FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 1997
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-19536
The Right Start, Inc.
---------------------
(Exact name of Registrant as specified in its charter)
California 95-3971414
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5334 Sterling Center Drive Westlake Village, California 91361
-------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(818) 707-7100
--------------
(Registrant's telephone number including area code)
Not applicable
--------------
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title: Common Stock Outstanding: 8,593,639 shares
<PAGE>
THE RIGHT START, INC.
INDEX TO FORM 10-Q
FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS
ENDED AUGUST 2, 1997
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet 3
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Resultsof Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
<PAGE>
THE RIGHT START, INC.
BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
August 2, February 1,
1997 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 374,000 $ 313,000
Accounts receivable 300,000 938,000
Note receivable 139,000 200,000
Merchandise inventories 7,271,000 7,664,000
Prepaid catalog expenses 1,200,000 782,000
Deferred pre-opening costs, net 266,000 543,000
Other current assets 1,362,000 1,264,000
------------ ------------
Total current assets 10,912,000 11,704,000
------------ ------------
Noncurrent assets:
Property, plant and equipment, net 10,367,000 9,841,000
Other non-current assets 36,000 37,000
Deferred income tax benefit 1,400,000 1,400,000
------------ ------------
11,803,000 11,278,000
------------ ------------
$ 22,715,000 $ 22,982,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,662,000 $ 6,076,000
Accrued salaries and bonuses 447,000 517,000
Advance payments on orders 70,000 31,000
Note payable 2,003,000 1,833,000
------------ ------------
Total current liabilities 6,905,000 8,457,000
------------ ------------
Note payable long term 3,000,000 2,643,000
Senior subordinated notes, net of
unamortized discount of $324,000 2,676,000
Convertible subordinated debentures 3,000,000 3,000,000
Deferred rent 1,934,000 1,710,000
------------ ------------
Total long term liabilities 10,610,000 7,353,000
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock (25,000,000 shares authorized at
no par value; 8,593,639 and 7,949,306 shares
issued and outstanding, respectively) 18,632,000 16,961,000
Accumulated deficit (13,709,000) (9,789,000)
------------ ------------
4,923,000 7,172,000
------------ ------------
$ 22,715,000 $ 22,982,000
============ ============
</TABLE>
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THE RIGHT START, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-six weeks
Ended Ended
--------------------------- ---------------------------
August 2, August3, August 2, August 3,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
Retail $ 8,171,000 $ 6,298,000 $ 15,585,000 $ 11,510,000
Catalog 1,782,000 3,318,000 4,304,000 8,928,000
------------ ------------ ------------ ------------
9,953,000 9,616,000 19,889,000 20,438,000
Other revenues 87,000 235,000 160,000 396,000
------------ ------------ ------------ ------------
10,040,000 9,851,000 20,049,000 20,834,000
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 5,314,000 5,629,000 10,231,000 11,286,000
Operating expense 4,647,000 5,186,000 9,828,000 9,711,000
General and administrative expense 876,000 1,408,000 1,939,000 2,451,000
Pre-opening cost amortization 160,000 184,000 377,000 275,000
Depreciation and amortization expense 397,000 304,000 791,000 554,000
------------ ------------ ------------ ------------
11,394,000 12,711,000 23,166,000 24,277,000
------------ ------------ ------------ ------------
Operating loss (1,354,000) (2,860,000) (3,117,000) (3,443,000)
Interest expense (income), net 285,000 (6,000) 490,000 34,000
Other expense 293,000 293,000 450,000
------------ ------------ ------------ ------------
Loss before income taxes (1,932,000) (2,854,000) (3,900,000) (3,927,000)
Income tax provision (benefit) 10,000 94,000 20,000 (425,000)
------------ ------------ ------------ ------------
Net loss $ (1,942,000) $ (2,948,000) $ (3,920,000) $ (3,502,000)
============ ============ ============ ============
Loss per share $ (0.23) $ (0.37) $ (0.46) $ (0.48)
============ ============ ============ ============
Weighted average number of shares
outstanding 8,593,639 7,937,053 8,546,496 7,346,157
============ ============ ============ ============
</TABLE>
4
<PAGE>
THE RIGHT START, INC.
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Twenty-six weeks
Ended
-------------------------
August 2, August 3,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,920,000) $(3,502,000)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 817,000 554,000
Pre-opening cost amortization 377,000 275,000
Change in assets and liabilities affecting
operations (743,000) 789,000
----------- -----------
Net cash used in operating activities (3,469,000) (1,884,000)
----------- -----------
Cash flows from investing activities:
Additions of property, plant and equipment (1,317,000) (2,062,000)
Proceeds from sale of telemarketing center 250,000
----------- -----------
Net cash used in investing activities (1,317,000) (1,812,000)
----------- -----------
Cash flows from financing activities:
Borrowings (repayments) under note payable to bank, net 527,000 (964,000)
Proceeds from common stock issued upon
exercise of stock options 1,320,000 165,000
Proceeds from common stock issued pursuant a
rights offering 4,906,000
Proceeds from subordinated notes 3,000,000
----------- -----------
Cash provided by financing activities 4,847,000 4,107,000
----------- -----------
Net increase in cash 61,000 411,000
Cash at beginning of period 313,000 141,000
----------- -----------
Cash at end of period $ 374,000 $ 552,000
=========== ===========
</TABLE>
5
<PAGE>
THE RIGHT START, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Description of Business and Significant Accounting Policies
The Right Start, Inc. is a leading merchant offering unique, high-quality
juvenile products for infants and young children. The Company markets its
products through its retail stores, located in major regional malls across the
nation, and through The Right Start Catalog.
Effective February 1, 1997, the Company changed its fiscal year end to the
Saturday closest to the last day of January. Previously, the Company reported on
a fiscal year ending the Saturday closest to the last day of May. This resulted
in a thirty-three week reporting period for the period June 2, 1996 through
February 1, 1997 (the "Transition Period").
There have been no changes in the Company's significant accounting policies
as set forth in the Company's consolidated financial statements for the
Transition Period. These unaudited consolidated financial statements as of
August 2, 1997 and for the thirteen and twenty-six 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.
Results of operations for the thirteen and twenty-six week periods ended
August 2, 1997 are not necessarily indicative of the results that may be
expected for the year ending January 31, 1998.
NOTE 2: Per Share Data
Earnings per share is computed in accordance with the treasury stock method
based upon the weighted average number of common shares and dilutive common
stock equivalents outstanding. Common stock equivalents comprise stock options
outstanding to key executives, employees and directors.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS
128 is effective for the Company at January 31, 1998. The statement requires
that basic earnings per share ("EPS") be presented instead of primary EPS. It
also requires both basic and diluted EPS be presented on the face of the income
statement, if applicable, as well as additional disclosures on the components of
EPS. Had the Company adopted FAS 128 at August 2, 1997, there would be no effect
on the financial statements for the periods then ended.
NOTE 3: Supplemental Disclosure of Cash Flow Information
Interest paid amounted to $394,000 and $4,000 for the twenty-six weeks
ended August 2, 1997 and August 3, 1996, respectively. Cash paid for income
taxes was $4,000 and $8,000 for the twenty-six weeks ended August 2, 1997 and
August 3, 1996, respectively.
Details of changes in assets and liabilities which increased (decreased)
cash is presented below:
<TABLE>
<CAPTION>
Twenty-six weeks ended
-----------------------
August 2, August 3,
1997 1996
----------- ---------
<S> <C> <C>
Accounts receivable $ 638,000 $(129,000)
Note receivable 61,000 (248,000)
Merchandise inventories 393,000 615,000
Prepaid catalog expenses (418,000) 454,000
Other current assets (98,000) 939,000
Other non-current assets 1,000 (509,000)
Accounts payable and accrued expenses (1,413,000) (385,000)
Accrued salaries and bonuses (70,000) (112,000)
Advance payments on orders 39,000 61,000
Deferred pre-opening costs (100,000) (335,000)
Deferred rent 224,000 438,000
----------- ---------
$ (743,000) $ 789,000
=========== =========
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Thirteen weeks ended August 2, 1997 compared with August 3, 1996
Net sales for the thirteen weeks ended August 2, 1997 increased 3.5% to
$9,953,000 as compared to $9,616,000 for the same period last year. Retail net
sales increased 29.7% to $8,171,000 from $6,298,000 last year, while catalog net
sales decreased 46.3% to $1,782,000 from $3,318,000 last year. The increase in
retail sales results from an increase in the number of stores open from 23 at
August 3, 1996 to 40 at August 2, 1997, offset by a decline in average sales per
store. Contributing to the decline in average sales per store was the extensive
amount of promotional activity that occurred in 1996 not present in 1997. The
catalog sales decline is in line with the reduced circulation planned for this
period as compared to the same period of the prior year. The Company has reduced
the circulation of The Right Start Catalog in order to better position it to
strategically support and complement the retail store operations.
Cost of goods sold decreased 5.6% to $5,314,000 from $5,629,000, resulting
in a gross margin of 46.6% for the second quarter of fiscal 1997 compared to
41.5% last year. Improved margins reflect the reduced promotional activity as
compared to the prior year and stronger initial margins on new products being
introduced.
Operating expense decreased 10.4% due to reductions in catalog operating
expenses offset by a slight increase in retail operating expenses. The increased
retail expenses represent additional occupancy costs incurred for new stores,
offset by decreases in payroll and other expenses resulting from management's
cost saving efforts.
General and administrative expense decreased 37.8% or $532,000 as compared
with the second quarter of the prior year. The expense reduction is reflective
of management's efforts to reduce corporate overhead expenses.
Depreciation and amortization expense increased to $397,000 from $304,000
due to the addition of improvements and equipment associated with the new stores
opened since last year.
Interest expense, net was $285,000 for the quarter ended August 2, 1997 as
compared to income of $6,000 for the same period of the prior year. The increase
is due to the increased borrowings under the Company's credit facility and the
issuance of the subordinated notes and convertible debentures.
Other expense of $293,000 for the quarter ended August 2, 1997 reflects
severance expense recorded in conjunction with the termination of certain
management employees and costs incurred in relocating the Company's catalog
distribution facilities.
Twenty-six weeks ended August 2, 1997 compared with August 3, 1996
Net sales for the first half of fiscal 1997 declined 2.7% to $19,889,000
from $20,438,000 for the same period last year. For the first half, retail net
sales increased 35.4% to $15,585,000 from $11,510,000 last year, while catalog
net sales decreased 51.8% to $4,304,000 from $8,928,000 last year. The increase
in retail sales results from an increase in the number of stores open from 23 at
August 3, 1996 to 40 at August 2, 1997, offset by a decline in average sales per
store. Contributing to the decline in average sales per store was the extensive
amount of promotional activity that occurred in 1996 not present in 1997. The
catalog sales decline is in line with the reduced circulation planned for this
period as compared to the same period of the prior year. The Company has reduced
the circulation of The Right Start Catalog in order to better position it to
strategically support and complement the retail store operations.
7
<PAGE>
Cost of goods sold decreased 9.3% to $10,231,000 from $11,286,000,
resulting in a gross margin of 48.6% for the first half of fiscal 1997 compared
to 44.8% last year. Improved margins reflect the reduced promotional activity as
compared to the prior year and stronger initial margins on new products being
introduced.
Operating expense increased 1.2% due to an increase of 17 stores in
operation, offset by reductions in catalog production costs.
General and administrative expense decreased 20.9% or $512,000 for the six
month period ended August 2, 1997 as compared with the same period last year.
The expense reduction is reflective of management's efforts to reduce corporate
overhead expenses.
Pre-opening cost amortization increased to $377,000 for the six month
period ended August 2, 1997 from $275,000 for the period ended August 3, 1996.
The increase is a result of the number of stores opened in the respective
periods.
Depreciation and amortization expense increased 42.8% to $791,000 for the
six months ended August 2, 1997 as compared to $554,000 for the same period of
the prior year. The increase results from the addition of improvements and
equipment associated with the new stores opened since last year.
Interest expense, net increased to $490,000 for the six month period ended
August 2, 1997 as compared to $34,000 for the same period of the prior year. The
increase is due to the increased borrowings under the Company's credit facility
and the placement of the subordinated notes and convertible debentures.
Other expense of $293,000 for the six months ended August 2, 1997 reflects
severance expense recorded in conjunction with the termination of certain
management employees and costs incurred in relocating the Company's catalog
distribution facilities. This compares to $450,000 of severance expense recorded
in the same period of 1996.
Liquidity and Capital Resources
During the six months ended August 2, 1997, the Company's primary source of
liquidity was from the sale of convertible subordinated debentures and
borrowings under its $13,000,000 senior credit facility (the "Credit Facility").
These sources funded cash used in operations of $3,469,000 and in investing
activities of $1,317,000. Capital expenditures represent amounts incurred in the
construction of new stores which were opened in late 1996 and in the first half
of fiscal 1997. The Company opened three stores in the first half of fiscal
1997.
Effective May 6, 1997, the Company raised $3,000,000 through the issuance
and sale of subordinated debt and warrants to purchase common stock to a limited
number of investors (some of whom are affiliates of the Company). The
subordinated notes bear interest at 11.5% and are due in full on May 6, 2000.
Warrants to purchase an aggregate of 475,000 shares of common stock at $3.00 per
share were issued in connection with the subordinated notes.
The Credit Facility consists of a $10,000,000 revolving line of credit for
working capital (the "Revolving Line") and a $3,000,000 capital expenditure
facility (the "Capex Line"). Availability under the Revolving Line is subject to
a defined borrowing base. As of August 2, 1997, borrowings of $2,003,000 and
$3,000,000 were outstanding under the Revolving Line and the Capex Line,
respectively, and $731,000 was available under the Revolving Line. The Credit
Facility terminates on November 19, 1999 and on such date all borrowings
thereunder are immediately due and payable. Borrowings under the Credit Facility
are secured by substantially all of the Company's assets.
8
<PAGE>
The Credit Facility, as amended, requires the Company at all times to
maintain net worth (defined to include equity and subordinated debt) of at least
$8 million. The Credit Facility also limits the Company's EBITDA (as defined in
the Credit Facility) to losses of $1,850,000 and $3,000,000 during the two
quarter period ended August 2, 1997 and the three quarter period ending October
31, 1997, respectively. Thereafter, the Credit Facility requires the Company's
interest coverage (as defined therein) to be at least (i) 1.5 to 1.0 for the
quarter ending January 31, 1998, (ii) 1.0 to 1.0 for the two quarter period
ending April 30, 1998, (iii) 1.5 to 1.0 for the three quarter period ending July
31, 1998, and (iv) 2.0 to 1.0 for the four quarter period at the end of each
subsequent quarter. Interest coverage is defined in the Credit Facility as
EBITDA divided by interest expense (each defined therein). During the first half
of fiscal 1997, the Company's losses exceeded those permitted by the Credit
Facility. The lender subsequently waived the requirement for the period ended
August 2, 1997.
Effective September 4, 1997, the Company entered into a Securities Purchase
Agreement with a limited number of investors (some of whom are affiliates of the
Company), pursuant to which it issued 1,510,000 shares of common stock at $2.50
per share, generating proceeds of $3,775,000 for the Company.
The Company's ability to fund its operations, open new stores and maintain
compliance with the Credit Facility is dependent on its ability to generate
sufficient cash flow form operations. Historically, the Company has incurred
losses and expects to continue to incur losses in the near term. Depending on
the success of its business strategy, the Company may continue to incur losses
beyond such period. Losses could negatively affect working capital, the
extension of credit by the Company's suppliers and the Company's ability to
maintain compliance with its debt covenants.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
The Company filed a Report on Form 8-K on May 21, 1997 with respect to the
Company's May 6, 1997 issuance of subordinated debt and warrants to purchase
common stock.
The following exhibits of The Right Start, Inc. are included herein.
Exhibit
Number
- ------
10.1 Securities Purchase Agreement dated as of September 4, 1997
10.2 Second Amendment to Loan and Security Agreement and Limited Waiver dated
July 10, 1997 between Heller Financial, Inc. and The Right Start, Inc.
10.3 Third Amendment to Loan and Security Agreement, Limited Waiver and Consent
dated September 3, 1997 between Heller Financial, Inc. and The Right Start,
Inc.
27 Financial Data Schedule
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
The Right Start, Inc.
September 12, 1997 By:\S\ Jerry R. Welch
-----------------------
Date Jerry R. Welch
Chief Executive Officer
September 12, 1997 By:\S\ Gina M. Shauer
-----------------------
Date Gina M. Shauer
Chief Financial Officer
THE RIGHT START, INC.
_______________
SECURITIES PURCHASE AGREEMENT
Dated as of September 4, 1997
_______________
Common Stock, no par value per share
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TABLE OF CONTENTS
-----------------
Page
----
Section 1. ISSUANCE OF SECURITIES 1
Section 1.1. Authorization 1
Section 1.2. Purchase and Sale of Common Shares; the Closing 1
Section 1.3. Representations of the Purchaser 2
Section 2. REPRESENTATIONS OF THE COMPANY 2
Section 2.1. Organization and Authority of the Company 2
Section 2.2. Business, Properties and Other Information
Regarding the Company 3
Section 2.3. Capital Stock 4
Section 2.4. Litigation; Observance of Statutes, Regulations and
Orders 5
Section 2.5. Title to Property 6
Section 2.6. Taxes 6
Section 2.7. Compliance with Laws and Other Instruments of the
Company 6
Section 2.8. Governmental Authorizations 7
Section 2.9. Licenses and Permits 7
Section 2.10. Compliance with ERISA 7
Section 2.11. Investment Company Act 9
Section 2.12. Environmental Compliance 9
Section 2.13. Maintenance of Insurance 9
Section 2.14. Labor Relations 9
Section 2.15. Assumptions or Guaranties of Indebtedness of Other
Persons 9
Section 2.16. Disclosure 9
Section 3. CONDITIONS OF CLOSING 10
Section 3.1. Proceedings Satisfactory 10
Section 3.2. Representations True; Officer's Certificate 10
Section 3.3. Purchase Permitted by Applicable Laws 11
Section 3.4. Common Shares 11
Section 3.5. Registration Rights Agreement 11
Section 4. COVENANTS 11
11
11
Section 4.1. Observance of Statutes, Regulations and Orders 11
Section 4.2. Corporate Existence 11
Section 4.3. Taxes 12
Section 4.4. Maintenance of Properties 12
Section 4.5. Books and Records 12
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Section 4.6. Maintenance of Insurance 12
Section 4.7. Limitations on Transactions with Affiliates 12
Section 4.8. Investment Company Act 12
Section 4.9. Compliance with ERISA 12
Section 4.10. Access to Information 13
Section 5. SEC REPORTS 13
Section 6. DEFINITIONS 14
Section 6.1. Definitions 14
Section 6.2. Accounting Terms 19
Section 7. REGISTRATION, TRANSFER AND EXCHANGE OF COMMON SHARES; LOST
CERTIFICATES 19
Section 8. TAXES 20
Section 9. MISCELLANEOUS 20
Section 9.1. Indemnification 20
Section 9.2. Expenses 20
Section 9.3. Amendments, Waiver and Consents 20
Section 9.4. Reliance on and Survival of Representations 21
Section 9.5. Successors and Assigns 21
Section 9.6. Notices 21
Section 9.7. Counterparts 22
Section 9.8. Governing Law 22
Section 9.9. Waiver of Jury Trial 23
Schedules
SCHEDULE I - Purchasers
SCHEDULE 2.13 - Insurance
Exhibits
EXHIBIT A - Form of Registration Rights Agreement 24
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THE RIGHT START, INC.
SECURITIES PURCHASE AGREEMENT
Dated as of September 4, 1997
To each of the Purchasers
Listed on Schedule I hereto
Ladies and Gentlemen:
The Right Start, Inc., a California corporation (the "Company"), hereby
agrees with the Purchasers as follows:
Section 1. ISSUANCE OF SECURITIES
Section 1.1. Authorization
The Company has duly authorized an the issuance of 1,510,000 shares (the
"Common Shares") of its common stock, no par value per share (the "Common
Stock") to the Purchasers listed on Schedule 1 hereto (the "Purchasers"). As
used herein, the term "Common Shares" shall include all Common Stock originally
issued pursuant to this Securities Purchase Agreement (the "Agreement") and
shall include the singular number as well as the plural.
Section 1.2. Purchase and Sale of Common Shares; the Closing. The Company
shall sell to the Purchasers and, subject to the terms and conditions hereof,
the Purchasers shall purchase from the Company, the Common Shares at an
aggregate purchase price of $3,775,000 for all of the Common Shares, or $2.50
per Common Share (the "Purchase Price").
The closing (the "Closing") of such purchase of the Securities shall be
held at 10:00 a.m., Los Angeles time, on September 4, 1997 (the "Closing Date"),
at the office of Milbank, Tweed, Hadley & McCloy, Los Angeles, or at such other
time or place as the parties hereto may mutually agree.
On the Closing Date, the Company shall deliver to each Purchaser one or
more certificates representing its Common Shares purchased hereunder, registered
in such Purchaser's name or in the name of such Purchaser's nominee, in any
denominations, all
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<PAGE>
as such Purchaser may specify by notice delivered to the Company at least
two days prior to the Closing Date (or, in the absence of such notice, one
certificate representing such Purchaser's Common Shares, registered in such
Purchaser's name), duly executed and dated the Closing Date, against each
Purchaser's delivery to the Company of immediately available funds in the amount
of the Purchase Price.
Section 1.3. Representations of the Purchaser. Each 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 Common Shares.
(b) Purchaser has sufficient knowledge and experience so as to be able to
evaluate the risks of merits of investment in the Company, and it is able
financially to bear the risks thereof.
(c) On the Closing Date, Purchaser is acquiring the Common Shares for such
Purchaser's own account for the purpose of investment and not with a view to or
for sale in connection with any distribution thereof in violation of the
Securities Act.
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2
<PAGE>
Section 2. REPRESENTATIONS OF THE COMPANY The Company represents and
warrants to each of the Purchasersas of the date hereof and as of the Closing
Date that:
Section 2.1. Organization and Authority of the Company.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California, and has all requisite
power and authority to own or hold under lease the property it purports to own
or hold under lease, to transact the business it transacts and proposes to
transact. The Company has all requisite power and authority to execute and
deliver this Agreement, the Common Shares, and any other documents or agreements
contemplated hereby and thereby, to perform its obligations hereunder and
thereunder and to consummate the transactions contemplated hereunder and
thereunder. The Company is duly qualified as a foreign corporation and is in
good standing in each jurisdiction in which the character of the properties
owned or held under lease by it or the nature of the business transacted by it
requires such qualification except such jurisdictions, if any, in which the
failure to be so qualified or in good standing will not have a Material Adverse
Effect on the Company.
(b) The execution, delivery and performance of this Agreement, the Common
Shares, and any other documents or agreements to which the Company is a party
contemplated hereby and thereby, and the consummation of the transactions
contemplated hereby and thereby, have been duly authorized and approved by the
Board of Directors. Each of this Agreement, the Common Shares, and any other
document or agreement to which the Company is a party contemplated hereby or
thereby has been (or on the Closing Date will have been) duly authorized,
executed and delivered by, and each is (or, when duly executed and delivered on
the Closing Date, will be) the valid and binding obligation of, the Company,
enforceable in accordance with its terms, except as may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium or other similar laws or by
legal or equitable principles relating to or limiting creditors' rights
generally.
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Section 2.2. Business, Properties and Other Information Regarding the
Company.
(a) The Company has delivered to each of the Purchasers copies of the
audited report of the Company's independent accountants for the transition
period ended February 1, 1997 containing balance sheets of the Company as of the
last day of the transition period ended February 1, 1997 and the fiscal year
ended June 1, 1996, and the related statements of operations, stockholders'
equity and cash flows of the Company for the eight month period ended February
1, 1997 and the fiscal year ended June 1, 1996 (such financial statements being
referred to collectively herein as the "Audited Financial Statements"). The
Company has also delivered to each of the Purchasers copies of the unaudited
balance sheets of the Company as of the last day of the 13 weeks ended May 3,
1997 and the related statements of operations, stockholders' equity and cash
flows of the Company for the 13 weeks ended May 3, 1997 (such financial
statements being referred to collectively herein as the "Unaudited Financial
Statements," and, together with the Audited Financial Statements, as the
"Financial Statements"). The Financial Statements fairly present the financial
position of the Company as of the respective dates of such balance sheets and
the results of the Company's operations for the respective periods covered by
such statements of operations, stockholders' equity and cash flows. The
Financial Statements are true, accurate and complete in all material respects
and have been prepared in accordance with GAAP consistently applied throughout
the periods involved. There are no material liabilities, contingent or
otherwise, of the Company as of the date hereof and as of the Closing Date
required to be reflected in a balance sheet prepared in accordance with GAAP
which are not reflected in such balance sheets. Since May 3, 1997, the Company
has continued to experience operating losses. However, there have been no
changes in the assets, liabilities or financial position of the Company from
that set forth in such balance sheet as of such date, other than such continued
operating losses and changes in the ordinary course of business.
(b) As of their respective dates, neither the Financial Statements nor any
certificate executed by the Company in connection with the transactions
contemplated hereby and thereby, contained any untrue statement of a material
fact or omitted to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Since May 3, 1997, there has been no change in the business,
prospects, properties, condition (financial or otherwise) or operations which
has had a Material Adverse Effect on the Company. To the best of the Company's
knowledge, no fact has had a Material Adverse Affect or, so far
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as the Company can reasonably foresee, will have a MaterialAdverse Effect
on the Company, or materially adversely affect the ability of the Company to
perform its respective obligations under this Agreement, the Common Shares, or
any other documents or agreements contemplated hereby and thereby.
Section 2.3. Capital Stock.
(a) The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock. Immediately prior to the sale of the Common Shares,
8,593,639 shares of Common Stock are and will be issued and outstanding, all of
which shares have been duly and validly issued and are fully paid and
nonassessable. On the date hereof, no shares of Preferred Stock have or will
have been issued.
(b) The Company does not have outstanding any capital stock or other
securities convertible into or exchangeable for any of its capital stock or any
rights to subscribe for or to purchase, or any options for the purchase of, or
any agreements (contingent or otherwise) providing for the issuance of, or any
calls, commitments or claims of any character relating to, any of its capital
stock or any securities convertible into or exchangeable for any of its capital
stock, other than (i) stock options issued under the Company's stock option
plans, (ii) the Convertible Debenture dated October 11, 1996 issued to Strategic
Associates, L.P., as amended on May 30, 1997, (ii) the Convertible Debenture
dated October 11, 1996 issued to Cahill, Warnock Strategic Partners, L.P., as
amended on May 30, 1997 and (iii) warrants to purchase an aggregate of 475,000
shares of Common Stock, each dated May 6, 1997.
(c) The Company does not have any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any of its capital stock or obligation
evidencing the right of the holder thereof to purchase any of its capital stock,
other than the Company's obligation to repurchase stock owned by an employee
under The Right Start, Inc. Employee Stock Purchase Plan after such employee
elects to withdraw from such plan. There is not in effect any agreement by the
Company pursuant to which any holders of securities of the Company have a right
to cause the Company to register such securities under the Securities Act, other
than (i) the shelf registration on file with the Commission for Kayne Anderson
to register shares of common stock owned by Kayne Anderson and certain other
investors, (ii) the Registration Rights Agreement dated October 11, 1996 between
the Company and Strategic Associates, L.P., (iii) the Registration Rights
Agreement dated October 11, 1996 between the Company and Cahill, Warnock
Strategic Partners, L.P. and (iv) the Registration Rights Agreement dated
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May 6,1997 between the Company and ARBCO Associates, L.P., Arthur E. Hall,
as Trustee for the A.E. Hall & Company Money Purchase Plan, Cahill, Warnock
Strategic Partners Fund, L.P., Fred Kayne, Kayne Anderson Non-Traditional
Investments, L.P., Kayne Anderson Offshore Limited, Offense Group Associates,
L.P., Opportunity Associates, L.P., Strategic Associates, L.P., Michael Targoff
and The Travelers Indemnity Company.
Section 2.4. Litigation; Observance of Statutes, Regulations and Orders.
(a) There are no actions, suits or proceedings pending or, to the knowledge
of the Company, threatened against or affecting the Company or any of its
properties in any court or before any arbitrator of any kind or before or by any
Governmental Body except actions, suits or proceedings arising in the ordinary
course of business which individually or in the aggregate, if adversely
determined, would not have a Material Adverse Effect on the Company or
materially adversely affect its ability to perform its obligations under this
Agreement, the Common Shares, and any other document or agreement contemplated
hereby or thereby.
(b) The Company is not in default under any order of any court, arbitrator
or Governmental Body, or is subject to or a party to any Order of any court or
Governmental Body arising out of any action, suit or proceeding under any
statute or other law respecting antitrust, monopoly, restraint of trade, unfair
competition or similar matters. The Company is not in violation of any statute
or other rule or regulation of any Governmental Body the violation of which
would have a Material Adverse Effect on the Company or materially adversely
affect its ability to perform its obligations under this Agreement, the Common
Shares, and any other document or agreement contemplated hereby or thereby.
Section 2.5. Title to Property.
(a) The Company has good and marketable title to its real properties and
good and merchantable title to each of its other properties as are reflected on
the Financial Statements, except for personal property sold or otherwise
disposed of in the ordinary course of business. All properties of the Company
are free and clear of all Liens, other than Permitted Liens.
(b) The Company enjoys full and undisturbed possession under all leases
necessary in any material respect for the operation of its business (the
"Leases"). None of the Company's Leases contain any unusual or
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burdensome provisions which, individually or in the aggregate, are likely to
materially impair the operation of the business of the Company. The
Company's Leases are valid and subsisting and are in full force and effect,
and there are no existing material defaults by the Company or events that
with notice or lapse of time or both would constitute material defaults by
the Company under any of the Leases.
Section 2.6. Taxes. The Company has filed all tax returns which are
required to have been filed in any jurisdiction, and has paid all taxes shown to
be due and payable on such returns and all other taxes and assessments payable
by the Company to the extent the same have become due and payable and before
they have become delinquent, except for any taxes and assessments the amount,
applicability or validity of which is currently being contested in good faith by
appropriate proceedings and with respect to which the Company has set aside on
its books reserves (segregated to the extent required by GAAP) deemed by it to
be adequate. The Company knows of no proposed material tax assessment against
the Company and in the opinion of the Company all tax liabilities are adequately
provided for on the books of the Company.
Section 2.7. Compliance with Laws and Other Instruments of the Company. The
consummation of the transactions contemplated by this Agreement and the
execution, delivery and performance of the terms and provisions of this
Agreement, the Common Shares, or any other document or agreement contemplated
hereby or thereby will not (i) contravene, result in any breach of, or
constitute a default under, or result in the creation of any Lien in respect of
any property of the Company under, any material indenture, mortgage, deed of
trust, bank loan or credit agreement, corporate charter, by-laws or other
material agreement or instrument to which the Company is a party or by which the
Company or any of its properties may be bound or affected, (ii) conflict with or
result in a breach of any of the terms, conditions or provisions of any Order of
any court, arbitrator or Governmental Body applicable to the Company, or (iii)
violate any provision of any statute or other rule or regulation of any
Governmental Body applicable to the Company.
Section 2.8. Governmental Authorizations. No consent, approval or
authorization of, or registration, filing or declaration with, any Governmental
Body is required for the issuance of the Common Shares or the valid execution
and delivery of the Common Shares or for the performance by the Company of this
Agreement, the Common Shares, and any other documents or agreements contemplated
hereby and thereby.
Section 2.9. Licenses and Permits. The Company possesses all licenses,
permits, franchises, authorizations, patents, copyrights, trademarks and trade
names, or rights thereto, required to conduct its business substantially as now
conducted and as currently proposed to be conducted, without known conflict with
the rights of others.
Section 2.10. Compliance with 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 2.10, 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.
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(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) 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.
(g) The Company is not a party in interest with respect to any employee
benefit plan, except for The Right Start, Inc. Employee Stock Ownership Plan,
and the Company's securities are not employer securities with respect to any
employee benefit plan other than the above listed plan. 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" or "employer securities"
shall have the meaning assigned to such term in Section 407(d)(1) of ERISA. The
execution and delivery of this Agreement, the Common Shares 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.
Section 2.11. Investment Company Act. The Company is not an investment
company or a person directly or indirectly controlled by or acting on behalf of
an investment company within the meaning of the Investment Company Act of 1940,
as amended.
Section 2.12. 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
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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.
Section 2.13. Maintenance of 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 in Schedule 2.13 hereto.
Section 2.14. Labor Relations. To the best knowledge of the Company, no
material unfair labor practice complaint or sex, age, race or other
discrimination claim has been brought during the last five years against the
Company before the National Labor Relations Board, the Equal Employment
Opportunity Commission or any other Governmental Body. During that period, the
Company has complied in all material respects with all applicable laws relating
to the employment of labor, including, without limitation, those relating to
immigration, wages, hours and collective bargaining.
Section 2.15. 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.
Section 2.16. Disclosure. The Company has provided to each Purchaser copies
of its Annual Report on Form 10-K for the transition period ended February 1,
1997, which includes the Audited Financial Statements (the "Form 10-K
Documents"); the Company has also provided to each Purchaser copies of its
Quarterly Report on Form 10-Q for the 13 weeks ended May 3, 1997, which includes
the Unaudited Financial Statements (the "Form 10-Q Documents"). Such documents
are true, accurate and complete in all material respects. Neither this
Agreement, the Financial Statements, the Form 10-K Documents, the Form 10-Q
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
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Company or any of its executive officers which has not been disclosed
herein, in the Form 10-K Documents, in the Form 10-Q 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.
Section 3. CONDITIONS OF CLOSING. Each Purchaser's obligation to purchase
and pay for the Common Shares to be purchased by such Purchaser on the Closing
Date shall be subject to the satisfaction on or before the Closing Date of the
conditions hereinafter set forth.
Section 3.1. Proceedings Satisfactory. All proceedings taken on or prior to
the Closing Date in connection with the issuance of the Common Shares and the
consummation of the transactions contemplated hereby and all documents and
papers relating thereto shall be reasonably satisfactory in form and substance
to the Purchasers and their counsel, and they shall have received copies of such
documents, papers, and certificates of officers of the Company, all in form and
substance reasonably satisfactory to the Purchasers and their counsel, as they
may reasonably request in connection therewith.
Section 3.2. Representations True; Officer's Certificate. All
representations and warranties of the Company contained in Section 2 shall be
true, in each case on and as of the Closing Date with the same effect as though
such representations and warranties had been made on and as of the Closing Date;
the Company shall have performed all agreements on its part required to be
performed under this Agreement on or prior to the Closing Date; the Company
shall not have consolidated with, merged into, or sold, leased or otherwise
disposed of its properties as an entirety or substantially as an entirety to any
person; all conditions specified in Section 3 shall have been satisfied; and the
Purchasers shall have received a certificate signed by the Chairman of the Board
of Directors, the President or the principal financial officer of the Company,
dated the Closing Date, certifying to the effect specified in this Section.
Section 3.3. Purchase Permitted by Applicable Laws. The sale by the Company
and the payment for the Common Shares to be purchased by the Purchasers (i)
shall not be prohibited by any applicable law or governmental regulation,
release, interpretation or opinion, (ii) shall not subject any Purchaser to any
penalty under or pursuant to any applicable law or governmental regulation, and
(iii) shall be permitted by the laws and regulations of the jurisdictions to
which any Purchaser is subject.
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Section 3.4. Common Shares. The Common Shares shall have been duly executed
and delivered by the parties thereto and all governmental charges payable in
connection therewith shall have been paid (or payment shall have been provided
for) in full.
Section 3.5. Registration Rights Agreement. The Company and the Purchasers
shall have entered into the Registration Rights Agreement substantially in the
form set forth as Exhibit 3.5 hereto.
Section 4. COVENANTS. The Company covenants and agrees that on and after
the date hereof, so long as any Common Shares shall be outstanding, that 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:
Section 4.1. Observance of Statutes, Regulations and Orders. The Company
shall remain at all times in compliance with all statutes or other rules or
regulations of any Governmental Body, including any Environmental Law, the
violation of which might have a Material Adverse Effect on the Company or
materially adversely affect the ability of the Company to perform its
obligations under this Agreement.
Section 4.2. Corporate Existence. The Company shall do or cause to be done
all things necessary to preserve and keep in full force and effect, and shall
cause each Subsidiary to preserve and keep in full force and effect, its
corporate existence in accordance with the rights (charter and statutory),
licenses and franchises of the Company; provided, however, that the Company
shall not be required to preserve any such right, license or franchise if the
Board of Directors shall determine in good faith in accordance with the
Company's charter that the preservation thereof is no longer desirable in the
conduct of the business of the Company, taken as a whole, and that the loss
thereof is not adverse in any material respect to the Purchasers.
Section 4.3. Taxes. The Company shall pay, and shall cause each Subsidiary
to pay, prior to delinquency, all material taxes, assessments and governmental
levies that may be imposed upon the Company, except as contested in good faith
and by appropriate proceedings.
Section 4.4. Maintenance of Properties. The Company shall, and shall cause
each of its Subsidiaries to, maintain, preserve, protect and keep its properties
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in good repair, working order and condition (ordinary wear and tear excepted),
and make necessary and proper repairs, renewals and replacements so that its
business carried on in connection therewith may be properly conducted at all
times consistent with past practices of the Company.
Section 4.5. Books and Records. The Company shall keep books and records
which accurately reflect all of its material business affairs and transactions.
Section 4.6. 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 operates.
Section 4.7. Limitations on Transactions with Affiliates. The Company shall
not make, and shall cause its Subsidiaries not to make, any payment to or
investment in, or enter into any transaction with, any Affiliate, including
without limitation the purchase, sale or exchange of property or the rendering
of any service, except pursuant to the reasonable requirements of the Company's
existing or proposed business; provided that such transaction is on terms
comparable to those generally available on an arm's-length basis.
Section 4.8. Investment Company Act. The Company shall not become an
investment company subject to registration under the Investment Company Act of
1940, as amended.
Section 4.9. 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. The Company
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.
Section 4.10. Access to Information. At the request of any Purchaser (a
"Requesting Purchaser"), the Company shall provide such Requesting Purchaser
with the monthly unaudited balance sheet of the Company as of the last day of
the month then ended and the related unaudited statements of operations,
stockholders' equity and cash flows of the Company for the month then ended. A
Requesting Purchaser under this Section 4.10 hereby acknowledges that it is
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aware of the restrictions imposed by federal and state securities laws on a
person possessing material nonpublic information about a company. In this
regard, a Requesting Purchaser hereby agrees that while it is in possession of
material nonpublic information with respect to the Company and its subsidiaries,
such Requesting Purchaser will not purchase or sell any securities of the
Company, or communicate such information to any third party, in violation of any
such laws. Such Requesting Purchaser also agrees that, if requested by the
Company, such Requesting Purchaser will cause any of its representatives,
consultants or advisors who have been or may become apprised of any material
nonpublic information about the Company to give a written undertaking to the
same effect to the Company.
Section 5. 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 each Purchaser.
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, statements of operations, shareholders equity and
cash flows 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 each Purchaser 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.
Each Purchaser and prospective purchasers designated by such Purchaser will
have the right to obtain from the Company upon request by such Purchaser 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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Section 6. DEFINITIONS.
Section 6.1. Definitions. Except as otherwise specified or as the context
may otherwise require, the following terms shall have the respective meanings
set forth below whenever used in this Agreement:
"Affiliate" means a Person (i) that directly or indirectly controls, or is
controlled by, or is under common control with, the Company, (ii) that
beneficially owns ten percent (10%) or more of the Voting Stock of the Company,
or (iii) ten percent (10%) or more of the Voting Stock (or in the case of a
Person which is not a corporation, ten percent (10%) or more of the equity
interest) of which is owned by the Company. The term "control" 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, by contract or otherwise. Notwithstanding the
foregoing, the holders of the Common Shares shall be deemed not to be Affiliates
of the Company for purposes of this Agreement.
"Agreement" has the meaning ascribed thereto in Section 1.1.
"Board of Directors" means either the board of directors of the Company or
any duly authorized committee of that board.
"Business Day" means any day other than a Saturday, Sunday or a day on
which banks in the State of California are required or permitted to close.
"Capital Lease" means any lease of property which, in accordance with GAAP,
should be capitalized on the lessee's balance sheet or for which the amount of
the asset and liability thereunder as if so capitalized should be disclosed in a
note to such balance sheet; and "Capital Lease Obligation" means the amount of
the liability with respect to a Capital Lease which should be so capitalized or
disclosed.
"Closing" has the meaning ascribed thereto in Section 1.2.
"Closing Date" has the meaning ascribed thereto in Section 1.2.
"Code" has the meaning ascribed thereto in Section 2.11.
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"Commission" means the Securities and Exchange Commission and any other
similar or successor agency of the federal government administering the
Securities Act and the Exchange Act.
"Common Shares" has the meaning ascribed thereto in Section 1.1.
"Common Stock" has the meaning ascribed thereto in Section 1.1.
"Company" means The Right Start, Inc., a California corporation.
"Environmental Law" or "Environmental Laws" mean any law or Order relating
to the regulation or protection of human health, safety or the environment or to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals or industrial, toxic or hazardous substances or wastes
into the environment (including, without limitation, ambient air, soil, surface
water, ground water, wetlands, land or subsurface strata), or otherwise relating
to the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, chemicals or industrial,
toxic or hazardous substances or wastes.
"ERISA" has the meaning ascribed thereto in Section 2.11.
"ERISA Affiliate" means any corporation that is a member of the same
controlled group of corporations (within the meaning of Section 414(b) of the
Code) as the Company or any corporation or trade or business that is under
common control (within the meaning of Section 414(c) of the Code) with the
Company.
"Exchange Act" means the Securities and Exchange Act of 1934, as amended,
and any similar or successor federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at any applicable
time.
"Financial Statements" has the meaning ascribed thereto in Section 2.2.
"GAAP" means generally accepted accounting principles as in effect at the
time of application to the provisions hereof.
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"Governmental Body" means any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
foreign or domestic, or any financial or other rating agency.
"Guarantee" means any guarantee or other contingent liability, direct or
indirect, with respect to any Indebtedness of another person, through an
agreement or otherwise, including, without limitation, (i) any endorsement
(otherwise than for collection or deposit in the ordinary course of business) or
discount with recourse or undertaking substantially equivalent to or having
similar economic effect of a guarantee with respect to any such Indebtedness,
and (ii) any agreement (A) to purchase, or to advance or supply funds for the
payment or purchase of, any such Indebtedness of another, (B) to purchase, sell
or lease property, products, materials or supplies, or transportation or
services, primarily for the purpose of enabling such other person to pay such
Indebtedness or to assure the owner thereof against loss regardless of the
delivery or non-delivery of the property, products, materials or supplies or
transportation or services, or (C) to make any loan, advance, capital
contribution or other investment in such other person to assure a minimum
equity, working capital or other balance sheet condition for any date, or to
provide funds for the payment of any liability, dividend or stock liquidation
payment, or otherwise to supply funds to or in any manner invest in such other
person. The amount of any Guarantee shall be equal to the outstanding principal
amount of the Indebtedness guaranteed, unless some lessor limitation is
specifically stated in such guarantee.
"Indebtedness" means any obligation for borrowed money or for which
interest is customarily paid, but in any event shall include without limitation
(i) any obligation owed for all or any part of the purchase price of property,
services or other assets or for the cost of property or other assets constructed
or of improvements thereto, other than accounts payable included in current
liabilities and incurred in respect of property purchased or services rendered
in the ordinary course of business, (ii) any obligations secured by any Lien in
respect of property even though the person owning the property has not assumed
or become liable for the payment of such obligation, (iii) any Capital Lease
Obligation, (iv) any Guarantee with respect to Indebtedness (of the kind
otherwise described in this definition) of another person, and (v) obligations
in respect of letters of credit, surety bonds and completion bonds.
"Kayne Anderson" means Kayne Anderson Investment Management, Inc., KAIM
Non-Traditional, L.P., Kayne Anderson Non-Traditional Investments, L.P., Kayne
Anderson Offshore Limited, ARBCO Associates, L.P., Offense Group Associates,
L.P., and Opportunity Associates, L.P. and each of their affiliates.
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"Leases" has the meaning ascribed thereto in Section 2.5.
"Lien" means, as to any person, any mortgage, lien, pledge, charge,
security interest or other encumbrance in or on, or any interest or title of any
vendor, lessor, lender or other secured party to or of the person under any
Indebtedness, conditional sale or other title retention agreement or Capital
Lease with respect to, any property or asset of the person, or the signing or
filing of a financing statement which names the person as debtor, or the signing
of any security agreement authorizing any other party as the secured party
thereunder to file any financing statement.
"Material Adverse Effect" means, with respect to any Person, a material
adverse effect on the business, prospects, properties, condition (financial or
otherwise) or operations of such Person.
"Order" means any order, writ, injunction, decree, judgment, award,
determination, direction or demand.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permitted Liens" means:
(a) Liens for taxes, assessments, or governmental charges
or claims the payment of which is not yet past due or that are being
contested in good faith by appropriate proceedings and for which
adequate reserves have been established;
(b) statutory Liens of landlords, carriers, warehousemen,
mechanics, or materialmen, and other Liens imposed by law and incurred
in the ordinary course of business, that are for sums not yet
delinquent for a period of more than thirty (30) days or are being
contested in good faith, if reserves or other appropriate provisions,
if any, as shall be required by GAAP, shall have been made therefor;
(c) Liens incurred or deposits or pledges made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance, and other types of social security laws;
(d) any attachment or judgment Lien; provided that (i) the
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time for the appeal or petition for rehearing of such judgment lien
shall not have expired; (ii) the Company in good faith shall be
prosecuting an appeal or proceeding for review with respect to which
execution has been stayed pending such appeal or which is vacated or
discharged within thirty (30) days of the termination of such stay; or
(iii) with respect to which payment in full above any applicable
deductible is covered by insurance (so long as no reservation of rights
has been made by the insurer in connection with such coverage), and
Liens incurred to secure any surety bonds, appeal bonds, supersedeas
bonds, or other instruments serving a similar purpose in connection
with the appeal of any such judgment or any proceeding to which the
Company is a party; and
(e) minor survey exceptions, easements and licenses,
reservations of, or rights of others for, rights-of-way, highway and
railroad crossings, sewers, electric lines, telegraph and telephone
lines, and other similar purposes, or zoning or other restrictions or
similar charges with respect to the use of real properties not incurred
in connection with Indebtedness of the Company or materially detracting
from the value of such properties.
(f) any Lien on the Company's assets or properties to
secure payment to a lender that is senior in right of payment to a
holder of the Company's 11.5% Senior Subordinated Notes due May 6, 2000.
"Person" shall include an individual, a corporation, an association, a
partnership, a trust or estate, a government, foreign or domestic, and any
agency or political subdivision thereof, or any other entity.
"Purchasers" means the Purchasers listed on Schedule I hereto.
"Securities Act" means the Securities Act of 1933, as amended, and any
similar or successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at any applicable
time.
"Subsidiary" means any corporation or other entity of which the Company
and/or one or more of its Subsidiaries own more than 50% of the outstanding
stock or other interest having by its terms ordinary voting power to elect a
majority of the board of directors of such corporation, entity or otherwise
control such corporation or entity, and, except as otherwise expressly indicated
herein, references to Subsidiaries shall refer to Subsidiaries of the Company.
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"Voting Stock" means any equity security entitling the holder of such
security to vote at meetings of shareholders except an equity security which
entitles the holder of such security to vote only upon the occurrence of some
contingency, unless that contingency shall have occurred and be continuing.
Section 6.2. Accounting Terms. All accounting terms used herein which are
not expressly defined in this Agreement have the meanings respectively given to
them in accordance with GAAP, all computations made pursuant to this Agreement
shall be made in accordance with GAAP, and all balance sheets and other
financial statements shall be prepared in accordance with GAAP, except in the
case of unaudited financial statements which are subject to year-end audit
adjustments and the absence of footnotes.
Section 7. REGISTRATION, TRANSFER AND EXCHANGE OF COMMON SHARES; LOST
CERTIFICATES. The Company shall cause its transfer agent, U.S. Stock Transfer
Corporation, subject to such reasonable regulations as such transfer agent may
prescribe, but at the Company's expense (other than transfer taxes, if any), to
provide for the registration and transfer of the Common Shares.
The Common Shares may not be sold, transferred, pledged or hypothecated
unless the proposed transaction does not require registration or qualification
under federal or state securities laws or unless the proposed transaction is
registered or qualified as required.
The holder of any of the Common Shares may, at such holder's option,
surrender the same for transfer or exchange either at the principal office of
the Company's transfer agent located at 1745 Gardena Ave., Glendale, California
91204 accompanied in the case of a transfer or assignment by a written
instrument of transfer or assignment in form satisfactory to the transfer agent
duly executed by the registered holder thereof or by such holder's attorney duly
authorized in writing. In case any holder shall so request the transfer,
assignment or exchange of any of the Common Shares, the transfer agent shall
execute and deliver in exchange therefor one or more new certificates
representing the Common Shares, as may be requested by such holder, in the same
denomination or denominations as the Common Shares so surrendered.
Upon receipt by the Company's transfer agent of evidence satisfactory to it
of the loss, theft, destruction or mutilation of any certificate evidencing the
Common Shares, and (in case of loss, theft or destruction) of indemnity
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reasonably satisfactory to it, upon surrender and cancellation of such
certificate or receipt of such indemnity, the Company shall make and deliver in
lieu of such certificate a new certificate in the same denomination.
Section 8. TAXES. The Company shall pay all taxes (including interest and
penalties), other than taxes imposed on the income of the Purchasers, which may
be payable in respect of the execution and delivery of this Agreement or of the
execution and delivery of any of the Common Shares or of any amendment of, or
waiver or consent under or with respect to, this Agreement or any of the Common
Shares and shall save each Purchaser harmless against any loss or liability
resulting from nonpayment or delay in payment of any such tax.
Section 9. MISCELLANEOUS.
Section 9.1. Indemnification. The Company hereby agrees to indemnify,
exonerate and hold Purchaser and each of its partners and affiliates, 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.
Section 9.2. 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 Common Shares and other instruments and
documents to be delivered hereunder.
Section 9.3. 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 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
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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.
Section 9.4. Reliance on and Survival of Representations. All agreements,
representations and warranties of the Company contained in this Agreement and in
any certificates or other instruments delivered pursuant to this Agreement shall
(i) be deemed to be material and to have been relied upon by the Purchasers,
notwithstanding any investigation heretofore or hereafter made by any Purchaser
or on such Purchaser's behalf, and (ii) survive the execution and delivery of
this Agreement for a period of one year.
Section 9.5. Successors and Assigns. This Agreement shall bind and inure to
the benefit of and be enforceable by the Company, each of the Purchasers, and
the Purchasers' respective successors and assigns. The Company may not assign
its rights under this Agreement.
Section 9.6. Notices. All notices and other communications provided for in
this Agreement shall be in writing and delivered, telecopied or mailed, first
class postage prepaid, addressed:
(a) If to the Company:
The Right Start, Inc.
5334 Sterling Center Drive
Westlake Village, CA 91361
Attention: President
Facsimile: (818) 707-7132
with a copy 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 the Purchasers, at the addresses set forth on the
signature page and as may be designated by notice to the Company.
Any such notice or communication shall be deemed to have been duly given
when delivered, telecopied or mailed as aforesaid.
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Section 9.7. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
Section 9.8. Governing Law9.8. Governing Law. This Agreement and (unless
otherwise provided) all amendments, supplements, waivers and consents relating
hereto or thereto shall be governed by and construed in accordance with the laws
of the State of Delaware.
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Section 9.9. Waiver of Jury Trial. EACH PURCHASER, BY ITS ACCEPTANCE OF ANY
OF THE COMMON SHARES, AND THE COMPANY, EACH HEREBY AGREE TO WAIVE ITS RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS AGREEMENT, THE COMMON SHARES OR ANY OTHER AGREEMENTS RELATING TO THE
COMMON SHARES OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF
THIS TRANSACTION. The scope of this waiver is intended to be all-encompassing of
any and all disputes that may be filed in any court and that relate to the
subject matter of this transaction, including without limitation, contract
claims, tort claims, breach of duty claims and all other common law and
statutory claims. The Purchasers and the Company each acknowledge that this
waiver is a material inducement to enter into a business relationship, that each
has already relied on the waiver in entering into this Agreement, and that each
shall continue to rely on the waiver in their related future dealings. The
Purchasers and the Company further represent and warrant 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.
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, THIS WAIVER IS IRREVOCABLE,
MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER
SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS
TO THIS AGREEMENT, THE COMMON SHARES, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO THE COMMON SHARES. In the event of litigation, this Agreement may be
filed as a written consent to a trial by the Court.
[Remainder of page intentionally left blank]
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Each Purchaser is requested to sign the form of acceptance in the space
provided below whereupon this Agreement shall become a binding agreement between
such Purchaser and the Company.
Very truly yours,
THE RIGHT START, INC.
By:
-----------------------
Jerry R. Welch
Chief Executive Officer
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The foregoing Agreement is hereby accepted as of the date first above written:
CAHILL, WARNOCK STRATEGIC PARTNERS FUND,
L.P.
By: Cahill, Warnock Strategic
Partners, L.P., its general
partner
By:
------------------
David L. Warnock,
a General Partner
Address for Notices and Payments:
1 South Street, Suite 2150
Baltimore, MD 21202
Attention: David Warnock
Telephone: (410) 895-3800
Telecopy: (410) 895-3805
With a copy to:
Wilmer, Cutler & Pickering
2445 M Street, NW
Washington, DC 20037
Attention: Gerry Cater, Esq.
Telephone: (410) 986-2800
Telecopy: (410) 986-2828
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The foregoing Agreement is hereby accepted as of the date first above written:
ARBCO Associates, L.P.
By:
----------------------
Name:
Title:
Address for Notices and Payments:
1800 Avenue of the Stars, 2nd Floor
Los Angeles, CA 90067
Attention: Ric Kayne
Telephone: (310) 556-2721
Telecopy: (310)
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The foregoing Agreement is hereby accepted as of the date first above written:
JERRY D. KAYNE AND IDA KAYNE REVOCABLE
TRUST UAD 2/14/83
--------------------------------------
Jerry D. Kayne, as Trustee
Address for Notices and Payments:
2182 Century Hill
Los Angeles, CA 90067
Attention: Jerry Kayne
Telephone: (310) 203-8060
Telecopy: (310) 203-9420
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The foregoing Agreement is hereby accepted as of the date first above written:
RICHARD A. KAYNE, an individual
--------------------------------------
Address for Notices and Payments:
1800 Avenue of the Stars, 2nd Floor
Los Angeles, CA 90067
Attention: Ric Kayne
Telephone: (310) 556-2721
Telecopy: (310)
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The foregoing Agreement is hereby accepted as of the date first above written:
FRED KAYNE, an individual
--------------------------------------
Address for Notices and Payments:
1800 Avenue of the Stars
Suite 1112
Los Angeles, CA 90067
Attention: Fred Kayne
Telephone: (310) 551-0322
Telecopy: (310) 551-3077
With a copy to:
--------------------------------------
--------------------------------------
Attention:
Telephone: ( ) _________________
Telecopy: ( ) _________________
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The foregoing Agreement is hereby accepted as of the date first above written:
KAYNE ANDERSON NON-TRADITIONAL
INVESTMENTS, L.P.
By: _______________________________
Name:
Title:
Address for Notices and Payments:
1800 Avenue of the Stars, 2nd Floor
Los Angeles, CA 90067
Attention: Ric Kayne
Telephone: (310) 556-2721
Telecopy: (310) _________________
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The foregoing Agreement is hereby accepted as of the date first above written:
KAYNE ANDERSON OFFSHORE LIMITED
By: _______________________________
Name:
Title:
Address for Notices and Payments:
1800 Avenue of the Stars, 2nd Floor
Los Angeles, CA 90067
Attention: Ric Kayne
Telephone: (310) 556-2721
Telecopy: (310) _________________
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The foregoing Agreement is hereby accepted as of the date first above written:
JAMES M. MALLICK, an individual
__________________________________
Address for Notices and Payments:
P.O. Box 1638
Rancho Santa Fe, CA 92067
Attention: James M. Mallick
Telephone: (619) 759-1995
Telecopy: (619) 759-1799
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The foregoing Agreement is hereby accepted as of the date first above written:
OFFENSE GROUP ASSOCIATES, L.P.
By: _______________________________
Name:
Title:
Address for Notices and Payments:
1800 Avenue of the Stars, 2nd Floor
Los Angeles, CA 90067
Attention: Ric Kayne
Telephone: (310) 556-2721
Telecopy: (310) _________________
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The foregoing Agreement is hereby accepted as of the date first above written:
OPPORTUNITY ASSOCIATES, L.P.
By: _______________________________
Name:
Title:
Address for Notices and Payments:
1800 Avenue of the Stars, 2nd Floor
Los Angeles, CA 90067
Attention: Ric Kayne
Telephone: (310) 556-2721
Telecopy: (310) _________________
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The foregoing Agreement is hereby accepted as of the date first above written:
STRATEGIC ASSOCIATES, L.P.
By: Cahill, Warnock & Company, LLC,
its general partner
By: _______________________________
David L. Warnock
Managing Member
Address for Notices and Payments:
1 South Street, Suite 2150
Baltimore, MD 21202
Attention: David Warnock
Telephone: (410) 895-3800
Telecopy: (410) 895-3805
With a copy to:
Wilmer, Cutler & Pickering
100 Light Street
Baltimore, MD 21202
Attention: Gerry Cater, Esq.
Telephone: (410) 986-2800
Telecopy: (410) 986-2828
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The foregoing Agreement is hereby accepted as of the date first above written:
MICHAEL TARGOFF
___________________________________
Address for Notices and Payments:
600 Third Avenue, 36th Floor
New York, NY 10016
Attention: Michael Targoff
Telephone: (212) 338-5221
Telecopy: (212)
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The foregoing Agreement is hereby accepted as of the date first above written:
THE TRAVELERS INDEMNITY COMPANY
By: _______________________________
Name:
Title:
Address for Notices and Payments:
388 Greenwich Street, 36th Floor
New York, NY 10013
Attention: Harvey Eisen
Telephone: (212) 816-3204
Telecopy: (212) 816-3364
With a copy to:
The Travelers Indemnity Company
One Tower Square
Hartford, Connecticut 06183
Attention: Securities Dept.
Telephone: (860) 277-5459
Telecopy: (860) 277-2299
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SCHEDULE I
Common Shares
Purchasers Purchased
ARBCO Associates, L.P. 220,000 shares
Cahill, Warnock Strategic Partners 75,800
Fund, L.P.
Fred Kayne 224,000
Jerry D. Kayne and Ida Kayne Revocable 66,000
Trust UAD 2/14/83
Richard A. Kayne 120,000
Kayne Anderson Non-Traditional 220,000
Investments, L.P.
Kayne Anderson Offshore Limited 40,000
James M. Mallick 50,000
Offense Group Associates, L.P. 220,000
Opportunity Associates, L.P. 100,000
Strategic Associates, L.P. 4,200
Michael Targoff 50,000
The Travelers Indemnity Company 120,000
TOTAL: 1,510,000 shares
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SCHEDULE 2.13
INSURANCE POLICIES
LINE OF COVERAGE CARRIERS POLICY
TERM
- --------------------------- ---------------------------- -------------
Commercial Package Reliance Insurance 8/31/97 -
(Property, Inland Company 8/31/98
Marine, Crime
Boiler & Machinery)
Commercial General General Star Indemnity 8/31/97 -
Liability Company 8/31/98
Including Employee Benefits
Liability
Employment Reliance Insurance 8/31/97 -
Practices Liability Company of Illinois 8/31/98
Directors, Officers National Union Fire 8/31/97 -
and Corporate Insurance Company 8/31/98
Liability
Workers' United Pacific 8/31/97 -
Compensation Insurance Company 8/31/98
Employers
Liability - CA only
Workers' Compensation United Pacific 8/31/97 -
Other States Insurance Company 8/31/98
Umbrella Liability TIG Insurance 8/31/97 -
8/31/98
Fiduciary Liability Federal Insurance 3/1/97 -
Company 3/1/98
Ocean Cargo Fireman's Fund 12/16/96
Insurance Company until canceled
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT AND LIMITED WAIVER
This Second Amendment to Loan and Security Agreement and Limited Waiver
("Amendment") is dated July 10, 1997 and entered into by and between HELLER
FINANCIAL, INC. ("Lender"), and THE RIGHT START, INC. ("Borrower").
WHEREAS, Lender and Borrower have entered into a Loan and Security
Agreement dated November 14, 1996 (as amended, the "Loan Agreement"); and
WHEREAS, Lender and Borrower desire to amend the Agreement with respect to
the Minimum EBITDA covenant contained in subsection 6.3 thereof, subject to the
terms and conditions set forth herein; and
WHEREAS, Borrower has requested a temporary increase in Letter of Credit
Liability from $2,000,000 to $3,000,000 until July 31, 1997; and
WHEREAS, an Event of Default is in existence under that certain letter
agreement dated November 15, 1996 (the "Letter Agreement") between Borrower and
Lender wherein Borrower agreed to establish a Blocked Account with a Collecting
Bank satisfactory to Lender and to otherwise comply with subsection 5.6 of the
Loan Agreement by December 16, 1996;
WHEREAS, Borrower has been unable to comply with the terms of the Letter
Agreement as they pertain to the Blocked Account, and has requested that Lender
waive the Event of Default resulting from said noncompliance (the "Existing
Event of Default") until July 31, 1997; and
WHEREAS, Lender has agreed to: (i) amend the Agreement with respect to the
Minimum EBITDA covenant contained in subsection 6.3 thereof, (ii) amend the
Agreement to temporarily increase the aggregate amount of Letter of Credit
Liability, and (iii) waive the Existing Event of Default, subject to the terms
and conditions set forth herein;
NOW THEREFORE, in consideration of the mutual conditions and agreements set
forth in the Agreements and this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
ARTICLE I. DEFINITIONS
Section 1.01. Definitions. Capitalized terms used in this Amendment, to the
extent not otherwise defined herein, shall have the same meanings as in the Loan
Agreement, as amended hereby.
ARTICLE II. LIMITED WAIVER
Subject to satisfaction of the conditions set forth in Article IV herein,
Lender hereby waives the Existing Event of Default until July 31, 1997. This is
a limited waiver and shall not be deemed to constitute a waiver of any other
existing Events of Default or any future breach of the Agreement or any of the
other Loan Documents (including, without limitation, a breach of the covenant
causing the Existing Event of Default for any period other than that specified
herein).
<PAGE>
ARTICLE III. AMENDMENTS
Section 3.01. Amendment to Subsection 6.3 of the Loan Agreement. Subsection
6.3 is hereby amended and restated as follows:
6.3 Minimum EBITDA. Borrower shall have a minimum EBITDA for the two
(2) fiscal quarters ending July 31, 1997 of no more negative than
($1,850,000) and for the three (3) fiscal quarters ending October 31, 1997
of no more negative than ($2,250,000).
Section 3.02. Amendment to Subsection 2.1(G)(1) of the Loan Agreement.
Subsection 2.1(G)(1) is hereby amended and restated as follows:
(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 $2,000,000, with the exception of the period from June 1, 1997
to July 31, 1997, in which the aggregate amount of Letter of Credit
Liability outstanding at any time shall not exceed $3,000,000.
ARTICLE IV. MISCELLANEOUS
Section 4.01. Conditions. The effectiveness of this Amendment is subject to
the satisfaction of the following conditions precedent (unless specifically
waived in writing by Lender):
(a) there shall have occurred no material adverse change in the business,
operations, financial conditions, profits or prospects, or in the
Collateral of Borrower;
(b) Borrower shall have executed and delivered such other documents and
instruments as Lender may require; and
(c) all corporate proceedings taken in connection with the transactions
contemplated by this Amendment and all documents, instruments and
other legal matters incident thereto shall be satisfactory to Lender
and its legal counsel.
Section 4.02 Ratification. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Agreement and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement, are ratified and confirmed
and shall continue in full force and effect.
Section 4.03 Corporate Action The execution, delivery and performance of
this Amendment have been authorized by all requisite corporate action on the
part of Borrower and will not violate the Articles of Incorporation or Bylaws of
Borrower.
Section 4.04 Severability. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 4.05 Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of Lender and Borrower and their respective
successors and assigns.
Section 4.06 Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment on the date
first above written.
HELLER FINANCIAL, INC.,
as Lender
By:
Title:
THE RIGHT START, INC.,
as Borrower
By:
Title:
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT,
LIMITED WAIVER AND CONSENT
This Third Amendment to Loan and Security Agreement, Limited Waiver and
Consent("Amendment") is dated September 3, 1997 and entered into by and between
HELLER FINANCIAL, INC. ("Lender"), and THE RIGHT START, INC. ("Borrower").
WHEREAS, Lender and Borrower have entered into a Loan and Security
Agreement dated November 14, 1996 (as amended, the "Loan Agreement"); and
WHEREAS, an Event of Default is in existence under subsection 8.1(C) of the
Agreement as a result of Borrower's breach of the Minimum EBITDA covenant
contained in subsection 6.3 for the two (2) fiscal quarters ending July 31, 1997
(the "Existing Event of Default"); and
WHEREAS, Borrower has requested that Lender (i) waive the Existing Event of
Default, (ii) amend the EBITDA covenant, (iii) increase Lender's Letter of
Credit Liability, and (iv) consent to Borrower's sale of 1,500,000 shares of its
common stock; and
WHEREAS, Lender has agreed to Borrower's requests, subject to the terms and
conditions set forth herein.
NOW THEREFORE, in consideration of the mutual conditions and agreements set
forth in the Agreements and this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
1. Definitions. Capitalized terms used in this Amendment, to the
extent not otherwise defined herein, shall have the same meanings as in the
Loan Agreement, as amended hereby.
2. Amendments. The Agreement is hereby amended as follows:
(a) Subsection 2.1(G)(1) is deleted in its entirety and replaced with
the following:
(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 $3,000,000.
<PAGE>
(b) Subsection 6.3 is deleted in its entirety and replaced with the
following:
6.3 Minimum EBITDA. Borrower shall have a minimum EBITDA for the
two (2) fiscal quarters ending July 31, 1997 of no more negative than
($1,850,000) and for the three (3) fiscal quarters ending October 31,
1997 of no more negative than ($3,000,000).
3. Limited Waiver. Lender hereby waives the Existing Event of Default.
This is a limited waiver and shall not be deemed to constitute a waiver of
any other existing Events of Default or any future breach of the Agreement
or any of the other Loan Documents (including, without limitation, a breach
of the covenant causing the Existing Event of Default for any period other
than that specified herein).
4. Limited Consent. Notwithstanding the provisions of subsection 7.8
of the Agreement, entitled "Transactions with Affiliates", Lender hereby
consents to Borrower's sale of 1,500,000 shares of common stock pursuant to
that certain Securities Purchase Agreement dated as of September 4, 1997
among Borrower and the Purchasers (as defined therein) listed on the
signature pages thereto (a copy of which is attached hereto as Exhibit A,
the "Securities Purchase Agreement"), the net proceeds of which shall be
equal to at least $3,500,000 and be wire transferred directly to the
Blocked Account. This is a limited consent which shall be effective only
with respect to the specific facts set forth above. This limited consent
shall not be deemed to constitute a consent or waiver of any other term,
provision or condition of the Agreement or to prejudice any right or remedy
that Lender may now have or may have in the future under or in connection
with any of the Loan Documents.
5. Conditions. The effectiveness of this Amendment is subject to the
satisfaction of the following conditions precedent (unless specifically
waived in writing by Lender):
(a) there shall have occurred no material adverse change in the business,
operations, financial conditions, profits or prospects, or in the
Collateral of Borrower;
(b) Borrower shall have executed and delivered such other documents
and instruments as Lender may require;
(c) all corporate proceedings taken in connection with the transactions
contemplated by this Amendment and all documents, instruments and other
legal matters incident thereto shall be satisfactory to Lender and its
legal counsel;
<PAGE>
(d) Borrower shall have received net proceeds in an amount of at least
$3,500,000 from the sale of 1,500,000 shares of its common stock pursuant
to the Securities Purchase Agreement and wire transferred said proceeds to
the Blocked Account; and
(e) Borrower shall have paid Lender a documentation fee in the amount
of $500.00
Section 5.02 Ratification. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Agreement and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement, are ratified and confirmed
and shall continue in full force and effect.
Section 5.03 Corporate Action The execution, delivery and performance of
this Amendment have been authorized by all requisite corporate action on the
part of Borrower and will not violate the Articles of Incorporation or Bylaws of
Borrower.
Section 5.04 Severability. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 5.05 Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of Lender and Borrower and their respective
successors and assigns.
Section 5.06 Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment on the date
first above written.
HELLER FINANCIAL, INC.,
as Lender
By:
Title:
THE RIGHT START, INC.,
as Borrower
By:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> AUG-02-1997
<CASH> 374
<SECURITIES> 0
<RECEIVABLES> 439
<ALLOWANCES> 0
<INVENTORY> 7,271
<CURRENT-ASSETS> 10,912
<PP&E> 13,964
<DEPRECIATION> 3,597
<TOTAL-ASSETS> 22,715
<CURRENT-LIABILITIES> 6,905
<BONDS> 0
0
0
<COMMON> 18,632
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,715
<SALES> 19,889
<TOTAL-REVENUES> 20,049
<CGS> 10,231
<TOTAL-COSTS> 23,166
<OTHER-EXPENSES> 293
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 490
<INCOME-PRETAX> (3,900)
<INCOME-TAX> 20
<INCOME-CONTINUING> (3,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,920)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
