<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS ENDED NOVEMBER 30, 1996
--------------------------------------------------------------------
Commission File Number 0-19536
THE RIGHT START, INC.
Incorporated in California Federal Employer Identification No. 95-3971414
Address of Principal Executive Offices:
5334 Sterling Center Drive, Westlake Village, CA 91361
Telephone: (818) 707-7100
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 November 30, 1996 - 8,153,639 shares
<PAGE>
THE RIGHT START, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS
ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheet 3
Statement of Operations 4
Statement of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
<PAGE>
THE RIGHT START, INC.
BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
November 30, June 1,
1996 1996
--------------------- -----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 515,000 $ 472,000
Accounts receivable 765,000 609,000
Note receivable 219,000
Merchandise inventories 8,060,000 5,264,000
Prepaid catalog expenses 498,000 713,000
Deferred pre-opening costs, net 633,000 531,000
Other current assets 1,009,000 764,000
------------------ -----------------
Total current assets 11,699,000 8,353,000
------------------ -----------------
Noncurrent assets:
Property, plant and equipment, net 8,925,000 7,363,000
Other non-current assets 38,000 152,000
Deferred income tax benefit 1,607,000 1,607,000
------------------ -----------------
Total noncurrent assets 10,570,000 9,122,000
------------------ -----------------
$ 22,269,000 $ 17,475,000
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,402,000 $ 3,976,000
Accrued salaries and bonuses 398,000 530,000
Advance payments on orders 94,000 143,000
Note payable 774,000
------------------ -----------------
Total current liabilities 6,668,000 4,649,000
Note payable long term 2,111,000
Convertible subordinated debentures 3,000,000
Deferred rent 1,211,000 924,000
------------------ -----------------
Total long term liabilities 6,322,000 924,000
Commitments and contingencies
Shareholders' equity:
Common stock (25,000,000 authorized at no par value; 8,153,639 16,961,000 16,313,000
and 7,939,306 issued and outstanding, respectively)
Accumulated deficit (7,682,000) (4,411,000)
------------------ -----------------
Total shareholders' equity 9,279,000 11,902,000
------------------ -----------------
$ 22,269,000 $ 17,475,000
================== =================
</TABLE>
3
<PAGE>
THE RIGHT START, INC.
STATEMENT OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Thirteen weeks Twenty-six weeks
ended ended
---------------------------- ---------------------------
November 30, November 29, November 30, November 29,
1996 1995 1996 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales:
Retail $ 6,865,000 $ 3,405,000 $12,937,000 $ 6,505,000
Catalog 3,184,000 6,653,000 6,005,000 13,094,000
----------- ----------- ----------- ------------
10,049,000 10,058,000 18,942,000 19,599,000
----------- ----------- ----------- ------------
Costs and expenses:
Cost of goods sold 5,047,000 5,164,000 9,908,000 10,408,000
Operating expense 5,019,000 4,391,000 8,984,000 7,654,000
General and administrative expense 973,000 1,223,000 1,835,000 1,943,000
Pre-opening cost amortization 195,000 103,000 377,000 189,000
Depreciation and amortization expense 295,000 206,000 583,000 403,000
----------- ----------- ----------- -----------
11,529,000 11,087,000 21,687,000 20,597,000
----------- ----------- ----------- -----------
Operating loss (1,480,000) (1,029,000) (2,745,000) (998,000)
Executive severance (280,000)
Debt prepayment costs (146,000) (146,000)
Interest and other income and expense, net (77,000) 3,000 (100,000) 26,000
----------- ----------- ----------- -----------
Loss before income tax benefit (1,703,000) (1,026,000) (3,271,000) (972,000)
Income tax benefit 398,000 378,000
----------- ----------- ----------- -----------
Net loss $(1,703,000) $ (628,000) $(3,271,000) $ (594,000)
=========== =========== =========== ===========
Loss per share $ (0.21) $ (0.10) $ (0.41) $ (0.09)
=========== =========== =========== ===========
Weighted average number of shares
outstanding 7,962,943 6,307,500 7,955,960 6,307,500
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
THE RIGHT START, INC.
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Twenty-six weeks ended
----------------------------
November 30, November 29,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(3,271,000) $ (594,000)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 960,000 403,000
Change in assets and liabilities affecting
operations (Note 3) (1,823,000) (572,000)
----------- -----------
Cash used in operating activities (4,134,000) (763,000)
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment, net (2,635,000) (1,715,000)
Proceeds from sale of telemarketing operation 279,000
----------- -----------
Cash used in investing activities (2,356,000) (1,715,000)
----------- -----------
Cash flows from financing activities:
Borrowings under note payable to bank 2,885,000 993,000
Proceeds from exercise of stock options 648,000 32,000
Proceeds from subordinated debentures 3,000,000
----------- -----------
Cash provided by financing activities 6,533,000 1,025,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 43,000 (1,453,000)
Cash and equivalents at beginning of period 472,000 1,567,000
----------- -----------
Cash and equivalents at end of period $ 515,000 $ 114,000
=========== ===========
</TABLE>
5
<PAGE>
THE RIGHT START, INC.
NOTES TO 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.
There have been no changes in the Company's significant accounting policies as
set forth in the Company's financial statements for the fiscal year ended June
1, 1996. These unaudited financial statements as of November 30, 1996 and for
the thirteen and twenty-six week periods 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 and twenty-six week periods ended November
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending May 31, 1997.
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.
6
<PAGE>
NOTE 3: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
There was no interest paid for the twenty-six weeks ended November 29, 1995.
For the period ended November 30,1996 interest paid amounted to $72,000.
Changes in assets and liabilities which increased (decreased) cash and
equivalents are as follows:
<TABLE>
<CAPTION>
Thirteen weeks ended
---------------------------------
<S> <C> <C>
Nov. 30, Nov. 29,
1996 1995
------------- -------------
Accounts receivable $ (156,000) $ (172,000)
Merchandise inventories (2,796,000) (2,028,000)
Prepaid catalog expenses 215,000 357,000
Other current assets (245,000) (407,000)
Deferred pre-opening costs (479,000) (128,000)
Deferred income tax benefit (369,000)
Other non-current assets 114,000 5,000
Accounts payable and accrued expenses 1,418,000 1,718,000
Accrued salaries and bonuses (132,000) (107,000)
Advance payments on order (49,000) (74,000)
Amounts due ARC (41,000)
Income tax receivable 472,000
Other liabilities 287,000 202,000
----------- -----------
$(1,823,000) $ (572,000)
=========== ===========
</TABLE>
Non-cash investing activity:
The Company received a $248,000 note in conjunction with the sale of assets
related to its telemarketing operations.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED NOVEMBER 30, 1996 COMPARED WITH NOVEMBER 29, 1995
Net sales for the thirteen weeks ended November 30, 1996 remained
relatively flat as compared to the comparable period ended November 29, 1995.
For the quarter, retail net sales increased over 100% to $6,865,000 while
catalog net sales declined $3,469,000 or 52%. The increase in retail net sales
resulted from the increase in the number of stores open during each of the
quarters. At November 30, 1996, the Company operated 36 stores, 11 of which
were opened during that quarter, as compared to 16 stores open at November 29,
1995. 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 2% to $5,047,000 from $5,164,000, resulting
in an improved gross margin of 49.8%, compared to 48.7% last year.
Operating expense increased 14% due to an increase of 20 stores in
operation, offset by reductions in catalog production and fulfillment costs due
to a decrease in the level of catalog circulation.
General and administrative expense decreased 20% or $250,000 to $973,000
for the quarter ended November 30, 1996. Included in the general and
administrative expense for the period ended November 29, 1995 was approximately
$200,000 related to the relocation of the Company's Westlake Village warehouse
facility. The remaining decrease reflects the net effect of increased business
travel and payroll costs to support the expanding retail operations, offset by
the results of cost savings measures in corporate overhead.
Pre-opening cost amortization increased to $195,000 from $103,000 last
year, while depreciation and amortization increased to $295,000 from $206,000
due to the increase in the number of retail stores.
The Company incurred $146,000 in debt prepayment costs during the second
quarter of fiscal 1996. These costs represent the settlement of a prepayment
penalty on the Company's former line of credit facility and the write-off of
prepaid costs related thereto. The Company entered into a new line of credit
agreement effective November 14, 1996. See "Liquidity and Capital Resources."
Interest and other income and expense, net was a net expense of $77,000 for
the quarter ended November 30, 1996 as compared to income for the quarter ended
November 29, 1995 of $3,000. The increased expense reflects the interest
charges associated with the Company's increased borrowings.
The Company has recorded no tax benefit against the loss incurred for the
first quarter of fiscal 1997.
As a result of the above, the Company experienced a net loss of $1,703,000
or $.21 per share, compared to a net loss of $628,000 last year.
8
<PAGE>
TWENTY-SIX WEEKS ENDED NOVEMBER 30, 1996 COMPARED WITH NOVEMBER 29, 1995
Net sales for the first half of fiscal 1997 declined 3% to $18,942,000
from $19,599,000 for the same period last year. For the same period, retail net
sales increased 99% to $12,937,000 from $6,505,000 last year, while catalog net
sales decreased 54% to $6,005,000 from $13,094,000 last year. The increase in
retail net sales was due to an increase in the number of stores to 36 at
November 30, 1996, compared to 16 at November 29, 1995. 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 5% to $9,908,000 from $10,408,000; gross
margin improved to 47.7% compared to 46.9% last year.
Operating expense increased 17% due to an increase of 20 stores in
operation, offset by reductions in catalog production and fulfillment costs due
to a decrease in the level of catalog circulation.
General and administrative expense decreased 6% or $108,000 due to
decreases in corporate overhead offset by increases in payroll and business
travel expenses to support the expanding retail operations.
Pre-opening cost amortization increased to $377,000 from $189,000 last
year, while depreciation and amortization increased to $583,000 from $403,000
due to the increase in the number of retail stores.
Executive severance charges of $280,000 relate to the resignation of the
Company's former president. The majority of the severance charge represents the
value of a life insurance policy that was transferred in accordance with the
terms of the related employment contract.
The Company incurred $146,000 in debt prepayment costs. These costs
represent the settlement of a prepayment penalty on the Company's former line of
credit and the write-off of prepaid costs related thereto. The Company entered
into a new line of credit agreement effective November 14, 1996. See "Liquidity
and Capital Resources."
Interest and other income and expense, net was an expense of $100,000 as
compared to income of $26,000 last year due to debt incurred to finance the
Company's retail expansion.
The Company has recorded no tax benefit against the loss incurred for the
first half of fiscal 1997.
As a result of the above, the Company experienced a net loss of $3,271,000
or $.41 per share, compared to a net loss of $594,000 last year.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 1996, the Company had cash and equivalents of $515,000,
borrowings of $774,000 against its revolving line of credit, a long-term note
payable of $2,111,000, and subordinated convertible debentures of $3 million
outstanding. This compares to $472,000 of cash and equivalents with no
outstanding borrowings at June 1, 1996. During the twenty-six weeks ended
November 30, 1996, operating activities used $4,134,000 and investing activities
used $2,356,000, each of which were funded primarily by borrowings. Investing
activities are related to the capital expenditures for new stores and a new
retail computer system, net of $498,000 of assets sold in conjunction with the
sale of the Company's telemarketing operations. Of the $498,000 in proceeds
from the sale, $248,000 were in the form of a two-year note, payable monthly
through August 1998.
Effective November 14, 1996, the Company entered into an agreement with a
financial institution for a $13 million credit facility. This facility replaced
the Company's $5 million line of credit. The new $13 million facility consists
of a $3 million capital expenditure facility and a $10 million revolving credit
line for working capital. Both lines of credit are for a period of three years,
are secured by substantially all the Company's assets and require that certain
financial covenants, including minimum net worth, be maintained. The lines
provide for interest at rates based either upon the prime rate or LIBOR. At
January 6, 1997, $2.1 million was outstanding under the capital expenditure
facility and $666,000 was outstanding under the revolving line of credit.
The Company issued and sold subordinated convertible debentures in the
aggregate principal amount of $3 million effective October 11, 1996. The terms
of such debentures permit the holders of such debentures to convert the
principal amount into 500,000 shares of the Company's common stock at $6.00 per
share at any time prior to May 31, 2002, the due date of the debentures. The
debentures bear interest at 8% per annum.
The Company opened 11 new stores in fiscal 1996, 15 new stores to date in
fiscal 1997, and expects to continue to open new stores in the remainder of
fiscal 1997 and beyond. The Company expects to expend approximately $400,000
for each new store it opens and 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.
10
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
There were no Reports on Form 8-K filed during the second quarter of fiscal
1997.
The following exhibits of The Right Start, Inc. are included herein.
<TABLE>
<CAPTION>
Exhibit
Number
- ----------
<S> <C>
10.1 Convertible Debenture Purchase Agreement between The Right Start, Inc.
and Cahill Warnock Strategic Partners, L.P. dated as of October 11, 1996
10.2 Convertible Debenture Purchase Agreement between The Right Start, Inc.
and Strategic Associates, L.P. dated as of October 11, 1996
10.3 Loan and Security Agreement dated as of November 14, 1996 between
The Right Start, Inc. and Heller Financial, Inc.
27 Financial Data Schedule
</TABLE>
11
<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: January 13, 1997 /s/ JERRY WELCH
----------------------------------------
Jerry Welch
Chief Executive Officer
Date: January 13, 1997 /s/ GINA M. SHAUER
----------------------------------------
Gina M. Shauer
Chief Financial Officer
12
<PAGE>
EXHIBIT 10.1
EXECUTION COPY
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
THIS CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (the "Agreement") is
made as of October 11, 1996 between THE RIGHT START, INC., a California
corporation (the "Company"), and CAHILL WARNOCK STRATEGIC PARTNERS FUND, L.P., a
limited partnership organized under the laws of the State of Delaware (the
"Purchaser").
WHEREAS, the Company wishes to sell to Purchaser, and Purchaser wishes
to purchase from the Company, the Company's Convertible Debenture;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
ARTICLE I
AUTHORIZATION, PURCHASE AND SALE OF DEBENTURE
1.01 Authorization of the Debenture. The Company has authorized
------------------------------
the issuance and sale to Purchaser of the Company's Convertible Debenture in the
original principal amount of Two Million Eight Hundred Forty Two Thousand
Dollars ($2,842,000), which is convertible into 473,666.66 shares of the
Company's Common Stock, no par value (the "Common Stock"). Such Convertible
Debenture shall be substantially in the form set forth as Exhibit 1.01 hereto
(the "Debenture").
1.02 Authorization of the Debenture Shares. The Company has
-------------------------------------
authorized and reserved a sufficient number of shares of Common Stock for
issuance upon conversion of the Debenture. (The shares of Common Stock issuable
upon conversion of the Debenture are referred to as the "Debenture Shares.")
1.03. Purchase and Sale of Debenture.
------------------------------
(a) The Closing. The Company agrees to issue and sell to
-----------
Purchaser, and, subject to and in reliance upon the representations, warranties,
terms and conditions of this Agreement, Purchaser agrees to purchase, the
Debenture for the purchase price (the "Purchase Price") of Two Million Eight
Hundred Forty Two Thousand Dollars ($2,842,000). Such purchase and sale shall
take place at a closing (the "Closing") to be held by exchange of documents on
October 11, 1996 at 12:00 noon Eastern Time, or on such other date and at such
time as may be mutually agreed, at the offices of Milbank, Tweed, Hadley &
McCloy in Los Angeles, California. At the
<PAGE>
Closing, the Company will issue to Purchaser the Debenture. At the Closing,
Purchaser will deliver to the Company, by wire transfer of immediately available
funds to an account designated by the Company by written notice to Purchaser,
the Purchase Price.
(b) Use of Proceeds. The Company agrees to use the full
---------------
proceeds from the sale of the Debenture to pay down or retire existing
debt of the Company, for store openings and acquisitions, and for working
capital purposes.
ARTICLE II
CERTAIN TERMS OF THE DEBENTURE
2.01 Certain Terms of the Debenture. All principal, interest and any
------------------------------
other amounts outstanding under the Debenture shall be due and payable in full
on May 31, 2002. No payment of principal (except upon acceleration of maturity
pursuant to the terms of this Agreement or the Debenture) shall be required (or
permitted) prior to May 31, 2002. The Debenture shall bear interest at an
annual rate of eight percent (8.0%). Accrued and unpaid interest shall be due
and payable quarterly in arrears on February 28, May 31, August 31, and November
30 of each year until maturity. The Debenture shall not be prepaid except as
set forth in the Debenture. Payments of principal and interest on the Debenture
shall be made directly by wire transfer to an account designated by Purchaser by
written notice to the Company or by check duly mailed or delivered to Purchaser
at its address set forth in Section 8.04. The Debenture shall be convertible at
any time into 500,000 shares of Common Stock, subject to adjustment for stock
splits, combinations and similar transactions. The Debenture initially shall
have a conversion price of $6.00 per share of Common Stock, subject to
adjustment in certain circumstances.
2.02 Replacement of Debenture. Upon receipt of evidence satisfactory
------------------------
to the Company of the loss, theft, destruction or mutilation of any Debenture
and, if requested in the case of any such loss, theft or destruction, upon
delivery of an indemnity bond or other agreement or security reasonably
satisfactory to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of such Debenture, the Company will issue a new
Debenture, of like tenor and amount, in lieu of such lost, stolen, destroyed or
mutilated Debenture; provided, however, if any Debenture of which Purchaser, its
nominee, or any of its partners, officers or principals is the registered holder
is lost, stolen or destroyed, the affidavit of such principal or general partner
or any principal or corporate officer of such holder setting forth the
circumstances with respect to such loss, theft or destruction, together with an
agreement to indemnify the Company with respect thereto shall be accepted as
satisfactory evidence thereof, and no bond or other security shall be required
as a condition to the execution and delivery by the Company of a new Debenture
in replacement of such lost, stolen or destroyed Debenture.
2.03 Registration, etc. The Company shall maintain at its principal
-----------------
office a register with respect to the Debenture and shall record therein the
name(s) and address(es) of the
-2-
<PAGE>
respective registered holder(s) thereof, to which notices are to be sent and the
address(es) to which payments are to be made as designated by the registered
holder if other than the address of such holder, and the particulars of all
transfers, exchanges and replacements of the Debenture. The Company shall
record on such register any and all transfers of the Debenture by or for the
registered holder or such holder's executors or administrators or their duly
appointed attorney, in form reasonably satisfactory to the Company, in order to
maintain an accurate record of the holder(s) thereof. Each Debenture issued
hereunder, whether originally or upon transfer, exchange or replacement, shall
be registered on the date of execution thereof by the Company. The registered
holder of a Debenture issued hereunder shall be that individual, corporation,
partnership, joint venture, trust or unincorporated organization or other entity
(a "Person") in whose name the Debenture has been so registered by the Company.
A registered holder shall be deemed the owner of a Debenture for all purposes of
this Agreement and, subject to the provisions hereof, shall be entitled to all
of the benefits thereof and rights thereunder free from all equities or rights
of setoff or counterclaim between the Company and the transferor of such
registered holder or any previous registered holder of such Debenture.
ARTICLE III
CONDITIONS TO PURCHASER'S OBLIGATION
The obligation of Purchaser to purchase and pay for the Debenture at
the Closing is subject to the following conditions:
3.01 Representations and Warranties. Each of the representations and
------------------------------
warranties of the Company set forth in Article IV hereof shall have been true
and correct when made and shall be true and correct on the date of the Closing
as if made on the date of the Closing.
3.02 Registration Rights Agreement. The Company and Purchaser shall
-----------------------------
have entered into the Registration Rights Agreement substantially in the form
set forth as Exhibit 3.02 hereto.
3.03 Performance. The Company shall have performed and complied
-----------
with all covenants and agreements contained herein and received any and all
consents, approvals or waivers necessary in order to complete the transactions
required to be performed or complied with by it or prior to or at the Closing
Date.
3.04 All Proceedings to be Satisfactory. All corporate and other
----------------------------------
proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be satisfactory in
form and substance to Purchaser, and
-3-
<PAGE>
Purchaser shall have received all such counterpart originals or certified or
other copies of such documents as it reasonably may request.
3.05 Documentation at Closing. Purchaser shall have received prior
------------------------
to or at the Closing all of the following, each in form and substance
satisfactory to Purchaser:
(a) A certified copy of all charter documents of the Company; a
certified copy of the resolutions of the Board of Directors and, to the extent
required, the stockholders of the Company, evidencing approval of this
Agreement, the Debenture, and other matters contemplated hereby; a certified
copy of the By-laws of the Company; and certified copies of all documents
evidencing other necessary corporate or other action and governmental approvals,
if any, with respect to this Agreement, and the Debenture.
(b) A favorable opinion of counsel for the Company, as to
matters set forth in Exhibit 3.05(b), and as to such other matters as Purchaser
may reasonably request, all in scope, form and substance reasonably satisfactory
to Purchaser.
(c) A certificate of the Secretary or an Assistant Secretary of
the Company which shall certify the names of the officers authorized to sign
this Agreement, the Debenture and the other documents or certificates to be
delivered pursuant to this Agreement by the Company or any of its officers,
together with the true signatures of such officers. Purchaser may rely
conclusively on such certificates until it shall receive a further certificate
of the Secretary or an Assistant Secretary of the Company canceling or amending
the prior certificate and submitting the signatures of the officers named in
such further certificate.
(d) A certificate from a duly authorized officer of the Company
stating that (i) the representations and warranties contained in Article IV
hereof and otherwise made by the Company in writing in connection with the
transactions contemplated hereby were true and correct when made and are true
and correct on the date of the Closing as if made on the date of the Closing,
(ii) the Company has performed and complied with all covenants and agreements
contained herein and has received any and all consents, approvals or waivers
necessary in order to complete the transactions required to be performed or
complied with by it prior to or at the Closing Date, and (iii) no condition or
event has occurred and is continuing or will result from execution and delivery
of this Agreement or the issuance of the Debenture which constitutes an Event of
Default or would constitute an Event of Default but for the requirement that
notice be given or time lapse or both.
(e) Such other documents as Purchaser reasonably may request.
-4-
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The representations and warranties in this Article IV are made by and
shall apply to each of the Company and any corporation of which the Company
directly or indirectly owns more than fifty percent (50%) of the outstanding
shares of capital stock (a "Subsidiary") alike so that all references to the
"Company" shall be deemed to include the Company and each Subsidiary
individually or on a consolidated basis, as appropriate to the context and
import of the information provided. Any exceptions or qualifications to the
representations and warranties set forth in this Article IV are set forth in the
Schedule of Disclosures hereto which specifically refers to the section number
identifying the information to which such disclosure relates. Accordingly, the
Company represents and warrants to Purchaser as follows, intending and
acknowledging that Purchaser shall rely upon such information.
4.01 Organization and Standing of the Company. The Company is a
----------------------------------------
duly organized and validly existing corporation in good standing under the laws
of the jurisdiction in which it was organized and has all requisite corporate
power and authority for the ownership and operation of its properties and for
the carrying on of its business as now conducted and as now proposed to be
conducted. The Company is duly licensed or qualified and in good standing as a
foreign corporation authorized to do business in all jurisdictions wherein the
character of the property owned or leased or the nature of the activities
conducted by it makes such licensing or qualification necessary, except when the
failure to be so licensed or qualified would not have a material adverse effect
on the Company.
4.02 Corporate Action. The Company has all necessary corporate
----------------
power and has taken all corporate action required to authorize this Agreement,
the Debenture and any other agreements and instruments executed in connection
herewith and therewith, and each such agreement and instrument is a valid and
binding obligation of the Company, enforceable in accordance with its respective
terms, except as to rights to indemnity and contribution that may be limited by
federal or state securities laws and except as the enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and subject to general principles of equity.
Sufficient shares of authorized but unissued Common Stock of the Company have
been reserved for issuance as Debenture Shares by appropriate corporate action
in connection with the prospective conversion of the Debenture. Neither the
issuance of the Debenture nor the issuance of Debenture Shares upon the
conversion of the Debenture, is subject to preemptive or other similar statutory
or contractual rights of any Person, and will not conflict with any provisions
of any agreement or instrument to which the Company is a party or by which it is
bound.
4.03 Governmental Approvals. No authorization, consent, approval,
----------------------
license, exemption filing or registration with any court or governmental
department, commission, board,
-5-
<PAGE>
bureau, agency or instrumentality, domestic or foreign, is or will be necessary
for, or in connection with, the offer, issuance, sale, execution or delivery by
the Company of, or for the performance by it of its obligations under, this
Agreement, the Debenture or any other agreement or instrument executed in
connection herewith or therewith other than the filing of a Form D with the
Securities and Exchange Commission and a Form 25102(f) with the California
Department of Corporations and filings that may be required pursuant to the
Registration Rights Agreement.
4.04 Litigation. There is no litigation or governmental proceeding
----------
or investigation pending or, to the best of the knowledge of the Company,
threatened (a) by or against the Company, or (b) against any officer, key
employee or principal stockholder of the Company where such litigation,
proceeding or investigation, either individually or in the aggregate, could
reasonably be expected to have a material adverse effect on the Company, nor, to
the best of the knowledge of the Company, has there occurred any event or does
there exist any condition on the basis of which any such litigation, proceeding
or investigation might properly be instituted. Neither the Company, nor, to the
best knowledge of the Company, any officer or key employee of the Company, is in
default with respect to any material order, writ, injunction, decree, ruling or
decision of any court, commission, board or other government agency affecting
the Company. There are no actions or proceedings pending or threatened (or any
basis therefor known to the Company) which could reasonably be expected to
result, either in any case or in the aggregate, in any material adverse change
in the business, operations, affairs or condition of the Company or in any of
its properties or assets, or which might call into question the validity of this
Agreement, the Debenture or any other agreement or instrument executed in
connection herewith or therewith, or any action taken or to be taken pursuant
hereto or thereto.
4.05 Compliance. The Company is in compliance in all material
----------
respects with the terms and provisions of this Agreement, its charter and by-
laws, all mortgages, indentures, leases, agreements and other instruments and of
all judgments, decrees, governmental orders, statutes, rules and regulations by
which it is bound or to which its properties or assets are subject. There is no
term or provision in any of the foregoing documents and instruments which
materially adversely affects the business, assets or financial condition of the
Company. Neither the execution and delivery of this Agreement, the Debenture or
any other agreement or instrument executed in connection herewith or therewith,
nor the consummation of any transactions contemplated hereby or thereby has
constituted or resulted in or will constitute or result in a default or
violation of any term or provision in any of the foregoing documents or
instruments.
4.06 Federal Reserve Regulations. The Company is not engaged in the
---------------------------
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation G of the Board of Governors of the
Federal Reserve System), and no part of the proceeds of the Debenture will be
used to purchase or carry any margin security or to
-6-
<PAGE>
extend credit to others for the purpose of purchasing or carrying any margin
security or in any other manner which would involve a violation of any of the
regulations of the Board of Governors of the Federal Reserve System.
4.07 Title to Assets, Patents. The Company has good and clear
------------------------
record and marketable title in fee to such of its fixed assets as are real
property, and good and merchantable title to all of its other assets, now
carried on its books including those reflected in the most recent balance sheet
of the Company which forms a part of Exhibit 4.08 attached hereto, or acquired
since the date of such balance sheet (except personal property disposed of since
said date in the ordinary course of business and personal property that is not
material to the business of the Company) free of any mortgages, pledges,
charges, claims, liens, security interests or other encumbrances; provided that
substantially all of the Company's assets are subject to the lien of the
Company's senior secured lender. The Company enjoys peaceful and undisturbed
possession under all leases under which it is the lessee, and all said leases
are valid and subsisting and in full force and effect. The Company owns or has a
valid right to use the patents, patent rights, licenses, permits, trade secrets,
trademarks, trade names, franchises, copyrights, inventions and intellectual
property rights (collectively, "Intellectual Property Rights") being used to
conduct its business as now operated and as now proposed to be operated; and the
conduct of its business as now operated and as now proposed to be operated does
not and will not conflict with Intellectual Property Rights of others. The
Company has no obligation to compensate any Person for the use of any
Intellectual Property Rights nor has the Company granted to any Person any
license or right to use any Intellectual Property Rights of the Company other
than the obligation of the Company to Ann Geddes pursuant to agreements dated
November 9, 1995 and March 20, 1996.
4.08 Financial Information. Attached as Exhibit 4.08 are (a) the
---------------------
Company's consolidated balance sheets as of May 31, 1996 and May 31, 1995, and
statements of income for the fiscal years then ended, together with the report
thereon of Price Waterhouse, L.L.P. and (b) the Company's unaudited consolidated
balance sheet as of August 31, 1996 and statement of income for the three-month
period ended August 31, 1996 (collectively, the "Financial Statements"). The
Financial Statements have been prepared in accordance with generally accepted
accounting principles consistently applied and present fairly the financial
condition and results of operations of the Company as of the dates and for the
periods indicated, subject, in the case of the unaudited Financial Statements,
to normal year-end adjustments, which in the aggregate are not material. The
Company has no liability, contingent or otherwise, not disclosed in the
Financial Statements or in the notes thereto that could, together with all such
other liabilities, materially affect the financial condition of the Company, nor
does the Company have any reasonable grounds to know of any such liability.
4.09 Subsequent Events or Changes. Since May 31, 1996, (a) there
----------------------------
has been no adverse change in the business, assets or condition, financial or
otherwise, operations or prospects, of the Company; (b) neither the business,
condition, operations or prospects of the Company or any of its properties or
assets has been adversely affected as a result of any
-7-
<PAGE>
legislative or regulatory change, any revocation or change in any franchise,
license or right to do business, or any other event or occurrence, whether or
not insured against; and (c) the Company has not entered into any material
transaction or made any distribution with respect to its capital stock.
4.10 Taxes. The Company has accurately prepared and timely filed all
-----
material federal, state and other tax returns required by law to be filed by it,
and has paid or made provision for the payment of all material taxes that are
due and payable. The Company knows of no additional assessments or adjustments
pending or threatened against the Company for any period, nor of any basis for
any such assessment or adjustment.
4.11 ERISA.
-----
(a) Neither the Company nor any Related Person (as defined
below) has breached the fiduciary rules of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or engaged in any transaction in
connection with which the Company or any Related Person could be subjected to a
suit for damages, a civil penalty assessed pursuant to Section 502(i) of ERISA
or a tax imposed by Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), in any such case which would be materially adverse to the
Company. For purposes of this Section 4.11, a "Related Person" shall mean any
trade or business, whether or not incorporated, which, together with the
Company, would be treated as a single employer under Section 414 of the Code.
(b) Neither any employee pension benefit plan (as defined in
Section 3(2) of ERISA) which is or has been established or maintained, or to
which contributions are or have been made, by the Company or any Related Person
or with respect to which the Company or any Related Person is or has been
obligated to contribute (a "Plan") nor any trust created under any Plan has been
terminated within the meaning of Title IV of ERISA since September 2, 1974 under
circumstances that could result in liability which could be materially adverse
to the Company. Other than premiums due and owing in the normal course, no
liability to the Pension Benefit Guaranty Corporation (the "PBGC") has been
incurred and remains unsatisfied or is expected by the Company to be incurred
with respect to any Plan by the Company or any Related Person which is or would
be materially adverse to the Company. There has been no reportable event (within
the meaning of Section 4043(b) of ERISA) or any other event or condition with
respect to any Plan which presents a risk of termination of any such Plan by the
PBGC under circumstances which in any case could result in liability which would
be materially adverse to the Company.
(c) Neither the Company nor any Related Person has within the
past six years contributed, or had any obligation to contribute, to a single
employer plan that has at least two contributing sponsors not under common
control or has ceased operations at a facility under circumstances which could
result in liability under Section 4068(f) of ERISA.
-8-
<PAGE>
(d) There is no multiemployer plan (within the meaning of
Section 4001(a)(3) of ERISA) to which the Company or any Related Person is or
has ever been obligated to contribute under Title IV of ERISA.
(e) No accumulated funding deficiency (as defined in Section 302
of ERISA and Section 412 of the Code), whether or not waived, exists with
respect to any Plan. Full payment has been made within the time required under
Section 412 of the Code of all amounts that the Company or any of its Related
Persons is required under the terms of each Plan and applicable law to have paid
as contributions to such Plan as of the date hereof. Each Plan satisfies the
minimum funding standard of Section 412 of the Code.
(f) The present value of the benefit liabilities (within the
meaning of Title IV of ERISA) under all Plans determined as of May 31, 1996 and
on the basis of PBGC assumptions required under Title IV of ERISA did not exceed
the current value of the assets of all such Plans determined as of such date.
(g) Neither the Company nor any Related Person has engaged in
any transaction that could result in the incurrence of any liabilities under
Section 4069 or Section 4212 of ERISA.
(h) The Company is not a party in interest with respect to any
employee benefit plan, except for The Right Start, Inc. Employee Stock Purchase
Plan and securities of the Company are not employer securities with respect to
any employee benefit plan other than the above listed plans. For such purpose,
the term "employee benefit plan" shall have the meaning assigned to such term in
Section 3 of ERISA and the term "employer security" shall have the meaning
assigned to such term in Section 407(d)(1) of ERISA. The execution and delivery
of this Agreement, the Debenture and any other agreements or instruments
executed in connection herewith and therewith will not involve any transaction
which is subject to the prohibitions of Section 406 of ERISA or in connection
with which a tax could be imposed pursuant to Section 4975 of the Code.
4.12 Transactions with Affiliates. There are no loans, leases,
----------------------------
royalty agreements or other continuing transactions between the Company and any
Person owning five percent (5%) or more of any class of capital stock of the
Company or any other entity controlled by such stockholder or any member of such
stockholder's family other than certain management, consulting and advisory
services provided to the Company by Kayne Anderson Investment Management, Inc.
for which it is entitled to receive a fee of $100,000 per year.
4.13 Assumptions or Guaranties of Indebtedness of Other Persons.
----------------------------------------------------------
The Company has not assumed, guaranteed, endorsed or otherwise become directly
or contingently liable (including, without limitation, liability by way of
agreement, contingent or otherwise, to
-9-
<PAGE>
purchase, to provide funds for payment, to supply funds to or otherwise invest
in the debtor or otherwise to assure the creditor against loss) on any
indebtedness of any other Person.
4.14 Investments in Other Persons. The Company has not made any
----------------------------
loan or advance to any Person which is outstanding on the date of this
Agreement, nor is the Company obligated or committed to make any such loan or
advance, nor does the Company own any capital stock or assets comprising the
business of, obligations of, or any interest in, any Person other than a loan in
the amount of $248,255 in connection with the sale of certain assets to Blasiar,
Inc. in July 1996.
4.15 Environmental Compliance. The Company has obtained and is in
------------------------
compliance with all permits, licenses, and other authorizations that are
required under all Environmental Laws (as hereinafter defined), including laws
relating to emissions, discharges, releases or threatened releases of
contaminants into the environment (including, without limitation, ambient air,
surface water, ground water or land) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of contaminants, except to the extent that failure to have any such
permit, license or other authorization does not have a material adverse effect
on the business, condition (financial or other), assets, properties, operations
or prospects of the Company. The term "Environmental Laws" shall mean any and
all federal, state, local and foreign statutes, laws, regulations, ordinances,
rules, judgments, orders, decrees, permits, concessions, grants, franchises,
licenses, agreement or governmental restrictions relating to the environment or
the release of any materials into the environment, including but not limited to
those relating to hazardous substances or wastes, air emissions and discharges
to waste or public systems.
4.16 Securities Act. Neither the Company nor anyone acting on its
--------------
behalf has offered any of the Debenture or the Debenture Shares or similar
securities, or solicited any offers to purchase, or made any attempt by
preliminary conversation or negotiations to dispose of, the Debenture or the
Debenture Shares or similar securities, to any person other than Purchaser.
Neither the Company nor anyone acting on its behalf has offered or will offer to
sell the Debenture or the Debenture Shares or similar securities to, or solicit
offers with respect thereto from, or enter into any preliminary conversations or
negotiations relating hereto with, any Person, so as to bring the offer, sale or
issuance of the Debenture or the Debenture Shares to Purchaser within the
registration provisions of the Securities Act of 1933, as amended (the
"Securities Act").
4.17 Disclosure. The Company has provided to Purchaser copies of
----------
the Financial Statements and copies of its Annual Report on Form 10K for the
fiscal year ended May 31, 1996, its Annual Report to Shareholders for the fiscal
year ended May 31, 1996 and its Report on Form 10Q for the three months ended
August 31, 1996 (collectively, the "Disclosure Documents"). Neither this
Agreement, the Financial Statements, the Disclosure Documents nor any other
agreement, document, certificate or written statement furnished to Purchaser by
or on
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<PAGE>
behalf of the Company in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein not
misleading. There is no fact within the knowledge of the Company or any of its
executive officers which has not been disclosed herein or in the Disclosure
Documents or in writing by them to Purchaser and which materially adversely
affects, or in the future in their opinion may, insofar as they can now
reasonably foresee, materially adversely affect, the business, properties,
assets, operations, prospects or condition, financial or otherwise, of the
Company.
4.18 No Brokers or Finders. No Person has or will have, as result of
---------------------
the transactions contemplated by this Agreement, any right, interest or valid
claim against or upon the Company or the Purchaser for any commission, fee or
other compensation as a finder or broker because of any act or omission by the
Company or any agent of the Company.
4.19 Agreements of Officers. To the best of the knowledge of the
----------------------
Company, no officer or key employee of the Company is a party to or bound by any
agreement, contract or commitment, or subject to any restrictions, particularly
but without limitation in connection with any previous employment of any such
person, which materially and adversely affects, or in the future may (insofar as
it can now reasonably foresee) materially and adversely affect, the business or
operations of the Company or the right of any such person to participate in the
affairs of the Company. To the best of the knowledge of the Company, no officer
or key employee has any present intention of terminating his employment with the
Company and the Company has no present intention of terminating any such
employment.
4.20 Capitalization; Status of Capital Stock. The Company has a
---------------------------------------
total authorized capitalization consisting of 25,000,000 shares of Common Stock,
of which 7,949,306 shares are issued and outstanding. All the outstanding
shares of capital stock of the Company have been duly authorized, are validly
issued and are fully paid and nonassessable. The shares of Common Stock
issuable as Debenture Shares upon conversion of the Debenture, when so issued,
will be duly authorized, validly issued and fully paid and nonassessable. Except
as set forth in the Disclosure Documents, there are no options, warrants or
rights to purchase shares of capital stock or other securities of the Company
authorized, issued or outstanding, nor is the Company obligated in any other
manner to issue shares of its capital stock or other securities. There are no
restrictions on the transfer of shares of capital stock of the Company other
than those imposed by relevant state and federal securities laws. No holder of
any security of the Company is entitled to preemptive or similar statutory or
contractual rights, either arising pursuant to any agreement or instrument to
which the Company is a party, or which are otherwise binding upon the Company.
The issuance of the Debenture or the Debenture Shares will not result in an
adjustment under the antidilution or exercise rights of any holders of any
outstanding shares of capital stock options, warrants or other rights to acquire
any securities of the Company. The offer and sale of all shares of capital
stock and other securities of the
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<PAGE>
Company issued before the Closing complied with or were exempt from all
federal and state securities laws.
4.21 Labor Relations. To the best of the knowledge of the Company,
---------------
no labor union or any representative thereof has made any attempt to organize or
represent employees of the Company, during the past two years. There are no
unfair labor practice charges, pending trials with respect to unfair labor
practice charges, pending material grievance proceedings or adverse decisions of
a Trial Examiner of the National Labor Relations Board against the Company. To
the best of the knowledge of the Company, relations with employees of the
Company are good and there is no reason to believe that any labor difficulties
will arise in the foreseeable future.
4.22 Insurance. The Company carries insurance covering its
---------
properties and business adequate and customary for the type and scope of the
properties and business. The Company's present insurance coverage is as set
forth on the Schedule of Disclosures.
4.23 Books and Records. The books of account, ledgers, order books,
-----------------
records and documents of the Company accurately and completely reflect all
material information relating to the business of the Company, the nature,
acquisition, maintenance, location and collection of the assets of the Company,
and the nature of all transactions giving rise to the obligations or accounts
receivable of the Company.
4.24 U.S. Real Property Holding Corporation. The Company is not now
--------------------------------------
and has not been a "United States real property holding corporation" as defined
in Section 897(c)(2) of the U.S. Internal Revenue Code of 1986, as amended (the
"Code"), and Section 1.897-2(b) of the Regulations thereunder.
4.25 Registration Rights. Except as granted to Purchaser in
-------------------
connection with the transactions contemplated by this Agreement, no Person has
any right to cause the Company to file any registration statement under the
Securities Act relating to any securities of the Company or any right to have
any securities of the Company in any such registration statement.
ARTICLE V
COVENANTS OF THE COMPANY
5.01 General Covenants of the Company. Without limiting any other
--------------------------------
covenants and provisions hereof, the Company covenants and agrees that, as long
as any of the Debenture or the Debenture Shares are outstanding, it will perform
and observe the following covenants and provisions and will cause each
Subsidiary to perform and observe such of the following covenants and provisions
as are applicable to such Subsidiary:
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<PAGE>
(a) Punctual Payment. The Company shall pay the principal of
----------------
and interest on the Debenture at the times and place and in the manner provided
in the Debenture and herein.
(b) Payment of Taxes and Trade Debt. The Company shall pay and
-------------------------------
discharge, and cause each Subsidiary to pay and discharge, all material taxes,
assessments and governmental charges or levies imposed on it or upon its income
or profits or business, or upon any properties belonging to it, prior to the
date on which penalties attach thereto, and all lawful claims which, if unpaid,
might become a lien or charge upon any properties of the Company or any
Subsidiary, provided that neither the Company nor the Subsidiary shall be
required to pay any such tax, assessment, charge, levy or claim which is being
contested in good faith and by appropriate proceedings if the Company or
Subsidiary concerned shall have set aside on its books adequate reserves with
respect thereto. The Company shall pay and cause each Subsidiary to pay, when
due, or in conformity with customary trade terms, all material lease
obligations, all material trade debt, and all other material indebtedness
incident to the operations of the Company or its Subsidiaries, except such as
are being contested in good with and by appropriate proceedings if the Company
or Subsidiary concerned shall have set aside on its books adequate reserves with
respect thereto.
(c) Maintenance of Insurance. The Company shall maintain, and
------------------------
cause each Subsidiary to maintain, insurance with responsible and reputable
insurance companies or associations in such amounts and covering such risks as
is usually carried by companies engaged in similar businesses and owning similar
properties in the same general areas in which the Company or such subsidiary
operates.
(d) Preservation of Corporate Existence. The Company shall
-----------------------------------
preserve and maintain, and cause each Subsidiary to preserve and maintain, its
corporate existence, rights, franchises and privileges in the jurisdiction of
its incorporation, and qualify and remain qualified, and cause each Subsidiary
to qualify and remain qualified, as a foreign corporation in each jurisdiction
in which such qualification is necessary or desirable in view of its business
and operations or the ownership of its properties. The Company shall preserve
and maintain, and cause each Subsidiary to preserve and maintain, all licenses
and other rights to use patents, processes, licenses, trademarks, trade names,
inventions, intellectual property rights or copyrights owned or used by and
necessary to the conduct of its business; provided, however, that the Company
shall not be required to preserve any such license or right if the Board of
Directors shall determine that the preservation is no longer desirable in the
conduct of the Company's business and that the loss thereof is not, and will not
be, adverse in any material respect to the registered holder of the Debenture.
(e) Compliance with Laws. The Company shall comply, and cause
--------------------
each Subsidiary to comply, with all applicable laws, rules, regulations and
orders of any governmental authority, noncompliance with which could materially
adversely affect its business or condition, financial or otherwise.
-13-
<PAGE>
(f) Access to Information. In the Event of a Default (as
---------------------
defined in Section 6.01 below), the Company shall permit Purchaser or any
representatives thereof, at any reasonable time and from time to time, to
receive, to examine and make copies of and extract from the records and books of
account of (including, but not limited to unaudited balance sheets of the
Company as at the end of each month and unaudited statements of income and of
cash flows of the Company for each month and for the current fiscal year to the
end of each month, setting forth in comparative form the Company's projected
financial statements for the corresponding periods for the current fiscal year,
all in reasonable detail and duly certified by the chief financial officer of
the Company as having been prepared in accordance with generally accepted
accounting principles consistently applied), and visit and inspect the
properties of, the Company and any Subsidiary, and to discuss the affairs,
finances and accounts of the Company and any Subsidiary with any of their
officers or directors and independent accountants.
(g) Keeping of Records and Books of Account. The Company shall
---------------------------------------
keep, and cause each Subsidiary to keep, adequate records and books of account,
in which complete entries shall be made in accordance with generally accepted
accounting principles consistently applied, reflecting all financial
transactions of the Company and such Subsidiary, and in which, for each fiscal
year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
(h) Maintenance of Properties, etc. The Company shall maintain
------------------------------
and preserve, and cause each Subsidiary to maintain and preserve, all of its
properties, necessary or useful in the proper conduct of its business, in good
repair, working order and condition, ordinary wear and tear excepted.
(i) Compliance with ERISA. The Company shall comply, and cause
---------------------
each Subsidiary to comply, with the provisions of ERISA and the Code, and the
rules and regulations thereunder, which are applicable to any Plan. Neither the
Company nor any Subsidiary shall permit any event or condition to exist which
could permit any such plan to be terminated under circumstances which would
cause the lien provided for in Section 4068 of ERISA to attach to the assets of
the Company or any Subsidiary.
(j) Dealings with Affiliates. The Company will not enter or
------------------------
permit any Subsidiary to enter into any transaction with any holder of five
percent (5%) or more of any class of capital stock of the Company, or any member
of their families or any corporation or other entity in which any one or more of
such stockholders or members of their immediate families directly or indirectly
holds five percent (5%) or more of any class of capital stock except in the
ordinary course of business and on terms not less favorable to the Company or
the Subsidiary than it would obtain in a transaction between unrelated parties.
(k) SEC Reports. The Company shall file all reports and other
-----------
information and documents which it is required to file with the Securities and
Exchange Commission
-14-
<PAGE>
("SEC") pursuant to Section 13 or 15(d) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act"). The Company will cause any quarterly and
annual reports, proxy statements and any other documents which it mails to its
stockholders to be mailed to the registered holder of the Debenture.
If the Company is not subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act, the Company will prepare, for the first three
quarters of each fiscal year, quarterly financial statements substantially
equivalent to the financial statements required to be included in a report on
Form 10-Q under the Exchange Act. The Company will also prepare, on an annual
basis, complete audited consolidated financial statements, including, but not
limited to, a balance sheet, a statement of income and retained earnings, a
statement of changes in financial position and all appropriate notes. All such
financial statements will be prepared in accordance with generally accepted
accounting principles consistently applied, except for changes with which the
Company's independent accountants concur, and except that quarterly statements
may be subject to year-end adjustments. The Company will cause a copy of such
financial statements to be mailed to the registered holder of the Debenture as
soon as available within forty-five (45) days after the close of each of the
first three quarters of each fiscal year and within ninety (90) days after the
close of each fiscal year.
A holder of the Debenture and prospective purchasers designated by
such holder will have the right to obtain from the Company upon request by such
holder or prospective purchasers, during any period in which the Company is not
subject to Section 13 or 15(d) of the Exchange Act, the information required by
paragraph d (4)(i) of Rule 144A under the Securities Act.
ARTICLE VI
EVENTS OF DEFAULT
6.01 Events of Default. For so long as any indebtedness under the
-----------------
Debenture shall be outstanding, the following events shall constitute an event
of default hereunder ("Events of Default").
(a) The Company shall fail to pay any installment of principal
of or interest on the Debenture when due and any such failure shall not be cured
by full performance thereof within ten (10) days after written notice thereof
shall have been given to the Company by any registered holder of the Debenture;
or
(b) The Company shall default in the performance of any covenant
contained in Article V and any such failure shall not be cured by full
performance thereof within
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<PAGE>
ten (10) days after written notice thereof shall have been given to the Company
by any registered holder of the Debenture; or
(c) Any representation or warranty made by the Company or any
Subsidiary in this Agreement or by the Company or any Subsidiary (or any
officers of the Company or any Subsidiary) in any certificate, instrument or
written statement contemplated by or made or delivered pursuant to or in
connection with this Agreement, shall prove to have been incorrect when made in
any material respect; or
(d) The Company or any Subsidiary shall fail to perform or
observe any other term, covenant or agreement contained in this Agreement, or
the Debenture on its part to be performed or observed and any such failure shall
not be cured or by full performance thereof within ten (10) days after written
notice thereof shall have been given to the Company by any registered holder of
the Debenture; or
(e) The Company or any Subsidiary shall (i) admit in writing its
inability to pay its debts generally as they become due; (ii) commence a
voluntary case under Title 11 of the United States Code as from time to time in
effect, or authorize, by appropriate proceedings of its Board of Directors or
other governing body, the commencement of such a voluntary case; (iii) file an
answer or other pleading omitting or failing to deny the material allegations of
a petition filed against it commencing an involuntary case under such Title 11,
or seek, consent to or acquiesce in the relief therein provided, or fail to
controvert timely the material allegations of any such petition; (iv) suffer the
entry an order for relief in any involuntary case commenced under said Title 11;
(v) seek relief as a debtor under any applicable law, other than said Title 11,
of any jurisdiction relating to the liquidation or reorganization of debtors or
to the modification or alteration of the rights of creditors, or consent to or
acquiesce in such relief; (vi) suffer the entry of an order by a court of
competent jurisdiction (A) finding it to be bankrupt or insolvent, (B) ordering
or approving its liquidation, reorganization or any modification or alteration
of the rights of its creditors, or (C) assuming custody of, or appointing a
receiver or other custodian for, all or a substantial part of its property; or
(vii) make an assignment for the benefit of, or enter into a composition with,
its creditors, or appoint or consent to the appointment of a receiver or other
custodian or all or a substantial part of its property; or
(f) Any judgment, writ, warrant of attachment or execution or
similar process shall be issued or levied against the property of the Company or
any Subsidiary in an aggregate amount which exceeds $2,500,000 and such
judgment, writ, or similar process shall not be released, vacated or fully
bonded or stayed pending appeal within sixty (60) days after its issue or levy.
Upon the occurrence of any Event of Default, and in any such event, Purchaser or
any other holder of any Debenture may, by notice to the Company, declare the
entire unpaid principal
-16-
<PAGE>
amount of such Debenture, all interest accrued and unpaid thereon and all other
amounts payable to such holder under such Debenture or this Agreement to be
forthwith due and payable, whereupon such Debenture, all such accrued interest
and all such amounts shall become and be forthwith due and payable (unless there
shall have occurred an Event of Default under Section 6.01(e) in which case all
such accounts shall automatically become due and payable without such
declaration), without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by the Company with respect to
itself and its Subsidiaries.
6.02 Annulment of Defaults. Section 6.01 is subject to the
---------------------
condition that, if at any time after the principal of any Debenture shall have
become due and payable, and before any judgment or decree for the payment of the
moneys so due shall have been entered, all arrears of interest upon such
Debenture and all other sums payable to the holder of such Debenture under or
such Debenture and under this Agreement (except the principal amount which by
such declaration shall have become payable) shall have been duly paid, and every
other default and Event of Default shall have been made good or cured, then and
in every such case the holder of such Debenture, by written instrument filed
with the Company, may rescind and annul such declaration and its consequences;
but no such rescission or annulment shall extend to or affect any other or
subsequent default or Event of Default or impair any right of the holders of any
other Debenture consequent thereon.
ARTICLE VII
CERTAIN SECURITIES LAW MATTERS
7.01 Representations by Purchaser. Purchaser represents and
----------------------------
warrants to the Company that:
(a) Purchaser is an "accredited investor" within the meaning of
Rule 501 under the Securities Act and was not organized for the specific purpose
of acquiring the Debenture or the Debenture Shares.
(b) Purchaser has sufficient knowledge and experience in
investing in companies similar to the Company in terms of the Company's stage of
development so as to be able to evaluate the risks and merits of investment in
the Company, and it is able financially to bear the risks thereof.
(c) Purchaser has had an opportunity to discuss the Company's
business, management and financial affairs with the Company's management.
(d) The Debenture is being acquired for Purchaser's own account
for the purpose of investment and not with a present view to or for sale in
connection with any
-17-
<PAGE>
distribution thereof, subject to the condition that the disposition of the
property of Purchaser shall be at all times within its control.
(e) Purchaser understands that (i) the Debenture and the
Debenture Shares are being issued in a transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof or Rule 505
or 506 promulgated under the Securities Act, (ii) the Debenture, and the
Debenture Shares must be held indefinitely unless a subsequent disposition
thereof is registered under the Securities Act or an exemption from registration
is available under applicable securities laws then in effect, and (iii) the
Debenture and the Debenture Shares will bear a legend to such effect and the
Company will make a notation on its transfer books to such effect.
7.02 Restrictions on Transfer. The Debenture and the Debenture
------------------------
Shares (collectively the "Restricted Securities") shall be transferable only
upon satisfaction of the applicable conditions specified in this Section 7.02 or
if sold in a Public Sale (as hereinafter defined) or pursuant to an exemption
from the registration requirements of the Securities Act.
(a) Restrictive Legend. Except as otherwise provided in
------------------
Section 7.02(c), each certificate representing the Restricted Securities shall
bear a legend in substantially the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under the
securities laws of any state, and may not be sold, or otherwise
transferred, in the absence of such registration or an exemption
therefrom under such Act and under any such applicable state laws."
Each certificate representing such Restricted Securities shall bear the
restrictive legend set forth above, in each case unless the restrictions on
transfer provided for in this Section 7.02 shall have ceased and terminated as
to such Restricted Securities or unless the Restricted Securities shall be
eligible for resale pursuant to Rule 144(k) under the Securities Act.
(b) Notice and Opinion for Transfer. Prior to any transfer of
-------------------------------
the Restricted Securities other than pursuant to an effective registration
statement under the Securities Act (a "Public Sale"), the holder thereof will
give written notice to the Company of such holder's intention to effect such
transfer, describing in reasonable detail the manner of the proposed transfer.
If any such holder delivers to the Company an opinion of counsel in form and
substance reasonably acceptable to the Company to the effect that the proposed
transfer may be effected without registration of such Restricted Securities
under the Securities Act or applicable state securities laws or, in lieu of an
opinion, written evidence from the holder on which the
-18-
<PAGE>
Company shall rely to the effect that the conditions of Rule 144(k) under the
Securities Act are satisfied with respect to the proposed transfer such holder
thereupon shall be entitled to transfer such Restricted Securities in accordance
with the terms of this Agreement and the notice delivered by such holder to the
Company. Notwithstanding the foregoing, no registration or opinion of counsel
shall be required for a transfer of Restricted Securities by any holder which is
a partnership to a partner or retired partner thereof, or to the estate of any
such partner or retired partner, if the transferee agrees in writing to be
subject to the terms of this Section 7.02 to the same extent as if he were an
original holder hereunder and if such transfer is made by way of distribution
pursuant to the terms of the applicable partnership agreement and without the
receipt of consideration therefor.
(c) Termination of Restrictions. The restrictions imposed by
---------------------------
this Section 7.02 upon the transferability of the Restricted Securities shall
cease and terminate as to any particular Restricted Securities and any
securities issued in exchange therefor or upon transfer thereof when, in the
opinion of counsel reasonably acceptable to the Company, such restrictions are
no longer required in order to assure compliance with the Securities Act.
Whenever any of such restrictions shall cease and terminate as to any Restricted
Securities, the holder thereof shall be entitled to receive from the Company,
without expense, new certificates not bearing the legend set forth in Section
7.02(a).
ARTICLE VIII
MISCELLANEOUS
8.01 Indemnification. The Company hereby agrees to indemnify,
---------------
exonerate and hold Purchaser and each of its partners, and their stockholders,
officers, directors, employees and agents free and harmless from and against any
and all actions, causes of action, suits, litigation, losses, liabilities and
damages, investigations or proceedings instituted by any governmental agency or
any other Person, and expenses in connection therewith, including without
limitation reasonable attorneys' fees and disbursements, incurred by the
indemnitee or any of them as a result of, or arising out of, or relating to (a)
any transaction financed or to be financed in whole or in part directly or
indirectly with proceeds from the sale by the company of any securities
hereunder, or (b) the execution, delivery, performance or enforcement of this
Agreement or any instrument contemplated hereby by any of the indemnitees,
except in each such case to the extent any such indemnified liabilities arise on
account of such indemnitee's gross negligence, willful misconduct or bad faith.
8.02 No Waiver; Cumulative Remedies. No failure or delay on the
------------------------------
part of Purchaser, or any other holder of Debenture in exercising any right,
power or remedy hereunder or thereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right, power or remedy preclude
any other or further exercise thereof or the exercise of any
-19-
<PAGE>
other right, power or remedy hereunder or thereunder. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
8.03 Amendments, Waiver and Consents. No amendment, modification or
-------------------------------
addition to this Agreement, and no waiver of or consent to noncompliance with
any covenant or other provision of this Agreement, or the Debenture shall be
effective unless in writing and duly executed by the party against whom
enforcement of such amendment, modification, addition, waiver or consent is
sought. Any waiver or consent may be given subject to satisfaction of conditions
stated therein and any waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
8.04 Notices. All notices, demands, requests, or other
-------
communications which may be or are required to be given, served, or sent by any
party to any other party pursuant to this Agreement shall be in writing and
shall be mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery (including delivery
by courier), telegram, telex, or facsimile transmission, addressed as follows:
(a) If to the Company:
The Right Start, Inc.
5334 Sterling Center Drive
Westlake Village, California 91361
Attention: President
Facsimile:
with a copy (which shall not constitute notice) to:
Milbank, Tweed, Hadley & McCloy
601 S. Figueroa, 30th Floor
Los Angeles, CA 90017
Attention: Kenneth J. Baronsky, Esq.
Facsimile: (213) 629-5063
(b) If to Purchaser:
Cahill Warnock Strategic Partners Fund, L.P.
10 North Calvert Street, Suite 735
Baltimore, Maryland 21202
Attention: Mr. David L. Warnock
Facsimile: 410/347-2963
-20-
<PAGE>
with a copy (which shall not constitute notice) to:
George P. Stamas, Esq.
Wilmer, Cutler & Pickering
100 Light Street
Baltimore, Maryland 21202
Facsimile: 410/986-2828
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a telex) the answerback being deemed conclusive
(but not exclusive) evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
8.05 Costs and Expenses. The Company and Purchaser each agree to
------------------
pay all their own costs and expenses in connection with the preparation,
execution and delivery of this Agreement, the Debenture and other instruments
and documents to be delivered hereunder.
8.06 Binding Effect; Assignment. This Agreement shall be binding
--------------------------
upon and inure to the benefit of the Company and Purchaser and their respective
successors and assigns, except that the Company shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of Purchaser.
8.07 Survival of Representations and Warranties. All
------------------------------------------
representations and warranties made in this Agreement, the Debenture or any
other instrument or document delivered in connection herewith or therewith,
shall survive the execution and delivery hereof or thereof and the making of the
loan as evidenced by the Debenture.
8.08 Prior Agreements. This Agreement constitutes the entire
----------------
agreement between the parties and supersedes any prior understandings or
agreements concerning the subject matter hereof.
8.09 Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Delaware (excluding the
choice of laws provisions thereof).
8.10 Headings. Article, Section and subsection headings in this
--------
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
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<PAGE>
8.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument, and each of the parties hereto may execute this Agreement by signing
any such counterpart.
8.12 Further Assurances. From and after the date of this
------------------
Agreement, upon the request of Purchaser, the Company and each Subsidiary shall
execute and deliver such instruments, documents and other writings as may be
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement, the Debenture, the Debenture Shares and
the other agreements and instruments contemplated hereby.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
THE RIGHT START, INC.
By: /s/ Jerry R. Welch
-----------------------------------------
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: /s/ David l. Warnock
-----------------------------------------
David L. Warnock
a General Partner
-22-
<PAGE>
EXHIBIT 1.01
THE SECURITIES EVIDENCED BY THIS CONVERTIBLE DEBENTURE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF
ANY STATE, AND MAY NOT BE SOLD, OR OTHERWISE TRANSFERRED, IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY SUCH
APPLICABLE STATE LAWS.
THE RIGHT START, INC.
Convertible Debenture
---------------------
$2,842,000 October 11, 1996
FOR VALUE RECEIVED, The Right Start, Inc., a California corporation
(the "Company"), hereby promises to pay to Cahill Warnock Strategic Partners
Fund, L.P., or assigns ("Strategic Partners" or the "Holder"), the principal
amount of Two Million Eight Hundred Forty Two Thousand Dollars ($2,842,000),
together with interest on the unpaid principal amount hereof, from the date
hereof until paid in full, at the annual rate of eight percent (8.00%).
Interest shall be computed on the basis of a 360 day year and the actual number
of days elapsed. Accrued and unpaid interest shall be due and payable quarterly
in arrears on February 28, May 31, August 31, and November 30 of each year from
the date hereof until May 31, 2002, when the entire principal amount, together
with all accrued and unpaid interest thereon, shall be due and payable. All
amounts due and owing hereunder shall be payable in lawful money of the United
States of America, in immediately available funds, at the principal office of
the Holder or at such other place as the Holder may designate from time to time
in writing to the Company. Any payment on this Convertible Debenture coming due
on a Saturday, a Sunday or a day which is a legal holiday in the place at which
a payment is to be made hereunder shall be made on the next succeeding day which
is a business day in such place, and any such extension of the time of payment
shall be included in the computation of interest hereunder. This Convertible
Debenture is issued pursuant and subject to and is entitled to the benefits of a
certain Convertible Debenture Purchase Agreement dated as of October 11, 1996
between the Company and Strategic Partners (the "Purchase Agreement").
Subject to the terms of the Purchase Agreement, upon the occurrence or
existence of an Event of Default (as defined in the Purchase Agreement) the
Holder may, by notice to the Company, declare the entire unpaid principal amount
of this Convertible Debenture, all interest accrued and unpaid hereon, and all
other amounts payable to the Holder hereunder or under the Purchase Agreement to
be forthwith due and payable, whereupon this Convertible Debenture, all such
accrued interest and all such amounts shall become and be forthwith due and
payable, and
<PAGE>
in addition thereto, and not in substitution therefor, the Holder shall be
entitled to exercise any one or more of the rights and remedies provided by
applicable law. Failure to exercise any right or remedy under this Convertible
Debenture or available under applicable law shall not constitute a waiver of
such option or such other remedies or of the right to exercise any of the same
in the event of any subsequent Event of Default. The Company and all makers,
sureties, guarantors, endorsers and other persons assuming obligations pursuant
to this Convertible Debenture hereby waive presentment, protest, demand, notice
of dishonor and all other notices and all defenses and pleas on the grounds of
any extension or extension of the time of payments or the due dates hereof, in
whole or in part, before or after maturity, with or without notice. No renewal
or extension of this Convertible Debenture, no release of any obligor and no
delay in enforcement of this Convertible Debenture or in exercising any right or
power hereunder shall affect the liability of any obligor hereunder. The
pleading of any statute of limitations as a defense to any demand against any
obligor is expressly waived.
1. Prepayment. Commencing only on October 11, 1999, upon thirty
----------
(30) days prior written notice, the Company may prepay all, but not less than
all, the unpaid principal amount and any outstanding interest thereon, only in
the following circumstances: (a) the Company has filed a Registration Statement
covering, at the option of the Holder, all or a portion of the shares of Common
Stock underlying the Convertible Debenture shares and such Registration
Statement has been declared effective on or before such prepayment date, and (b)
the market price of the Company's Common Stock on the date of such notice is at
least $7.50 per share ( as adjusted from time to time in the same manner as the
Conversion Price pursuant to Section 2.4 hereof).
2. Conversion.
----------
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
$6.00, as adjusted from time to time as hereinafter provided (the "Conversion
Price").
2.2 Manner of Conversion. In order to exercise the foregoing
--------------------
conversion right, the Holder shall surrender this Convertible Debenture to the
Company at the address of the Company set forth in the Purchase Agreement (or at
such other address as the Company, in accordance with the Purchase Agreement,
shall specify in writing to the Holder), accompanied by written notice (the
"Conversion Notice") to the Company stating that the Holder elects to convert
this Convertible Debenture.
-2-
<PAGE>
2.3 Issuance of Common Stock on Conversion; Payment in Lieu of
----------------------------------------------------------
Fractional Shares; Payment of Interest. As soon as practicable after any such
- --------------------------------------
conversion, and in any event within 10 days thereafter, the Company, at its
expense (including the payment by it of any applicable issue or stamp taxes),
will cause to be issued in the name of and delivered to the Holder, or as the
Holder (upon payment by such holder of any applicable transfer taxes) may
direct, a certificate or certificates for the number of fully paid and
nonassessable shares of Common Stock to which the Holder shall be entitled on
such conversion, in such denominations as may be requested by the Holder, plus,
in lieu of any fractional share to which the Holder would otherwise be entitled,
cash equal to the amount of such fractional share multiplied by the then fair
market value (as determined in good faith by the Board of Directors of the
Company) of a single share of Common Stock. Concurrently with the issuance of
such shares, the Company shall pay all unpaid interest which accrued prior to
the date of the Conversion Notice with respect to the portion of the principal
amount of this Convertible Debenture then being converted.
2.4 Adjustment of Conversion Price. In case the Company shall (a)
------------------------------
pay a dividend in shares of Common Stock to holders of Common Stock, (b) make a
distribution in shares of Common Stock to holders of Common Stock, (c) subdivide
its outstanding shares of Common Stock into a greater number of shares of Common
Stock, or (d) combine its outstanding shares of Common Stock, the Conversion
Price in effect immediately prior to such action shall be adjusted so that the
Holder of any Convertible Debenture thereafeter surrendered for conversion shall
be entitled to receive the number of shares of Common Stock which he would have
owned immediately following such action had such Convertible Debenture been
converted immediately prior thereto. Any adjustment made pursuant to this
subsection 2.4 shall become effective immediately after the record date in the
case of a dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision or combination.
2.5 No Adjustment. No adjustment in the Conversion Price shall be
-------------
required until cumulative adjustments amount to one percent (1%) or more of the
Conversion Price as last adjusted; provided, however, that any adjustments which
by reason of this Section 2.5 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 2.5 shall be made to the nearest cent or to the nearest one-
hundredth of a share, as the case may be. No adjustment of the Conversion Price
shall be made for cash dividends.
2.6 Continuation of Terms. In the event that the Company (a) effects
---------------------
a reorganization or (b) consolidates with or merges into or with any other
person, this Convertible Debenture shall continue in full force and effect and
the terms hereof shall be applicable to the shares of stock and other securities
and property receivable on the conversion of this Convertible Debenture after
the consummation of such reorganization, consolidation or merger, as the case
may be, and shall be binding upon the issuer of any such stock or other
securities or property.
-3-
<PAGE>
3. Subordination.
--------------
3.1 Agreement to Subordinate. The Company, for itself and its
------------------------
successors, and each Holder, by his acceptance of this Convertible Debenture,
agree that the payment of the principal of or interest on or any other amounts
due on this Convertible Debenture is subordinated in right of payment, to the
extent and in the manner stated in this Section 3, to the prior payment in full
of all Senior Debt. For purposes hereof, "Senior Debt" means the principal of,
interest on (including any interest accruing after the commencement of any
bankruptcy proceeding or which would have accrued but for such proceeding
whether or not allowed) and other amounts due on or with respect to (i)
indebtedness of the Company, whether outstanding on the date hereof or incurred,
assumed or guaranteed by the Company, for money borrowed from banks or other
financial institutions and any refinancings or refundings thereof; (ii)
indebtedness of the company, whether outstanding on the date hereof or hereafter
created, incurred, assumed or guaranteed by the Company, which is not
subordinated in right of payment or in rights upon liquidation to any Senior
Debt; and (iii) indebtedness of the Company under interest rate swaps, caps or
similar hedging agreements and foreign exchange contracts, currency swaps or
similar agreements.
3.2 No Payment on this Convertible Debenture if Senior Debt in
----------------------------------------------------------
Default. Anything in this Convertible Debenture to the contrary
- -------
notwithstanding, no payment or other distribution on account of principal of or
redemption of, interest on or other amounts due on this Convertible Debenture,
and no redemption, purchase, or other acquisition of this Convertible Debenture,
shall be made by or on behalf of the Company (i) unless full payment of amounts
then due for principal and interest and of all other amounts then due on all
Senior Debt has been made or duly provided for in cash pursuant to the terms of
the instrument governing such Senior Debt, (ii) if, at the time of such payment,
redemption, purchase or other acquisition, or immediately after giving effect
thereto, there shall exist under any Senior Debt, or any agreement pursuant to
which any Senior Debt is issued, any default, which default shall not have been
Senior Debt being due and payable or (iii) if, at the time of such payment,
redemption, purchase or other acquisition, the Holder shall have received
written notice from the Holder or holders of any Senior Debt or their
representative or representatives (a "Payment Blockage Notice") that there
exists under such Senior Debt, or any agreement pursuant to which such Senior
Debt is issued, any default, which default shall not have been cured or waived,
permitting the holders there to declare the full amount of such Senior Debt due
and payable, but only for the period (the "Payment Blockage Period") commencing
on the date of receipt of the Payment Blockage Notice and ending (unless earlier
terminated by notice given to the Holder by the holders of such Senior Debt) on
the earlier of (a) the date on which such event of default shall have been cured
or waived or (b) 180 days from the receipt of the Payment Blockage Notice unless
payment or distribution with respect to this Convertible Debenture are otherwise
not then permitted. Upon termination of Payment Blockage Period, payments on
account of principal of or interest on this Convertible Debenture (other than
amounts due and payable by reason of the acceleration of the maturity of
-4-
<PAGE>
this Convertible Debenture) and redemptions, purchases or other acquisitions may
be made by or on behalf of the Company, if otherwise permitted hereunder.
Notwithstanding anything herein to the contrary, (A) only one Payment Blockage
Notice may be given during any period of 360 consecutive days with respect to
the same event of default and any other events of default on the same issue of
Senior Debt existing and known to the person giving such notice at the time of
such notice and (B) no new Payment Blockage Period may be commenced by the
Holder or holders of the same issue of Senior Debt or their representative or
representatives during any period of 360 consecutive days unless all events of
default which were the object of the immediately preceding Payment Blockage
Notice, and any other event of default on the same issue of Senior Debt existing
and known to the person giving such notice at the time of such notice, have been
cured or waived.
In the event that, notwithstanding the provisions of this Section 3.2,
payments are made by or on behalf of the Company in contravention of the
provisions of this Section 3.2, such payments shall be held by the Holders in
trust for the benefit of, and shall be paid over to and delivered to, the
holders of Senior Debt or their representative for application to the payment of
all Senior Debt remaining unpaid to the extent necessary to pay all Senior Debt
in full in accordance with the terms of such Senior Debt, after giving effect to
any concurrent payment or distribution to or for the holders of Senior Debt.
The Company shall give prompt written notice to the Holder of any
event of default under any Senior Debt or under any agreement pursuant to which
any Senior Debt may have bene issued.
So long as any Senior Debt remains unpaid, the Holders of these
Subordinated Debentures will not accelerate, or cause to be accelerated, the
Subordinated Debentures, or exercise any remedies with respect to any event of
default occurring with respect to the Subordinated Debentures for a period of no
less than 180 days after the holders have delivered to the holders of the Senior
Debt notice of the occurrence of any event of default. If the event of default
is cured or waived or shall have ceased to exist within such 180 day period (and
payment of all amounts then due on the Subordinated Debentures without
acceleration shall constitute a cure of any event of default resulting from the
failure to make such payment when due), then the holders shall not be entitled
to declare these Subordinated Debentures due prior to their stated maturity
because of such event of default.
3.3 Distribution on Acceleration of this Convertible Debenture;
-----------------------------------------------------------
Dissolution and Reorganization; Subrogation of this Convertible Debenture.
- -------------------------------------------------------------------------
(a) Upon (i) any acceleration of the principal amount due on
this Convertible Debenture because of an Event of Default or (ii) any
distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization of the Company (whether in bankruptcy, insolvency
or receivership proceedings or upon an assignment for the
-5-
<PAGE>
benefit of creditors or any other dissolution, winding up, liquidation or
reorganization of the Company):
(1) the holders of the Senior Debt shall first be entitled
to receive payment in full of the principal thereof, the interest thereon and
any other amounts due thereon before the Holder is entitled to receive payment
on account of the principal of or interest on or any other amounts due on the
Convertible Debenture.
(2) any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities (other than
securities of the Company as reorganized or readjusted or securities of the
Company or any other corporation provided for by a plan of reorganization or
readjustment the payment of which is subordinate, at least to the extent
provided in this Section 3 with respect to this Convertible Debenture, to the
payment in full without diminution or modification by such plan of all Senior
Debt), to which the Holder would be entitled except for the provisions of this
Section 3, shall be paid by the liquidating trustee or agent or other person
making such a payment or distribution, directly to the holders of Senior Debt
(or their representative(s) or trustee(s) acting on their behalf), ratably
according to the aggregate amounts remaining unpaid on account of the principal
of or interest on and other amounts due on the Senior Debt held or represented
by each, to the extent necessary to make payment in full of all Senior Debt
remaining unpaid, after giving effect to any concurrent payment or distribution
to the holders of such Senior Debt; and
(3) in the event that, notwithstanding the foregoing, any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities shall be received by the Holders before
all Senior Debt is paid in full in cash, such payment or distribution shall be
held in trust for the benefit of, and be paid over to upon request by a holder
of the Senior Debt, the holders of the Senior Debt remaining unpaid (or their
representatives) or trustee(s) acting on their behalf, ratably as aforesaid, for
application to the payment of such Senior Debt until all such Senior Debt shall
have been paid in full, after giving effect to any concurrent payment or
distribution to the holders of such Senior Debt.
Subject to the payment in full of all Senior Debt, the
Holder shall be subrogated to the rights of the holders of Senior Debt to
receive payments or distributions of cash, property or securities of the Company
applicable to the Senior Debt until the principal of and interest on this
Convertible Debenture shall be paid in full and, for purposes of such
subrogation, no such payments or distributions to the holders of Senior Debt of
cash, property or securities which otherwise would have been payable or
distributable to the Holder shall, as between the Company, its creditors other
than the holders of Senior Debt, and the Holder, be deemed to be a payment by
the Company to or on account of the Senior Debt, it being understood that the
provisions of this Section 3 are and are intended solely for the purpose of
defining the relative rights of the Holder, on the one hand, and the holders of
Senior Debt, on the other hand.
-6-
<PAGE>
Nothing contained in this Section 3 or elsewhere in this
Convertible Debenture is intended to or shall impair, as between the Company and
its creditors other than the holders of Senior Debt, the obligation of the
Company, which is absolute and unconditional, to pay to the Holder the principal
of and interest on this Convertible Debenture as and when the same shall become
due and payable in accordance with the terms of this Convertible Debenture or is
intended to or shall affect the relative rights of the Holder and creditors of
the Company other than holders of Senior Debt, nor shall anything herein or
therein prevent the Holder from exercising all remedies otherwise permitted by
applicable law upon default under this Convertible Debenture, subject to the
rights, if any, under this Section 3 of the holders of Senior Debt in respect of
cash, property and securities of the Company received upon the exercise of any
such remedy. Upon distribution of assets of the Company referred to in this
Section 3 the Holder shall be entitled to rely upon a certificate of the
liquidating trustee or agent or other person making any distribution to the
Holder for the purpose of ascertaining the persons entitled to participate in
such distribution, the holders of the Senior Debt and other indebtedness of the
Company, the amount hereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Section 3.
3.4 Reliance by Senior Debt on Subordination Provisions. The Holder
---------------------------------------------------
of this Convertible Debenture by his acceptance thereof acknowledges and agrees
that the foregoing subordination provisions are, and are intended to be, an
inducement and a consideration for each holder of any Senior Debt, whether such
Senior Debt was created or acquired before or after the issuance of this
Convertible Debenture, to acquire and continue to hold, or to continue to hold,
such Senior Debt, and such holder of Senior Debt shall be deemed conclusively to
have relied on such subordination provisions in acquiring and continuing to
hold, or in continuing to hold, such Senior Debt. Notice of any default in the
payment of any Senior Debt, except as expressly stated in this Section 3, and
notice of acceptance of the provisions thereof are hereby expressly waived.
Except as otherwise expressly provided herein, no waiver, forbearance or release
by any holder of Senior Debt under such Senior Debt or under this Section 3
shall constitute a release of any of the obligations or liabilities of the
Holders provided in this Section 3. Except as otherwise expressly provided
herein, no right of any present or future holder of Senior Debt to enforce the
subordination provisions hereof shall at any time or in any way be prejudiced or
impaired by any act or failure to act on the part of the Company or any such
holder or by any noncompliance by the Company with the terms, provisions or
covenants of this Convertible Debenture, regardless of any knowledge thereof
which such holder may have otherwise been charged with.
4. No Impairment. The Company will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, or any other similar voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this
Convertible Debenture, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder against
impairment due to such event. Without limiting the generality of the foregoing,
the Company (a) will not increase
-7-
<PAGE>
the par value of any shares of stock receivable on conversion of this
Convertible Debenture above the Conversion Price then in effect, (b) will take
all action that may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of stock, free
from all taxes, liens and charges with respect to the issue thereof, on the
conversion of this Convertible Debenture from time to time and (c) will not
consolidate with or merge into any other person or permit any such person to
consolidate with or merge into the Company, unless such other person (or, in the
case of a merger or consolidation in which the Company is the surviving entity,
the person issuing the securities involved in such merger or consolidation)
shall, pursuant to Section 2.6 hereof, expressly assume in writing and will be
bound by all the terms of this Convertible Debenture.
5. Chief Financial Officer's Certificate as Adjustments. In each
----------------------------------------------------
case of any adjustment or readjustment in the shares of Common Stock issuable on
the conversion of this Convertible Debenture, the Chief Financial Officer of the
Company will promptly compute such adjustment or readjustment in accordance with
the terms of this Convertible Debenture and prepare a certificate setting forth
such adjustment or readjustment, the Purchase Price resulting therefrom and the
increase or decrease, if any, of the number of shares purchasable at such price
upon conversion of the Convertible Debenture, and showing in detail the facts
and computation upon which such adjustment or readjustment is based. The Company
will forthwith mail a copy of each such certificate to each registered holder of
this Convertible Debenture, and will, on the written request at any time of the
holder of this Convertible Debenture, furnish to such holder a like certificate
setting forth the Purchase Price at the time in effect and showing how it was
calculated.
6. Notices of Record Date, etc. In the event the Company (a) takes
---------------------------
by the Company of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend on, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, or (b) consolidates or merges into, or transfers all or
substanitally all of its assets to, another corporation, or (c) dissolves or
liquidates (the events described in the foregoing clauses (b) and (c) being
hereinafter referred to as a "Fundamental Change"), then and in each such event
the Company will mail or cause to be mailed to the registered holder of this
Convertible Debenture a notice specifying (i) the date on which any such record
is to be taken for the purpose of such dividend, distribution or right, and
stating the amount and character of such dividend, distribution or right, (ii)
the date on which any such Fundamental Change is to be effected, and the time,
if any is to be fixed, as of which the holders of record of Common Stock shall
be entitled to exchange their shares of Common Stock for securities or other
property, if any, deliverable on any Fundamental Change and (iii) the amount and
character of any stock or other securities, or rights or options with respect
thereto, proposed to be issued or granted, the date of such proposed issue or
grant and the persons or class of persons to whom such proposed issue or grant
is to be offered or made. Such notice shall also state that the action in
question or the record date is subject to the effectiveness of a registration
statement under the Securities Act
-8-
<PAGE>
of 1933, as amended (the "Securities Act"), or a favorable vote of stockholders,
if either is required. Such notice shall be mailed at least 20 days prior to
the date specified in such notice on which any such action is to be taken or 20
days prior to the record date therefor, whichever is earlier.
7. Reservation of Conversion Shares. The Company will at all times
--------------------------------
reserve and keep available, solely for issuance and delivery on the conversion
of this Convertible Debenture, all shares of Common Stock from time to time
issuable upon such conversion.
8. Transfer. Subject to applicable federal and state securities
--------
laws the transfer of this Convertible Debenture and all rights hereunder, in
whole or in part, is registrable at the office or agency of the Company by the
holder hereof in person or by his duly authorized attorney, upon surrender of
this Convertible Debenture properly endorsed. Each taker and holder of this
Convertible Debenture, by taking or holding the same, consents and agrees that
this Convertible Debenture, when endorsed in blank, shall be deemed negotiable,
and that the holder hereof, when this Convertible Debenture shall have been so
endorsed, may be treated by the Company and all other persons dealing with this
Convertible Debenture as the absolute owner and holder hereof for any purpose
and as the person entitled to exercise the rights represented by this
Convertible Debenture, or to the registration of transfer hereof on the books of
the Company; and until due presentment for registration of transfer on such
books the Company may treat the registered holder hereof as the owner and holder
for all purposes, and the Company shall not be affected by notice to the
contrary.
9. Register. The Company shall maintain, at the principal office
--------
of the Company (or such other office as it may designate by notice to the holder
hereof), a register for the Convertible Debentures, in which the Company shall
record the name and address of the person in whose name a Convertible Debenture
has been issued, as well as the name and address of each transferee and each
prior owner of such Convertible Debenture.
10. Replacement. On receipt of evidence reasonably satisfactory to
-----------
the Company of the loss, theft, destruction or mutilation of this Convertible
Debenture and, in the case of any such loss, theft or destruction of this
Convertible Debenture, on delivery of an indemnity agreement or security
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, on surrender and cancellation of such Convertible Debenture,
the Company at its expense will execute and deliver, in lieu thereof, a new
Convertible Debenture of like tenor; provided, however, if a Convertible
-------- -------
Debenture held by Strategic Partners its nominee or any of its partners,
principals, officers or directors is lost, stolen or destroyed, the affidavit of
a general partner or any principal or corporate officer of Strategic Partners
setting forth the circumstances with respect to such loss, theft or destruction
shall be accepted as satisfactory evidence thereof, and no indemnity bond or
other security shall be required as a condition to the execution and delivery by
the company of a new Convertible Debenture in replacement of such lost, stolen
or destroyed Convertible Debenture.
-9-
<PAGE>
11. Remedies. The Company stipulates that the remedies at law of
--------
the holder of this Convertible Debenture in the event of any default or
threatened default by the Company in the performance of or compliance with any
of the terms of this Convertible Debenture are not and will not be adequate, and
that such terms may be specifically enforced pursuant to a decree for the
specific performance of any agreement contained herein or by an injunction
against a violation of any of the terms hereof or otherwise.
12. No Rights or Liabilities as a Stockholder. This Convertible
-----------------------------------------
Debenture shall not entitle the Holder to any voting rights or other rights as a
stockholder of the Company; provided, however, that nothing herein shall be
-------- -------
construed to affect any rights a Holder may have under the Purchase Agreement.
No provision of this Convertible Debenture, in the absence of affirmative action
by the Holder to purchase Common Stock, and no mere enumeration herein of the
rights or privileges of the Holder, shall give rise to any liability of the
Holder for the Conversion Price or otherwise as a stockholder of the Company,
whether such liability is asserted by the Company or by creditors of the
Company.
13. Notices. All notices, demands, requests, or other
-------
communications which may be or are required to be given, served, or sent
pursuant to this Convertible Debenture shall be given, served and sent in
accordance with the provisions of the Purchase Agreement.
14. Miscellaneous. This Convertible Debenture and any term hereof
-------------
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. This Convertible Debenture shall be
construed and enforced in accordance with and governed by the laws of the State
of Delaware (excluding the choice of law rules thereof). The headings in this
Convertible Debenture are for purposes of reference only, and shall not limit or
otherwise affect any of the terms hereof. The invalidity or unenforceability of
any provision hereof shall in no way affect the validity or enforceability of
any other provision.
IN WITNESS WHEREOF, the undersigned has caused this Convertible
Debenture to be duly executed on its behalf as of the date first hereinabove set
forth.
THE RIGHT START, INC.
By: /s/ Jerry R. Welch
-----------------------------------------
Jerry R. Welch
President
-10-
<PAGE>
EXHIBIT 3.02
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of
October 11, 1996 between The Right Start, Inc., a California corporation (the
"Company"), and Cahill Warnock Strategic Partners Fund, L.P. Fund, a limited
partnership organized under the laws of the State of Delaware ("Purchaser").
WHEREAS, the Company and Purchaser have entered into a Convertible
Debenture Purchase Agreement dated as of October 11, 1996 (the "Purchase
Agreement");
WHEREAS, pursuant to the Purchase Agreement, the Company and Purchaser
desire to enter into this Agreement to provide Purchaser with certain
registration rights and to address related matters;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties agree as follows:
1. Registration Rights.
-------------------
1.1 Demand Registration Rights.
--------------------------
(a) Subject to the provisions of this Section 1.1, at any
time after the date hereof, Purchaser may request registration for sale under
the Act of all or part of the Common Stock, no par value, of the Company
("Common Stock") then held by Purchaser or issuable to Purchaser pursuant to
conversion of the Convertible Debenture of even date herewith, issued by the
Company to Purchaser pursuant to the Purchase Agreement (the "Debenture"). The
Company shall thereafter, as expeditiously as practicable, use its best efforts
(i) to file with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Act"), a registration statement on the
appropriate form (using Form S-3 or other "short form," if available) covering
all the shares of Common Stock specified in the demand request and (ii) to cause
such registration statement to be declared effective. The Company shall use its
best efforts to cause each offering pursuant to this Section 1.1 to be managed,
on a firm commitment basis, by a recognized regional or national underwriter.
The Company shall not be required to comply with more than two (2) requests by
Purchaser for demand registration pursuant to this Section 1.1(a).
(b) The Company shall not be required to effect a demand
registration under the Act pursuant to Section 1.1(a) above if (i) the Company
receives such request for registration within 120 days preceding the anticipated
effective date of a proposed underwritten public offering of securities of the
Company approved by the Company's Board of Directors prior to the Company's
receipt of such request; (ii) within 6 months prior to any such request for
registration, a registration of securities of the Company has been effected in
which
<PAGE>
Purchaser had the right to participate pursuant to Section 1.2 hereof; or (iii)
the Board of Directors of the Company reasonably determines in good faith that
effecting such a demand registration at such time would have a material adverse
effect upon a proposed sale of all (or substantially all) the assets of the
Company, or a merger, reorganization, recapitalization, or similar transaction
materially affecting the capital structure or equity ownership of the Company;
provided, however, that the Company may only delay a demand registration
pursuant to this Section 1.1(b)(iii) for a period not exceeding 3 months (or
until such earlier time as such transaction is consummated or no longer
proposed). The Company shall promptly notify Purchaser in writing of any
decision not to effect any such request for registration pursuant to this
Section 1.1(b), which notice shall set forth in reasonable detail the reason for
such decision and shall include an undertaking by the Company promptly to notify
Purchaser as soon as a demand registration may be effected.
(c) Purchaser may withdraw a request for demand
registration at any time before a registration statement is declared effective,
in which event the Company shall withdraw such registration statement (and
Purchaser shall not be deemed to have requested a demand registration for
purposes of Section 1.1(a) hereof). If the Company withdraws a registration
statement under this Section 1.1(c) in respect of a registration for which the
Company would otherwise be required to pay expenses under Section 1.4(b) hereof,
Purchaser shall be liable to the Company for all expenses of such registration
specified in Section 1.4(b) hereof in proportion to the number of shares
Purchaser shall have requested to be registered, and Purchaser shall not be
deemed to have requested a demand registration for purposes of Section 1.1(a)
hereof.
1.2 Piggyback Registration Rights.
-----------------------------
(a) If at any time or times after the date hereof, the
Company proposes to make a registered public offering of any of its securities
under the Act (whether to be sold by it or by one or more third parties), other
than an offering pursuant to a demand registration under Section 1.1(a) hereof
or an offering registered on Form S-8, Form S-4, or comparable forms, the
Company shall, not less than 45 days prior to the proposed filing date of the
registration form, give written notice of the proposed registration to
Purchaser, and at the written request of Purchaser delivered to the Company
within 20 days after the receipt of such notice, shall include in such
registration and offering, and in any underwriting of such offering, all shares
of Common Stock that may have been designated in Purchaser's request.
(b) If a registration in which Purchaser has the right to
participate pursuant to this Section 1.2 is an underwritten offering for the
account of the Company or for the account of a security holder (other than
Purchaser) pursuant to the exercise of a demand registration right, and the
managing underwriters advise the Company or such security holder, as the case
may be, in writing that in their opinion the number of securities requested to
be included in such registration, together with the securities being offered by
the
-2-
<PAGE>
Company or such security holder, as the case may be, exceeds the number which
can be effectively sold in such offering, the Company shall include in such
registration (i) first, the securities of the Company or such security holder
proposed to be sold, and (ii) second, to the extent possible, the Common Stock
proposed to be sold by Purchaser and any other selling stockholders, in
proportion to the number of shares of Common Stock with respect to which they
have requested registration.
1.3 Registration Procedures. The Company shall have no
-----------------------
obligation to file a registration statement pursuant to Section 1.1 hereof, or
to include shares of Common Stock owned by or issuable to Purchaser in a
registration statement pursuant to Section 1.2 hereof, unless and until
Purchaser shall have furnished the Company with all information and statements
about or pertaining to Purchaser in such reasonable detail and on such timely
basis as is reasonably required by the Company in connection with the
preparation of the registration statement. Whenever Purchaser has requested that
any shares of Common Stock be registered pursuant to Sections 1.1 or 1.2 hereof,
the Company shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement with
respect to such shares and use its best efforts to cause such registration
statement to become effective as soon as reasonably practicable thereafter
(provided that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company shall furnish counsel for
Purchaser with copies of all such documents proposed to be filed);
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of not less than nine months (or two years, if the provisions of Rule
415 under the Act are available with respect thereto) or until Purchaser has
completed the distribution described in such registration statement, whichever
occurs first;
(c) furnish to Purchaser such number of copies of such
registration statement, each amendment and supplement thereto, the prospectus
included in such registration statement (including each preliminary prospectus),
and such other documents as Purchaser may reasonably request;
(d) use its best efforts to register or qualify such shares
under such other securities or blue sky laws of such jurisdictions as Purchaser
requests (and to maintain such registrations and qualifications effective for a
period of nine months or until Purchaser has completed the distribution of such
shares, whichever occurs first), and to do any and all other acts and things
which may be necessary or advisable to enable Purchaser to consummate the
disposition in such jurisdictions of such shares (provided that the Company will
not be required to (i) qualify generally to do business in any jurisdiction
where it would not be required but for
-3-
<PAGE>
this Section 1.3(d), (ii) subject itself to taxation in any such jurisdiction,
or (iii) file any general consent to service of process in any such
jurisdiction);
(e) notify Purchaser, at any time during which a prospectus
relating thereto is required to be delivered under the Act within the period
that the Company is required to keep a registration statement effective, of the
happening of any event as a result of which the prospectus included in such
registration statement contains an untrue statement of a material fact or omits
any fact necessary to make the statements therein not misleading, and prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such shares, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading;
(f) use its best efforts to cause all such shares to be listed
on securities exchanges or interdealer quotation systems (including NASDAQ
National or Small-Cap Market), if any, on which similar securities issued by the
Company are then listed;
(g) enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other actions as
Purchaser reasonably requests (and subject to Purchaser's reasonable approval)
in order to expedite or facilitate the disposition of such shares; and
(h) make reasonably available for inspection by Purchaser, by
any underwriter participating in any distribution pursuant to such registration
statement, and by any attorney, accountant or other agent retained by Purchaser
or by any such underwriter, all relevant financial and other records, pertinent
corporate documents, and properties (other than confidential intellectual
property) of the Company; provided, however, that any information that is
designated in writing by the Company, in good faith, as confidential at the time
of delivery of such information shall be kept confidential by Purchaser or any
such underwriter, attorney, accountant or agent, unless such disclosure is made
in connection with a court proceeding or required by law, or such information
becomes available to the public generally or through a third party without an
accompanying obligation of confidentiality.
1.4 Registration Expenses.
----------------------
The Company will pay all Registration Expenses of all registrations
under this Agreement, provided, however, that if a registration under Section
-------- -------
1.1 is withdrawn at the request of Purchaser (other than as a result of
information concerning the business or financial condition of the Company that
is made known to the Purchaser after the date on which such registration was
requested) and if the requesting Purchaser elects not to have such registration
counted as a registration requested under Section 1.1, the Purchaser shall pay
the Registration expenses of such registration. For purposes of this Section,
the term "Registration Expenses" means all expenses incurred by the Company in
complying with this Section, including, without
-4-
<PAGE>
limitation, all registration and filing fees (other than Natioanl Association of
Securities Dealers, Inc. filing fees pursuant to an underwritten offering),
exchange listing fees, printing expenses, fees, and expenses of counsel for the
Company and the reasonable fees and expenses of one firm or counsel selected by
the Purchaser to represent it, state Blue Sky fees and expenses, and the expense
of any special audits incident to or required by any such registration, but
excluding underwriting discounts and selling commissions.
1.5 Indemnity.
---------
(a) In the event that any shares of Common Stock owned by
Purchaser are sold by means of a registration statement pursuant to Section 1.1
or 1.2 hereof, the Company agrees to indemnify and hold harmless Purchaser, each
of its partners and their officers and directors, and each person, if any, who
controls Purchaser within the meaning of the Act (Purchaser, its partners and
their officers and directors, and any such other persons being hereinafter
referred to individually as an "Indemnified Person" and collectively as
"Indemnified Persons") from and against all demands, claims, actions or causes
of action, assessments, losses, damages, liabilities, costs, and expenses,
including, without limitation, interest, penalties, and reasonable attorneys'
fees and disbursements, asserted against, resulting to, imposed upon or incurred
by such Indemnified Person, directly or indirectly (hereinafter referred to in
this Section 1.5 in the singular as a "claim" and in the plural as "claims"),
based upon, arising out of or resulting from any untrue statement of a material
fact contained in the registration statement or any omission to state therein a
material fact necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading, except insofar as such
claim is based upon, arises out of or results from information furnished to the
Company in writing by Purchaser for use in connection with the registration
statement.
(b) Purchaser agrees to indemnify and hold harmless the Company,
its officers and directors, and each person, if any, who controls the Company
within the meaning of the Act (the Company, its officers and directors, and any
such other persons also being hereinafter referred to individually as an
"Indemnified Person" and collectively as "Indemnified Persons") from and against
all claims based upon, arising out of or resulting from any untrue statement of
a material fact contained in the registration statement or any omission to state
therein a material fact necessary in order to make the statement made therein,
in the light of the circumstances under which they were made, not misleading, to
the extent that such claim is based upon, arises out of or results from
information furnished to the Company in writing by Purchaser for use in
connection with the registration statement.
(c) The indemnification set forth herein shall be in addition to
any liability the Company or Purchaser may otherwise have to the Indemnified
Persons. Promptly after actually receiving definitive notice of any claim in
respect of which an Indemnified Person may seek indemnification under this
Section 1.5, such Indemnified Person shall submit written notice thereof to
either the Company or Purchaser, as the case may be
-5-
<PAGE>
(sometimes being hereinafter referred to as an "Indemnifying Person"). The
failure of the Indemnified Person so to notify the Indemnifying Person of any
such claim shall not relieve the Indemnifying Person from any liability it may
have hereunder except to the extent that (a) such liability was caused or
materially increased by such failure, or (b) the ability of the Indemnifying
Person to reduce such liability was materially adversely affected by such
failure. In addition, the failure of the Indemnified Person so to notify the
Indemnifying Person of any such claim shall not relieve the Indemnifying Person
from any liability it may have otherwise than hereunder. The Indemnifying Person
shall have the right to undertake, by counsel or representatives of its own
choosing, the defense, compromise or settlement (without admitting liability of
the Indemnified Person) of any such claim asserted, such defense, compromise or
settlement to be undertaken at the expense and risk of the Indemnifying Person,
and the Indemnified Person shall have the right to engage separate counsel, at
such Indemnified Person's own expense, whom counsel for the Indemnifying Person
shall keep informed and consult with in a reasonable manner. In the event the
Indemnifying Person shall elect not to undertake such defense by its own
representatives, the Indemnifying Person shall give prompt written notice of
such election to the Indemnified Person, and the Indemnified Person may
undertake the defense, compromise or settlement (without admitting liability of
the Indemnified Person) thereof on behalf of and for the account and risk of the
Indemnifying Person by counsel or other representatives designated by the
Indemnified Person. Notwithstanding the foregoing, no Indemnifying Person shall
be obligated hereunder with respect to amounts paid in settlement of any claim
if such settlement is effected without the consent of such Indemnifying Person
(which consent shall not be unreasonably withheld).
(d) If for any reason the foregoing indemnity is unavailable to,
or is insufficient to hold harmless, an Indemnified Person, then the
Indemnifying Person shall contribute to the amount paid or payable by the
Indemnified Person as a result of such claims, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Person and the
Indemnified Person as well as any other relevant equitable considerations. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
1.6 Subsequent Registration Statements. The Company shall not cause
----------------------------------
or permit any new registration statements (except registration statements on
Forms S-8, S-4, or comparable forms) to become effective during the 90 days
after the effective date of a registration statement covering shares of Common
Stock owned by Purchaser.
2. Miscellaneous.
-------------
2.1 Additional Actions and Documents. Each of the parties
--------------------------------
hereto hereby agrees to use its good faith best efforts to bring about the
consummation of this Agreement, and to take or cause to be taken such further
actions, to execute, deliver and file or cause to be executed, delivered and
filed such further documents and instruments, and to obtain
-6-
<PAGE>
such consents, as may be necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this Agreement.
2.2 Assignment. Purchaser may assign its rights under this
----------
Agreement to any assignee of the Convertible Debenture or the shares of Common
Stock issuable thereunder.
2.3 Entire Agreement; Amendment. This Agreement, including the
---------------------------
other writings referred to herein or delivered pursuant hereto, constitutes the
entire agreement among the parties hereto with respect to the transactions
contemplated herein, and it supersedes all prior oral or written agreements,
commitments or understandings with respect to the matters provided for herein.
No amendment, modification or discharge of this Agreement shall be valid or
binding unless set forth in writing and duly executed by the party against whom
enforcement of the amendment, modification, or discharge is sought.
2.4 Limitation on Benefits. It is the explicit intention of
----------------------
the parties hereto that no person or entity other than the parties hereto (and
their respective successors and assigns) is or shall be entitled to bring any
action to enforce any provision of this Agreement against any of the parties
hereto, and the covenants, undertakings and agreements set forth in this
Agreement shall be solely for the benefit of, and shall be enforceable only by,
the parties hereto or their respective successors and assigns.
2.5 Binding Effect. This Agreement shall be binding upon and
--------------
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
2.6 Governing Law. This Agreement, 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 Delaware (excluding the
choice of law rules thereof).
2.7 Notices. All notices, demands, requests, or other
-------
communications which may be or are required to be given, served, or sent by any
party to any other party pursuant to this Agreement shall be in writing and
shall be mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery (including delivery
by courier), telegram, telex, or facsimile transmission, addressed as follows:
(a) If to the Company:
The Right Start, Inc.
5334 Starling Center Drive
Westlake Village, California 91361
Attention: President
Facsimile:
-7-
<PAGE>
with a copy (which shall not constitute notice) to:
Milbank, Tweed, Hadley & McCloy
601 S. Figueroa, 30th Floor
Los Angeles, CA 90017
Attention: Kenneth J. Baronsky, Esq.
Facsimile: (213) 629-5063
(b) If to Purchaser:
Cahill Warnock Strategic Partners Fund, L.P.
10 North Calvert Street, Suite 735
Baltimore, Maryland 21202
Attention: Mr. David L. Warnock
Facsimile: 410/347-2963
with a copy (which shall not constitute notice) to:
George P Stamas, Esq.
Wilmer, Cutler & Pickering
100 Light Street
Baltimore, Maryland 21202
Facsimile: 410/986-2828
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a telex) the answerback being deemed conclusive
(but not exclusive) evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
2.8 Headings. Article and Section headings contained in this
--------
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
2.9 Execution in Counterparts. To facilitate execution, this
-------------------------
Agreement may be executed in as many counterparts as may be required; and it
shall not be necessary that the signatures of each party appear on each
counterpart; but it shall be sufficient that the
-8-
<PAGE>
signature of each party appear on one or more of the counterparts. All
counterparts shall collectively constitute a single agreement. It shall not be
necessary in making proof of this
-9-
<PAGE>
Agreement to produce or account for more than a number of counterparts
containing the respective signatures of all of the parties hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
THE RIGHT START, INC.
By: /s/ Jerry R. Welch
----------------------------------------
Jerry R. Welch
President
CAHILL, WARNOCK STRATEGIC
PARTNERS FUND, L.P.
By: Cahill, Warnock Strategic Partners, L.P.
its general partner
By: /s/ David L. Warnock
----------------------------------------
David L. Warnock
a General Partner
<PAGE>
EXHIBIT 10.2
EXECUTION COPY
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
THIS CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (the "Agreement") is
made as of October 11, 1996 between THE RIGHT START, INC., a California
corporation (the "Company"), and STRATEGIC ASSOCIATES, L.P., a limited
partnership organized under the laws of the State of Delaware (the "Purchaser").
WHEREAS, the Company wishes to sell to Purchaser, and Purchaser wishes
to purchase from the Company, the Company's Convertible Debenture;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
ARTICLE I
AUTHORIZATION, PURCHASE AND SALE OF DEBENTURE
1.01 Authorization of the Debenture. The Company has authorized the
------------------------------
issuance and sale to Purchaser of the Company's Convertible Debenture in the
original principal amount of One Hundred Fifty Eight Thousand Dollars
($158,000), which is convertible into 26,333.33 shares of the Company's Common
Stock, no par value (the "Common Stock"). Such Convertible Debenture shall be
substantially in the form set forth as Exhibit 1.01 hereto (the "Debenture").
1.02 Authorization of the Debenture Shares. The Company has
-------------------------------------
authorized and reserved a sufficient number of shares of Common Stock for
issuance upon conversion of the Debenture. (The shares of Common Stock issuable
upon conversion of the Debenture are referred to as the "Debenture Shares.")
1.03. Purchase and Sale of Debenture.
------------------------------
(a) The Closing. The Company agrees to issue and sell to Purchaser,
-----------
and, subject to and in reliance upon the representations, warranties, terms and
conditions of this Agreement, Purchaser agrees to purchase, the Debenture for
the purchase price (the "Purchase Price") of One Hundred Fifty Eight Thousand
Dollars ($158,000). Such purchase and sale shall take place at a closing (the
"Closing") to be held by exchange of documents on October 11, 1996 at 12:00 noon
Eastern Time, or on such other date and at such time as may be mutually agreed,
at the offices of Milbank, Tweed, Hadley & McCloy in Los Angeles, California. At
the Closing, the Company will issue to Purchaser the Debenture. At the Closing,
Purchaser will deliver to the
<PAGE>
Company, by wire transfer of immediately available funds to an account
designated by the Company by written notice to Purchaser, the Purchase Price.
(b) Use of Proceeds. The Company agrees to use the full proceeds
---------------
form the sale of the Debenture to pay down or retire existing debt of the
Company, for store openings and acquisitions, and for working capital purposes.
ARTICLE II
CERTAIN TERMS OF THE DEBENTURE
2.01 Certain Terms of the Debenture. All principal, interest and any
------------------------------
other amounts outstanding under the Debenture shall be due and payable in full
on May 31, 2002. No payment of principal (except upon acceleration of maturity
pursuant to the terms of this Agreement or the Debenture) shall be required (or
permitted) prior to May 31, 2002. The Debenture shall bear interest at an annual
rate of eight percent (8.0%). Accrued and unpaid interest shall be due and
payable quarterly in arrears on February 28, May 31, August 31, and November 31
of each year until maturity. The Debenture shall not be prepaid except as set
forth in the Debenture. Payments of principal and interest on the Debenture
shall be made directly by wire transfer to an account designated by Purchaser by
written notice to the Company or by check duly mailed or delivered to Purchaser
at its address set forth in Section 8.04. The Debenture shall be convertible at
any time into 26,333.33 shares of Common Stock, subject to adjustment for stock
splits, combinations and similar transactions. The Debenture initially shall
have a conversion price of $6.00 per share of Common Stock, subject to
adjustment in certain circumstances.
2.02 Replacement of Debenture. Upon receipt of evidence satisfactory
------------------------
to the Company of the loss, theft, destruction or mutilation of any Debenture
and, if requested in the case of any such loss, theft or destruction, upon
delivery of an indemnity bond or other agreement or security reasonably
satisfactory to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of such Debenture, the Company will issue a new
Debenture, of like tenor and amount, in lieu of such lost, stolen, destroyed or
mutilated Debenture; provided, however, if any Debenture of which Purchaser, its
nominee, or any of its partners, officers or principals is the registered holder
is lost, stolen or destroyed, the affidavit of such principal or general partner
or any principal or corporate officer of such holder setting forth the
circumstances with respect to such loss, theft or destruction, together with an
agreement to indemnify the Company with respect thereto shall be accepted as
satisfactory evidence thereof, and no bond or other security shall be required
as a condition to the execution and delivery by the Company of a new Debenture
in replacement of such lost, stolen or destroyed Debenture.
-2-
<PAGE>
2.03 Registration, etc. The Company shall maintain at its principal
-----------------
office a register with respect to the Debenture and shall record therein the
name(s) and address(es) of the respective registered holder(s) thereof, to which
notices are to be sent and the address(es) to which payments are to be made as
designated by the registered holder if other than the address of such holder,
and the particulars of all transfers, exchanges and replacements of the
Debenture. The Company shall record on such register any and all transfers of
the Debenture by or for the registered holder or such holder's executors or
administrators or their duly appointed attorney, in form reasonably satisfactory
to the Company, in order to maintain an accurate record of the holder(s)
thereof. Each Debenture issued hereunder, whether originally or upon transfer,
exchange or replacement, shall be registered on the date of execution thereof by
the Company. The registered holder of a Debenture issued hereunder shall be that
individual, corporation, partnership, joint venture, trust or unincorporated
organization or other entity (a "Person") in whose name the Debenture has been
so registered by the Company. A registered holder shall be deemed the owner of a
Debenture for all purposes of this Agreement and, subject to the provisions
hereof, shall be entitled to all of the benefits thereof and rights thereunder
free from all equities or rights of setoff or counterclaim between the Company
and the transferor of such registered holder or any previous registered holder
of such Debenture.
ARTICLE III
CONDITIONS TO PURCHASER'S OBLIGATION
The obligation of Purchaser to purchase and pay for the Debenture at
the Closing is subject to the following conditions:
3.01 Representations and Warranties. Each of the representations and
------------------------------
warranties of the Company set forth in Article IV hereof shall have been true
and correct when made and shall be true and correct on the date of the Closing
as if made on the date of the Closing.
3.02 Registration Rights Agreement. The Company and Purchaser shall
-----------------------------
have entered into the Registration Rights Agreement substantially in the form
set forth as Exhibit 3.02 hereto.
3.03 Performance. The Company shall have performed and complied
-----------
with all covenants and agreements contained herein and received any and all
consents, approvals or waivers necessary in order to complete the transactions
required to be performed or complied with by it or prior to or at the Closing
Date.
-3-
<PAGE>
3.04 All Proceedings to be Satisfactory. All corporate and other
----------------------------------
proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be satisfactory in
form and substance to Purchaser, and Purchaser shall have received all such
counterpart originals or certified or other copies of such documents as it
reasonably may request.
3.05 Documentation at Closing. Purchaser shall have received prior
------------------------
to or at the Closing all of the following, each in form and substance
satisfactory to Purchaser:
(a) A certified copy of all charter documents of the Company; a
certified copy of the resolutions of the Board of Directors and, to the extent
required, the stockholders of the Company, evidencing approval of this
Agreement, the Debenture, and other matters contemplated hereby; a certified
copy of the By-laws of the Company; and certified copies of all documents
evidencing other necessary corporate or other action and governmental approvals,
if any, with respect to this Agreement, and the Debenture.
(b) A favorable opinion of counsel for the Company, as to
matters set forth in Exhibit 3.05(b), and as to such other matters as Purchaser
may reasonably request, all in scope, form and substance reasonably satisfactory
to Purchaser.
(c) A certificate of the Secretary or an Assistant Secretary of
the Company which shall certify the names of the officers authorized to sign
this Agreement, the Debenture and the other documents or certificates to be
delivered pursuant to this Agreement by the Company or any of its officers,
together with the true signatures of such officers. Purchaser may rely
conclusively on such certificates until it shall receive a further certificate
of the Secretary or an Assistant Secretary of the Company canceling or amending
the prior certificate and submitting the signatures of the officers named in
such further certificate.
(d) A certificate from a duly authorized officer of the Company
stating that (i) the representations and warranties contained in Article IV
hereof and otherwise made by the Company in writing in connection with the
transactions contemplated hereby were true and correct when made and are true
and correct on the date of the Closing as if made on the date of the Closing,
(ii) the Company has performed and complied with all covenants and agreements
contained herein and has received any and all consents, approvals or waivers
necessary in order to complete the transactions required to be performed or
complied with by it prior to or at the Closing Date, and (iii) no condition or
event has occurred and is continuing or will result from execution and delivery
of this Agreement or the issuance of the Debenture which constitutes an Event of
Default or would constitute an Event of Default but for the requirement that
notice be given or time lapse or both.
(e) Such other documents as Purchaser reasonably may request.
-4-
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The representations and warranties in this Article IV are made by and
shall apply to each of the Company and any corporation of which the Company
directly or indirectly owns more than fifty percent (50%) of the outstanding
shares of capital stock (a "Subsidiary") alike so that all references to the
"Company" shall be deemed to include the Company and each Subsidiary
individually or on a consolidated basis, as appropriate to the context and
import of the information provided. Any exceptions or qualifications to the
representations and warranties set forth in this Article IV are set forth in the
Schedule of Disclosures hereto which specifically refers to the section number
identifying the information to which such disclosure relates. Accordingly, the
Company represents and warrants to Purchaser as follows, intending and
acknowledging that Purchaser shall rely upon such information.
4.01 Organization and Standing of the Company. The Company is a duly
----------------------------------------
organized and validly existing corporation in good standing under the laws of
the jurisdiction in which it was organized and has all requisite corporate power
and authority for the ownership and operation of its properties and for the
carrying on of its business as now conducted and as now proposed to be
conducted. The Company is duly licensed or qualified and in good standing as a
foreign corporation authorized to do business in all jurisdictions wherein the
character of the property owned or leased or the nature of the activities
conducted by it makes such licensing or qualification necessary, except when the
failure to be so licensed or qualified would not have a material adverse effect
on the Company.
4.02 Corporate Action. The Company has all necessary corporate power
----------------
and has taken all corporate action required to authorize this Agreement, the
Debenture and any other agreements and instruments executed in connection
herewith and therewith, and each such agreement and instrument is a valid and
binding obligation of the Company, enforceable in accordance with its respective
terms, except as to rights to indemnity and contribution that may be limited by
federal or state securities laws and except as the enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and subject to general principles of equity.
Sufficient shares of authorized but unissued Common Stock of the Company have
been reserved for issuance as Debenture Shares by appropriate corporate action
in connection with the prospective conversion of the Debenture. Neither the
issuance of the Debenture nor the issuance of Debenture Shares upon the
conversion of the Debenture, is subject to preemptive or other similar statutory
or contractual rights of any Person, and will not conflict with any provisions
of any agreement or instrument to which the Company is a party or by which it is
bound.
-5-
<PAGE>
4.03 Governmental Approvals. No authorization, consent, approval,
----------------------
license, exemption filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary for, or in connection with, the offer,
issuance, sale, execution or delivery by the Company of, or for the performance
by it of its obligations under, this Agreement, the Debenture or any other
agreement or instrument executed in connection herewith or therewith other than
the filing of a Form D with the Securities and Exchange Commission and a Form
25102(f) with the California Department of Corporations and filings that may be
required pursuant to the Registration Rights Agreement.
4.04 Litigation. There is no litigation or governmental proceeding
----------
or investigation pending or, to the best of the knowledge of the Company,
threatened (a) by or against the Company, or (b) against any officer, key
employee or principal stockholder of the Company where such litigation,
proceeding or investigation, either individually or in the aggregate, could
reasonably be expected to have a material adverse effect on the Company, nor, to
the best of the knowledge of the Company, has there occurred any event or does
there exist any condition on the basis of which any such litigation, proceeding
or investigation might properly be instituted. Neither the Company, nor, to the
best knowledge of the Company, any officer or key employee of the Company, is in
default with respect to any material order, writ, injunction, decree, ruling or
decision of any court, commission, board or other government agency affecting
the Company. There are no actions or proceedings pending or threatened (or any
basis therefor known to the Company) which could reasonably be expected to
result, either in any case or in the aggregate, in any material adverse change
in the business, operations, affairs or condition of the Company or in any of
its properties or assets, or which might call into question the validity of this
Agreement, the Debenture or any other agreement or instrument executed in
connection herewith or therewith, or any action taken or to be taken pursuant
hereto or thereto.
4.05 Compliance. The Company is in compliance in all material
----------
respects with the terms and provisions of this Agreement, its charter and by-
laws, all mortgages, indentures, leases, agreements and other instruments and of
all judgments, decrees, governmental orders, statutes, rules and regulations by
which it is bound or to which its properties or assets are subject. There is no
term or provision in any of the foregoing documents and instruments which
materially adversely affects the business, assets or financial condition of the
Company. Neither the execution and delivery of this Agreement, the Debenture or
any other agreement or instrument executed in connection herewith or therewith,
nor the consummation of any transactions contemplated hereby or thereby has
constituted or resulted in or will constitute or result in a default or
violation of any term or provision in any of the foregoing documents or
instruments.
-6-
<PAGE>
4.06 Federal Reserve Regulations. The Company is not engaged in the
---------------------------
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation G of the Board of Governors of the
Federal Reserve System), and no part of the proceeds of the Debenture will be
used to purchase or carry any margin security or to extend credit to others for
the purpose of purchasing or carrying any margin security or in any other manner
which would involve a violation of any of the regulations of the Board of
Governors of the Federal Reserve System.
4.07 Title to Assets, Patents. The Company has good and clear record
------------------------
and marketable title in fee to such of its fixed assets as are real property,
and good and merchantable title to all of its other assets, now carried on its
books including those reflected in the most recent balance sheet of the Company
which forms a part of Exhibit 4.08 attached hereto, or acquired since the date
------------
of such balance sheet (except personal property disposed of since said date in
the ordinary course of business and personal property that is not material to
the business of the Company) free of any mortgages, pledges, charges, claims,
liens, security interests or other encumbrances; provided that substantially all
of the Company's assets are subject to the lien of the Company's senior secured
lender. The Company enjoys peaceful and undisturbed possession under all leases
under which it is the lessee, and all said leases are valid and subsisting and
in full force and effect. The Company owns or has a valid right to use the
patents, patent rights, licenses, permits, trade secrets, trademarks, trade
names, franchises, copyrights, inventions and intellectual property rights
(collectively, "Intellectual Property Rights") being used to conduct its
business as now operated and as now proposed to be operated; and the conduct of
its business as now operated and as now proposed to be operated does not and
will not conflict with Intellectual Property Rights of others. The Company has
no obligation to compensate any Person for the use of any Intellectual Property
Rights nor has the Company granted to any Person any license or right to use any
Intellectual Property Rights of the Company other than the obligation of the
Company to Ann Geddes pursuant to agreements dated November 9, 1995 and March
20, 1996.
4.08 Financial Information. Attached as Exhibit 4.08 are (a) the
--------------------- ------------
Company's consolidated balance sheets as of May 31, 1996 and May 31, 1995, and
statements of income for the fiscal years then ended, together with the report
thereon of Price Waterhouse, L.L.P. and (b) the Company's unaudited consolidated
balance sheet as of August 31, 1996 and statement of income for the three-month
period ended August 31, 1996 (collectively, the "Financial Statements"). The
Financial Statements have been prepared in accordance with generally accepted
accounting principles consistently applied and present fairly the financial
condition and results of operations of the Company as of the dates and for the
periods indicated, subject, in the case of the unaudited Financial Statements,
to normal year-end adjustments, which in the aggregate are not material. The
Company has no liability, contingent or otherwise, not disclosed in the
Financial Statements or in the notes thereto that could, together with all such
other liabilities, materially affect the financial condition of the Company, nor
does the Company have any reasonable grounds to know of any such liability.
-7-
<PAGE>
4.09 Subsequent Events or Changes. Since May 31, 1996, (a) there has
----------------------------
been no adverse change in the business, assets or condition, financial or
otherwise, operations or prospects, of the Company; (b) neither the business,
condition, operations or prospects of the Company or any of its properties or
assets has been adversely affected as a result of any legislative or regulatory
change, any revocation or change in any franchise, license or right to do
business, or any other event or occurrence, whether or not insured against; and
(c) the Company has not entered into any material transaction or made any
distribution with respect to its capital stock.
4.10 Taxes. The Company has accurately prepared and timely filed all
-----
material federal, state and other tax returns required by law to be filed by it,
and has paid or made provision for the payment of all material taxes that are
due and payable. The Company knows of no additional assessments or adjustments
pending or threatened against the Company for any period, nor of any basis for
any such assessment or adjustment.
4.11 ERISA.
-----
(a) Neither the Company nor any Related Person (as defined
below) has breached the fiduciary rules of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or engaged in any transaction in
connection with which the Company or any Related Person could be subjected to a
suit for damages, a civil penalty assessed pursuant to Section 502(i) of ERISA
or a tax imposed by Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), in any such case which would be materially adverse to the
Company. For purposes of this Section 4.11, a "Related Person" shall mean any
trade or business, whether or not incorporated, which, together with the
Company, would be treated as a single employer under Section 414 of the Code.
(b) Neither any employee pension benefit plan (as defined in
Section 3(2) of ERISA) which is or has been established or maintained, or to
which contributions are or have been made, by the Company or any Related Person
or with respect to which the Company or any Related Person is or has been
obligated to contribute (a "Plan") nor any trust created under any Plan has been
terminated within the meaning of Title IV of ERISA since September 2, 1974 under
circumstances that could result in liability which could be materially adverse
to the Company. Other than premiums due and owing in the normal course, no
liability to the Pension Benefit Guaranty Corporation (the "PBGC") has been
incurred and remains unsatisfied or is expected by the Company to be incurred
with respect to any Plan by the Company or any Related Person which is or would
be materially adverse to the Company. There has been no reportable event (within
the meaning of Section 4043(b) of ERISA) or any other event or condition with
respect to any Plan which presents a risk of termination of any such Plan by the
PBGC under circumstances which in any case could result in liability which would
be materially adverse to the Company.
-8-
<PAGE>
(c) Neither the Company nor any Related Person has within the
past six years contributed, or had any obligation to contribute, to a single
employer plan that has at least two contributing sponsors not under common
control or has ceased operations at a facility under circumstances which could
result in liability under Section 4068(f) of ERISA.
(d) There is no multiemployer plan (within the meaning of
Section 4001(a)(3) of ERISA) to which the Company or any Related Person is or
has ever been obligated to contribute under Title IV of ERISA.
(e) No accumulated funding deficiency (as defined in Section 302
of ERISA and Section 412 of the Code), whether or not waived, exists with
respect to any Plan. Full payment has been made within the time required under
Section 412 of the Code of all amounts that the Company or any of its Related
Persons is required under the terms of each Plan and applicable law to have paid
as contributions to such Plan as of the date hereof. Each Plan satisfies the
minimum funding standard of Section 412 of the Code.
(f) The present value of the benefit liabilities (within the
meaning of Title IV of ERISA) under all Plans determined as of May 31, 1996 and
on the basis of PBGC assumptions required under Title IV of ERISA did not exceed
the current value of the assets of all such Plans determined as of such date.
(g) Neither the Company nor any Related Person has engaged in
any transaction that could result in the incurrence of any liabilities under
Section 4069 or Section 4212 of ERISA.
(h) The Company is not a party in interest with respect to any
employee benefit plan, except for The Right Start, Inc. Employee Stock Purchase
Plan and securities of the Company are not employer securities with respect to
any employee benefit plan other than the above listed plans. For such purpose,
the term "employee benefit plan" shall have the meaning assigned to such term in
Section 3 of ERISA and the term "employer security" shall have the meaning
assigned to such term in Section 407(d)(1) of ERISA. The execution and delivery
of this Agreement, the Debenture and any other agreements or instruments
executed in connection herewith and therewith will not involve any transaction
which is subject to the prohibitions of Section 406 of ERISA or in connection
with which a tax could be imposed pursuant to Section 4975 of the Code.
4.12 Transactions with Affiliates. There are no loans, leases,
----------------------------
royalty agreements or other continuing transactions between the Company and any
Person owning five percent (5%) or more of any class of capital stock of the
Company or any other entity controlled by such stockholder or any member of such
stockholder's family other than certain management,
-9-
<PAGE>
consulting and advisory services provided to the Company by Kayne Anderson
Investment Management, Inc. for which it is entitled to receive a fee of
$100,000 per year.
4.13 Assumptions or Guaranties of Indebtedness of Other Persons. The
----------------------------------------------------------
Company has not assumed, guaranteed, endorsed or otherwise become directly or
contingently liable (including, without limitation, liability by way of
agreement, contingent or otherwise, to purchase, to provide funds for payment,
to supply funds to or otherwise invest in the debtor or otherwise to assure the
creditor against loss) on any indebtedness of any other Person.
4.14 Investments in Other Persons. The Company has not made any loan
----------------------------
or advance to any Person which is outstanding on the date of this Agreement, nor
is the Company obligated or committed to make any such loan or advance, nor does
the Company own any capital stock or assets comprising the business of,
obligations of, or any interest in, any Person other than a loan in the amount
of $248,255 in connection with the sale of certain assets to Blasiar, Inc. in
July 1996.
4.15 Environmental Compliance. The Company has obtained and is in
------------------------
compliance with all permits, licenses, and other authorizations that are
required under all Environmental Laws (as hereinafter defined), including laws
relating to emissions, discharges, releases or threatened releases of
contaminants into the environment (including, without limitation, ambient air,
surface water, ground water or land) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of contaminants, except to the extent that failure to have any such
permit, license or other authorization does not have a material adverse effect
on the business, condition (financial or other), assets, properties, operations
or prospects of the Company. The term "Environmental Laws" shall mean any and
all federal, state, local and foreign statutes, laws, regulations, ordinances,
rules, judgments, orders, decrees, permits, concessions, grants, franchises,
licenses, agreement or governmental restrictions relating to the environment or
the release of any materials into the environment, including but not limited to
those relating to hazardous substances or wastes, air emissions and discharges
to waste or public systems.
4.16 Securities Act. Neither the Company nor anyone acting on its
--------------
behalf has offered any of the Debenture or the Debenture Shares or similar
securities, or solicited any offers to purchase, or made any attempt by
preliminary conversation or negotiations to dispose of, the Debenture or the
Debenture Shares or similar securities, to any person other than Purchaser.
Neither the Company nor anyone acting on its behalf has offered or will offer to
sell the Debenture or the Debenture Shares or similar securities to, or solicit
offers with respect thereto from, or enter into any preliminary conversations or
negotiations relating hereto with, any Person, so as to bring the offer, sale or
issuance of the Debenture or the Debenture Shares to Purchaser within the
registration provisions of the Securities Act of 1933, as amended (the
"Securities Act").
-10-
<PAGE>
4.17 Disclosure. The Company has provided to Purchaser copies of the
----------
Financial Statements and copies of its Annual Report on Form 10K for the fiscal
year ended May 31, 1996, its Annual Report to Shareholders for the fiscal year
ended May 31, 1996 and its Report on Form 10Q for the three months ended August
31, 1996 (collectively, the "Disclosure Documents"). Neither this Agreement, the
Financial Statements, the Disclosure Documents nor any other agreement,
document, certificate or written statement furnished to Purchaser by or on
behalf of the Company in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein not
misleading. There is no fact within the knowledge of the Company or any of its
executive officers which has not been disclosed herein or in the Disclosure
Documents or in writing by them to Purchaser and which materially adversely
affects, or in the future in their opinion may, insofar as they can now
reasonably foresee, materially adversely affect, the business, properties,
assets, operations, prospects or condition, financial or otherwise, of the
Company.
4.18 No Brokers or Finders. No Person has or will have, as result of
---------------------
the transactions contemplated by this Agreement, any right, interest or valid
claim against or upon the Company or the Purchaser for any commission, fee or
other compensation as a finder or broker because of any act or omission by the
Company or any agent of the Company.
4.19 Agreements of Officers. To the best of the knowledge of the
----------------------
Company, no officer or key employee of the Company is a party to or bound by any
agreement, contract or commitment, or subject to any restrictions, particularly
but without limitation in connection with any previous employment of any such
person, which materially and adversely affects, or in the future may (insofar as
it can now reasonably foresee) materially and adversely affect, the business or
operations of the Company or the right of any such person to participate in the
affairs of the Company. To the best of the knowledge of the Company, no officer
or key employee has any present intention of terminating his employment with the
Company and the Company has no present intention of terminating any such
employment.
4.20 Capitalization; Status of Capital Stock. The Company has a
---------------------------------------
total authorized capitalization consisting of 25,000,000 shares of Common Stock,
of which 7,949,306 shares are issued and outstanding. All the outstanding shares
of capital stock of the Company have been duly authorized, are validly issued
and are fully paid and nonassessable. The shares of Common Stock issuable as
Debenture Shares upon conversion of the Debenture, when so issued, will be duly
authorized, validly issued and fully paid and nonassessable. Except as set forth
in the Disclosure Documents, there are no options, warrants or rights to
purchase shares of capital stock or other securities of the Company authorized,
issued or outstanding, nor is the Company obligated in any other manner to issue
shares of its capital stock or other securities. There are no restrictions on
the transfer of shares of capital stock of the Company other than those imposed
by relevant state and federal securities laws. No holder of any security of the
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Company is entitled to preemptive or similar statutory or contractual rights,
either arising pursuant to any agreement or instrument to which the Company is a
party, or which are otherwise binding upon the Company. The issuance of the
Debenture or the Debenture Shares will not result in an adjustment under the
antidilution or exercise rights of any holders of any outstanding shares of
capital stock options, warrants or other rights to acquire any securities of the
Company. The offer and sale of all shares of capital stock and other securities
of the Company issued before the Closing complied with or were exempt from all
federal and state securities laws.
4.21 Labor Relations. To the best of the knowledge of the Company,
---------------
no labor union or any representative thereof has made any attempt to organize or
represent employees of the Company, during the past two years. There are no
unfair labor practice charges, pending trials with respect to unfair labor
practice charges, pending material grievance proceedings or adverse decisions of
a Trial Examiner of the National Labor Relations Board against the Company. To
the best of the knowledge of the Company, relations with employees of the
Company are good and there is no reason to believe that any labor difficulties
will arise in the foreseeable future.
4.22 Insurance. The Company carries insurance covering its
---------
properties and business adequate and customary for the type and scope of the
properties and business. The Company's present insurance coverage is as set
forth on the Schedule of Disclosures.
-----------------------
4.23 Books and Records. The books of account, ledgers, order books,
-----------------
records and documents of the Company accurately and completely reflect all
material information relating to the business of the Company, the nature,
acquisition, maintenance, location and collection of the assets of the Company,
and the nature of all transactions giving rise to the obligations or accounts
receivable of the Company.
4.24 U.S. Real Property Holding Corporation. The Company is not now
--------------------------------------
and has not been a "United States real property holding corporation" as defined
in Section 897(c)(2) of the U.S. Internal Revenue Code of 1986, as amended (the
"Code"), and Section 1.897-2(b) of the Regulations thereunder.
4.25 Registration Rights. Except as granted to Purchaser in
-------------------
connection with the transactions contemplated by this Agreement, no Person has
any right to cause the Company to file any registration statement under the
Securities Act relating to any securities of the Company or any right to have
any securities of the Company in any such registration statement.
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ARTICLE V
COVENANTS OF THE COMPANY
5.01 General Covenants of the Company. Without limiting any other
--------------------------------
covenants and provisions hereof, the Company covenants and agrees that, as long
as any of the Debenture or the Debenture Shares are outstanding, it will perform
and observe the following covenants and provisions and will cause each
Subsidiary to perform and observe such of the following covenants and provisions
as are applicable to such Subsidiary:
(a) Punctual Payment. The Company shall pay the principal of and
----------------
interest on the Debenture at the times and place and in the manner provided in
the Debenture and herein.
(b) Payment of Taxes and Trade Debt. The Company shall pay and
-------------------------------
discharge, and cause each Subsidiary to pay and discharge, all material taxes,
assessments and governmental charges or levies imposed on it or upon its income
or profits or business, or upon any properties belonging to it, prior to the
date on which penalties attach thereto, and all lawful claims which, if unpaid,
might become a lien or charge upon any properties of the Company or any
Subsidiary, provided that neither the Company nor the Subsidiary shall be
required to pay any such tax, assessment, charge, levy or claim which is being
contested in good faith and by appropriate proceedings if the Company or
Subsidiary concerned shall have set aside on its books adequate reserves with
respect thereto. The Company shall pay and cause each Subsidiary to pay, when
due, or in conformity with customary trade terms, all material lease
obligations, all material trade debt, and all other material indebtedness
incident to the operations of the Company or its Subsidiaries, except such as
are being contested in good with and by appropriate proceedings if the Company
or Subsidiary concerned shall have set aside on its books adequate reserves with
respect thereto.
(c) Maintenance of Insurance. The Company shall maintain, and cause
------------------------
each Subsidiary to maintain, insurance with responsible and reputable insurance
companies or associations in such amounts and covering such risks as is usually
carried by companies engaged in similar businesses and owning similar properties
in the same general areas in which the Company or such subsidiary operates.
(d) Preservation of Corporate Existence. The Company shall preserve
-----------------------------------
and maintain, and cause each Subsidiary to preserve and maintain, its corporate
existence, rights, franchises and privileges in the jurisdiction of its
incorporation, and qualify and remain qualified, and cause each Subsidiary to
qualify and remain qualified, as a foreign corporation in each jurisdiction in
which such qualification is necessary or desirable in view of its business and
operations or the ownership of its properties. The Company shall preserve and
maintain, and cause each Subsidiary to preserve and maintain, all licenses and
other rights to use patents,
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processes, licenses, trademarks, trade names, inventions, intellectual property
rights or copyrights owned or used by and necessary to the conduct of its
business; provided, however, that the Company shall not be required to preserve
any such license or right if the Board of Directors shall determine that the
preservation is no longer desirable in the conduct of the Company's business and
that the loss thereof is not, and will not be, adverse in any material respect
to the registered holder of the Debenture.
(e) Compliance with Laws. The Company shall comply, and cause each
--------------------
Subsidiary to comply, with all applicable laws, rules, regulations and orders of
any governmental authority, noncompliance with which could materially adversely
affect its business or condition, financial or otherwise.
(f) Access to Information. In the Event of a Default (as defined in
---------------------
Section 6.01 below), the Company shall permit Purchaser or any representatives
thereof, at any reasonable time and from time to time, to receive, to examine
and make copies of and extract from the records and books of account of
(including, but not limited to, unaudited balance sheets of the Company as at
the end of each month and unaudited statements of income and of cash flows of
the Company for each month and for the current fiscal year to the end of each
month, setting forth in comparative form the Company's projected financial
statements for the corresponding periods for the current fiscal year, all in
reasonable detail and duly certified by the chief financial officer of the
Company as having been prepared in accordance with generally accepted accounting
principles consistently applied), and visit and inspect the properties of, the
Company and any Subsidiary, and to discuss the affairs, finances and accounts of
the Company and any Subsidiary with any of their officers or directors and
independent accountants.
(g) Keeping of Records and Books of Account. The Company shall keep,
---------------------------------------
and cause each Subsidiary to keep, adequate records and books of account, in
which complete entries shall be made in accordance with generally accepted
accounting principles consistently applied, reflecting all financial
transactions of the Company and such Subsidiary, and in which, for each fiscal
year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
(h) Maintenance of Properties, etc. The Company shall maintain and
------------------------------
preserve, and cause each Subsidiary to maintain and preserve, all of its
properties, necessary or useful in the proper conduct of its business, in good
repair, working order and condition, ordinary wear and tear excepted.
(i) Compliance with ERISA. The Company shall comply, and cause each
---------------------
Subsidiary to comply, with the provisions of ERISA and the Code, and the rules
and regulations thereunder, which are applicable to any Plan. Neither the
Company nor any Subsidiary shall permit any event or condition to exist which
could permit any such plan to be terminated under
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<PAGE>
circumstances which would cause the lien provided for in Section 4068 of ERISA
to attach to the assets of the Company or any Subsidiary.
(j) Dealings with Affiliates. The Company will not enter or permit
------------------------
any Subsidiary to enter into any transaction with any holder of five percent
(5%) or more of any class of capital stock of the Company, or any member of
their families or any corporation or other entity in which any one or more of
such stockholders or members of their immediate families directly or indirectly
holds five percent (5%) or more of any class of capital stock except in the
ordinary course of business and on terms not less favorable to the Company or
the Subsidiary than it would obtain in a transaction between unrelated parties.
(k) SEC Reports. The Company shall file all reports and other
-----------
information and documents which it is required to file with the Securities and
Exchange Commission ("SEC") pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"). The Company will
cause any quarterly and annual reports, proxy statements and any other documents
which it mails to its stockholders to be mailed to the registered holder of the
Debenture.
If the Company is not subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act, the Company will prepare, for the first three
quarters of each fiscal year, quarterly financial statements substantially
equivalent to the financial statements required to be included in a report on
Form 10-Q under the Exchange Act. The Company will also prepare, on an annual
basis, complete audited consolidated financial statements, including, but not
limited to, a balance sheet, a statement of income and retained earnings, a
statement of changes in financial position and all appropriate notes. All such
financial statements will be prepared in accordance with generally accepted
accounting principles consistently applied, except for changes with which the
Company's independent accountants concur, and except that quarterly statements
may be subject to year-end adjustments. The Company will cause a copy of such
financial statements to be mailed to the registered holder of the Debenture as
soon as available within forty-five (45) days after the close of each of the
first three quarters of each fiscal year and within ninety (90) days after the
close of each fiscal year.
A holder of the Debenture and prospective purchasers designated by
such holder will have the right to obtain from the Company upon request by such
holder or prospective purchasers, during any period in which the Company is not
subject to Section 13 or 15(d) of the Exchange Act, the information required by
paragraph d (4)(i) of Rule 144A under the Securities Act.
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<PAGE>
ARTICLE VI
EVENTS OF DEFAULT
6.01 Events of Default. For so long as any indebtedness under the
-----------------
Debenture shall be outstanding, the following events shall constitute an event
of default hereunder ("Events of Default").
(a) The Company shall fail to pay any installment of principal
of or interest on the Debenture when due and any such failure shall not be cured
by full performance thereof within ten (10) days after written notice thereof
shall have been given to the Company by any registered holder of the Debenture;
or
(b) The Company shall default in the performance of any covenant
contained in Article V and any such failure shall not be cured by full
performance thereof within ten (10) days after written notice thereof shall have
been given to the Company by any registered holder of the Debenture; or
(c) Any representation or warranty made by the Company or any
Subsidiary in this Agreement or by the Company or any Subsidiary (or any
officers of the Company or any Subsidiary) in any certificate, instrument or
written statement contemplated by or made or delivered pursuant to or in
connection with this Agreement, shall prove to have been incorrect when made in
any material respect; or
(d) The Company or any Subsidiary shall fail to perform or
observe any other term, covenant or agreement contained in this Agreement, or
the Debenture on its part to be performed or observed and any such failure shall
not be cured or by full performance thereof within ten (10) days after written
notice thereof shall have been given to the Company by any registered holder of
the Debenture; or
(e) The Company or any Subsidiary shall (i) admit in writing its
inability to pay its debts generally as they become due; (ii) commence a
voluntary case under Title 11 of the United States Code as from time to time in
effect, or authorize, by appropriate proceedings of its Board of Directors or
other governing body, the commencement of such a voluntary case; (iii) file an
answer or other pleading omitting or failing to deny the material allegations of
a petition filed against it commencing an involuntary case under such Title 11,
or seek, consent to or acquiesce in the relief therein provided, or fail to
controvert timely the material allegations of any such petition; (iv) suffer the
entry an order for relief in any involuntary case commenced under said Title 11;
(v) seek relief as a debtor under any applicable law, other than said Title 11,
of any jurisdiction relating to the liquidation or reorganization of debtors or
to the modification or alteration of the rights of creditors, or consent to or
acquiesce in
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<PAGE>
such relief; (vi) suffer the entry of an order by a court of competent
jurisdiction (A) finding it to be bankrupt or insolvent, (B) ordering or
approving its liquidation, reorganization or any modification or alteration of
the rights of its creditors, or (C) assuming custody of, or appointing a
receiver or other custodian for, all or a substantial part of its property; or
(vii) make an assignment for the benefit of, or enter into a composition with,
its creditors, or appoint or consent to the appointment of a receiver or other
custodian or all or a substantial part of its property; or
(f) Any judgment, writ, warrant of attachment or execution or
similar process shall be issued or levied against the property of the Company or
any Subsidiary in an aggregate amount which exceeds $2,500,000 and such
judgment, writ, or similar process shall not be released, vacated or fully
bonded or stayed pending appeal within sixty (60) days after its issue or levy.
Upon the occurrence of any Event of Default, and in any such event, Purchaser or
any other holder of any Debenture may, by notice to the Company, declare the
entire unpaid principal amount of such Debenture, all interest accrued and
unpaid thereon and all other amounts payable to such holder under such Debenture
or this Agreement to be forthwith due and payable, whereupon such Debenture, all
such accrued interest and all such amounts shall become and be forthwith due and
payable (unless there shall have occurred an Event of Default under Section
6.01(e) in which case all such accounts shall automatically become due and
payable without such declaration), without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Company with respect to itself and its Subsidiaries.
6.02 Annulment of Defaults. Section 6.01 is subject to the condition
---------------------
that, if at any time after the principal of any Debenture shall have become due
and payable, and before any judgment or decree for the payment of the moneys so
due shall have been entered, all arrears of interest upon such Debenture and all
other sums payable to the holder of such Debenture under or such Debenture and
under this Agreement (except the principal amount which by such declaration
shall have become payable) shall have been duly paid, and every other default
and Event of Default shall have been made good or cured, then and in every such
case the holder of such Debenture, by written instrument filed with the Company,
may rescind and annul such declaration and its consequences; but no such
rescission or annulment shall extend to or affect any other or subsequent
default or Event of Default or impair any right of the holders of any other
Debenture consequent thereon.
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<PAGE>
ARTICLE VII
CERTAIN SECURITIES LAW MATTERS
7.01 Representations by Purchaser. Purchaser represents and warrants
----------------------------
to the Company that:
(a) Purchaser is an "accredited investor" within the meaning of
Rule 501 under the Securities Act and was not organized for the specific purpose
of acquiring the Debenture or the Debenture Shares.
(b) Purchaser has sufficient knowledge and experience in
investing in companies similar to the Company in terms of the Company's stage of
development so as to be able to evaluate the risks and merits of investment in
the Company, and it is able financially to bear the risks thereof.
(c) Purchaser has had an opportunity to discuss the Company's
business, management and financial affairs with the Company's management.
(d) The Debenture is being acquired for Purchaser's own account
for the purpose of investment and not with a present view to or for sale in
connection with any distribution thereof, subject to the condition that the
disposition of the property of Purchaser shall be at all times within its
control.
(e) Purchaser understands that (i) the Debenture and the
Debenture Shares are being issued in a transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof or Rule 505
or 506 promulgated under the Securities Act, (ii) the Debenture, and the
Debenture Shares must be held indefinitely unless a subsequent disposition
thereof is registered under the Securities Act or an exemption from registration
is available under applicable securities laws then in effect, and (iii) the
Debenture and the Debenture Shares will bear a legend to such effect and the
Company will make a notation on its transfer books to such effect.
7.02 Restrictions on Transfer. The Debenture and the Debenture
------------------------
Shares (collectively the "Restricted Securities") shall be transferable only
upon satisfaction of the applicable conditions specified in this Section 7.02 or
if sold in a Public Sale (as hereinafter defined) or pursuant to an exemption
from the registration requirements of the Securities Act.
(a) Restrictive Legend. Except as otherwise provided in
------------------
Section 7.02(c), each certificate representing the Restricted Securities shall
bear a legend in substantially the following form:
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<PAGE>
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under the
securities laws of any state, and may not be sold, or otherwise
transferred, in the absence of such registration or an exemption
therefrom under such Act and under any such applicable state laws."
Each certificate representing such Restricted Securities shall bear the
restrictive legend set forth above, in each case unless the restrictions on
transfer provided for in this Section 7.02 shall have ceased and terminated as
to such Restricted Securities or unless the Restricted Securities shall be
eligible for resale pursuant to Rule 144(k) under the Securities Act.
(b) Notice and Opinion for Transfer. Prior to any transfer of
-------------------------------
the Restricted Securities other than pursuant to an effective registration
statement under the Securities Act (a "Public Sale"), the holder thereof will
give written notice to the Company of such holder's intention to effect such
transfer, describing in reasonable detail the manner of the proposed transfer.
If any such holder delivers to the Company an opinion of counsel in form and
substance reasonably acceptable to the Company to the effect that the proposed
transfer may be effected without registration of such Restricted Securities
under the Securities Act or applicable state securities laws or, in lieu of an
opinion, written evidence from the holder on which the Company shall rely to the
effect that the conditions of Rule 144(k) under the Securities Act are satisfied
with respect to the proposed transfer such holder thereupon shall be entitled to
transfer such Restricted Securities in accordance with the terms of this
Agreement and the notice delivered by such holder to the Company.
Notwithstanding the foregoing, no registration or opinion of counsel shall be
required for a transfer of Restricted Securities by any holder which is a
partnership to a partner or retired partner thereof, or to the estate of any
such partner or retired partner, if the transferee agrees in writing to be
subject to the terms of this Section 7.02 to the same extent as if he were an
original holder hereunder and if such transfer is made by way of distribution
pursuant to the terms of the applicable partnership agreement and without the
receipt of consideration therefor.
(c) Termination of Restrictions. The restrictions imposed by
---------------------------
this Section 7.02 upon the transferability of the Restricted Securities shall
cease and terminate as to any particular Restricted Securities and any
securities issued in exchange therefor or upon transfer thereof when, in the
opinion of counsel reasonably acceptable to the Company, such restrictions are
no longer required in order to assure compliance with the Securities Act.
Whenever any of such restrictions shall cease and terminate as to any Restricted
Securities, the holder thereof shall be entitled to receive from the Company,
without expense, new certificates not bearing the legend set forth in Section
7.02(a).
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ARTICLE VIII
MISCELLANEOUS
8.01 Indemnification. The Company hereby agrees to indemnify,
---------------
exonerate and hold Purchaser and each of its partners, and their stockholders,
officers, directors, employees and agents free and harmless from and against any
and all actions, causes of action, suits, litigation, losses, liabilities and
damages, investigations or proceedings instituted by any governmental agency or
any other Person, and expenses in connection therewith, including without
limitation reasonable attorneys' fees and disbursements, incurred by the
indemnitee or any of them as a result of, or arising out of, or relating to (a)
any transaction financed or to be financed in whole or in part directly or
indirectly with proceeds from the sale by the company of any securities
hereunder, or (b) the execution, delivery, performance or enforcement of this
Agreement or any instrument contemplated hereby by any of the indemnitees,
except in each such case to the extent any such indemnified liabilities arise on
account of such indemnitee's gross negligence, willful misconduct or bad faith.
8.02 No Waiver; Cumulative Remedies. No failure or delay on the part
------------------------------
of Purchaser, or any other holder of Debenture in exercising any right, power or
remedy hereunder or thereunder shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right, power or remedy preclude any other
or further exercise thereof or the exercise of any other right, power or remedy
hereunder or thereunder. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
8.03 Amendments, Waiver and Consents. No amendment, modification or
-------------------------------
addition to this Agreement, and no waiver of or consent to noncompliance with
any covenant or other provision of this Agreement, or the Debenture shall be
effective unless in writing and duly executed by the party against whom
enforcement of such amendment, modification, addition, waiver or consent is
sought. Any waiver or consent may be given subject to satisfaction of conditions
stated therein and any waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
8.04 Notices. All notices, demands, requests, or other
-------
communications which may be or are required to be given, served, or sent by any
party to any other party pursuant to this Agreement shall be in writing and
shall be mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery (including delivery
by courier), telegram, telex, or facsimile transmission, addressed as follows:
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(a) If to the Company:
The Right Start, Inc.
5334 Sterling Center Drive
Westlake Village, California 91361
Attention: President
Facsimile:
with a copy (which shall not constitute notice) to:
Milbank, Tweed, Hadley & McCloy
601 S. Figueroa, 30th Floor
Los Angeles, CA 90017
Attention: Kenneth J. Baronsky, Esq.
Facsimile: (213) 629-5063
(b) If to Purchaser:
Strategic Associates, L.P.
10 North Calvert Street, Suite 735
Baltimore, Maryland 21202
Attention: Mr. David L. Warnock
Facsimile: 410/347-2963
with a copy (which shall not constitute notice) to:
George P. Stamas, Esq.
Wilmer, Cutler & Pickering
100 Light Street
Baltimore, Maryland 21202
Facsimile: 410/986-2828
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a telex) the answerback being deemed conclusive
(but not exclusive) evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
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8.05 Costs and Expenses. The Company and Purchaser each agree to pay
------------------
all their own costs and expenses in connection with the preparation, execution
and delivery of this Agreement, the Debenture and other instruments and
documents to be delivered hereunder.
8.06 Binding Effect; Assignment. This Agreement shall be binding
--------------------------
upon and inure to the benefit of the Company and Purchaser and their respective
successors and assigns, except that the Company shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of Purchaser.
8.07 Survival of Representations and Warranties. All representations
------------------------------------------
and warranties made in this Agreement, the Debenture or any other instrument or
document delivered in connection herewith or therewith, shall survive the
execution and delivery hereof or thereof and the making of the loan as evidenced
by the Debenture.
8.08 Prior Agreements. This Agreement constitutes the entire
----------------
agreement between the parties and supersedes any prior understandings or
agreements concerning the subject matter hereof.
8.09 Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Delaware (excluding the
choice of laws provisions thereof).
8.10 Headings. Article, Section and subsection headings in this
--------
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
8.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument, and each of the parties hereto may execute this Agreement by signing
any such counterpart.
8.12 Further Assurances. From and after the date of this Agreement,
------------------
upon the request of Purchaser, the Company and each Subsidiary shall execute and
deliver such instruments, documents and other writings as may be necessary or
desirable to confirm and carry out and to effectuate fully the intent and
purposes of this Agreement, the Debenture, the Debenture Shares and the other
agreements and instruments contemplated hereby.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
THE RIGHT START, INC.
By: /s/ Jerry R. Welch
-------------------------------------
Jerry R. Welch
President and Chief Executive Officer
STRATEGIC ASSOCIATES, L.P.
By: Cahill, Warnock & Company, LLC
its general partner
By: /s/ David L. Warnock
-------------------------------------
David L. Warnock
Managing Member
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<PAGE>
EXHIBIT 1.01
THE SECURITIES EVIDENCED BY THIS CONVERTIBLE DEBENTURE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF
ANY STATE, AND MAY NOT BE SOLD, OR OTHERWISE TRANSFERRED, IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY SUCH
APPLICABLE STATE LAWS.
THE RIGHT START, INC.
Convertible Debenture
---------------------
$158,000 October 11, 1996
FOR VALUE RECEIVED, The Right Start, Inc., a California corporation
(the "Company"), hereby promises to pay to Strategic Associates, L.P., or
assigns ("Strategic Associates" or the "Holder"), the principal amount of One
Hundred Fifty Eight Thousand Dollars ($158,000), together with interest on the
unpaid principal amount hereof, from the date hereof until paid in full, at the
annual rate of eight percent (8.00%). Interest shall be computed on the basis
of a 360 day year and the actual number of days elapsed. Accrued and unpaid
interest shall be due and payable quarterly in arrears on February 28, May 31,
August 31, and November 30 of each year from the date hereof until May 31, 2002,
when the entire principal amount, together with all accrued and unpaid interest
thereon, shall be due and payable. All amounts due and owing hereunder shall be
payable in lawful money of the United States of America, in immediately
available funds, at the principal office of the Holder or at such other place as
the Holder may designate from time to time in writing to the Company. Any
payment on this Convertible Debenture coming due on a Saturday, a Sunday or a
day which is a legal holiday in the place at which a payment is to be made
hereunder shall be made on the next succeeding day which is a business day in
such place, and any such extension of the time of payment shall be included in
the computation of interest hereunder. This Convertible Debenture is issued
pursuant and subject to and is entitled to the benefits of a certain Convertible
Debenture Purchase Agreement dated as of October 11, 1996 between the Company
and Strategic Associates (the "Purchase Agreement").
Subject to the terms of the Purchase Agreement, upon the occurrence or
existence of an Event of Default (as defined in the Purchase Agreement) the
Holder may, by notice to the Company, declare the entire unpaid principal amount
of this Convertible Debenture, all interest accrued and unpaid hereon, and all
other amounts payable to the Holder hereunder or under the Purchase Agreement to
be forthwith due and payable, whereupon this Convertible Debenture, all
<PAGE>
such accrued interest and all such amounts shall become and be forthwith due and
payable, and in addition thereto, and not in substitution therefor, the Holder
shall be entitled to exercise any one or more of the rights and remedies
provided by applicable law. Failure to exercise any right or remedy under this
Convertible Debenture or available under applicable law shall not constitute a
waiver of such option or such other remedies or of the right to exercise any of
the same in the event of any subsequent Event of Default. The Company and all
makers, sureties, guarantors, endorsers and other persons assuming obligations
pursuant to this Convertible Debenture hereby waive presentment, protest,
demand, notice of dishonor and all other notices and all defenses and pleas on
the grounds of any extension or extension of the time of payments or the due
dates hereof, in whole or in part, before or after maturity, with or without
notice. No renewal or extension of this Convertible Debenture, no release of any
obligor and no delay in enforcement of this Convertible Debenture or in
exercising any right or power hereunder shall affect the liability of any
obligor hereunder. The pleading of any statute of limitations as a defense to
any demand against any obligor is expressly waived.
1. Prepayment. Commencing only on October 11, 1999, upon thirty (30)
----------
days prior written notice, the Company may prepay all, but not less than all,
the unpaid principal amount and any outstanding interest thereon, only in the
following circumstances: (a) the Company has filed a Registration Statement
covering, at the option of the Holder, all or a portion of the shares of Common
Stock underlying the Convertible Debenture shares and such Registration
Statement has been declared effective on or before such prepayment date, and (b)
the market price of the Company's Common Stock on the date of such notice is at
least $7.50 per share (as adjusted from time to time in the same manner as the
Conversion Price pursuant to Section 2.4 hereof).
2. Conversion.
----------
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
$6.00, as adjusted from time to time as hereinafter provided (the "Conversion
Price").
2.2 Manner of Conversion. In order to exercise the foregoing
--------------------
conversion right, the Holder shall surrender this Convertible Debenture to the
Company at the address of the Company set forth in the Purchase Agreement (or at
such other address as the Company, in accordance with the Purchase Agreement,
shall specify in writing to the Holder),
-2-
<PAGE>
accompanied by written notice (the "Conversion Notice") to the Company stating
that the Holder elects to convert this Convertible Debenture.
2.3 Issuance of Common Stock on Conversion; Payment in Lieu of
----------------------------------------------------------
Fractional Shares; Payment of Interest. As soon as practicable after any such
- --------------------------------------
conversion, and in any event within 10 days thereafter, the Company, at its
expense (including the payment by it of any applicable issue or stamp taxes),
will cause to be issued in the name of and delivered to the Holder, or as the
Holder (upon payment by such holder of any applicable transfer taxes) may
direct, a certificate or certificates for the number of fully paid and
nonassessable shares of Common Stock to which the Holder shall be entitled on
such conversion, in such denominations as may be requested by the Holder, plus,
in lieu of any fractional share to which the Holder would otherwise be entitled,
cash equal to the amount of such fractional share multiplied by the then fair
market value (as determined in good faith by the Board of Directors of the
Company) of a single share of Common Stock. Concurrently with the issuance of
such shares, the Company shall pay all unpaid interest which accrued prior to
the date of the Conversion Notice with respect to the portion of the principal
amount of this Convertible Debenture then being converted.
2.4 Adjustment of Conversion Price. In case the Company shall (a)
------------------------------
pay a dividend in shares of Common Stock to holders of Common Stock, (b) make a
distribution in shares of Common Stock to holders of Common Stock, (c) subdivide
its outstanding shares of Common Stock into a greater number of shares of Common
Stock, or (d) combine its outstanding shares of Common Stock, the Conversion
Price in effect immediately prior to such action shall be adjusted so that the
Holder of any Convertible Debenture thereafeter surrendered for conversion shall
be entitled to receive the number of shares of Common Stock which he would have
owned immediately following such action had such Convertible Debenture been
converted immediately prior thereto. Any adjustment made pursuant to this
subsection 2.4 shall become effective immediately after the record date in the
case of a dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision or combination.
2.5 No Adjustment. No adjustment in the Conversion Price shall be
-------------
required until cumulative adjustments amount to one percent (1%) or more of the
Conversion Price as last adjusted; provided, however, that any adjustments which
by reason of this Section 2.5 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 2.5 shall be made to the nearest cent or to the nearest one-
hundredth of a share, as the case may be. No adjustment of the Conversion Price
shall be made for cash dividends.
2.6 Continuation of Terms. In the event that the Company (a) effects
---------------------
a reorganization or (b) consolidates with or merges into or with any other
person, this Convertible
-3-
<PAGE>
Debenture shall continue in full force and effect and the terms hereof shall be
applicable to the shares of stock and other securities and property receivable
on the conversion of this Convertible Debenture after the consummation of such
reorganization, consolidation or merger, as the case may be, and shall be
binding upon the issuer of any such stock or other securities or property.
3. Subordination.
-------------
3.1 Agreement to Subordinate. The Company, for itself and its
------------------------
successors, and each Holder, by his acceptance of this Convertible Debenture,
agree that the payment of the principal of or interest on or any other amounts
due on this Convertible Debenture is subordinated in right of payment, to the
extent and in the manner stated in this Section 3, to the prior payment in full
of all Senior Debt. For purposes hereof, "Senior Debt" means the principal of,
interest on (including any interest accruing after the commencement of any
bankruptcy proceeding or which would have accrued but for such proceeding
whether or not allowed) and other amounts due on or with respect to (i)
indebtedness of the Company, whether outstanding on the date hereof or incurred,
assumed or guaranteed by the Company, for money borrowed from banks or other
financial institutions and any refinancings or refundings thereof; (ii)
indebtedness of the company, whether outstanding on the date hereof or hereafter
created, incurred, assumed or guaranteed by the Company, which is not
subordinated in right of payment or in rights upon liquidation to any Senior
Debt; and (iii) indebtedness of the Company under interest rate swaps, caps or
similar hedging agreements and foreign exchange contracts, currency swaps or
similar agreements.
3.2 No Payment on this Convertible Debenture if Senior Debt in
----------------------------------------------------------
Default. Anything in this Convertible Debenture to the contrary
- -------
notwithstanding, no payment or other distribution on account of principal of or
redemption of, interest on or other amounts due on this Convertible Debenture,
and no redemption, purchase, or other acquisition of this Convertible Debenture,
shall be made by or on behalf of the Company (i) unless full payment of amounts
then due for principal and interest and of all other amounts then due on all
Senior Debt has been made or duly provided for in cash pursuant to the terms of
the instrument governing such Senior Debt, (ii) if, at the time of such payment,
redemption, purchase or other acquisition, or immediately after giving effect
thereto, there shall exist under any Senior Debt, or any agreement pursuant to
which any Senior Debt is issued, any default, which default shall not have been
cured or waived and which default shall have resulted in the full amount of such
Senior Debt being due and payable or (iii) if, at the time of such payment,
redemption, purchase or other acquisition, the Holder shall have received
written notice from the Holder or holders of any Senior Debt or their
representative or representatives (a "Payment Blockage Notice") that there
exists under such Senior Debt, or any agreement pursuant to which such Senior
Debt is issued, any default, which default shall not have been cured or waived,
permitting the holders there to declare the full amount of such Senior Debt due
and payable, but only for the period (the "Payment Blockage Period") commencing
on the date of receipt of the Payment Blockage Notice and ending (unless
-4-
<PAGE>
earlier terminated by notice given to the Holder by the holders of such Senior
Debt) on the earlier of (a) the date on which such event of default shall have
been cured or waived or (b) 180 days from the receipt of the Payment Blockage
Notice unless payment or distribution with respect to this Convertible Debenture
are otherwise not then permitted. Upon termination of Payment Blockage Period,
payments on account of principal of or interest on this Convertible Debenture
(other than amounts due and payable by reason of the acceleration of the
maturity of this Convertible Debenture) and redemptions, purchases or other
acquisitions may be made by or on behalf of the Company, if otherwise permitted
hereunder. Notwithstanding anything herein to the contrary, (A) only one Payment
Blockage Notice may be given during any period of 360 consecutive days with
respect to the same event of default and any other events of default on the same
issue of Senior Debt existing and known to the person giving such notice at the
time of such notice and (B) no new Payment Blockage Period may be commenced by
the Holder or holders of the same issue of Senior Debt or their representative
or representatives during any period of 360 consecutive days unless all events
of default which were the object of the immediately preceding Payment Blockage
Notice, and any other event of default on the same issue of Senior Debt existing
and known to the person giving such notice at the time of such notice, have been
cured or waived.
In the event that, notwithstanding the provisions of this Section 3.2,
payments are made by or on behalf of the Company in contravention of the
provisions of this Section 3.2, such payments shall be held by the Holders in
trust for the benefit of, and shall be paid over to and delivered to, the
holders of Senior Debt or their representative for application to the payment of
all Senior Debt remaining unpaid to the extent necessary to pay all Senior Debt
in full in accordance with the terms of such Senior Debt, after giving effect to
any concurrent payment or distribution to or for the holders of Senior Debt.
The Company shall give prompt written notice to the Holder of any
event of default under any Senior Debt or under any agreement pursuant to which
any Senior Debt may have been issued.
So long as any Senior Debt remains unpaid, the Holders of these
Subordinated Debentures will not accelerate, or cause to be accelerated, the
Subordinated Debentures, or exercise any remedies with respect to any event of
default occurring with respect to the Subordinated Debentures for a period of no
less than 180 days after the holders have delivered to the holders of the Senior
Debt notice of the occurrence of any event of default. If the event of default
is cured or waived or shall have ceased to exist within such 180 day period (and
payment of all amounts then due on the Subordinated Debentures without
acceleration shall constitute a cure of any event of default resulting from the
failure to make such payment when due), then the holders shall not be entitled
to declare these Subordinated Debentures due prior to their stated maturity
because of such event of default.
-5-
<PAGE>
3.3 Distribution on Acceleration of this Convertible Debenture;
-----------------------------------------------------------
Dissolution and Reorganization; Subrogation of this Convertible Debenture.
- -------------------------------------------------------------------------
(a) Upon (i) any acceleration of the principal amount due on this
Convertible Debenture because of an Event of Default or (ii) any distribution of
assets of the Company upon any dissolution, winding up, liquidation or
reorganization of the Company (whether in bankruptcy, insolvency or receivership
proceedings or upon an assignment for the benefit of creditors or any other
dissolution, winding up, liquidation or reorganization of the Company):
(1) the holders of the Senior Debt shall first be entitled to
receive payment in full of the principal thereof, the interest thereon and any
other amounts due thereon before the Holder is entitled to receive payment on
account of the principal of or interest on or any other amounts due on the
Convertible Debenture.
(2) any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities (other than
securities of the Company as reorganized or readjusted or securities of the
Company or any other corporation provided for by a plan of reorganization or
readjustment the payment of which is subordinate, at least to the extent
provided in this Section 3 with respect to this Convertible Debenture, to the
payment in full without diminution or modification by such plan of all Senior
Debt), to which the Holder would be entitled except for the provisions of this
Section 3, shall be paid by the liquidating trustee or agent or other person
making such a payment or distribution, directly to the holders of Senior Debt
(or their representative(s) or trustee(s) acting on their behalf), ratably
according to the aggregate amounts remaining unpaid on account of the principal
of or interest on and other amounts due on the Senior Debt held or represented
by each, to the extent necessary to make payment in full of all Senior Debt
remaining unpaid, after giving effect to any concurrent payment or distribution
to the holders of such Senior Debt; and
(3) in the event that, notwithstanding the foregoing, any payment
or distribution of assets of the Company of any kind or character, whether in
cash, property or securities shall be received by the Holders before all Senior
Debt is paid in full in cash, such payment or distribution shall be held in
trust for the benefit of, and be paid over to upon request by a holder of the
Senior Debt, the holders of the Senior Debt remaining unpaid (or their
representatives) or trustee(s) acting on their behalf, ratably as aforesaid, for
application to the payment of such Senior Debt until all such Senior Debt shall
have been paid in full, after giving effect to any concurrent payment or
distribution to the holders of such Senior Debt.
Subject to the payment in full of all Senior Debt, the Holder
shall be subrogated to the rights of the holders of Senior Debt to receive
payments or distributions of cash, property or securities of the Company
applicable to the Senior Debt until the principal of
-6-
<PAGE>
and interest on this Convertible Debenture shall be paid in full and, for
purposes of such subrogation, no such payments or distributions to the holders
of Senior Debt of cash, property or securities which otherwise would have been
payable or distributable to the Holder shall, as between the Company, its
creditors other than the holders of Senior Debt, and the Holder, be deemed to be
a payment by the Company to or on account of the Senior Debt, it being
understood that the provisions of this Section 3 are and are intended solely for
the purpose of defining the relative rights of the Holder, on the one hand, and
the holders of Senior Debt, on the other hand.
Nothing contained in this Section 3 or elsewhere in this
Convertible Debenture is intended to or shall impair, as between the Company and
its creditors other than the holders of Senior Debt, the obligation of the
Company, which is absolute and unconditional, to pay to the Holder the principal
of and interest on this Convertible Debenture as and when the same shall become
due and payable in accordance with the terms of this Convertible Debenture or is
intended to or shall affect the relative rights of the Holder and creditors of
the Company other than holders of Senior Debt, nor shall anything herein or
therein prevent the Holder from exercising all remedies otherwise permitted by
applicable law upon default under this Convertible Debenture, subject to the
rights, if any, under this Section 3 of the holders of Senior Debt in respect of
cash, property and securities of the Company received upon the exercise of any
such remedy. Upon distribution of assets of the Company referred to in this
Section 3 the Holder shall be entitled to rely upon a certificate of the
liquidating trustee or agent or other person making any distribution to the
Holder for the purpose of ascertaining the persons entitled to participate in
such distribution, the holders of the Senior Debt and other indebtedness of the
Company, the amount hereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Section 3.
3.4 Reliance by Senior Debt on Subordination Provisions. The Holder
---------------------------------------------------
of this Convertible Debenture by his acceptance thereof acknowledges and agrees
that the foregoing subordination provisions are, and are intended to be, an
inducement and a consideration for each holder of any Senior Debt, whether such
Senior Debt was created or acquired before or after the issuance of this
Convertible Debenture, to acquire and continue to hold, or to continue to hold,
such Senior Debt, and such holder of Senior Debt shall be deemed conclusively to
have relied on such subordination provisions in acquiring and continuing to
hold, or in continuing to hold, such Senior Debt. Notice of any default in the
payment of any Senior Debt, except as expressly stated in this Section 3, and
notice of acceptance of the provisions thereof are hereby expressly waived.
Except as otherwise expressly provided herein, no waiver, forbearance or release
by any holder of Senior Debt under such Senior Debt or under this Section 3
shall constitute a release of any of the obligations or liabilities of the
Holders provided in this Section 3. Except as otherwise expressly provided
herein, no right of any present or future holder of Senior Debt to enforce the
subordination provisions hereof shall at any time or in any way be prejudiced or
impaired by any act or failure to act on the part of the Company or any such
holder or by any noncompliance by
-7-
<PAGE>
the Company with the terms, provisions or covenants of this Convertible
Debenture, regardless of any knowledge thereof which such holder may have
otherwise been charged with.
4. No Impairment. The Company will not, by amendment of its Articles
-------------
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, or any other similar voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this
Convertible Debenture, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder against
impairment due to such event. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value of any shares of stock
receivable on conversion of this Convertible Debenture above the Conversion
Price then in effect, (b) will take all action that may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of stock, free from all taxes, liens and charges with
respect to the issue thereof, on the conversion of this Convertible Debenture
from time to time and (c) will not consolidate with or merge into any other
person or permit any such person to consolidate with or merge into the Company,
unless such other person (or, in the case of a merger or consolidation in which
the Company is the surviving entity, the person issuing the securities involved
in such merger or consolidation) shall, pursuant to Section 2.6 hereof,
expressly assume in writing and will be bound by all the terms of this
Convertible Debenture.
5. Chief Financial Officer's Certificate as Adjustments. In each
----------------------------------------------------
case of any adjustment or readjustment in the shares of Common Stock issuable on
the conversion of this Convertible Debenture, the Chief Financial Officer of the
Company will promptly compute such adjustment or readjustment in accordance with
the terms of this Convertible Debenture and prepare a certificate setting forth
such adjustment or readjustment, the Purchase Price resulting therefrom and the
increase or decrease, if any, of the number of shares purchasable at such price
upon conversion of the Convertible Debenture, and showing in detail the facts
and computation upon which such adjustment or readjustment is based. The Company
will forthwith mail a copy of each such certificate to each registered holder of
this Convertible Debenture, and will, on the written request at any time of the
holder of this Convertible Debenture, furnish to such holder a like certificate
setting forth the Purchase Price at the time in effect and showing how it was
calculated.
6. Notices of Record Date, etc. In the event the Company (a) takes
---------------------------
by the Company of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend on, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, or (b) consolidates or merges into, or transfers all or
substanitally all of its assets to, another corporation, or (c) dissolves or
liquidates (the events described in the foregoing clauses (b) and (c) being
hereinafter referred to as a "Fundamental Change"), then and
-8-
<PAGE>
in each such event the Company will mail or cause to be mailed to the registered
holder of this Convertible Debenture a notice specifying (i) the date on which
any such record is to be taken for the purpose of such dividend, distribution or
right, and stating the amount and character of such dividend, distribution or
right, (ii) the date on which any such Fundamental Change is to be effected, and
the time, if any is to be fixed, as of which the holders of record of Common
Stock shall be entitled to exchange their shares of Common Stock for securities
or other property, if any, deliverable on any Fundamental Change and (iii) the
amount and character of any stock or other securities, or rights or options with
respect thereto, proposed to be issued or granted, the date of such proposed
issue or grant and the persons or class of persons to whom such proposed issue
or grant is to be offered or made. Such notice shall also state that the action
in question or the record date is subject to the effectiveness of a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
or a favorable vote of stockholders, if either is required. Such notice shall be
mailed at least 20 days prior to the date specified in such notice on which any
such action is to be taken or 20 days prior to the record date therefor,
whichever is earlier.
7. Reservation of Conversion Shares. The Company will at all times
--------------------------------
reserve and keep available, solely for issuance and delivery on the conversion
of this Convertible Debenture, all shares of Common Stock from time to time
issuable upon such conversion.
8. Transfer. Subject to applicable federal and state securities laws
--------
the transfer of this Convertible Debenture and all rights hereunder, in whole or
in part, is registrable at the office or agency of the Company by the holder
hereof in person or by his duly authorized attorney, upon surrender of this
Convertible Debenture properly endorsed. Each taker and holder of this
Convertible Debenture, by taking or holding the same, consents and agrees that
this Convertible Debenture, when endorsed in blank, shall be deemed negotiable,
and that the holder hereof, when this Convertible Debenture shall have been so
endorsed, may be treated by the Company and all other persons dealing with this
Convertible Debenture as the absolute owner and holder hereof for any purpose
and as the person entitled to exercise the rights represented by this
Convertible Debenture, or to the registration of transfer hereof on the books of
the Company; and until due presentment for registration of transfer on such
books the Company may treat the registered holder hereof as the owner and holder
for all purposes, and the Company shall not be affected by notice to the
contrary.
9. Register. The Company shall maintain, at the principal office of
--------
the Company (or such other office as it may designate by notice to the holder
hereof), a register for the Convertible Debentures, in which the Company shall
record the name and address of the person in whose name a Convertible Debenture
has been issued, as well as the name and address of each transferee and each
prior owner of such Convertible Debenture.
-9-
<PAGE>
10. Replacement. On receipt of evidence reasonably satisfactory to
-----------
the Company of the loss, theft, destruction or mutilation of this Convertible
Debenture and, in the case of any such loss, theft or destruction of this
Convertible Debenture, on delivery of an indemnity agreement or security
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, on surrender and cancellation of such Convertible Debenture,
the Company at its expense will execute and deliver, in lieu thereof, a new
Convertible Debenture of like tenor; provided, however, if a Convertible
-------- -------
Debenture held by Strategic Partners its nominee or any of its partners,
principals, officers or directors is lost, stolen or destroyed, the affidavit of
a general partner or any principal or corporate officer of Strategic Partners
setting forth the circumstances with respect to such loss, theft or destruction
shall be accepted as satisfactory evidence thereof, and no indemnity bond or
other security shall be required as a condition to the execution and delivery by
the company of a new Convertible Debenture in replacement of such lost, stolen
or destroyed Convertible Debenture.
11. Remedies. The Company stipulates that the remedies at law of the
--------
holder of this Convertible Debenture in the event of any default or threatened
default by the Company in the performance of or compliance with any of the terms
of this Convertible Debenture are not and will not be adequate, and that such
terms may be specifically enforced pursuant to a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
12. No Rights or Liabilities as a Stockholder. This Convertible
-----------------------------------------
Debenture shall not entitle the Holder to any voting rights or other rights as a
stockholder of the Company; provided, however, that nothing herein shall be
-------- -------
construed to affect any rights a Holder may have under the Purchase Agreement.
No provision of this Convertible Debenture, in the absence of affirmative action
by the Holder to purchase Common Stock, and no mere enumeration herein of the
rights or privileges of the Holder, shall give rise to any liability of the
Holder for the Conversion Price or otherwise as a stockholder of the Company,
whether such liability is asserted by the Company or by creditors of the
Company.
13. Notices. All notices, demands, requests, or other communications
-------
which may be or are required to be given, served, or sent pursuant to this
Convertible Debenture shall be given, served and sent in accordance with the
provisions of the Purchase Agreement.
14. Miscellaneous. This Convertible Debenture and any term hereof
-------------
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. This Convertible Debenture shall be
construed and enforced in accordance with and governed by the laws of the State
of Delaware (excluding the choice of law rules thereof). The headings in this
Convertible Debenture are for purposes of reference only, and shall not limit or
otherwise affect
-10-
<PAGE>
any of the terms hereof. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
IN WITNESS WHEREOF, the undersigned has caused this Convertible
Debenture to be duly executed on its behalf as of the date first hereinabove set
forth.
THE RIGHT START, INC.
By: /s/ Jerry R. Welch
--------------------------------------
Jerry R. Welch
President
-11-
<PAGE>
EXHIBIT 3.02
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of
October 11, 1996 between The Right Start, Inc., a California corporation (the
"Company"), and Strategic Associates, L.P., a limited partnership organized
under the laws of the State of Delaware ("Purchaser").
WHEREAS, the Company and Purchaser have entered into a Convertible
Debenture Purchase Agreement dated as of October 11, 1996 (the "Purchase
Agreement");
WHEREAS, pursuant to the Purchase Agreement, the Company and Purchaser
desire to enter into this Agreement to provide Purchaser with certain
registration rights and to address related matters;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties agree as follows:
1. Registration Rights
-------------------
1.1 Demand Registration Rights.
--------------------------
(a) Subject to the provisions of this Section 1.1, at any
time after the date hereof, Purchaser may request registration for sale under
the Act of all or part of the Common Stock, no par value, of the Company
("Common Stock") then held by Purchaser or issuable to Purchaser pursuant to
conversion of the Convertible Debenture of even date herewith, issued by the
Company to Purchaser pursuant to the Purchase Agreement (the "Debenture"). The
Company shall thereafter, as expeditiously as practicable, use its best efforts
(i) to file with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Act"), a registration statement on the
appropriate form (using Form S-3 or other "short form," if available) covering
all the shares of Common Stock specified in the demand request and (ii) to cause
such registration statement to be declared effective. The Company shall use its
best efforts to cause each offering pursuant to this Section 1.1 to be managed,
on a firm commitment basis, by a recognized regional or national underwriter.
The Company shall not be required to comply with more than two (2) requests by
Purchaser for demand registration pursuant to this Section 1.1(a).
(b) The Company shall not be required to effect a demand
registration under the Act pursuant to Section 1.1(a) above if (i) the Company
receives such request for registration within 120 days preceding the anticipated
effective date of a proposed underwritten public offering of securities of the
Company approved by the Company's Board of Directors prior to the Company's
receipt of such request; (ii) within 6 months prior to any such
<PAGE>
request for registration, a registration of securities of the Company has been
effected in which Purchaser had the right to participate pursuant to Section 1.2
hereof; or (iii) the Board of Directors of the Company reasonably determines in
good faith that effecting such a demand registration at such time would have a
material adverse effect upon a proposed sale of all (or substantially all) the
assets of the Company, or a merger, reorganization, recapitalization, or similar
transaction materially affecting the capital structure or equity ownership of
the Company; provided, however, that the Company may only delay a demand
registration pursuant to this Section 1.1(b)(iii) for a period not exceeding 3
months (or until such earlier time as such transaction is consummated or no
longer proposed). The Company shall promptly notify Purchaser in writing of any
decision not to effect any such request for registration pursuant to this
Section 1.1(b), which notice shall set forth in reasonable detail the reason for
such decision and shall include an undertaking by the Company promptly to notify
Purchaser as soon as a demand registration may be effected.
(c) Purchaser may withdraw a request for demand registration
at any time before a registration statement is declared effective, in which
event the Company shall withdraw such registration statement (and Purchaser
shall not be deemed to have requested a demand registration for purposes of
Section 1.1(a) hereof). If the Company withdraws a registration statement under
this Section 1.1(c) in respect of a registration for which the Company would
otherwise be required to pay expenses under Section 1.4(b) hereof, Purchaser
shall be liable to the Company for all expenses of such registration specified
in Section 1.4(b) hereof in proportion to the number of shares Purchaser shall
have requested to be registered, and Purchaser shall not be deemed to have
requested a demand registration for purposes of Section 1.1(a) hereof.
1.2 Piggyback Registration Rights.
-----------------------------
(a) If at any time or times after the date hereof, the
Company proposes to make a registered public offering of any of its securities
under the Act (whether to be sold by it or by one or more third parties), other
than an offering pursuant to a demand registration under Section 1.1(a) hereof
or an offering registered on Form S-8, Form S-4, or comparable forms, the
Company shall, not less than 45 days prior to the proposed filing date of the
registration form, give written notice of the proposed registration to
Purchaser, and at the written request of Purchaser delivered to the Company
within 20 days after the receipt of such notice, shall include in such
registration and offering, and in any underwriting of such offering, all shares
of Common Stock that may have been designated in Purchaser's request.
(b) If a registration in which Purchaser has the right to
participate pursuant to this Section 1.2 is an underwritten offering for the
account of the Company or for the account of a security holder (other than
Purchaser) pursuant to the exercise of a demand registration right, and the
managing underwriters advise the Company or such
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<PAGE>
security holder, as the case may be, in writing that in their opinion the number
of securities requested to be included in such registration, together with the
securities being offered by the Company or such security holder, as the case may
be, exceeds the number which can be effectively sold in such offering, the
Company shall include in such registration (i) first, the securities of the
Company or such security holder proposed to be sold, and (ii) second, to the
extent possible, the Common Stock proposed to be sold by Purchaser and any other
selling stockholders, in proportion to the number of shares of Common Stock with
respect to which they have requested registration.
1.3 Registration Procedures. The Company shall have no
-----------------------
obligation to file a registration statement pursuant to Section 1.1 hereof, or
to include shares of Common Stock owned by or issuable to Purchaser in a
registration statement pursuant to Section 1.2 hereof, unless and until
Purchaser shall have furnished the Company with all information and statements
about or pertaining to Purchaser in such reasonable detail and on such timely
basis as is reasonably required by the Company in connection with the
preparation of the registration statement. Whenever Purchaser has requested that
any shares of Common Stock be registered pursuant to Sections 1.1 or 1.2 hereof,
the Company shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement
with respect to such shares and use its best efforts to cause such registration
statement to become effective as soon as reasonably practicable thereafter
(provided that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company shall furnish counsel for
Purchaser with copies of all such documents proposed to be filed);
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of not less than nine months (or two years, if the provisions of Rule
415 under the Act are available with respect thereto) or until Purchaser has
completed the distribution described in such registration statement, whichever
occurs first;
(c) furnish to Purchaser such number of copies of such
registration statement, each amendment and supplement thereto, the prospectus
included in such registration statement (including each preliminary prospectus),
and such other documents as Purchaser may reasonably request;
(d) use its best efforts to register or qualify such shares
under such other securities or blue sky laws of such jurisdictions as Purchaser
requests (and to maintain such registrations and qualifications effective for a
period of nine months or until Purchaser has completed the distribution of such
shares, whichever occurs first), and to do any and all other
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<PAGE>
acts and things which may be necessary or advisable to enable Purchaser to
consummate the disposition in such jurisdictions of such shares (provided that
the Company will not be required to (i) qualify generally to do business in any
jurisdiction where it would not be required but for this Section 1.3(d), (ii)
subject itself to taxation in any such jurisdiction, or (iii) file any general
consent to service of process in any such jurisdiction);
(e) notify Purchaser, at any time during which a prospectus
relating thereto is required to be delivered under the Act within the period
that the Company is required to keep a registration statement effective, of the
happening of any event as a result of which the prospectus included in such
registration statement contains an untrue statement of a material fact or omits
any fact necessary to make the statements therein not misleading, and prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such shares, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading;
(f) use its best efforts to cause all such shares to be
listed on securities exchanges or interdealer quotation systems (including
NASDAQ National or Small-Cap Market), if any, on which similar securities issued
by the Company are then listed;
(g) enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other actions as
Purchaser reasonably requests (and subject to Purchaser's reasonable approval)
in order to expedite or facilitate the disposition of such shares; and
(h) make reasonably available for inspection by Purchaser, by
any underwriter participating in any distribution pursuant to such registration
statement, and by any attorney, accountant or other agent retained by Purchaser
or by any such underwriter, all relevant financial and other records, pertinent
corporate documents, and properties (other than confidential intellectual
property) of the Company; provided, however, that any information that is
designated in writing by the Company, in good faith, as confidential at the time
of delivery of such information shall be kept confidential by Purchaser or any
such underwriter, attorney, accountant or agent, unless such disclosure is made
in connection with a court proceeding or required by law, or such information
becomes available to the public generally or through a third party without an
accompanying obligation of confidentiality.
1.4 Registration Expenses.
---------------------
The Company will pay all Registration Expenses of all
registrations under this Agreement, provided, however, that if a registration
-------- -------
under Section 1.1 is withdrawn at the request of Purchaser (other than as a
result of information concerning the business or financial condition of the
Company that is made known to the Purchaser after the date on which such
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<PAGE>
registration was requested) and if the requesting Purchaser elects not to have
such registration counted as a registration requested under Section 1.1, the
Purchaser shall pay the Registration expenses of such registration. For purposes
of this Section, the term "Registration Expenses" means all expenses incurred by
the Company in complying with this Section, including, without limitation, all
registration and filing fees (other than Natioanl Association of Securities
Dealers, Inc. filing fees pursuant to an underwritten offering), exchange
listing fees, printing expenses, fees, and expenses of counsel for the Company
and the reasonable fees and expenses of one firm or counsel selected by the
Purchaser to represent it, state Blue Sky fees and expenses, and the expense of
any special audits incident to or required by any such registration, but
excluding underwriting discounts and selling commissions.
1.5 Indemnity.
---------
(a) In the event that any shares of Common Stock owned by
Purchaser are sold by means of a registration statement pursuant to Section 1.1
or 1.2 hereof, the Company agrees to indemnify and hold harmless Purchaser, each
of its partners and their officers and directors, and each person, if any, who
controls Purchaser within the meaning of the Act (Purchaser, its partners and
their officers and directors, and any such other persons being hereinafter
referred to individually as an "Indemnified Person" and collectively as
"Indemnified Persons") from and against all demands, claims, actions or causes
of action, assessments, losses, damages, liabilities, costs, and expenses,
including, without limitation, interest, penalties, and reasonable attorneys'
fees and disbursements, asserted against, resulting to, imposed upon or incurred
by such Indemnified Person, directly or indirectly (hereinafter referred to in
this Section 1.5 in the singular as a "claim" and in the plural as "claims"),
based upon, arising out of or resulting from any untrue statement of a material
fact contained in the registration statement or any omission to state therein a
material fact necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading, except insofar as such
claim is based upon, arises out of or results from information furnished to the
Company in writing by Purchaser for use in connection with the registration
statement.
(b) Purchaser agrees to indemnify and hold harmless the
Company, its officers and directors, and each person, if any, who controls the
Company within the meaning of the Act (the Company, its officers and directors,
and any such other persons also being hereinafter referred to individually as an
"Indemnified Person" and collectively as "Indemnified Persons") from and against
all claims based upon, arising out of or resulting from any untrue statement of
a material fact contained in the registration statement or any omission to state
therein a material fact necessary in order to make the statement made therein,
in the light of the circumstances under which they were made, not misleading, to
the extent that such claim is based upon, arises out of or results from
information furnished to the Company in writing by Purchaser for use in
connection with the registration statement.
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<PAGE>
(c) The indemnification set forth herein shall be in addition
to any liability the Company or Purchaser may otherwise have to the Indemnified
Persons. Promptly after actually receiving definitive notice of any claim in
respect of which an Indemnified Person may seek indemnification under this
Section 1.5, such Indemnified Person shall submit written notice thereof to
either the Company or Purchaser, as the case may be (sometimes being hereinafter
referred to as an "Indemnifying Person"). The failure of the Indemnified Person
so to notify the Indemnifying Person of any such claim shall not relieve the
Indemnifying Person from any liability it may have hereunder except to the
extent that (a) such liability was caused or materially increased by such
failure, or (b) the ability of the Indemnifying Person to reduce such liability
was materially adversely affected by such failure. In addition, the failure of
the Indemnified Person so to notify the Indemnifying Person of any such claim
shall not relieve the Indemnifying Person from any liability it may have
otherwise than hereunder. The Indemnifying Person shall have the right to
undertake, by counsel or representatives of its own choosing, the defense,
compromise or settlement (without admitting liability of the Indemnified Person)
of any such claim asserted, such defense, compromise or settlement to be
undertaken at the expense and risk of the Indemnifying Person, and the
Indemnified Person shall have the right to engage separate counsel, at such
Indemnified Person's own expense, whom counsel for the Indemnifying Person shall
keep informed and consult with in a reasonable manner. In the event the
Indemnifying Person shall elect not to undertake such defense by its own
representatives, the Indemnifying Person shall give prompt written notice of
such election to the Indemnified Person, and the Indemnified Person may
undertake the defense, compromise or settlement (without admitting liability of
the Indemnified Person) thereof on behalf of and for the account and risk of the
Indemnifying Person by counsel or other representatives designated by the
Indemnified Person. Notwithstanding the foregoing, no Indemnifying Person shall
be obligated hereunder with respect to amounts paid in settlement of any claim
if such settlement is effected without the consent of such Indemnifying Person
(which consent shall not be unreasonably withheld).
(d) If for any reason the foregoing indemnity is unavailable
to, or is insufficient to hold harmless, an Indemnified Person, then the
Indemnifying Person shall contribute to the amount paid or payable by the
Indemnified Person as a result of such claims, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Person and the
Indemnified Person as well as any other relevant equitable considerations. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
1.6 Subsequent Registration Statements. The Company shall not
----------------------------------
cause or permit any new registration statements (except registration statements
on Forms S-8, S-4, or comparable forms) to become effective during the 90 days
after the effective date of a registration statement covering shares of Common
Stock owned by Purchaser.
-6-
<PAGE>
2. Miscellaneous.
-------------
2.1 Additional Actions and Documents. Each of the parties hereto
--------------------------------
hereby agrees to use its good faith best efforts to bring about the consummation
of this Agreement, and to take or cause to be taken such further actions, to
execute, deliver and file or cause to be executed, delivered and filed such
further documents and instruments, and to obtain such consents, as may be
necessary or as may be reasonably requested in order to fully effectuate the
purposes, terms and conditions of this Agreement.
2.2 Assignment. Purchaser may assign its rights under this
----------
Agreement to any assignee of the Convertible Debenture or the shares of Common
Stock issuable thereunder.
2.3 Entire Agreement; Amendment. This Agreement, including the
---------------------------
other writings referred to herein or delivered pursuant hereto, constitutes the
entire agreement among the parties hereto with respect to the transactions
contemplated herein, and it supersedes all prior oral or written agreements,
commitments or understandings with respect to the matters provided for herein.
No amendment, modification or discharge of this Agreement shall be valid or
binding unless set forth in writing and duly executed by the party against whom
enforcement of the amendment, modification, or discharge is sought.
2.4 Limitation on Benefits. It is the explicit intention of the
----------------------
parties hereto that no person or entity other than the parties hereto (and their
respective successors and assigns) is or shall be entitled to bring any action
to enforce any provision of this Agreement against any of the parties hereto,
and the covenants, undertakings and agreements set forth in this Agreement shall
be solely for the benefit of, and shall be enforceable only by, the parties
hereto or their respective successors and assigns.
2.5 Binding Effect. This Agreement shall be binding upon and
--------------
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
2.6 Governing Law. This Agreement, 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 Delaware (excluding the
choice of law rules thereof).
2.7 Notices. All notices, demands, requests, or other communications
-------
which may be or are required to be given, served, or sent by any party to any
other party pursuant to this Agreement shall be in writing and shall be mailed
by first-class, registered or certified mail, return receipt requested, postage
prepaid, or transmitted by hand delivery (including delivery by courier),
telegram, telex, or facsimile transmission, addressed as follows:
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<PAGE>
(a) If to the Company:
The Right Start, Inc.
5334 Starling Center Drive
Westlake Village, California 91361
Attention: President
Facsimile:
with a copy (which shall not constitute notice) to:
Milbank, Tweed, Hadley & McCloy
601 S. Figueroa, 30th Floor
Los Angeles, CA 90017
Attention: Kenneth J. Baronsky, Esq.
Facsimile: (213) 629-5063
(b) If to Purchaser:
Strategic Associates, L.P.
10 North Calvert Street, Suite 735
Baltimore, Maryland 21202
Attention: Mr. David L. Warnock
Facsimile: 410/347-2963
with a copy (which shall not constitute notice) to:
George P Stamas, Esq.
Wilmer, Cutler & Pickering
100 Light Street
Baltimore, Maryland 21202
Facsimile: 410/986-2828
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a telex) the answerback being deemed conclusive
(but not exclusive) evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
-8-
<PAGE>
2.8 Headings. Article and Section headings contained in this
--------
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
2.9 Execution in Counterparts. To facilitate execution, this
-------------------------
Agreement may be executed in as many counterparts as may be required; and it
shall not be necessary that the signatures of each party appear on each
counterpart; but it shall be sufficient that the signature of each party appear
on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of this
Agreement to produce or account for more than a number of counterparts
containing the respective signatures of all of the parties hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
THE RIGHT START, INC.
By: /s/ Jerry R. Welch
--------------------------------------
Jerry R. Welch
President
STRATEGIC ASSOCIATES, L.P.
By: Cahill, Warnock & Company, LLC
its general partner
By: /s/ David L. Warnock
--------------------------------------
David L. Warnock
Managing Member
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<PAGE>
EXHIBIT 10.3
[EXECUTION COPY]
LOAN AND SECURITY AGREEMENT
DATED AS OF NOVEMBER 14, 1996
between
THE RIGHT START, INC.,
as Borrower,
and
HELLER FINANCIAL, INC.,
as Lender
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1 DEFINITIONS............................................... 1
1.1 Certain Defined Terms....................................... 1
1.2 Accounting Terms............................................ 11
1.3 Other Definitional Provisions............................... 12
SECTION 2 LOANS AND COLLATERAL...................................... 12
2.1 Loans....................................................... 12
(A) Revolving Loan......................................... 12
(B) Eligible Collateral.................................... 13
(C) CAPEX Line............................................. 13
(D) Borrowing Mechanics.................................... 14
(E) CAPEX Note............................................. 14
(F) Evidence of Revolving Loan Obligations................. 15
(G) Letters of Credit...................................... 15
(1) Maximum Amount.................................... 15
(2) Reimbursement..................................... 15
(3) Conditions of Issuance............................ 15
(4) Request for Letters of Credit..................... 16
(H) Other Letter of Credit Provisions...................... 16
(1) Obligations Absolute.............................. 16
(2) Nature of Duties.................................. 17
2.2 Interest.................................................... 17
(A) Rate of Interest....................................... 17
(B) Interest Periods....................................... 18
(C) Computation and Payment of Interest.................... 19
(D) Interest Laws.......................................... 19
(E) Conversion or Continuation............................. 20
2.3 Fees........................................................ 20
(A) Closing Fee............................................ 20
(B) Unused Line Fee........................................ 20
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
(C) Letter of Credit Fees.................................. 21
(D) Prepayment Fees........................................ 21
(E) Audit Fees............................................. 21
(F) Other Fees and Expenses................................ 21
2.4 Payments and Prepayments.................................... 21
(A) Manner and Time of Payment............................. 21
(B) Mandatory Prepayments.................................. 22
(1) Overadvance...................................... 22
(2) Proceeds of Asset Dispositions................... 22
(C) Voluntary Prepayments and Repayments................... 22
(D) Payments on Business Days.............................. 22
2.5 Term of this Agreement...................................... 22
2.6 Statements.................................................. 23
2.7 Grant of Security Interest.................................. 23
2.8 Capital Adequacy and Other Adjustments...................... 23
2.9 Taxes....................................................... 24
(A) No Deductions.......................................... 24
(B) Changes in Tax Laws.................................... 24
2.10 Required Termination and Prepayment........................ 25
2.11 Compensation............................................... 25
2.12 Booking of LIBOR Loans..................................... 25
2.13 Assumptions Concerning Funding of LIBOR Loans.............. 25
SECTION 3 CONDITIONS TO LOANS....................................... 26
3.1 Conditions to Loans......................................... 26
(A) Closing Deliveries..................................... 26
(B) Security Interests..................................... 26
(C) Closing Date Availability.............................. 26
(D) Representations and Warranties......................... 26
(E) Fees................................................... 26
(F) No Default............................................. 27
(G) Performance of Agreements.............................. 27
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
(H) No Prohibition........................................ 27
(I) No Litigation......................................... 27
(J) Appraisals............................................ 27
SECTION 4 BORROWER'S REPRESENTATIONS AND WARRANTIES................ 27
4.1 Organization, Powers, Capitalization....................... 27
(A) Organization and Powers............................... 27
(B) Capitalization........................................ 28
4.2 Authorization of Borrowing, No Conflict.................... 28
4.3 Financial Condition........................................ 28
4.4 Indebtedness and Liabilities............................... 29
4.5 Account Warranties......................................... 29
4.6 Names...................................................... 29
4.7 Locations; FEIN............................................ 29
4.8 Title to Properties; Liens................................. 29
4.9 Litigation; Adverse Facts.................................. 29
4.10 Payment of Taxes.......................................... 30
4.11 Performance of Agreements................................. 30
4.12 Employee Benefit Plans.................................... 30
4.13 Intellectual Property..................................... 30
4.14 Broker's Fees............................................. 30
4.15 Environmental Compliance.................................. 31
4.16 Solvency.................................................. 31
4.17 Disclosure................................................ 31
4.18 Insurance................................................. 31
4.19 Compliance with Laws...................................... 31
4.20 Bank Accounts............................................. 32
4.21 Subsidiaries.............................................. 32
4.22 Employee Matters.......................................... 32
4.23 Governmental Regulation................................... 32
SECTION 5 AFFIRMATIVE COVENANTS.................................... 33
5.1 Financial Statements and Other Reports..................... 33
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
(A) Monthly Financials...................................... 33
(B) Quarterly Financials.................................... 33
(C) Year-End Financials..................................... 33
(D) [intentionally omitted]................................. 34
(E) Compliance Certificate.................................. 34
(F) Weekly Borrowing Base Certificates and Inventory Reports 34
(G) Listings and Agings..................................... 34
(H) [intentionally deleted]................................. 34
(I) Appraisals.............................................. 34
(J) Government Notices...................................... 35
(K) SEC Filings............................................. 35
(L) Events of Default, etc.................................. 35
(M) Trade Names............................................. 35
(N) Locations............................................... 35
(O) Bank Accounts........................................... 35
(P) Litigation.............................................. 35
(Q) Projections............................................. 36
(R) Subordinated Debt and Other Indebtedness Notices........ 36
(S) Other Information....................................... 36
5.2 Access to Accountants........................................ 36
5.3 Inspection................................................... 36
5.4 Collateral Records........................................... 36
5.5 [intentionally deleted]...................................... 37
5.6 Collection of Accounts and Payments.......................... 37
5.7 Endorsement.................................................. 37
5.8 Corporate Existence.......................................... 37
5.9 Payment of Taxes............................................. 38
5.10 Maintenance of Properties; Insurance........................ 38
5.11 Compliance with Laws........................................ 38
5.12 Further Assurances.......................................... 38
5.13 Collateral Locations........................................ 39
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
5.14 Bailees.................................................... 39
5.15 Mortgages; Title Insurance; Surveys........................ 39
(A) Title Insurance........................................ 39
(B) Additional Mortgaged Property.......................... 39
(C) Surveys................................................ 39
5.16 Use of Proceeds and Margin Security........................ 40
SECTION 6 FINANCIAL COVENANTS....................................... 40
6.1 Net Worth................................................... 40
6.2 Interest Coverage........................................... 40
SECTION 7 NEGATIVE COVENANTS........................................ 40
7.1 Indebtedness and Liabilities................................ 40
7.2 Guaranties.................................................. 41
7.3 Transfers, Liens and Related Matters........................ 41
(A) Transfers.............................................. 41
(B) Liens.................................................. 41
(C) No Negative Pledges.................................... 42
(D) No Restrictions on Subsidiary Distributions to Borrower 42
7.4 Investments and Loans....................................... 42
7.5 Restricted Junior Payments.................................. 42
7.6 Restriction on Fundamental Changes.......................... 42
7.7 Changes Relating to Subordinated Debt....................... 43
7.8 Transactions with Affiliates................................ 43
7.9 Environmental Liabilities................................... 43
7.10 Conduct of Business........................................ 43
7.11 Compliance with ERISA...................................... 43
7.12 Tax Consolidations......................................... 43
7.13 Subsidiaries............................................... 44
7.14 Fiscal Year................................................ 44
7.15 Press Release; Public Offering Materials................... 44
7.16 Bank Accounts.............................................. 44
SECTION 8 DEFAULT, RIGHTS AND REMEDIES.............................. 44
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
8.1 Event of Default............................................ 44
(A) Payment................................................ 44
(B) Default in Other Agreements............................ 44
(C) Breach of Certain Provisions........................... 44
(D) Breach of Warranty..................................... 45
(E) Other Defaults Under Loan Documents.................... 45
(F) Change in Control...................................... 45
(G) Involuntary Bankruptcy; Appointment of Receiver, etc... 45
(H) Voluntary Bankruptcy; Appointment of Receiver, etc..... 45
(I) Liens.................................................. 46
(J) Judgment and Attachments............................... 46
(K) Dissolution............................................ 46
(L) Solvency............................................... 46
(M) Injunction............................................. 46
(N) Invalidity of Loan Documents........................... 46
(O) Failure of Security................................... 46
(P) Damage, Strike, Casualty............................... 47
(Q) Licenses and Permits................................... 47
(R) Forfeiture............................................. 47
8.2 Suspension of Commitments................................... 47
8.3 Acceleration................................................ 47
8.4 Remedies.................................................... 48
8.5 Appointment of Attorney-in-Fact............................. 48
8.6 Limitation on Duty of Lender with Respect to Collateral..... 49
8.7 Application of Proceeds..................................... 49
8.8 License of Intellectual Property............................ 49
8.9 Waivers, Non-Exclusive Remedies............................. 50
SECTION 9 MISCELLANEOUS............................................. 50
9.1 Assignments and Participations.............................. 50
9.2 Set Off..................................................... 50
9.3 Expenses and Attorneys' Fees................................ 51
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
9.4 Indemnity................................................... 51
9.5 Amendments and Waivers...................................... 52
9.6 Notices..................................................... 52
9.7 Survival of Warranties and Certain Agreements............... 53
9.8 Indulgence Not Waiver....................................... 53
9.9 Marshaling; Payments Set Aside.............................. 53
9.10 Entire Agreement........................................... 53
9.11 Independence of Covenants.................................. 54
9.12 Severability............................................... 54
9.13 Headings................................................... 54
9.14 APPLICABLE LAW............................................. 54
9.15 Successors and Assigns..................................... 54
9.16 No Fiduciary Relationship; Limitation of Liabilities....... 54
9.17 CONSENT TO JURISDICTION.................................... 55
9.18 WAIVER OF JURY TRIAL....................................... 55
9.19 Construction............................................... 55
9.20 Counterparts; Effectiveness................................ 55
9.21 No Duty.................................................... 56
9.22 Confidentiality............................................ 56
EXHIBITS............................................................. i
SCHEDULES............................................................ ii
</TABLE>
vii
<PAGE>
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is dated as of November 14, 1996 and
entered into by and between THE RIGHT START, INC., a California corporation
("Borrower"), with its principal place of business at 5334 Sterling Center
Drive, Westlake Village, California 91361, and HELLER FINANCIAL, INC., a
Delaware corporation ("Lender"), with offices at 500 West Monroe, Chicago,
Illinois, 60661. All capitalized terms used herein are defined in Section 1 of
---------
this Agreement.
WHEREAS, Borrower desires that Lender extend a credit facility to provide
working capital financing and to provide funds for other general corporate
purposes; and
WHEREAS, Borrower desires to secure its obligations under the Loan
Documents by granting to Lender a security interest in and lien upon certain of
Borrower's property;
NOW, THEREFORE, in consideration of these premises and the agreements,
provisions and covenants herein contained, Borrower and Lender agree as follows:
SECTION 1 DEFINITIONS
1.1 Certain Defined Terms. The following terms used in this Agreement
---------------------
shall have the following meanings:
"Accounts" means, all "accounts" (as defined in the UCC), accounts
receivable, contract rights and general intangibles relating thereto, notes,
drafts and other forms of obligations owed to or owned by Borrower arising or
resulting from the sale of goods or the rendering of services.
"Affiliate" means any Person (other than Lender): (a) directly or
indirectly controlling, controlled by, or under common control with any Loan
Party; (b) directly or indirectly owning or holding five percent (5%) or more of
any equity interest in Borrower; or (c) five percent (5%) or more of whose
voting stock or other equity interest having ordinary voting power for the
election of directors or the power to direct or cause the direction of
management, is directly or indirectly owned or held by Borrower; or (d) which
has a senior executive officer who is also a senior executive officer of
Borrower. For purposes of this definition, "control" (including with correlative
meanings, the terms "controlling", "controlled by" and "under common control
with") means the possession directly or indirectly of the power to direct or
cause the direction of the management and policies of a Person, whether through
the ownership of voting securities or other equity interest, or by contract or
otherwise.
"Agreement" means this Loan and Security Agreement as it may be amended,
restated supplemented or otherwise modified from time to time.
1
<PAGE>
"Asset Disposition" means the disposition, whether by sale, lease,
transfer, loss, damage, destruction, condemnation or otherwise, of any or all of
the assets of Borrower or any of its Subsidiaries other than sales of Inventory
in the ordinary course of business.
"Bank Letter of Credit" means each letter of credit issued by a bank
acceptable to and approved by Lender for the account of Borrower and supported
by a Risk Participation Agreement.
"Base Rate" means a variable rate of interest per annum equal to the higher
of (a) the rate of interest from time to time published by the Board of
Governors of the Federal Reserve System as the "Bank Prime Loan" rate in Federal
Reserve Statistical Release H.15(519) entitled "Selected Interest Rates" or any
successor publication of the Federal Reserve System reporting the Bank Prime
Loan rate or its equivalent, or (b) the Federal Funds Effective Rate. The
statistical release generally sets forth a Bank Prime Loan rate for each
Business Day. In the event the Board of Governors of the Federal Reserve System
ceases to publish a Bank Prime Loan rate or its equivalent, the term "Base Rate"
shall mean a variable rate of interest per annum equal to the highest of the
"prime rate", "reference rate", "base rate", or other similar rate announced
from time to time by any of Bankers Trust Company, or The Chase Manhattan Bank,
N.A., or their successors (with the understanding that any such rate may merely
be a reference rate and may not necessarily represent the lowest or best rate
actually charged to any customer by any such bank).
"Base Rate Loans" means Loans bearing interest at rates determined by
reference to the Base Rate.
"Blocked Accounts" has the meaning assigned to that term in subsection 5.6.
--------------
"Borrower" has the meaning assigned to that term in the preamble to this
Agreement.
"Borrowing Base" has the meaning assigned to that term in subsection
----------
2.1(A).
- ------
"Borrowing Base Certificate" means a certificate and assignment schedule
duly executed by an officer of Borrower appropriately completed and in
substantially the form of Exhibit A.
---------
"Business Day" means any day excluding Saturday, Sunday and any day which
is a legal holiday under the laws of the States of Illinois, Pennsylvania or
California, or is a day on which banking institutions located in any such state
are closed or, for the purposes of LIBOR Loans only, a day on which commercial
banks are open for dealings in Dollar deposits in the London, England (UK)
market.
"CAPEX Advance" means each advance made by Lender under the CAPEX Loan
Commitment pursuant to subsection 2.1(C).
-----------------
"CAPEX Loan" means the outstanding balance of all CAPEX Advances.
2
<PAGE>
"CAPEX Loan Commitment" means the commitment of Lender to make CAPEX
Advances pursuant to subsection 2.1(C).
-----------------
"CAPEX Note" or "CAPEX Notes" means each promissory note of Borrower in
substantially the form of Exhibit B, issued pursuant to subsection 2.1(E).
--------- -----------------
"Capital Lease" means any lease of any property (whether real, personal or
mixed) that, in conformity with GAAP, should be accounted for as a capital
lease.
"Cash Equivalents" means: (a) marketable direct obligations issued or
unconditionally guaranteed by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within six (6) months from the date of acquisition thereof;
(b) commercial paper maturing no more than six (6) months from the date issued
and, at the time of acquisition, having a rating of at least A-1 from Standard &
Poor's Corporation or at least P-1 from Moody's Investors Service, Inc.; and (c)
certificates of deposit or bankers' acceptances maturing within six (6) months
from the date of issuance thereof issued by, or overnight reverse repurchase
agreements from, any commercial bank organized under the laws of the United
States of America or any state thereof or the District of Columbia having
combined capital and surplus of not less than $250,000,000 and not subject to
setoff rights in favor of such bank.
"Closing Date" means November 18, 1996.
"Collateral" has the meaning assigned to that term in subsection 2.7.
--------------
"Collecting Bank" has the meaning assigned to that term in subsection 5.6.
--------------
"Commitment" or "Commitments" means the commitment or commitments of Lender
to make Loans as set forth in subsections 2.l(A) and 2.1(B) and to provide
-----------------------------
Lender Letters of Credit as set forth in subsection 2.1(G).
-----------------
"Compliance Certificate" means a certificate duly executed by the chief
executive officer or chief financial officer of Borrower appropriately completed
and in substantially the form of Exhibit C.
---------
"Default" means a condition, act or event that, after notice or lapse of
time or both, would constitute an Event of Default if that condition or event
were not cured or removed within any applicable grace or cure period.
"Default Rate" has the meaning assigned to that term in subsection 2.2.
--------------
"EBITDA" means, for any period, without duplication, the total of the
following for Borrower and its Subsidiaries on a consolidated basis, each
calculated for such period: (1) net
3
<PAGE>
income determined in accordance with GAAP; plus, to the extent included in the
calculation of net income, (2) the sum of (a) income and franchise taxes paid or
accrued; (b) Interest Expenses, net of interest income, paid or accrued; (c)
interest paid in kind; (d) amortization and depreciation and (e) other non-cash
charges (excluding accruals for cash expenses made in the ordinary course of
business); less, to the extent included in the calculation of net income, (3)
the sum of (a) the income of any Person other than wholly-owned Subsidiaries of
Borrower in which Borrower or a wholly owned Subsidiary of Borrower has an
ownership interest except to the extent such income is received by Borrower or
such wholly-owned Subsidiary in a cash distribution during such period; and (b)
gains or losses from sales or other dispositions of assets (other than Inventory
in the normal course of business), each of the foregoing to exclude
extraordinary or non-recurring gains or losses.
"Eligible Inventory" has the meaning assigned to that term in subsection
----------
2.1(B).
- ------
"Employee Benefit Plan" means any employee benefit plan within the meaning
of Section 3(3) of ERISA which (a) is maintained for employees of any Loan Party
------------
or any ERISA Affiliate or (b) has at any time within the preceding six (6) years
been maintained for the employees of any Loan Party or any current or former
ERISA Affiliate.
"Environmental Claims" means claims, liabilities, investigations,
litigation, administrative proceedings, judgments or orders relating to
Hazardous Materials.
"Environmental Laws" means any present or future federal, state or local
law, rule, regulation or order relating to pollution, waste, disposal or the
protection of human health or safety, plant life or animal life, natural
resources or the environment.
"Equipment" means all "equipment" (as defined in the UCC), including,
without limitation, all furniture, furnishings, fixtures, machinery, motor
vehicles, trucks, trailers, vessels, aircraft and rolling stock and all parts
thereof and all additions and accessions thereto and replacements therefor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor statute and all rules and
regulations promulgated thereunder.
"ERISA Affiliate", as applied to any Loan Party, means any Person who is a
member of a group which is under common control with any Loan Party, who
together with any Loan Party is treated as a single employer within the meaning
of Section 414(b) and (c) of the IRC.
----------------------
"Event of Default" means each of the events set forth in subsection 8.1.
--------------
"Federal Funds Effective Rate" means, for any day, the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published on the
immediately following Business Day by the Federal
4
<PAGE>
Reserve Bank of New York or, if such rate is not published for any Business Day,
the average of the quotations for the day of the requested Loan received by
Lender from three Federal funds brokers of recognized standing selected by
Lender.
"Fiscal Year" means each fifty-two or fifty-three week period ending on the
Saturday which is nearest the end of May in each year.
"Funding Date" means the date of each funding of a Loan or issuance of a
Lender Letter of Credit.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board that are applicable to the
circumstances as of the date of determination.
"Hazardous Material" means all or any of the following: (a) substances that
are defined or listed in, or otherwise classified pursuant to, any Environmental
Laws or regulations as "hazardous substances", "hazardous materials", "hazardous
wastes", "toxic substances" or any other formulation intended to define, list or
classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, or toxicity; (b) oil, petroleum or
petroleum derived substances, natural gas, natural gas liquids or synthetic gas
and drilling fluids, produced waters and other wastes associated with the
exploration, development or production of crude oil, natural gas or geothermal
resources; (c) any flammable substances or explosives or any radioactive
materials; and (d) asbestos in any form or electrical equipment which contains
any oil or dielectric fluid containing polychlorinated biphenyls.
"Indebtedness", as applied to any Person, means without duplication: (a)
all indebtedness for borrowed money; (b) obligations under leases which in
accordance with GAAP constitute Capital Leases; (c) notes payable and drafts
accepted representing extensions of credit whether or not representing
obligations for borrowed money; (d) any obligation owed for all or any part of
the deferred purchase price of property or services if the purchase price is due
more than six months from the date the obligation is incurred or is evidenced by
a note or similar written instrument; (e) all indebtedness secured by any Lien
on any property or asset owned or held by that Person regardless of whether the
indebtedness secured thereby shall have been assumed by that Person or is non
recourse to the credit of that Person; (f) obligations in respect of letters of
credit and (g) any advances under any factoring arrangement.
"Intellectual Property" means all present and future designs, patents,
patent rights and applications therefor, trademarks and registrations or
applications therefor, trade names, inventions, copyrights and all applications
and registrations therefor, software or computer programs, license rights, trade
secrets, methods, processes, know-how, drawings, specifications, descriptions,
and all memoranda, notes and records with respect to any research and
development, whether now owned or hereafter acquired, all goodwill associated
with any of the
5
<PAGE>
foregoing, and proceeds of all of the foregoing, including, without limitation,
proceeds of insurance policies thereon.
"Interest Coverage" means, for any period, EBITDA divided by Interest
----------
Expenses.
"Interest Expenses" means, without duplication, for any period, the
following, for Borrower and its Subsidiaries each calculated for such period:
interest expenses deducted in the determination of net income (excluding (i) the
amortizati on of fees and costs with respect to the transactions contemplated by
this Agreement which have been capitalized as transaction costs in accordance
with the provisions of subsection 1.2; and (ii) interest paid in kind).
"Interest Period" has the meaning assigned to that term in subsection
----------
2.2(B).
- ------
"Interest Rate" has the meaning assigned to that term in subsection 2.2(A).
-----------------
"Inventory" means all "inventory" (as defined in the UCC) including,
without limitation, finished goods, raw materials, work in process and other
materials and supplies used or consumed in a Person's business, and goods which
are returned or repossessed.
"Inventory Report" means a report duly executed by an officer of Borrower
appropriately completed and in substantially the form of Exhibit D.
---------
"IRC" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor statute and all rules and regulations promulgated
thereunder. "
"Kayne Anderson" means Kayne Anderson Investment Management, Inc., KAIM
Non-Traditional, L.P., Kayne Anderson Non-Traditional Investments, L.P., ARBCO
Associates, L.P., Offense Group Associates, L.P., and Opportunity Associates,
L.P. and each of their affiliates.
"Landlord Lien" means a Lien on Collateral of Borrower in favor of a
lessor, sublessor, landlord or owner, as the case may be, pursuant to a lease,
sublease or other agreement, existing as of the date hereof or hereafter,
entered into by Borrower as lessee, sublessee or tenant, as the case may be, or
pursuant to applicable laws, which Lien is prior to or will prime the Lien of
Lender on such Collateral.
"Landlord Waiver" means an agreement whereby the lessor, sublessor,
landlord or owner, as the case may be, of real property leased or rented by
Borrower waives in favor of Lender certain of its rights created under the
respective lease, sublease or other agreement, or by operation of law, including
without limitation Landlord Liens, and grants Lender access to the Collateral,
such agreement to be in form and substance acceptable to Lender.
"Lender" means Heller Financial, Inc., together with its successors and
permitted assigns pursuant to subsection 9.1.
--------------
6
<PAGE>
"Lender Letter of Credit" has the meaning assigned to that term in
subsection 2.1(G).
- -----------------
"Lender's Account" means ABA No. 0710-0001-3, Account No. 52-98695 at First
National Bank of Chicago, One First National Plaza, Chicago, IL 60670,
Reference: Heller Business Credit for the benefit of The Right Start, Inc.
"Letter of Credit Inventory" has the meaning set forth in subsection
----------
2.1(A)(1).
- ---------
"Letter of Credit Liability" means, at any time, all reimbursement and
other liabilities of Borrower or any of its Subsidiaries with respect to each
Lender Letter of Credit, whether contingent or otherwise, including: (a) the
amount available to be drawn or which may become available to be drawn; (b) all
amounts which have been paid or made available by Lender issuing a Lender Letter
of Credit or any bank issuing a Bank Letter of Credit to the extent not
reimbursed; and (c) all unpaid interest, fees and expenses related thereto.
"Letter of Credit Reserve" means, at any time, an amount equal to (a) the
aggregate amount of Letter of Credit Liability with respect to all Lender
Letters of Credit outstanding at such time plus, without duplication, (b) the
----
aggregate amount theretofore paid by Lender under Lender Letters of Credit and
not debited to the Loan Account pursuant to subsection 2.1(G)(2) or otherwise
--------------------
reimbursed by Borrower.
"Liabilities" shall have the meaning given that term in accordance with
GAAP and shall include Indebtedness.
"LIBOR" means, for each Interest Period, a rate of interest equal to:
(a) the rate of interest determined by Lender at which deposits in Dollars
for the relevant Interest Period are offered based on information presented on
the Reuters Screen LIBOR Page as of 11:00 A.M. (London time) on the day which is
two (2) Business Days prior to the first day of such Interest Period; provided
that if at least two such offered rates appear on the Reuters Screen LIBOR Page
in respect of such Interest Period, the arithmetic mean of all such rates (as
determined by Lender) will be the rate used; provided further that if Reuters
ceases to provide LIBOR quotations, such rate shall be the average rate of
interest determined by Lender at which deposits in Dollars are offered for the
relevant Interest Period by Bankers Trust Company, The Chase Manhattan Bank,
N.A., or its successors, to prime banks in the London interbank market as of
11:00 A.M. (London time) on the applicable interest rate determination date,
divided by
(b) a number equal to 1.0 minus the aggregate (but without duplication) of
the rates (expressed as a decimal fraction) of reserve requirements in effect on
the day which is two (2) Business Days prior to the beginning of such Interest
Period (including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Board of Governors of the
Federal Reserve System or other governmental authority having jurisdiction with
respect thereto, as now and from time to time in effect) for Eurocurrency
funding (currently referred to as
7
<PAGE>
"Eurocurrency Liabilities" in Regulation D of such Board) which are required to
be maintained by a member bank of the Federal Reserve System;
(such rate to be adjusted to the nearest one sixteenth of one percent (1/16 of
1%) or, if there is not a nearest one sixteenth of one percent (1/16 of 1%), to
the next higher one sixteenth of one percent (1/16 of 1%).
"LIBOR Loans" means at any time that portion of the Loans bearing interest
at rates determined by reference to LIBOR.
"Lien" means any lien, mortgage, pledge, security interest, charge or
encumbrance of any kind, whether voluntary or involuntary (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, and any agreement to give any security interest).
"Loan" or "Loans" means an advance or advances under the Revolving Loan
Commitment or the CAPEX Loan Commitment.
"Loan Documents" means this Agreement, the CAPEX Note, the Trademark
Security Agreement and all other instruments, documents and agreements executed
by or on behalf of Borrower and delivered concurrently herewith or at any time
hereafter to or for Lender in connection with the Loans, the CAPEX Loan, any
Lender Letter of Credit, and other transactions contemplated by this Agreement,
all as amended, restated, supplemented or modified from time to time.
"Loan Party" means, each of Borrower, Borrower's Subsidiaries and any other
Person (other than Lender) which is or becomes a party to any Loan Document.
"Loan Year" means each period of twelve (12) consecutive months commencing
on the Closing Date and on each anniversary thereof.
"Material Adverse Effect" means a material adverse effect upon (a) the
business, operations, prospects, properties, assets or condition (financial or
otherwise) of any Loan Party on an individual basis or taken as a whole or (b)
the ability of any Loan Party to perform its obligations under any Loan Document
to which it is a party or Lender to enforce or collect any of the Obligations.
"Maximum Revolving Loan Amount" has the meaning assigned to that term in
subsection 2.1(A).
- -----------------
"Mortgage" means each of the mortgages, deeds of trust, leasehold
mortgages, leasehold deeds of trust, collateral assignments of leases or other
real estate security documents delivered by any Loan Party to Lender, with
respect to Mortgaged Property, all in form and substance satisfactory to Lender.
8
<PAGE>
"Mortgaged Property" has the meaning assigned to that term in subsection
----------
5.15.
- ----
"Net Worth" means, as of any date, the sum of the capital stock and
additional paid-in capital plus retained earnings (or minus accumulated deficit)
calculated in conformity with GAAP.
"Notice of Borrowing" has the meaning assigned to that term in subsection
----------
2.1(D).
- ------
"Obligations" means all obligations, liabilities and indebtedness of every
nature of each Loan Party from time to time owed to Lender under the Loan
Documents including the principal amount of all debts, claims and indebtedness
(whether incurred before or after the Termination Date), accrued and unpaid
interest and all fees, costs and expenses, whether primary, secondary, direct,
contingent, fixed or otherwise, heretofore, now and/or from time to time
hereafter owing, due or payable including, without limitation, all interest,
fees, costs and expenses accrued or incurred after the filing of any petition
under any bankruptcy or insolvency law.
"Permitted CAPEX Expenditures" means costs and expenses, including the
purchase of Equipment, incurred in connection with the opening of new retail
stores of Borrower opening on or after June 1, 1996, but excluding all costs and
expenses relating to Inventory.
"Permitted Encumbrances" means the following types of Liens: (a) Liens
(other than Liens relating to Environmental Claims or ERISA) for taxes,
assessments or other governmental charges not yet due and payable; (b) statutory
Liens of landlords, carriers, warehousemen, mechanics, materialmen and other
similar liens imposed by law, which are incurred in the ordinary course of
business (1) for sums not more than thirty (30) days delinquent or (2) that are
being diligently contested in good faith, provided that adequate reserves with
--------
respect thereto are maintained on the books of Borrower in conformity with GAAP
and, if required by Lender, a reserve is established against the Borrowing Base;
(c) Liens (other than any Lien imposed by ERISA) incurred or deposits made in
the ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security, statutory
obligations, surety and appeal bonds, bids, leases, government contracts, trade
contracts, performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money); (d) easements,
rights-of-way, restrictions, and other similar charges or encumbrances not
interfering in any material respect with the ordinary conduct of the business of
any Loan Party or any of its Subsidiaries; (e) Liens for purchase money
obligations, provided that (1) the Indebtedness secured by any such Lien is
permitted under subsection 7.1, and (2) such Lien encumbers only the asset so
--------------
purchased; (f) Liens in favor of Lender; (g) Landlord Liens; (h) cash collateral
for letters of credit outstanding on the Closing Date and issued pursuant to
that certain Loan Agreement dated as of June 12, 1995, by and between The Right
Start, Inc., as borrower and Wells Fargo Bank, National Association, as lender,
in an amount not to exceed $300,000; and (i) Liens set forth on Schedule 1.1(A).
---------------
"Person" means and includes natural persons, corporations, limited
partnerships, general partnerships, limited liability companies, joint stock
companies, joint ventures, associations,
9
<PAGE>
companies, trusts, banks, trust companies, land trusts, business trusts or other
organizations, whether or not legal entities, and governments and agencies and
political subdivisions thereof.
"Projections" means Borrower's forecasted consolidated and consolidating:
(a) balance sheets; (b) profit and loss statements; (c) cash flow statements;
and (d) capitalization statements, all prepared on a division by division and
Subsidiary by Subsidiary basis and otherwise consistent with Borrower's
historical financial statements, together with appropriate supporting details
and a statement of underlying assumptions.
"Rent Reserve" means a reserve against the Borrowing Base for a store
located in a Statutory Landlord Lien State where Eligible Inventory is located,
in such amount as Lender, in its reasonable discretion, may require, but in no
event in excess of the maximum amount which could be secured under any Landlord
Lien arising under the laws or any other applicable authority of the respective
Statutory Landlord Lien State.
"Restricted Junior Payment" means: (a) any dividend or other distribution,
direct or indirect, on account of any shares of any class of stock of Borrower
or any of its Subsidiaries now or hereafter outstanding, except a dividend
payable solely with shares of the class of stock on which such dividend is
declared; (b) any payment or prepayment of principal of, premium, if any, or
interest on, or any redemption, conversion, exchange, retirement, defeasance,
sinking fund or similar payment, purchase or other acquisition for value, direct
or indirect, of any Subordinated Debt or any shares of any class of stock of
Borrower or any of its Subsidiaries now or hereafter outstanding, or the
issuance of a notice of an intention to do any of the foregoing; (c) any payment
made to retire, or to obtain the surrender of, any outstanding warrants, options
or other rights to acquire shares of any class of stock of Borrower or any of
its Subsidiaries now or hereafter outstanding; and (d) any payment by Borrower
or any of its Subsidiaries of any management, consulting or similar fees to any
Affiliate, whether pursuant to a management agreement or otherwise.
"Revolving Advance" means each advance made by Lender pursuant to
subsection 2.1(A).
- -----------------
"Revolving Loan" means the outstanding balance of all Revolving Advances
and any amounts added to the principal balance of the Revolving Loan pursuant to
this Agreement.
"Revolving Loan Commitment" means the commitment of Lender to make
Revolving Advances and to issue Lender Letters of Credit pursuant to subsection
----------
2.1 (G), in the aggregate not to exceed at anytime $10,000,000.
- -------
"Risk Participation Agreement" has the meaning assigned to that term in
subsection 2.1(G).
- -----------------
"Statutory Landlord Lien State" means each jurisdiction which, by operation
of statute or other law, may give rise to Landlord Liens.
10
<PAGE>
"Subordinated Debt" means the Indebtedness of Borrower under that certain
Convertible Debenture dated as of October 11, 1996, in the principal amount of
$2,842,000, made by Borrower in favor of Cahill Warnock Strategic Partners,
L.P., and that certain Convertible Debenture, dated as of October 11, 1996, in
the principal amount of $158,000, made by Borrower in favor of Strategic
Associates, L.P.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than fifty percent (50%) of
the total voting power of shares of stock (or equivalent ownership or
controlling interest) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other subsidiaries of that Person or a combination thereof.
"Termination Date" means the date this Agreement is terminated as set forth
in subsection 2.5.
--------------
"Total Loan Commitment" means the aggregate commitment of Lender with
respect to the Revolving Loan Commitment and the CAPEX Loan Commitment.
"Trademark Security Agreement" means the confirmation and grant of security
interest in trademark and trademark applications by Borrower in a form
reasonably acceptable to Lender, as such agreement may be amended, restated,
supplemented or otherwise modified from time to time.
"UCC" means the Uniform Commercial Code as in effect on the date hereof in
the State of Illinois, as amended from time to time, and any successor statute.
"Warehouse Agreement" means an agreement and related documents in favor of
Lender executed by each consignee, warehouseman, third-party distribution
service, bailee or other Person retained by Borrower to store, transfer,
distribute or otherwise handle Inventory of Borrower, including without
limitation the Jay Group, Inc., and USCO Distribution Services, Inc., such
agreement and related documents to be in form and substance acceptable to
Lender.
1.2 Accounting Terms. For purposes of this Agreement, all accounting terms
----------------
not otherwise defined herein shall have the meanings assigned to such terms in
conformity with GAAP. Financial statements and other information furnished to
Lender pursuant to subsection 5.1 shall be prepared in accordance with GAAP (as
in effect at the time of such preparation) on a consistent basis. In the event
any "Accounting Changes" (as defined below) shall occur and such changes affect
financial covenants, standards or terms in this Agreement, then Borrower and
Lender agree to enter into negotiations in order to amend such provisions of
this Agreement so as to equitably reflect such Accounting Changes with the
desired result that the criteria for evaluating the financial condition of
Borrower shall be the same after such Accounting Changes as if such Accounting
Changes had not been made, and until such time as such an amendment
11
<PAGE>
shall have been executed and delivered by Borrower and Lender, (A) all financial
covenants, standards and terms in this Agreement shall be calculated and/or
construed as if such Accounting Changes had not been made, and (B) Borrower
shall prepare footnotes to each Compliance Certificate and the financial
statements required to be delivered hereunder that show the differences between
the financial statements delivered (which reflect such Accounting Changes) and
the basis for calculating financial covenant compliance (without reflecting such
Accounting Changes). "Accounting Changes" means: (a) changes in accounting
principles required by GAAP and implemented by Borrower; and (b) changes in
accounting principles recommended by Borrower's certified public accountants.
All such adjustments resulting from expenditures made subsequent to the Closing
Date (including, but not limited to, capitalization of costs and expenses or
payment of pre-Closing Date liabilities) shall be treated as expenses in the
period the expenditures are made and deducted as part of the calculation of
EBITDA in such period.
1.3 Other Definitional Provisions. References to "Sections", "subsections",
-----------------------------
"Exhibits" and "Schedules" shall be to Sections, subsections, Exhibits and
Schedules, respectively, of this Agreement unless otherwise specifically
provided. Any of the terms defined in subsection 1.1 may, unless the context
otherwise requires, be used in the singular or the plural depending on the
reference. In this Agreement, words importing any gender include the other
genders; the words "including," "includes" and "include" shall be deemed to be
followed by the words "without limitation"; references to agreements and other
contractual instruments shall be deemed to include subsequent amendments,
assignments, and other modifications thereto, but only to the extent such
amendments, assignments and other modifications are not prohibited by the terms
of this Agreement or any other Loan Document; references to Persons include
their respective permitted successors and assigns or, in the case of
governmental Persons, Persons succeeding to the relevant functions of such
Persons; and all references to statutes and related regulations shall include
any amendments of same and any successor statutes and regulations.
SECTION 2 LOANS AND COLLATERAL
2.1 Loans.
-----
(A) Revolving Loan. Subject to the terms and conditions of this
--------------
Agreement and in reliance upon the representations and warranties of Borrower
and the other Loan Parties set forth herein and in the other Loan Documents,
Lender agrees to lend to Borrower from time to time an aggregate amount not to
exceed at any time $10,000,000, as reduced by Section 2.4(B). Amounts borrowed
--------------
under this subsection 2.1(A) may be repaid and reborrowed at any time prior to
-----------------
the earlier of (i) the termination of the Revolving Loan Commitment pursuant to
subsection 8.3 or (ii) the Termination Date. Lender shall have no obligation to
- --------------
make a Revolving Advance to the extent any requested advance would cause the
Revolving Loan (after giving effect to any immediate application of the proceeds
thereof) to exceed the Maximum Revolving Loan Amount; provided that Lender may,
in its sole discretion, elect from time to time to make Loans in excess of the
Maximum Revolving Loan Amount.
12
<PAGE>
(1) "Maximum Revolving Loan Amount" means, as of any date of
determination, the lesser of (a) the Revolving Loan Commitment minus the Letter
of Credit Reserve or (b) the Borrowing Base minus the Letter of Credit Reserve.
(2) "Borrowing Base" means, as of any date of determination, an
amount equal to (a) sixty percent (60%) of Eligible Inventory plus (b)(i) sixty
----
percent (60%) of Inventory ordered but not received, the payment for which is to
be made under documentary Lender Letters of Credit ("Letter of Credit
Inventory") less (ii) duty and freight due with respect to the Letter of Credit
----
Inventory, less in each case such reserves as Lender, in its reasonable
discretion, may elect to establish, including, but not limited to, a Rent
Reserve.
(B) Eligible Collateral.
-------------------
"Eligible Inventory" means, as at any date of determination, the value
(determined at the lower of cost or market on a first-in, first-out basis) of
all finished goods Inventory owned by and in the possession of Borrower and
located in the United States of America or Canada that Lender, in its reasonable
credit judgment, deems to be eligible for borrowing purposes. Without limiting
the generality of the foregoing, unless otherwise agreed by Lender, the
following is not Eligible Inventory: (a) raw materials or work-in-process that
is not readily marketable in its current form; (b) finished goods which do not
meet the specifications of the purchase order for such goods; (c) Inventory
which Lender determines, is unacceptable for borrowing purposes due to age,
quality, type, category and/or quantity; (d) Inventory returned as defective or
otherwise unsuitable for its intended use; (e) Inventory with respect to which
Lender does not have a valid, first priority and fully perfected security
interest; (f) Inventory with respect to which there exists any Lien in favor of
any Person other than Lender, except Permitted Encumbrances; (g) Inventory
produced in violation of the Fair Labor Standards Act and subject to the so-
called "hot goods" provisions contained in Title 29 U.S.C. (S) 215(a)(i); (h)
Inventory located at a store in a Statutory Landlord Lien State, unless (1) an
enforceable Landlord Waiver in form and substance reasonably acceptable to
Lender has been obtained with respect to such location or (2) a Rent Reserve has
been established with respect to such location and such Rent Reserve is less
than the value of Eligible Inventory at such location; and (i) Inventory stored,
transferred, distributed or otherwise handled by a consignee, warehouseman,
third-party distribution service, bailee or other Person who has not executed
and delivered a Warehouse Agreement.
(C) CAPEX Line. Subject to the terms and conditions of this
----------
Agreement and in reliance upon the representations and warranties of Borrower
and the other Loan Parties set forth herein and in the other Loan Documents,
Lender agrees to lend to Borrower each CAPEX Advance from time to time requested
by Borrower prior to the second anniversary of the Closing Date, the aggregate
amount of which shall not exceed $3,000,000. The principal amount of each CAPEX
Advance shall not (i) exceed an amount equal to one hundred percent (100%) of
the Permitted CAPEX Expenditures to be paid with the proceeds of such CAPEX
Advance or (ii) be less than $50,000. Amounts borrowed under this subsection
----------
2.1(C) and prepaid may not be reborrowed. On the second anniversary of the
- ------
Closing Date, the then outstanding CAPEX Loan shall convert to a term loan,
payable in three equal quarterly installments of principal equal to
13
<PAGE>
1/12th of the outstanding principal balance of the CAPEX Loan on the second
anniversary of the Closing Date, with the remaining outstanding balance due and
payable on the Termination Date.
(D) Borrowing Mechanics. (1) LIBOR Loans made on any Funding Date
-------------------
shall be in an aggregate minimum amount of $500,000 and integral multiples of
$100,000 in excess of such amount. (2) On any day Borrower desires an advance
under this subsection 2.1, Borrower shall give Lender telephonic notice of the
--------------
proposed borrowing by 11:00 a.m. (Central time) on the Funding Date of a Base
Rate Loan and three (3) Business Days in advance of the Funding Date of a LIBOR
Loan, which notice (a "Notice of Borrowing") shall also specify the proposed
Funding Date (which shall be a Business Day), whether such Loans shall consist
of Base Rate Loans or LIBOR Loans, and for LIBOR Loans the Interest Period
applicable thereto. Any such telephonic notice shall be confirmed in writing on
the same day. Lender shall not incur any liability to Borrower for acting upon
any telephonic notice Lender believes in good faith to have been given by a duly
authorized officer or other person authorized to borrow on behalf of Borrower or
for otherwise acting in good faith under this subsection 2.1(D). Lender will not
-----------------
make any advance pursuant to any telephonic notice unless Lender has also
received the most recent Borrowing Base Certificate and all other documents
required under subsection 5.1 by 11:00 a.m. (Chicago time). Each Revolving
--------------
Advance shall be deposited by wire transfer in immediately available funds in
such account as Borrower may from time to time designate to Lender in writing.
The becoming due of any amount required to be paid under this Agreement or any
of the other Loan Documents as principal, accrued interest and fees shall be
deemed irrevocably to be a request by Borrower for a Revolving Advance on the
due date of, and in the amount required to pay, such principal, accrued interest
and fees, and the proceeds of each such Revolving Loan if made by Lender shall
be disbursed by Lender by way of direct payment of the relevant obligation. (3)
When Borrower desires a CAPEX Advance pursuant to subsection 2.1(B), Borrower
-----------------
shall give Lender written notice of the proposed borrowing no less than three
(3) days prior to the requested Funding Date thereof. Prior to making any CAPEX
Advance, Lender shall have received a certification by an officer of Borrower
that (a) Permitted CAPEX Expenditures have been incurred in conjunction with the
opening of a new retail store or stores of Borrower (as identified in such
certification) and (b) they have not been incurred for any improper purpose or
in violation of this Agreement or any Loan Documents, and such other
documentation as Lender shall reasonably request. Each CAPEX Advance shall be
deposited in immediately available funds in such account as Borrower may from
time to time designate to Lender in writing.
(E) CAPEX Note. Borrower shall execute and deliver to Lender with
----------
appropriate insertions a CAPEX Note to evidence the CAPEX Loan Commitment. In
the event of an assignment under subsection 9.1, Borrower shall, upon surrender
of the assigning Lender's CAPEX Notes, issue new CAPEX Notes to reflect the
interest held by the assigning Lender and its assignee.
(F) Evidence of Revolving Loan Obligations. Each Revolving Advance
--------------------------------------
shall be evidenced by this Agreement and notations made from time to time by
Lender in its books and records, including computer records. Lender's books and
records shall constitute presumptive
14
<PAGE>
evidence, absent manifest error, of the accuracy of the information contained
therein. Failure by the Lender to make any such notation or record shall not
affect the obligations of Borrower to Lender with respect to the Revolving
Loans.
(G) Letters of Credit. Subject to the terms and conditions of this
-----------------
Agreement and in reliance upon the representations and warranties of Borrower
herein set forth, the Revolving Loan Commitment may, in addition to Revolving
Advances, be utilized, upon the request of Borrower, for (i) the issuance of
letters of credit by Lender or (ii) the issuance by Lender of risk
participations (a "Risk Participation Agreement") to banks to induce the bank to
issue letters of credit for the account of Borrower (each of (i) and (ii) above,
a "Lender Letter of Credit"). In no event shall any Lender Letter of Credit be
issued to the extent that the issuance of such Lender Letter of Credit would
cause the sum of the Letter of Credit Reserve (after giving effect to such
issuance) plus the Revolving Loan to exceed the lesser of (x) the Borrowing Base
and (y) the Revolving Loan Commitment.
(1) Maximum Amount. The aggregate amount of Letter of Credit
--------------
Liability with respect to all Lender Letters of Credit outstanding at any time
shall not exceed $1,000,000.
(2) Reimbursement. Borrower shall be irrevocably and
-------------
unconditionally obligated forthwith without presentment, demand, protest or
other formalities of any kind, to reimburse Lender for any amounts paid by
Lender with respect to a Lender Letter of Credit including all fees, costs and
expenses paid by Lender to any bank that issues a Bank Letter of Credit.
Borrower hereby authorizes and directs Lender, at Lender's option, to debit
Borrower's account (by increasing the Revolving Loan) in the amount of any
payment made by Lender with respect to any Lender Letter of Credit. All amounts
paid with respect to any Lender Letter of Credit that are not immediately repaid
by Borrower with the proceeds of a Revolving Advance or otherwise shall bear
interest at the Default Rate applicable to Base Rate Revolving Loans.
(3) Conditions of Issuance. In addition to all other terms and
----------------------
conditions set forth in this Agreement, the issuance of any Lender Letter of
Credit shall be subject to the satisfaction of all conditions applicable to
Revolving Advances, and the conditions that the letter of credit which Borrower
requests be in such form, be for such amount, contain such terms and support
such transactions as are reasonably satisfactory to Lender. The expiration date
of each Lender Letter of Credit shall be on a date which is at least thirty (30)
days prior to the Termination Date.
(4) Request for Letters of Credit. Borrower shall give Lender at
-----------------------------
least three (3) Business Days prior notice specifying the date a Lender Letter
of Credit is to be issued, identifying the beneficiary and describing the nature
of the transactions proposed to be supported thereby. The notice shall be
accompanied by the form of the letter of credit being requested.
(H) Other Letter of Credit Provisions.
---------------------------------
15
<PAGE>
(1) Obligations Absolute. The obligation of Borrower to
--------------------
reimburse Lender for payments made under, and other amounts payable in
connection with, any Lender Letter of Credit shall be unconditional and
irrevocable and shall be paid strictly in accordance with the terms of this
Agreement under all circumstances, including the following circumstances:
(a) any lack of validity or enforceability of any Lender
Letter of Credit, Bank Letter of Credit or any other agreement;
(b) the existence of any claim, set-off, defense or other
right which Borrower, any of its Affiliates, or Lender, on the one hand, may at
any time have against any beneficiary or transferee of any Lender Letter of
Credit or Bank Letter of Credit (or any Persons for whom any such transferee may
be acting), Lender or any other Person, on the other hand, whether in connection
with this Agreement, the transactions contemplated herein or any unrelated
transaction (including any underlying transaction between Borrower or any of its
Affiliates and the beneficiary of the letter of credit);
(c) any draft, demand, certificate or any other document
presented under any Lender Letter of Credit or Bank Letter of Credit is alleged
to be forged, fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect;
(d) payment under any Lender Letter of Credit, or Bank
Letter of Credit against presentation of a demand, draft or certificate or other
document which does not comply with the terms of such Lender Letter of Credit
provided that, in the case of any payment by Lender under any Lender Letter of
Credit, Lender has not acted with gross negligence or willful misconduct (as
determined by a court of competent jurisdiction) in determining that the demand
for payment under such Lender Letter of Credit complies on its face with any
applicable requirements for a demand for payment under such Lender Letter of
Credit;
(e) any other circumstance or happening whatsoever, which is
similar to any of the foregoing; or
(f) the fact that a Default or an Event of Default shall
have occurred and be continuing.
(2) Nature of Duties. As between Lender and Borrower, Borrower assumes
----------------
all risks of the acts and omissions of, or misuse of any Lender Letter of Credit
by the beneficiary thereof. In furtherance and not in limitation of the
foregoing, Lender shall not be responsible: (a) for the form, validity,
sufficiency, accuracy, genuineness or legal effect of any document by any party
in connection with the application for and issuance of any Lender Letter of
Credit, even if it should in fact prove to be in any or all respects invalid,
insufficient, inaccurate, fraudulent or forged; (b) for the validity or
sufficiency of any instrument transferring or assigning or purporting to
transfer or assign any Lender Letter of Credit or the rights or benefits
thereunder or proceeds thereof, in whole or in part, which may prove to be
invalid or
16
<PAGE>
ineffective for any reason; (c) for failure of the beneficiary of any Lender
Letter of Credit to comply fully with conditions required in order to demand
payment thereunder; provided that, in the case of any payment by Lender under
any Lender Letter of Credit, Lender has not acted with gross negligence or
willful misconduct (as determined by a court of competent jurisdiction) in
determining that the demand for payment under such Lender Letter of Credit
complies on its face with any applicable requirements for a demand for payment
thereunder; (d) for errors, omissions, interruptions or delays in transmission
or delivery of any messages, by mail, cable, telegraph, telex or otherwise,
whether or not they be in cipher; (e) for errors in interpretation of technical
terms; (f) for any loss or delay in the transmission or otherwise of any
document required in order to make a payment under any Lender Letter of Credit;
(g) for the credit of the proceeds of any drawing under any Lender Letter of
Credit; and (h) for any consequences arising from causes beyond the control of
Lender. None of the above shall affect, impair, or prevent the vesting of any of
Lender's rights or powers hereunder.
2.2 Interest
--------
(A) Rate of Interest. The Loans and all other Obligations shall bear
----------------
interest from the date such Loans are made or such other Obligations become due
to the date paid at a rate per annum equal to (i) in the case of Base Rate Loans
and other Obligations for which no other interest rate is specified, the Base
Rate plus (a) one percent (1.0%) with respect to the Revolving Loan and such
other Obligations and (b) one-and-one-half percent (1.5%) with respect to the
CAPEX Loan and (ii) in the case of LIBOR Loans, LIBOR plus (a) three-and-one-
quarter percent (3.25%) with respect to the Revolving Loan, and (b) three-and-
three quarters percent (3.75%) with respect to the CAPEX Loan (the "Interest
Rate"). The applicable basis for determining the rate of interest shall be
selected by Borrower initially at the time a Notice of Borrowing is given
pursuant to subsection 2.1(D). The basis for determining the interest rate with
-----------------
respect to any Loan or a portion of any Loan may be changed from time to time
pursuant to subsection 2.2(E). If on any day a Loan or a portion of any Loan is
-----------------
outstanding with respect to which notice has not been delivered to Lender in
accordance with the terms of this Agreement specifying the basis for determining
the rate of interest, then for that day that Loan or portion thereof shall bear
interest determined by reference to the Base Rate.
After the occurrence and during the continuance of an Event of Default (i) the
Loans and all other Obligations shall, at Lender's option, bear interest at a
rate per annum equal to two percent (2.0%) plus the applicable Interest Rate
(the "Default Rate"), (ii) each LIBOR Loan shall automatically convert to a Base
Rate Loan at the end of any applicable Interest Period and (iii) no Loans may be
converted to LIBOR Loans.
(B) Interest Periods. In connection with each LIBOR Loan, Borrower
----------------
shall elect an interest period (each an "Interest Period") to be applicable to
such Loan, which Interest Period shall be either a one, two, three or six month
period; provided that:
(1) the initial Interest Period for any LIBOR Loan shall commence
on the Funding Date of such Loan;
17
<PAGE>
(2) in the case of successive Interest Periods, each successive
Interest Period shall commence on the day on which the immediately preceding
Interest Period expires;
(3) if an Interest Period expiration date is not a Business Day,
such Interest Period shall expire on the next succeeding Business Day; provided
that if any Interest Period expiration date is not a Business Day but is a day
of the month after which no further Business Day occurs in such month, such
Interest Period shall expire on the immediately preceding Business Day;
(4) any Interest Period that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period) shall, subject to part
(5), below, end on the last Business Day of a calendar month;
(5) no Interest Period shall extend beyond the Termination Date;
(6) no Interest Period may extend beyond a scheduled principal
payment date unless the sum of (a) the aggregate principal amount of Loans that
are Base Rate Loans or that have Interest Periods expiring on or before such
date and (b) the available, unused Revolving Loan Commitment or Borrowing Base
equals or exceeds the principal amount required to be paid on the Loans on such
date; and
(7) there shall be no more than three (3) Interest Periods
relating to LIBOR Loans outstanding at any time.
(C) Computation and Payment of Interest. Interest on the Loans and all
-----------------------------------
other Obligations shall be computed on the daily principal balance on the basis
of a 360 day year for the actual number of days elapsed in the period during
which it accrues. In computing interest on any Loan, the date of funding of the
Loan or the first day of an Interest Period applicable to such Loan or, with
respect to a Base Rate Loan being converted from a LIBOR Loan, the date of
conversion of such LIBOR Loan to such Base Rate Loan, shall be included; and the
date of payment of such Loan or the expiration date of an Interest Period
applicable to such Loan, or with respect to a Base Rate Loan being converted to
a LIBOR Loan, the date of conversion of such Base Rate Loan to such LIBOR Loan,
shall be excluded; provided that if a Loan is repaid on the same day on which it
--------
is made, one day's interest shall be paid on that Loan. Interest on Base Rate
Loans and all other Obligations other than LIBOR Loans shall be payable to
Lender monthly in arrears on the first day of each month, on the date of any
prepayment of Loans, and at maturity, whether by acceleration or otherwise.
Interest on LIBOR Loans shall be payable to Lender on the last day of the
applicable Interest Period for such Loan, on the date of any prepayment of the
Loans, and at maturity, whether by acceleration or otherwise. In addition, for
each LIBOR Loan having an Interest Period longer than three (3) months, interest
accrued on such Loan shall also be payable on the last day of each three (3)
month interval during such Interest Period.
18
<PAGE>
(D) Interest Laws. Notwithstanding any provision to the contrary
-------------
contained in this Agreement or any other Loan Document, Borrower shall not be
required to pay, and Lender shall not be permitted to collect, any amount of
interest in excess of the maximum amount of interest permitted by applicable law
("Excess Interest"). If any Excess Interest is provided for or determined by a
court of competent jurisdiction to have been provided for in this Agreement or
in any other Loan Document, then in such event: (1) the provisions of this
subsection shall govern and control; (2) neither Borrower nor any other Loan
Party shall be obligated to pay any Excess Interest; (3) any Excess Interest
that Lender may have received hereunder shall be, at Lender's option, (a)
applied as a credit against the outstanding principal balance of the Obligations
or accrued and unpaid interest (not to exceed the maximum amount permitted by
law), (b) refunded to the payor thereof, or (c) any combination of the
foregoing; (4) the interest rate(s) provided for herein shall be automatically
reduced to the maximum lawful rate allowed from time to time under applicable
law (the "Maximum Rate"), and this Agreement and the other Loan Documents shall
be deemed to have been and shall be, reformed and modified to reflect such
reduction; and (5) neither Borrower nor any Loan Party shall have any action
against Lender for any damages arising out of the payment or collection of any
Excess Interest. Notwithstanding the foregoing, if for any period of time
interest on any Obligations is calculated at the Maximum Rate rather than the
applicable rate under this Agreement, and thereafter such applicable rate
becomes less than the Maximum Rate, the rate of interest payable on such
Obligations shall remain at the Maximum Rate until Lender shall have received
the amount of interest which Lender would have received during such period on
such Obligations had the rate of interest not been limited to the Maximum Rate
during such period.
(E) Conversion or Continuation. Subject to the provisions of
--------------------------
subsection 2.2, Borrower shall have the option to (1) convert at any time all or
- --------------
any part of outstanding Loans equal to $500,000 and integral multiples of
$100,000 in excess of that amount from Base Rate Loans to LIBOR Loans or (2)
upon the expiration of any Interest Period applicable to a LIBOR Loan, to (a)
continue all or any portion of such LIBOR Loan equal to $500,000 and integral
multiplies of $100,000 in excess of that amount as a LIBOR Loan or (b) convert
all or any portion of such LIBOR Loan to a Base Rate Loan. The succeeding
Interest Period(s) of such continued or converted Loan commence on the last day
of the Interest Period of the Loan to be continued or converted; provided that
no outstanding Loan may be continued as, or be converted into, a LIBOR Loan,
when any Event of Default or Default has occurred and is continuing.
Borrower shall deliver a notice of conversion/continuation to Lender
no later than 11:00 a.m. (Central time) at least three (3) Business Days in
advance of the proposed conversion/ continuation date ("Notice of
Conversion/Continuation"). A Notice of Conversion/Continuation shall certify:
(1) the proposed conversion/continuation date (which shall be a Business Day);
(2) the amount of the Loan to be converted/continued; (3) the nature of the
proposed conversion/continuation; (4) in the case of conversion to, or a
continuation of, a LIBOR Loan, the requested Interest Period; and (5) that no
Default or Event of Default has occurred and is continuing or would result from
the proposed conversion/continuation.
19
<PAGE>
In lieu of delivering the Notice of Conversion/Continuation, Borrower
may give Lender telephonic notice by the required time of any proposed
conversion/continuation under this subsection 2.2(E); provided that such notice
-----------------
shall be promptly confirmed in writing by delivery of a Notice of
Conversion/Continuation to Lender on or before the proposed
conversion/continuation date.
Lender shall not incur any liability to Borrower in acting upon any
telephonic notice referred to above that Lender believes in good faith to have
been given by a duly authorized officer or other person authorized to act on
behalf of Borrower or for otherwise acting in good faith under this subsection
----------
2.2(E) and upon conversion/continuation by Lender in accordance with this
- ------
Agreement pursuant to any telephonic notice, Borrower shall have effected such
conversion or continuation, as the case may be, hereunder.
2.3 Fees.
----
(A) Closing Fee. Borrower shall pay to Lender on the Closing Date a
-----------
closing fee in the amount of $25,000.
(B) Unused Line Fee. Borrower shall pay to Lender a fee in an amount
---------------
equal to the Revolving Loan Commitment less the sum of the average daily balance
of the Revolving Loan plus the average daily face amount of the Letter of Credit
Reserve during the preceding month multiplied by one-half percent (0.5%) per
annum, such fee to be calculated on the basis of a 360 day year for the actual
number of days elapsed and to be payable monthly in arrears on the first day of
the first month following the Closing Date and the first day of each month
thereafter.
(C) Letter of Credit Fees. Borrower shall pay to Lender a fee with
---------------------
respect to Lender Letters of Credit in the amount of the average daily amount of
Letter of Credit Liability outstanding during such month multiplied by one-and
one-half percent (1.5%) per annum. Such fees will be calculated on the basis of
a 360 day year for the actual number of days elapsed and will be payable monthly
in arrears on the first day of each month. Borrower shall also reimburse Lender
for any and all fees, costs and expenses, if any, paid by Lender to the issuer
of any Bank Letter of Credit.
(D) Prepayment Fees. If Borrower voluntarily prepays the Obligations
---------------
in full (rather than voluntary prepayments of the Revolving Loan which do not
terminate the Revolving Loan Commitment) prior to the Termination Date, Borrower
at the time of prepayment shall pay to Lender, as compensation for the costs of
being prepared to make funds available to Borrower under this Agreement, and not
as a penalty, an amount determined by multiplying the percentage set forth below
by the Total Loan Commitment: (i) three percent (3.0%) upon a prepayment during
the first Loan Year; (ii) one percent (1.0%) upon a prepayment during the second
Loan Year; and (iii) none thereafter.
20
<PAGE>
(E) Audit Fees. Borrower agrees to pay Lender an audit fee for each
----------
inspection equal to $650.00 per auditor per day or any portion thereof,
excluding all full days spent by Lender traveling to or from Borrower's
locations, together with out-of-pocket expenses.
(F) Other Fees and Expenses. Borrower shall pay to Lender, for its own
-----------------------
account, all charges for returned items and all other bank charges incurred by
Lender, as well as Lender's standard wire transfer charges for each wire
transfer made under this Agreement.
2.4 Payments and Prepayments.
------------------------
(A) Manner and Time of Payment. In its sole discretion, Lender may
--------------------------
charge interest and other amounts payable hereunder to the Revolving Loan, all
as set forth on Lender's books and records. If Lender elects to bill Borrower
for any amount due hereunder, such amount shall be immediately due and payable
with interest thereon as provided herein. All payments made by Borrower with
respect to the Obligations shall be made without deduction, defense, setoff or
counterclaim. All payments to Lender hereunder shall, unless otherwise directed
by Lender, be made in accordance with subsection 5.6. Proceeds remitted to
--------------
Lender's Account shall be credited to the Obligations on the Business Day good
funds were received in such account.
(B) Mandatory Prepayments.
---------------------
(1) Overadvance. At any time that the Revolving Loan exceeds the
-----------
Maximum Revolving Loan Amount, Borrower shall immediately repay the Revolving
Loan to the extent necessary to reduce the principal balance to an amount that
is equal to or less than the Maximum Revolving Loan Amount.
(2) Proceeds of Asset Dispositions. Immediately upon receipt by
------------------------------
Borrower or any of its Subsidiaries of proceeds of any Asset Disposition (in one
or a series of related transactions), which proceeds exceed $10,000 (it being
understood that if the proceeds exceed $10,000, the entire amount and not just
the portion above $10,000 shall be subject to this subsection 2.4(B)(2)),
---------------------
Borrower shall prepay the Revolving Loan in an amount equal to such proceeds.
(C) Voluntary Prepayments and Repayments. Borrower may, at any time
------------------------------------
upon not less than three (3) Business Days' prior notice to Lender, prepay the
CAPEX Loan or terminate the Revolving Loan Commitment; provided, however, the
--------
Revolving Loan Commitment may not be terminated by Borrower until the CAPEX Loan
is paid in full. Upon termination of the Revolving Loan Commitment, Borrower
shall cause Lender to be released from all liability under any Lender Letters of
Credit, or, at Lender's option, Borrower will deposit cash collateral with
Lender in an amount equal to one-hundred percent (100%) of the Letter of Credit
Liability that will remain outstanding after prepayment or repayment plus
----
estimated costs.
(D) Payments on Business Days. Whenever any payment to be made
-------------------------
hereunder shall be stated to be due on a day that is not a Business Day, the
payment may be made on the
21
<PAGE>
next succeeding Business Day and such extension of time shall be included in the
computation of the amount of interest or fees due hereunder.
2.5 Term of this Agreement. This Agreement shall be effective until the
----------------------
third anniversary of the Closing Date (the "Termination Date"). The Commitments
shall (unless earlier terminated) terminate upon the earlier of (i) the
occurrence of an event specified in subsection 8.3 or (ii) the Termination Date.
--------------
Upon termination in accordance with subsection 8.3 or on the Termination Date,
--------------
all Obligations shall become immediately due and payable without notice or
demand. Notwithstanding any termination, until all Obligations have been fully
paid and satisfied, Lender shall be entitled to retain security interests in and
liens upon all Collateral, and even after payment of all Obligations hereunder,
Borrower's obligation to indemnify Lender in accordance with the terms hereof
shall continue.
2.6 Statements. Lender shall render a monthly statement of account to
----------
Borrower within twenty (20) days after the end of each month. Such statement of
account shall constitute a final and definitive statement of account unless
Borrower makes written objection thereto within thirty (30) days from the date
such statement is mailed to Borrower. Borrower promises to pay all of its
Obligations as such amounts become due or are declared due pursuant to the terms
of this Agreement.
2.7 Grant of Security Interest. To secure the payment and performance of
--------------------------
the Obligations, including all renewals, extensions, restructurings and
refinancings of any or all of the Obligations, Borrower hereby grants to Lender
a continuing security interest, lien and mortgage in and to all right, title and
interest of Borrower in the following property of Borrower, whether now owned or
existing or hereafter acquired or arising and regardless of where located (all
being collectively referred to as the "Collateral"): (A) Accounts, and all
guaranties and security therefor, and all goods and rights represented thereby
or arising therefrom including the rights of stoppage in transit, replevin and
reclamation; (B) Inventory; (C) general intangibles (as defined in the UCC); (D)
documents (as defined in the UCC) or other receipts covering, evidencing or
representing goods; (E) instruments (as defined in the UCC); (F) chattel paper
(as defined in the UCC); (G) Equipment; (H) Mortgaged Property; (I) Intellectual
Property; (J) all deposit accounts of Borrower maintained with any bank or
financial institution; (K) all cash and other monies and property of Borrower in
the possession or under the control of Lender or any participant; (L) all
investment property (as defined in the UCC); (M) all books, records, ledger
cards, files, correspondence, computer programs, tapes, disks and related data
processing software that at any time evidence or contain information relating to
any of the property described above or are otherwise necessary or helpful in the
collection thereof or realization thereon; and (N) proceeds of all or any of the
property described above, including, without limitation, the proceeds of any
insurance policies covering any of the above described property.
2.8 Capital Adequacy and Other Adjustments. In the event Lender shall have
--------------------------------------
determined that the adoption after the date hereof of any law, treaty,
governmental (or quasi-governmental) rule, regulation, guideline or order
regarding capital adequacy, reserve requirements or similar requirements or
compliance by Lender or any corporation controlling
22
<PAGE>
Lender with any request or directive regarding capital adequacy, reserve
requirements or similar requirements (whether or not having the force of law and
whether or not failure to comply therewith would be unlawful) from any central
bank or governmental agency or body having jurisdiction does or shall have the
effect of increasing the amount of capital, reserves or other funds required to
be maintained by Lender or any corporation controlling Lender and thereby
reducing the rate of return on Lender's or such corporation's capital as a
consequence of its obligations hereunder, then Borrower shall from time to time
within fifteen (15) days after notice and demand from Lender (together with the
certificate referred to in the next sentence) pay to Lender additional amounts
sufficient to compensate such Lender for such reduction. A certificate as to the
amount of such cost and showing the basis of the computation of such cost
submitted by Lender to Borrower shall, absent manifest error, be final,
conclusive and binding for all purposes.
2.9 Taxes.
-----
(A) No Deductions. Any and all payments or reimbursements made
-------------
hereunder or under the CAPEX Notes shall be made free and clear of and without
deduction for any and all taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto; excluding, however, the
following: taxes imposed on the net income of Lender by the jurisdiction under
the laws of which Lender is organized or doing business or any political
subdivision thereof and taxes imposed on its net income by the jurisdiction of
Lender's applicable lending office or any political subdivision thereof (all
such taxes, levies, imposts, deductions, charges or withholdings and all
liabilities with respect thereto excluding such taxes imposed on net income,
herein "Tax Liabilities"). If Borrower shall be required by law to deduct any
such Tax Liabilities from or in respect of any sum payable hereunder to Lender,
then the sum payable hereunder shall be increased as may be necessary so that,
after making all required deductions, Lender receives an amount equal to the sum
it would have received had no such deductions been made.
(B) Changes in Tax Laws. In the event that, subsequent to the Closing
-------------------
Date, (i) any changes in any existing law, regulation, treaty or directive or in
the interpretation or application thereof, (ii) any new law, regulation, treaty
or directive enacted or any interpretation or application thereof, or (iii)
compliance by Lender with any request or directive (whether or not having the
force of law) from any governmental authority, agency or instrumentality:
(1) does or shall subject Lender to any tax of any kind
whatsoever with respect to this Agreement, the other Loan Documents or any Loans
made or Lender Letters of Credit issued hereunder, or change the basis of
taxation of payments to Lender of principal, fees, interest or any other amount
payable hereunder (except for net income taxes, or franchise taxes imposed in
lieu of net income taxes, imposed generally by federal, state or local taxing
authorities with respect to interest or commitment or other fees payable
hereunder or changes in the rate of tax on the overall net income of Lender); or
23
<PAGE>
(2) does or shall impose on Lender any other condition or
increased cost in connection with the transactions contemplated hereby or
participations herein; and the result of any of the foregoing is to increase the
cost to Lender of issuing any Lender Letter of Credit or making or continuing
any Loan hereunder, as the case may be, or to reduce any amount receivable
hereunder, then, in any such case, Borrower shall promptly pay to Lender, upon
its demand, any additional amounts necessary to compensate Lender, on an after-
tax basis, for such additional cost or reduced amount receivable, as determined
by Lender with respect to this Agreement or the other Loan Documents. If Lender
becomes entitled to claim any additional amounts pursuant to this subsection, it
shall promptly notify Borrower of the event by reason of which Lender has become
so entitled. A certificate as to any additional amounts payable pursuant to the
foregoing sentence submitted by Lender to Borrower shall, absent manifest error,
be final, conclusive and binding for all purposes.
2.10 Required Termination and Prepayment. If on any date any Lender shall
-----------------------------------
have reasonably determined (which determination shall be final and conclusive
and binding upon all parties) that the making or continuation of its LIBOR Loans
has become unlawful or impossible by compliance by Lender in good faith with any
law, governmental rule, regulation or order (whether or not having the force of
law and whether or not failure to comply therewith would be unlawful), then, and
in any such event, that Lender shall promptly give notice (by telephone
confirmed in writing) to Borrower of that determination. Subject to prior
withdrawal of a Notice of Borrowing or a Notice of Conversion/Continuation or
prepayment of LIBOR Loans as contemplated by subsection 2.11, the obligation of
---------------
Lender to make or maintain its LIBOR Loans during any such period shall be
terminated at the earlier of the termination of the Interest Period then in
effect or when required by law and Borrower shall no later than the termination
of the Interest Period in effect at the time any such determination pursuant to
this subsection 2.10 is made or, earlier when required by law, repay or prepay
---------------
LIBOR Loans together with all interest accrued thereon or convert LIBOR Loans to
Base Rate Loans.
2.11 Compensation. Borrower shall compensate Lender, upon written request
------------
by Lender (which request shall set forth in reasonable detail the basis for
requesting such amounts and which shall, absent manifest error, be conclusive
and binding upon all parties hereto), for all reasonable losses, expenses and
liabilities (including, without limitation, any loss sustained by Lender in
connection with the re-employment of such funds), (i) if for any reason (other
than a default by Lender) a borrowing of any LIBOR Loan does not occur on a date
specified therefor in a Notice of Borrowing, a Notice of Conversion/Continuation
or a telephonic request for borrowing or Conversion/Continuation; (ii) if any
prepayment of any of its LIBOR Loans occurs on a date that is not the last day
of an Interest Period applicable to that Loan; (iii) if any prepayment of any of
its LIBOR Loans is not made on any date specified in a notice of prepayment
given by Borrower; or (iv) as a consequence of any other default by Borrower to
repay its LIBOR Loans when required by the terms of this Agreement; provided
that during the period while any such amounts have not been paid, Lender shall
reserve an equal amount from amounts otherwise available to be borrowed under
the Revolving Loan.
24
<PAGE>
2.12 Booking of LIBOR Loans. Lender may make, carry or transfer LIBOR Loans
----------------------
at, to, or for the account of, any of its branch offices or the office of an
affiliate of Lender.
2.13 Assumptions Concerning Funding of LIBOR Loans. Calculation of all
---------------------------------------------
amounts payable to Lender under subsection 2.11 shall be made as though Lender
---------------
had actually funded its relevant LIBOR Loan through the purchase of a LIBOR
deposit bearing interest at LIBOR in an amount equal to the amount of that LIBOR
Loan and having maturity comparable to the relevant Interest Period and through
the transfer of such LIBOR deposit from an offshore office to a domestic office
in the United States of America; provided, however, that Lender may fund each of
its LIBOR Loans in any manner it sees fit and the foregoing assumption shall be
utilized only for the calculation of amounts payable under subsection 2.11.
---------------
SECTION 3 CONDITIONS TO LOANS
3.1 Conditions to Loans. The obligations of Lender to make Loans and to
-------------------
issue Lender Letters of Credit on the Closing Date and on each Funding Date are
subject to satisfaction of all of the conditions set forth below:
(A) Closing Deliveries. Lender shall have received, in form and
------------------
substance satisfactory to Lender and, where applicable, duly executed, all
documents, instruments and information identified on Schedule 3.1(A) and all
---------------
other agreements, notes, certificates, orders, authorizations, consents,
opinions, reports, approvals, financing statements, mortgages and other
documents which Lender may at any time reasonably request.
(B) Security Interests. Lender shall have received satisfactory
------------------
evidence that all security interests and liens granted to Lender pursuant to
this Agreement or the other Loan Documents have been duly perfected and
constitute first priority liens on the Collateral, subject only to Permitted
Encumbrances.
(C) Closing Date Availability. After giving effect to the consummation
-------------------------
of the transactions contemplated hereunder on the Closing Date and the payment
by Borrower of all costs, fees and expenses relating thereto, the Maximum
Revolving Loan Amount on the Closing Date shall exceed the principal balance of
the Revolving Loan plus the Letter of Credit Reserve by at least $1,000,000.
(D) Representations and Warranties. The representations and warranties
------------------------------
contained herein and in the Loan Documents shall be true, correct and complete
in all material respects on and as of that Funding Date to the same extent as
though made on and as of that date, except for any representation or warranty
limited by its terms to a specific date and taking into account any amendments
to the Schedules or Exhibits as a result of any disclosures made by Borrower to
Lender after the Closing Date and approved by Lender.
25
<PAGE>
(E) Fees. With respect to Loans or Lender Letters of Credit to be made
----
or issued on the Closing Date, Borrower shall have paid the fees payable on the
Closing Date referred to in subsection 2.3(A).
-----------------
(F) No Default. No event shall have occurred and be continuing or
----------
would result from the consummation of the requested borrowing or notice
requesting issuance of a Lender Letter of Credit that would constitute an Event
of Default or a Default.
(G) Performance of Agreements. Each Loan Party shall have performed in
-------------------------
all material respects all agreements and satisfied all conditions which any Loan
Document provides shall be performed by it on or before that Funding Date.
(H) No Prohibition. No order, judgment or decree of any court,
--------------
arbitrator or governmental authority shall purport to enjoin or restrain Lender
from making any Loans or issuing any Lender Letters of Credit.
(I) No Litigation. There shall not be pending or, to the knowledge of
-------------
Borrower, threatened, any action, charge, claim, demand, suit, proceeding,
petition, governmental investigation or arbitration by, against or affecting any
Loan Party or any of its Subsidiaries or any property of any Loan Party or any
of its Subsidiaries that has not been disclosed by Borrower in writing, and
there shall have occurred no development in any such action, charge, claim,
demand, suit, proceeding, petition, governmental investigation or arbitration
that, in the opinion of Lender, would reasonably be expected to have a Material
Adverse Effect.
(J) Appraisals. Lender shall have received from appraisers
----------
satisfactory to Lender all appraisals that Lender, in its sole discretion,
requires as of the Closing Date, including, but not limited to, appraisals of
Borrower's inventory and catalog business, and such appraisals are in form and
substance reasonably satisfactory to Lender.
SECTION 4 BORROWER'S REPRESENTATIONS AND WARRANTIES
To induce Lender to enter into this Agreement, to make Loans and to issue
Lender Letters of Credit, Borrower represents and warrants to Lender that the
following statements are and will be true, correct and complete:
4.1 Organization, Powers, Capitalization.
------------------------------------
(A) Organization and Powers. Each of the Loan Parties is a corporation
-----------------------
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and qualified to do business in all states where
such qualification is required except where failure to be so qualified could not
be reasonably expected to have a Material Adverse Effect. Each of the Loan
Parties has all requisite corporate power and authority to own and
26
<PAGE>
operate its properties, to carry on its business as now conducted and proposed
to be conducted and to enter into each Loan Document.
(B) Capitalization. The authorized capital stock of each of the Loan
--------------
Parties is as set forth on Schedule 4.1(B)(1). All issued and outstanding shares
------------------
of capital stock of each of the Loan Parties are duly authorized and validly
issued, fully paid, nonassessable, free and clear of all Liens and such shares
were issued in compliance with all applicable state and federal laws concerning
the issuance of securities. The capital stock of each of the Loan Parties is
owned by the stockholders and in the amounts set forth on Schedule 4.1(B)(1). No
------------------
shares of the capital stock of any Loan Party, other than those described above,
are issued and outstanding. There are no preemptive or other outstanding rights,
options, warrants, conversion rights or similar agreements or understandings for
the purchase or acquisition from any Loan Party, of any shares of capital stock
or other securities of any such entity, except as set forth on Schedule
4.1(B)(2).
4.2 Authorization of Borrowing, No Conflict. Borrower has the corporate
---------------------------------------
power and authority to incur the Obligations and to grant security interests in
the Collateral. On the Closing Date, the execution, delivery and performance of
the Loan Documents by each Loan Party signatory thereto will have been duly
authorized by all necessary corporate and shareholder action. The execution,
delivery and performance by each Loan Party of each Loan Document to which it is
a party and the consummation of the transactions contemplated by this Agreement
and the other Loan Documents by each Loan Party do not contravene and will not
be in contravention of any applicable law, the corporate charter or bylaws of
any Loan Party or any agreement or order by which any Loan Party or any Loan
Party's property is bound. This Agreement is, and the other Loan Documents,
including the CAPEX Note, when executed and delivered will be the legally valid
and binding obligations of the applicable Loan Parties respectively, each
enforceable against the Loan Parties, as applicable, in accordance with their
respective terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors' rights generally and subject to the availability of
equitable remedies.
4.3 Financial Condition. All financial statements concerning Borrower and
-------------------
its Subsidiaries which have been or will hereafter be furnished by Borrower and
its Subsidiaries to Lender pursuant to this Agreement have been or will be
prepared in accordance with GAAP consistently applied throughout the periods
involved (except as disclosed therein) and do or will present fairly the
financial condition of the Persons covered thereby as at the dates thereof and
the results of their operations for the periods then ended. The Projections
delivered and to be delivered have been and will be prepared by Borrower in
light of the past operations of the business of Borrower and its Subsidiaries,
and such Projections represent and will represent the good faith estimate of
Borrower and its senior management concerning the most probable course of its
business as of the date such Projections are prepared and delivered.
4.4 Indebtedness and Liabilities. As of the Closing Date, Borrower does not
----------------------------
have (a) any Indebtedness except (i) as reflected on the financial statements
for the period ended August 31, 1996, previously delivered to Lender, (ii) the
Subordinated Debt or (iii) Indebtedness existing
27
<PAGE>
on the Closing Date and identified on Schedule 7.1, or (b) any Liabilities other
------------
than as reflected on such financial statements or as incurred in the ordinary
course of business following the date of such financial statements.
4.5 Account Warranties. Borrower represents, warrants and covenants as to
------------------
each Account that, at the time of its creation, the Account is a valid, bona
fide account, representing an undisputed indebtedness incurred by the named
account debtor for goods actually sold and delivered or for services completely
rendered; there are no setoffs, offsets or counterclaims, genuine or otherwise,
against the Account; the Account does not represent a sale to an Affiliate or a
consignment, sale or return or a bill and hold transaction; no agreement exists
permitting any deduction or discount (other than the discount stated on the
invoice); Borrower is the lawful owner of the Account and has the right to
assign the same to Lender; the Account is free of all security interests, liens
and encumbrances other than those in favor of Lender, and the Account is due and
payable in accordance with its terms.
4.6 Names. Schedule 4.6 sets forth all names, trade names, fictitious names
----- ------------
and business names under which Borrower currently conducts business or has at
any time during the past five years conducted business.
4.7 Locations; FEIN. Schedule 4.7 sets forth the location of Borrower's
--------------- ------------
principal place of business, the location of Borrower's books and records, the
location of all other offices of Borrower and all Collateral locations, and such
locations are Borrower's sole locations for its business and the Collateral.
Borrower's federal employer identification number is set forth on the signature
page hereof.
4.8 Title to Properties; Liens. Borrower and each of its Subsidiaries has
--------------------------
good, sufficient and legal title, subject to Permitted Encumbrances, to all its
respective material properties and assets. Except for Permitted Encumbrances,
all such properties and assets are free and clear of Liens. To the best
knowledge of Borrower after due inquiry, there are no actual, threatened or
alleged defaults with respect to any leases of real property under which
Borrower or any of its Subsidiaries is lessee or lessor which would have a
Material Adverse Effect.
4.9 Litigation; Adverse Facts. There are no judgments outstanding against
-------------------------
any Loan Party or affecting any property of any Loan Party nor is there any
action, charge, claim, demand, suit, proceeding, petition, governmental
investigation or arbitration now pending or, to the best knowledge of Borrower
after due inquiry, threatened against or affecting any Loan Party or any
property of any Loan Party which could reasonably be expected to result in any
Material Adverse Effect. No Loan Party has received any opinion or memorandum or
legal advice from legal counsel to the effect that it is exposed to any
liability which could reasonably be expected to result in any Material Adverse
Effect.
4.10 Payment of Taxes. All material tax returns and reports of Borrower and
----------------
each of its Subsidiaries required to be filed by any of them have been timely
filed, and all taxes, assessments, fees and other governmental charges upon such
Persons and upon their respective
28
<PAGE>
properties, assets, income and franchises which are shown on such returns as due
and payable have been paid when due and payable. As of the Closing Date, none of
the United States income tax returns of Borrower are under audit. No tax liens
have been filed and no claims (except as otherwise permitted by Section 5.9) are
-----------
being asserted with respect to any such taxes. The charges, accruals and
reserves on the books of Borrower and each of its Subsidiaries in respect of any
taxes or other governmental charges are in accordance with GAAP.
4.11 Performance of Agreements. None of the Loan Parties and none of their
-------------------------
respective Subsidiaries is in default in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in any
contractual obligation of any such Person which individually or in the aggregate
could reasonably be expected to have a Material Adverse Effect, and no condition
exists that, with the giving of notice or the lapse of time or both, would
constitute such a default.
4.12 Employee Benefit Plans. Borrower, each of its Subsidiaries and each
----------------------
ERISA Affiliate is in compliance in all material respects with all applicable
provisions of ERISA, the IRC and all other applicable laws and the regulations
and interpretations thereof with respect to all Employee Benefit Plans. No
material liability has been incurred by Borrower, any of its Subsidiaries or any
ERISA Affiliate which remains unsatisfied for any funding obligation, taxes or
penalties with respect to any Employee Benefit Plan.
4.13 Intellectual Property. Borrower and each of its Subsidiaries owns, is
---------------------
licensed to use or otherwise has the right to use all Intellectual Property used
in or necessary for the conduct of its business as currently conducted, and all
such Intellectual Property is identified on Schedule 4.13.
-------------
4.14 Broker's Fees. No broker's or finder's fee or commission will be
-------------
payable with respect to any of the transactions contemplated hereby.
4.15 Environmental Compliance. Each Loan Party has been and is currently in
------------------------
compliance with all applicable Environmental Laws, including obtaining and
maintaining in effect all permits, licenses or other authorizations required by
applicable Environmental Laws. There are no claims, liabilities, investigations,
litigation, administrative proceedings, whether pending or threatened, or
judgments or orders relating to any Hazardous Materials asserted or threatened
against any Loan Party or relating to any real property currently or formerly
owned, leased or operated by any Loan Party.
4.16 Solvency. After giving effect to the transactions contemplated by the
--------
Loan Documents, including the payment of all applicable fees, costs and
expenses, and as of, from and after the date of this Agreement, Borrower: (a)
owns and will own assets the fair salable value of which are (i) greater than
the total amount of its liabilities (including contingent liabilities) and (ii)
greater than the amount that will be required to pay the probable liabilities of
Borrower as they mature; (b) has capital that is not unreasonably small in
relation to its business as presently
29
<PAGE>
conducted or any contemplated or undertaken transaction; and (c) does not intend
to incur and does not believe that it will incur debts beyond its ability to pay
such debts as they become due.
4.17 Disclosure. No representation or warranty of Borrower, any of its
----------
Subsidiaries or any other Loan Party contained in this Agreement, the financial
statements, the other Loan Documents or any other document, certificate or
written statement furnished to Lender by or on behalf of any such Person for use
in connection with the Loan Documents contains any untrue statement of a
material fact or omitted, omits or will omit to state a material fact necessary
in order to make the statements contained herein or therein not misleading in
light of the circumstances in which the same were made. The Projections and pro
forma financial information contained in such materials are based upon good
faith estimates and assumptions believed by such Persons to be reasonable at the
time made, it being recognized by Lender that such projections as to future
events are not to be viewed as facts and that actual results during the period
or periods covered by any such projections may differ from the projected
results. There is no material fact known to Borrower that has had or could have
a Material Adverse Effect and that has not been fully disclosed herein or in
such other documents, certificates and statements furnished to Lender for use in
connection with the transactions contemplated hereby.
4.18 Insurance. Borrower and each of its Subsidiaries maintains adequate
---------
insurance policies for public liability, property damage for its business and
properties, product liability, and business interruption, no notice of
cancellation has been received with respect to such policies and Borrower and
each of its Subsidiaries is in compliance with all material conditions contained
in such policies.
4.19 Compliance with Laws. Neither Borrower nor any of its Subsidiaries is
--------------------
in violation of any law, ordinance, rule, regulation, order, policy, guideline
or other requirement of any domestic or foreign government or any
instrumentality or agency thereof, having jurisdiction over the conduct of its
business or the ownership of its properties, including, without limitation, any
violation relating to any use, release, storage, transport or disposal of any
Hazardous Material, which violation would subject Borrower or any of its
Subsidiaries, or any of their respective officers to criminal liability or have
a Material Adverse Effect and no such violation has been alleged.
4.20 Bank Accounts. Schedule 4.20 sets forth the account numbers and
------------- -------------
locations of all bank accounts of Borrower and its Subsidiaries.
4.21 Subsidiaries. Borrower has no Subsidiaries other than as set forth on
------------
Schedule 4.21.
- -------------
4.22 Employee Matters. Except as set forth on Schedule 4.22, (a) no Loan
---------------- -------------
Party nor any of such Loan Party's employees is subject to any collective
bargaining agreement, (b) no petition for certification or union election is
pending with respect to the employees of any Loan Party and no union or
collective bargaining unit has sought such certification or recognition with
respect to the employees of any Loan Party and (c) there are no strikes,
slowdowns, work
30
<PAGE>
stoppages or controversies pending or, to the best knowledge of Borrower after
due inquiry, threatened between any Loan Party and its respective employees,
other than employee grievances arising in the ordinary course of business which
could reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect. Except as set forth on Schedule 4.22, neither Borrower
-------------
nor any of its Subsidiaries is subject to an employment contract.
4.23 Governmental Regulation. None of the Loan Parties is, or after giving
-----------------------
effect to any loan will be, subject to regulation under the Public Utility
Holding Company Act of 1935, the Federal Power Act or the Investment Company Act
of 1940 or to any federal or state statute or regulation limiting its ability to
incur indebtedness for borrowed money.
Borrower may, at any time and from time to time and subject to subsection
----------
5.13, amend any one or more of the Schedules referred in this Section 4 and any
- ---- ---------
representation or warranty contained herein which refers to any such Schedule
shall from and after the date of any such amendment refer to such Schedule as so
amended, provided, however, that in no event may the Borrower amend any such
--------
Schedule if such amendment would reflect or evidence a Default or Event of
Default.
SECTION 5 AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, so long as any of the Commitments
hereunder shall be in effect and until payment in full of all Obligations and
termination of all Lender Letters of Credit, unless Lender shall otherwise give
its prior written consent, Borrower shall perform, and shall cause each of its
Subsidiaries to perform, all covenants in this Section 5 applicable to such
Person.
5.1 Financial Statements and Other Reports. Borrower will maintain, and
--------------------------------------
cause each of its Subsidiaries to maintain, a system of accounting established
and administered in accordance with sound business practices to permit
preparation of financial statements in conformity with GAAP. Borrower will
deliver to Lender the financial statements and other reports described below.
(A) Monthly Financials. As soon as available and in any event within
------------------
twenty-five (25) days after the end of each month, Borrower will deliver (1) the
consolidated and consolidating balance sheet of Borrower and its Subsidiaries as
at the end of such month and the related consolidated and consolidating
statements of income, stockholders' equity and cash flow for such month and for
the period from the beginning of the then current Fiscal Year to the end of such
month, (2) a schedule of the outstanding Indebtedness for borrowed money of
Borrower and its Subsidiaries describing in reasonable detail each such debt
issue or loan outstanding and the principal amount and amount of accrued and
unpaid interest with respect to each such debt issue or loan, and (3) a
perpetual inventory report by store location and distribution center along with
the reconciliation of the perpetual to the general ledger.
31
<PAGE>
(B) Quarterly Financials. As soon as available and in any event within
--------------------
forty-five (45) days after the end of each quarter of a Fiscal Year, Borrower
will deliver the consolidated and consolidating balance sheet of Borrower and
its Subsidiaries as at the end of such period and the related consolidated and
consolidating statements of income, stockholders' equity and cash flow for such
quarter of a Fiscal Year and for the period from the beginning of the then
current Fiscal Year to the end of such quarter of a Fiscal Year.
(C) Year-End Financials. As soon as available and in any event within
-------------------
ninety (90) days after the end of each Fiscal Year, Borrower will deliver: (1)
the consolidated balance sheet of Borrower and its Subsidiaries as at the end of
such year and the related consolidated statements of income, stockholders'
equity and cash flow for such Fiscal Year; (2) a schedule of the outstanding
Indebtedness of Borrower and its Subsidiaries describing in reasonable detail
each such debt issue or loan outstanding and the principal amount and amount of
accrued and unpaid interest with respect to each such debt issue or loan; and
(3) a report with respect to the financial statements from a firm of independent
certified public accountants selected by Borrower, and acceptable to Lender,
which report shall be unqualified as to going concern and scope of audit of
Borrower and its Subsidiaries and shall state that (a) such consolidated
financial statements present fairly the consolidated financial position of
Borrower and its Subsidiaries as at the dates indicated and the results of their
operations and cash flow for the periods indicated in conformity with GAAP
applied on a basis consistent with prior years and (b) that the examination by
such accountants in connection with such consolidated financial statements has
been made in accordance with generally accepted auditing standards; and (4)
copies of the consolidating financial statements of Borrower and its
Subsidiaries, including (a) consolidating balance sheets of Borrower and its
Subsidiaries as at the end of such Fiscal Year showing intercompany eliminations
and (b) related consolidating statements of earnings of Borrower and its
Subsidiaries showing intercompany eliminations.
(D) [intentionally omitted]
(E) Compliance Certificate. Together with the delivery of each set of
----------------------
financial statements referenced in subparts (A), (B) and (C) of this subsection
-----------
5.1, Borrower will deliver to Lender a Compliance Certificate, together with
- ---
copies of the calculations and work-up employed to determine Borrower's
compliance or noncompliance with the financial covenants set forth in Section 6.
---------
(F) Weekly Borrowing Base Certificates and Inventory Reports. Borrower
--------------------------------------------------------
will deliver to Lender on a weekly basis, on or before 2:00 p.m. (Chicago time)
on the second Business Day of each week, or more frequent basis, as reasonably
requested by Lender, a Borrowing Base Certificate and an Inventory Report as of
close of business on the previous Friday.
(G) Listings and Agings. As soon as available and in any event within
-------------------
five (5) Business Days after the last day of each month, and from time to time
upon the request of
32
<PAGE>
Lender, Borrower will deliver to Lender an aged trial balance of all then
existing accounts payable, such report to be in form and substance satisfactory
to Lender.
(H) [intentionally deleted]
(I) Appraisals. From time to time, upon the request of Lender,
----------
Borrower will obtain and deliver to Lender, or will cooperate with Lender to
provide, appraisal reports in form and substance and from appraisers
satisfactory to Lender, stating the then current fair market and orderly
liquidation values of all or any portion of the Collateral; provided, however,
--------
that upon and during the continuation of an Event of Default, such appraisals
shall be performed at Borrower's expense.
(J) Government Notices. Borrower will deliver to Lender promptly after
------------------
receipt copies of all notices, requests, subpoenas, inquiries or other writings
received from any governmental agency concerning any Employee Benefit Plan, the
violation or alleged violation of any Environmental Laws, the storage, use or
disposal of any Hazardous Material, the violation or alleged violation of the
Fair Labor Standards Act or Borrower's payment or non-payment of any taxes
including any tax audit.
(K) SEC Filings. Borrower will deliver to Lender, promptly after the
-----------
sending or filing of, and in any event within ten (10) days of such sending or
filing, copies of all reports and registration statements which Borrower or any
Subsidiary of Borrower files with the Securities and Exchange Commission or any
national securities exchange.
(L) Events of Default, etc. Promptly upon any officer of Borrower
----------------------
obtaining knowledge of any of the following events or conditions, Borrower shall
deliver a certificate of Borrower's chief executive officer specifying the
nature and period of existence of such condition or event and what action
Borrower has taken, is taking and proposes to take with respect thereto: (1) any
condition or event that constitutes an Event of Default or Default; (2) any
notice of default that any Person has given to Borrower or any of its
Subsidiaries or any other action taken with respect to a claimed default; or (3)
any Material Adverse Effect.
(M) Trade Names. Borrower and each of its Subsidiaries will give
-----------
Lender at least thirty (30) days advance written notice of any change of name or
of any new trade name or fictitious business name. Borrower's use of any trade
name or fictitious business name will be in compliance with all laws regarding
the use of such names.
(N) Locations. Borrower will give Lender at least thirty (30) days
---------
advance written notice of any change in Borrower's principal place of business
or any change in the location of its books and records or the Collateral or of
any new location for its books and records or the Collateral.
(O) Bank Accounts. Borrower will give Lender prompt notice of any new
-------------
bank accounts Borrower or any of its Subsidiaries intends to establish prior to
their opening same.
33
<PAGE>
(P) Litigation. Promptly upon any officer of Borrower or its
----------
subsidiaries obtaining knowledge of (1) the institution of any action, suit,
proceeding, governmental investigation or arbitration against or affecting any
Loan Party or any property of any Loan Party not previously disclosed by
Borrower to Lender or (2) any material development in any action, suit,
proceeding, governmental investigation or arbitration at any time pending
against or affecting any Loan Party or any property of any Loan Party which
could reasonably be expected to have a Material Adverse Effect, Borrower will
promptly give notice thereof to Lender and provide such other information as may
be reasonably available to them to enable Lender and its counsel to evaluate
such matter.
(Q) Projections. As soon as available and in any event no later than
-----------
the first day of each new Fiscal Year of Borrower, Borrower will deliver
consolidated and consolidating Projections of Borrower and its Subsidiaries for
the forthcoming Fiscal Year, month by month.
(R) Subordinated Debt and Other Indebtedness Notices. Borrower shall
------------------------------------------------
promptly deliver copies of all notices given or received by Borrower and any of
its Subsidiaries with respect to noncompliance with any term or condition
related to any Subordinated Debt or other Indebtedness having an individual
principal amount of $50,000 or more, and shall promptly notify Lender of any
potential or actual event of default with respect to any Subordinated Debt or
other Indebtedness.
(S) Other Information. With reasonable promptness, Borrower will
-----------------
deliver such other information and data with respect to any Loan Party, any
Subsidiary of any Loan Party or the Collateral as Lender may reasonably request
from time to time.
5.2 Access to Accountants. Borrower authorizes Lender to discuss the
---------------------
financial condition and financial statements of Borrower and its Subsidiaries
with Borrower's independent public accountants upon reasonable notice to
Borrower of its intention to do so, and authorizes such accountants to respond
to all of Lender's inquiries.
5.3 Inspection. Borrower shall permit Lender and any authorized
----------
representatives designated by Lender to visit and inspect any of the properties
of Borrower or any of its Subsidiaries, including its and their financial and
accounting records, and in conjunction with such inspection, to make copies and
take extracts therefrom, and to discuss its and their affairs, finances and
business with its and their officers and independent public accountants, at such
reasonable times during normal business hours and as often as may be reasonably
requested. Borrower acknowledges that Lender intends to make such inspections on
at least a quarterly basis.
5.4 Collateral Records. Borrower shall keep full and accurate books and
------------------
records relating to the Collateral and shall mark such books and records to
indicate Lender's security interests in the Collateral.
34
<PAGE>
5.5 [intentionally deleted]
5.6 Collection of Accounts and Payments. Borrower shall establish a blocked
-----------------------------------
concentration account (the "Blocked Account") in Borrower's name with such bank
("Collecting Bank") as is acceptable to Lender (subject to irrevocable
instructions acceptable to Lender as hereinafter set forth) in which Borrower
will immediately deposit or cause to be promptly deposited all payments made for
Inventory or other payments constituting proceeds of Collateral in the identical
form in which such payment was made, whether by cash or check, other than
deposits in deposit accounts for retail stores, where funds in excess of the
minimum deposit of $2,000 required for each such account shall be transferred no
less often than weekly to the Blocked Account. The Collecting Bank shall
acknowledge and agree, in a manner satisfactory to Lender, that all payments
made to the Blocked Account are the sole and exclusive property of Lender, and
that the Collecting Bank has no right of setoff against the Blocked Account and
that all such payments received will be promptly transferred to Lender's
Account. Borrower hereby agrees that all payments received by Lender, whether by
cash, check, wire transfer or any other instrument, made to such Blocked Account
or otherwise received by Lender and whether on the Accounts or as proceeds of
other Collateral or otherwise will be the sole and exclusive property of Lender.
Borrower shall irrevocably instruct the Collecting Bank to promptly transfer all
payments or deposits to the Blocked Account into Lender's Account. Borrower, and
any of its Affiliates, employees, agents or other Persons acting for or in
concert with Borrower, shall, acting as trustee for Lender, receive, as the sole
and exclusive property of Lender, any monies, checks, notes, drafts or any other
payments relating to and/or proceeds of Accounts or other Collateral which come
into the possession or under the control of Borrower or any of Borrower's
Affiliates, employees, agents or other Persons acting for or in concert with
Borrower, and Borrower or such Persons shall remit the same or cause the same to
be remitted, in kind, to the Blocked Account or to Lender at its address set
forth in subsection 9.6 below no less often than weekly. Borrower hereby further
--------------
agrees that any bank accounts opened after the date hereof shall comply fully
with the provisions of this subsection 5.6, including, but not limited to, the
--------------
requirement that all funds in any such accounts be transferred no less often
than weekly to the Blocked Accounts.
5.7 Endorsement. Borrower hereby constitutes and appoints Lender and all
-----------
Persons designated by Lender for that purpose as Borrower's true and lawful
attorney-in-fact, with power to endorse Borrower's name to any of the items of
payment or proceeds described in subsection 5.6 above and all proceeds of
--------------
Collateral that come into Lender's possession or under Lender's control. Both
the appointment of Lender as Borrower's attorney and Lender's rights and powers
are coupled with an interest and are irrevocable until payment in full and
complete performance of all of the Obligations.
5.8 Corporate Existence. Borrower will, and will cause each of its
-------------------
Subsidiaries to, at all times preserve and keep in full force and effect its
corporate existence and all rights and franchises material to its business.
Borrower will promptly notify Lender of any change in its or its Subsidiaries'
ownership or corporate structure.
35
<PAGE>
5.9 Payment of Taxes. Borrower will, and will cause each of its
----------------
Subsidiaries to, pay all taxes, assessments and other governmental charges
imposed upon it or any of its properties or assets or with respect to any of its
franchises, business, income or property before any penalty accrues thereon
provided that no such tax need be paid if Borrower or one of its Subsidiaries is
- --------
contesting same in good faith by appropriate proceedings promptly instituted and
diligently conducted and if Borrower or such Subsidiary has established
appropriate reserves as shall be required in conformity with GAAP.
5.10 Maintenance of Properties; Insurance. Borrower will maintain or cause
------------------------------------
to be maintained in good repair, working order and condition all material
properties used in the business of Borrower and its Subsidiaries and will make
or cause to be made all appropriate repairs, renewals and replacements thereof.
Borrower will maintain or cause to be maintained, with financially sound and
reputable insurers, public liability and property damage insurance with respect
to its business and properties and the business and properties of its
Subsidiaries against loss or damage of the kinds customarily carried or
maintained by corporations of established reputation engaged in similar
businesses and in amounts acceptable to Lender. Borrower shall cause Lender to
be named as loss payee on all insurance policies relating to any Collateral and
as additional insured under all liability policies, in each case pursuant to
appropriate endorsements in form and substance satisfactory to Lender and shall
collaterally assign to Lender as security for the payment of the Obligations all
business interruption insurance of Borrower. Borrower shall apply any proceeds
received from any policies of insurance relating to any Collateral to the
Obligations as set forth in subsection 2.4(B).
-----------------
5.11 Compliance with Laws. Borrower will, and will cause each of its
--------------------
Subsidiaries to, comply with the requirements of all applicable laws, rules,
regulations and orders of any governmental authority as now in effect and which
may be imposed in the future in all jurisdictions in which Borrower or any of
its Subsidiaries is now doing business or may hereafter be doing business, other
than those laws the noncompliance with which would not have a Material Adverse
Effect.
5.12 Further Assurances. Borrower shall, and shall cause each of its
------------------
Subsidiaries to, from time to time, execute such guaranties, financing or
continuation statements, documents, security agreements, reports and other
documents or deliver to Lender such instruments, certificates of title or other
documents as Lender at any time may reasonably request to evidence, perfect or
otherwise implement the guaranties and security for repayment of the Obligations
provided for in the Loan Documents. At Lender's request, Borrower shall cause
any Subsidiaries of Borrower promptly to guaranty the Obligations and to grant
to Lender security interests in the real, personal and mixed property of such
Subsidiary to secure the Obligations.
5.13 Collateral Locations. Borrower will keep the Collateral at the
--------------------
locations specified on Schedule 4.7. With respect to any new location (which in
------------
any event shall be within the United States or Canada), Borrower will (a)
execute such documents and take such actions as Lender deems necessary to
perfect and protect the security interests of the Lender in the
36
<PAGE>
Collateral prior to the transfer or removal of any Collateral to such new
location and (b) use its best efforts to timely obtain a Landlord Waiver with
respect to such new location.
5.14 Bailees. If any Collateral is at any time in the possession or control
-------
of any warehouseman, bailee or any of Borrower's agents or processors, Borrower
shall, upon the request of Lender, notify such warehouseman, bailee, agent or
processor of the security interests in favor of Lender created hereby and shall
instruct such Person to hold all such Collateral for Lender's account subject to
Lender's instructions.
5.15 Mortgages; Title Insurance; Surveys.
-----------------------------------
(A) Title Insurance. Within thirty (30) days following delivery of any
---------------
Mortgage required by subsection 5.15(B), Borrower shall deliver or cause to be
------------------
delivered to Lender ALTA lender's title insurance policies issued by title
insurers reasonably satisfactory to Lender (the "Mortgage Policies") in form and
substance and in amounts reasonably satisfactory to Lender assuring Lender that
the Mortgages are valid and enforceable first priority mortgage liens on the
respective Mortgaged Property, free and clear of all defects and encumbrances
except Permitted Encumbrances. The Mortgage Policies shall be in form and
substance reasonably satisfactory to Lender and shall include an endorsement
insuring against the effect of future advances under this Agreement, for
mechanics' liens and for any other matter that Lender may reasonably request,
and shall provide for affirmative insurance and such reinsurance as Lender may
reasonably request.
(B) Mortgaged Property. Lender may from time to time designate real
------------------
property of any Loan Party after the date hereof as "Mortgaged Property", in
which case Borrower shall as promptly as possible (and in any event within sixty
(60) days after such designation) deliver to Lender a fully executed Mortgage,
in form and substance satisfactory to Lender together with title insurance
policies and surveys as required by this subsection 5.15. Borrower agrees that,
---------------
following the taking of the actions with respect to any Mortgaged Property
required by the immediately preceding sentence, Lender shall have a valid and
enforceable first priority mortgage on the respective Mortgaged Property, free
and clear of all defects and encumbrances except for Permitted Encumbrances.
(C) Surveys. Within thirty (30) days following delivery of any
-------
Mortgage, Borrower shall deliver or cause to be delivered to Lender current
surveys, certified by a licensed surveyor, for all real property that is the
subject of the Mortgage Policies. All such surveys shall be sufficient to allow
the issuer of the mortgage policy to issue an ALTA lender's policy.
5.16 Use of Proceeds and Margin Security. Borrower shall use the proceeds
-----------------------------------
of all Loans for proper business purposes (as described in the recitals to this
Agreement) consistent with all applicable laws, statutes, rules and regulations.
No portion of the proceeds of any Loan shall be used by Borrower or any of its
Subsidiaries for the purpose of purchasing or carrying of margin stock within
the meaning of Regulation G or Regulation U, or in any manner that might cause
the borrowing or the application of such proceeds to violate Regulation T or
Regulation X
37
<PAGE>
or any other regulation of the Board of Governors of the Federal Reserve System,
or to violate the Exchange Act.
SECTION 6 FINANCIAL COVENANTS
Borrower covenants and agrees that so long as any of the Commitments remain
in effect and until payment in full of all Obligations and termination of all
Lender Letters of Credit, Borrower shall comply with and shall cause each of its
Subsidiaries to comply with all covenants in this Section 6 applicable to such
---------
Person.
6.1 Net Worth. Borrower shall at all times maintain Net Worth of at least
---------
$8,000,000.
6.2 Interest Coverage. Borrower shall not permit Interest Coverage for (a)
-----------------
the fiscal quarter ending March 1, 1997; (b) each multi-month rolling fiscal
period beginning with the rolling four (4) month fiscal period ending April 5,
1997, through the close of each monthly fiscal period thereafter up to a rolling
twelve (12) month fiscal period; or (c) each rolling twelve (12) month fiscal
period thereafter, to be less than 2:1.
SECTION 7 NEGATIVE COVENANTS
Borrower covenants and agrees that so long as any of the Commitments remain
in effect and until payment in full of all Obligations and termination of all
Lender Letters of Credit, unless Borrower has received the prior written consent
of Lender, Borrower shall not and will not permit any of its Subsidiaries to:
7.1 Indebtedness and Liabilities. Directly or indirectly create, incur,
----------------------------
assume, guaranty, or otherwise become or remain directly or indirectly liable,
on a fixed or contingent basis, with respect to any Indebtedness except: (a) the
Obligations; (b) Indebtedness (excluding capital leases) not to exceed $250,000
in the aggregate at any time outstanding secured by purchase money Liens; (c)
Indebtedness under Capital Leases not to exceed $200,000 outstanding at any time
in the aggregate; (d) operating Leases; (e) the Subordinated Debt; and (f)
Indebtedness existing on the Closing Date and identified on Schedule 7.1. Except
------------
for Indebtedness described permitted in the preceding sentence, Borrower will
not, and will not permit any of its Subsidiaries to, incur any Liabilities
except for trade payables and normal accruals in the ordinary course of business
not yet due and payable or with respect to which Borrower or any of its
Subsidiaries is contesting in good faith the amount or validity thereof by
appropriate proceedings and then only to the extent that Borrower or any of its
Subsidiaries has established adequate reserves therefor, if appropriate under
GAAP.
7.2 Guaranties. Except for endorsements of instruments or items of payment
----------
for collection in the ordinary course of business, guaranty, endorse, or
otherwise in any way become or be responsible for any obligations of any other
Person, whether directly or indirectly by
38
<PAGE>
agreement to purchase the indebtedness of any other Person or through the
purchase of goods, supplies or services, or maintenance of working capital or
other balance sheet covenants or conditions, or by way of stock purchase,
capital contribution, advance or loan for the purpose of paying or discharging
any indebtedness or obligation of such other Person or otherwise.
7.3 Transfers, Liens and Related Matters.
------------------------------------
(A) Transfers. Sell, assign (by operation of law or otherwise) or
---------
otherwise dispose of, or grant any option with respect to any of the Collateral
or the assets of such Person, except that Borrower and its Subsidiaries may (i)
sell inventory in the ordinary course of business; and (ii) make Asset
Dispositions if all of the following conditions are met: (1) the market value of
assets sold or otherwise disposed of in any single transaction or series of
related transactions does not exceed $50,000 and the aggregate market value of
assets sold or otherwise disposed of in any Fiscal Year does not exceed
$100,000; (2) the consideration received is at least equal to the fair market
value of such assets; (3) the consideration received is cash or notes, which
notes shall be promptly pledged to Lender; (4) the net proceeds of such Asset
Disposition are applied as required by subsection 2.4(B); (5) after giving
-----------------
effect to the sale or other disposition of the assets included within the Asset
Disposition and the repayment of the Obligations with the proceeds thereof,
Borrower is in compliance on a pro forma basis with the covenants set forth in
Section 6 recomputed for the most recently ended month for which information is
- ---------
available and is in compliance with all other terms and conditions contained in
this Agreement; and (6) no Default or Event of Default shall then exist or
result from such sale or other disposition.
(B) Liens. Except for Permitted Encumbrances, directly or indirectly
-----
create, incur, assume or permit to exist any Lien on or with respect to any of
the Collateral or the assets of such Person or any proceeds, income or profits
therefrom.
(C) No Negative Pledges. Enter into or assume any agreement (other than the
-------------------
Loan Documents) prohibiting the creation or assumption of any Lien upon its
properties or assets, whether now owned or hereafter acquired.
(D) No Restrictions on Subsidiary Distributions to Borrower. Except as
-------------------------------------------------------
provided herein, directly or indirectly create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any such Subsidiary to: (1) pay dividends or make any other
distribution on any of such Subsidiary's capital stock owned by Borrower or any
Subsidiary of Borrower: (2) subject to subordination provisions, pay any
indebtedness owed to Borrower or any other Subsidiary; (3) make loans or
advances to Borrower or any other Subsidiary; or (4) transfer any of its
property or assets to Borrower or any other Subsidiary.
7.4 Investments and Loans. Make or permit to exist investments in or loans
---------------------
to any other Person, except: (a) Cash Equivalents; (b) loans and advances to
employees for moving, entertainment, travel and other similar expenses in the
ordinary course of business in an
39
<PAGE>
aggregate outstanding amount not in excess of $50,000 at any time; and (c)
investments or loans existing on the Closing Date and identified on Schedule
--------
7.4.
- ---
7.5 Restricted Junior Payments. Directly or indirectly declare, order, pay,
--------------------------
make or set apart any sum for any Restricted Junior Payment, except that (a)
Subsidiaries of Borrower may make Restricted Junior Payments with respect to
their common stock to the extent necessary to permit Borrower to pay the
Obligations and to permit Borrower to pay expenses incurred in the ordinary
course of business, and (b) Borrower may (i) pay management fees not in excess
of $400,000 per annum to Kayne Anderson pursuant to an arm's length agreement
upon fair and reasonable terms which are fully disclosed to Lender and (ii) so
long as no Default or Event of Default has occurred and is continuing, make
payments of interest on the Subordinated Debt in accordance with the terms
thereof.
7.6 Restriction on Fundamental Changes. (a) Enter into any transaction of
----------------------------------
merger or consolidation; (b) liquidate, wind-up or dissolve itself (or suffer
any liquidation or dissolution); (c) convey, sell, lease, sublease, transfer or
otherwise dispose of, in one transaction or a series of transactions, all or any
substantial part of its business or assets, or the capital stock of any of its
Subsidiaries, whether now owned or hereafter acquired; or (d) acquire by
purchase or otherwise all or any substantial part of the business or assets of,
or stock or other evidence of beneficial ownership of, any Person.
7.7 Changes Relating to Subordinated Debt. Change or amend the terms of the
-------------------------------------
Subordinated Debt if the effect of such amendment is to: (a) increase the
interest rate on such Indebtedness; (b) change the dates upon which payments of
principal or interest are due on such Indebtedness; (c) change any event of
default or add any covenant with respect to such Indebtedness; (d) change the
payment provisions of such Indebtedness; (e) change the subordination provisions
thereof; or (f) change or amend any other term if such change or amendment would
materially increase the obligations of the obligor or confer additional material
rights on the holder of such Indebtedness in a manner adverse to Borrower, any
of its Subsidiaries, or Lender.
7.8 Transactions with Affiliates. Directly or indirectly, enter into or
----------------------------
permit to exist any transaction (including the purchase, sale or exchange of
property or the rendering of any service) with any Affiliate or with any
officer, director or employee of any Loan Party, except for (a) transactions in
the ordinary course of and pursuant to the reasonable requirements of
Borrower's business and upon fair and reasonable terms which are fully disclosed
to Lender and which are no less favorable to Borrower than it would obtain in an
arm's length transaction with an unaffiliated Person, (b) management agreements
with Kayne Anderson permitted under subsection 7.5 and (c) the Subordinated
--------------
Debt.
7.9 Environmental Liabilities. (a) Violate any applicable Environmental
-------------------------
Law; (b) dispose of any Hazardous Materials (except in accordance with
applicable law) into or onto or from, any real property owned, leased or
operated by any Loan Party; or (c) permit any Lien
40
<PAGE>
imposed pursuant to any Environmental Law to be imposed or to remain on any real
property owned, leased or operated by any Loan Party.
7.10 Conduct of Business. From and after the Closing Date, engage in any
-------------------
business other than businesses of the type engaged in by Borrower or any
Subsidiary on the Closing Date.
7.11 Compliance with ERISA. Establish any new Employee Benefit Plan or
---------------------
amend any existing Employee Benefit Plan if the liability or increased liability
resulting from such establishment or amendment is material. Neither Borrower nor
any Subsidiary shall fail to establish, maintain and operate each Employee
Benefit Plan in compliance in all material respects with the provisions of
ERISA, the IRC and all other applicable laws and the regulations and
interpretations thereof.
7.12 Tax Consolidations. File or consent to the filing of any consolidated
------------------
income tax return with any Person other than Borrower or any of its
Subsidiaries.
7.13 Subsidiaries. Establish, create or acquire any new Subsidiaries
------------
without the prior written consent of Lender, which consent shall not be
unreasonably withheld.
7.14 Fiscal Year. Change its Fiscal Year.
-----------
7.15 Press Release; Public Offering Materials. Disclose the name of Lender
----------------------------------------
in any press release or in any prospectus, proxy statement or other materials
filed with any governmental entity relating to a public offering of the capital
stock of any Loan Party except as may be required by law.
7.16 Bank Accounts. (a) Fail to give Lender written notice thereof within
-------------
fifteen (15) days after establishing any new bank accounts, which notice shall
identify the bank or other financial institution, the account number and the
respective store of Borrower establishing and/or making deposits to such bank
account, or (b) amend or terminate the Blocked Account or any agreement relating
hereto without Lender's prior written consent.
SECTION 8 DEFAULT, RIGHTS AND REMEDIES
8.1 Event of Default. "Event of Default" shall mean the occurrence or
----------------
existence of any one or more of the following:
(A) Payment. Failure to make payment of any of the Obligations when
-------
due and in the case of interest, such failure shall not be cured within five (5)
days of the applicable due date; or
(B) Default in Other Agreements. (1) Failure of Borrower or any of its
---------------------------
Subsidiaries to pay when due any principal or interest on any Indebtedness
(other than the
41
<PAGE>
Obligations) or (2) breach or default of Borrower or any of its Subsidiaries
with respect to any Indebtedness (other than the Obligations); if such failure
to pay, breach or default entitles the holder to cause such Indebtedness having
an individual principal amount in excess of $100,000 or having an aggregate
principal amount in excess of $200,000 to become or be declared due prior to its
stated maturity; or
(C) Breach of Certain Provisions. Failure of Borrower to perform or
----------------------------
comply with any term or condition contained in subsections 5.1, 5.3 or 5.6 or
contained in Section 6 or Section 7; or
(D) Breach of Warranty. Any representation, warranty, certification or
------------------
other statement made by any Loan Party in any Loan Document or in any statement
or certificate at any time given by such Person in writing pursuant or in
connection with any Loan Document is false in any material respect on the date
made; or
(E) Other Defaults Under Loan Documents. Borrower or any other Loan
-----------------------------------
Party defaults in the performance of or compliance with any term contained in
this Agreement or the other Loan Documents and such default is not remedied or
waived within ten (10) days after receipt by Borrower of notice from Lender of
such default (other than occurrences described in other provisions of this
subsection 8.1 for which a different grace or cure period is specified or which
- --------------
constitute immediate Events of Default); or
(F) Change in Control. (1) Kayne Anderson ceases to beneficially own
-----------------
and control, directly or indirectly, at least twenty-five percent (25%) of the
issued and outstanding shares of each class of capital stock of Borrower
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 Borrower; or
(G) Involuntary Bankruptcy; Appointment of Receiver, etc. (1) A court
----------------------------------------------------
enters a decree or order for relief with respect to Borrower or any of its
Subsidiaries in an involuntary case under 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 other similar relief is not granted under any
applicable federal or state law; or (2) the continuance of any of the following
events for sixty (60) days unless dismissed, bonded or discharged: (a) an
involuntary case is commenced against Borrower or any of its Subsidiaries, under
any applicable bankruptcy, insolvency or other similar law now or hereafter in
effect; or (b) a decree or order of a court for the appointment of a receiver,
liquidator, sequestrator, trustee, custodian or other officer having similar
powers over Borrower or any of its Subsidiaries, or over all or a substantial
part of their respective property, is entered; or (c) an interim receiver,
trustee or other custodian is appointed without the consent of Borrower or any
of its Subsidiaries, for all or a substantial part of the property of Borrower
or any such Subsidiary; or
(H) Voluntary Bankruptcy; Appointment of Receiver, etc. (1) An order
--------------------------------------------------
for relief is entered with respect to Borrower or any of its Subsidiaries or
Borrower or any of its
42
<PAGE>
Subsidiaries commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consents 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 consents to the
appointment of or taking possession by a receiver, trustee or other custodian
for all or a substantial part of its property; or (2) Borrower or any of its
Subsidiaries makes any assignment for the benefit of creditors; or (3) the board
of directors of Borrower or any of its Subsidiaries adopts any resolution or
otherwise authorizes action to approve any of the actions referred to in this
subsection 8.1(H); or
- -----------------
(I) Liens. Any lien, levy or assessment is filed or recorded with
-----
respect to or otherwise imposed upon all or any part of the Collateral or the
assets of Borrower or any of its Subsidiaries by the United States or any
department or instrumentality thereof or by any state, county, municipality or
other governmental agency (other than Permitted Encumbrances) and such lien,
levy or assessment is not stayed, vacated, paid or discharged within ten (10)
days; or
(J) Judgment and Attachments. Any money judgment, writ or warrant of
------------------------
attachment, or similar process involving (1) an amount in any individual case in
excess of $25,000 or (2) an amount in the aggregate at any time in excess of
$50,000 (in either case not adequately covered by insurance as to which the
insurance company has acknowledged coverage) is entered or filed against
Borrower or any of its Subsidiaries or any of their respective assets and
remains undischarged, unvacated, unbonded or unstayed for a period of thirty
(30) days or in any event later than five (5) days prior to the date of any
proposed sale thereunder; or
(K) Dissolution. Any order, judgment or decree is entered against
-----------
Borrower or any of its Subsidiaries decreeing the dissolution or split up of
Borrower or that Subsidiary and such order remains undischarged or unstayed for
a period in excess of twenty (20) days; or
(L) Solvency. Borrower ceases to be solvent (as represented by
--------
Borrower in subsection 4.17) or admits in writing its present or prospective
---------------
inability to pay its debts as they become due; or
(M) Injunction. Borrower or any of its Subsidiaries is enjoined,
----------
restrained or in any way prevented by the order of any court or any
administrative or regulatory agency from conducting all or any material part of
its business and such order continues for more than thirty (30) days; or
(N) Invalidity of Loan Documents. Any of the Loan Documents for any
----------------------------
reason, other than a partial or full release in accordance with the terms
thereof, ceases to be in full force and effect or is declared to be null and
void, or any Loan Party denies that it has any further liability under any Loan
Documents to which it is party, or gives notice to such effect; or
(O) Failure of Security. Lender does not have or ceases to have a
-------------------
valid and perfected first priority security interest in the Collateral (subject
to Permitted Encumbrances), in each case, for any reason other than the failure
of Lender to take any action within its control; or
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(P) Damage, Strike, Casualty. Any material damage to, or loss, theft
------------------------
or destruction of, any Collateral, whether or not insured, or any strike,
lockout, labor dispute, embargo, condemnation, act of God or public enemy, or
other casualty which causes, for more than fifteen (15) consecutive days beyond
the coverage period of any applicable business interruption insurance, the
cessation or substantial curtailment of revenue producing activities at any
facility of Borrower or any of its Subsidiaries if any such event or
circumstance could reasonably be expected to have a Material Adverse Effect.
(Q) Licenses and Permits. The loss, suspension or revocation of, or
--------------------
failure to renew, any license or permit now held or hereafter acquired by
Borrower or any of its Subsidiaries, if such loss, suspension, revocation or
failure to renew could reasonably be expected to have a Material Adverse Effect.
(R) Forfeiture. There is filed against Borrower any civil or criminal
----------
action, suit or proceeding under any federal or state racketeering statute
(including, without limitation, the Racketeer Influenced and Corrupt
Organization Act of 1970), which action, suit or proceeding (1) is not dismissed
within one-hundred-twenty (120) days; and (2) could reasonably be expected to
result in the confiscation or forfeiture of any material portion of the
Collateral.
8.2 Suspension of Commitments. Upon the occurrence of any Default or Event
-------------------------
of Default, notwithstanding any grace period or right to cure, Lender, without
notice or demand, may immediately cease making additional Loans and the
Commitments shall be suspended; provided that, in the case of a Default, if the
subject condition or event is waived or cured within any applicable grace or
cure period, the Commitments shall be reinstated.
8.3 Acceleration. Upon the occurrence of any Event of Default described in
------------
the foregoing subsections 8.1(G) or 8.1(H), all Obligations shall automatically
------------------ ------
become immediately due and payable, without presentment, demand, protest or
other requirements of any kind, all of which are hereby expressly waived by
Borrower, and the Commitments shall thereupon terminate. Upon the occurrence and
during the continuance of any other Event of Default, Lender may, by written
notice to Borrower, (a) declare all or any portion of the Obligations to be, and
the same shall forthwith become, immediately due and payable and the Commitment
s shall thereupon terminate and (b) demand that Borrower immediately deposit
with Lender an amount equal to one-hundred percent (100%) of the Letter of
Credit Reserve to enable Lender to make payments under the Lender Letters of
Credit when required and such amount shall become immediately due and payable.
8.4 Remedies. If any Event of Default shall have occurred and be
--------
continuing, in addition to and not in limitation of any rights or remedies
available to Lender at law or in equity, Lender may exercise in respect of the
Collateral, in addition to all other rights and remedies provided for herein or
otherwise available to it, all the rights and remedies of a secured party on
default under the UCC (whether or not the UCC applies to the affected
Collateral) and may also (a) notify any or all obligors on the Accounts to make
all payments directly to Lender; (b) require
44
<PAGE>
Borrower to, and Borrower hereby agrees that it will, at its expense and upon
request of Lender forthwith, assemble all or part of the Collateral as directed
by Lender and make it available to Lender at a place to be designated by Lender
which is reasonably convenient to both parties; (c) withdraw all cash in the
Blocked Accounts and apply such monies in payment of the Obligations in the
manner provided in subsection 8.7; (d) without notice or demand or legal
process, enter upon any premises of Borrower and take possession of the
Collateral; and (e) without notice, except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or private sale,
at any of the Lender's offices or elsewhere, at such time or times, for cash, on
credit or for future delivery, and at such price or prices and upon such other
terms as Lender may deem commercially reasonable. Borrower agrees that, to the
extent notice of sale shall be required by law, at least ten (10) days notice to
Borrower of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification. At any sale
of the Collateral, if permitted by law, Lender may bid (which bid may be, in
whole or in part, in the form of cancellation of indebtedness) for the purchase
of the Collateral or any portion thereof for the account of Lender. Lender shall
not be obligated to make any sale of Collateral regardless of notice of sale
having been given. Borrower shall remain liable for any deficiency. Lender may
adjourn any public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned. To the extent permitted by law,
Borrower hereby specifically waives all rights of redemption, stay or appraisal
which it has or may have under any law now existing or hereafter enacted. Lender
shall not be required to proceed against any Collateral but may proceed against
Borrower directly.
8.5 Appointment of Attorney-in-Fact. Borrower hereby constitutes and
-------------------------------
appoints Lender as Borrower's attorney-in-fact with full authority in the place
and stead of Borrower and in the name of Borrower, Lender or otherwise, from
time to time in Lender's discretion while an Event of Default is continuing to
take any action and to execute any instrument that Lender may deem necessary or
advisable to accomplish the purposes of this Agreement, including: (a) to ask,
demand, collect, sue for, recover, compound, receive and give acquittance and
receipts for moneys due and to become due under or in respect of any of the
Collateral; (b) to adjust, settle or compromise the amount or payment of any
Account, or release wholly or partly any customer or obligor thereunder or allow
any credit or discount thereon; (c) to receive, endorse, and collect any drafts
or other instruments, documents and chattel paper, in connection with clause (a)
above; (d) to file any claims or take any action or institute any proceedings
that Lender may deem necessary or desirable for the collection of any of the
Collateral or otherwise to enforce the rights of Lender with respect to any of
the Collateral; and (e) to sign and endorse any invoices, freight or express
bills, bills of lading, storage or warehouse receipts, assignments,
verifications and notices in connection with Accounts and other documents
relating to the Collateral. The appointment of Lender as Borrower's attorney and
Lender's rights and powers are coupled with an interest and are irrevocable
until payment in full and complete performance of all of the Obligations.
8.6 Limitation on Duty of Lender with Respect to Collateral. Beyond the
-------------------------------------------------------
safe custody thereof, Lender shall have no duty with respect to any Collateral
in its possession or control (or in the possession or control of any agent or
bailee) or with respect to any income thereon or the
45
<PAGE>
preservation of rights against prior parties or any other rights pertaining
thereto. Lender shall be deemed to have exercised reasonable care in the custody
and preservation of the Collateral in its possession if the Collateral is
accorded treatment substantially equal to that which Lender accords its own
property. Lender shall not be liable or responsible for any loss or damage to
any of the Collateral, or for any diminution in the value thereof, by reason of
the act or omission of any warehouseman, carrier, forwarding agency, consignee
or other agent or bailee selected by Lender in good faith.
8.7 Application of Proceeds. Upon the occurrence and during the continuance
-----------------------
of an Event of Default, (a) Borrower irrevocably waives the right to direct the
application of any and all payments at any time or times thereafter received by
Lender from or on behalf of Borrower, and Borrower hereby irrevocably agrees
that Lender shall have the continuing exclusive right to apply and to reapply
any and all payments received at any time or times after the occurrence and
during the continuance of an Event of Default against the Obligations in such
manner as Lender may deem advisable notwithstanding any previous entry by Lender
upon any books and records and (b) the proceeds of any sale of, or other
realization upon, all or any part of the Collateral shall be applied: first, to
-----
all fees, costs and expenses incurred by Lender with respect to this Agreement,
the other Loan Documents or the Collateral; second, to all fees due and owing to
------
Lender; third, to accrued and unpaid interest on the Obligations; fourth, to the
----- ------
principal amounts of the Obligations outstanding; and fifth, to any other
-----
indebtedness or obligations of Borrower owing to Lender.
8.8 License of Intellectual Property. Borrower hereby assigns, transfers
--------------------------------
and conveys to Lender, effective upon the occurrence and during the continuance
of any Event of Default hereunder, the non-exclusive right and license to use
all Intellectual Property owned or used by Borrower together with any goodwill
associated therewith, all to the extent necessary to enable Lender to realize on
the Collateral and any successor or assign to enjoy the benefits of the
Collateral. This right and license shall inure to the benefit of all successors,
assigns and transferees of Lender and its successors, assigns and transferees,
whether by voluntary conveyance, operation of law, assignment, transfer,
foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is
granted free of charge, without requirement that any monetary payment whatsoever
be made to Borrower by Lender.
8.9 Waivers, Non-Exclusive Remedies. No failure on the part of Lender to
-------------------------------
exercise, and no delay in exercising and no course of dealing with respect to,
any right under this Agreement or the other Loan Documents shall operate as a
waiver thereof; nor shall any single or partial exercise by Lender of any right
under this Agreement or any other Loan Document preclude any other or further
exercise thereof or the exercise of any other right. The rights in this
Agreement and the other Loan Documents are cumulative and are not exclusive of
any other remedies provided by law.
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<PAGE>
SECTION 9 MISCELLANEOUS
9.1 Assignments and Participations. Lender may assign its rights and
------------------------------
delegate its obligations under this Agreement and further may assign, or sell
participations in, all or any part of the Loans, the Commitments or any other
interest herein to an Affiliate or to another Person. In the case of an
assignment authorized under this subsection 9.1, the assignee shall have, to the
--------------
extent of such assignment, the same rights, benefits and obligations as it would
if it were a Lender hereunder. Lender shall be relieved of its obligations
hereunder with respect to the Commitments or assigned portion thereof. Borrower
hereby acknowledges and agrees that any assignment will give rise to a direct
obligation of Borrower to the assignee and that the assignee shall be considered
to be a "Lender". Lender may furnish any information concerning Borrower and its
Subsidiaries in its possession from time to time to assignees and participants
(including prospective assignees and participants).
9.2 Set Off. In addition to any rights now or hereafter granted under
-------
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, Lender, each assignee of Lender's interest,
and each participant is hereby authorized by Borrower at any time or from time
to time, without notice to Borrower or to any other Person, any such notice
being hereby expressly waived, to set off and to appropriate and to apply any
and all balances held by it at any of its offices for the account of Borrower or
any of its Subsidiaries (regardless of whether such balances are then due to
Borrower or its Subsidiaries) and any other property at any time held or owing
by that Lender or assignee to or for the credit or for the account of Borrower
against and on account of any of the Obligations then outstanding; provided,
that no participant shall exercise such right without the prior written consent
of Lender.
Borrower hereby agrees, to the fullest extent permitted by law, that any
Lender, assignee or participant may exercise its right of setoff with respect to
amounts in excess of its pro rata share of the Obligations (or, in the case of a
participant, in excess of its pro rata participation interest in the
Obligations) and that such Lender, assignee or participant, as the case may be,
shall be deemed to have purchased for cash in the amount of such excess,
participations in each other Lender's or holder's share of the Obligations.
9.3 Expenses and Attorneys' Fees. Whether or not the transactions
----------------------------
contemplated hereby shall be consummated, Borrower agrees to promptly pay all
fees, costs and expenses incurred by Lender in connection with any matters
contemplated by or arising out of this Agreement or the other Loan Documents
including the following, and all such fees, costs and expenses shall be part of
the Obligations, payable on demand and secured by the Collateral: (a) fees,
costs and expenses (including attorneys' fees, allocated costs of internal
counsel and fees of environmental consultants, accountants and other
professionals retained by Lender) incurred in connection with the examination,
review, due diligence investigation, documentation and closing of the financing
arrangements evidenced by the Loan Documents, other than the appraisal of
Borrower's catalog business, and subject to the limitations on reimbursements
set forth in Lender's proposal letter dated September 10, 1996; (b) fees, costs
and expenses (including attorneys' fees, allocated costs of internal counsel and
fees of environmental consultants,
47
<PAGE>
accountants and other professionals retained by Lender) incurred in connection
with the review, negotiation, preparation, documentation, execution and
administration of the Loan Documents, the Loans, and any amendments, waivers,
consents, forbearances and other modifications relating thereto or any
subordination or intercreditor agreements; (c) fees, costs and expenses incurred
in creating, perfecting and maintaining perfection of Liens in favor of Lender;
(d) fees, costs and expenses incurred in connection with forwarding to Borrower
the proceeds of Loans including Lender's standard wire transfer fee; (e) fees,
costs, expenses and bank charges, including bank charges for returned checks,
incurred by Lender in establishing, maintaining and handling lock box accounts,
blocked accounts or other accounts for collection of the Collateral; (f) fees,
costs, expenses (including attorneys' fees and allocated costs of internal
counsel) and costs of settlement incurred in collecting upon or enforcing rights
against the Collateral or incurred in any action to enforce this Agreement or
the other Loan Documents or to collect any payments due from Borrower or any
other Loan Party under this Agreement or any other Loan Document or incurred in
connection with any refinancing or restructuring of the credit arrangements
provided under this Agreement, whether in the nature of a "workout" or in
connection with any insolvency or bankruptcy proceedings or otherwise.
9.4 Indemnity. In addition to the payment of expenses pursuant to
---------
subsection 9.3, whether or not the transactions contemplated hereby shall be
- --------------
consummated, Borrower agrees to indemnify, pay and hold Lender and any holder of
the CAPEX Notes, and the officers, directors, employees, agents, consultants,
auditors, persons engaged by Lender and any holder of the CAPEX Notes to
evaluate or monitor the Collateral, affiliates and attorneys of Lender and such
holders (collectively called the "Indemnitees") harmless from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, expenses and disbursements of any kind or
nature whatsoever (including the fees and disbursements of counsel for such
Indemnitees in connection with any investigative, administrative or judicial
proceeding commenced or threatened, whether or not such Indemnitee shall be
designated a party thereto) that may be imposed on, incurred by, or asserted
against that Indemnitee, in any manner relating to or arising out of this
Agreement or the other Loan Documents, the consummation of the transactions
contemplated by this Agreement, the statements contained in the commitment
letters, if any, delivered by Lender, Lender's agreement to make the Loans
hereunder, the use or intended use of the proceeds of any of the Loans or the
exercise of any right or remedy hereunder or under the other Loan Documents (the
"Indemnified Liabilities"); provided that Borrower shall have no obligation to
--------
an Indemnitee hereunder with respect to Indemnified Liabilities arising from the
gross negligence or willful misconduct of that Indemnitee as determined by a
court of competent jurisdiction.
9.5 Amendments and Waivers. No amendment, modification, termination or
----------------------
waiver of any provision of this Agreement or of the other Loan Documents, or
consent to any departure by Borrower therefrom, shall be effective unless the
same shall be in writing and signed by Lender and Borrower. Each amendment,
modification, termination or waiver shall be effective only in the specific
instance and for the specific purpose for which it was given.
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<PAGE>
9.6 Notices. Unless otherwise specifically provided herein, all notices
-------
shall be in writing addressed to the respective party as set forth below and may
be personally served, telecopied or sent by overnight courier service or United
States mail and shall be deemed to have been given: (a) if delivered in person,
when delivered; (b) if delivered by telecopy, on the date of transmission if
transmitted on a Business Day before 4:00 p.m. Central time or, if not, on the
next succeeding Business Day; (c) if delivered by overnight courier, two (2)
days after delivery to such courier properly addressed; or (d) if by U.S. Mail,
four (4) Business Days after depositing in the United States mail, with postage
prepaid and properly addressed.
If to Borrower: THE RIGHT START, INC.
Attn: Gina M. Shauer
5334 Sterling Center Drive
Westlake Village, California 91361
Telecopy No.: 818-707-7132
With a copy to: MILBANK, TWEED, HADLEY
& McCLOY
Attn: Kenneth J. Baronsky, Esq.
601 South Figueroa Street, 30th Floor
Los Angeles, California 90017
Telecopy No.: 213-629-5063
If to Lender: HELLER FINANCIAL, INC.
Attn: HBC Portfolio Manager
500 West Monroe Street
Chicago, Illinois 60661
Telecopy No.: 312-441-6969
With a copy to: HELLER FINANCIAL, INC.
Attn: Legal Department/HBC
500 West Monroe Street
Chicago, Illinois 60661
Telecopy No. 312-441-7652
or to such other address as the party addressed shall have previously designated
by written notice to the serving party, given in accordance with this subsection
----------
9.6.
- ---
9.7 Survival of Warranties and Certain Agreements. All agreements,
---------------------------------------------
representations and warranties made herein shall survive the execution and
delivery of this Agreement and the making of the Loans hereunder.
Notwithstanding anything in this Agreement or implied by law to the contrary,
the agreements of Borrower set forth in subsections 9.3 and 9.4 shall survive
--------------- ---
the payment of the Loans and the termination of this Agreement.
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<PAGE>
9.8 Indulgence Not Waiver. No failure or delay on the part of Lender in the
---------------------
exercise of any power, right or privilege shall impair such power, right or
privilege or be construed to be a waiver of any default or acquiescence therein,
nor shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege.
9.9 Marshaling; Payments Set Aside. Lender shall not be under any
------------------------------
obligation to marshal any assets in favor of any Loan Party or any other party
or against or in payment of any or all of the Obligations. To the extent that
any Loan Party makes a payment or payments to Lender or Lender enforces its
security interests or exercise its rights of setoff, and such payment or
payments or the proceeds of such enforcement or setoff or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then to the
extent of such recovery, the Obligations or part thereof originally intended to
be satisfied, and all Liens, rights and remedies therefor, shall be revived and
continued in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.
9.10 Entire Agreement. This Agreement and the other Loan Documents referred
----------------
to herein embody the final, entire agreement among the parties hereto and
supersede any and all prior commitments, agreements, representations, and
understandings, whether written or oral, relating to the subject matter hereof
and may not be contradicted or varied by evidence of prior, contemporaneous, or
subsequent oral agreements or discussions of the parties hereto. There are no
oral agreements among the parties hereto.
9.11 Independence of Covenants. All covenants hereunder shall be given
-------------------------
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or be otherwise within the limitations of, another covenant shall not avoid
the occurrence of a Default or an Event of Default if such action is taken or
condition exists.
9.12 Severability. The invalidity, illegality or unenforceability in any
------------
jurisdiction of any provision in or obligation under this Agreement or the other
Loan Documents shall not affect or impair the validity, legality or
enforceability of the remaining provisions or obligations under this Agreement,
or the other Loan Documents or of such provision or obligation in any other
jurisdiction.
9.13 Headings. Section and subsection headings in this Agreement are
--------
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose or be given any substantive effect.
9.14 APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE
--------------
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL
50
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LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
9.15 Successors and Assigns. This Agreement shall be binding upon and inure
----------------------
to the benefit of the parties hereto and their respective successors and assigns
except that Borrower may not assign its rights or obligations hereunder without
the prior written consent of Lender.
9.16 No Fiduciary Relationship; Limitation of Liabilities.
----------------------------------------------------
(A) No provision in this Agreement or in any of the other Loan
Documents and no course of dealing between the parties shall be deemed to create
any fiduciary duty by Lender to Borrower.
(B) Neither Lender, nor any affiliate, officer, director, shareholder,
employee, attorney, or agent of Lender shall have any liability with respect to,
and Borrower hereby waives, releases, and agrees not to sue any of them upon,
any claim for any special, indirect, incidental, or consequential damages
suffered or incurred by Borrower in connection with, arising out of, or in any
way related to, this Agreement or any of the other Loan Documents, or any of the
transactions contemplated by this Agreement or any of the other Loan Documents.
Borrower hereby waives, releases, and agrees not to sue Lender or any of
Lender's affiliates, officers, directors, employees, attorneys, or agents for
punitive damages in respect of any claim in connection with, arising out of, or
in any way related to, this Agreement or any of the other Loan Documents, or any
of the transactions contemplated by this Agreement or any of the transactions
contemplated hereby.
9.17 CONSENT TO JURISDICTION. BORROWER HEREBY CONSENTS TO THE JURISDICTION
-----------------------
OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF
ILLINOIS AND IRREVOCABLY AGREES THAT, SUBJECT TO LENDER'S ELECTION, ALL ACTIONS
OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE CAPEX NOTE OR
THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. BORROWER ACCEPTS FOR
ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE
NON-EXCLUSIVE 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 AGREEMENT, THE CAPEX NOTE, THE OTHER
LOAN DOCUMENTS OR THE OBLIGATIONS.
9.18 WAIVER OF JURY TRIAL. BORROWER AND LENDER HEREBY WAIVE THEIR
--------------------
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS AGREEMENT, THE CAPEX NOTE OR THE OTHER LOAN DOCUMENTS.
BORROWER AND LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO
ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER
IN ENTERING
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<PAGE>
INTO THIS AGREEMENT, THE CAPEX NOTE AND THE OTHER LOAN DOCUMENTS AND THAT EACH
WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. BORROWER
AND LENDER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH
ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL
RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
9.19 Construction. Borrower and Lender each acknowledge that it has had the
------------
benefit of legal counsel of its own choice and has been afforded an opportunity
to review this Agreement and the other Loan Documents with its legal counsel and
that this Agreement and the other Loan Documents shall be construed as if
jointly drafted by Borrower and Lender.
9.20 Counterparts; Effectiveness. This Agreement and any amendments,
---------------------------
waivers, consents, or supplements may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all of which
counterparts together shall constitute but one and the same instrument. This
Agreement shall become effective upon the execution of a counterpart hereof by
each of the parties hereto. Delivery of an executed counterpart of a signature
page to this Agreement, any amendments, waivers, consents or supplements, or to
any other Loan Document by telecopier shall be as effective as delivery of a
manually executed counterpart thereof.
9.21 No Duty. All attorneys, accountants, appraisers, and other
-------
professional Persons and consultants retained by Lender shall have the right to
act exclusively in the interest of Lender and shall have no duty of disclosure,
duty of loyalty, duty of care, or other duty or obligation of any type or nature
whatsoever to Borrower or any of Borrower's shareholders or any other Person.
9.22 Confidentiality. Lender shall hold all nonpublic information obtained
---------------
pursuant to the requirements hereof and identified as such by Borrower in
accordance with such Person's customary procedures for handling confidential
information of this nature and in accordance with safe and sound business
practices and in any event may make disclosure to such of its respective
Affiliates, officers, directors, employees, agents and representatives as need
to know such information in connection with the Loans. If any Lender is
otherwise a creditor of a Borrower, such Lender may use the information in
connection with its other credits. Agent and Lenders may also make disclosure
reasonably required by a bona fide offeree or assignee (or participation), or as
required or requested by any Governmental Authority or representative thereof,
or pursuant to legal process, or to its accountants, lawyers and other advisors,
and shall require any such offeree or assignee (or participant) to agree (and
require any of its offerees, assignees or participants to agree) to comply with
this Section 9.22. In no event shall Lender be obligated or required to return
------------
any materials furnished by Borrower; provided, however, each Offeree shall be
required to agree that if it does not become a assignee (or participant) it
shall return all materials furnished to it by Borrower in connection herewith.
52
<PAGE>
Witness the due execution hereof by the respective duly authorized officers
of the undersigned as of the date first written above.
HELLER FINANCIAL, INC. THE RIGHT START, INC.
By: /s/ Terry A. Rothe By: /s/ Gina M. Shauer
Title: SVP Title: Chief Financial Officer
FEIN: 95-3971414
<PAGE>
EXHIBITS
Exhibit A Form of Borrowing Base Certificate
Exhibit B Form of Secured CAPEX Note
Exhibit C Form of Compliance Certificate
Exhibit D Form of Inventory Report
<PAGE>
SCHEDULES
1.1(A) Other Liens
3.1(A) List of Closing Documents
4.1(B)(1) Capitalization of Loan Parties
4.1(B)(2) Securities Agreements
4.6 Trade Names (Present and Past Five Years)
4.7 Location of Principal Place of Business, Books and
Records and Collateral
4.13 Intellectual Property
4.20 Bank Accounts
4.21 Subsidiaries
4.22 Employee Matters
7.1 Other Indebtedness
7.4 Investments and Loans
<PAGE>
Exhibit A
to Loan and Security Agreement
FORM OF BORROWING BASE CERTIFICATE
----------------------------------
[LOGO] HELLER BUSINESS CREDIT CERTIFICATE: _________
BORROWING BASE CERTIFICATE DATE: _________
<TABLE>
<CAPTION>
INVENTORY:
- ---------
DESCRIPTION BALANCE INELIGIBLE RATE AVAILABLE
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RETAIL INVENTORY 0.00 0.00 60% 0.00
------------------------------------------------------------------------------------------------------
WAREHOUSE INVENTORY 0.00 0.00 60% 0.00
------------------------------------------------------------------------------------------------------
IN-TRANSIT INVENTORY 0.00 0.00 60% 0.00
------------------------------------------------------------------------------------------------------
1 TOTALS 0.00 0.00 0.00
----------------------------------- ---------------
LETTER OF CREDITS:
- -----------------
DESCRIPTION BALANCE INELIGIBLE RATE AVAILABLE
------------------------------------------------------------------------------------------------------
2 INVENTORY 0.00 0.00 60% 0.00
------------------------------------------------------------------------------------------------------
LETTER OF CREDIT AVAILABLE
3 TOTAL COLLATERAL AVAILABILITY (Line 1+2) 0.00
---------------
4 REVOLVER LIMIT 10,000,000.00
--------------- ---------------
5 TOTAL AVAILABILITY (Lessor of Line 4 and 3) $0.00
---------------
LOAN ACTIVITY:
---------------
6 BEGINNING LOAN BALANCE (Line 10 of Prior Certificate) $0.00
--------------- ---------------
7 TOTAL COLLECTIONS 0.00
---------------
8 ADVANCE REQUESTS 0.00
---------------
9 INTEREST, FEES, OTHER ADJUSTMENTS 0.00
--------------- ---------------
10 ENDING LOAN BALANCE (Line 6-7+11+9) $0.00
---------------
11 LETTER OF CREDIT BALANCE ---------------
$0.00
---------------
12 RESERVES (Attach Schedule) $0.00
---------------
13 AVAILABILITY REMAINING (Line 5-10-11-12) ---------------
$0.00
---------------
</TABLE>
THE UNDERSIGNED REPRESENTS AND WARRANTS THAT THE FOREGOING INFORMATION
IS TRUE, COMPLETE AND CORRECT, AND THAT THE COLLATERAL, REFLECTED
HEREIN COMPLIES WITH THE CONDITIONS, TERMS, WARRANTIES,
REPRESENTATIONS AND COVENANTS SET FORTH IN THE LOAN AND SECURITY
AGREEMENT BETWEEN THE UNDERSIGNED AND HELLER FINANCIAL, INC. AND ANY
SUPPLEMENTS AND AMENDMENTS, IF ANY, THERETO (THE "AGREEMENT").
BORROWER: AUTHORIZED SIGNATURE/TITLE:
<PAGE>
Exhibit B
to Loan and Security Agreement
FORM OF SECURED CAPEX NOTE
--------------------------
$3,000,000 November 14, 1996
FOR VALUE RECEIVED, THE RIGHT START, INC., a California corporation
("Borrower"), promises to pay to the order of HELLER FINANCIAL, INC., a Delaware
corporation, ("Payee"), on or before November 18, 1999, the lesser of (i) the
principal amount of three million dollars ($3,000,000), or (ii) the unpaid
principal amount of all advances made by Lender as CAPEX Advances under the Loan
Agreement (as hereinafter defined) payable pursuant to the Loan Agreement.
Borrower also promises to pay interest on the unpaid principal amount
of this Secured CAPEX Note (this "Secured CAPEX Note") at the rates and at the
times which shall be determined in accordance with the provisions of the Loan
and Security Agreement (as hereafter amended, supplemented or otherwise modified
from time to time, the "Loan Agreement"), dated as of November 14, 1996, between
Borrower and Heller Financial, Inc., as Lender. Capitalized terms used herein
without definition shall have the meanings set forth in the Loan Agreement.
This Secured CAPEX Note is subject to mandatory prepayment as provided
in the Loan Agreement and prepayment at the option of Borrower as provided in
the Loan Agreement.
This Secured CAPEX Note is the "CAPEX Note" as such term is defined
and used in the Loan Agreement, is issued pursuant to the Loan Agreement and is
entitled to the benefits of the Loan Agreement, reference to which is hereby
made for a more complete statement of the terms and conditions under which the
term loan evidenced hereby is made and is to be repaid, and the Collateral by
which this Secured CAPEX Note is secured.
All payments of principal and interest due in respect of this Secured
CAPEX Note shall be made without defense, set off or counterclaim, in lawful
money of the United States of America, and in same day funds and delivered to
Payee by wire transfer to Payee's account, ABA No. 0710-0000-3 Account No.
52-98695 at First National Bank of Chicago, One First National Plaza, Chicago,
IL 60670, Reference: "Heller Business Credit for the benefit of The Right Start,
Inc.", or at such other place as shall be designated in writing for such purpose
in accordance with the terms of the Loan Agreement.
<PAGE>
THE LOAN AGREEMENT AND THIS SECURED CAPEX NOTE SHALL BE GOVERNED BY,
AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
Upon the occurrence of an Event of Default, the unpaid balance of the
principal amount of this Secured CAPEX Note may become, or may be declared to
be, due and payable in the manner, upon the conditions and with the effect
provided in the Loan Agreement.
The terms of this Secured CAPEX Note are subject to amendment only in
the manner provided in the Loan Agreement.
No reference herein to the Loan Agreement and no provision of this
Secured CAPEX Note or the Loan Agreement or the other Loan Documents shall alter
or impair the obligation of Borrower, which is absolute and unconditional, to
pay the principal of and interest on this Secured CAPEX Note at the place, at
the respective times, and in the currency herein prescribed.
Borrower promises to pay all fees, costs and expenses incurred in the
collection and enforcement of this Secured CAPEX Note. Borrower and endorsers of
this Secured CAPEX 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 (except such notices as
may be expressly required under the Loan Agreement or the other Loan Documents)
and, to the full extent permitted by law, the right to plead any statute of
limitations as a defense to any demand hereunder.
Whenever possible, each provision of this Secured CAPEX Note shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Secured CAPEX Note 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 Secured CAPEX Note.
IN WITNESS WHEREOF, Borrower has caused this Secured CAPEX Note to be
executed and delivered by its duly authorized officer, as of the day and year
first written above.
THE RIGHT START, INC.,
a California corporation
By: _______________________________
Name: _____________________________
Title: ____________________________
2
<PAGE>
Exhibit C
to Loan and Security Agreement
FORM OF COMPLIANCE CERTIFICATE
------------------------------
[DATE]
Heller Financial, Inc.
500 West Monroe Street
Chicago, Illinois 60661
Attn: HBC Portfolio
Re: The Right Start, Inc. Compliance Certificate
--------------------------------------------
Ladies and Gentlemen:
This certificate is given in accordance with subsection 5.1(E) of the
Loan and Security Agreement dated as of November 14, 1996, between THE RIGHT
START, INC., and HELLER FINANCIAL, INC. (as such agreement may be amended,
restated, supplemented or otherwise modified and in effect from time to time,
the "Loan Agreement"). Capitalized terms used herein without definition shall
have the meanings set forth in the Loan Agreement.
I hereby certify that:
(a) I am the duly elected and acting Chief Financial Officer of
Borrower, and as such am duly authorized to execute and deliver
this certificate on behalf of Borrower.
(b) The financial statements delivered with this certificate in
accordance with subsection [5.1(A)/5.1(B)/5.1(C)] of the Loan
Agreement fairly present in all material respects the financial
condition and results of operations of _________________ as of
the dates of such financial statements.
(c) I have reviewed the terms of the Loan Agreement and have made,
or caused to be made under my supervision, a review in
reasonable detail
<PAGE>
Heller Financial, Inc.
___________________, 19__
Page 2
of the transactions and condition of Borrower and its
Subsidiaries during the accounting period covered by such
financial statements.
(d) Such review has not disclosed the existence during or at the
end of such accounting period, and I have no knowledge,
whether arising out of such review or otherwise, of the
existence during or at the end of such accounting period or
as of the date hereof, of any condition or event that
constitutes a Default or an Event of Default except as set
forth on Schedule 1 hereto, which includes a description of
----------
the nature and period of existence thereof and what action
Borrower has taken, is undertaking and proposes to take with
respect thereto.
(e) Borrower and its Subsidiaries are in compliance with the
covenants contained in Section 6 and subsections 7.1, 7.4
and 7.5 of the Loan Agreement except as set forth below or
described on Schedule 1 attached hereto.
----------
(f) Attached hereto as Schedule 2 is a schedule of each issue of
----------
the outstanding Indebtedness for borrowed money of Borrower
and its Subsidiaries and the Subordinated Debt, showing the
outstanding principal amount thereof and the accrued and
unpaid interest thereon.
In determining compliance with the provisions identified in (e)
above, the following calculations have been made:
1. NET WORTH (subsection 6.1) of Borrower and its Subsidiaries on a
---------
consolidated basis as of ___________________, _____
A. Net Worth in accordance with GAAP $___________
B. Required minimum Net Worth
under subsection 6.1 $ 8,000,000
-----------
C. In Compliance Yes/No
2
<PAGE>
Heller Financial, Inc.
_____________________, 19___
Page 3
2. INTEREST COVERAGE (subsection 6.2)
-----------------
for Borrower and its Subsidiaries
on a consolidated basis
A. [Fiscal quarter] [_______-month fiscal period] covered:
_____________________, 19___ through
_____________________, 19___
1. EBITDA $_________
2. Interest Expenses $_________
3. Actual Interest Coverage
(1 divided by 2) _________
4. Required minimum Interest
Coverage ratio under subsection 6.2 2:1
---------
5. In Compliance Yes/No
B. Twelve-month fiscal period covered:
_____________________, 19___ through
_____________________, 19___
1. EBITDA $_________
2. Interest Expenses $_________
3. Actual Interest Coverage
(1 divided by 2) _________
4. Required minimum Interest
Coverage ratio under subsection 6.2 2:1
---------
5. In Compliance Yes/No
3
<PAGE>
Heller Financial, Inc.
_____________________, 19___
Page 4
3. INDEBTEDNESS (subsection 7.1)
------------
A. Secured purchase money debt (7.1(b))
1. Permitted $ 250,000
----------
2. Actual (excluding capital leases) $__________
3. In Compliance Yes/No
B. Capital Leases (7.1(c))
1. Permitted $ 200,000
----------
2. Actual $__________
3. In Compliance Yes/No
C. Refinancings Of Indebtedness
(7.1(f)) incurred during period
1. [describe debt outstanding]
Balance on Closing Date $__________
2. Amount of refinancing Indebtedness $__________
4. ASSET DISPOSITIONS (subsection 7.3(A))
------------------
Period covered:
____________________, 19___ through
____________________, 19___
A. Describe any sales during period
(other than sales of Inventory in ordinary
course of business ("OCB")) (list each by
market value of assets sold):
_________________________________________
_________________________________________
4
<PAGE>
Heller Financial, Inc.
_____________________, 19___
Page 5
B. Aggregate market value of assets
sold during period (other than
sales of Inventory in OCB $__________
C. Aggregate market value of assets sold
in Fiscal Year (other than sales of
Inventory in OCB) $__________
D. Permitted Assets Dispositions
(individual/aggregate) in any
Fiscal Year $50,000/100,000
--------------
E. In Compliance Yes/No
5. INVESTMENTS (subsection 7.4)
-----------
A. Permitted outstanding employee
Loans and advances $ 50,000
----------
B. Actual outstanding employee
Loans and advances $__________
C. In Compliance Yes/No
6. RESTRICTED JUNIOR PAYMENTS (subsection 7.5)
--------------------------
Period covered:
___________________, 19___ though
___________________, 19___
A. Permitted management fees $ 400,000/yr
-----------
B. Actual management fees paid $___________
C. In Compliance Yes/No
5
<PAGE>
Heller Financial, Inc.
____________________, 19__
Page 6
The foregoing certifications and computations are made as of
____________ [end of fiscal period] and delivered this ____ day of
__________________, 19__.
THE RIGHT START, INC.
By _________________________________
Name _______________________________
Its ________________________________
6
<PAGE>
Heller Financial, Inc.
_____________________, 19__
Page 7
SCHEDULE 1
DEFAULTS AND EVENTS OF DEFAULT
7
<PAGE>
Heller Financial, Inc.
_____________________, 19__
Page 8
SCHEDULE 2
INDEBTEDNESS
8
<PAGE>
Exhibit D
to Loan and Security Agreement
FORM OF INVENTORY REPORT
------------------------
Inventory Designation Report and Certification
----------------------------------------------
To: Heller Financial, Inc. Date Prepared: ________________________
505 North Brand Blvd. Borrower's Name: ________________________
11th Floor Client Number: ________________________
Glendale, CA 91203 Address: ________________________
________________________
Pursuant to the terms of our Loan and Security Agreement entered into with
Heller Financial, Inc. dated _________________ we hereby represent to you that;
(i) all inventory listed below is owned by us free and clear of all encumbrances
except your security agreement; (ii) all inventory is issued for not less than
the amount set forth below and you are named Loss Payee thereunder; (iii) the
inventory values set forth below are based upon the lower of (a) cost on a
first-in first-out basis, or (b) current market; and (iv) the most recent
physical inventory count took place on and was taken by
inventory as of:___________________________
(Done)
Inventory and Reserves Compulation
----------------------------------
GROSS INVENTORY
- ---------------
------------------
RETAIL STORE INVENTORY (ATTACHED SCHEDULE) $0.00
EAST COAST DISTRIBUTION ------------------
WEST COAST DISTRIBUTION ------------------
INVENTORY IN-TRANSIT ------------------
LETTER OF CREDIT INVENTORY ------------------
OTHER ------------------
GROSS INVENTORY BALANCE ------------------
LESS INELIGIBLE INVENTORY
- -------------------------
------------------
DEFECTIVE MERCHANDISE TO BE RETURNED $0.00
LIENED INVENTORY (STATES OF PENNSYLVANIA) ------------------
OTHER INELIGIBLES (PER SECTION 21(B) OF LOAN
AND SECURITY AGREEMENT) ------------------
DUTY AND FREIGHT ON LETTER OF CREDIT INVENTORY ------------------
NET ELIGIBLE INVENTORY ------------------
------------------
RESERVES
- --------
------------------
RENTAL RESERVES TO BE TAKEN IN (ATTACHED SCHEDULE) $0.00
EXCESS OF $500,000 PER SECTION ------------------
2.1(A)(2) OF THE LOAN AND
SECURITY AGREEMENT DATED
BORROWER: ____________________________
BY: ____________________________
Authorized Signature
Do Not Use - OFFICE USE ONLY
- --------------------------------------------------------------------------------
Received by: Reviewed by: Posted:
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE 1.1(A)
to Loan and Security Agreement
OTHER LIENS
1. UCC FILINGS
<TABLE>
<CAPTION>
Debtor Secured Party State Filing No. Date
- ------ ------------- ----- ---------- ----
<S> <C> <C> <C> <C>
The Right Start Pitney Bowes Credit Corp. CA 91261914 12/10/91
The Right Start, Inc. AT&T Credit Corp. CA 93092047 5/13/93
dba The Right Start
The Right Start, Inc. AT&T Credit Corp. CA 932422028 12/2/93
dba The Right Start
Catalog
The Right Start STS Systems CA 9613060758 5/8/96
The Right Start Pitney Bowes Credit Corp. CA 92099701 5/4/92
Catalog
The Right Start Pitney Bowes Credit Corp. CA 92192558 9/3/92
Catalog
The Right Start Pitney Bowes Credit Corp. CA 9508960407 3/27/95
Catalog
</TABLE>
1
<PAGE>
SCHEDULE 3.1(A)
to Loan and Security Agreement
HELLER FINANCIAL, INC./THE RIGHT START, INC.
LOAN AND SECURITY AGREEMENT
LIST OF CLOSING DOCUMENTS
1. Loan and Security Agreement (including all exhibits and schedules
thereto)
2. Secured CAPEX Note
3. Initial Borrowing Base Certificate
4. Notice of Initial Borrowing
5. Trademark Security Agreement (including exhibits thereto)
6. Assignment of Insurance Proceeds
7. Blocked Account Agreement
8. Notices of Security Interest in Bank Accounts
9. Warehouse Agreements (plus UCC-1 Financial Statements executed in
conjunction therewith)
a. The Jay Group, Inc.
b. USCO Distribution Services, Inc.
10. Legal Option of Millbank Tweed Hadley & McCloy, special counsel
to Borrower
11. Closing Certificate
12. Accountants Letter
13. Payoff Demands (with wire instructions)
14. Funds Flow Memorandum/Disbursement Instructions
15. Business Plan
16. Projections
1
<PAGE>
17. Borrower's Secretary's Certificate (including incumbency)
Exhibit A-Articles of Incorporation
Exhibit B-Bylaws
Exhibit C-Resolutions
18. Certified Charter of Borrower
19. Good Standing Certificates of Borrower for each of the
jurisdictions set forth on Schedule 1 hereto
a. Telephonic confirmation of good standing of the foregoing on
the Closing Date
20. UCC-1s for filing in each of the jurisdictions set forth on
Schedule 2 hereto, each executed by Borrower as Debtor
21. Proof of Insurance conforming with (S) 5.10
22 Proof of termination of existing security interests, including
executed UCC-2s.
2
<PAGE>
SCHEDULE 1 TO SCHEDULE 3.1(A)
to Loan and Security Agreement
GOOD STANDING JURISDICTIONS
California
Colorado
Connecticut
Georgia
Illinois
Maryland
Massachusetts
Michigan
Minnesota
Missouri
New Jersey
New York
Pennsylvania
Virginia
Washington
3
<PAGE>
SCHEDULE 2 to SCHEDULE 3.1 (A)
to Loan and Security Agreement
UCC-1 FILING JURISDICTIONS
Office of Secretary of State,
or Jurisdictional Equivalent,
in each of the following:
California
Colorado
Connecticut
Georgia
Illinois
Maryland
Massachusetts
Michigan
Minnesota
Missouri
New Jersey
New York
Pennsylvania
Virginia
Washington
4
<PAGE>
SCHEDULE 4.1(B) (1)
--------------------
Capitalization of Loan Parties
Authorized capital stock of The Right Start, Inc.:
25,000,000 shares of common stock, no par value per share
Principal shareholders of The Right Start, Inc.:
The following table sets forth certain information, as of September 25,
1996, with respect to all those known by the Company to be the beneficial owners
of more than 5% of its outstanding common stock, each director who owns shares
of common stock, certain executive officers of the Company, and all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership (1) Percent of Class
- ------------------------------------ ------------------------ ----------------
<S> <C> <C>
KAIM Non-Traditional, L.P. (2) 3,077,709 38.7%
1800 Avenue of the Stars
Second Floor
Los Angeles CA 90067
Fred Kayne (3) 641,693 8.0%
Fortune Fashions
6501 Flotilla Street
Commerce, CA 90040
Primerica Life Insurance Company 631,376 7.9%
388 Greenwich Street
Commerce, Ca 90040
Albert O. Nicholas 625,000 7.9%
Nicholas Co., Inc.
700 North Water Street
Milwaukee, WI 53202
Howard Kaplan 610,000 7.7%
99 Chauncy Street
Boston, MA 02111
Stanley M. Fridstein (4) 427,009 5.3%
5334 Sterling Center Drive
Westlake Village, CA 91361
Lenny M. Targon (5) 362,300 4.6%
5334 Sterling Center Drive
Westlake Village, CA 91361
Ronald J Blumenthal (6) 76,193 *
5334 Sterling Center Drive
Westlake Village, CA 91361
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Andrew Feshbach (7) 10,317 *
Big Dogs
121 Gray Avenue, Suite 300
Santa Barbara, CA 93101
Robert R. Hollman (7) 10,317 *
Topa Management
1800 Avenue of the Stars
Suite 1400
Los Angeles, CA 90067
Richard A. Kayne (7) 10,317 *
Kayne Anderson Investment Management, Inc.
1800 Avenue of the Stars
Second Floor
Los Angeles, CA 90067
Jerry R. Welch (7)(8) 10,317 *
Kayne Anderson Investment Management, Inc.
1800 Avenue of the Stars
Second Floor
Los Angeles, CA 90067
Howard M. Zelikow (7)(8) 10,317 *
Kayne Anderson Investment Management, Inc.
1800 Avenue of the Stars
Second Floor
Los Angeles, CA 90067
All executive offices and directors 4,058,101 51%
as a group (14 persons) (9)
</TABLE>
_______________________________
* Less than one percent.
(1) Except as otherwise noted below, the persons named in the table have
sole voting power and investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to community
property laws where applicable.
(2) Richard A. Kayne is the President, Chief Executive Officer and a
Director of Kayne Anderson Investment Management, Inc., the general
partner of KAIM Non-Traditional, L.P. ("KAIM"). Mr. Kayne has shared
dispositive and voting power with KAIM with respect to the shares. The
shares are held by four investment partnerships for which KAIM serves
as general partner, including 1,261,703 shares held by Kayne, Anderson
Non-Traditional Investments, L.P., 861,651 shares held by ARBCO
Associates, L.P., 738,558 shares held by Offense Group Associates,
L.P. and 215,412 shares held by Opportunity Associates, L.P.
(3) Shares include currently exercisable stock options to purchase 10,317
shares of common stock.
(4) Shares include (i) currently exercisable stock options to purchase
388,000 shares held by Mr. Fridstein, (ii) 14,939 shares held by the
Company's employee stock ownership plan for the benefit of Mr.
Fridstein and (iii) 24,070 shares which vest over time which are held
by the Company's ESPP for the benefit of Mr. Fridstein.
(5) Shares include (i) currently exercisable stock options to purchase
333,000 shares held by Mr. Targon, (ii) 1,204 shares held by the
Company's employee stock ownership plan for the benefit of Mr. Targon,
- 2 -
<PAGE>
(iii) 2,620 shares held by the Company's employee stock ownership plan
for the benefit of Mr. Targon's spouse, (iv) 3,991 vested shares held
by the Company's ESPP for the benefit of Mr. Targon, (v) 695 vested
shares held by the Company's ESPP for the benefit of Mr. Targon's
spouse, (vi) 19,020 shares which vest over time which are held by the
Company's ESPP for the benefit of Mr. Targon and (vii) 2,961 shares
which vest over time which are held by the Company's ESPP for the
benefit of Mr. Targon's spouse. Mr. Targon disclaims beneficial
interest in his spouse's stock in the employee stock ownership plan
and ESPP.
(6) Shares include stock options to purchase 75,000 shares of common stock
and 1,193 shares held by the Company's employee stock ownership plan
for the benefit of Mr. Blumenthal.
(7) All shares consist of currently exercisable options to purchase common
stock.
(8) Messrs. Welch and Zelikow are a Senior Vice President and a member of
Kayne Anderson Investment Management, Inc., respectively; however,
they disclaim beneficial ownership with respect to shares held by KAIM
or any of its affiliates.
(9) Shares include options to purchase common stock beneficially owned by
executive officers and directors, including 75,000 with respect to Mr.
Blumenthal, 75,000 with respect to Mr. Mitchell, 45,000 with respect
to Ms. Shauer, 25,000 with respect to Ms. Platfoot, 20,000 with
respect to Ms. Mickey, 20,000 with respect to Mr. Young, 10,317 with
respect to each of Messrs. Feshbach, Hollman, Fred Kayne, Richard
Kayne, Welch and Zelikow and 5,000 with respect to Mr. Pollock. Shares
also include 3,077,709 shares beneficially owned by KAIM for which Mr.
Richard A. Kayne shares dispositive and voting power.
Authorized capital stock of The Right Start Subsidiary I, Inc.:
1,000 shares of common stock, no par value per share
Sole shareholder of The Right Start Subsidiary I, Inc.:
The Right Start, Inc.: 1000 shares
-3-
<PAGE>
SCHEDULE 4.1 (B) (2)
--------------------
Convertible Debenture dated as of October 11, 1996, in the principal amount of
$2,842,000, made in favor of Cahill Warnock Strategic Partners, L.P.,
convertible into 500,000 shares of common stock of The Right Start, Inc.
Convertible Debenture dated as of October 11, 1996, in the principal amount of
$158,000, made in favor of Strategic Associates, L.P., convertible into
26,333.33 shares of common stock of The Right Start, Inc.
As of November 13, 1996, the following options to purchase the Company's common
stock are issued and outstanding under the Company's various stock plans:
1991 Employee Stock Option Plan: 242,500 shares
1995 Non-employee Director Plan: 61,902 shares (plus shares issued
11/12/96, the number of which has not yet been determined)
As of November 13, 1996, Stanley Fridstein holds options exercisable into
388,000 shares of the Company's common stock.
As of November 13, 1996, Lenny Targon holds options exercisable into 333,000
shares of the Company's common stock.
<PAGE>
SCHEDULE 4.6
TRADE NAMES
The Right Start
The Right Start Catalog
The Right Start Store (no longer in use)
The Right Answer (no longer in use)
Children's Wear Digest (sold December 1994)
Markdown Playground (no longer in use)
Weebok Children's Wear Catalog ("Weebok" name used under license agreement with
Reebok dated c.1992; no longer in used since c.1993)
<PAGE>
SCHEDULE 4.7
LOCATION OF PRINCIPAL PLACE OF BUSINESS, BOOKS AND RECORDS AND COLLATERAL
Principal place of business and books and records:
Corporate Office-
The Right Start, Inc.
5334 Sterling Center Drive
Westlake Village, CA 91361
Collateral locations:
Corporate office (as above)
The Jay Group (Third Party Distribution Center)
60 North Ronks Road
Ronks, PA 17572
USCO (Third Party Distribution Center)
15927 Distribution Way
Cerritos, CA 90703
The Right Start stores (see directory for individual locations)
<PAGE>
THE RIGHT START, INC. STORE DIRECTORY [LOGO APPEARS HERE]
- ---------------------------------------
<TABLE>
<S> <C>
DISTRICT NAME MID-ATLANTIC DISTRICT MANAGER DEBRA NATION
ADDRESS: 1106 Linden Street Woodbridge VA 22191
HOME PHONE: 703-494-8292 OFFICE PHONE: 703-491-5554 CELL PHONE:
HOME FAX: V-MAIL EXT: 514 PAGER:
- -----------------------------------------------------------------------------------------------------------
STORE # 4 STORE NAME Gwinnett Phone 770 497-1115
- --------
2100 Pleasant Hill Road Suite #14 Fax 770 497-0322
Duluth GA 30136 Modem 770 497-1816
OPEN DATE 12/9/94 Speed Dial 10214
- ------------------------------------------------------------------------------------------------------------
Kandyss Goad Store Manager Home Phone 404-235-7842 B-Day Jun 25
Kerry Sheehan Assistant Manager 1 Home Phone 770-640-0195 B-Day Apr 05
Walter Stanley Assistant Manager 1 Home Phone 770-924-6503 B-Day Sep 01
- ------------------------------------------------------------------------------------------------------------
STORE # 5 STORE NAME TOWN CENTER Phone 770 795-8009
- -----------
400 Barrett Parkway Suite #260 Fax 770 795-8909
Kennesaw GA 30144 Modem 770 795-8305
OPEN DATE 11/26/94 Speed Dial 10215
- ------------------------------------------------------------------------------------------------------------
Melissa Boring Area Manager Home Phone B-Day
Geni Russell Assistant Manager 2 Home Phone B-Day
- ------------------------------------------------------------------------------------------------------------
STORE # 15 STORE NAME King of Prussia Phone 610 337-0707
-- ---------------
160 North Gulph Road Suite #6225 Fax 610 337-1822
King of Prussia PA 19406 Modem 610 337-1903
OPEN DATE 11/1/95 Speed Dial 10315
- ------------------------------------------------------------------------------------------------------------
Sandra Hill Store Manager Home Phone 215-943-6051 B-Day Feb 12
Dana Robinson-Melendez Assistant Manager 1 Home Phone 215-587-0704 B-Day Jun 30
Jenifer Melvin Assistant Manager 2 Home Phone 610-622-5648 B-Day
- ------------------------------------------------------------------------------------------------------------
STORE # 27 STORE NAME Galleria Phone 412 563-3350
-- --------
1500 Washington Road Space #1307 Fax 412-563-3211
Pittsburgh PA 15228 Modem 412-563-3212
OPEN DATE 10/10/96 Speed Dial
- ------------------------------------------------------------------------------------------------------------
Krista Shields Store Manager Home Phone 412-942-6429 B-Day
Zoe Rudolph Assistant Manager 1 Home Phone 412-344-4092 B-Day
Christine Crow Assistant Manager 2 Home Phone 412-494-9606 B-Day
- ------------------------------------------------------------------------------------------------------------
STORE # 29 STORE NAME Tysons Phone 703 448-9610
-- ------
8030 L Tysons Corner Center Fax 703 448-9870
Mclean VA 22102 Modem 703 448-9776
OPEN DATE 10/10/96 Speed Dial
- ------------------------------------------------------------------------------------------------------------
Michelle Adams Store Manager Home Phone 703-264-1214 B-Day Mar 07
Michael Marcus Assistant Manager 1 Home Phone 301-299-7498 B-Day
- ------------------------------------------------------------------------------------------------------------
STORE # 33 STORE NAME Fair Oaks Phone 703 383-0200
-- ---------
11835-L Fair Oaks Fax 703 383-0205
Fairfax VA 22033 Modem 703 0202-0204
OPEN DATE 10/31/96 Speed Dial
- ------------------------------------------------------------------------------------------------------------
Shannon Rabideau Store Manager Home Phone 703-222-0226 B-Day
Steve Buenaga Assistant Manager 1 Home Phone B-Day
- ------------------------------------------------------------------------------------------------------------
</TABLE>
---------------------------------------------
Tuesday, October 08, 1996 This is the information as of day of print.
Page 1 of 9 Please forward any revisions to
Janette Smaligo via e-mail.
---------------------------------------------
<PAGE>
THE RIGHT START, INC. STORE DIRECTORY [LOGO APPEARS HERE]
- ---------------------------------------
<TABLE>
<S> <C>
STORE# 38 STORE NAME MONTGOMERY MALL Phone 410
-- ---------------
7101 Democracy Boulevard #1056 Fax 410
Bethesda MD 20817 Modem 410
OPEN DATE 11/20/96 Speed Dial
.............................................................................................
Debbie Ruben Store Manager Home Phone 301-230-1685 B-Day
Nikki Perryman Assistant Manager 1 Home Phone 650-550-0954 B-Day Jan 08
- ---------------------------------------------------------------------------------------------
</TABLE>
-------------------------------------------------
Tuesday, October 08, 1996 This is the information as of day of print.
Page 2 of 9 Please forward any revisions to Janette
Smaligo via e-mail.
--------------------------------------------------
<PAGE>
THE RIGHT START, INC. STORE DIRECTORY [LOGO APPEARS HERE]
- -------------------------------------
<TABLE>
<S> <C>
District Name Midwest District Manager Kathy Buchanan
Address: 252 Merton Avenue Glen Ellyn IL 60137
Home Phone: 630-545-2732 Office Phone: 630-545-9366 Cell Phone
Home Fax: 630-545-9511 V-Mail Ext: 331 Pager: 888-492-0428
- ---------------------------------------------------------------------------------------------------------------------------------
STORE # 7 STORE NAME MALL OF AMERICA Phone 612 854-6604
-- ---------------
W134 West Market Fax 612 854-6590
Bloomington MN 55425-5550 Modem 612 854-6249
OPEN DATE 11/5/94 Speed Dial 10217
.................................................................................................................................
Kim Rooney Training Store Manager Home Phone 612-494-4503 B-Day Jul 22
Martha Powers Store Manager In Training Home Phone 612-443-2319 B-Day Sep 24
Danielle Ottman Assistant Manager 2 Home Phone 612-405-8237 B-Day Sep 18
- ---------------------------------------------------------------------------------------------------------------------------------
STORE # 14 STORE NAME WOODFIELD Phone 847 619-0024
-- ---------
F333 Woodfield Mall Fax 847 619-0028
Schaumburg IL 60173 Modem 847 619-6450
OPEN DATE 11/22/95 Speed Dial 10314
.................................................................................................................................
Nancy Laskowski Store Manager Home Phone 847-299-7584 B-Day May 25
Tamara Janda Assistant Manager 1 Home Phone 847-776-4965 B-Day Oct 22
Suzanne Thomas Assistant Manager 2 Home Phone 312-784-7945 B-Day Jun 05
- ---------------------------------------------------------------------------------------------------------------------------------
STORE # 16 STORE NAME OLD ORCHARD Phone 847 329-0250
-- -----------
78 Old Orchard Center Suite #F-78 Fax 847 329-0350
Skokie Il 60077 Modem 847 329-9636
OPEN DATE 11/8/95 Speed Dial 10316
.................................................................................................................................
Sueann French Store Manager Home Phone 630-263-9320 B-Day Sep 04
Samara Gallino Assistant Manager 2 Home Phone 312-267-9435 B-Day Feb 15
- ---------------------------------------------------------------------------------------------------------------------------------
STORE # 19 STORE NAME TWELVE OAKS Phone 810 347-2300
-- -----------
27488 Novi Road Suite #C-248 Fax 810 347-2434
Novi MI 48377 Modem 810 347-2391
OPEN DATE 3/28/96 Speed Dial 10319
.................................................................................................................................
Tiffen Long Store Manager Home Phone B-Day
Paula Patterson Assistant Manager 1 Home Phone 810-887-2845 B-Day Jan 21
- ---------------------------------------------------------------------------------------------------------------------------------
STORE # 21 STORE NAME BURNSVILLE Phone 612 892-5665
-- ----------
2021 Burnsville Center Fax 612 892-6092
Burnsville MN 55306 Modem 612 892-5683
OPEN DATE 5/2/96 Speed Dial 10321
.................................................................................................................................
Barrie Kraus Store Manager Home Phone 612-591-7705 B-Day Mar 03
Jennifer Palido Assistant Manager 1 Home Phone 612-463-2910 B-Day Aug 07
- ---------------------------------------------------------------------------------------------------------------------------------
STORE # 24 STORE NAME SOMERSET Phone 810 649-8800
-- --------
2800 West Big Beaver Road Suite # W-312 Fax 810 649-6410
Troy MI 48084 Modem 810 649-9639
OPEN DATE 8/15/96 Speed Dial
.................................................................................................................................
Pam Leffew Store Manager Home Phone 810-652-4503 B-Day
Tracy Gardner Assistant Manager 1 Home Phone 810-340-9311 B-Day
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
------------------------------------------
Tuesday, October 08, 1996 This is the information as of day of
Page 3 of 9 print. Please forward any revisions to
Janette Smaligo via e-mail.
------------------------------------------
<PAGE>
<TABLE>
THE RIGHT START, INC. STORE DIRECTORY [LOGO APPEARS HERE]
===============================================
<S> <C>
STORE # 26 STORE NAME SAINT LOUIS Phone 314 725-4399
-- -----------
1436 Saint Louis Galleria Fax 314 725-5630
Saint Louis MO 63117 Modem 314 725-5271
OPEN DATE 5/23/96 Speed Dial 10326
..............................................................................................................
Kellie Corwin Store Manager Home Phone 314-256-7568 B-Day Feb 12
Jane Burke Store Manager in Training Home Phone 314-940-8506 B-Day
- --------------------------------------------------------------------------------------------------------------
STORE # 31 STORE NAME WOODLAND Phone 616 285-0030
-- --------
3191 28th Street, SE Fax 616 285-0035
Kentwood MI 49512 Modem 616 285-0032
OPEN DATE 10/24/96 Speed Dial
..............................................................................................................
Donelle Christiansen Assistant Manager 2 Home Phone 616-531-2253 B-Day
Shannon Powers Assistant Manager 2 Home Phone 616-698-1075 B-Day
- --------------------------------------------------------------------------------------------------------------
STORE # 34 STORE NAME OAKBROOK CENTER Phone 630 574 9166
-- ---------------
20 Oakbrook Center Fax 630
Oak Brook IL 60521 Modem 630
OPEN DATE 11/19/96 Speed Dial
..............................................................................................................
Amy Karaba Store Manager Home Phone 630-637-0862 B-Day Sep 08
- --------------------------------------------------------------------------------------------------------------
</TABLE>
------------------------------------------------
Tuesday, October 08, 1996 This is the information as of day of print.
Page 4 of 9 Please forward any revisions to
Janette Smaligo via e-mail.
------------------------------------------------
<PAGE>
The Right Start, Inc. Store Directory [LOGO APPEARS HERE]
==============================================
<TABLE>
<S> <C>
DISTRICT NAME NORTHEAST DISTRICT MANAGER Robin Taylor
Address: 514 Azalea Terrace Branchburg NJ 08876
Home Phone: 908-218-1082 Office Phone: Cell Phone: 908-400-8520
Home Fax: 908-218-1584 V-Mail Ext.: 478 Pager:
- --------------------------------------------------------------------------------------------------------------
STORE # 6 STORE NAME NATICK Phone 508 647-0907
- ------
1245 Worcester Street Suite #2108 Fax 508 647-1504
Natick MA 01760 Modem 508 647-1501
OPEN DATE 10/25/94 Speed Dial 10216
..............................................................................................................
Tina Coleman Store Manager Home Phone 508-970-3645 B-Day Jun 02
Sandreley Henderson Assistant Manager 2 Home Phone 508-879-6352 B-Day Oct 22
- --------------------------------------------------------------------------------------------------------------
STORE # 10 STORE NAME BURLINGTON Phone 617 272-3353
-- ----------
1 Burlington Mall Suite #2116 Fax 617 272-5861
Burlington MA 01803 Modem 617 272-6590
OPEN DATE 11/22/94 Speed Dial 10200
..............................................................................................................
Sean Tabb Training Store Manager Home Phone 617-395-4666 B-Day Feb 01
Michele Becker Store Manager in Training Home Phone 617-787-3356 B-Day Mar 07
Rosario Dominguez Assistant Manager 2 Home Phone 617-641-0282 B-Day Aug 09
Maureen Croce Assistant Manager 2 Home Phone 508-536-9051 B-day Jul 24
- --------------------------------------------------------------------------------------------------------------
STORE # 13 STORE NAME SHORT HILLS Phone 201 258-0800
-- -----------
1200 Morris Turnpike Fax 201 258-0841
Short Hills NJ 07076 Modem 201 258-0842
OPEN DATE 8/18/95 Speed Dial 10313
..............................................................................................................
Jen Borton Store Manager Home Phone 908-233-9174 B-Day Dec 02
Sue Gorbino Assistant Manager 1 Home Phone 201-331-1019 B-Day Jul 04
Hollie Buchsbaum Assistant Manager 2 Home Phone 908-688-7490 B-Day Dec 05
Laura Brouillard Assistant Manager 2 Home Phone 908-732-8031 B-Day Jun 04
- --------------------------------------------------------------------------------------------------------------
STORE # 17 STORE NAME ROOSEVELT FIELD Phone 516 873-0701
-- --------------
Level 1 Suite #1086 Fax 516 873-0720
Garden City NY 11530 Modem 516 873-0907
OPEN DATE 11/22/95 Speed Dial 10317
..............................................................................................................
Desiree Greayer Store Manager Home Phone 516-944-3267 B-Day Jul 27
Michelle Torrisi Store Manager in Training Home Phone 718-777-0353 B-Day Sep 08
Meredith Cardenes Assistant Manager 2 Home Phone 516-292-6536 B-Day Aug 11
Diana Iaboni Assistant Manager 2 Home Phone 516-747-1916 B-Day Nov 06
- --------------------------------------------------------------------------------------------------------------
STORE # 18 STORE NAME DANBURY Phone 203 730-9003
-- -------
7 Backus Avenue Space #B-210 Fax 203 730-8611
Danbury CT 06810 Modem 203 730-8727
OPEN DATE 3/21/96 Speed Dial 10318
..............................................................................................................
Donna Galotto Store Manager Home Phone 914-225-6088 B-day Sep 27
Lorraine Gordon Assistant Manager 2 Home Phone 914-664-8227 B-day Jun 25
Joseph Sarandrea Assistant Manager 2 Home Phone 203-574-4834 B-day Apr 16
- --------------------------------------------------------------------------------------------------------------
</TABLE>
----------------------------------------------
Tuesday, October 08, 1996 This is the information as of day of print.
Page 5 of 9 Please forward any revisions to Janette
Smaligo via e-mail.
----------------------------------------------
<PAGE>
THE RIGHT START, INC. STORE DIRECTORY [LOGO APPEARS HERE]
- --------------------------------------
<TABLE>
<S> <C>
STORE # 20 STORE NAME BRIDGEWATER Phone 908 575-9730
-- -----------
400 Commons Way Suite #303 Fax 908 575-9734
Bridgewater NJ 08807 Modem 908 575-9735
Open Date 4/17/96 Speed Dial 10320
........................................................................................................................
Valerie Pascadlo Store Manager Home Phone 908-359-8493 B-Day May 02
Carolyn Penna Store Manager In Training Home Phone 908-813-1098 B-Day Mar 20
Rebecca Besen Assistant Manager 2 Home Phone 908-359-1878 B-Day Apr 26
- ------------------------------------------------------------------------------------------------------------------------
STORE # 28 STORE NAME GARDEN STATE Phone 201 845-5000
-- ------------
Routes 4 & 17 Space #C8 Fax 201 845-5001
Paramus NJ 07652 Modem 201 845-6518
Open Date 10/3/96 Speed Dial
........................................................................................................................
Jennifer Santandreu Store Manager Home Phone 201-457-9726 B-Day Jun 13
Michele Hooban Assistant Manager 2 Home Phone 201-279-0074 B-Day Nov 05
Judi Manzi Assistant Manager 2 Home Phone 201-827-0535 B-Day Apr 16
- ------------------------------------------------------------------------------------------------------------------------
STORE # 35 STORE NAME WESTFARMS Phone 310
-- ---------
119 Westfarms Mall Fax 310
Farmington CT 06032 Modem 310
Open Date 11/21/96 Speed Dial
........................................................................................................................
Robin Taylor District Manager Home Phone B-Day
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------
Tuesday, October 08, 1996 This is the information as of day of print.
Page 6 of 9 Please forward any revisions to Janette
Samaligo via e-mail.
-------------------------------------------------
<PAGE>
The Right Start, Inc. Store Directory [LOGO APPEARS HERE]
========================================
<TABLE>
<S> <C>
DISTRICT NAME NORTHWEST DISTRICT MANAGER PAM MAROTA
Address: 364 12th Avenue San Francisco CA 94118
Home Phone: 415-668-1916 Office Phone: 415-751-5584 Cell Phone: 415-699-3818
Home Fax: 415-751-5655 V-Mail ext: 350 Pager: 888-492-0429
- ----------------------------------------------------------------------------------------------------------------------------
STORE # 3 STORE NAME STONERIDGE Phone 510 847-6093
- ----------
1320 Stoneridge Mall, #D-127 Fax 510 847-7368
Pleasanton CA 94588 Modem 510 847-7329
OPEN DATE 11/14/93 Speed Dial 10213
............................................................................................................................
Angela Graff Store Manager Home Phone 510-828-0922 B-Day Oct 07
Lisa Wykoff Store Manger In Training Home Phone 510-371-1018 B-Day Feb 16
Jennifer Sanchez Assistant Manager 2 Home Phone 510-357-6889 B-Day Sep 06
- ---------------------------------------------------------------------------------------------------------------------------
STORE # 11 STORE NAME HILLSDALE Phone 415 358-1465
-- ---------
328 Hillsdale Mall Suite #1274 Fax 415 358-1474
San Mateo CA 94403 Modem 415 358-1470
OPEN DATE 12/17/94 Speed Dial 10311
............................................................................................................................
Vonne Ayers Store Manager Home Phone B-Day
Teri Eggers Store Manager In Training Home Phone B-Day
Angela Batton-Pouliot Assistant manager 1 Home Phone 510-522-6860 B-day Oct 26
Anne Reardon Assistant manager 2 Home Phone B-Day
- ----------------------------------------------------------------------------------------------------------------------------
STORE # 12 STORE NAME VALLEY FAIR Phone 408 556-0100
-- ------------
2855 Stevens Creek Boulevard Suite #1073 Fax 408 556-0106
Santa Clara 95050 Modem 408 556-0107
OPEN DATE 12/18/94 Speed Dial 10312
............................................................................................................................
Gwen Stevens Store Manager Home Phone B-Day
Paula Vargas Store Manager In Training Home Phone 408-274-5965 B-Day Apr 23
Gary Moore Assistant Manager 1 Home Phone 408-274-3586 B-Day Jun 28
- ----------------------------------------------------------------------------------------------------------------------------
STORE # 22 STORE NAME BELLEVUE Phone 206 451-2445
-- --------
Bellevue Square Space #168 Fax 206 451-2119
Bellevue WA 98004 Modem 206 451-2124
OPEN DATE 5/3/96 Speed Dial 10322
............................................................................................................................
Sherelle Sisson Store Manager Home Phone 206-781-4570 B-Day Nov 01
Laura Rose Store Manager In Training Home Phone 206-283-4164 B-Day Nov 10
Evan Dreger Assistant Manager 2 Home Phone B-Day
Karen Morris Assistant Manager 2 Home Phone B-Day
- ----------------------------------------------------------------------------------------------------------------------------
STORE # 30 STORE NAME ARDEN FAIR Phone 916 563-0540
-- ----------
1689 Arden Way Suite #1088 Fax 916 563-0546
Sacramento CA 95815 Modem 916 563-0547
OPEN DATE 10/17/96 Speed Dial
............................................................................................................................
Melissa Meece Store Manager Home Phone 916-383-5563 B-Day
Matthew Chestnut Assistant Manager 1 Home Phone 916-393-3989 B-Day
Candi Malcolm Assistant Manager 2 Home Phone 916-669-1669 B-Day
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------
Tuesday, October 08, 1996 This is the information as of day of print. Please
Page 7 of 9 forward any revisions to
Janette Smaligo via e-mail.
--------------------------------------------------
<PAGE>
THE RIGHT START, INC. STORE DIRECTORY [LOGO APPEARS HERE]
- -------------------------------------
<TABLE>
<S> <C>
District Name Southwest District Manager Stephanie Bridson
Address: 1709 Milan Avenue South Pasadena CA 91030
Home Phone: 818-441-4912 Office Phone: 818-441-5583 Cell Phone: 818-489-9142
Home Fax: 818-441-0431 V-Mail Ext: 447 Pager: 888-351-7254
- --------------------------------------------------------------------------------------------------------------------
STORE # 1 STORE NAME WESTLAKE VILLAGE Phone 818 707-0164
- ----------------
5334A Sterling Center Drive Fax 818 707-9108
Westlake Village CA 91361 Modem 818 707-1342
OPEN DATE 10/21/91 Speed Dial 10211
....................................................................................................................
Mindy Moss Area Manager Home Phone 818-344-9027 B-Day Oct 11
Beverly Henderson Assistant Manager 1 Home Phone 805-581-5820 B-Day
Merle Yeager Assistant Manager 2 Home Phone B-Day
Alberto Mendoza Assistant Manager 2 Home Phone B-Day
- --------------------------------------------------------------------------------------------------------------------
STORE # 2 STORE NAME LAGUNA HILLS Phone 714 581-5369
- ------------
23052 Lake Forest Drive, #D-1 Fax 714 581-7847
Laguna Hills CA 92653 Modem 714 581-5374
OPEN DATE 7/1/93 Speed Dial 10212
....................................................................................................................
Jodi Deusterhaus Store Manager Home Phone 714-641-9609 B-Day Sep 16
Kathleen Higgins Store Manager In Training Home Phone 714-459-8726 B-Day
Marjorie Barragan Assistant Manager 1 Home Phone 714-770-5516 B-Day Jan 11
April Heike Assistant Manager 1 Home Phone 714-581-2766 B-Day Jan 05
- --------------------------------------------------------------------------------------------------------------------
STORE # 9 STORE NAME SANTA ANITA Phone 818 294-2400
- -----------
400 South Baldwin Suite #203 Fax 818 294-2404
Arcadia CA 91007 Modem 818 294-2405
OPEN DATE 12/4/94 Speed Dial 10219
....................................................................................................................
Michelle Hixon Store Manager Home Phone 805-297-6079 B-Day
Jennifer Boyd Assistant Manager 1 Home Phone 818-576-8345 B-Day Sep 22
Kritiya Pokawatana Assistant Manager 2 Home Phone 213-828-7968 B-Day Sep 21
- --------------------------------------------------------------------------------------------------------------------
STORE # 23 STORE NAME LOS CERRITOS Phone 310 467-2080
-- ------------
168 Los Cerritos Center Fax 310 467-2077
Cerritos CA 90703 Modem 310 467-2078
OPEN DATE 5/23/96 Speed Dial 10323
....................................................................................................................
Lisa Golka Store Manager Home Phone 714-362-7286 B-Day
- --------------------------------------------------------------------------------------------------------------------
STORE # 25 STORE NAME PARK MEADOWS Phone 303 706-9100
-- ------------
8405 Park Meadows Center Drive Suite #1077 Fax 303 706-9300
Littleton CO 80124 Modem 303 706-1140
OPEN DATE 8/30/96 Speed Dial
....................................................................................................................
Debbie Kruszeski Training Store Manager Home Phone 303-797-6215 B-Day Nov 09
Stephanie McBride Store manager In Training Home Phone 303-936-3327 B-Day Jan 11
Kirstin Kreger Assistant Manager 2 Home Phone 303-306-3148 B-Day
Sara Thobois Assistant Manager 2 Home Phone 303-935-0031 B-Day Feb 24
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
-----------------------------------------------
Tuesday, October 08, 1996 This is the information as of print.
Page 8 of 9 Please forward any revisions to Janette
Smaligo via e-mail.
--------------------------------------------
<PAGE>
The Right Start, Inc. Store Directory [LOGO APPEARS HERE]
===============================================
<TABLE>
<S> <C>
STORE # 32 STORE NAME GLENDALE GALLERIA Phone 818-637-5590
-- ----------------
1302 Glendale Galleria Fax 818
Glendale CA 91210 Modem 818
OPEN DATE 11/7/96 Speed Dial
..............................................................................................................................
Katie Murphy Store Manager Home Phone 310-434-7584 B-Day Oct 09
Carol Gratrix Assistant Manager 1 Home Phone 805-252-0851 B-Day
- ------------------------------------------------------------------------------------------------------------------------------
STORE # 36 STORE NAME WESTSIDE PAVILION Phone 818
-- -----------------
10800 West Pico Boulevard Suite 337 Fax 818
West Los Angeles CA 90064 Modem 818
OPEN DATE 11/21/96 Speed Dial
..............................................................................................................................
James Nowell Store Manager Home Phone 310-793-7992 B-Day Jun 17
Lisa Walls Store Manager In Training Home PhonE 213-936-3155 B-Day
- -----------------------------------------------------------------------------------------------------------------------------
STORE # 37 STORE NAME TOPANGA PLAZA Phone 301
-- -------------
6600 Topanga Canyon Blvd. #28 Fax 301
Canoga Park CA 91303 Modem 301
OPEN DATE 11/17/96 Speed Dial
............................................................................................................................
Mindy Moss Area Manager Home Phone 818-344-9027 B-Day Oct 11
Stacy Krant Assistant Manager 1 Home Phone 818-345-0961 B-Day Dec 26
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
---------------------------------------------------
Tuesday, October 08, 1996 This is the information as of day of print.
Page 9 of 9 Please forward any revisions to Janette Smaligo
via e-mail.
---------------------------------------------------
<PAGE>
SCHEDULE 4.13
UNITED STATES TRADEMARK REGISTRATIONS
<TABLE>
<CAPTION>
================================================================================
MARK INTERNATIONAL REGISTRATION REGISTRATION
CLASS NUMBER DATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
THE RIGHT START 16 1,917,940 9/12/95
- --------------------------------------------------------------------------------
THE RIGHT START 42 1,918,619 9/12/95
- --------------------------------------------------------------------------------
THE RIGHT START 16 1,919,710 9/19/95
CATALOG
- --------------------------------------------------------------------------------
THE RIGHT START 42 1,918,513 9/12/95
PROFESSIONAL
- --------------------------------------------------------------------------------
LOOP D' LOOP (28) 28 1,616,864 10/9/90
================================================================================
</TABLE>
UNITED STATES TRADEMARK APPLICATIONS
<TABLE>
<CAPTION>
================================================================================
MARK INTERNATIONAL APPLICATION FILING DATE
CLASS NUMBER
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
THE RIGHT START 7 75/067,366 3/4/96
- --------------------------------------------------------------------------------
THE RIGHT START 9 75/067,367 3/4/96
- --------------------------------------------------------------------------------
THE RIGHT START 20 75/067,374 3/4/96
- --------------------------------------------------------------------------------
THE RIGHT START 21 75/067,370 3/4/96
- --------------------------------------------------------------------------------
THE RIGHT START 24 75/087,466 4/12/96
- --------------------------------------------------------------------------------
THE RIGHT START 25 75/067,371 3/4/96
- --------------------------------------------------------------------------------
THE RIGHT START 25 75/067,372 3/4/96
- --------------------------------------------------------------------------------
THE RIGHT START 27 75/067,373 3/4/96
================================================================================
</TABLE>
<PAGE>
UNITED STATES COPYRIGHT REGISTRATIONS
<TABLE>
<CAPTION>
================================================================================
TITLE REGISTRATION NUMBER REGISTRATION DATE
- --------------------------------------------------------------------------------
<S> <C> <C>
TWO BABIES/WYATT START VA 744683 2/29/96
================================================================================
KID IN A HIGH CHAIR VA 514452 3/15/92
================================================================================
</TABLE>
CANADIAN TRADEMARK REGISTRATIONS
<TABLE>
<CAPTION>
================================================================================
MARK INTERNATIONAL REGISTRATION REGISTRATION DATE
CLASS NUMBER
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
THE RIGHT START 42 TMA434,105 9/30/94
- --------------------------------------------------------------------------------
THE RIGHT START 42 TMA434,104 9/30/94
CATALOG
================================================================================
</TABLE>
FRENCH TRADEMARK REGISTRATION
<TABLE>
<CAPTION>
================================================================================
MARK INTERNATIONAL REGISTRATION REGISTRATION DATE
CLASS NUMBER
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
THE RIGHT START 35 558955 8/24/94
CATALOG
================================================================================
</TABLE>
<PAGE>
UNREGISTERED MARKS
<TABLE>
<CAPTION>
================================================================================
MARK GOODS AND SERVICES
- --------------------------------------------------------------------------------
<S> <C>
THE RIGHT START catalog services in the fields of infant and juvenile
CATALOG furniture, clothing, toys and accessories
- --------------------------------------------------------------------------------
DESIGN MARK (TWO publications, namely booklets, catalogs and magazines,
BABIES) featuring infants' and children's toys and playthings,
furniture, clothing, bedding, sports and transportation
equipment; hygiene, toilet-training and safety
equipment; nutrition and feeding, first aid and health
care equipment, clothing and accessories for expectant
and nursing mothers; and clothing and picture frames
and other memorabilia relating to newborn, parents and
grandparents
- --------------------------------------------------------------------------------
mail order and catalog services in the field of
infants' and children's toys and playthings, furniture,
clothing, bedding, sports and transportation equipment;
hygiene, toilet-training and safety equipment; nutrition
and feeding, first aid and health care equipment,
clothing and accessories for expectant and nursing
mothers; and clothing and picture frames and other
memorabilia relating to newborns, parents and
grandparents
================================================================================
</TABLE>
<PAGE>
The Right Start, Inc
<TABLE>
<CAPTION>
Retail Bank Accounts Fed. Tax ID # 95-3971414 Schedule 4.20
- --------------------------------------------------------------------------------------------------------------
Store No. Store Bank & Account No Phone No.
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
002 Laguna Hills Dana Niguel Bank (714) 951-8444
23052 Lake Forest Dr. #D-1 008-019126
Laguna Hills, CA 92653
- --------------------------------------------------------------------------------------------------------------
003 Stoneridge Bank of America
1320 Stoneridge Mall #D127 See Valley Fair
Pleasanton, CA 94588
- --------------------------------------------------------------------------------------------------------------
004 Gwinnett Place Mall South Trust Bank (770) 612-6500*
2100 Pleasant Hill Rd. #140 66-994-944 Press 1,1
Duluth, GA 30136 Last 4
- --------------------------------------------------------------------------------------------------------------
005 Town Canter Nations Bank (800) 299-2265
400 Barrett Pkwy. #260 01-0674-5582 Press 3,1
Kennesaw, GA 31044
- --------------------------------------------------------------------------------------------------------------
006 Natick Bay Bank (800) 833-3336*
1245 Worcester St. #2108 387-14260 Press 1,1
Natick, MA 01760 586824-38714260-119 Last 4
- --------------------------------------------------------------------------------------------------------------
007 Mall of America First Bank (800) 846-4646*
W134 West Market 1728-2101-6240 Press 1,1,1
Bloominton, MN 55425 Last 4
- --------------------------------------------------------------------------------------------------------------
009 Santa Anita Bank of America
400 South Baldwin #203 See Valley Fair
Arcadia, CA 91007
- --------------------------------------------------------------------------------------------------------------
010 Burlington Bay Bank
1 Burlington Mall #2116 See Natick
Burlington, MA 01803
- --------------------------------------------------------------------------------------------------------------
012 Valley Fair Bank of America (818) 707-2699*
2855 Stevens Creek Blvd. #2178 06689-17603 Last 4
Santa Clara, CA 95050
- --------------------------------------------------------------------------------------------------------------
013 Short Hills PNC Bank (800) 225-2424
1200 Morris Tumpike 81-0434-3370 Press 5
Short Hills, NJ 07078 Customer #8218776875
Pin #
- --------------------------------------------------------------------------------------------------------------
014 Woodfield First Chicago (847) 240-6400
F333 Woodfield Mall 375001251814
Schaumburg, IL 60173
- --------------------------------------------------------------------------------------------------------------
015 King of Prussia CoreStates Bank (800) 426-6900
160 North Gulph Rd. #8225 14106-72322 Press 1,0,1
King Of Prussia, PA 19406
- --------------------------------------------------------------------------------------------------------------
016 Old Orchard First American Bank (847) 952-3700
78 Old Orchard Center #F78 19671104 Press 2,1
Skokie, IL 60077
- --------------------------------------------------------------------------------------------------------------
017 Roosevelt Field Republic Bank (516) 742-5500
Level 1 Suite 1086 9701017304
Garden City, NY 11530
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
018 Danbury Fair Mall First Union (800) 225-5332
7 Backus Ave Space B210 3024614723 Press 9,2
Danbury, CT 06810
- ------------------------------------------------------------------------------------
019 Twelve Oaks Mall Michigan National (800) 225-5662 *
27488 Novi Rd. #C248 5700 94725 1 Press 1
Novi, MI 48377 Last 4
- ------------------------------------------------------------------------------------
020 Bridgewater Commons PNC Bank (800) 762-3955 *
400 Commons Way #303 8010356744 Customer No.
Bridgewater, NJ 08807 0953971414
Pin #0755
Press 1,1,1
- ------------------------------------------------------------------------------------
021 Burnsville Center Norwest Bank (612) 667-9378
2021 Burnsville Center 3970122002 Press 0
Burnsville, MN 55306
- ------------------------------------------------------------------------------------
022 Bellevue Square Seafirst Bank (206) 358-5112 *
Space 168, Bellevue Square 75470302 Press 2,5,1
Bellevue, WA 98004 1st 5
- ------------------------------------------------------------------------------------
023 Los Cerritos Bank of America
168 Los Cerritos Center See Valley Fair
Cerritos, CA 90703
- ------------------------------------------------------------------------------------
024 Somerset North Standard Federal (810) 816-0510
2800 W. Big River Beaver Rd #W312 2354000132
Troy, MI 48084
- ------------------------------------------------------------------------------------
025 Park Meadows Security Service (303) 649-9771
8405 Park Meadows Ctr Dr #1077 Federal Credit Union Press 0
Littleton, CO 80124 4304438071
- ------------------------------------------------------------------------------------
026 St. Louis Galleria Commerce Bank (314) 746-8700 *
1436 St. Louis Galleria 270177733 Press 1,1
St. Louis, MO 63117 Access Code 1414
- ------------------------------------------------------------------------------------
027 Galleria PNC Bank (412) 762-2000
1500 Washington Road #1307 1002523512
Pittsburgh, PA 15228
- ------------------------------------------------------------------------------------
028 Garden State Summit Bank (201) 845-5450
Routes 4 & 17 4007 01032 4
Paramus, NJ 07652
- ------------------------------------------------------------------------------------
029 Tysons Riggs Bank (800) 368-5800
8030 L Tysons Corner Center 01816438 Press 1,2,0
McLean, VA 22102
- ------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Wells Fargo Bank Accounts
Depository 4737-051888
General 4737-051920
Sweep 4417-828191
Accounts Payable 4759-605827
Payroll 4737-051912
Right Start Refund 4737-051904
Freight 4737-051896
Office Supply 4737-052084
<TABLE>
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
031 Woodland Comerica Bank (800)643-4418
3191 28th St. SE 1850291079 Press 0
Kentwood, MI 49512
- --------------------------------------------------------------------------------------
037 Topanga Plaza California Federal Bank (818) 883-1550
6600 Topanga Canyon Blvd.#28 078 5215795
Canoga Park, CA 91303
- --------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE 4.21
SUBSIDIARIES
The Right Start, Inc. has the following inactive, wholly-owned subsidiary:
The Right Start, Inc. Subsidiary I
<PAGE>
SCHEDULE 4.22
-------------
Employee Matters
None.
<PAGE>
SCHEDULE 7.1
OTHER INDEBTEDNESS
Loan Agreement between The Right Start, Inc. and Wells Fargo Bank dated June 12,
1995
Finance agreement with Premium Financing Specialists of California, Inc. dated
October 9, 1996; financed amount of $114,554 with eight monthly principal and
interest payments of $14,804.01. Purpose is to pay corporate insurance premiums.
Finance agreement dated April 12, 1996 in the amount of $157,925 with STS
Systems for merchandising system; secured by hardware and operating system.
Letters of credit open as of November 13, 1996 - see attached
<PAGE>
THE RIGHT START, INC. 11/14/96
<TABLE>
<CAPTION>
Documentary letters of credit:
Draws
today Balance Expiry Vendor
----- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
217243 17,205.00 17,205.00 11/30/96 Manhattan Toy
217245 13,888.00 13,888.00 10/20/96 Spectrum
217246 20,730.00 20,730.00 11/2/96 Zak (Sara Rose) (waiver)
217250 11,904.00 11,904.00 11/4/96 Spectrum
217251 2,556.00 (2,556.00) 0.00 11/16/96 Blubox
217252 90,091.20 90,091.20 12/11/96 Playhut (extended to March 1997)
217253 27,555.00 (26,052.00) 1,503.00 11/11/96 Playtech
-----------------------------------------
183,929.20 (28,608.00) 155,321.20
Standby letters of credit:
228143 50,000.00 50,000.00 4/30/97 Diner's Club
248917 5,467.50 5,467.50 1/23/97 Kingsway Toy (waiver)
-----------------------------------------
55,467.50 55,467.50
239,396.70 210,788.70
========== ==========
</TABLE>
Page 1
<PAGE>
SCHEDULE 7.4
------------
Investments and Loans
Secured Promissory Note due August 1, 1998 made in favor of the Company by
Blasiar, Inc. (DBA Alert Communications Company) in the initial principal amount
of $248,255. As of November 13, 1996 the current outstanding principal balance
is $219,474.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-02-1996
<PERIOD-END> NOV-30-1996
<CASH> 515
<SECURITIES> 0
<RECEIVABLES> 765
<ALLOWANCES> 0
<INVENTORY> 8,060
<CURRENT-ASSETS> 11,699
<PP&E> 11,483
<DEPRECIATION> 2,558
<TOTAL-ASSETS> 22,269
<CURRENT-LIABILITIES> 6,668
<BONDS> 0
0
0
<COMMON> 16,961
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,269
<SALES> 18,942
<TOTAL-REVENUES> 18,942
<CGS> 9,908
<TOTAL-COSTS> 21,687
<OTHER-EXPENSES> 426
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100
<INCOME-PRETAX> (3,271)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,271)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,271)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
