agreement or any of
the Operative Agreements, or (ii) individually or in the aggregate with other
such Actions or Proceedings, to have a material adverse effect on the Condition
of the Business; and
(b) there are no Orders outstanding against Seller which,
individually or in the aggregate with other such Orders, materially adversely
affect the Condition of the Business.
7
<PAGE>
2.06 Compliance With Laws and Orders. Seller is not in violation of
-------------------------------
or in default under any Law or Order applicable to the Business or the Assets
the effect of which, individually or in the aggregate with other such violations
and defaults, could reasonably be expected to be materially adverse to the
Condition of the Business.
2.07 Real Property Lease. Seller has a valid and subsisting
-------------------
leasehold estate in and the right to quiet enjoyment of the real property
subject to the Real Property Lease for the full term thereof. The Real Property
Lease is a legal, valid and binding agreement, enforceable in accordance with
its terms, of Seller and, to the Knowledge of Seller, of each other Person that
is a party thereto, and to the Knowledge of Seller there is no default (or any
condition or event which, after notice or lapse of time or both, would
constitute a default) thereunder. Seller has delivered to Purchaser prior to
the execution of this Agreement a true and complete copy of the Real Property
Lease (including any amendments and renewal letters).
2.08 Tangible Personal Property. Seller is in possession of and has
--------------------------
good title to, or has valid leasehold interests in or valid rights under
Contract to use, all the Tangible Personal Property used in and individually or
in the aggregate with other such property material to the Condition of the
Business. All the Tangible Personal Property is free and clear of all Liens,
other than Permitted Liens, and is in all material respects in good working
order and condition, ordinary wear and tear excepted.
2.09 Business Contracts. Prior to the execution of this Agreement,
------------------
Seller has delivered to Purchaser true and complete copies of all Business
Contracts and (i) each Business Contract is in full force and effect and
constitutes a legal, valid and binding agreement, enforceable in accordance with
its terms, of the Seller and, to the Knowledge of Seller, of each other party
thereto and (ii) neither Seller nor, to the Knowledge of Seller, any other party
to such Business Contract is in violation or breach of or default under any such
Business Contract (or with notice or lapse of time or both, would be in
violation or breach of or default under any such Business Contract) the effect
of which, individually or in the aggregate, could reasonably be expected to be
materially adverse to the Condition of the Business.
8
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller as follows:
3.01 Corporate Existence. Purchaser is a corporation duly
-------------------
incorporated, validly existing and in good standing under the Laws of the State
of [California]. Purchaser has full corporate power and authority to enter into
this Agreement and the Operative Agreements to which it is a party, to perform
its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby.
3.02 Authority. The execution and delivery by Purchaser of this
---------
Agreement and the Operative Agreements to which it is a party, and the
performance by Purchaser of its obligations hereunder and thereunder, have been
duly and validly authorized by the Board of Directors of Purchaser, no other
corporate action on the part of Purchaser or its stockholders being necessary.
This Agreement has been duly and validly executed and delivered by Purchaser and
constitutes, and upon the execution and delivery by Purchaser of the Operative
Agreements to which it is a party, such Operative Agreements will constitute,
legal, valid and binding obligations of Purchaser enforceable against Purchaser
in accordance with their terms.
3.03 No Conflicts. The execution and delivery by Purchaser of this
------------
Agreement do not, and the execution and delivery by Purchaser of the Operative
Agreements to which it is a party, the performance by Purchaser of its
obligations under this Agreement and such Operative Agreements and the
consummation of the transactions contemplated hereby and thereby will not:
(a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the [articles] of incorporation or by-laws
(or other comparable corporate charter document) of Purchaser;
(b) conflict with or result in a violation or breach of any term or
provision of any Law or Order applicable to Purchaser or any of its Assets and
Properties (other than such conflicts, violations or breaches which could not in
the aggregate reasonably be expected to adversely affect the validity or
enforceability of this Agreement or any of such Operative Agreements); or
(c) except as could not, individually or in the aggregate, reasonably
be expected to adversely affect the ability
9
<PAGE>
of Seller to consummate the transactions contemplated hereby or by any such
Operative Agreements or to perform its obligations hereunder or thereunder, (i)
conflict with or result in a violation or breach of, (ii) constitute (with or
without notice or lapse of time or both) a default under, (iii) require
Purchaser to obtain any consent, approval or action of, make any filing with or
give any notice to any Person as a result or under the terms of, or (iv) result
in the creation or imposition of any Lien upon Purchaser or any of its Assets or
Properties under, any Contract or License to which Purchaser is a party or by
which any of its Assets and Properties is bound.
3.04 Governmental Approvals and Filings. No consent, approval or
----------------------------------
action of, filing with or notice to any Governmental or Regulatory Authority on
the part of Purchaser is required in connection with the execution, delivery and
performance of this Agreement or the Operative Agreements to which it is a party
or the consummation of the transactions contemplated hereby or thereby, except
where the failure to obtain any such consent, approval or action, to make any
such filing or to give any such notice could not reasonably be expected to
adversely affect the ability of Seller to consummate the transactions
contemplated by this Agreement or any of such Operative Agreements or to perform
its obligations hereunder or thereunder.
3.05 Legal Proceedings. There are no Actions or Proceedings pending
-----------------
or, to the knowledge of Purchaser, threatened against, relating to or affecting
Purchaser or any of its Assets and Properties which could reasonably be expected
to result in the issuance of an Order restraining, enjoining or otherwise
prohibiting or making illegal the consummation of any of the transactions
contemplated by this Agreement or any of the Operative Agreements.
ARTICLE IV
CONDITIONS TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser hereunder to purchase the Assets and to
assume and pay, perform and discharge the Assumed Liabilities are subject to the
fulfillment, at or before the Closing, of each of the following conditions (all
or any of which may be waived in whole or in part by Purchaser in its sole
discretion):
4.01 Representations and Warranties. The representations and
------------------------------
warranties made by Seller in this Agreement, taken as a whole, shall be true and
correct, in all material respects, on and as of the Closing Date, as though made
on and as
10
<PAGE>
of the Closing or, in the case of representations and warranties made as of a
specified date earlier than the Closing Date, on and as of such earlier date.
4.02 Performance. Seller shall have performed and complied with, in
-----------
all material respects, the agreements, covenants and obligations required by
this Agreement to be so performed or complied with by Seller at or before the
Closing.
4.03 Orders and Laws. There shall not be in effect on the Closing
---------------
Date any Order or Law restraining, enjoining or otherwise prohibiting or making
illegal the consummation of any of the transactions contemplated by this
Agreement or any of the Operative Agreements.
4.04 Regulatory Consents and Approvals. All consents, approvals and
---------------------------------
actions of, filings with and notices to any Governmental or Regulatory Authority
necessary to permit Purchaser and Seller to perform their obligations under this
Agreement and the Operative Agreements and to consummate the transactions
contemplated hereby and thereby shall have been duly obtained, made or given and
shall be in full force and effect, and all terminations or expirations of
waiting periods imposed by any Governmental or Regulatory Authority necessary
for the consummation of the transactions contemplated by this Agreement and the
Operative Agreements shall have occurred.
4.05 Deliveries. Seller shall have delivered to Purchaser the
----------
General Assignment and the other Assignment Instruments.
ARTICLE V
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of Seller hereunder to sell the Assets are subject to
the fulfillment, at or before the Closing, of each of the following conditions
(all or any of which may be waived in whole or in part by Seller in its sole
discretion):
5.01 Representations and Warranties. The representations and
------------------------------
warranties made by Purchaser in this Agreement, taken as a whole, shall be true
and correct in all material respects on and as of the Closing Date as though
made on and as of the Closing Date.
5.02 Performance. Purchaser shall have performed and complied with,
-----------
in all material respects, the agreements, covenants and obligations required by
this Agreement to be so performed or complied with by Purchaser at or before the
Closing.
11
<PAGE>
5.03 Orders and Laws. There shall not be in effect on the Closing
---------------
Date any Order or Law restraining, enjoining or otherwise prohibiting or making
illegal the consummation of any of the transactions contemplated by this
Agreement or any of the Operative Agreements.
5.04 Regulatory Consents and Approvals. All consents, approvals and
---------------------------------
actions of, filings with and notices to any Governmental or Regulatory Authority
necessary to permit Seller and Purchaser to perform their obligations under this
Agreement and the Operative Agreements and to consummate the transactions
contemplated hereby and thereby shall have been duly obtained, made or given and
shall be in full force and effect, and all terminations or expirations of
waiting periods imposed by any Governmental or Regulatory Authority necessary
for the consummation of the transactions contemplated by this Agreement and the
Operative Agreements shall have occurred.
5.05 Deliveries. Purchaser shall have delivered to Seller the
----------
Assumption Agreement, the other Assumption Instruments, the Promissory Note and
the Security Agreement.
5.06 Telemarketing Agreement. Seller and Purchaser shall have
-----------------------
entered into a telemarketing services agreement, substantially in the form
attached hereto as Exhibit D.
---------
ARTICLE VI
SURVIVAL; NO OTHER REPRESENTATIONS
6.01 Survival of Representations, Warranties, Covenants and
------------------------------------------------------
Agreements. The representations and warranties contained in this Agreement
- ----------
shall survive for a period of six months after the Closing, and thereafter there
shall be no liability in respect thereof, whether such liability has accrued
prior to the Closing Date or after the Closing Date, on the part of either party
or its officers, directors, employees, agents and Affiliates. This Section
shall not limit in any way the survival and enforceability of any covenant or
agreement of the parties hereto which by its terms contemplates performance
after the Closing Date, which shall survive for the respective periods set forth
herein.
6.02 No Other Representations. Notwithstanding anything to the
------------------------
contrary contained in this Agreement, it is the explicit intent of each party
hereto that Seller is making no representation or warranty whatsoever, express
or implied, including but not limited to any implied representation or warranty
as to condition, merchantability or suitability as to any of the Assets or other
properties of the Business, except those representations and warranties
contained in Article II. It
----------
12
<PAGE>
is understood that, except to the extent otherwise expressly provided herein,
Purchaser takes the Assets "as is" and "where is".
ARTICLE VII
DEFINITIONS
7.01 Definitions. (a) Defined Terms. As used in this Agreement,
----------- -------------
the following defined terms have the meanings indicated below:
"Accounts Receivable" has the meaning ascribed to it in Section
------------------- -------
1.01(b)(ii).
- -----------
"Actions or Proceedings" means any action, suit, proceeding,
----------------------
arbitration or Governmental or Regulatory Authority investigation.
"Affiliate" means any Person that directly, or indirectly through one
---------
of more intermediaries, controls or is controlled by or is under common control
with the Person specified. For purposes of this definition, control of a Person
means the power, direct or indirect, to direct or cause the direction of the
management and policies of such Person whether by Contract or otherwise and, in
any event and without limitation of the previous sentence, any Person owning ten
percent (10%) or more of the voting securities of another Person shall be deemed
to control that Person.
"Agreement" means this Asset Purchase Agreement and the Exhibits, the
---------
Disclosure Schedule and the Schedules hereto, as the same shall be amended from
time to time.
"Assets" has the meaning ascribed to it in Section 1.01(a).
------ ---------------
"Assets and Properties" of any Person means all assets and properties
---------------------
of every kind, nature, character and description (whether real, personal or
mixed, whether tangible or intangible and wherever situated), including the
goodwill related thereto, operated, owned or leased by such Person.
"Assignment Instruments" has the meaning ascribed to it in
----------------------
Section 1.04.
- ------------
"Assumed Liabilities" has the meaning ascribed to it in Section
------------------- -------
1.02(a).
- -------
13
<PAGE>
"Assumption Agreement" has the meaning ascribed to it in Section 1.04.
-------------------- ------------
"Assumption Instruments" has the meaning ascribed to it in
----------------------
Section 1.04.
- ------------
"AT&T" has the meaning ascribed to it in Section 1.05.
---- ------------
"AT&T Lease" has the meaning ascribed to it in Section 1.05.
---------- ------------
"Books and Records" of any Person means all files, documents,
-----------------
instruments, papers, books and records relating to the business of such Person.
"Business" has the meaning ascribed to it in the forepart of
--------
this Agreement.
"Business Books and Records" has the meaning ascribed to it in
--------------------------
Section 1.01(a)(vii).
- --------------------
"Business Contracts" has the meaning ascribed to it in Section
------------------ -------
1.01(a)(iv).
- -----------
"Business Day" means a day other than Saturday, Sunday or any day on
------------
which banks located in the State of California are authorized or obligated to
close.
"Closing" means the closing of the transactions contemplated by
-------
Section 1.04.
- ------------
"Closing Date" means (a) July 29, 1996, or (b) such other date as
------------
Purchaser and Seller mutually agree upon in writing.
"Condition of the Business" means the business, financial condition,
-------------------------
results of operations and Assets and Properties of the Business.
"Contract" means any agreement, lease, license, evidence of
--------
Indebtedness, mortgage, indenture, security agreement or other contract.
"Disclosure Schedule" means the record delivered to Purchaser by
-------------------
Seller herewith and dated as of the date hereof, containing all lists,
descriptions, exceptions and other information and materials as are required to
be included therein by Seller pursuant to this Agreement.
14
<PAGE>
"Excluded Assets" has the meaning ascribed to it in Section 1.01(b).
--------------- ---------------
"GAAP" means generally accepted accounting principles, consistently
----
applied throughout the specified period and in the immediately prior comparable
period.
"General Assignment" has the meaning ascribed to it in Section 1.04.
------------------ ------------
"Governmental or Regulatory Authority" means any court, tribunal,
------------------------------------
arbitrator, authority, agency, commission, official or other instrumentality of
the United States or any state, county, city or other political subdivision.
"Indebtedness" of any Person means all obligations of such Person (i)
------------
for borrowed money, (ii) evidenced by notes, bonds, debentures or similar
instruments, (iii) for the deferred purchase price of goods or services (other
than trade payables or accruals incurred in the ordinary course of business),
(iv) under capital leases and (v) in the nature of guarantees of the obligations
described in clauses (i) through (iv) above of any other Person.
"Intangible Personal Property" has the meaning ascribed to it in
----------------------------
Section 1.01(a)(v).
- ------------------
"Intellectual Property" means all patents and patent rights,
---------------------
trademarks and trademark rights, trade names and trade name rights, service
marks and service mark rights, service names and service name rights, brand
names, inventions, copyrights and copyright rights, know-how and all pending
applications for and registrations of patents trademarks, service marks and
copyrights.
"Knowledge of Seller" means the actual knowledge of the officers and
-------------------
employees of Seller engaged primarily in the conduct of the Business as well as
other material knowledge available to Seller's officers and employees in the
exercise of reasonable diligence.
"Laws" means all laws, statutes, rules, regulations, ordinances and
----
other pronouncements having the effect of law of the United States or any state,
county, city or other political subdivision or of any Governmental or Regulatory
Authority.
"Liabilities" means all Indebtedness, obligations and other
-----------
liabilities of a Person (whether absolute, accrued, contingent, fixed or
otherwise, or whether due or to become due).
15
<PAGE>
"Licenses" means all licenses, permits, certificates of authority,
--------
authorizations, approvals, registrations, franchises and similar consents
granted or issued by any Governmental or Regulatory Authority.
"Liens" means any mortgage, pledge, assessment, security interest,
-----
lease, lien, adverse claim, levy, charge or other encumbrance of any kind, or
any conditional sale Contract, title retention Contract or other Contract to
give any of the foregoing.
"Operative Agreements" means, collectively, the General Assignment and
--------------------
the other Assignment Instruments, the Assumption Agreement and the other
Assumption Instruments and any support or other agreements to be entered into in
connection with the transaction.
"Order" means any writ, judgment, decree, injunction or similar order
-----
of any Governmental or Regulatory Authority (in each such case whether
preliminary or final).
"Permitted Lien" means (i) any Lien for taxes not yet due or
--------------
delinquent or being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP; (ii) any
statutory Lien arising in the ordinary course of business by operation of Law
with respect to a Liability that is not yet due or delinquent; and (iii) any
minor imperfection of title or similar Lien which individually or in the
aggregate with other such Liens could not reasonably be expected to materially
adversely affect the Condition of the Business.
"Person" means any natural person, corporation, general partnership,
------
limited partnership, proprietorship, other business organization, trust, union,
association or Governmental or Regulatory Authority.
"Personal Property Leases" has the meaning ascribed to it in
------------------------
Section 1.01(a)(iii).
- --------------------
"Purchase Price" has the meaning ascribed to it in Section 1.03(a).
-------------- ---------------
"Purchaser" has the meaning ascribed to it in the forepart of
---------
this Agreement.
"Real Property Lease" has the meaning ascribed to it in
-------------------
Section 1.01(a)(i).
- ------------------
16
<PAGE>
"Retained Liabilities" has the meaning ascribed to it in Section
-------------------- -------
1.02(b).
- -------
"Security Agreement" means an executed security agreement
------------------
substantially in the form of Exhibit E hereto, granting Seller a first priority
---------
security interest in the Assets to secure payment of the Promissory Note.
"Seller" has the meaning ascribed to it in the forepart of
------
this Agreement.
"Tangible Personal Property" has the meaning ascribed to it
--------------------------
in Section 1.01(a)(ii).
-------------------
(b) Construction of Certain Terms and Phrases. Unless the context of
-----------------------------------------
this Agreement otherwise requires, (i) words of any gender include each other
gender; (ii) words using the singular or plural number also include the plural
or singular number, respectively; (iii) the terms "hereof," "herein," "hereby"
and derivative or similar words refer to this entire Agreement; (iv) the terms
"Article" or "Section" refer to the specified Article or Section of this
Agreement; and (v) the phrase "ordinary course of business" refers to the
business of Seller in connection with the Business. Whenever this Agreement
refers to a number of days, such number shall refer to calendar days unless
Business Days are specified. All accounting terms used herein and not expressly
defined herein shall have the meanings given to them under GAAP. Any
representation or warranty contained herein as to the enforceability of a
Contract shall be subject to the effect of any bankruptcy, insolvency,
reorganization, moratorium or other similar law affecting the enforcement of
creditors' rights generally and to general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at Law).
ARTICLE VIII
MISCELLANEOUS
8.01 Notices. All notices, requests and other communications
-------
hereunder must be in writing and will be deemed to have been duly given only if
delivered personally or by facsimile
17
<PAGE>
transmission or mailed (first class postage prepaid) to the parties at the
following addresses or facsimile numbers:
If to Purchaser, to:
ALERT COMMUNICATIONS COMPANY
5515 York Boulevard
Los Angeles, California 90042-2499
Facsimile No.: (213) 254-6802
Attn: Mr. Gary K. Blasiar, President
with a copy to:
Jackson, DeMarco & Peckenpaugh
4 Park Plaza - 16th Floor
Post Office Box 19704
Irvine, California 92713-9704
Facsimile No.: (714) 752-0597
Attn: Douglas P. Smith, Esq.
If to Seller, to:
THE RIGHT START, INC.
5334 Sterling Center Drive
Westlake Village, CA 91361
Facsimile No.: 818-707-7132
Attn: Mr. Jerry R. Welch,
Chief Executive Officer
with a copy to:
MILBANK, TWEED, HADLEY & MCCLOY
601 South Figueroa Street
Los Angeles, CA 90017
Facsimile No.: 213-629-5063
Attn: Kenneth J. Baronsky, Esq.
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section, be deemed given upon receipt, and (iii) if delivered
by mail in the manner described above to the address as provided in this
Section, be deemed given upon receipt (in each case regardless of whether such
notice, request or other communication is received by any other Person to whom a
copy of such notice, request or other communication is to be delivered pursuant
to this Section). Any party from time to time may change its address, facsimile
number or other information for the purpose of notices to that
18
<PAGE>
party by giving notice specifying such change to the other party hereto.
8.02 Entire Agreement. This Agreement and the Operative Agreements
----------------
supersede all prior discussions and agreements between the parties with respect
to the subject matter hereof and thereof, and contain the sole and entire
agreement between the parties hereto with respect to the subject matter hereof
and thereof.
8.03 Expenses. Except as otherwise expressly provided in this
--------
Agreement, whether or not the transactions contemplated hereby are consummated,
each party will pay its own costs and expenses incurred in connection with the
negotiation, execution and closing of this Agreement and the Operative
Agreements and the transactions contemplated hereby and thereby.
8.04 Waiver. Any term or condition of this Agreement may be waived
------
at any time by the party that is entitled to the benefit thereof, but no such
waiver shall be effective unless set forth in a written instrument duly executed
by or on behalf of the party waiving such term or condition. No waiver by any
party of any term or condition of this Agreement, in any one or more instances,
shall be deemed to be or construed as a waiver of the same or any other term or
condition of this Agreement on any future occasion. All remedies, either under
this Agreement or by Law or otherwise afforded, will be cumulative and not
alternative.
8.05 Amendment. This Agreement may be amended, supplemented or
---------
modified only by a written instrument duly executed by or on behalf of each
party hereto.
8.06 No Third Party Beneficiary. The terms and provisions of this
--------------------------
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and it is not the intention of the
parties to confer third-party beneficiary rights upon any other Person.
8.07 No Assignment; Binding Effect. Neither this Agreement nor any
-----------------------------
right, interest or obligation hereunder may be assigned by any party hereto
without the prior written consent of the other party hereto and any attempt to
do so will be void, except (a) for assignments and transfers by operation of Law
and (b) that Purchaser may assign any or all of its rights, interests and
obligations hereunder to a wholly-owned subsidiary, provided that any such
subsidiary agrees in writing to be bound by all of the terms, conditions and
provisions contained herein, but no such assignment referred to in clause (b)
shall relieve Purchaser of its obligations hereunder. Subject to the preceding
sentence,
19
<PAGE>
this Agreement is binding upon, inures to the benefit of and is enforceable by
the parties hereto and their respective successors and assigns. Such consent as
required by this Section 8.07 shall not be unreasonably withheld or delayed.
------------
8.08 Headings. The headings used in this Agreement have been
--------
inserted for convenience of reference only and do not define or limit the
provisions hereof.
8.09 Invalid Provisions. If any provision of this Agreement is held
------------------
to be illegal, invalid or unenforceable under any present or future Law, and if
the rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (a) such provision will be fully
severable, (b) this Agreement will be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a part hereof, (c) the
remaining provisions of this Agreement will remain in full force and effect and
will not be affected by the illegal, invalid or unenforceable provision or by
its severance herefrom and (d) in lieu of such illegal, invalid or unenforceable
provision, there will be added automatically as a part of this Agreement a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible.
8.10 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the Laws of the State of California applicable to a
contract executed and performed in such State, without giving effect to the
conflicts of laws principles thereof.
8.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
20
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officer of each party as of the date first
above written.
BLASIAR, INC.
(DBA ALERT COMMUNICATIONS COMPANY)
By:________________________________
Gary K. Blasiar
President
THE RIGHT START, INC.
By:________________________________
Jerry R. Welch
Chief Executive Officer
21
<PAGE>
Disclosure Schedule 1.01(a)(i)
Real Property Lease
-------------------
1. Standard Industrial/Commercial Single-Tenant Lease Net dated as of April 8,
1993 by and between Westlake Industrial Complex, a California limited
partnership, and The Right Start, Inc., a California corporation,
pertaining to real property located at 31333 Agoura Road, Westlake Village,
CA 91361.
<PAGE>
Disclosure Schedule 1.01(a)(ii)
Tangible Personal Property
--------------------------
<TABLE>
<CAPTION>
INVENTORY
- ---------
PHONES
- ------
LOCATION DESCRIPTION
- -------- -----------
7406 Plus 7410 Plus 7410 no 8102 Callmaster Callmaster Pac-Bell
w/display no display display old model model II payphone
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Telemarket
supervisors 2
- -------------------------------------------------------------------------------------------------------------------------
Telemarket
area 2 54 40
- -------------------------------------------------------------------------------------------------------------------------
Billing 1 1 2 5
- -------------------------------------------------------------------------------------------------------------------------
Customer
service 2 6 5
- -------------------------------------------------------------------------------------------------------------------------
Computer
room 1 2
- -------------------------------------------------------------------------------------------------------------------------
Ursula's
office 1
- -------------------------------------------------------------------------------------------------------------------------
Fishbowl 1
- -------------------------------------------------------------------------------------------------------------------------
Lunchroom 1 2
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CHAIRS
- ------
LOCATION DESCRIPTION
- -------- -----------
superior HONchair task Comforto Comforto Comforto Comforto
craft (grey) chair TR95 TR94 old old
(green) (small) (light blue) (burgundy) TR72 (blue) TR15 (grey)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Telemarket area 38 21 7 1
- -------------------------------------------------------------------------------------------------------------------------
Billing 9
- -------------------------------------------------------------------------------------------------------------------------
Customer
service 11 3 1
- -------------------------------------------------------------------------------------------------------------------------
Fishbowl 9 3 1 3 3 1
- -------------------------------------------------------------------------------------------------------------------------
Computer room 3
- -------------------------------------------------------------------------------------------------------------------------
Ursula's office 1
- -------------------------------------------------------------------------------------------------------------------------
Lunchroom 12 10 1
- -------------------------------------------------------------------------------------------------------------------------
Warehouse
storage 3 (broken) 12 4
- -------------------------------------------------------------------------------------------------------------------------
Temporary
conference room 3 3 1 3
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
INVENTORY BY LOCATION
- ---------------------
(EXCEPT CHAIRS, PHONES, CUBE & STORAGE COMPONENTS)
FISHBOWL
- --------
<TABLE>
<CAPTION>
QTY. DESCRIPTION
- ---- -----------
<C> <S>
1 T.V. / storage credenza with motorized lift with wireless remote
1 Zenith color 20" T.V.
1 RCA color 12" T.V.
1 Hitachi M270 V.C.R.
1 Overhead projector
1 LCD overhead panel
1 Overhead projector screen
1 Coffee maker - double (owned by Foodcraft)
------------------
1 Coffee maker - single (owned by Foodcraft)
------------------
5 white vinyl shelving racks (KA)
--
2 Howe granite 8' rectangular tables
2 Howe granite 30" half-round tables
4 Howe granite 5" rectangular tables
1 aluminum easel
1 dry easel board 2' x 3'
LUNCHROOM
- ---------
QTY. DESCRIPTION
- ---- -----------
7 3' x 3' tables
4 Corkboards
1 Corkboard with glass case
1 2' x 4' rectangular table
2 Microwaves
1 Toaster
1 Fire Extinguisher
1 Can Crusher
1 Coffee Machine (owned by Foodcraft)
------------------
1 Water machine with hot, cold & neutral dispenser (owned by Foodcraft)
------------------
1 Paper towel dispenser
1 Hand soap dispenser
1 Refrigerator with ice maker
COMPUTER ROOM
- -------------
QTY. DESCRIPTION
- ---- -----------
1 6' folding table
1 4' fixed table
1 3' fixed table
1 5' shelf rack (in the closet)
</TABLE>
3
<PAGE>
1 Halon fire extinguisher
URSULA'S OFFICE
- ---------------
<TABLE>
<CAPTION>
QTY. DESCRIPTION
- ---- -----------
<C> <S>
2 Black guest chairs
1 2 drawer vertical black file cabinet
1 Haworth black "L shaped" freestanding furniture
2 Haworth black pedestal drawers
4 Haworth teal locking flippers
MISCELLANEOUS
- -------------
QTY. DESCRIPTION
- ---- -----------
1 Ricoh FT 6750 copier
1 Ricoh FT 4727 copier
1 Ricoh 3200 fax with stand
1 Amano MJR-8000 timeclock with 3 card racks
1 Burster
2 4' fixed table
1 3' fixed table (oak)
2 8' folding table
1 4' folding table
3 Corkboards
4 Dry easel boards
3 Easel stands
1 First aid kit
1 Emergency kit
1 Suggestion box
1 Multi-color tackboard
1 Fire extinguisher
1 Fire extinguisher with glass case
STORAGE COMPONENTS
- ------------------
QTY. MISCELLANEOUS
- ---- -------------
1 4 shelf white/pink storage/bookcase
1 2 drawer black vertical file cabinet
1 2 drawer beige lateral file cabinet
1 Hon 2 drawer grey lateral file cabinet
2 Haworth 2 drawer grey lateral file cabinet
2 Short 4 drawer grey lateral file cabinet
2 Tall 4 drawer grey lateral file cabinet
3 Haworth grey storage cabinet
2 Mail bin sorter
1 Mail bin sorter with storage, pink/blue
</TABLE>
4
<PAGE>
CUBES
- -----
<TABLE>
<CAPTION>
QTY. LOCATION DESCRIPTION
- ---- -------- -----------
<C> <C> <S>
2 Supervisor area Haworth stations with glass
4 Supervisor area Pedestal drawers
9 Billing area Haworth stations with double
pedestal storage drawers
13 Customer service area Haworth stations with double
pedestal storage drawers
1 Customer service area Haworth station with double
pedestal storage drawers & overhead flippers
86 Telemarket employee area Haworth stations with worksurface,
teal tackboards & CPU holders
2 Telemarket employee area Haworth stations with teal
tackboards & CPU holders (no worksurface)
6 Telemarket employee area Haworth blue/grey stations with
worksurface & CPU holders
8 Telemarket employee area Haworth cream colored stations with
worksurface & CPU holders
</TABLE>
TELEMARKETING COMPUTER EQUIPMENT INVENTORY
- ------------------------------------------
PC's
486 82
386 39
Total 121
<TABLE>
PRINTERS
- --------
<C> <S>
3 HP LJ4L
1 HP DJ520
1 EPSON 870
1 HP LJ4
1 Alps P2100
1 OTC Laser 1000
8 Total
NETWORK EQUIPMENT
- -----------------
1 Synoptics Lattisnet 3000 Concentrator
3 Synoptics Re-Timing Modules
7 Synoptics 10-BaseT Host Modules
2 Isolan Modular Repeator/Concentrator
4 Isolan Host Modules
121 Isolan / 3 com NIC's
</TABLE>
Fiber Optic Cables
5
<PAGE>
10-BaseT Cables
<TABLE>
<CAPTION>
MISCELLANEOUS
- -------------
<C> <S>
150 Surge Protectors
2 Conner 5 Gig Tape Backup Drive
3 APC Back-UPS 400
2 APC Back-UPS 600
3 VGA Monitors
1 Motorola Codex Modem
2 Prac. Per. Modems
SERVERS
- -------
2 Compaq 1500 Pentium Servers with 12 Gig HD and 132 Meg of RAM
2 Novell Netware 3.11 250 user version
1 Fax Server
1 Print Server
1 Access Server
1 Kalpana Etherswitch with 7 modules
</TABLE>
6
<PAGE>
Disclosure Schedule 1.01(a)(iii)
Personal Property Leases
------------------------
1. Master Equipment Lease Agreement dated as of August 15, 1990 by and between
AT&T Credit Corporation and the Right Start, Inc. d/b/a/ the Right Start
Catalog.
<PAGE>
Disclosure Schedule 1.01(a)(iv)
Business Contracts
------------------
1. Telemarketing Agreement (Inbound) dated as of May 24, 1996, between the
Right Start, Inc. and Back to Basics Toys, Inc.
2. Telemarketing Agreement (Inbound) dated as of June 7, 1996, between The
Right Start, Inc. and KA Industries.
3. Telemarketing Agreement (Inbound) dated as of October 27, 1994, between The
Right Start, Inc. and Imperial Bank.
4. Telemarketing Agreement (Inbound) dated as of October 1, 1995, between The
Right Start, Inc. and Audio Navigation Systems, Inc.
<PAGE>
Disclosure Schedule 1.01(b)(iv)
Excluded Personal Property
--------------------------
1. All other personal property not listed on Disclosure Schedule 1.01(a)(ii).
<PAGE>
Disclosure Schedule 1.01(b)(ix)
Excluded 800 Numbers
--------------------
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
800-293-5984 Stores to Fax
800-293-5986 Wendy C Modem
800-455-1298 Modems
800-526-5220 Hotline
800-548-8531 Right Start
800-710-7815 Modems
800-796-6582 Stores to 818
</TABLE>
<PAGE>
EXHIBIT A
SECURED PROMISSORY NOTE
DUE AUGUST 1, 1998
$248,255 LOS ANGELES, CALIFORNIA
JULY, 29, 1996
FOR VALUE RECEIVED, BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY),
a California corporation ("Maker"), unconditionally promises to pay to the order
-----
of THE RIGHT START, INC. ("Payee"), in the manner and at the place hereinafter
-----
provided, the principal amount of Two Hundred Forty-Eight Thousand Two Hundred
Fifty-Five Dollars ($248,255) on August 1, 1998.
Maker also promises to pay interest on the unpaid principal amount
hereof from the date hereof until paid in full at an interest rate per annum
which is at all times equal to eight and one-half percent (8.5%); provided that
--------
upon the occurrence of any Event of Default, the outstanding principal amount
hereunder and, to the extent permitted by applicable law, any interest not paid
when due and all other amounts then due and payable hereunder, shall thereafter
bear interest (including post-petition interest in any proceeding under
applicable bankruptcy laws) payable upon demand at a rate which is equal to ten
and one-half percent (10.5)% per annum. Payments shall be made on the first day
of each month without deduction, defense, set-off or counterclaim. Commencing
as of August 1, 1996, the principal balance shall be amortized over the
remaining twenty-four (24) months of the term hereof and monthly payments of
principal and interest shall be in the amount of $11,284.60. All computations
of interest shall be made by Payee on the basis of a 360-day year, for the
actual number of days elapsed in the relevant period (including the first day
but excluding the last day).
This is the Promissory Note referred to in the Asset Purchase
Agreement dated as of July 29, 1996 between the Maker and the Payee (the "Asset
-----
Purchase Agreement"). Capitalized terms used herein but not defined herein
- ------------------
shall have the meanings assigned thereto in the Asset Purchase Agreement. This
Note is also secured by, and entitled to the benefits provided in, the Security
Agreement.
<PAGE>
1. Payments. All payments of principal and interest in respect of
--------
this Note shall be made in lawful money of the United States of America in same
day funds at the office of Payee located at 5334 Sterling Center Drive,
Westlake, California 91361, or at such other place as shall be designated in a
written notice provided by Payee. If any payment of principal or interest to be
made by maker shall become due on a day that is not a Business Day, such payment
shall instead be made on the next succeeding Business Day, and such extension of
time shall be included in the computation of interest payable on this Note.
Each payment made hereunder shall be credited first to interest then due and the
remainder of such payment shall be credited to principal, and interest shall
thereupon cease to accrue upon the principal so credited.
2. Prepayments. Maker shall have the right at any time and from time
-----------
to time to prepay the principal of this Note in whole or in part without premium
or penalty upon at least two days' notice; provided that each such prepayment
--------
shall be in a minimum amount of $10,000 and integral multiples of $1,000 in
excess of that amount. Each prepayment hereunder shall be accompanied by
interest on the principal amount of the Note being prepaid to the date of
prepayment.
3. Covenants. Maker covenants and agrees that until this Note is
---------
paid in full it will promptly after the occurrence of an Event of Default or an
event, act or condition which, with notice or lapse of time or both, would
constitute an Event of Default, provide Payee with a certificate of an officer
of maker specifying the nature thereof and Maker's proposed response thereto.
4. Events of Default. The occurrence of any of the following events
-----------------
shall constitute an "Event of Default":
----------------
(a) failure of Maker to pay any principal under this Note when due,
whether at stated maturity, by required prepayment, declaration,
acceleration, demand or otherwise, or failure of Maker to pay any interest
or other amount due under this Note within seven Business Days after the
date due; or
(b) failure of Maker to perform or observe any other material term,
covenant or agreement on its part to be performed or observed pursuant to
this Note or the Asset Purchase Agreement and such failure shall not have
been remedied or waived within thirty days after the earlier of (i) an
officer of Maker becoming aware of such default or (ii) receipt by Maker of
notice from Payee of such default; or
2
<PAGE>
(c) any representation or warranty made by Maker to Payee in
connection with this Note or the Asset Purchase Agreement shall prove to
have been false in any material respect when made; or
(d) any final order, judgment or decree shall be entered against
Maker decreeing the dissolution or split-up of Maker and such order shall
remain undischarged or unstayed for a period in excess of 60 days; or
(e) suspension of the usual business activities of Maker for a
period in excess of 60 days or the sale or liquidation of all or
substantially all of Maker's assets or stock; or
(f) (i) a court having jurisdiction in the premises shall enter a
decree or order for relief in respect of Maker in an involuntary case under
Title 11 of the United States Code entitled "Bankruptcy" (as now and
hereinafter in effect, or any successor thereto, the "Bankruptcy Code") or
---------------
any applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, which decree or order is not stayed; or any other similar relief
shall be granted under any applicable federal or state law; or (ii) an
involuntary case shall be commenced against Maker under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect; or
a decree or order of a court having jurisdiction in the premises for the
appointment of a receiver, liquidator, sequestrator, trustee, custodian or
other officer having similar powers over Maker or over all or a substantial
part of its property shall have been entered; or the involuntary
appointment of an interim receiver, trustee or other custodian of Maker for
all or a substantial part of its property shall have occurred; or a writ of
execution or similar process shall have been issued against all or
substantially all of the property of Maker, and, in the case of any event
described in this clause (ii), such event shall have continued for 60 days
unless dismissed, bonded or discharged; or
(g) an order for relief shall be entered with respect to Maker or
Maker shall commence a voluntary case under the Bankruptcy Code or any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or shall consent to the entry of an order for relief in an
involuntary case, or to the conversion of an involuntary case to a
voluntary case, under any such law, or shall consent to the appointment of
or taking possession by a receiver, trustee or other custodian for all or a
substantial part of its property; or Maker shall make an
3
<PAGE>
assignment for the benefit of creditors; or Maker shall be unable or fail,
or shall admit in writing its inability to pay its debts as such debts
become due; or the Board of Directors of Maker (or any committee thereof)
shall adopt any resolution or otherwise authorize action to approve any of
the foregoing.
5. Remedies. Upon the occurrence of any Event of Default specified
--------
in clauses (g) or (h) above, the principal amount of this Note together with
accrued interest thereon shall become immediately due and payable, without
presentment, demand, notice, protest or other requirements of any kind (all of
which are hereby expressly waived by Maker), and upon the occurrence and during
the continuance of any other Event of Default Payee may, by written notice to
Maker, declare the principal amount of this Note together with accrued interest
thereon to be due and payable, and the principal amount of this Note together
with such interest shall thereupon immediately become due and payable without
presentment, further notice, protest or other requirements of any kind (all of
which are hereby expressly waived by Maker).
6. Miscellaneous.
-------------
(a) All notices and other communications provided for hereunder
shall be in writing (including telegraphic, telex, telecopier or cable
communication) and mailed, telegraphed, telexed, telecopied, cabled or
delivered as set forth in the Asset Purchase Agreement.
(b) Maker agrees to indemnify Payee against any losses, claims,
damages and liabilities and related expenses, including reasonable counsel
fees and expenses, incurred by Payee arising out of or in connection with
the collection and enforcement of this Note.
(c) No failure or delay on the part of Payee or any other holder
of this Note to exercise any right, power or privilege under this Note and
no course of dealing between Maker and Payee shall impair such right, power
or privilege or operate as a waiver of any default or an acquiescence
therein, nor shall any single or partial exercise of any such right, power
or privilege preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies herein
expressly provided are cumulative to, and not exclusive of, any rights or
remedies which Payee would otherwise have. No notice to or demand on Maker
in any case shall entitle Maker to any other or further notice or demand in
similar or other circumstances or constitute a waiver of
4
<PAGE>
the right of Payee to any other or further action in any circumstances
without notice or demand.
(d) Maker and any endorser of this Note hereby consent to
renewals and extensions of time at or after the maturity hereof, without
notice, and hereby waive diligence, presentment, protest, demand and notice
of every kind and, to the full extent permitted by law, the right to plead
any statute of limitations as a defense to any demand hereunder.
(e) THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA,
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
(f) ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST MAKER ARISING OUT OF
OR RELATING TO THIS NOTE MAY BE BROUGHT IN STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA, AND BY EXECUTION AND
DELIVERY OF THIS NOTE MAKER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF
THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND
IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN
CONNECTION WITH THIS NOTE.
IN WITNESS WHEREOF, Maker has caused this Note to be executed and
delivered by its duly authorized officer as of the day and year and at the place
first above written.
BLASIAR, INC.
(DBA ALERT COMMUNICATIONS COMPANY)
By: _______________________
Gary K. Blasiar
President
5
<PAGE>
EXHIBIT B
GENERAL ASSIGNMENT AND BILL OF SALE
-----------------------------------
THIS GENERAL ASSIGNMENT AND BILL OF SALE is entered into this 29th day
of July, 1996, by and between Blasiar, Inc. (DBA Alert Communications Company),
a California corporation ("Purchaser"), and The Right Start, Inc., a California
---------
corporation ("Seller").
------
WHEREAS, Purchaser and Seller have entered into an Asset Purchase
Agreement, dated as of July 29, 1996 (the "Asset Purchase Agreement";
------------------------
capitalized terms not defined herein shall have the meanings ascribed to them in
the Asset Purchase Agreement), pursuant to which Seller has agreed to sell,
transfer, convey, assign and deliver to Purchaser and Purchaser has agreed to
purchase from Seller substantially all of the assets used by Seller in
connection with the conduct of the Business, and Purchaser has agreed, in
partial consideration therefor, to assume certain obligations in connection
therewith by executing an Assumption Agreement of even date herewith;
WHEREAS, Seller desires to transfer and assign to Purchaser the assets
described below pursuant to Section 1.03 of the Asset Purchase Agreement and
Purchaser desires to accept the sale, transfer, conveyance, assignment and
delivery thereof;
NOW, THEREFORE, for and in consideration of the mutual covenants
contained herein and other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, Seller hereby irrevocably sells,
transfers, conveys, assigns and delivers to Purchaser free and clear of all
Liens, other than Permitted Liens, all of Seller's right, title and interest in,
to and under the following Assets and Properties of Seller used in connection
with the Business, other than the Excluded Assets, as the same shall exist on
the date hereof: (i) the Real Property Lease, (ii) the Tangible Personal
Property, (iii) the Personal Property Leases, (iv) the Business Contracts, (v)
the Intangible Personal Property and (vi) the Business Books and Records
(collectively, the "Assigned Assets"), TO HAVE AND TO HOLD the same unto
---------------
Purchaser, its successors and assigns, forever.
Purchaser hereby accepts the sale, transfer, conveyance, assignment
and delivery of the Assigned Assets.
<PAGE>
Seller represents, warrants, covenants and agrees that it: (a) has
good and marketable title to the Assigned Assets, free and clear of all Liens
other than Permitted Liens; and (b) will warrant and defend the sale of the
Assigned Assets against all and every Person or Persons whomsoever claiming
against any or all of the same, subject to the terms and provisions of the Asset
Purchase Agreement. The representations and covenants contained in this
paragraph shall survive only for the applicable period provided in the Asset
Purchase Agreement.
At any time or from time to time after the date hereof, at Purchaser's
request and without further consideration, Seller shall execute and deliver to
Purchaser such other instruments of sale, transfer, conveyance, assignment and
confirmation, provide such materials and information and take such other actions
as Purchaser may reasonably deem necessary or desirable in order more
effectively to transfer, convey and assign to Purchaser, and to confirm
Purchaser's title to, all of the Assigned Assets, and, to the full extent
permitted by Law, to put Purchaser in actual possession and operating control of
the Assigned Assets and to assist Purchaser in exercising all rights with
respect thereto.
This General Assignment and Bill of Sale may be executed in any number
of counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
This General Assignment and Bill of Sale shall be governed by and
construed in accordance with the laws of the State of California applicable to a
contract executed and performed in such State without giving effect to the
conflicts of laws principles thereof, except that if it is necessary in any
other jurisdiction to have the law of such other jurisdiction govern this
General Assignment and Bill of Sale in order for this General Assignment and
Bill of Sale to be effective in any respect, then the laws of such other
jurisdiction shall govern this General Assignment and Bill of Sale to such
extent.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused their duly authorized
officers to execute this General Assignment and Bill of Sale on the day and year
first above written.
BLASIAR, INC.
(DBA ALERT COMMUNICATIONS COMPANY)
By:________________________________
Gary K. Blasiar
President
THE RIGHT START, INC.
By:________________________________
Jerry R. Welch
Chief Executive Officer
3
<PAGE>
EXHIBIT C
ASSUMPTION AGREEMENT
--------------------
THIS ASSUMPTION AGREEMENT is entered into this 29th day of July, 1996,
by and between Blasiar, Inc. (DBA Alert Communications Company), a California
corporation ("Purchaser"), and The Right Start, Inc., a California corporation
---------
("Seller").
------
WHEREAS, Purchaser and Seller have entered into an Asset Purchase
Agreement, dated as of July 29, 1996 (the "Asset Purchase Agreement";
------------------------
capitalized terms not defined herein shall have the meanings ascribed to them in
the Asset Purchase Agreement), pursuant to which Seller has agreed to sell,
transfer, convey, assign and deliver to Purchaser and Purchaser has agreed to
purchase from Seller substantially all of the assets used by Seller in
connection with the conduct of the Business, and Purchaser has agreed, in
partial consideration therefor, to assume certain obligations in connection
therewith by executing this Assumption Agreement;
WHEREAS, pursuant to Section 1.04 of the Asset Purchase Agreement,
Purchaser is required to execute and deliver to Seller this Agreement whereby
Purchaser assumes such obligations;
NOW, THEREFORE, for and in consideration of the mutual covenants
contained herein and other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, Purchaser hereby undertakes and
agrees from and after the date hereof, subject to the limitations contained
herein, to assume and to pay, perform and discharge when due the Assumed
Liabilities.
Nothing contained herein shall require Purchaser to pay or discharge
any debts or obligations expressly assumed hereby so long as Purchaser shall in
good faith contest or cause to be contested the amount or validity thereof.
Other than as specifically stated above or in the Asset Purchase
Agreement, Purchaser assumes no debt, liability or obligation of Seller,
including without limitation the Retained Liabilities, by this Assumption
Agreement, and it is expressly understood and agreed that all debts, liabilities
and obligations not assumed hereby by Purchaser shall remain the sole obligation
of Seller, its successors and assigns.
<PAGE>
No Person other than Seller, its successors and assigns shall have any
rights under this Assumption Agreement or the provisions contained herein.
This Assumption Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
This Assumption Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to a contract
executed and performed in such State without giving effect to the conflicts of
laws principles thereof, except that if it is necessary in any other
jurisdiction to have the law of such other jurisdiction govern this Assumption
Agreement in order for this Assumption Agreement to be effective in any respect,
then the laws of such other jurisdiction shall govern this Assumption Agreement
to such extent.
IN WITNESS WHEREOF, the undersigned have caused their duly authorized
officers to execute this Assumption Agreement on the day and year first above
written.
BLASIAR, INC.
(DBA ALERT COMMUNICATIONS COMPANY)
By:________________________________
Gary K. Blasiar
President
THE RIGHT START, INC.
By:________________________________
Jerry R. Welch
Chief Executive Officer
2
<PAGE>
EXHIBIT D
BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY)
AND
THE RIGHT START, INC.
TELEMARKETING AGREEMENT (INBOUND)
This Telemarketing Agreement is entered into as of the 29th day of
July, 1996 between Blasiar, Inc. (DBA Alert Communications Company) ("Alert"), a
California corporation and The Right Start, Inc., a California corporation
("Customer").
RECITALS
A. Alert provides telemarketing services of various types, including
telemarketing services for the receipt of incoming calls.
B. Customer desires to obtain certain telemarketing services from Alert.
AGREEMENTS
1. SERVICES. Alert will provide Customer the services described on
Schedule 1 (the "Services") during the term of the Agreement. Alert will not be
obligated to provide any services not expressly set forth on Schedule 1.
2. TERM. This Agreement will continue for a period of two (2) years
after the date of this Agreement (the "Initial Term"). After the Initial Term,
this Agreement shall automatically renew for successive one-year terms unless it
is cancelled by either party upon one hundred twenty (120) days written notice
prior to the commencement of any such one-year term. In the event of a material
breach of this Agreement by either party that is not cured within twenty days
following written notice, the non-breaching party may terminate this Agreement.
3. PAYMENT. Customer will pay Alert the fees for Services described
in Schedule 2. Invoices will be due and payable within ten (10) days after the
date of receipt by Customer of such invoices. Payment will be deemed made when
received by Alert. Customer will pay any federal, state, local or foreign
taxes, duties, tariffs or other assessments (other than any tax based solely on
Alert's net income) and related interest and penalties that Alert is at any time
obligated to pay or collect in connection with or arising out of the
transactions
<PAGE>
contemplated under this Agreement. Without limiting Alert's other rights or
remedies, late charges at the rate of one and one-half percent (1 1/2%) per
month or the maximum rate permitted by applicable law, whichever is lower, will
accrue on any amounts not paid when due, including any accrued but unpaid late
charges. In addition to the fees, Customer will reimburse Alert for those
reasonable out-of-pocket expenses not contemplated by Schedule 2 incurred by
Alert in the performance of the Services; provided that Customer shall not be
--------
obligated to reimburse Alert for any out-of-pocket expenses which individually
or in the aggregate exceed five hundred dollars ($500.00) per month, without the
prior written consent of Customer.
4. CUSTOMER OBLIGATIONS. Customer will perform those obligations
and provide those materials described on Schedule 1 and 2.
5. WARRANTIES. Alert warrants that the Services will be performed
in a commercially reasonable manner. If, within thirty (30) days of its
occurrence, Customer reports that Alert has provided Services in a manner that
breaches the foregoing warranty, Alert will, at no cost to Customer and at
Customer's sole option, promptly repeat such Services in a manner consistent
with such warranty or credit the Customer's account for the amount charged to
the Customer for the service.
6. LIMITATIONS OF LIABILITY. NOTWITHSTANDING ANY CONTRARY PROVISION
CONTAINED HEREIN, IN THE EVENT OF A MATERIAL BREACH BY EITHER PARTY OF ITS
OBLIGATIONS UNDER THIS AGREEMENT, DAMAGES PAYABLE BY THE NONDEFAULTING PARTY
SHALL NOT EXCEED THE AMOUNTS ACTUALLY PAID BY CUSTOMER TO ALERT HEREUNDER IN THE
SIX (6) MONTH'S PRIOR TO SUCH BREACH, PLUS ATTORNEYS FEES AND COSTS INCURRED BY
THE NONDEFAULTING PARTY TO OBTAIN, IF NECESSARY, A FINAL JUDGMENT OR ARBITRATION
DETERMINATION THAT THE DEFAULTING PARTY HAS MATERIALLY BREACHED ITS OBLIGATIONS
UNDER THIS AGREEMENT. NO ACTION, REGARDLESS OF FORM, ARISING OUT OF THE
TRANSACTIONS UNDER THE AGREEMENT MAY BE BROUGHT BY EITHER PARTY HERETO MORE THAN
ONE (1) YEAR AFTER THE CAUSE OF ACTION HAS ACCRUED, EXCEPT THAT AN ACTION FOR
NONPAYMENT MAY BE BROUGHT WITHIN ONE (1) YEAR AFTER THE DATE THE LAST PAYMENT
WAS DUE.
7. INDEMNIFICATION; CLAIMS BY THIRD PARTIES.
a. Indemnification of Customer. Alert shall indemnify and hold
---------------------------
harmless Customer and its directors, officers, parent corporations, sister
corporations, subsidiaries, assigns, liability, damage, injury to property or
person, death or expense (including reasonable attorneys' fees and expenses)
which directly or indirectly arise from Alert's services, actions or omissions,
including without limitation, any action or claim
2
<PAGE>
brought by Alert's employees, agents and representatives, pertaining to or
arising out of Alert's performance under this Agreement; provided, however, that
-------- -------
Alert shall not be liable to Account for any claim, litigation, judgment, loss,
liability, damage, injury to property or person, death or expense arising from
or based upon the negligence of Customer.
b. Indemnification of Alert. Customer shall indemnify and hold
------------------------
harmless Alert and its directors, officers, parent corporations, sister
corporations, subsidiaries, assigns, agents and employees from any claim,
litigation, judgment, loss, liability, damage, injury to property or person,
death or expense (including reasonable attorneys' fees and expenses) which
directly or indirectly arise from Customer's actions or omissions, including
without limitation any action or claim brought by Customer's employees, agents
and representatives, pertaining to or arising out of Customer's performance
under this Agreement; provided, however, that Customer shall not be liable to
-------- -------
Alert for any claim, litigation, judgment, loss, liability, damage, injury to
property or person, death or expense arising from or based upon the negligence
of Alert.
8. MISCELLANEOUS.
(a) Notices. All notices hereunder (other than payment) will be
-------
in writing and delivered personally or sent via facsimile, by certified mail,
return receipt requested, or by a reputable courier service to addresses shown
below or to such other addresses as may be designated in writing by Alert or
Customer, as the case may be, to the other party hereto.
(b) Integration. This Agreement constitutes the entire agreement
-----------
between Alert and Customer with respect to the transactions contemplated herein
and supersedes any and all prior or contemporaneous oral or written
communications relating to the subject matter hereof.
(c) Amendment; Waiver. This Agreement may not be amended except
-----------------
by a writing executed by both parties. No waiver of any provision of this
Agreement or any rights or obligations of either party hereunder will be
effective, except pursuant to a written instrument signed by the party or
parties waiving compliance, and any such waiver, will be effective only in the
specific instance and for the specific purpose stated in such writing.
(d) Other Customers. During and after the term of this Agreement,
---------------
Alert will have the right, in its sole discretion, to provide services of any
type to any person or entity, regardless of the industry or trade in which such
person
3
<PAGE>
or entity may conduct any business or in connection with which such services may
be provided. The provision of any such services by Alert will not give rise to
any liability to Customer on the part of Alert.
(e) Independent Contractor. Neither party nor any of its
----------------------
personnel will be considered as an agent or employee of the other party. Alert
is an independent contractor with respect to performing the Services on behalf
of the Customer and Alert will have full control over, and responsibility for,
the manner and means by which the Services are provided.
(f) Confidentiality. Customer and Alert shall keep the terms and
---------------
conditions of this Agreement strictly confidential, except as otherwise required
by law.
(g) Agreement Controls. If Customer submits any order or similar
------------------
document containing any provisions that are in addition to or inconsistent with
the provisions hereof, the provisions of this Agreement will control, and the
provisions of any such order or similar document will be of no force or effect.
(h) Severability of Provisions. If any provision hereof is found
--------------------------
invalid or unenforceable pursuant to judicial decree or decisions, the remainder
of this Agreement will valid and enforceable according to its terms. Further,
to the extent any provision hereof is found to be in part enforceable and in
part unenforceable, the unenforceable portion will be deemed stricken therefrom,
and such provision will be valid and enforceable to the maximum extent permitted
under applicable law. WITHOUT LIMITING THE FOREGOING, IT IS UNDERSTOOD AND
AGREED THAT EACH AND EVERY PROVISION OF THIS AGREEMENT WHICH PROVIDES FOR
LIMITATION OF LIABILITY, DISCLAIMER OR WARRANTIES, OR EXCLUSION OF DAMAGES OR
EXCLUSION OF OTHER REMEDIES IS INTENDED BY THE PARTIES TO BE SEVERABLE AND
INDEPENDENT OF ANY OTHER PROVISION AND TO BE ENFORCED AS SUCH. FURTHER, IT IS
UNDERSTOOD AND AGREED THAT IF ANY REMEDY HEREUNDER IS DETERMINED TO HAVE FAILED
OF ITS ESSENTIAL PURPOSE, ALL LIMITATIONS OF LIABILITY, EXCLUSIONS OF DAMAGES
AND EXCLUSIONS OF OTHER REMEDIES SET FORTH HEREIN WILL REMAIN IN EFFECT.
(i) Governing Law; Forum. This Agreement shall be governed by the
--------------------
laws of the State of California. Any action or proceeding brought by Customer
or Alert against the other related to this Agreement will be brought in a court
located in the County of Los Angeles and the parties each submit to the in
--
personam jurisdiction of such courts for purposes of any such action or
- --------
proceeding.
4
<PAGE>
(j) Assignment. This Agreement shall be binding upon the parties
----------
hereto, as well as their respective legal representatives, successors and
assigns. No assignment of this Agreement by Alert shall be effective without
the prior written consent of Customer.
(k) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed the Agreement as
of the date first above written:
BLASIAR, INC. THE RIGHT START, INC.
(DBA ALERT COMMUNICATIONS COMPANY)
By: By:
------------------------- ------------------------
Gary K. Blasiar Jerry R. Welch
President Chief Executive Officer
5515 York Boulevard 5334 Sterling Center Drive
Los Angeles, CA 90042-2499 Westlake Village, CA 91361
5
<PAGE>
EXHIBIT E
SECURITY AGREEMENT
THIS SECURITY AGREEMENT, dated as of July 29, 1996 (herein, as the same may
be amended from time to time, called this "AGREEMENT") is entered into by
BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY), a California corporation (the
"DEBTOR"), as debtor, and THE RIGHT START, INC., a California corporation, as
secured party ("SECURED PARTY").
W I T N E S S E T H:
-------------------
WHEREAS, Debtor, to evidence a loan made to it by Secured Party, has
executed and delivered a Promissory Note (the "NOTE") in connection with that
certain Asset Purchase Agreement dated as of July 29, 1996 between Debtor and
Secured Party (the "ASSET PURCHASE AGREEMENT"); and
WHEREAS, Debtor has agreed to enter into this Agreement in favor of Secured
Party, as security for the Obligations (as defined below);
NOW THEREFORE, in consideration of the foregoing recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, intending to be legally bound hereby, the parties hereto agree as
follows:
1. DEFINITIONS. Unless otherwise defined, all capitalized terms used in
-----------
this Agreement shall have the respective meanings assigned to such terms in the
Asset Purchase Agreement. In addition, when used herein, the following terms
shall have the following meanings:
"COLLATERAL" shall mean all property or rights in which a security
interest is granted hereunder, as described in Section 3 of this Agreement.
---------
"OBLIGATIONS" shall mean, collectively: (a) The Note and all other
obligations, covenants, agreements, and liabilities of Debtor to Secured Party;
(b) any and all other indebtedness of Debtor to Secured Party now or hereafter
owing, whether direct or indirect, primary or secondary, fixed or contingent,
joint or several, regardless of how evidenced or arising; (c) all obligations of
Debtor under this Agreement; and (d) any extensions, replacements or renewals of
all such obligations described in subparagraphs (a) through (c) above, whether
or not
Security Agreement
------------------
<PAGE>
any extension agreements, replacement agreements or renewal instruments are
executed.
2. GRANT OF SECURITY INTEREST. As security for the prompt payment and
--------------------------
faithful performance of the Obligations, Debtor hereby grants to Secured Party a
first priority continuing security interest in, all right, title and interest of
Debtor, in and to all of the Assets transferred under the Asset Purchase
Agreement (collectively, the "COLLATERAL"):
3. WARRANTIES. Debtor represents and warrants to Secured Party that:
----------
(a) No presently effective security agreement, mortgage, deed of trust
or financing statement covering any of the Collateral in which Debtor is named
or signs as debtor is on file in any public office.
(b) All information with respect to the Collateral set forth in any
schedule, certificate or other writing at any time heretofore or hereafter
furnished by Debtor to Secured Party, and all other written information
heretofore or hereafter furnished by Debtor to Secured Party, is and will be
true and correct in all material respects as of the date furnished.
(c) The principal place of business of Debtor is at the address of
Debtor shown in Subsection 7(c) below.
---------------
(d) The only office in which Debtor keeps records concerning the
Collateral is at the address shown in Subsection 7(c) below.
---------------
4. UNDERTAKINGS AND AGREEMENTS OF DEBTOR. Debtor shall:
-------------------------------------
(a) Deliver to Secured Party, concurrently with the execution and
delivery of this Agreement (or, in the case of after-acquired Collateral,
promptly upon receipt thereof), all instruments, if any, included in the
Collateral, for possession by Secured Party; and do such other acts and things
as Secured Party may from time to time request to establish and maintain a valid
pledge of, and perfected security interest in, the Collateral, to secure the
payment of the Obligations;
(b) Keep, at its principal business office set forth below, all its
records concerning the Collateral, which records will be of such character as
will enable Secured Party or its designees to determine at any time the status
thereof and promptly notify Secured Party of any change in the location of the
office where such records are kept, and of any additional place or places of
business of Debtor.
Security Agreement
------------------
2
<PAGE>
(c) Not sell, lease, assign or create or permit the existence of any
lien on or security interest in any Collateral in favor of any party other than
Secured Party; and defend the Collateral against the claims and demands of all
persons;
(d) At all times keep all Assets insured against loss, damage, theft
and other risks, in such amounts and with such companies, and under such
policies and in such form as shall be satisfactory to Secured Party, which
policies shall provide, if Secured Party so requests, that loss hereunder shall
be payable to Secured Party as its interests may appear (and Secured Party may
apply any proceeds of such insurance which may be received by it toward payment
of the Obligations;
(e) Reimburse Secured Party upon demand for all expenses, including
reasonable attorneys' fees and legal expenses, incurred by or on behalf of
Secured Party in seeking to collect, preserve, protect or enforce any rights in
the Collateral; and
(f) Execute and deliver to Secured Party such amendments and
supplements to this Agreement, as may from time to time be necessary or
appropriate to subject to the security interests granted hereby all property and
interests of Debtor contemplated to be subjected thereto, and to provide all
information in connection therewith required to be provided pursuant to such
section.
5. DEFAULT AND REMEDIES. Upon an Event of Default, Secured Party, in
--------------------
addition to any and all other rights and remedies provided for herein or under
applicable law, in its discretion and without demand or notice of any kind
(except to the extent required by law), may take any one or more of the
following actions, without liability except to account for funds actually
received; and Debtor hereby irrevocably constitutes and appoints Secured Party
and any officer thereof (with full power of substitution) Debtor's true and
lawful attorney-in-fact, with full power, in its own name or in Debtor's name
and stead, to execute and deliver all documents and to take all other actions
necessary or appropriate to accomplish any of the following (all as fully as
Debtor might do) and Debtor hereby ratifies all that said attorney shall
lawfully do by virtue hereof:
(a) Apply toward the payment of the Note and other Obligations, any
and all balances, credits, deposits, accounts or monies of or in the name of
Debtor then or thereafter held by Secured Party;
Security Agreement
------------------
3
<PAGE>
(b) Exercise any and all rights and remedies of a secured party under
the Uniform Commercial Code as then in effect in the State of California;
(c) Require Debtor, at its expense, to assemble any or all Collateral
at a convenient place acceptable to Secured Party (and Debtor hereby undertakes
and agrees to do so);
(d) Have a receiver appointed to take charge of all or any part of the
Collateral; and
(e) To the fullest extent permitted by applicable law, without notice,
advertisement, hearing or process of law of any kind, sell any or all of the
Collateral, free of all rights and claims of Debtor therein and thereto at any
public or private sale, and bid for and purchase any or all of the Collateral at
any such public or private sale. Any notification of intended disposition of
any of the Collateral required by law shall be deemed reasonable and properly
given if given at least ten (10) days before such disposition. Any proceeds of
any disposition by Secured Party of any of the Collateral may be applied by
Secured Party to the payment of reasonable expenses in connection with retaking,
holding, preparing for sale, selling and otherwise dealing with the Collateral
in any manner permitted hereby, including reasonable attorneys' fees and legal
expenses, and any balance of such proceeds shall be applied by Secured Party
toward the payment of such of the Obligations, and in such order of application,
as Secured Party may from time to time elect.
6. GENERAL PROVISIONS.
------------------
(a) Secured Party shall be deemed to have exercised reasonable care in
the custody and preservation of any of the Collateral in its possession if it
takes such action for that purpose as Debtor requests by notice to Secured
Party, but failure to comply with such request shall not of itself be deemed a
failure to exercise reasonable care, and no failure of Secured Party to preserve
and protect any rights with respect to such Collateral against prior parties, or
to do any act with respect to the preservation of such Collateral not so
requested by Debtor, shall be deemed a failure to exercise reasonable care in
the custody or preservation of such Collateral. Secured Party shall be under no
duty to exercise or refrain from exercising any of the rights, powers and
privileges granted hereby, and shall not be responsible for any failure to do so
or delay in so doing.
(b) All notices and communications to be given under this Agreement
(including any modifications of, or waivers or consents under, this Agreement)
shall be in writing sent by mail, postage prepaid, or by personal service
(including courier or
Security Agreement
------------------
4
<PAGE>
express service) or by facsimile transmission addressed as follows and the
address of the following Persons shall be deemed to be as set forth below:
To Debtor:
--------- Alert Communications Co.
5515 York Boulevard
Los Angeles, CA 90042-2499
Attention: Gary K. Blasiar
Facsimile No. (213) 254-6802
With a Copy to:
-------------- Jackson, DeMarco & Peckenpaugh
4 Park Plaza - 16th Floor
Post Office Box 19704
Irvine, CA 92713-9704
Attention: Douglas P. Smith, Esq.
Facsimile No. (714) 752-0597
To Secured Party:
---------------- The Right Start, Inc.
5334 Sterling Center Drive
Westlake Village, CA 91361
Attention: Jerry R. Welch
Facsimile No. (818) 707-7132
With a Copy to:
-------------- Milbank, Tweed, Hadley & McCloy
601 S. Figueroa Street, 30th Floor
Los Angeles, California 90017
Attention: Kenneth J. Baronsky, Esq.
Facsimile No. (213) 629-5063
Communications sent by mail shall be deemed made on the third business day
following the deposit thereof in the U.S. Mail. Communications personally
served shall be deemed made upon delivery to the address of the addressee set
forth above. Communications transmitted by facsimile transmission shall be
deemed made upon receipt by the addressee if a copy of such communication shall
be delivered to the addressee on the next business day by express mail service.
If such copy is not then so delivered, such communication shall be deemed made
upon the day of actual delivery of such copy to the office of the addressee.
Any party hereto may, on three days' notice given as hereinabove prescribed,
specify a different address for communications. Any person succeeding to all or
any part of an interest of the parties hereto shall specify by written notice
the address of such person for all notices hereunder.
(c) Neither this Agreement nor any provision hereof may be amended,
modified, waived, discharged or terminated orally, nor may any of the Collateral
be released, except by an instrument in writing duly signed on behalf of the
parties.
Security Agreement
------------------
5
<PAGE>
(d) Section headings used herein are for convenience of reference
only and shall not define or limit the provisions of this Agreement.
(e) No delay on the part of Secured Party in the exercise of any
right or remedy shall operate as a waiver thereof, and no single or partial
exercise by Secured Party of any right or remedy shall preclude other or further
exercise thereof or the exercise of any other right or remedy. Debtor waives
demand, notice, protest, and all demands and notices of any action taken by
Secured Party under this Security Agreement except as is specifically elsewhere
provided herein and except as to notices which are required (and which may not
be waived under the provisions of the California or other applicable version of
the Uniform Commercial Code), and any indulgence by Secured Party, substitution
for, exchange of, or release of the Collateral is hereby assented to and
consented to.
(f) THIS SECURITY AGREEMENT SHALL BE CONSTRUED UNDER AND GOVERNED BY
THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO THE CONFLICTS OF
LAWS PRINCIPLES THEREOF.
(g) Whenever possible each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
(h) Secured Party's rights hereunder or the Obligations may be
assigned by Secured Party at any time and from time to time, and in such case
the assignee shall be entitled to all of the rights, privileges and remedies
granted in this Security Agreement to Secured Party.
(i) The remedies of Secured Party hereunder are cumulative, and the
exercise of any one or more of the remedies provided for herein shall not be
construed as a waiver of any of the other remedies of Secured Party.
(j) This Agreement shall be binding upon and inure to the benefit of
Debtor and Secured Party and their respective successors and assigns.
(k) Upon the full performance and satisfaction of all Obligations,
the security interest hereby granted in the Collateral shall thereupon
terminate. Secured Party shall execute and deliver any documents necessary to
effect such termination.
Security Agreement
------------------
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as of the
day, month and year first above written.
DEBTOR:
BLASIAR, INC.
(DBA ALERT COMMUNICATIONS COMPANY),
a California corporation
By: ____________________________
Gary K. Blasiar
President
SECURED PARTY:
THE RIGHT START, INC.,
a California corporation
By: _____________________________
Jerry R. Welch
Chief Executive Officer
Security Agreement
------------------
7
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement of Form S-8 of The Right Start, Inc. of our report dated July 3, 1996
which appears on page F-1 of this Form 10-K.
PRICE WATERHOUSE LLP
Woodland Hills, California
August 29, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-01-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> JUN-01-1996
<CASH> 472
<SECURITIES> 0
<RECEIVABLES> 609
<ALLOWANCES> 0
<INVENTORY> 5,264
<CURRENT-ASSETS> 2,008
<PP&E> 9,969
<DEPRECIATION> 2,606
<TOTAL-ASSETS> 17,475
<CURRENT-LIABILITIES> 4,649
<BONDS> 0
0
0
<COMMON> 16,313
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 17,475
<SALES> 40,368
<TOTAL-REVENUES> 41,786
<CGS> 21,605
<TOTAL-COSTS> 18,823
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> (4,826)
<INCOME-TAX> (927)
<INCOME-CONTINUING> (3,899)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,899)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)
</TABLE>
