<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
================================================================================
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the thirteen week period ended May 3, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-19536
THE RIGHT START, INC.
---------------------
(Exact name of registrant as specified by 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, CA 91361
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(818) 707-7100
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Capital Stock Outstanding as of May 3, 1997 - 8,593,639 shares
<PAGE>
THE RIGHT START, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN WEEK PERIOD
ENDED MAY 3, 1997
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
SIGNATURES 11
<PAGE>
THE RIGHT START, INC.
BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
May 3, May 4,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 396,000 $ 644,000
Accounts receivable 421,000 767,000
Note receivable 170,000 0
Merchandise inventories 7,388,000 5,721,000
Prepaid catalog expenses 819,000 958,000
Deferred pre-opening costs, net 382,000 542,000
Other current assets 1,588,000 1,019,000
------------ ------------
Total current assets 11,164,000 9,651,000
------------ ------------
Noncurrent assets:
Property, plant and equipment, net 10,320,000 6,595,000
Other non-current assets 37,000 150,000
Deferred income tax benefit 1,400,000 1,562,000
------------ ------------
Total noncurrent assets 11,757,000 8,307,000
------------ ------------
$ 22,921,000 $ 17,958,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,229,000 $ 2,671,000
Accrued salaries and bonuses 356,000 122,000
Advance payments on orders 63,000 94,000
Note payable 1,964,000
------------ ------------
Total current liabilities 8,612,000 2,887,000
------------ ------------
Note payable long term 3,000,000
Convertible subordinated debentures 3,000,000
Deferred rent 1,794,000 1,026,000
------------ ------------
Total long term liabilities 7,794,000 1,026,000
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock (25,000,000 authorized at no par value; 8,593,639 and
7,939,306 issued and outstanding, respectively) 18,281,000 16,250,000
Accumulated deficit
(11,766,000) (2,205,000)
------------ ------------
Total shareholders' equity 6,515,000 14,045,000
------------ ------------
$ 22,921,000 $ 17,958,000
============ ============
</TABLE>
3
<PAGE>
THE RIGHT START, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Thirteen weeks
Ended
----------------------------
May 3, May 4,
1997 1996
------------ ------------
<S> <C> <C>
Net sales:
Retail $ 7,414,000 $ 5,212,000
Catalog 2,522,000 5,610,000
------------ ------------
9,936,000 10,822,000
Other revenues 73,000 161,000
------------ ------------
10,009,000 10,983,000
------------ ------------
Costs and expenses:
Cost of goods sold 4,917,000 5,657,000
Operating expense 5,181,000 4,525,000
General and administrative expense 1,063,000 1,043,000
Pre-opening cost amortization 217,000 91,000
Depreciation and amortization expense 394,000 250,000
------------ ------------
11,772,000 11,566,000
------------ ------------
Operating loss (1,763,000) (583,000)
Interest and other income and expense, net (205,000) (490,000)
------------ ------------
Loss before income taxes (1,968,000) (1,073,000)
Income tax provision (benefit) 10,000 (519,000)
------------ ------------
Net loss $ (1,978,000) $ (554,000)
============ ============
Loss per share $ (0.23) $ (0.08)
============ ============
Weighted average number of shares
outstanding 8,499,353 6,761,684
============ ============
</TABLE>
4
<PAGE>
THE RIGHT START, INC.
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Thirteen weeks
Ended
--------------------------
May 3, May 4,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,978,000) $ (554,000)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 611,000 341,000
Change in assets and liabilities affecting
operations 515,000 (1,950,000)
----------- -----------
Cash used in operating activities (852,000) (2,163,000)
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (873,000) (1,012,000)
----------- -----------
Cash used in investing activities (873,000) (1,012,000)
----------- -----------
Cash flows from financing activities:
Borrowings (repayments) under note payable to bank, net 488,000 (1,300,000)
Proceeds from exercise of stock options 1,320,000 4,978,000
----------- -----------
Cash provided by financing activities 1,808,000 3,678,000
----------- -----------
Net increase in cash 83,000 503,000
Cash at beginning of period 313,000 141,000
----------- -----------
Cash at end of period $ 396,000 $ 644,000
=========== ===========
</TABLE>
5
<PAGE>
THE RIGHT START, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Description of Business and Significant Accounting Policies
The Right Start, Inc. is a leading merchant offering unique, high-quality
juvenile products for infants and young children. The Company markets its
products through its retail stores, located in major regional malls across the
nation, and through The Right Start Catalog.
Effective February 1, 1997, the Company changed its fiscal year end to the
Saturday closest to the last day of January. Previously, the Company reported on
a fiscal year ending the Saturday closest to the last day of May. This resulted
in a thirty-three week reporting period for the period June 2, 1997 through
February 1, 1997 (the "Transition Period").
There have been no changes in the Company's significant accounting policies as
set forth in the Company's consolidated financial statements for the Transition
Period. These unaudited consolidated financial statements as of May 3, 1997 and
for the thirteen week period then ended have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Certain reclassifications have been made to conform prior year amounts to
current year presentation.
Operating results for the thirteen week period ended May 3, 1997 are not
necessarily indicative of the results that may be expected for the year ending
January 31, 1998.
NOTE 2: PER SHARE DATA
Earnings per share is 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 stock options
outstanding to key executives, employees and directors.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS
128 is effective for the Company at January 31, 1998. The statement requires
that basic earnings per share ("EPS") be presented instead of primary EPS. It
also requires both basic and diluted EPS be presented on the face of the income
statement, if applicable, as well as additional disclosures on the components of
EPS. Had the Company adopted FAS 128 at May 3, 1997, there would be no effect on
the financial statements for the quarter then ended.
6
<PAGE>
NOTE 3: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid amounted to $142,000 and $45,000 for the thirteen weeks ended May
3, 1997 and May 4, 1996, respectively. Cash paid for income taxes was $12,000
and $8,000 for the thirteen weeks ended May 3, 1997 and May 4, 1996,
respectively.
Changes in assets and liabilities which increased (decreased) cash and
equivalents are as follows:
<TABLE>
<CAPTION>
Thirteen weeks ended
------------------------------------
May 3, May 4,
1997 1996
----------- ------------
<S> <C> <C>
Accounts receivable $ 517,000 $ (252,000)
Note receivable 30,000
Merchandise inventories 276,000 (57,000)
Prepaid catalog expenses (37,000) (112,000)
Deferred pre-opening costs (56,000) (251,000)
Other current assets (324,000) 639,000
Other non-current assets 147,000
Deferred income tax benefit (618,000)
Accounts payable and accrued expenses 154,000 (1,599,000)
Accrued salaries and bonuses (161,000) (377,000)
Advance payments on orders 32,000 16,000
Deferred rent 84,000 514,000
----------- -----------
$ (515,000) $(1,950,000)
=========== ===========
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED MAY 3, 1997 COMPARED WITH MAY 4, 1996
Net sales for the thirteen weeks ended May 3, 1997 declined 8.2% to
$9,936,000 from $10,822,000 for the same period last year. For the quarter,
retail net sales increased 42.2% to $7,414,000 from $5,212,000 last year, while
catalog net sales decreased 55.0% to $2,522,000 from $5,610,000 last year. The
increase in retail net sales is due to an increase in stores to 38 at May 3,
1997, compared to 19 at May 4, 1996. The impact of the increased number of
stores was somewhat offset by the absence of heavy discounting and promotional
activities which were present in the prior year. The reduction in catalog net
sales is due to the Company's decision to significantly reduce circulation and
reposition the catalog to strategically support and complement the retail store
operations.
Cost of goods sold decreased 13.1% to $4,917,000 from $5,657,000,
resulting in gross margin of 50.5% for the first quarter of fiscal 1997 compared
to 47.7% last year. Improved margins reflect the lack of promotional and sale
activity in this year versus the prior year.
Operating expense increased 14.5% due to an increase of 19 stores in
operation, offset by reductions in catalog production costs due to the decrease
in the level of catalog circulation.
General and administrative expense increased 1.9% or $20,000 as
compared to the first quarter of the prior year. The increase reflects
additional payroll incurred in staffing the merchandising and other corporate
departments to support the expanding retail chain, offset by the results of
successful cost savings efforts in other corporate overhead areas.
Pre-opening cost amortization increased to $217,000 from $91,000 last
year, while depreciation and amortization increased to $394,000 from $250,000
due to the increase in the number of retail stores.
Interest and other income and expense decreased to $205,000 from
$490,000 last year. Included in last year's reported amount were severance
charges of $450,000 incurred in conjunction with the resignation of the
Company's former chief executive officer. After consideration of this charge,
the remaining increase in the account reflects additional interest expense
incurred on borrowings under the Company's senior credit facility and
subordinated notes.
The Company provided for state income tax expense in the current
quarter as compared to the prior year in which a benefit was recorded for
pre-tax losses.
As a result of the above, the Company experienced a net loss of
$1,978,000 or $.23 per share, compared to a net loss of $554,000 or $.08 per
share last year.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended May 3, 1997, the Company's primary source of
liquidity was from borrowings under its $13,000,000 senior credit facility (the
"Credit Facility"). Borrowings under the Credit Facility funded cash used in
operations of $852,000 and in investing activities of $873,000. Capital
expenditures represent amounts incurred in the construction of new stores. The
Company opened one store during the quarter and another in May 1997.
The Credit Facility consists of a $10,000,000 revolving line of credit
for working capital (the "Revolving Line") and a $3,000,000 capital expenditure
facility (the "Capex Line"). Availability under the Revolving Line is subject to
a defined borrowing base. As of May 3, 1997, borrowings of $1,964,000 and
$3,000,000 were outstanding under the Revolving Line and Capex Line,
respectively, and $1,603,000 was available under the Revolving Line. The Credit
Facility terminates on November 19, 1999 and on such date all borrowings
thereunder are immediately due and payable. Borrowings under the Credit Facility
are secured by substantially all of the Company's assets.
The Credit Facility, as amended, requires the Company at all times to
maintain net worth (defined to include equity and subordinated debt) of at least
$8 million. The Credit Facility also limits the Company's losses from operations
to $1,850,000 and $2,250,000 during the quarters ending July 31, 1997 and
October 31, 1997, respectively. Thereafter, the Credit Facility requires the
Company's interest coverage (as defined therein) to be at least (I) 1.5 to 1.0
for the quarter ending January 31, 1998, (ii) 1.0 to 1.0 for the two quarter
period ending April 30, 1998, (iii) 1.5 to 1.0 for the three quarter period
ending July 31, 1998, and (iv) 2.0 to 1.0 for the four quarter period at the end
of each subsequent quarter. Interest coverage is defined in the Credit Facility
as EBITDA divided by interest expenses (each defined therein).
Effective May 6, 1997, the Company raised $3,000,000 through the
issuance and sale of subordinated debt and warrants to purchase common stock to
a limited number of investors (some of whom are affiliates of the Company). The
subordinated notes bear interest at 11.5% and are due in full on May 6, 2000.
Warrants to purchase an aggregate of 475,000 shares of common stock at $3.00 per
share were issued in connection with the subordinated notes.
The Company's ability to fund its operations, open new stores and
maintain compliance with the Credit Facility is dependent on its ability to
generate sufficient cash flow from operations. Historically, the Company has
incurred losses and expects to continue to incur losses in the near term.
Depending on the success of its business strategy, the Company may continue to
incur losses beyond such period. Losses could negatively affect working capital,
the extension of credit by the Company's suppliers and the Company's ability to
maintain compliance with its debt covenants.
9
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
The Company filed a Report of Form 8-K on March 5, 1997 reporting the
Company's change in fiscal year end to the Saturday closest to the last day of
January.
The Company filed no other Reports of Form 8-K during the first quarter
of fiscal 1997.
The following exhibits of The Right Start, Inc. are included herein.
Exhibit
Number
- ---------
10.1 First Amendment to Convertible Debenture Purchase Agreement and
Convertible Debenture between The Right Start, Inc. and Cahill Warnock
Strategic Partners Fund, L.P. dated May 30, 1997
10.2 First Amendment to Convertible Debenture Purchase Agreement and
Convertible Debenture between The Right Start, Inc. and Strategic
Associates, L.P. dated May 30, 1997
27 Financial Data Schedule
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.
THE RIGHT START, INC.
Date: June 12, 1997 /s/ Jerry Welch
------------- --------------------------
Jerry Welch
Chief Executive Officer
Date: June 12, 1997
------------- /s/ Gina M. Shauer
--------------------------
Gina M. Shauer
Chief Financial Officer
11
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT TO
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
AND
CONVERTIBLE DEBENTURE
THIS FIRST AMENDMENT TO CONVERTIBLE DEBENTURE PURCHASE
AGREEMENT AND CONVERTIBLE DEBENTURE (this "Amendment") is made as of May 30,
---------
1997, between The Right Start, Inc., a California corporation (the "Company")
-------
and Cahill Warnock Strategic Partners Fund, L.P., a Delaware limited partnership
(the "Purchaser").
---------
R E C I T A L S:
A. The Company and the Purchaser entered into that certain
Convertible Debenture Purchase Agreement dated as of October 11, 1996 (the
"Agreement") providing for the sale by the Company to the Purchaser of the
---------
Company's Convertible Debenture dated October 11, 1996 (the "Debenture"). All
---------
capitalized terms used, and not otherwise defined, in this Amendment shall have
the meanings set forth in the Agreement and the Debenture;
B. The Company issued the Debenture to the Purchaser on
October 11, 1996; and
C. The Company and the Purchaser desire to amend the Agreement
and the Debenture as set forth below for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged.
Accordingly, the parties hereby agree to amend and modify the
Agreement and to restate the Debenture as set forth below:
1. The last sentence of Section 2.01 of the Agreement
shall be amended to read in its entirety as follows:
"The Debenture, from and after the effectiveness of
the First Amendment to this Agreement dated as of May 30, 1997, shall
have a conversion price of $4.00 per share of Common Stock, subject to
adjustment in certain circumstances."
2. Section 5.01 of the Agreement shall be amended by
adding the following provision at the end of such section:
"(l) Change of Control. If at any time there is a
-----------------
Change of Control of the Company then the Company shall, immediately
following the occurrence of any such event, send a notice to Purchaser
offering to repurchase the Debenture (or at each Purchaser's option,
any portion thereof) at the par amount thereof, plus interest accrued
and unpaid on the Debenture to the date of such repurchase. If the
Purchaser desires to accept such offer in whole or in part, the
Purchaser must advise the Company of such acceptance within 30 days of
the date of receiving such notice. The Company shall then repurchase
the Debenture or portion thereof so tendered for repurchase by the
Purchaser by paying the purchase price to the Purchaser (or any person
or persons designated by the
<PAGE>
Purchaser in such acceptance notice), in immediately available funds,
within five days of the Company's receipt of the Purchaser's acceptance
notice. For purposes of this covenant (l), "Change of Control" shall
mean an event or series of events by which (1) Kayne Anderson ceases to
beneficially own (as beneficial ownership is defined in Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) and control, directly or indirectly, at least twenty-five
percent (25%) of the issued and outstanding shares of each class of
capital stock of the Company entitled (without regard to the occurrence
of any contingency) to vote for the election of a majority of the
members of the board of directors of the Company; (2) any person or
group (as defined in Rule 13d-1 of the Exchange Act), other than a
group which includes Kayne Anderson, who obtains beneficial ownership
(as defined in Rule 13d-3 of the Exchange Act) or control of a majority
of the securities of the Company ordinarily having the right to vote in
the election of directors; (3) during any two year period commencing on
the date hereof, individuals who at the beginning of such period
constituted the Board of Directors cease for any reason to constitute a
majority of the Board of Directors; (4) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions)
of all, or substantially all, the assets of the Company; (5) the merger
or consolidation of the Company with another corporation with the
effect that immediately after such transaction any beneficial owner of
the Company shall have become the beneficial owner of securities of the
corporation surviving such merger or consolidation representing a
majority of the combined voting power of the outstanding securities of
the surviving corporation ordinarily having the right to vote in the
election of directors; or (6) the adoption of a plan leading to the
liquidation or dissolution of the Company. For purposes of this
covenant (l), "Kayne Anderson" means Kayne Anderson Investment
Management, Inc., KAIM Non-Traditional, L.P., Kayne Anderson
Non-Traditional Investments, L.P., Kayne Anderson Offshore Limited,
ARBCO Associates, L.P., Offense Group Associates, L.P., and Opportunity
Associates, L.P. and each of their affiliates.
3. On the date hereof, the Debenture as issued shall be
cancelled and the Company shall deliver to the Purchaser a replacement debenture
identical in all respects to the Debenture, except that Section 2.1 of the
Debenture shall have been amended to read in its entirety as follows:
"2.1 Right of Conversion. Subject to and in
-------------------
compliance with the provisions of this Section 2, the Holder shall have
the right, at the Holder's option, at any time, and before the date on
which the entire principal amount hereof, all accrued and unpaid
interest hereon, and all other amounts payable to the Holder hereunder
or under the Purchase Agreement have been paid in full (the "Expiration
Date"), to convert the principal amount of this Convertible Debenture,
or any portion thereof, into the number of fully paid and nonassessable
shares of Common Stock, no par value, of the Company determined by
dividing the principal amount so converted by the purchase price per
share of $4.00, as adjusted from time to time as hereinafter provided
(the "Conversion Price").
4. The Agreement shall remain in full force and effect as
amended hereby and all parties hereto hereby ratify and affirm the Agreement as
so amended.
-2-
<PAGE>
5. Two or more duplicate originals of this Amendment may be
signed by the parties, each of which shall be an original but all of which
together shall constitute one and the same original.
6. This Amendment, the rights and obligations of the parties
hereto, and any claims or disputes relating thereto, shall be governed by and
construed in accordance with the laws of the State of Delaware (excluding the
choice of law rules thereof).
IN WITNESS WHEREOF, this Amendment is executed as of the day
and year first above written.
THE RIGHT START, INC.
By:
------------------------
Jerry R. Welch
President and Chief Executive Officer
CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P.
By: Cahill, Warnock Strategic Partners,
L.P., its general partner
By:
------------------------
David Warnock
-3-
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT TO
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
AND
CONVERTIBLE DEBENTURE
THIS FIRST AMENDMENT TO CONVERTIBLE DEBENTURE PURCHASE
AGREEMENT AND CONVERTIBLE DEBENTURE (this "Amendment") is made as of May 30,
---------
1997, between The Right Start, Inc., a California corporation (the "Company")
-------
and Strategic Associates, L.P., a Delaware limited partnership (the
"Purchaser").
---------
R E C I T A L S:
A. The Company and the Purchaser entered into that certain
Convertible Debenture Purchase Agreement dated as of October 11, 1996 (the
"Agreement") providing for the sale by the Company to the Purchaser of the
---------
Company's Convertible Debenture dated October 11, 1996 (the "Debenture"). All
---------
capitalized terms used, and not otherwise defined, in this Amendment shall have
the meanings set forth in the Agreement;
B. The Company issued the Debenture to the Purchaser on
October 11, 1996;
C. The Company and the Purchaser desire to amend the Agreement
and the Debenture as set forth below for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged.
Accordingly, the parties hereby agree to amend and modify the
Agreement and to restate the Debenture as set forth below:
1. The last sentence of Section 2.01 of the Agreement
shall be amended to read in its entirety as follows:
"The Debenture, from and after the effectiveness of
the First Amendment to this Agreement dated as of May 30, 1997, shall
have a conversion price of $4.00 per share of Common Stock, subject to
adjustment in certain circumstances."
2. Section 5.01 of the Agreement shall be amended by
adding the following provision at the end of such section:
"(l) Change of Control. If at any time there is a
-----------------
Change of Control of the Company then the Company shall, immediately
following the occurrence of any such event, send a notice to Purchaser
offering to repurchase the Debenture (or at each Purchaser's option,
any portion thereof) at the par amount thereof, plus interest accrued
and unpaid on the Debenture to the date of such repurchase. If the
Purchaser desires to accept such offer in whole or in part, the
Purchaser must advise the Company of such acceptance within 30 days of
the date of receiving such notice. The Company shall then repurchase
the Debenture or portion thereof so tendered for repurchase by the
Purchaser by paying the purchase price to the Purchaser (or any person
or persons designated by the Purchaser in such acceptance notice), in
immediately available funds, within five days of the Company's receipt
of the Purchaser's acceptance notice. For purposes of this
<PAGE>
covenant (l), "Change of Control" shall mean an event or series of
events by which (1) Kayne Anderson ceases to beneficially own (as
beneficial ownership is defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) and control,
directly or indirectly, at least twenty-five percent (25%) of the
issued and outstanding shares of each class of capital stock of the
Company entitled (without regard to the occurrence of any contingency)
to vote for the election of a majority of the members of the board of
directors of the Company; (2) any person or group (as defined in Rule
13d-1 of the Exchange Act), other than a group which includes Kayne
Anderson, who obtains beneficial ownership (as defined in Rule 13d-3 of
the Exchange Act) or control of a majority of the securities of the
Company ordinarily having the right to vote in the election of
directors; (3) during any two year period commencing on the date
hereof, individuals who at the beginning of such period constituted the
Board of Directors cease for any reason to constitute a majority of the
Board of Directors; (4) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all, or
substantially all, the assets of the Company; (5) the merger or
consolidation of the Company with another corporation with the effect
that immediately after such transaction any beneficial owner of the
Company shall have become the beneficial owner of securities of the
corporation surviving such merger or consolidation representing a
majority of the combined voting power of the outstanding securities of
the surviving corporation ordinarily having the right to vote in the
election of directors; or (6) the adoption of a plan leading to the
liquidation or dissolution of the Company. For purposes of this
covenant (l), "Kayne Anderson" means Kayne Anderson Investment
Management, Inc., KAIM Non-Traditional, L.P., Kayne Anderson
Non-Traditional Investments, L.P., Kayne Anderson Offshore Limited,
ARBCO Associates, L.P., Offense Group Associates, L.P., and Opportunity
Associates, L.P. and each of their affiliates.
3. On the date hereof, the Debenture as issued shall be
cancelled and the Company shall deliver to the Purchaser a replacement debenture
identical in all respects to the Debenture, except that Section 2.1 of the
Debenture shall have been amended to read in its entirety as follows:
"2.1 Right of Conversion. Subject to and in
-------------------
compliance with the provisions of this Section 2, the Holder shall have
the right, at the Holder's option, at any time, and before the date on
which the entire principal amount hereof, all accrued and unpaid
interest hereon, and all other amounts payable to the Holder hereunder
or under the Purchase Agreement have been paid in full (the "Expiration
Date"), to convert the principal amount of this Convertible Debenture,
or any portion thereof, into the number of fully paid and nonassessable
shares of Common Stock, no par value, of the Company determined by
dividing the principal amount so converted by the purchase price per
share of $4.00, as adjusted from time to time as hereinafter provided
(the "Conversion Price").
4. The Agreement shall remain in full force and effect as
amended hereby and all parties hereto hereby ratify and affirm the Agreement as
so amended.
-2-
<PAGE>
5. Two or more duplicate originals of this Amendment may be
signed by the parties, each of which shall be an original but all of which
together shall constitute one and the same original.
6. This Amendment, the rights and obligations of the parties
hereto, and any claims or disputes relating thereto, shall be governed by and
construed in accordance with the laws of the State of Delaware (excluding the
choice of law rules thereof).
IN WITNESS WHEREOF, this Amendment is executed as of the day
and year first above written.
THE RIGHT START, INC.
By:
-------------------------
Jerry R. Welch
President and Chief Executive Officer
STRATEGIC ASSOCIATES, L.P.
By: Cahill, Warnock & Company, LLC,
its general partner
By:
-------------------------
David Warnock
-3-
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