<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one) FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required effective October 7, 1996)
For the fiscal year ended January 31, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
Commission file no. 0-19536
THE RIGHT START, INC.
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(Exact name of registrant as specified in its charter)
California 95-3971414
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5388 Sterling Center Dr., Unit C, Westlake Village, California 91361
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(818) 707-7100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of April 15, 1998, approximately 3,134,963 shares of the Registrant's Common
Stock held by non-affiliates were outstanding and the aggregate market value of
such shares was approximately $6,662,000.
As of April 15, 1998 there were outstanding 10,103,639 shares of Common Stock,
no par value, with no treasury stock.
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on June 29, 1998 (the "Proxy Statement") are
incorporated by reference into Part III hereof.
Total number of pages in this report: ___
(Exhibit index located on page ___)
<PAGE>
This Annual Report on form 10-K contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Discussions
containing such forward-looking statements may be found in the material set
forth under Item 1. Business and Item 7. Management's Discussion and Analysis,
as well as within this Annual Report generally (including any document
incorporated by reference herein). Also, documents subsequently filed by the
Company with the Securities and Exchange Commission may contain forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors identified herein or
in other public filings by the Company, including but not limited to, the
Company's Registration Statement on Form S-3 (File No. 333-08175).
PART I
ITEM 1. BUSINESS
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GENERAL
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The Right Start, Inc. ("The Right Start" or "the Company") is a leading
merchant offering unique, high-quality products for infants and young children.
The Company markets its products through 40 retail stores and through The Right
Start Catalog. The Company is a market leader offering approximately 800 items
targeting infants and children from pre-birth up to age four. Products offered
are carefully selected to meet parents' baby care needs in such categories as
Nursery, Baby's Health, Feeding, Travel, Developmental and Apparel.
HISTORY
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The Company was formed in 1985 to capitalize upon growing trends towards the
use of mail order catalogs and the demand for high quality infants' and
children's goods. Until the formation of the Company, new parents' alternatives
were low-service mass merchant stores or sparsely-stocked, high-priced infant
and children specialty stores. To counter this, The Right Start carefully
screened infant and toddler products in order to identify those considered to be
the "best of the best," that is, the safest, most durable, best designed and
best valued items.
The Right Start then expanded its distribution channel beyond The Right Start
Catalog and into specialty retail sales through The Right Start stores. Based
on the results of the retail stores, the Company's strategy evolved to include a
reduction in The Right Start Catalog circulation and plans for a major retail
expansion.
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Management has always made customer service the Company's highest priority.
By offering to its customers sales associates with extensive product knowledge,
carefully selected and tested products, fast shipment that is generally less
than 48 hours from receipt of catalog orders, and a 24 hour a day/365 day a year
ordering capacity, The Right Start is able to differentiate itself from its
competitors.
RETAIL OPERATIONS
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At January 31, 1998, the Company had 43 stores in operation with 38 of these
located in major regional malls throughout the United States. The remaining
five stores are in Southern California: four in street locations and one in an
outlet mall. The stores' product mix includes a wide variety of items to meet
the needs of the parents of infants and small children, all presented within a
store designed to provide a safe, baby-friendly environment for the shopping
ease of new parents. The Company recently increased its offering to include an
expanded selection of infant care products, apparel and developmental items.
The number of stores open reflects the rapid growth that the Company
experienced in 1996 and early 1997, wherein 24 mall stores were opened. After
studying the results of both the mall and street locations, management concluded
that street locations represented a much more appropriate format for future
retail growth. These locations are more convenient to access and shop for the
Company's customers, many of whom are shopping with infants and small children.
Further, street locations are more cost efficient to build and operate.
Accordingly, the Company has adopted a store opening plan which calls for the
opening of six or more street-location stores in 1998.
In addition to reevaluating store location strategy, in 1997 the Company
determined that certain existing mall locations were not performing at an
acceptable level and implemented a store closing plan. Nine stores were
identified for closure and the Company is in the process of closing those of the
nine that have not already closed.
THE RIGHT START CATALOG
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The Right Start Catalog offers a mail order alternative for The Right Start
customers. This division of the Company represents the business on which the
Company was founded over twelve years ago, and it continues to offer a quality
selection of Right Start products through nationally distributed mail order
catalogs. Several attractive glossy issues are mailed each year, targeting the
Company's principal customers: educated, first-time parents from 23-40 years
old, with average annual income in excess of $60,000.
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ADVERTISING AND MARKETING
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The Right Start positions its mall stores in premier locations of top malls in
order to capitalize on the malls' ability to attract a high volume of customers.
Accordingly, minimal promotional advertising is done for these stores. For
street locations, additional marketing programs are done to establish an
awareness of the stores in the local markets. These programs include direct
mail pieces and local newspaper advertising. In addition, the stores' point of
sale system provides a strong marketing database. Customers' names and addresses
are captured and are then used for promotional mailings and other follow up.
Further, the Right Start Catalog provides effective marketing support for the
stores. Catalogs are distributed in existing and future retail markets to a
targeted customer base.
The Company reaches its catalog customers through extensive mailings of The
Right Start Catalog to qualified segments of the Company's own customer list and
selected rented lists. In order to achieve this efficiently, the customer list
is segmented by frequency, recency and size of purchase. Rented lists are
evaluated based on historical performance in The Right Start mailings and
availability of names meeting the Company's customer profile.
PURCHASING
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The Right Start purchases products from over 300 vendors. No single vendor
represents more than 4% of overall sales. In total, the Company imports
approximately 13% of the products offered and this source is expected to grow in
the next year as the Company expands its private label and import programs.
Imported items have historically had higher gross profit margins and tend to
provide more opportunities for the Company to offer a large selection of unique
goods.
RECENT DEVELOPMENTS
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Effective April 13, 1998, the Company completed a private placement of non-
interest bearing senior subordinated notes in an aggregate principal amount of
$3,850,000, together with warrants to purchase an aggregate of 3,850,000 shares
of common stock exercisable at $1.00 per share. The new securities were sold
for an aggregate purchase price of $3,850,000 and were purchased primarily by
affiliates of the Company. In connection with the sale of the new securities,
the Company entered into an agreement with all of the holders of the Company's
existing subordinated debt securities, representing an aggregate principal
amount of $6,000,000. Pursuant to the agreement, each holder agreed to exchange
all of its subordinated debt securities together with any warrants issued in
connection therewith, for newly issued preferred stock. Holders of $3,000,000
principal amount of existing subordinated debt securities elected to receive
Series A Preferred Stock which will have no fixed dividend rights, will not be
convertible into common stock and will be mandatorily redeemable by the
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Company in May 2002. Holders of $3,000,000 principal amount of existing
subordinated debt securities elected to receive Series B convertible preferred
stock which will have no fixed dividend rights, will be convertible into common
stock at a price per share of $1.50 and will not be mandatorily redeemable by
the Company. Holders of the $3,850,000 principal amount of new subordinated
debt securities elected to receive Series C convertible preferred stock which
will have no fixed dividend rights, will be convertible into common stock at a
price per share of $1.00 and will not be mandatorily redeemable by the Company.
The issuance of the shares of preferred stock upon exchange of the subordinated
debt securities is subject to approval of the Company's shareholders, which
approval the Company expects to obtain at its annual meeting scheduled to be
held in June 1998.
EMPLOYEES
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As of April 26, 1998, the Company employed 321 employees, approximately 55
percent of whom were part-time. During the retail holiday season, additional
temporary employees are hired. The Company's employees have not entered into
any collective bargaining agreements nor are they represented by union. The
Company considers its employee relations to be good.
COMPETITION
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The retail market for infant and toddler products is very competitive.
Significant competition currently comes from "big box" concept children's stores
which are becoming more and more prevalent. This type of operation offers
customers an extensive variety of products for children and is typically located
in up to 50,000 square feet of retail space, generally in lower real estate cost
locations. In addition, many national and regional mass merchants offer infant
and toddler products in conjunction with a full line of hard and soft goods.
The Right Start distinguishes itself from its competition by offering only
select, high-quality products in each category in a small, service-intense
environment.
There are a variety of general and specialty catalogs selling infants' and
children's items in competition with The Right Start Catalog. The Company
considers its primary catalog competition, however, to be "One Step Ahead,"
"Kids Club" by Perfectly Safe, and "Sensational Beginnings." These catalogs
emerged several years after The Right Start Catalog and directly compete by
offering a very similar product line at comparable price points to the same
target market.
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TRADEMARKS
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The Company has registered and continues to register, when deemed appropriate,
certain U.S. trademarks and trade names, including "The Right Start Catalog."
The Company considers these trademarks and tradenames to be readily identifiable
with, and valuable to, its business.
ITEM 2. PROPERTIES
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At January 31, 1998, The Right Start operated 43 retail stores in 16 states.
The Company leases each of its retail locations under operating leases with
lease terms ranging from six to ten years, including provisions for early
termination in most locations if certain sales levels are not achieved. At
certain locations, the Company has options to extend the term of the lease. In
most cases, rent provisions include a fixed minimum rent plus a contingent
percentage rent based on net sales of the store in excess of a certain
threshold.
The Right Start currently leases approximately 26,000 square feet of mixed use
space in Westlake Village, California. The Company's corporate office and first
retail store reside in this space. The building's lease agreement terminates in
April 1998. The Company is moving its corporate office to another location in
Westlake Village, California which it is leasing as a sub-tenant under an 18
month lease. The space being leased is approximately 13,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
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The Company is a party to various legal actions arising in the ordinary course
of business. In the opinion of management, any claims which may occur are
adequately covered by insurance or are without merit. The Company believes that
the ultimate outcome of these matters will not have a material adverse effect on
the Company's financial position or results of operations.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS'
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MATTERS
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The Company's common stock is traded on the Nasdaq National Market system
under the symbol RTST. The Company's stock is held of record by approximately
126 registered shareholders as of April 15, 1998. The following table sets
forth the range of high and low bid prices on the Nasdaq National Market for the
Common Stock for the periods indicated.
<TABLE>
<CAPTION>
Bid Price
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High Low
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<S> <C> <C>
Fiscal 1997
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First Quarter $5.50 $2.13
Second Quarter 3.38 2.25
Third Quarter 3.50 2.38
Fourth Quarter 2.69 1.75
Transition Period
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First Quarter 6.88 4.25
Second Quarter 5.63 4.56
Third Quarter (1) 6.38 5.00
</TABLE>
1) Covers the period from December 1, 1996 to February 1, 1997, the date to
which the Company changed its fiscal year end
The Company has not paid dividends on its common stock and presently intends to
continue this policy. In addition, the Company's credit agreement contains a
number of financial covenants which may, among other things, limit the
Company's ability to pay dividends.
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ITEM 6. SELECTED FINANCIAL DATA - (Dollars in thousands except share
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data)
<TABLE>
<CAPTION>
FISCAL YEAR TRANSITION FISCAL YEAR
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1997 PERIOD 1996 1995 1994
EARNINGS DATA
Revenues:
<S> <C> <C> <C> <C> <C>
Net sales $ 38,521 $ 27,211 $ 40,368 $ 44,573 $ 49,204
Other revenues 877 1,168 1,311
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38,521 27,211 41,245 45,741 50,515
Net income (loss) (9,241) (5,378) (3,899) (2,106) 176
Earnings (loss) per share (1.01) (0.67) (0.60) (0.33) 0.03
SHARE DATA
Weighted average
shares outstanding 9,188,172 8,006,190 6,536,813 6,300,000 6,637,142
BALANCE DATA SHEET
Current assets $ 8,908 $ 11,704 $ 8,353 $ 9,660 $ 12,002
Total assets 18,462 22,982 17,475 14,632 18,221
Current liabilities 4,796 8,457 4,649 3,690 4,979
Long-term debt 8,734 5,643
Shareholders' equity 3,307 7,172 11,902 10,694 12,800
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATION
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RESULTS OF OPERATIONS
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This discussion should be read in conjunction with the information
contained in the Financial Statements and accompanying Notes thereto of the
Company appearing elsewhere in this Form 10-K.
Transition Period results have been presented and discussed to provide the
reader with an understanding of the Company's financial condition and results of
operations. Comparisons have been made, based on the significant operating
factors in each period, to the current fiscal year, the comparable period of the
Fiscal 1996 and based on annualized Transition Period data. Annualized data was
computed by multiplying the thirty-three week results by 1.58. Where annualized
results are used, these calculations have been presented for purposes of
analysis only.
FISCAL 1997 COMPARED WITH TRANSITION PERIOD
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Revenues for Fiscal 1997 were $38.5 million compared to $27.2 million for
the Transition Period ($43.0 million annualized). Retail net sales were $31.1
million in Fiscal 1997 and $19.6 million in the Transition Period ($31.0 million
annualized); catalog net sales were $7.4 million in Fiscal 1997 and $7.6 million
in the Transition Period ($12.1 million annualized). Retail net sales were flat
between Fiscal 1997 and the annualized Transition Period, reflecting the partial
year impact of three new stores opened in early Fiscal 1997 and three new stores
opened at the end of the year, offset by same-store sales declines. The 39%
decline in annualized catalog net sales reflects the continued downsizing of the
Company's catalog circulation. Fiscal 1997 circulation was down 32% compared to
the annualized Transition Period circulation. This reflects the Company's plan
to reduce the mailings of the catalog to operate it at a more profitable level.
Cost of goods sold represented 50% of net sales in Fiscal 1997 and 53% in
the Transition Period. The Company has achieved better gross margins in Fiscal
1997, continuing the favorable trend in gross margin that began in the
Transition Period. At the same time, average inventory turns have increased
from two times in the Transition Period to three times in Fiscal 1997. This
reflects the ongoing effort to right size inventory levels and minimize the need
for markdowns.
Operating expenses increased as a percentage of net sales to 50% or $19.2
million in Fiscal 1997 compared to 46% in the Transition Period or $12.6
million. Included in operating expenses in Fiscal 1997 and the Transition
Period are retail occupancy costs of $5.9 million or 15% of sales and $2.9
million or 11% of sales, respectively. The remaining $13.3 million or 35% of
sales and $9.7 million or 36% of sales, respectively, are payroll and other
operating expenses. These costs have decreased as a percentage of sales,
reflecting management's
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on-going attention to cost reductions. The burden of fixed occupancy costs in
light of the decline in same-store-sales had a negative impact on the Company's
results for Fiscal 1997. This fact is a major part of the Company's decision to
focus its retail expansion plans on street locations, wherein occupancy and
other fixed operating costs are substantially lower than in mall locations.
General and administrative expenses were $3.9 million in Fiscal 1997
compared to $2.9 million in the Transition Period ($4.6 million annualized).
The 16% decline in general and administrative expenses between the annualized
Transition Period and Fiscal 1997 reflects the impact of payroll and other
overhead cost reductions made in connection with the Company's ongoing efforts
to reduce expenses.
Pre-opening cost amortization was $.7 million in Fiscal 1997 compared to
the annualized Transition Period expense of $.8 million. The decrease is due to
the reduction in the number of stores opened in Fiscal 1997. In the third
quarter of Fiscal 1997, the Company changed its method of accounting for pre-
opening costs and began expensing them in the first full month of the store's
operations. Previously, the Company deferred pre-opening costs and amortized
them over twelve months.
Depreciation and amortization expense increased to $1.6 million in Fiscal
1997 compared to $.8 million ($1.3 million annualized) in the Transition Period.
The increase results from a full-year impact of the addition of build-outs and
equipment for the new stores opened during the Transition Period and the
partial-year impact of stores opened during Fiscal 1997.
Interest expense, net increased from $.2 million in the Transition Period
($.3 million annualized) to $1.1 million in Fiscal 1997. This reflects the
interest charge on the Company's borrowings under its credit facility and
subordinated debt issuances which funded operating losses and growth.
Included in other expense of $1.9 million in Fiscal 1997 are the costs
incurred in the write-off of assets and expenses associated with the move of the
Company's east coast warehouse facilities and store closures.
TRANSITION PERIOD COMPARED WITH FISCAL 1996
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Revenues for the Transition Period were $27.6 million compared to $41.8
million for Fiscal 1996. Catalog net sales for the Transition Period were $7.6
million and were $16.6 million for the comparable period of Fiscal 1996. The
54% decline in catalog net sales was a result of a significant decrease in
catalog circulation. The decrease in circulation reflects management's efforts
to discontinue the summer sale catalog which generated very low margin sales and
eliminate circulation to unprofitable mailing lists.
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Retail net sales were $19.6 million for the Transition Period compared to
$17.1 million for Fiscal 1996. Annualized Transition Period retail net sales
were $30.8 million. The increase in retail net sales was a result of the
Company's retail expansion; 37 stores were open at February 1, 1997 as compared
to 22 at June 1, 1996. Further, the Transition Period includes the benefit of a
full period's results for the eleven stores opened in Fiscal 1996.
Cost of goods sold represented 53% of net sales in the Transition Period
and 54% of net sales in Fiscal 1996. The improvement in gross margin reflected
the net positive impact of steadily improved margins beginning in Fall 1996,
offset by lower margins generated at the beginning of the Transition Period due
to heavy promotional activity to improve the Company's inventory position. The
margin improvement was attributed to better management of inventory levels and
the elimination of excessive mark-down promotions.
Operating expense was $12.6 million, or 46% of net sales, in the Transition
Period compared to $18.3 million, or 45% of net sales, in Fiscal 1996. The
increase was primarily attributed to the addition of senior retail operations
management and increased telemarketing costs for the catalog.
General and administrative expense in the Transition Period was $2.9
million (or $4.6 million annualized) compared to $4.3 million in Fiscal 1996.
The increase reflected the investment made in executive and senior management in
the merchandising areas to support the Company's new retail stores and implement
the Company's merchandising strategy, offset by decreases in certain general
corporate overhead expenses.
The Transition Period increase in pre-opening cost amortization of $110,000
(or $414,000 on an annualized basis) compared to $418,000 in Fiscal 1996
resulted from the retail expansion over the last two years. The Company
amortized its new store opening costs over the first twelve months of each
store's operations.
Depreciation and amortization was $833,000 during the Transition Period
($1,313,000 annualized) as compared to $938,000 in Fiscal 1996. The increase was
due to the increase in property and equipment resulting from the construction of
new stores and installation of the Company's new information system.
Other expense of $851,000 incurred during the Transition Period was
primarily attributed to the following: The Company's former President resigned
in October 1996 resulting in a $280,000 severance charge; the Company prepaid
its line of credit upon funding of its new credit facility (see Liquidity and
Capital Resources) resulting in $145,000 of prepayment charges; and the Company
had taken action to close two unprofitable retail store locations, which has
resulted in a write-off of $425,000 in non-recoverable assets. The $450,000 of
Other expense in Fiscal 1996 resulted from the severance charge associated with
the resignation of the Company's former Chief Executive Officer.
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The Company recognized $207,000 of income tax expense for the Transition
Period. This charge resulted from management's revaluation of the deferred tax
asset. In evaluating the deferred tax asset, management considered the Company's
plans and projections and available tax planning strategies.
LIQUIDITY AND CAPITAL RESOURCES
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During Fiscal 1997, the Company's primary sources of liquidity were from
borrowings under its $13 million senior credit facility (the "Credit Facility")
and proceeds from the sale of $3.0 million of subordinated debentures with
warrants. These sources financed the Company's operations and capital
expenditures. Capital expenditures of approximately $2.0 million were incurred
in new store openings and refurbishing several of the Company's older stores.
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 January 31, 1998, borrowings of $2,014,000
and $3,000,000 were outstanding under the Revolving Line and the Capex Line,
respectively, and $1,081,000 was available under the Revolving Line. The Credit
Facility terminates on November 19, 1999 and on such date all borrowings
thereunder are immediately due and payable. Borrowings under the Credit
Facility are secured by substantially all of the Company's assets.
The Credit Facility, as amended, requires the Company at all times to
maintain net worth (defined to include equity and subordinated debt) of at least
$8 million. The Credit Facility also limits the Company's earnings before
interest, taxes, depreciation and amortization (EBITDA) to the following loss
amounts: $1.2 million for the three months ended April 30, 1998 and the six
months ended July 31, 1998, $900,000 for the nine months ended October 31, 1998
and the twelve months ended January 31, 1999 and $500,000 for the twelve months
ended April 30, 1999. Minimum EBITDA of zero is required for the twelve months
ended July 31, 1999 and $400,000 for the twelve months ended October 31, 1999.
In addition, capital expenditures are limited to $1,750,000 in fiscal years 1998
and 1999.
The Company's ability to fund its operations, open new stores and maintain
compliance with the Credit Facility is dependent on its ability to generate
sufficient cash flow from operations and obtain additional financing as
described below. 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 and the extension of credit by
the Company's suppliers and impact the Company's operations.
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In order to enhance the Company's liquidity and improve its capital
structure, the Company completed a private placement of non-interest bearing
senior subordinated notes in an aggregate principal amount of $3,850,000,
together with warrants to purchase an aggregate of 3,850,000 shares of common
stock exercisable at $1.00 per share. The new securities were sold for an
aggregate purchase price of $3,850,000 and were purchased principally by
affiliates of the Company. In connection with the sale of the new securities,
the Company entered into an agreement with all of the holders of the Company's
existing subordinated debt securities, representing an aggregate principal
amount of $6,000,000. Pursuant to the agreement, each holder agreed to exchange
all of its subordinated debt securities together with any warrants issued in
connection therewith, for newly issued preferred stock. Holders of $3,000,000
principal amount existing subordinated debt securities elected to receive Series
A Preferred Stock which will have no fixed dividend rights, will not be
convertible into common stock and will be mandatorily redeemable by the Company
in May 2002. Holders of $3,000,000 principal amount existing subordinated debt
securities elected to receive Series B convertible preferred stock which will
have no fixed dividend rights, will be convertible into common stock at a price
per share of $1.50 and will not be mandatorily redeemable by the Company.
Holders of the $3,850,000 principal amount of new subordinated debt securities
elected to receive Series C convertible preferred stock which will have no fixed
dividend rights, will be convertible into common stock at a price per share of
$1.00 and will not be mandatorily redeemable by the Company. The issuance of
the shares of preferred stock upon exchange of the subordinated debt securities
is subject to the approval of the Company's shareholders, which approval the
Company expects to obtain at its annual meeting scheduled to be held in June
1998.
In connection with the above restructuring, the holders of $6.0 million
principal amount of subordinated debt permanently waived their rights to receive
interest payments and agreed to exchange such debt for preferred stock,
resulting in the elimination of approximately $.6 million in annual interest
payments. In addition, the proceeds from the Company's private placement of
$3,850,000 were used to pay off the Company's revolving line of credit.
SEASONALITY
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The Company's business is not as significantly impacted by seasonal
fluctuations, as compared to many other specialty retail and catalog operations.
The Right Start's products are for the most part need-driven and the customer is
often the end user of the product. However, the Company does experience
increased sales during the Christmas holiday season.
IMPACT OF INFLATION
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The impact of inflation on results of operations has not been significant.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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The financial statements and supplementary data of the Company are as set
forth in the "INDEX TO FINANCIAL STATEMENTS" on the following page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The information contained in the Company's Proxy Statement under the
captions "Executive Officers" and "Election of Directors" is incorporated herein
by reference. The Company's Proxy Statement will be filed with the Securities
and Exchange Commission no later than 120 days after the close of Fiscal 1997.
ITEM 11. EXECUTIVE COMPENSATION
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The information contained in the Company's Proxy Statement under the
caption "Executive Compensation and Other Information" is incorporated herein by
reference. The Company's Proxy Statement will be filed with the Securities and
Exchange Commission no later than 120 days after the close of Fiscal 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The information contained in the Company's Proxy Statement under the
caption "Principal Shareholders and Management" is incorporated herein by
reference. The Company's Proxy Statement will be filed with the Securities and
Exchange Commission no later than 120 days after the close of Fiscal 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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The information contained in the Company's Proxy Statement under the
caption "Certain Relationships and Related Transactions" is incorporated herein
by reference. The Company's Proxy Statement will be filed with the Securities
and Exchange Commission no later than 120 days after the end of Fiscal 1997.
14
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT.
(1) FINANCIAL STATEMENTS: PAGE
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<TABLE>
<S> <C>
Report of Independent Accountants F-1
Balance Sheet --
January 31, 1998 and February 1, 1997 F-2
Statement of Operations - Periods Ended
January 31, 1998, February 1, 1997 and June 1, 1996 F-3
Statement of Changes in
Shareholders' Equity -- Periods Ended
January 31, 1998, February 1, 1997 and
June 1, 1996 F-4
Statement of Cash Flows --
Periods Ended January 31, 1998,
February 1, 1997 and June 1, 1996 F-5
Notes to Financial Statements F-6
(2) FINANCIAL STATEMENT SCHEDULES:
Valuation Reserves F-16
</TABLE>
All other financial statement schedules are omitted because they are either
not applicable or the required information is shown in the
financial statements or notes thereto.
15
<PAGE>
(3) LISTING OF EXHIBITS
The following exhibits are filed as part of, or incorporated by reference
into, this annual report:
INDEX TO EXHIBITS
EXHIBIT
NUMBER
- ------
3.1 Amended and Restated Articles of Incorporation
of the Company, dated August 12, 1991/*/
3.1.1 Amendment to Articles of Incorporation, dated
August 20, 1991*
3.1.2 Form of Amendment to Articles of Incorporation,
dated August 24, 1991*
3.2 Bylaws of the Company, as amended*
3.3 Specimen Certificate of the Common Stock
(without par value)*
10.1 1991 Key Employee Stock Option Plan*
10.2 Stock Option Grant to Stanley Fridstein, dated
March 15, 1991, as amended*
10.3 Stock Option Grant to Lenny Targon, dated
March 15, 1991, as amended*
10.4 Form of Indemnification Agreement between
Registrant and its directors and executive
officers*
10.5 Asset Purchase Agreement for Acquisition of
the Assets of Small People, Inc. and Jimash
Corporation by Right Start Subsidiary I, Inc.*
10.6 Software License Agreement between the Registrant
and Marriner Systems, Inc., dated April 27, 1994*
10.7 1995 Non-employee Directors Option Plan*
10.8 Registration Rights Agreement between Registrant and Kayne Anderson
Non-Traditional Investments LP, ARBCO Associates LP, Offense Group
Associates LP, Opportunity Associates LP, Fred Kayne, Albert O.
Nicholas and Primerica Life Insurance Company*
- -------------------------
/*/ Previously filed.
16
<PAGE>
10.9 Termination and Release Agreement between The Right Start, Inc. and
Lenny M. Targon dated February 28, 1996*
10.10 Asset Purchase Agreement dated as of July 29, 1996 by and between
Blasiar, Inc. (DBA Alert Communications Company) and The Right Start,
Inc.*
10.11 Termination and Release Agreement Inc. and Stanley M. Fridstein dated
between The Right Start, as of September 19, 1996*
10.12 Convertible Debenture Purchase Agreement between The Right Start, Inc.
and Cahill, Warnock Strategic Partners Fund, LP dated as of October 11,
1996*
10.13 Convertible Debenture Purchase Agreement between The Right Start, Inc.
and Strategic Associates, LP dated as of October 11, 1996*
10.14 Registration Rights Agreement dated October 11, 1996 between The Right
Start, Inc. and Strategic Associates, L.P.
10.15 Registration Rights Agreement dated October 11, 1996 between The Right
Start, Inc. and Cahill, Warnock Strategic Partners Fund, L.P.
10.16 Loan and Security Agreement dated as of November 14, 1996 between The
Right Start, Inc. and Heller Financial, Inc.*
10.17 First Amendment to Loan and Security Agreement and Limited Waiver and
Consent*
10.18 Registration Rights Agreement dated May 6, 1997 between The Right
Start, Inc. and certain Kayne Anderson funds, Cahill, Warnock Strategic
Partners Fund, L.P., Strategic Associates, L.P., The Travelers
Indemnity Company and certain other investors named therein
10.19 Registration Rights Agreement dated September 4, 1997 between The Right
Start, Inc. and certain Kayne Anderson funds, Cahill, Warnock Strategic
Partners Fund, L.P., The Travelers Indemnity Company and certain other
investors named therein
10.20 The Right Start, Inc. Letter Agreement dated as of April 6, 1998*
10.21 The Right Start, Inc. Amendment to Letter Agreement dated as of April
13, 1998*
10.22 The Right Start, Inc. Securities Purchase Agreement dated as of April
13, 1998 between the Company and certain investors listed therein with
respect to the Company's Senior Subordinated Notes due May 6, 2000 and
warrants to purchase the Company's common stock.*
17
<PAGE>
10.23 Registration Rights Agreement dated April 13, 1998 between The Right
Start, Inc. and the investors named therein
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
There were no Reports on Form 8-K filed during the last quarter of Fiscal
1997.
(c) A list of exhibits included as part of this report is set forth in Part 1V
of this Annual Report on Form 10-K above and is hereby incorporated by reference
herein.
(d) Not applicable
18
<PAGE>
SIGNATURES
Pursuant to the requirement of Sections 13 and 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE RIGHT START, INC.
(Registrant)
Dated: May 1, 1998 /s/ Jerry R. Welch
------------------------------
Jerry R. Welch
Chairman of the Board, Chief
Executive Officer and
President
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Jerry R. Welch May 1, 1998
- -------------------------------
Jerry R. Welch, Chairman of the
Board, Chief Executive Officer
and President
/s/ Richard A. Kayne May 1, 1998
- -------------------------------
Richard A. Kayne, Director
/s/ Andrew D. Feshbach May 1, 1998
- --------------------------------
Andrew D. Feshbach, Director
/s/ Robert R. Hollman May 1, 1998
- --------------------------------
Robert R. Hollman, Director
/s/ Fred Kayne May 1, 1998
- --------------------------------
Fred Kayne, Director
/s/ Howard M. Zelikow May 1, 1998
- --------------------------------
Howard M. Zelikow, Director
/s/ Gina M. Shauer May 1, 1998
- --------------------------------
Gina M. Shauer, Chief Financial
Officer (Principal Financial and
Accounting Officer)
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and
Shareholders of The Right Start, Inc.
In our opinion, the financial statements listed in the index appearing under
Item 14(a) (1) and (2) on page 15 present fairly, in all material respects, the
financial position of The Right Start, Inc. at January 31, 1998 and February 1,
1997, and the results of its operations and its cash flows for the fiscal year
ended January 31, 1998, the thirty-three weeks ended February 1, 1997 and the
fiscal year ended June 1, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
\s\ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Los Angeles, California
March 6, 1998, except as to
Note 11 which is as of
April 13, 1998
F-1
<PAGE>
THE RIGHT START, INC.
BALANCE SHEET
-------------
<TABLE>
<CAPTION>
January 31, February 1,
1998 1997
---- ----
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash $ 240,000 $ 313,000
Accounts receivable 328,000 938,000
Note receivable 77,000 200,000
Merchandise inventories 6,602,000 7,664,000
Prepaid catalog expenses 297,000 782,000
Deferred pre-opening costs, net 50,000 543,000
Other current assets 1,314,000 1,264,000
----------- -----------
8,908,000 11,704,000
----------- -----------
Property, plant and equipment, net 8,115,000 9,841,000
Other assets 39,000 37,000
Deferred income tax benefit 1,400,000 1,400,000
----------- -----------
9,554,000 11,278,000
----------- -----------
$18,462,000 $22,982,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 2,372,000 $ 6,076,000
Accrued salaries and bonuses 380,000 517,000
Advance payments on orders 30,000 31,000
Revolving line of credit 2,014,000 1,833,000
----------- -----------
4,796,000 8,457,000
------------ -----------
Note payable 3,000,000 2,643,000
Senior subordinated notes, net of unamortized
discount of $266,000 2,734,000
Subordinated convertible debentures 3,000,000 3,000,000
Deferred rent 1,625,000 1,710,000
Commitments and contingencies
Shareholders' equity:
Common stock (25,000,000 shares authorized,
no par value; 10,103,639 and 8,153,639 shares
issued and outstanding, respectively) 22,337,000 16,961,000
Accumulated deficit (19,030,000) (9,789,000)
----------- -----------
3,307,000 7,172,000
----------- -----------
$18,462,000 $22,982,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
THE RIGHT START, INC.
STATEMENT OF OPERATIONS
-----------------------
<TABLE>
<CAPTION>
Fiscal Year Thirty-three Fiscal Year
Ended Weeks Ended Ended
January 31, February 1, June 1,
1998 1997 1996
----------- ------------ -------------
<S> <C> <C> <C>
Net sales:
Retail $31,107,000 $ 19,576,000 $ 17,075,000
Catalog 7,414,000 7,635,000 23,293,000
Other revenues 877,000
----------- ------------ -------------
38,521,000 27,211,000 41,245,000
----------- ------------ -------------
Costs and expenses:
Cost of goods sold 19,244,000 14,417,000 21,605,000
Operating expense 19,212,000 12,608,000 18,282,000
General and administrative expense 3,912,000 2,941,000 4,341,000
Pre-opening cost amortization 711,000 528,000 418,000
Depreciation and amortization expense 1,608,000 833,000 938,000
----------- ------------ -------------
44,687,000 31,327,000 45,584,000
----------- ------------ -------------
Operating loss (6,166,000) (4,116,000) (4,339,000)
Interest expense, net 1,143,000 204,000 37,000
Other expense, net 1,905,000 851,000 450,000
----------- ------------ -------------
Loss before income taxes (9,214,000) (5,171,000) (4,826,000)
Income tax provision (benefit) 27,000 207,000 (927,000)
----------- ------------ -------------
Net loss ($ 9,241,000) ($5,378,000) ($ 3,899,000)
============ =========== ============
Loss per share ($ 1.01) ($ 0.67) ($ 0.60)
============ =========== ============
Weighted average number of shares outstanding 9,188,172 8,006,190 6,536,813
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
THE RIGHT START, INC.
STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
--------------------
<TABLE>
<CAPTION>
Common Stock
---------------------
Shares Amount Accumulated Deficit
------ ------ -------------------
<S> <C> <C> <C>
Balance at May 31, 1995 6,300,000 $11,206,000 ($ 512,000)
Issuance of shares pursuant
to a rights offering 1,578,806 4,906,000
Issuance of shares pursuant
to the exercise of stock options 60,500 201,000
Net loss (3,899,000)
--------- ---------- -----------
Balance at June 1, 1996 7,939,306 16,313,000 (4,411,000)
Issuance of shares pursuant
to the exercise of stock options 214,333 648,000
Net loss (5,378,000)
--------- ---------- ----------
Balance at February 1, 1997 8,153,639 16,961,000 (9,789,000)
Issuance of shares pursuant
to the exercise of stock options 440,000 1,320,000
Issuance of shares pursuant to a
private placement 1,510,000 3,705,000
Issuance of common stock warrants
in conjunction with sale of senior
subordinated notes 351,000
Net loss (9,241,000)
--------- --------- ----------
Balance at January 31, 1998 10,103,639 $22,337,000 ($19,030,000)
========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
THE RIGHT START, INC.
STATEMENT OF CASH FLOWS
-----------------------
<TABLE>
<CAPTION>
Fiscal Year Thirty-three Fiscal Year
Ended Weeks Ended Ended
January 31, February 1, June 1,
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss ($9,241,000) ($5,378,000) ($3,899,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and amortization 1,608,000 833,000 938,000
Pre-opening cost amortization 711,000 528,000 418,000
Amortization of discount on
senior subordinated notes 85,000
Loss on store closings and
relocation 1,580,000
Change in assets and
liabilities affecting
operations (1,316,000) (957,000) 506,000
----------- ----------- -----------
Net cash used in
operating activities (6,573,000) (4,974,000) (2,037,000)
----------- ----------- -----------
Cash flows from investing
activities:
Additions to property,
plant and equipment (2,063,000) (3,607,000) (4,165,000)
Proceeds from sale of
telemarketing center 298,000
----------- ----------- -----------
Net cash used in
investing activities (2,063,000) (3,309,000) (4,165,000)
----------- ----------- -----------
Cash flows from financing
activities:
Net proceeds from borrowings
under revolving line of
credit 181,000 1,833,000
Proceeds from borrowings under
note payable 357,000 2,643,000
Proceeds from private placement
of common stock 3,705,000
Proceeds from issuance of
subordinated convertible
debentures 3,000,000
Proceeds from common stock
issued upon exercise of
stock options 1,320,000 648,000 201,000
Proceeds from sale of senior
subordinated notes 3,000,000
Proceeds from common stock
issued pursuant a rights
offering 4,906,000
----------- ----------- -----------
Cash provided by financing
activities 8,563,000 8,124,000 5,107,000
----------- ----------- -----------
Net decrease in cash (73,000) (159,000) (1,095,000)
Cash at beginning of period 313,000 472,000 1,567,000
----------- ----------- -----------
Cash at end of period $ 240,000 $ 313,000 $ 472,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
THE RIGHT START, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
- ------------------------------------------------------------
The Company
- -----------
The Right Start, Inc. (the Company) is a specialty merchant of infants' and
children's products throughout the United States. In 1991, the Company
completed the sale of 2,300,000 shares of its common stock in an initial public
offering. Prior to that, it was a wholly owned subsidiary of American
Recreation Centers, Inc. (ARC). ARC maintained majority ownership of the
Company through July 1995. In August 1995, an investment group led by Kayne,
Anderson Investment Management, Inc. (KAIM) acquired the 3,937,000 shares of
common stock owned by ARC.
Fiscal Year
- -----------
The Company has a fiscal year consisting of fifty-two or fifty-three weeks
ending on the Saturday closest to the last day in January. Effective January
1997, the Company changed its fiscal year which had been the fifty-two or fifty-
three weeks ending on the Saturday closest to the last day in May. The change
in year end resulted in a thirty-three week transition period from June 2, 1996
to February 1, 1997 ("the Transition Period"). The fiscal years ended January
31, 1998 ("Fiscal 1997") and June 1, 1996 ("Fiscal 1996") were fifty-two week
periods.
Revenue Recognition
- -------------------
Retail sales are recorded at time of sale or when goods are delivered. Catalog
sales are recorded at the time of shipment. The Company provides for estimated
returns at the time of the sale.
Merchandise Inventories
- -----------------------
Merchandise inventories consist of products purchased for resale and are stated
at the lower of cost or market value. Cost is determined on a first-in, first-
out basis.
Prepaid Catalog Expenses
- ------------------------
Prepaid catalog expenses consist of the costs to produce, print and distribute
catalogs. These costs are amortized over the expected sales life of each
catalog. Catalog production expenses of $2,753,000, $1,844,000, and $6,061,000
were recorded in Fiscal 1997, the Transition Period and Fiscal 1996,
respectively.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method based upon the estimated
useful lives of the assets, generally three to ten years. Amortization of
leasehold improvements is based upon the term of the lease or the estimated
useful life of the leasehold improvements, whichever is shorter.
F-6
<PAGE>
NOTE 1: (Continued)
- ------
Store Opening Costs
- -------------------
Effective October 1, 1997, the Company changed the way costs incurred in opening
stores are recognized. Previously, these costs had been deferred and amortized
over 12 months commencing with the store opening. After the effective date, any
pre-opening costs incurred for new stores were recognized as current period
charges. The impact of this change was not significant to the Company's results
of operations or financial position.
Deferred Rent
- -------------
The Company recognizes rent expense on a straight-line basis over the life of
the underlying lease. The benefit from tenant allowances and landlord
concessions are recorded as deferred rent and recognized over the lease term.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standard No. 109 (FAS 109), "Accounting for Income Taxes." FAS 109
requires an asset and liability approach under which deferred tax liabilities
and assets are recognized for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other assets and
liabilities.
During the periods that the Company was majority owned by ARC, the Company
provided for income taxes as a separate taxpayer. State income taxes were
settled pursuant to an informal tax sharing agreement and the Company filed a
separate federal income tax return.
Per Share Data
- --------------
Basic per share data is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding.
Stock-Based Compensation
- ------------------------
Compensation cost attributable to stock option plans is recognized based on the
difference, if any, between the closing market price of the stock on the date of
grant over the exercise price of the option. The Company has not issued any
stock options with an exercise price less than the closing market price of the
stock on the date of grant.
Reclassifications
- -----------------
Certain reclassifications have been made to conform prior period amounts to
current year presentation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-7
<PAGE>
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT, NET:
- --------------------------------------------
January 31, February 1,
1998 1997
----------- -----------
Property, plant and equipment, at cost:
Machinery, furniture and equipment $ 3,669,000 $ 3,728,000
Leaseholds and leasehold improvements 6,683,000 7,676,000
Construction in progress 551,000
Computer software 821,000 693,000
----------- -----------
11,173,000 12,648,000
Accumulated depreciation and amortization (3,058,000) (2,807,000)
----------- -----------
$ 8,115,000 $ 9,841,000
=========== ===========
Depreciation and amortization expense for property, plant and equipment amounted
to $1,608,000, $833,000 and $935,000, for Fiscal 1997, the Transition Period and
Fiscal 1996, respectively.
NOTE 3 - CREDIT AGREEMENTS:
- --------------------------
In November 1996, the Company entered into an agreement with a financial
institution for a $13 million credit facility. The $13 million facility consists
of a $3 million capital expenditure facility and a $10 million revolving credit
line for working capital. The loan agreement, as amended, is for a period of
three years, is secured by substantially all the Company's assets, includes
dividend restrictions and requires that certain financial covenants, including
minimum net worth, be maintained. Interest accrues on the revolving line of
credit at prime plus 1% and at prime plus 1 1/2% on the capital expenditure
facility. At January 31, 1998, the bank's prime rate of interest was 8.50%.
Effective May 6, 1997, the Company sold subordinated debt and warrants to
purchase common stock, certain of the purchasers of which 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.
Subsequent to year end, these subordinated debentures were exchanged in
connection with a capital restructuring. See Note 11.
The Company issued and sold subordinated convertible debentures in the aggregate
principal amount of $3 million effective October 11, 1996. The terms of such
debentures, as amended, permit the holders to convert the principal amount into
750,000 shares of the Company's common stock at $4.00 per share at any time
prior to May 31, 2002, the due date of the debentures. The debentures bear
interest at a rate of 8% per annum. The debentures were exchanged in
conjunction with a capital restructuring in April 1998. See Note 11.
F-8
<PAGE>
NOTE 4 - INCOME TAXES:
- ---------------------
The provision (benefit) for income taxes is comprised of the following:
Fiscal Year Thirty-three Fiscal Year
Ended weeks ended Ended
January 31, February 1, June 1,
1998 1997 1996
----------- ----------- -----------
Current provision:
Federal $1,000
State $27,000
Deferred provision (benefit):
Federal (928,000)
Adjustment to valuation allowance $207,000
------- -------- --------
$27,000 $207,000 ($927,000)
======= ======== =========
The Company's effective income tax rate differed from the federal statutory rate
as follows:
<TABLE>
<CAPTION>
Fiscal Year Thirty-three Fiscal Year
Ended weeks ended Ended
January 31, February 1, June 1,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
State income taxes, net of federal benefit 3 1 3
Stock options 4
Valuation allowance (39) (45) (19)
Other 2 2 1
---- ---- ---
Effective tax rate 0 % (4)% 19%
==== ==== ===
</TABLE>
F-9
<PAGE>
NOTE 4: (Continued)
- -------
Deferred tax liabilities (assets) are comprised of the following:
January 31, February 1, June 1,
1998 1997 1996
----------- ----------- --------
Depreciation and amortization $200,000 $236,000 $112,000
Pre-opening costs 21,000 225,000 220,000
Other 64,000 68,000 11,000
-------- -------- --------
Deferred tax liabilities 285,000 529,000 343,000
-------- -------- --------
Deferred rent (839,000) (708,000) (380,000)
Sales returns and other reserves (1,058,000) (277,000) (184,000)
Net operating loss carryforward (6,799,000) (4,157,000) (2,256,000)
Other tax carryforwards (68,000) (67,000) (70,000)
---------- ---------- ----------
Deferred tax assets (8,764,000) (5,209,000) (2,890,000)
---------- ---------- ----------
Valuation allowance 7,079,000 3,280,000 940,000
---------- ---------- ----------
Net deferred tax asset ($1,400,000) ($1,400,000) ($1,607,000)
========== ========== ==========
The Company's deferred tax asset is net of a valuation allowance of $7,079,000.
In evaluating the deferred tax asset, management considered the Company's
projections and available tax planning strategies.
The Company has federal and state net operating loss carryforwards at January
31, 1998 of $18,499,000 and $6,844,000, respectively. These carryforwards will
expire in fiscal years ending 2002 through 2012.
NOTE 5 - SALE OF TELEMARKETING CENTER:
- -------------------------------------
In July 1996, the Company sold its phone center operations to a telemarketing
services provider for approximately $500,000, $250,000 of which was in cash and
the remainder of which was in a two-year note secured by the assets of the phone
center. There was no gain or loss on the sale.
NOTE 6 - EMPLOYEE BENEFITS AND STOCK OPTIONS:
- --------------------------------------------
On March 15, 1991, two former executives were granted options to acquire up to
900,000 shares of the Company's common stock under a non-qualified stock option
plan. The options were granted at fair market value of $3.33 per share. Three
hundred thousand options were exercisable at the date of grant. These options
expire June 1, 2001. In conjunction with the August 1995 renegotiation of the
employment contracts with these two executives, certain option terms were
amended. Each executive's holdings became 388,000 options exercisable at $3.00
per share, the fair market value at the time of reissuance. At January 31, 1998,
81,000 shares were outstanding under this plan.
F-10
<PAGE>
NOTE 6 (Continued)
- ------
The Company adopted the 1991 Employee Stock Option Plan, covering an aggregate
of 450,000 shares of the Company's common stock, in October 1991. Options
granted vest either 20% or 33% (depending on the terms of the individual grant)
each year commencing on grant date and expire 10 years thereafter. In August
1995, those holding options under the 1991 Employee Stock Option Plan were given
the right to cancel their options (the "existing options") and have an equal
number of options (the "new options") reissued to them at the fair market value
of $3.00 per share. The vesting period on the existing options is 20% each year
and the new options vest 33% each year, both from date of grant. Options for
379,982 shares were outstanding as of January 31, 1998, 125,717 of which were
exercisable.
In October 1995, the Company adopted the 1995 Non-Employee Directors Option
Plan. This Plan provides for the annual issuance, to each non-employee director,
of options to purchase 3,000 shares of common stock. In addition, each director
is entitled to make an election to receive, in lieu of directors' fees,
additional options to purchase common stock. The amount of additional options is
determined based on an independent valuation such that the value of the options
issued is equivalent to the fees that the director would be otherwise entitled
to receive. Options issued under this plan vest on the anniversary date of their
grant and upon termination of Board membership. These options expire five years
from the date of grant. 191,029 options were issued under this plan, 117,204 of
which are exercisable at January 31, 1998.
In 1993, the Company adopted an employee stock ownership plan (ESOP) and
employee stock purchase plan (ESPP) for the benefit of its employees. The ESOP
is funded exclusively by discretionary contributions determined by the Board of
Directors. The Board of Directors authorized contributions to the ESOP of
$70,000 in Fiscal 1996. The Company matches employees' contributions to the ESPP
at a rate of 50%. The Company's contributions to the ESPP amounted to $24,000,
$21,000, and $28,000 in Fiscal 1997, the Transition Period and Fiscal 1996,
respectively.
The following table summarizes option activity through January 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price
--------------
<S> <C> <C>
Outstanding at May 31, 1995 1,042,000 3.49
Granted 306,902 4.27
Canceled (241,000) 3.10
Exercised (60,500) 3.19
---------
Outstanding at June 1, 1996 1,047,402 3.40
Granted 163,519 5.27
Canceled (16,667) 3.42
Exercised (214,333) 3.02
---------
Outstanding at February 1, 1997 979,921 3.70
Granted 196,590 2.50
Canceled (84,500) 4.04
Exercised (440,000) 3.00
---------
Outstanding at January 31, 1998 652,011 3.81
=========
</TABLE>
F-11
<PAGE>
NOTE 6: (Continued)
- ------
The Company has adopted Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123"). In accordance with the provisions of FAS
123, the Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans and does not
recognize compensation expense for its stock-based compensation plans based on
the fair market value method prescribed by FAS 123. If the Company had elected
to recognize compensation expense based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed by FAS
123, the Company's net loss and loss per share would be increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Fiscal Thirty-three Fiscal
year ended weeks ended year ended
January 31, February 1, June 1,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported ($9,241,000) ($5,378,000) ($3,899,000)
Pro forma ( 9,640,000) ( 5,839,000) ( 4,068,000)
Loss per share:
As reported ($1.01) ($0.67) ($0.60)
Pro forma (1.05) ( 0.73) ( 0.62)
</TABLE>
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years. The fair
value for these options was estimated at the date of grant using the Black-
Scholes options-pricing model with the following weighted-average assumptions
for Fiscal 1997, the Transition Period and Fiscal 1996, respectively: dividend
yields of zero percent; expected monthly volatility of 79.34, 73.25 and 70.97
percent; risk free interest rates of 6.00, 6.36 and 6.10 percent; and expected
life of four years for all periods. The weighted average fair value of options
granted during Fiscal 1997, the Transition Period and Fiscal 1996 for which the
exercise price equals the market price on the grant date was $2.50, $3.10 and
$2.39, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of employee stock options.
The following table summarizes information concerning currently outstanding and
exercisable stock options:
<TABLE>
<S> <C>
Range of exercise prices $2.50 - $6.50
Number of outstanding options 652,011
Weighted average remaining contractual life 6.7 years
Weighted average exercise price $3.81
Number of options exercisable 323,921
Weighted average price of exercisable options $4.17
</TABLE>
F-12
<PAGE>
NOTE 7 - RELATED PARTY TRANSACTIONS :
- ------------------------------------
KAIM provides certain management services to the Company and charges the Company
for such services. Management fees of $100,000, $66,667 and $83,333 were
incurred in Fiscal 1997, the Transition Period, and Fiscal 1996, respectively.
The Company provided telemarketing services through July 1996, to K.A.
Industries, a related party to Kayne Anderson. Revenues generated from this
service amount to $365,000 for Fiscal 1996. Management believes that the terms
of this agreement were no less favorable than those that would have been
negotiated with an unrelated third party.
NOTE 8 - OPERATING LEASES :
- --------------------------
The Company leases real property and equipment under non-cancelable agreements
expiring from 1998 through 2007. Certain retail store lease agreements provide
for contingent rental payments if the store's net sales exceed stated levels
("percentage rents"). A majority of the leases contain escalation clauses
which provide for increases in base rental for increases in future operating
cost and renewal options at fair market rental rates. The Company's minimum
rental commitments are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
------------------
<S> <C>
1999 $3,582,000
2000 3,377,000
2001 3,254,000
2002 3,217,000
2003 3,038,000
Thereafter 8,435,000
----------
$24,903,000
===========
</TABLE>
Net rental expense under operating leases was $3,802,000, $1,929,000 and
$1,959,000 for Fiscal 1997, the Transition Period and Fiscal 1996, respectively.
Percentage rents incurred in the Transition Period and Fiscal 1996 amounted to
$54,000 and $82,000, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES :
- ---------------------------------------
The Company is not party to any material legal actions.
F-13
<PAGE>
NOTE 10 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION :
- ------------------------------------------------------------
Changes in assets and liabilities which increased (decreased) cash and
equivalents are as follows:
<TABLE>
<CAPTION>
Fiscal Year Thirty-three Fiscal Year
Ended weeks ended Ended
January 31, February 1, June 1,
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
Accounts receivable $ 610,000 ($329,000) ($126,000)
Note receivable 123,000 (200,000)
Merchandise inventories 1,062,000 (2,400,000) (122,000)
Prepaid catalog expenses 485,000 (69,000) 268,000
Income taxes receivable 472,000
Other current assets (50,000) (500,000) (835,000)
Deferred pre-opening costs (218,000) (540,000)
Other noncurrent assets (2,000) 113,000 142,000
Accounts payable and accrued expenses (3,503,000) 2,100,000 753,000
Accrued salaries and bonuses (137,000) (13,000) 292,000
Advance payments on orders (1,000) (112,000) (15,000)
Amounts due to ARC (71,000)
Deferred income taxes 207,000 (928,000)
Other liabilities (97,000)
Deferred rent 315,000 786,000 773,000
----------- ---------- ---------
($1,316,000) ($ 957,000) $506,000
========== ========== ========
</TABLE>
Cash paid for income taxes was $5,000 and $7,000 for Fiscal 1997and the
Transition Period, respectively. Non-cash investing activity consists of a
$250,000 note received upon the sale of the phone center operations (see Note
5).
NOTE 11 - SUBSEQUENT EVENT :
- ----------------------------
In order to enhance the Company's liquidity and improve its capital structure,
effective April 13, 1998 the Company completed a private placement of non-
interest bearing senior subordinated notes in an aggregate principal amount of
$3,850,000, together with warrants to purchase an aggregate of 3,850,000 shares
of common stock exercisable at $1.00 per share. The new securities were sold
for an aggregate purchase price of $3,850,000 and were purchased principally by
affiliates of the Company. In connection with the sale of the new securities,
the Company entered into an agreement with all of the holders of the Company's
existing subordinated debt securities, representing an aggregate principal
amount of $6,000,000. Pursuant to the agreement, each holder agreed to exchange
all of its subordinated debt securities together with any warrants issued in
connection therewith, for newly issued preferred stock. Holders of $3,000,000
principal amount existing subordinated debt securities elected to receive Series
A Preferred Stock which will have no fixed dividend rights, will not be
convertible into common stock and will be mandatorily redeemable by the Company
in May 2002. Holders of $3,000,000 principal amount existing subordinated debt
securities elected to receive Series B convertible preferred stock which will
have no fixed dividend rights, will be convertible into common stock at a price
per share of $1.50 and will not be mandatorily redeemable by the Company.
Holders of the $3,850,000 principal amount of new subordinated debt securities
elected to receive Series C convertible preferred stock which will have no fixed
dividend rights, will be convertible into common stock at a price per share of
$1.00 and will not be mandatorily redeemable by the Company. The issuance of the
shares of preferred stock upon exchange of the subordinated debt securities is
subject to the approval of the Company's shareholders, which approval the
Company expects to obtain at its annual meeting scheduled to be held in June
1998.
F-14
<PAGE>
NOTE 11: (Continued)
- -------
In connection with the above restructuring, the holders of $6.0 million
principal amount of subordinated debt permanently waived their rights to receive
interest payments and agreed to exchange such debt for preferred stock,
resulting in the elimination of approximately $.6 million in annual interest
expense. In addition, the proceeds from the Company's private placement of
$3,850,000 were used to pay off the Company's revolving line of credit.
Further, the Company's lender amended the existing loan agreement to provide
more favorable terms which are consistent with management's financial and
operational plans. These plans include the closure of certain unprofitable mall
stores and opening of other store locations.
As a result of the above, management believes that it has sufficient liquidity
to execute its current plan. However, the Company's ability to fund its
operations, open new stores and maintain compliance with its loan agreement is
dependent on its ability to generate sufficient cash flow from operations and
obtain additional financing as described above. 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
and the extension of credit by the Company's suppliers and impact the Company's
operations.
F-15
<PAGE>
THE RIGHT START, INC.
SCHEDULE VIII - VALUATION RESERVES
<TABLE>
<CAPTION>
Additional
Balance at charged Balance at
beginning to costs end
Classification of period and expenses Deductions of period
- ---------------------------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Fiscal year ended January 31, 1998
- ----------------------------------
Allowance for deferred tax asset $ 3,280,000 $ 3,730,000 $ 7,010,000
Allowance for sales returns 103,000 $ 34,000 69,000
----------- ----------- -------- -----------
$ 3,383,000 $ 3,730,000 $ 34,000 $ 7,010,000
=========== =========== ======== ===========
Thirty-three weeks ended February 1, 1997
- -----------------------------------------
Allowance for deferred tax asset $ 940,000 $ 2,340,000 $ 3,280,000
Allowance for sales returns 103,000 103,000
----------- ----------- -------- -----------
$ 1,043,000 $ 2,340,000 $ 3,383,000
=========== =========== ======== ===========
Fiscal year ended June 1, 1996
- ------------------------------
Allowance for deferred tax asset $ 940,000 $ 940,000
Allowance for sales returns $ 103,000 103,000
----------- ----------- -------- -----------
$ 103,000 $ 940,000 $ 1,043,000
=========== =========== ======== ===========
</TABLE>
F-16
<PAGE>
EXHIBIT 10.14
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of
October 11, 1996 between The Right Start, Inc., a California corporation (the
"Company"), and Strategic Associates, L.P., a limited partnership organized
under the laws of the State of Delaware ("Purchaser").
WHEREAS, the Company and Purchaser have entered into a Securities
Purchase Agreement dated as of October 11, 1998 (the "Purchase Agreement")
WHEREAS, pursuant to the Purchase Agreement, the Company and Purchaser
desire to enter into this Agreement to provide Purchaser with certain
registration rights and to address related matters;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties agree as follows:
1. Registration Rights.
-------------------
1.1 Demand Registration Rights.
--------------------------
(a) Subject to the provisions of this Section 1.1, at any time
after the date hereof, Purchaser may request registration for sale under the Act
of all or part of the Common Stock, no par value, of the Company ("Common
Stock") then held by Purchaser or issuable to Purchaser pursuant to conversion
of the Convertible Debenture of even date herewith, issued by the Company to
Purchaser pursuant to the Purchase Agreement (the "Debenture"). The Company
shall thereafter, as expeditiously as practicable, use its best efforts (i) to
file with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Act"), a registration statement on the
appropriate form (using Form S-3 or other "short form," if available) covering
all the shares of Common Stock specified in the demand request and (ii) to cause
such registration statement to be declared effective. The Company shall use its
best efforts to cause each offering pursuant to this Section 1.1 to be managed,
on a firm commitment basis, by a recognized regional or national underwriter.
The Company shall not be required to comply with more than two (2) requests by
Purchaser for demand registration pursuant to this Section 1.1(a).
(b) The Company shall not be required to effect a demand
registration under the Act pursuant to Section 1.1(a) above if (i) the Company
receives such request for registration within 120 days preceding the anticipated
effective
<PAGE>
date of a proposed underwritten public offering of securities of the Company
approved by the Company's Board of Directors prior to the Company's receipt of
such request; (ii) within 6 months prior to any such request for registration ,
a registration of securities of the Company has been effected in which Purchaser
had the right to participate pursuant to Section 1.2 hereof; or (iii) the Board
of Directors of the Company reasonably determines in good faith that effecting
such a demand registration at such time would have a material adverse effect
upon a proposed sale of all (or substantially all) the assets of the Company, or
a merger, reorganization, recapitalization, or similar transaction materially
affecting the capital structure or equity ownership of the Company; provided,
however, that the Company may only delay a demand registration pursuant to this
Section 1.1(b)(iii) for a period not exceeding 3 months (or until such earlier
time as such transaction is consummated or no longer proposed). The Company
shall promptly notify Purchaser in writing of any decision not to effect any
such request for registration pursuant to this Section 1.1(b), which notice
shall set forth in reasonable detail the reason for such decision and shall
include an undertaking by the Company promptly to notify Purchaser as soon as a
demand registration may be effected.
(c) Purchaser may withdraw a request for demand registration at
any time before a registration statement is declared effective, in which event
the Company shall withdraw such registration statement (and Purchaser shall not
be deemed to have requested a demand registration for purposes of Section 1.1(a)
hereof). If the Company withdraws a registration statement under this Section
1.1(c) in respect of a registration for which the Company would otherwise be
required to pay expenses under Section 1.4(b) hereof, Purchaser shall be liable
to the Company for all expenses of such registration specified in Section 1.4(b)
hereof in proportion to the number of shares Purchaser shall have requested to
be registered, and Purchaser shall not be deemed to have requested a demand
registration for purposes of Section 1.1(a) hereof.
1.2 Piggyback Registration Rights.
-----------------------------
(a) If at any time or times after the date hereof, the Company
proposes to make a registered public offering of any of its securities under the
Act (whether to be sold by it or by one or more third parties), other than an
offering pursuant to a demand registration under Section 1.1(a) hereof or an
offering registered on Form S-8, Form S-4, or comparable forms, the Company
shall, not less than 45 days prior to the proposed filing date of the
registration form, give written notice of the proposed registration to
Purchaser, and at the written request of Purchaser delivered to the Company
within 20 days after the
-2-
<PAGE>
receipt of such notice, shall include in such registration and offering, and in
any underwriting of such offering, all shares of Common Stock that may have been
designated in Purchaser's request.
(b) If a registration in which Purchaser has the right to
participate pursuant to this Section 1.2 is an underwritten offering for the
account of the Company or for the account of a security holder (other than
Purchaser) pursuant to the exercise of a demand registration right, and the
managing underwriters advise the Company or such security holder, as the case
may be, in writing that in their opinion the number of securities requested to
be included in such registration, together with the securities being offered by
the Company or such security holder, as the case may be, exceeds the number
which can be effectively sold in such offering, the Company shall include in
such registration (i) first, the securities of the Company or such security
holder proposed to be sold, and (ii) second, to the extent possible, the Common
Stock proposed to be sold by Purchaser and any other selling stockholders, in
proportion to the number of shares of Common Stock with respect to which they
have requested registration.
1.3 Registration Procedures. The Company shall have no
-----------------------
obligation to file a registration statement pursuant to Section 1.1 hereof, or
to include shares of Common Stock owned by or issuable to Purchaser in a
registration statement pursuant to Section 1.2 hereof, unless and until
Purchaser shall have furnished the Company with all information and statements
about or pertaining to Purchaser in such reasonable detail and on such timely
basis as is reasonably required by the Company in connection with the
preparation of the registration statement. Whenever Purchaser has requested that
any shares of Common Stock be registered pursuant to Section 1.1 or 1.2 hereof,
the Company shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement with
respect to such shares and use its best efforts to cause such registration
statement to become effective as soon as reasonably practicable thereafter
(provided that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company shall furnish counsel for
Purchaser with copies of all such documents proposed to be filed);
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of not less than nine months (or two years, if the provisions of Rule
-3-
<PAGE>
415 under the Act are available with respect thereto) or until Purchaser has
completed the distribution described in such registration statement, whichever
occurs first;
(c) furnish to Purchaser such number of copies of such
registration statement, each amendment and supplement thereto, the prospectus
included in such registration statement (including each preliminary prospectus),
and such other document as Purchaser may reasonably request;
(d) use its best efforts to register or qualify such shares
under such other securities or blue sky laws of such jurisdictions as Purchaser
requests (and to maintain such registrations and qualifications effective for a
period of nine months or until Purchaser has completed the distribution of such
shares, whichever occurs first), and to do any and all other acts and things
which may be necessary or advisable to enable Purchaser to consummate the
disposition in such jurisdictions of such shares (provided that the Company will
not be required to (i) qualify generally to do business in any jurisdiction
where it would not be required but for this Section 1.3(d), (ii) subject itself
to taxation in any such jurisdiction, or (iii) file any general consent to
service of process in any such jurisdiction);
(e) notify Purchaser, at any time during which a prospectus
relating thereto is required to be delivered under the Act within the period
that the Company is required to keep a registration statement effective, of the
happening of any event as a result of which the prospectus included in such
registration statement contains an untrue statement of a material fact or omits
any fact necessary to make the statements therein not misleading, and prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such shares, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading;
(f) use its best efforts to cause all such shares to be listed
on securities exchanges or interdealer quotation systems (including NASDAQ
National or Small-Cap Market), if any, on which similar securities issued by the
Company are then listed;
(g) enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other actions as
Purchaser reasonably requests (and subject to Purchaser's reasonable approval)
in order to expedite or facilitate the disposition of such shares; and
-4-
<PAGE>
(h) make reasonably available for inspection by Purchaser, by
any underwriter participating in any distribution pursuant to such registration
statement, and by any attorney, accountant or other agent retained by Purchaser
or by any such underwriter, all relevant financial and other records, pertinent
corporate documents, and properties (other than confidential intellectual
property) of the Company; provided, however, that any information that is
designated in writing by the Company, in good faith, as confidential at the time
of delivery of such information shall be kept confidential by Purchaser or any
such underwriter, attorney, accountant or agent, unless such disclosure is made
in connection with a court proceeding or required by law, or such information
becomes available to the public generally or through a third party without an
accompanying obligation of confidentiality.
1.4 Registration Expenses.
---------------------
The Company will pay all Registration Expenses of all registrations
under this Agreement, provided, however, that if a registration under Section
-------- -------
1.1 is withdrawn at the request of Purchaser (other than as a result of
information concerning the business or financial condition of the Company that
is made known to the Purchaser after the date on which such registration was
requested) and if the requesting Purchaser elects not to have such registration
counted as a registration requested under Section 1.1, the Purchaser shall pay
the Registration expenses of such registration. For purposes of this Section,
the term "Registration Expenses" means all expenses incurred by the Company in
complying with this Section, including, without limitation, all registration and
filing fees (other than National Association of Securities Dealers, Inc. filing
fees pursuant to an underwritten offering), exchange listing fees, printing
expenses, fees, and expenses of counsel for the Company and the reasonable fees
and expenses of one firm or counsel selected by the Purchaser to represent it,
state Blue Sky fees and expenses, and the expense of any special audits incident
to or required by any such registration, but excluding underwriting discounts
and selling commissions.
1.5 Indemnity.
---------
(a) In the event that any shares of Common Stock owned by Purchaser
are sold by means of a registration statement pursuant to Section 1.1 or 1.2
hereof, the Company agrees to indemnify and hold harmless Purchaser, each of its
partners and their officers and directors, and each person, if any, who controls
Purchaser within the meaning of the Act (Purchaser, its partners and their
officers and directors, and any such other persons being hereinafter referred to
individually
-5-
<PAGE>
as an "Indemnified Person" and collectively as "Indemnified Persons") from and
against all demands, claims, actions or causes of action, assessments, losses,
damages, liabilities, costs, and expenses, including, without limitation,
interest, penalties, and reasonable attorneys' fees and disbursements, asserted
against, resulting to, imposed upon or incurred by such Indemnified Person,
directly or indirectly (hereinafter referred to in this Section 1.5 in the
singular as a "claim" and in the plural as "claims"), based upon, arising out of
or resulting from any untrue statement of a material fact contained in the
registration statement or any omission to state therein a material fact
necessary to make the statements made therein, in the light of the circumstances
under which they were made, not misleading, except insofar as such claim is
based upon, arises out of or result from information furnished to the Company in
writing by Purchaser for use in connection with the registration statement.
(b) Purchaser agrees to indemnify and hold harmless the
Company, its officers and directors, and each person, if any, who controls the
Company within the meaning of the Act (the Company, its officers and directors,
and any such other persons also being hereinafter referred to individually as an
"Indemnified Person" and collectively as "Indemnified Persons") from and against
all claims based upon, arising out of or resulting from any untrue statement of
a material fact contained in the registration statement or any omission to state
therein a material fact necessary in order to make the statement made therein,
in the light of the circumstances under which they were made, not misleading, to
the extent that such claim is based upon, arises out of or result from
information furnished to the Company in writing by Purchaser for use in
connection with the registration statement.
(c) The indemnification set forth herein shall be in addition
to any liability the Company or Purchaser may otherwise have to the Indemnified
Persons. Promptly after actually receiving definitive notice of any claim in
respect of which an Indemnified Person may seek indemnification under this
Section 1.5, such Indemnified Person shall submit written notice thereof to
either the Company or Purchaser, as the case may be (sometimes being hereinafter
referred to as an "Indemnifying Person"). The failure of the Indemnified Person
so to notify the Indemnifying Person of any such claim shall not relieve the
Indemnifying Person from any liability it may have hereunder except to the
extent that (a) such liability was caused or materially increased by such
failure, or (b) the ability of the Indemnifying Person to reduce such liability
was materially adversely affected by such failure. In addition, the failure of
the Indemnified Person so to notify the Indemnifying Person of any such claim
shall not relieve the Indemnifying Person from any
-6-
<PAGE>
liability it may have otherwise than hereunder. The Indemnifying Person shall
have the right to undertake, by counsel or representatives of its own choosing,
the defense, compromise or settlement (without admitting liability of the
Indemnified Person) of any such claim asserted, such defense, compromise or
settlement to be undertaken at the expense and risk of the Indemnifying Person,
and the Indemnified Person shall have the right to engage separate counsel, at
such Indemnified Person's own expense, whom counsel for the Indemnifying Person
shall keep informed and consult with in a reasonable manner. In the event the
Indemnifying Person shall elect not to undertake such defense by its own
representatives, the Indemnifying Person shall give prompt written notice of
such election to the Indemnified Person, and the Indemnified Person may
undertake the defense, compromise or settlement (without admitting liability of
the Indemnified Person) thereof on behalf of and for the account and risk of the
Indemnifying Person by counsel or other representatives designated by the
Indemnified Person. Notwithstanding the foregoing, no Indemnifying Person shall
be obligated hereunder with respect to amounts paid in settlement of any claim
if such settlement is effected without the consent of such Indemnifying Person
(which consent shall not be unreasonably withheld).
(d) If for any reason the foregoing indemnity is unavailable
to, or is insufficient to hold harmless, an Indemnified Person, then the
Indemnifying Person shall contribute to the amount paid or payable by the
Indemnified Person as a result of such claims, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Person and the
Indemnified Person as well as any other relevant equitable considerations. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
1.6 Subsequent Registration Statements. The Company shall not
----------------------------------
cause or permit any new registration statements (except registration statements
on Form S-8, S-4, or comparable forms) to become effective during the 90 days
after the effective date of a registration statement covering shares of Common
Stock owned by Purchaser.
2. Miscellaneous.
-------------
2.1 Additional Actions and Documents. Each of the parties hereto
--------------------------------
hereby agrees to use its good faith best efforts to bring about the consummation
of this Agreement, and to take or cause to be taken such further actions, to
execute, deliver and file or cause to be executed, delivered and filed such
further documents and instruments, and to obtain such
-7-
<PAGE>
consents, as may be necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this Agreement.
2.2 Assignment. Purchaser may assign its rights under this
----------
Agreement to any assignee of the Debenture or the shares of Common Stock
issuable thereunder.
2.3 Entire Agreement; Amendment. This Agreement, including the
---------------------------
other writings referred to herein or delivered pursuant hereto, constitutes the
entire agreement among the parties hereto with respect to the transactions
contemplated herein, and it supersedes all prior oral or written agreements,
commitments or understandings with respect to the matters provided for herein.
No amendment, modification or discharge of this Agreement shall be valid or
binding unless set forth in writing and duly executed by a party against whom
enforcement of the amendment, modification, or discharge is sought.
2.4 Limitation on Benefits. It is the explicit intention of the
----------------------
parties hereto that no person or entity other than the parties hereto (and their
respective successors and assigns) is or shall be entitled to bring any action
to enforce any provision of this Agreement against any of the parties hereto,
and the covenants, undertakings and agreements set forth in this Agreement shall
be solely for the benefit of, and shall be enforceable only by, the parties
hereto or their respective successors and assigns.
2.5 Binding Effect. This Agreement shall be binding upon and
--------------
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
2.6 Governing Law. This Agreement, the rights and obligations
-------------
of the parties hereto, and any claims or disputes relating thereto, shall be
governed by and construed in accordance with the laws of Delaware (excluding the
choice of law rules thereof).
2.7 Notices. All notices, demands, requests, or other
-------
communications which may be or are required to be given, served, or sent by any
party to any other party pursuant to this Agreement shall be in writing and
shall be mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery (including delivery
by courier), telegram, telex, or facsimile transmission, addressed as follows:
(a) If to the Company:
-8-
<PAGE>
The Right Start, Inc.
5334 Starling Center Drive
Westlake Village, California 91361
Attention: President
Facsimile:
with a copy (which shall not constitute notice) to:
Milbank, Tweed, Hadley & McCloy
601 S. Figueroa, 30th Floor
Los Angeles, CA 90017
Attention: Kenneth J. Baronsky, Esq.
Facsimile: (213) 629-5063
(b) If to Purchaser:
Strategic Associates, L.P.
10 North Calvert Street, Suite 735
Baltimore, Maryland 21202
Attention: Mr. David L. Warnock
Facsimile: 410/347-2963
with a copy (which shall not constitute notice) to:
George P Stamas, Esq.
Wilmer, Cutler & Pickering
100 Light Street
Baltimore, Maryland 21202
Facsimile: 410/986-2828
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a telex) the answer back being deemed conclusive
(but not exclusive) evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
2.8 Headings. Article and Section headings contained in this
--------
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
-9-
<PAGE>
2.9 Execution in Counterparts. To facilitate execution, this
-------------------------
Agreement may be executed in as many counterparts as may be required; and it
shall not be necessary that the signatures of each party appear on each
counterpart; but it shall be sufficient that the signature of each party appear
on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of
this Agreement to produce or account for more than a number of counterparts
containing the respective signatures of all of the parties hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
THE RIGHT START, INC.
By: /s/ Jerry R. Welch
------------------
Jerry R. Welch
Chief Executive Officer
STRATEGIC ASSOCIATES, L.P.
By: Cahill, Warnock & Company, LLC
its general partner
By /s/ David L. Warnock
--------------------
David L. Warnock
Managing Member
-10-
<PAGE>
EXHIBIT 10.15
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of
October 11, 1996 between The Right Start, Inc., a California corporation (the
"Company"), and Cahill Warnock Strategic Partners, L.P., a limited partnership
organized under the laws of the State of Delaware ("Purchaser").
WHEREAS, the Company and Purchaser have entered into a Securities
Purchase Agreement dated as of October 11, 1996 (the "Purchase Agreement")
WHEREAS, pursuant to the Purchase Agreement, the Company and Purchaser
desire to enter into this Agreement to provide Purchaser with certain
registration rights and to address related matters;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties agree as follows:
1. Registration Rights.
-------------------
1.1 Demand Registration Rights.
--------------------------
(a) Subject to the provisions of this Section 1.1, at any
time after the date hereof, Purchaser may request registration for sale under
the Act of all or part of the Common Stock, no par value, of the Company
("Common Stock") then held by Purchaser or issuable to Purchaser pursuant to
conversion of the Convertible Debenture of even date herewith, issued by the
Company to Purchaser pursuant to the Purchase Agreement (the "Debenture"). The
Company shall thereafter, as expeditiously as practicable, use its best efforts
(i) to file with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Act"), a registration statement on the
appropriate form (using Form S-3 or other "short form," if available) covering
all the shares of Common Stock specified in the demand request and (ii) to cause
such registration statement to be declared effective. The Company shall use its
best efforts to cause each offering pursuant to this Section 1.1 to be managed,
on a firm commitment basis, by a recognized regional or national underwriter.
The Company shall not be required to comply with more than two (2) requests by
Purchaser for demand registration pursuant to this Section 1.1(a).
(b) The Company shall not be required to effect a demand
registration under the Act pursuant to Section 1.1(a) above if (i) the Company
receives such request for registration within 120 days preceding the anticipated
effective
<PAGE>
date of a proposed underwritten public offering of securities of the Company
approved by the Company's Board of Directors prior to the Company's receipt of
such request; (ii) within 6 months prior to any such request for registration ,
a registration of securities of the Company has been effected in which Purchaser
had the right to participate pursuant to Section 1.2 hereof; or (iii) the Board
of Directors of the Company reasonably determines in good faith that effecting
such a demand registration at such time would have a material adverse effect
upon a proposed sale of all (or substantially all) the assets of the Company, or
a merger, reorganization, recapitalization, or similar transaction materially
affecting the capital structure or equity ownership of the Company; provided,
however, that the Company may only delay a demand registration pursuant to this
Section 1.1(b)(iii) for a period not exceeding 3 months (or until such earlier
time as such transaction is consummated or no longer proposed). The Company
shall promptly notify Purchaser in writing of any decision not to effect any
such request for registration pursuant to this Section 1.1(b), which notice
shall set forth in reasonable detail the reason for such decision and shall
include an undertaking by the Company promptly to notify Purchaser as soon as a
demand registration may be effected.
(c) Purchaser may withdraw a request for demand
registration at any time before a registration statement is declared effective,
in which event the Company shall withdraw such registration statement (and
Purchaser shall not be deemed to have requested a demand registration for
purposes of Section 1.1(a) hereof). If the Company withdraws a registration
statement under this Section 1.1(c) in respect of a registration for which the
Company would otherwise be required to pay expenses under Section 1.4(b) hereof,
Purchaser shall be liable to the Company for all expenses of such registration
specified in Section 1.4(b) hereof in proportion to the number of shares
Purchaser shall have requested to be registered, and Purchaser shall not be
deemed to have requested a demand registration for purposes of Section 1.1(a)
hereof.
1.2 Piggyback Registration Rights.
-----------------------------
(a) If at any time or times after the date hereof, the
Company proposes to make a registered public offering of any of its securities
under the Act (whether to be sold by it or by one or more third parties), other
than an offering pursuant to a demand registration under Section 1.1(a) hereof
or an offering registered on Form S-8, Form S-4, or comparable forms, the
Company shall, not less than 45 days prior to the proposed filing date of the
registration form, give written notice of the proposed registration to
Purchaser, and at the written request of Purchaser delivered to the Company
within 20 days after the
-2-
<PAGE>
receipt of such notice, shall include in such registration and offering, and in
any underwriting of such offering, all shares of Common Stock that may have been
designated in Purchaser's request.
(b) If a registration in which Purchaser has the right to
participate pursuant to this Section 1.2 is an underwritten offering for the
account of the Company or for the account of a security holder (other than
Purchaser) pursuant to the exercise of a demand registration right, and the
managing underwriters advise the Company or such security holder, as the case
may be, in writing that in their opinion the number of securities requested to
be included in such registration, together with the securities being offered by
the Company or such security holder, as the case may be, exceeds the number
which can be effectively sold in such offering, the Company shall include in
such registration (i) first, the securities of the Company or such security
holder proposed to be sold, and (ii) second, to the extent possible, the Common
Stock proposed to be sold by Purchaser and any other selling stockholders, in
proportion to the number of shares of Common Stock with respect to which they
have requested registration.
1.3 Registration Procedures. The Company shall have no obligation to
-----------------------
file a registration statement pursuant to Section 1.1 hereof, or to include
shares of Common Stock owned by or issuable to Purchaser in a registration
statement pursuant to Section 1.2 hereof, unless and until Purchaser shall have
furnished the Company with all information and statements about or pertaining to
Purchaser in such reasonable detail and on such timely basis as is reasonably
required by the Company in connection with the preparation of the registration
statement. Whenever Purchaser has requested that any shares of Common Stock be
registered pursuant to Section 1.1 or 1.2 hereof, the Company shall, as
expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement with
respect to such shares and use its best efforts to cause such registration
statement to become effective as soon as reasonably practicable thereafter
(provided that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company shall furnish counsel for
Purchaser with copies of all such documents proposed to be filed);
(b) prepare and file with the SEC such amendments and supplements
to such registration statement and prospectus used in connection therewith as
may be necessary to keep such registration statement effective for a period of
not less than nine months (or two years, if the provisions of Rule
-3-
<PAGE>
415 under the Act are available with respect thereto) or until Purchaser has
completed the distribution described in such registration statement, whichever
occurs first;
(c) furnish to Purchaser such number of copies of such registration
statement, each amendment and supplement thereto, the prospectus included in
such registration statement (including each preliminary prospectus), and such
other document as Purchaser may reasonably request;
(d) use its best efforts to register or qualify such shares under
such other securities or blue sky laws of such jurisdictions as Purchaser
requests (and to maintain such registrations and qualifications effective for a
period of nine months or until Purchaser has completed the distribution of such
shares, whichever occurs first), and to do any and all other acts and things
which may be necessary or advisable to enable Purchaser to consummate the
disposition in such jurisdictions of such shares (provided that the Company will
not be required to (i) qualify generally to do business in any jurisdiction
where it would not be required but for this Section 1.3(d), (ii) subject itself
to taxation in any such jurisdiction, or (iii) file any general consent to
service of process in any such jurisdiction);
(e) notify Purchaser, at any time during which a prospectus relating
thereto is required to be delivered under the Act within the period that the
Company is required to keep a registration statement effective, of the happening
of any event as a result of which the prospectus included in such registration
statement contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading, and prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such shares, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading;
(f) use its best efforts to cause all such shares to be listed on
securities exchanges or interdealer quotation systems (including NASDAQ National
or Small-Cap Market), if any, on which similar securities issued by the Company
are then listed;
(g) enter into such customary agreements (including an underwriting
agreement in customary form) and take all such other actions as Purchaser
reasonably requests (and subject to Purchaser's reasonable approval) in order to
expedite or facilitate the disposition of such shares; and
-4-
<PAGE>
(h) make reasonably available for inspection by Purchaser, by
any underwriter participating in any distribution pursuant to such registration
statement, and by any attorney, accountant or other agent retained by Purchaser
or by any such underwriter, all relevant financial and other records, pertinent
corporate documents, and properties (other than confidential intellectual
property) of the Company; provided, however, that any information that is
designated in writing by the Company, in good faith, as confidential at the time
of delivery of such information shall be kept confidential by Purchaser or any
such underwriter, attorney, accountant or agent, unless such disclosure is made
in connection with a court proceeding or required by law, or such information
becomes available to the public generally or through a third party without an
accompanying obligation of confidentiality.
1.4 Registration Expenses.
---------------------
The Company will pay all Registration Expenses of all registrations
under this Agreement, provided, however, that if a registration under Section
-------- -------
1.1 is withdrawn at the request of Purchaser (other than as a result of
information concerning the business or financial condition of the Company that
is made known to the Purchaser after the date on which such registration was
requested) and if the requesting Purchaser elects not to have such registration
counted as a registration requested under Section 1.1, the Purchaser shall pay
the Registration expenses of such registration. For purposes of this Section,
the term "Registration Expenses" means all expenses incurred by the Company in
complying with this Section, including, without limitation, all registration and
filing fees (other than National Association of Securities Dealers, Inc. filing
fees pursuant to an underwritten offering), exchange listing fees, printing
expenses, fees, and expenses of counsel for the Company and the reasonable fees
and expenses of one firm or counsel selected by the Purchaser to represent it,
state Blue Sky fees and expenses, and the expense of any special audits incident
to or required by any such registration, but excluding underwriting discounts
and selling commissions.
1.5 Indemnity.
---------
(a) In the event that any shares of Common Stock owned by
Purchaser are sold by means of a registration statement pursuant to Section 1.1
or 1.2 hereof, the Company agrees to indemnify and hold harmless Purchaser, each
of its partners and their officers and directors, and each person, if any, who
controls Purchaser within the meaning of the Act (Purchaser, its partners and
their officers and directors, and any such other persons being hereinafter
referred to individually
-5-
<PAGE>
as an "Indemnified Person" and collectively as "Indemnified Persons") from and
against all demands, claims, actions or causes of action, assessments, losses,
damages, liabilities, costs, and expenses, including, without limitation,
interest, penalties, and reasonable attorneys' fees and disbursements, asserted
against, resulting to, imposed upon or incurred by such Indemnified Person,
directly or indirectly (hereinafter referred to in this Section 1.5 in the
singular as a "claim" and in the plural as "claims"), based upon, arising out of
or resulting from any untrue statement of a material fact contained in the
registration statement or any omission to state therein a material fact
necessary to make the statements made therein, in the light of the circumstances
under which they were made, not misleading, except insofar as such claim is
based upon, arises out of or result from information furnished to the Company in
writing by Purchaser for use in connection with the registration statement.
(b) Purchaser agrees to indemnify and hold harmless the Company, its
officers and directors, and each person, if any, who controls the Company within
the meaning of the Act (the Company, its officers and directors, and any such
other persons also being hereinafter referred to individually as an "Indemnified
Person" and collectively as "Indemnified Persons") from and against all claims
based upon, arising out of or resulting from any untrue statement of a material
fact contained in the registration statement or any omission to state therein a
material fact necessary in order to make the statement made therein, in the
light of the circumstances under which they were made, not misleading, to the
extent that such claim is based upon, arises out of or result from information
furnished to the Company in writing by Purchaser for use in connection with the
registration statement.
(c) The indemnification set forth herein shall be in addition to any
liability the Company or Purchaser may otherwise have to the Indemnified
Persons. Promptly after actually receiving definitive notice of any claim in
respect of which an Indemnified Person may seek indemnification under this
Section 1.5, such Indemnified Person shall submit written notice thereof to
either the Company or Purchaser, as the case may be (sometimes being hereinafter
referred to as an "Indemnifying Person"). The failure of the Indemnified Person
so to notify the Indemnifying Person of any such claim shall not relieve the
Indemnifying Person from any liability it may have hereunder except to the
extent that (a) such liability was caused or materially increased by such
failure, or (b) the ability of the Indemnifying Person to reduce such liability
was materially adversely affected by such failure. In addition, the failure of
the Indemnified Person so to notify the Indemnifying Person of any such claim
shall not relieve the Indemnifying Person from any
-6-
<PAGE>
liability it may have otherwise than hereunder. The Indemnifying Person shall
have the right to undertake, by counsel or representatives of its own choosing,
the defense, compromise or settlement (without admitting liability of the
Indemnified Person) of any such claim asserted, such defense, compromise or
settlement to be undertaken at the expense and risk of the Indemnifying Person,
and the Indemnified Person shall have the right to engage separate counsel, at
such Indemnified Person's own expense, whom counsel for the Indemnifying Person
shall keep informed and consult with in a reasonable manner. In the event the
Indemnifying Person shall elect not to undertake such defense by its own
representatives, the Indemnifying Person shall give prompt written notice of
such election to the Indemnified Person, and the Indemnified Person may
undertake the defense, compromise or settlement (without admitting liability of
the Indemnified Person) thereof on behalf of and for the account and risk of the
Indemnifying Person by counsel or other representatives designated by the
Indemnified Person. Notwithstanding the foregoing, no Indemnifying Person shall
be obligated hereunder with respect to amounts paid in settlement of any claim
if such settlement is effected without the consent of such Indemnifying Person
(which consent shall not be unreasonably withheld).
(d) If for any reason the foregoing indemnity is unavailable to,
or is insufficient to hold harmless, an Indemnified Person, then the
Indemnifying Person shall contribute to the amount paid or payable by the
Indemnified Person as a result of such claims, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Person and the
Indemnified Person as well as any other relevant equitable considerations. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
1.6 Subsequent Registration Statements. The Company shall not cause
----------------------------------
or permit any new registration statements (except registration statements on
Form S-8, S-4, or comparable forms) to become effective during the 90 days after
the effective date of a registration statement covering shares of Common Stock
owned by Purchaser.
2. Miscellaneous.
-------------
2.1 Additional Actions and Documents. Each of the parties hereto
--------------------------------
hereby agrees to use its good faith best efforts to bring about the consummation
of this Agreement, and to take or cause to be taken such further actions, to
execute, deliver and file or cause to be executed, delivered and filed such
further documents and instruments, and to obtain such
-7-
<PAGE>
consents, as may be necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this Agreement.
2.2 Assignment. Purchaser may assign its rights under this Agreement
----------
to any assignee of the Debenture or the shares of Common Stock issuable
thereunder.
2.3 Entire Agreement; Amendment. This Agreement, including the other
---------------------------
writings referred to herein or delivered pursuant hereto, constitutes the entire
agreement among the parties hereto with respect to the transactions contemplated
herein, and it supersedes all prior oral or written agreements, commitments or
understandings with respect to the matters provided for herein. No amendment,
modification or discharge of this Agreement shall be valid or binding unless set
forth in writing and duly executed by a party against whom enforcement of the
amendment, modification, or discharge is sought.
2.4 Limitation on Benefits. It is the explicit intention of the
----------------------
parties hereto that no person or entity other than the parties hereto (and their
respective successors and assigns) is or shall be entitled to bring any action
to enforce any provision of this Agreement against any of the parties hereto,
and the covenants, undertakings and agreements set forth in this Agreement shall
be solely for the benefit of, and shall be enforceable only by, the parties
hereto or their respective successors and assigns.
2.5 Binding Effect. This Agreement shall be binding upon and shall
--------------
inure to the benefit of the parties hereto and their respective successors and
assigns.
2.6 Governing Law. This Agreement, the rights and obligations of
-------------
the parties hereto, and any claims or disputes relating thereto, shall be
governed by and construed in accordance with the laws of Delaware (excluding the
choice of law rules thereof).
2.7 Notices. All notices, demands, requests, or other communications
-------
which may be or are required to be given, served, or sent by any party to any
other party pursuant to this Agreement shall be in writing and shall be mailed
by first-class, registered or certified mail, return receipt requested, postage
prepaid, or transmitted by hand delivery (including delivery by courier),
telegram, telex, or facsimile transmission, addressed as follows:
(a) If to the Company:
-8-
<PAGE>
The Right Start, Inc.
5334 Starling Center Drive
Westlake Village, California 91361
Attention: President
Facsimile:
with a copy (which shall not constitute notice) to:
Milbank, Tweed, Hadley & McCloy
601 S. Figueroa, 30th Floor
Los Angeles, CA 90017
Attention: Kenneth J. Baronsky, Esq.
Facsimile: (213) 629-5063
(b) If to Purchaser:
Cahill Warnock Strategic Partners, L.P.
10 North Calvert Street, Suite 735
Baltimore, Maryland 21202
Attention: Mr. David L. Warnock
Facsimile: 410/347-2963
with a copy (which shall not constitute
notice) to:
George P Stamas, Esq.
Wilmer, Cutler & Pickering
100 Light Street
Baltimore, Maryland 21202
Facsimile: 410/986-2828
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a telex) the answer back being deemed conclusive
(but not exclusive) evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
2.8 Headings. Article and Section headings contained in this
--------
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
-9-
<PAGE>
2.9 Execution in Counterparts. To facilitate execution, this
-------------------------
Agreement may be executed in as many counterparts as may be required; and it
shall not be necessary that the signatures of each party appear on each
counterpart; but it shall be sufficient that the signature of each party appear
on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of
this Agreement to produce or account for more than a number of counterparts
containing the respective signatures of all of the parties hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
THE RIGHT START, INC.
By: /s/ Jerry R. Welch
------------------
Jerry R. Welch
President
CAHILL, WARNOCK STRATEGIC
PARTNERS FUND, L.P.
By: Cahill, Warnock Strategic
Partners, L.P.
its general partner
By /s/ David L. Warnock
--------------------
David L. Warnock
a General Partner
-10-
<PAGE>
EXHIBIT 10.18
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of May
6, 1997 between The Right Start, Inc., a California corporation (the "Company"),
and ARBCO Associates, L.P., a California limited partnership, Arthur E. Hall, as
Trustee for the A.E. Hall & Company Money Purchase Plan, Cahill, Warnock
Strategic Partners Fund, L.P., a Delaware limited partnership, Fred Kayne, an
individual, Kayne Anderson Non-Traditional Investments, L.P., a California
limited partnership, Kayne Anderson Offshore Limited, a British Virgin Islands
corporation, Offense Group Associates, L.P., a California limited partnership,
Opportunity Associates, L.P., a California limited partnership, Strategic
Associates, L.P., a Delaware limited partnership, Michael Tragoff, an
individual, and The Travelers Indemnity Company, a Connecticut corporation (each
individually a "Purchaser," and collectively the "Purchasers").
WHEREAS, the Company and Purchasers have entered into a Securities
Purchase Agreement dated as of May 6, 1997 (the "Purchase Agreement")
WHEREAS, pursuant to the Purchase Agreement, the Company and
Purchasers desire to enter into this Agreement to provide Purchasers with
certain registration rights and to address related matters;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties agree as follows:
1. Registration Rights.
-------------------
1.1 Demand Registration Rights.
--------------------------
(a) Subject to the provisions of this Section 1.1, at any
time after the date hereof, Purchasers may request registration for sale under
the Act of all or part of the Common Stock, no par value, of the Company
("Common Stock") then held by Purchasers or issuable to Purchasers pursuant to
exercise of the Warrant of even date herewith, issued by the Company to
Purchasers pursuant to the Purchase Agreement (the "Warrant"). The Company shall
thereafter, as expeditiously as practicable, use its best efforts (i) to file
with the Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "Act"), a registration statement on the appropriate
form (using Form S-3 or other "short form," if available) covering all the
shares of Common Stock specified in the demand request and (ii) to cause such
registration statement to be declared effective. The Company shall use its best
efforts to cause each offering pursuant to this Section 1.1 to be managed,
<PAGE>
on a firm commitment basis, by a recognized regional or national underwriter.
The Company shall not be required to comply with more than two (2) requests by
Purchasers for demand registration pursuant to this Section 1.1(a).
(b) The Company shall not be required to effect a demand
registration under the Act pursuant to Section 1.1(a) above if (i) the Company
receives such request for registration within 120 days preceding the anticipated
effective date of a proposed underwritten public offering of securities of the
Company approved by the Company's Board of Directors prior to the Company's
receipt of such request; (ii) within 6 months prior to any such request for
registration, a registration of securities of the Company has been effected in
which Purchasers had the right to participate pursuant to Section 1.2 hereof; or
(iii) the Board of Directors of the Company reasonably determines in good faith
that effecting such a demand registration at such time would have a material
adverse effect upon a proposed sale of all (or substantially all) the assets of
the Company, or a merger, reorganization, recapitalization, or similar
transaction materially affecting the capital structure or equity ownership of
the company; provided, however, that the Company may only delay a demand
registration pursuant to this Section 1.1(b)(iii) for a period not exceeding 3
months (or until such earlier time as such transaction is consummated or no
longer proposed). The Company shall promptly notify Purchasers in writing of any
decision not to effect any such request for registration pursuant to this
Section 1.1(b), which notice shall set forth in reasonable detail the reason for
such decision and shall include an undertaking by the Company promptly to notify
Purchasers as soon as a demand registration may be effected.
(c) Purchasers may withdraw a request for demand registration
at any time before a registration statement is declared effective, in which
event the Company shall withdraw such registration statement (and Purchasers
shall not be deemed to have requested a demand registration for purposes of
Section 1.1(a) hereof). If the Company withdraws a registration statement under
this Section 1.1(c) in respect of a registration for which the Company would
otherwise be required to pay expenses under Section 1.4(b) hereof, Purchasers
shall be liable to the Company for all expenses of such registration specified
in Section 1.4(b) hereof in proportion to the number of shares each of the
Purchasers shall have requested to be registered, and Purchasers shall not be
deemed to have requested a demand registration for purposes of Section 1.1(a)
hereof.
1.2 Piggyback Registration Rights.
-----------------------------
(a) If at any time or times after the date hereof, the
Company proposes to make a registered public offering
-2-
<PAGE>
of any of its securities under the Act, whether to be sold by it or by one or
more third parties (other than an offering pursuant to a demand registration
under Section 1.1(a) hereof or an offering registered on Form S-8, Form S-4, or
comparable forms), the Company shall, not less than 45 days prior to the
proposed filing date of the registration form, give written notice of the
proposed registration to Purchasers, and at the written request of Purchasers
delivered to the Company within 20 days after the receipt of such notice, shall
include in such registration and offering, and in any underwriting of such
offering, all shares of Common Stock that may have been designated in
Purchasers' request.
(b) If a registration in which Purchasers have the right to
participate pursuant to this Section 1.2 is an underwritten offering for the
account of the Company or for the account of a security holder (other than
Purchaser) pursuant to the exercise of a demand registration right, and the
managing underwriters advise the Company or such security holder, as the case
may be, in writing that in their opinion the number of securities requested to
be included in such registration, together with the securities being offered by
the Company or such security holder, as the case may be, exceeds the number
which can be effectively sold in such offering, the Company shall include in
such registration (i) first, the securities of the Company or such security
holder proposed to be sold, and (ii) second, to the extent possible, the Common
Stock proposed to be sold by each of the Purchasers and any other selling
stockholders, in proportion to the number of shares of Common Stock with respect
to which they have requested registration.
1.3 Registration Procedures. The Company shall have no
-----------------------
obligation to file a registration statement pursuant to Section 1.1 hereof, or
to include shares of Common Stock owned by or issuable to any Purchaser in a
registration statement pursuant to Section 1.2 hereof, unless and until such
Purchaser shall have furnished the Company with all information and statements
about or pertaining to such Purchaser in such reasonable detail and on such
timely basis as is reasonably required by the Company in connection with the
preparation of the registration statement. Whenever Purchasers have requested
that any shares of Common Stock be registered pursuant to Section 1.1 or 1.2
hereof, the Company shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement
with respect to such shares and use its best efforts to cause such registration
statement to become effective as soon as reasonably practicable thereafter
(provided that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company shall furnish
-3-
<PAGE>
counsel for Purchasers with copies of all such documents proposed to be filed);
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of not less than nine months (or two years, if the provisions of Rule
415 under the Act are available with respect thereto) or until Purchasers have
completed the distribution described in such registration statement, whichever
occurs first;
(c) furnish to Purchasers such number of copies of such
registration statement, each amendment and supplement thereto, the prospectus
included in such registration statement (including each preliminary prospectus),
and such other document as Purchasers may reasonably request;
(d) use its best efforts to register or qualify such shares
under such other securities or blue sky laws of such jurisdictions as Purchasers
request (and to maintain such registrations and qualifications effective for a
period of nine months or until Purchasers have completed the distribution of
such shares, whichever occurs first), and to do any and all other acts and
things which may be necessary or advisable to enable Purchasers to consummate
the disposition in such jurisdictions of such shares (provided that the Company
will not be required to (i) qualify generally to do business in any jurisdiction
where it would not be required but for this Section 1.3(d), (ii) subject itself
to taxation in any such jurisdiction, or (iii) file any general consent to
service of process in any such jurisdiction);
(e) notify Purchasers, at any time during which a prospectus
relating thereto is required to be delivered under the Act within the period
that the Company is required to keep a registration statement effective, of the
happening of any event as a result of which the prospectus included in such
registration statement contains an untrue statement of a material fact or omits
any fact necessary to make the statements therein not misleading, and prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such shares, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading;
(f) use its best efforts to cause all such shares to be
listed on securities exchanges or interdealer quotation systems (including
NASDAQ National or Small-Cap Market), if any, on which similar securities issued
by the Company are then listed;
-4-
<PAGE>
(g) enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other actions as
Purchasers reasonably request (and subject to Purchasers' reasonable approval)
in order to expedite or facilitate the disposition of such shares; and
(h) make reasonably available for inspection by Purchasers,
by any underwriter participating in any distribution pursuant to such
registration statement, and by any attorney, accountant or other agent retained
by Purchasers or by any such underwriter, all relevant financial and other
records, pertinent corporate documents, and properties (other than confidential
intellectual property) of the Company; provided, however, that any information
that is designated in writing by the Company, in good faith, as confidential at
the time of delivery of such information shall be kept confidential by
Purchasers or any such underwriter, attorney, accountant or agent, unless such
disclosure is made in connection with a court proceeding or required by law, or
such information becomes available to the public generally or through a third
party without an accompanying obligation of confidentiality.
1.4 Registration Expenses.
---------------------
The Company will pay all Registration Expenses of all
registrations under this Agreement, provided, however, that if a registration
-------- -------
under Section 1.1 is withdrawn at the request of Purchasers (other than as a
result of information concerning the business or financial condition of the
Company that is made known to the Purchasers after the date on which such
registration was requested) and if the requesting Purchasers elect not to have
such registration counted as a registration requested under Section 1.1,
Purchasers shall pay the Registration expenses of such registration. For
purposes of this Section, the term "Registration Expenses" means all expenses
incurred by the Company in complying with this Section, including, without
limitation, all registration and filing fees (other than National Association of
Securities Dealers, Inc. filing fees pursuant to an underwritten offering),
exchange listing fees, printing expenses, fees, and expenses of counsel for the
Company and the reasonable fees and expenses of one firm or counsel selected by
Purchasers to represent it, state Blue Sky fees and expenses, and the expense of
any special audits incident to or required by any such registration, but
excluding underwriting discounts and selling commissions.
1.5 Indemnity.
---------
(a) In the event that any shares of Common Stock owned by
Purchasers are sold by means of a registration statement pursuant to Section 1.1
or 1.2 hereof, the Company
-5-
<PAGE>
agrees to indemnify and hold harmless such Purchasers, each of its partners and
their officers and directors, and each person, if any, who controls such
Purchasers within the meaning of the Act (Purchaser, its partners and their
officers and directors, and any such other persons being hereinafter referred to
individually as an "Indemnified Person" and collectively as "Indemnified
Persons") from and against all demands, claims, actions or causes of action,
assessments, losses, damages, liabilities, costs, and expenses, including,
without limitation, interest, penalties, and reasonable attorneys' fees and
disbursements, asserted against, resulting to, imposed upon or incurred by such
Indemnified Person, directly or indirectly (hereinafter referred to in this
Section 1.5 in the singular as a "claim" and in the plural as "claims"), based
upon, arising out of or resulting from any untrue statement of a material fact
contained in the registration statement or any omission to state therein a
material fact necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading, except insofar as such
claim is based upon, arises out of or result from information furnished to the
Company in writing by such Purchaser for use in connection with the registration
statement.
(b) Each Purchaser agrees to indemnify and hold harmless the
Company, its officers and directors, and each person, if any, who controls the
Company within the meaning of the Act (the Company, its officers and directors,
and any such other persons also being hereinafter referred to individually as an
"Indemnified Person" and collectively as "Indemnified Persons") from and against
all claims based upon, arising out of or resulting from any untrue statement of
a material fact contained in the registration statement or any omission to state
therein a material fact necessary in order to make the statement made therein,
in the light of the circumstances under which they were made, not misleading, to
the extent that such claim is based upon, arises out of or result from
information furnished to the Company in writing by Purchaser for use in
connection with the registration statement.
(c) The indemnification set forth herein shall be in addition
to any liability the Company or a Purchaser may otherwise have to the
Indemnified Persons. Promptly after actually receiving definitive notice of any
claim in respect of which an Indemnified Person may seek indemnification under
this Section 1.5, such Indemnified Person shall submit written notice thereof to
either the Company or Purchaser, as the case may be (sometimes being hereinafter
referred to as an "Indemnifying Person"). The failure of the Indemnified Person
so to notify the Indemnifying Person of any such claim shall not relieve the
Indemnifying Person from any liability it may have hereunder except to the
extent that (a) such liability was caused or
-6-
<PAGE>
materially increased by such failure, or (b) the ability of the Indemnifying
Person to reduce such liability was materially adversely affected by such
failure. In addition, the failure of the Indemnified Person so to notify the
Indemnifying Person of any such claim shall not relieve the Indemnifying Person
from any liability it may have otherwise than hereunder. The Indemnifying
Person shall have the right to undertake, by counsel or representatives of its
own choosing, the defense, compromise or settlement (without admitting liability
of the Indemnified Person) of any such claim asserted, such defense, compromise
or settlement to be undertaken at the expense and risk of the Indemnifying
Person, and the Indemnified Person shall have the right to engage separate
counsel, at such Indemnified Person's own expense, whom counsel for the
Indemnifying Person shall keep informed and consult with in a reasonable manner.
In the event the Indemnifying Person shall elect not to undertake such defense
by its own representatives, the Indemnifying Person shall give prompt written
notice of such election to the Indemnified Person, and the Indemnified Person
may undertake the defense, compromise or settlement without admitting liability
of the Indemnified Person) thereof on behalf of and for the account and risk of
the Indemnifying Person by counsel or other representatives designated by the
Indemnified Person. Notwithstanding the foregoing, no Indemnifying Person shall
be obligated hereunder with respect to amounts paid in settlement of any claim
if such settlement is effected without the consent of such Indemnifying Person
(which consent shall not be unreasonably withheld).
(d) If for any reason the foregoing indemnity is unavailable
to, or is insufficient to hold harmless, an Indemnified Person, then the
Indemnifying Person shall contribute to the amount paid or payable by the
Indemnified Person as a result of such claims, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Person and the
Indemnified Person as well as any other relevant equitable considerations. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
1.6 Subsequent Registration Statements. The Company shall not
----------------------------------
cause or permit any new registration statements (except registration statements
on Form S-8, S-4, or comparable forms) to become effective during the 90 days
after the effective date of a registration statement covering shares of Common
Stock owned by Purchasers.
2. Miscellaneous.
-------------
2.1 Additional Actions and Documents. Each of the parties hereto
--------------------------------
hereby agrees to use its good faith best
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<PAGE>
efforts to take or cause to be taken such further actions, to execute, deliver
and file or cause to be executed, delivered and filed such further documents and
instruments, and to obtain such consents, as may be necessary or as may be
reasonably requested in order to fully effectuate the purposes, terms and
conditions of this Agreement.
2.2 Assignment. Any Purchaser may assign its rights under this
----------
Agreement to any assignee of the Warrant or the shares of Common Stock issuable
thereunder.
2.3 Entire Agreement; Amendment. This Agreement, including the other
---------------------------
writings referred to herein or delivered pursuant hereto, constitutes the entire
agreement among the parties hereto with respect to the transactions contemplated
herein, and its supersedes all prior oral or written agreements, commitments or
understandings with respect to the matters provided for herein. No amendment,
modification or discharge of this Agreement shall be valid or binding unless set
forth in writing and duly executed by a party against whom enforcement of the
amendment, modification, or discharge is sought.
2.4 Limitation on Benefits. It is the explicit intention of the
----------------------
parties hereto that no person or entity other than the parties hereto (and their
respective successors and assigns) is or shall be entitled to bring any action
to enforce any provision of this Agreement against any of the parties hereto,
and the covenants, undertakings and agreements set forth in this Agreement shall
be solely for the benefit of, and shall be enforceable only by, the parties
hereto or their respective successors and assigns.
2.5 Binding Effect. This Agreement shall be binding upon and shall
--------------
inure to the benefit of the parties hereto and their respective successors and
assigns.
2.6 Governing Law. This Agreement, the rights and obligations of
-------------
the parties hereto, and any claims or disputes relating thereto, shall be
governed by and construed in accordance with the laws of Delaware.
2.7 Notices. All notices, demands, requests, or other communications
-------
which may be or are required to be given, served, or sent by any party to any
other party pursuant to this Agreement shall be in writing and shall be mailed
by first-class, registered or certified mail, return receipt requested, postage
prepaid, or transmitted by hand delivery (including delivery by courier),
telegram, telex, or facsimile transmission, addressed as follows:
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<PAGE>
(a) If to the Company:
The Right Start, Inc.
5334 Starling Center Drive
Westlake Village, California 91361
Attention: President
Facsimile: (818) 707-7132
with a copy (which shall not constitute
notice) to:
Milbank, Tweed, Hadley & McCloy
601 S. Figueroa, 30th Floor
Los Angeles, CA 90017
Attention: Kenneth J. Baronsky, Esq.
Facsimile: (213) 629-5063
(b) If to Purchaser, to the address set
forth in the Securities Purchase
Agreement for such Purchaser.
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a telex) the answer back being deemed conclusive
(but not exclusive) evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
2.8 Headings. Article and Section headings contained in this
--------
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
2.9 Execution in Counterparts. To facilitate execution, this
-------------------------
Agreement may be executed in as many counterparts as may be required; and it
shall not be necessary that the signatures of each party appear on each
counterpart; but it shall be sufficient that the signature of each party appear
on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of
this Agreement to produce or account for more than a number of counterparts
containing the respective signatures of all of the parties hereto.
-9-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
THE RIGHT START, INC.
By: /s/ Jerry R. Welch
------------------
Jerry R. Welch
Chief Executive Officer
The Purchasers:
ARBCO ASSOCIATES, L.P.
By: /s/ Robert V. Sinnott
---------------------
Robert V. Sinnott
Vice President of Kayne
Anderson Investment
Management, general partner of
KAIM Non-Traditional, LP,
General Partner
CAHILL, WARNOCK STRATEGIC PARTNERS
FUND, L.P.
By: /s/ David L. Warnock
------------------------------
FRED KAYNE, an individual
/s/ Fred Kayne
-----------------------------------
<PAGE>
KAYNE ANDERSON NON-TRADITIONAL
INVESTMENTS, L.P.
By: /s/ Robert V. Sinnott
------------------------------
Robert V. Sinnott
Vice President of Kayne
Anderson Investment
Management, general partner of
KAIM Non-Traditional, LP,
General Partner
KAYNE ANDERSON OFFSHORE LIMITED
By: /s/ CFS Cinoabt KTD
------------------------------
CFS Company Ltd., Director
OFFENSE GROUP ASSOCIATES, L.P.
By: /s/ Robert V. Sinnott
------------------------------
Robert V. Sinnott
Vice President of Kayne
Anderson Investment
Management, general partner of
KAIM Non-Traditional, LP,
General Partner
STRATEGIC ASSOCIATES, L.P.
By: /s/ David L. Warnock
------------------------------
David L. Warnock
OPPORTUNITY ASSOCIATES, L.P.
By: /s/ Robert V. Sinnott
------------------------------
Robert V. Sinnott
Vice President of Kayne
Anderson Investment
Management, general partner of
KAIM Non-Traditional, LP,
General Partner
<PAGE>
MICHAEL TARGOFF, an individual
/s/ Michael Targoff
-----------------------------------
THE TRAVELERS INDEMNITY COMPANY
By: /s/ David A. Tyson
------------------------------
Name: David A. Tyson
Title: Senior Vice President
ARTHUR E. HALL, as Trustee for the
A. E. Hall & Company Money Purchase
Plan
By: /s/ Arthur E. Hall
-------------------------------
Arthur E. Hall
<PAGE>
EXHIBIT 10.19
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of
September 4, 1997 between The Right Start, Inc., a California corporation (the
"Company"), and ARBCO Associates, L.P., a California limited partnership,
Cahill, Warnock Strategic Partners Fund, L.P., a Delaware limited partnership,
Fred Kayne, an individual, Jerry D. Kayne, as trustee for the Jerry D. Kayne and
Ida Kayne Recovable Trust UAD 2/14/83, Richard A. Kayne, an individual, Kayne
Anderson Non-Traditional Investments, L.P., a California limited partnership,
Kayne Anderson Offshore Limited, a British Virgin Islands company, James M.
Mallick, an individual, Offense Group Associates, L.P., a California limited
partnership, Opportunity Associates, L.P., a California limited partnership,
Strategic Associates, L.P., a Delaware limited partnership, Michael Targoff, an
individual, and The Travelers Indemnity Company, a Connecticut corporation (each
individually a "Purchaser," and collectively the "Purchasers").
WHEREAS, the Company and Purchasers have entered into a Securities Purchase
Agreement dated as of September 4, 1997 (the "Purchase Agreement")
WHEREAS, pursuant to the Purchase Agreement, the Company and Purchasers
desire to enter into this Agreement to provide Purchasers with certain
registration rights and to address related matters;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties agree as follows:
1. Registration Rights.
-------------------
1.1 Demand Registration Rights.
--------------------------
(a) Subject to the provisions of this Section 1.1, at any time after
the date hereof, Purchasers may request registration for sale under the
Securities Act of 1933, as amended (the "Act") of all or part of the Common
Stock, no par value per share of the Company (the "Common Stock") then held by
Purchasers or issuable to Purchasers. The Company shall thereafter, as
expeditiously as practicable, use its best efforts (i) to file with the
Securities and Exchange Commission (the "SEC") under the Act, a registration
statement on the appropriate form (using Form S-3 or other "short form," if
available) covering all the shares of Common Stock specified in the demand
request and (ii) to cause such registration statement to be declared effective.
The Company shall use its best efforts to
<PAGE>
cause each offering pursuant to this Section 1.1 to be managed, on a firm
commitment basis, by a recognized regional or national underwriter. The Company
shall not be required to comply with more than two (2) requests by Purchasers
for demand registration pursuant to this Section 1.1(a).
(b) The Company shall not be required to effect a demand registration
under the Act pursuant to Section 1.1(a) above if (i) the Company receives such
request for registration within 120 days preceding the anticipated effective
date of a proposed underwritten public offering of securities of the Company
approved by the Company's Board of Directors prior to the Company's receipt of
such request; (ii) within 6 months prior to any such request for registration, a
registration of securities of the Company has been effected in which Purchasers
had the right to participate pursuant to Section 1.2 hereof; or (iii) the Board
of Directors of the Company reasonably determines in good faith that effecting
such a demand registration at such time would have a material adverse effect
upon a proposed sale of all (or substantially all) the assets of the Company, or
a merger, reorganization, recapitalization, or similar transaction materially
affecting the capital structure or equity ownership of the Company; provided,
however, that the Company may only delay a demand registration pursuant to this
Section 1.1(b)(iii) for a period not exceeding 3 months (or until such earlier
time as such transaction is consummated or no longer proposed). The Company
shall promptly notify Purchasers in writing of any decision not to effect any
such request for registration pursuant to this Section 1.1(b), which notice
shall set forth in reasonable detail the reason for such decision and shall
include an undertaking by the Company promptly to notify Purchasers as soon as a
demand registration may be effected.
(c) Purchasers may withdraw a request for demand registration at any
time before a registration statement is declared effective, in which event the
Company shall withdraw such registration statement (and Purchasers shall not be
deemed to have requested a demand registration for purposes of Section 1.1(a)
hereof). If the Company withdraws a registration statement under this Section
1.1(c) in respect of a registration for which the Company would otherwise be
required to pay expenses under Section 1.4(b) hereof, Purchasers shall be liable
to the Company for all expenses of such registration specified in Section 1.4(b)
hereof in proportion to the number of shares each of the Purchasers shall have
requested to be registered, and Purchasers shall not be deemed to have requested
a demand registration for purposes of Section 1.1(a) hereof.
1.2 Piggyback Registration Rights.
-----------------------------
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<PAGE>
(a) If at any time or times after the date hereof, the Company
proposes to make a registered public offering of any of its securities under the
Act, whether to be sold by it or by one or more third parties (other than an
offering pursuant to a demand registration under Section 1.1 hereof or an
offering registered on Form S-8, Form S-4, or comparable forms), the Company
shall, not less than 45 days prior to the proposed filing date of the
registration form, give written notice of the proposed registration to
Purchasers, and at the written request of Purchasers delivered to the Company
within 20 days after the receipt of such notice, shall include in such
registration and offering, and in any underwriting of such offering, all shares
of Common Stock that may have been designated in Purchasers' request.
(b) If a registration in which Purchasers have the right to participate
pursuant to this Section 1.2 is an underwritten offering for the account of the
Company or for the account of a security holder (other than Purchaser) pursuant
to the exercise of a demand registration right, and the managing underwriters
advise the Company or such security holder, as the case may be, in writing that
in their opinion the number of securities requested to be included in such
registration, together with the securities being offered by the Company or such
security holder, as the case may be, exceeds the number which can be effectively
sold in such offering, the Company shall include in such registration (i) first,
the securities of the Company or such security holder proposed to be sold, and
(ii) second, to the extent possible, the Common Stock proposed to be sold by
each of the Purchasers and any other selling stockholders, in proportion to the
number of shares of Common Stock with respect to which they have requested
registration.
1.3 Registration Procedures. The Company shall have no obligation to file
-----------------------
a registration statement pursuant to Section 1.1 hereof, or to include shares of
Common Stock owned by or issuable to any Purchaser in a registration statement
pursuant to Section 1.2 hereof, unless and until such Purchaser shall have
furnished the Company with all information and statements about or pertaining to
such Purchaser in such reasonable detail and on such timely basis as is
reasonably required by the Company in connection with the preparation of the
registration statement. Whenever Purchasers have requested that any shares of
Common Stock be registered pursuant to Sections 1.1 or 1.2 hereof, the Company
shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement with
respect to such shares and use its best efforts to cause such registration
statement to become effective as soon as reasonably practicable thereafter
(provided that before filing a registration statement or prospectus or any
-3-
<PAGE>
amendments or supplements thereto, the Company shall furnish counsel for
Purchasers with copies of all such documents proposed to be filed);
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and prospectus used in connection therewith as may
be necessary to keep such registration statement effective for a period of not
less than nine months (or two years, if the provisions of Rule 415 under the Act
are available with respect thereto) or until Purchasers have completed the
distribution described in such registration statement, whichever occurs first;
(c) furnish to Purchasers such number of copies of such registration
statement, each amendment and supplement thereto, the prospectus included in
such registration statement (including each preliminary prospectus), and such
other document as Purchasers may reasonably request;
(d) use its best efforts to register or qualify such shares under such
other securities or blue sky laws of such jurisdictions as Purchasers request
(and to maintain such registrations and qualifications effective for a period of
nine months or until Purchasers have completed the distribution of such shares,
whichever occurs first), and to do any and all other acts and things which may
be necessary or advisable to enable Purchasers to consummate the disposition in
such jurisdictions of such shares (provided that the Company will not be
required to (i) qualify generally to do business in any jurisdiction where it
would not be required but for this Section 1.3(d), (ii) subject itself to
taxation in any such jurisdiction, or (iii) file any general consent to service
of process in any such jurisdiction);
(e) notify Purchasers, at any time during which a prospectus relating
thereto is required to be delivered under the Act within the period that the
Company is required to keep a registration statement effective, of the happening
of any event as a result of which the prospectus included in such registration
statement contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading, and prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such shares, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading;
(f) use its best efforts to cause all such shares to be listed on
securities exchanges or interdealer quotation systems (including Nasdaq National
or Small-Cap Market), if any, on which similar securities issued by the Company
are then listed;
-4-
<PAGE>
(g) enter into such customary agreements (including an underwriting
agreement in customary form) and take all such other actions as Purchasers
reasonably request (and subject to Purchasers' reasonable approval) in order to
expedite or facilitate the disposition of such shares; and
(h) make reasonably available for inspection by Purchasers, by any
underwriter participating in any distribution pursuant to such registration
statement, and by any attorney, accountant or other agent retained by Purchasers
or by any such underwriter, all relevant financial and other records, pertinent
corporate documents, and properties (other than confidential intellectual
property) of the Company; provided, however, that any information that is
designated in writing by the Company, in good faith, as confidential at the time
of delivery of such information shall be kept confidential by Purchasers or any
such underwriter, attorney, accountant or agent, unless such disclosure is made
in connection with a court proceeding or required by law, or such information
becomes available to the public generally or through a third party without an
accompanying obligation of confidentiality.
1.4 Registration Expenses.
---------------------
The Company will pay all Registration Expenses of all registrations under
this Agreement; provided, however, that if a registration under Section 1.1 is
-------- -------
withdrawn at the request of Purchasers (other than as a result of information
concerning the business or financial condition of the Company that is made known
to the Purchasers after the date on which such registration was requested) and
if the requesting Purchasers elect not to have such registration counted as a
registration requested under Section 1.1, Purchasers shall pay the Registration
expenses of such registration. For purposes of this Section, the term
"Registration Expenses" means all expenses incurred by the Company in complying
with this Section, including, without limitation, all registration and filing
fees (other than National Association of Securities Dealers, Inc. filing fees
pursuant to an underwritten offering), exchange listing fees, printing expenses,
fees, and expenses of counsel for the Company and the reasonable fees and
expenses of one firm or counsel selected by Purchasers to represent it, state
Blue Sky fees and expenses, and the expense of any special audits incident to or
required by any such registration, but excluding underwriting discounts and
selling commissions.
1.5 Indemnity.
---------
(a) In the event that any shares of Common Stock owned by Purchasers
are sold by means of a registration statement pursuant to Section 1.1 or 1.2
hereof, the Company
-5-
<PAGE>
agrees to indemnify and hold harmless such Purchasers, each of its partners and
their officers and directors, and each person, if any, who controls such
Purchasers within the meaning of the Act (Purchaser, its partners and their
officers and directors, and any such other persons being hereinafter referred to
individually as an "Indemnified Person" and collectively as "Indemnified
Persons") from and against all demands, claims, actions or causes of action,
assessments, losses, damages, liabilities, costs, and expenses, including,
without limitation, interest, penalties, and reasonable attorneys' fees and
disbursements, asserted against, resulting to, imposed upon or incurred by such
Indemnified Person, directly or indirectly (hereinafter referred to in this
Section 1.5 in the singular as a "claim" and in the plural as "claims"), based
upon, arising out of or resulting from any untrue statement of a material fact
contained in the registration statement or any omission to state therein a
material fact necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading, except insofar as such
claim is based upon, arises out of or result from information furnished to the
Company in writing by such Purchaser for use in connection with the registration
statement.
(b) Each Purchaser agrees to indemnify and hold harmless the
Company, its officers and directors, and each person, if any, who controls the
Company within the meaning of the Act (the Company, its officers and directors,
and any such other persons also being hereinafter referred to individually as an
"Indemnified Person" and collectively as "Indemnified Persons") from and against
all claims based upon, arising out of or resulting from any untrue statement of
a material fact contained in the registration statement or any omission to state
therein a material fact necessary in order to make the statement made therein,
in the light of the circumstances under which they were made, not misleading, to
the extent that such claim is based upon, arises out of or result from
information furnished to the Company in writing by Purchaser for use in
connection with the registration statement.
(c) The indemnification set forth herein shall be in addition to
any liability the Company or a Purchaser may otherwise have to the Indemnified
Persons. Promptly after actually receiving definitive notice of any claim in
respect of which an Indemnified Person may seek indemnification under this
Section 1.5, such Indemnified Person shall submit written notice thereof to
either the Company or Purchaser, as the case may be (sometimes being hereinafter
referred to as an "Indemnifying Person"). The failure of the Indemnified Person
so to notify the Indemnifying Person of any such claim shall not relieve the
Indemnifying Person from any liability it may have hereunder except to the
extent that (a) such liability was caused or
-6-
<PAGE>
materially increased by such failure, or (b) the ability of the Indemnifying
Person to reduce such liability was materially adversely affected by such
failure. In addition, the failure of the Indemnified Person so to notify the
Indemnifying Person of any such claim shall not relieve the Indemnifying Person
from any liability it may have otherwise than hereunder. The Indemnifying
Person shall have the right to undertake, by counsel or representatives of its
own choosing, the defense, compromise or settlement (without admitting liability
of the Indemnified Person) of any such claim asserted, such defense, compromise
or settlement to be undertaken at the expense and risk of the Indemnifying
Person, and the Indemnified Person shall have the right to engage separate
counsel, at such Indemnified Person's own expense, whom counsel for the
Indemnifying Person shall keep informed and consult with in a reasonable manner.
In the event the Indemnifying Person shall elect not to undertake such defense
by its own representatives, the Indemnifying Person shall give prompt written
notice of such election to the Indemnified Person, and the Indemnified Person
may undertake the defense, compromise or settlement without admitting liability
of the Indemnified Person) thereof on behalf of and for the account and risk of
the Indemnifying Person by counsel or other representatives designated by the
Indemnified Person. Notwithstanding the foregoing, no Indemnifying Person shall
be obligated hereunder with respect to amounts paid in settlement of any claim
if such settlement is effected without the consent of such Indemnifying Person
(which consent shall not be unreasonably withheld).
(d) If for any reason the foregoing indemnity is unavailable to,
or is insufficient to hold harmless, an Indemnified Person, then the
Indemnifying Person shall contribute to the amount paid or payable by the
Indemnified Person as a result of such claims, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Person and the
Indemnified Person as well as any other relevant equitable considerations. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
1.6 Subsequent Registration Statements. The Company shall not cause
----------------------------------
or permit any new registration statements (except registration statements on
Form S-8, S-4, or comparable forms) to become effective during the 90 days after
the effective date of a registration statement covering shares of Common Stock
owned by Purchasers.
2. Miscellaneous.
-------------
2.1 Additional Actions and Documents. Each of the parties hereto hereby
--------------------------------
agrees to use its good faith best
-7-
<PAGE>
efforts to take or cause to be taken such further actions, to execute, deliver
and file or cause to be executed, delivered and filed such further documents and
instruments, and to obtain such consents, as may be necessary or as may be
reasonably requested in order to fully effectuate the purposes, terms and
conditions of this Agreement.
2.2 Assignment. Any Purchaser may assign its rights under Section 1.2 of
----------
this Agreement with respect to the Common Stock purchased hereunder.
2.3 Entire Agreement; Amendment. This Agreement, including the other
---------------------------
writings referred to herein or delivered pursuant hereto, constitutes the entire
agreement among the parties hereto with respect to the transactions contemplated
herein, and its supersedes all prior oral or written agreements, commitments or
understandings with respect to the matters provided for herein. No amendment,
modification or discharge of this Agreement shall be valid or binding unless set
forth in writing and duly executed by a party against whom enforcement of the
amendment, modification, or discharge is sought.
2.4 Limitation on Benefits. It is the explicit intention of the parties
----------------------
hereto that no person or entity other than the parties hereto (and their
respective successors and assigns) is or shall be entitled to bring any action
to enforce any provision of this Agreement against any of the parties hereto,
and the covenants, undertakings and agreements set forth in this Agreement shall
be solely for the benefit of, and shall be enforceable only by, the parties
hereto or their respective successors and assigns.
2.5 Binding Effect. This Agreement shall be binding upon and shall inure
--------------
to the benefit of the parties hereto and their respective successors and
assigns.
2.6 Governing Law. This Agreement, the rights and obligations of the
-------------
parties hereto, and any claims or disputes relating thereto, shall be governed
by and construed in accordance with the laws of Delaware.
2.7 Notices. All notices, demands, requests, or other communications
-------
which may be or are required to be given, served, or sent by any party to any
other party pursuant to this Agreement shall be in writing and shall be mailed
by first-class, registered or certified mail, return receipt requested, postage
prepaid, or transmitted by hand delivery )including delivery by courier),
telegram, telex, or facsimile transmission, addressed as follows:
(a) If to the Company:
-8-
<PAGE>
The Right Start, Inc.
5334 Starling Center Drive
Westlake Village, California 91361
Attention: President
Facsimile: (818) 707-7132
with a copy (which shall not constitute notice) to:
Milbank, Tweed, Hadley & McCloy
601 S. Figueroa, 30th Floor
Los Angeles, CA 90017
Attention: Kenneth J. Baronsky, Esq.
Facsimile: (213) 629-5063
(b) If to Purchaser, to the address set
forth in the Securities Purchase
Agreement for such Purchaser.
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a telex) the answer back being deemed conclusive
(but not exclusive) evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
2.8 Headings. Article and Section headings contained in this
--------
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
2.9 Execution in Counterparts. To facilitate execution, this
-------------------------
Agreement may be executed in as many counterparts as may be required; and it
shall not be necessary that the signatures of each party appear on each
counterpart; but it shall be sufficient that the signature of each party appear
on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of
this Agreement to produce or account for more than a number of counterparts
containing the respective signatures of all of the parties hereto.
-9-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
THE RIGHT START, INC.
By: /s/ Jerry R. Welch
----------------------------------
Jerry R. Welch
Chief Executive Officer
The Purchasers:
ARBCO Associates, L.P.
By: /s/ Robert V. Sinnott
----------------------------------
Name: Robert V. Sinnott
Title: Vice President
Cahill, Warnock Strategic Partners
Fund, L.P.
By: Cahill, Warnock Strategic
Partners, L.P., its general
partner
By: /s/ David L. Warnock
----------------------------------
Name: David L. Warnock
Title: a General Partner
Fred Kayne, an individual
By: /s/ Fred Kayne
----------------------------------
<PAGE>
Jerry D. Kayne TTEE
Jerry D. Kayne and Ida Kayne
Revocable Trust UAD 2/14/83
2182 Century Hill
Los Angeles, CA 90067
By: /s/ Jerry D. Kayne, trustee
-----------------------------
Jerry D. Kayne, trustee
Richard A. Kayne, an individual
By: /s/ Richard A. Kayne
-------------------------------
Kayne Anderson Non-Traditional
Investments, L.P.
By: /s/ Robert V. Sinnott
-------------------------------
Name: Robert V. Sinnott
Title: Vice President
Kayne Anderson Offshore Limited
By: /s/ S. Gorward
-------------------------------
Name: S. Gorward
Title: CFS Company Ltd.
Director
James M. Mallick, an individual
By: /s/ James M. Mallick
------------------------------
<PAGE>
Offense Group Associates, L.P.
By: /s/ Robert V. Sinnott
-------------------------------
Name: Robert V. Sinnott
Title: Vice President
Opportunity Associates, L.P.
By: /s/ Robert V. Sinnott
--------------------------------
Name: Robert V. Sinnott
Title: Vice President
Strategic Associates, L.P.
By: Cahill, Warnock & Company,
LLC, its general partner
By: /s/ David L. Warnock
--------------------------------
Name: David L. Warnock
Title: Managing Member
Michael Targoff, an individual
/s/ Michael Targoff
-----------------------------------
The Travelers Indemnity Company
By: /s/ Harvey Eisen
-------------------------------
Name: Harvey Eisen
Title: Vice President
<PAGE>
EXHIBIT 10.23
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of
April 13, 1998 between The Right Start, Inc., a California corporation (the
"Company"), and ARBCO Associates, L.P., a California limited partnership, Kayne
Anderson Non-Traditional Investments, L.P., a California limited partnership,
Kayne Anderson Offshore Limited, a British Virgin Islands corporation, Offense
Group Associates, L.P., a California limited partnership, Opportunity
Associates, L.P., a California limited partnership and Arthur E. Hall, as
Trustee for the Arthur E. Hall & Company Money Purchase Plan (each individually
a "Purchaser," and collectively the "Purchasers").
WHEREAS, the Company and Purchasers have entered into a Securities
Purchase Agreement dated as of April 13, 1998 (the "Purchase Agreement")
WHEREAS, pursuant to the Purchase Agreement, the Company and
Purchasers desire to enter into this Agreement to provide Purchasers with
certain registration rights and to address related matters;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties agree as follows:
1. Registration Rights.
-------------------
1.1 Demand Registration Rights.
--------------------------
(a) Subject to the provisions of this Section 1.1, at any time after
the date hereof, Purchasers may request registration for sale under the Act of
all or part of the Common Stock, no par value, of the Company ("Common Stock")
then held by Purchasers or issuable to Purchasers pursuant to exercise of the
Warrant of even date herewith, issued by the Company to Purchasers pursuant to
the Purchase Agreement (the "Warrant"). The Company shall thereafter, as
expeditiously as practicable, use its best efforts (i) to file with the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "Act"), a registration statement on the appropriate form (using
Form S-3 or other "short form," if available) covering all the shares of Common
Stock specified in the demand request and (ii) to cause such registration
statement to be declared effective. The Company shall use its best efforts to
cause each offering pursuant to this Section 1.1 to be managed, on a firm
commitment basis, by a recognized regional or national underwriter. The Company
shall not be required to comply with more than two (2) requests by Purchasers
for demand registration pursuant to this Section 1.1(a).
<PAGE>
(b) The Company shall not be required to effect a demand registration
under the Act pursuant to Section 1.1(a) above if (i) the Company receives such
request for registration within 120 days preceding the anticipated effective
date of a proposed underwritten public offering of securities of the Company
approved by the Company's Board of Directors prior to the Company's receipt of
such request; (ii) within 180 days prior to any such request for registration ,
a registration of securities of the Company has been effected in which
Purchasers had the right to participate pursuant to Section 1.2 hereof; or (iii)
the Board of Directors of the Company reasonably determines in good faith that
effecting such a demand registration at such time would have a material adverse
effect upon a proposed sale of all (or substantially all) the assets of the
Company, or a merger, reorganization, recapitalization, or similar transaction
materially affecting the capital structure or equity ownership of the Company,
including the transactions set forth in the Letter Agreement dated April 6, 1998
(the "Letter Agreement") among the Company, the holders of the Company's
Convertible Debentures and the holders of the Company's 11.5% Senior
Subordinated Notes due 2000; provided, however, that the Company may only delay
a demand registration pursuant to this Section 1.1(b)(iii) for a period not
exceeding 90 days (or until such earlier time as such transaction is consummated
or no longer proposed). The Company shall promptly notify Purchasers in writing
of any decision not to effect any such request for registration pursuant to this
Section 1.1(b), which notice shall set forth in reasonable detail the reason for
such decision and shall include an undertaking by the Company promptly to notify
Purchasers as soon as a demand registration may be effected.
(c) Purchasers may withdraw a request for demand registration at any
time before a registration statement is declared effective, in which event the
Company shall withdraw such registration statement (and Purchasers shall not be
deemed to have requested a demand registration for purposes of Section 1.1(a)
hereof). If the Company withdraws a registration statement under this Section
1.1(c) in respect of a registration for which the Company would otherwise be
required to pay expenses under Section 1.4(b) hereof, Purchasers shall be liable
to the Company for all expenses of such registration specified in Section 1.4(b)
hereof in proportion to the number of shares each of the Purchasers shall have
requested to be registered, and Purchasers shall not be deemed to have requested
a demand registration for purposes of Section 1.1(a) hereof.
1.2 Piggyback Registration Rights.
-----------------------------
(a) If at any time or times after the date hereof, the Company
proposes to make a registered public offering of any of its securities under the
Act, whether to be sold by it or by one or more third parties (other than an
offering pursuant to a demand registration under Section 1.1(a) hereof or an
-2-
<PAGE>
offering registered on Form S-8, Form S-4, or comparable forms), the Company
shall, not less than 45 days prior to the proposed filing date of the
registration form, give written notice of the proposed registration to
Purchasers, and at the written request of Purchasers delivered to the Company
within 20 days after the receipt of such notice, shall include in such
registration and offering, and in any underwriting of such offering, all shares
of Common Stock that may have been designated in Purchasers' request.
(b) If a registration in which Purchasers have the right to
participate pursuant to this Section 1.2 is an underwritten offering for the
account of the Company or for the account of a security holder (other than
Purchaser) pursuant to the exercise of a demand registration right, and the
managing underwriters advise the Company or such security holder, as the case
may be, in writing that in their opinion the number of securities requested to
be included in such registration, together with the securities being offered by
the Company or such security holder, as the case may be, exceeds the number
which can be effectively sold in such offering, the Company shall include in
such registration (i) first, the securities of the Company or such security
holder proposed to be sold, and (ii) second, to the extent possible, the Common
Stock proposed to be sold by each of the Purchasers and any other selling
stockholders, in proportion to the number of shares of Common Stock with respect
to which they have requested registration.
1.3 Registration Procedures. The Company shall have no obligation to
-----------------------
file a registration statement pursuant to Section 1.1 hereof, or to include
shares of Common Stock owned by or issuable to any Purchaser in a registration
statement pursuant to Section 1.2 hereof, unless and until such Purchaser shall
have furnished the Company with all information and statements about or
pertaining to such Purchaser in such reasonable detail and on such timely basis
as is reasonably required by the Company in connection with the preparation of
the registration statement. Whenever Purchasers have requested that any shares
of Common Stock be registered pursuant to Section 1.1 or 1.2 hereof, the Company
shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement with
respect to such shares and use its best efforts to cause such registration
statement to become effective as soon as reasonably practicable thereafter
(provided that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company shall furnish counsel for
Purchasers with copies of all such documents proposed to be filed);
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and prospectus used in connection therewith as may
be necessary to
-3-
<PAGE>
keep such registration statement effective for a period of not less than nine
months (or two years, if the provisions of Rule 415 under the Act are available
with respect thereto) or until Purchasers have completed the distribution
described in such registration statement, whichever occurs first;
(c) furnish to Purchasers such number of copies of such registration
statement, each amendment and supplement thereto, the prospectus included in
such registration statement (including each preliminary prospectus), and such
other document as Purchasers may reasonably request;
(d) use its best efforts to register or qualify such shares under such
other securities or blue sky laws of such jurisdictions as Purchasers request
(and to maintain such registrations and qualifications effective for a period of
nine months or until Purchasers have completed the distribution of such shares,
whichever occurs first), and to do any and all other acts and things which may
be necessary or advisable to enable Purchasers to consummate the disposition in
such jurisdictions of such shares (provided that the Company will not be
required to (i) qualify generally to do business in any jurisdiction where it
would not be required but for this Section 1.3(d), (ii) subject itself to
taxation in any such jurisdiction, or (iii) file any general consent to service
of process in any such jurisdiction);
(e) notify Purchasers, at any time during which a prospectus relating
thereto is required to be delivered under the Act within the period that the
Company is required to keep a registration statement effective, of the happening
of any event as a result of which the prospectus included in such registration
statement contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein not misleading, and prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such shares, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading;
(f) use its best efforts to cause all such shares to be listed on
securities exchanges or interdealer quotation systems (including Nasdaq National
Market), if any, on which similar securities issued by the Company are then
listed;
(g) enter into such customary agreements (including an underwriting
agreement in customary form) and take all such other actions as Purchasers
reasonably request (and subject to Purchasers' reasonable approval) in order to
expedite or facilitate the disposition of such shares; and
-4-
<PAGE>
(h) make reasonably available for inspection by Purchasers, by
any underwriter participating in any distribution pursuant to such registration
statement, and by any attorney, accountant or other agent retained by Purchasers
or by any such underwriter, all relevant financial and other records, pertinent
corporate documents, and properties (other than confidential intellectual
property) of the Company; provided, however, that any information that is
designated in writing by the Company, in good faith, as confidential at the time
of delivery of such information shall be kept confidential by Purchasers or any
such underwriter, attorney, accountant or agent, unless such disclosure is made
in connection with a court proceeding or required by law, or such information
becomes available to the public generally or through a third party without an
accompanying obligation of confidentiality.
1.4 Registration Expenses.
---------------------
The Company will pay all Registration Expenses of all registrations
under this Agreement, provided, however, that if a registration under Section
-------- -------
1.1 is withdrawn at the request of Purchasers (other than as a result of
information concerning the business or financial condition of the Company that
is made known to the Purchasers after the date on which such registration was
requested) and if the requesting Purchasers elect not to have such registration
counted as a registration requested under Section 1.1, Purchasers shall pay the
Registration expenses of such registration. For purposes of this Section, the
term "Registration Expenses" means all expenses incurred by the Company in
complying with sections 1.1, 1.2 and 1.3, including, without limitation, all
registration and filing fees (other than National Association of Securities
Dealers, Inc. filing fees pursuant to an underwritten offering), exchange
listing fees, printing expenses, fees, and expenses of counsel for the Company
and the reasonable fees and expenses of one firm or counsel selected by
Purchasers to represent it, state Blue Sky fees and expenses, and the expense of
any special audits incident to or required by any such registration, but
excluding underwriting discounts and selling commissions.
1.5 Indemnity.
---------
(a) In the event that any shares of Common Stock owned by
Purchasers are sold by means of a registration statement pursuant to Section 1.1
or 1.2 hereof, the Company agrees to indemnify and hold harmless such
Purchasers, each of its partners and their officers and directors, and each
person, if any, who controls such Purchasers within the meaning of the Act
(Purchaser, its partners and their officers and directors, and any such other
persons being hereinafter referred to individually as an "Indemnified Person"
and collectively as "Indemnified Persons") from and against all demands, claims,
actions or causes of action, assessments, losses, damages,
-5-
<PAGE>
liabilities, costs, and expenses, including, without limitation, interest,
penalties, and reasonable attorneys' fees and disbursements, asserted against,
resulting to, imposed upon or incurred by such Indemnified Person, directly or
indirectly (hereinafter referred to in this Section 1.5 in the singular as a
"claim" and in the plural as "claims"), based upon, arising out of or resulting
from any untrue statement of a material fact contained in the registration
statement or any omission to state therein a material fact necessary to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading, except insofar as such claim is based upon, arises out of
or results from information furnished to the Company in writing by such
Purchaser for use in connection with the registration statement.
(b) Each Purchaser agrees to indemnify and hold harmless the Company,
its officers and directors, and each person, if any, who controls the Company
within the meaning of the Act (the Company, its officers and directors, and any
such other persons also being hereinafter referred to individually as an
"Indemnified Person" and collectively as "Indemnified Persons") from and against
all claims based upon, arising out of or resulting from any untrue statement of
a material fact contained in the registration statement or any omission to state
therein a material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading, to
the extent that such claim is based upon, arises out of or results from
information furnished to the Company in writing by Purchaser for use in
connection with the registration statement.
(c) The indemnification set forth herein shall be in addition to any
liability the Company or a Purchaser may otherwise have to the Indemnified
Persons. Promptly after actually receiving definitive notice of any claim in
respect of which an Indemnified Person may seek indemnification under this
Section 1.5, such Indemnified Person shall submit written notice thereof to
either the Company or Purchaser, as the case may be (sometimes being hereinafter
referred to as an "Indemnifying Person"). The failure of the Indemnified Person
so to notify the Indemnifying Person of any such claim shall not relieve the
Indemnifying Person from any liability it may have hereunder except to the
extent that (a) such liability was caused or materially increased by such
failure, or (b) the ability of the Indemnifying Person to reduce such liability
was materially adversely affected by such failure. In addition, the failure of
the Indemnified Person so to notify the Indemnifying Person of any such claim
shall not relieve the Indemnifying Person from any liability it may have
otherwise than hereunder. The Indemnifying Person shall have the right to
undertake, by counsel or representatives of its own choosing, the defense,
compromise or settlement (without admitting liability of the Indemnified Person)
of any such claim asserted, such defense, compromise or
-6-
<PAGE>
settlement to be undertaken at the expense and risk of the Indemnifying Person,
and the Indemnified Person shall have the right to engage separate counsel, at
such Indemnified Person's own expense, whom counsel for the Indemnifying Person
shall keep informed and consult with in a reasonable manner. In the event the
Indemnifying Person shall elect not to undertake such defense by its own
representatives, the Indemnifying Person shall give prompt written notice of
such election to the Indemnified Person, and the Indemnified Person may
undertake the defense, compromise or settlement (without admitting liability of
the Indemnified Person) thereof on behalf of and for the account and risk of the
Indemnifying Person by counsel or other representatives designated by the
Indemnified Person. Notwithstanding the foregoing, no Indemnifying Person shall
be obligated hereunder with respect to amounts paid in settlement of any claim
if such settlement is effected without the consent of such Indemnifying Person,
which consent shall not be unreasonably withheld.
(d) If for any reason the foregoing indemnity is unavailable to,
or is insufficient to hold harmless, an Indemnified Person, then the
Indemnifying Person shall contribute to the amount paid or payable by the
Indemnified Person as a result of such claims, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Person and the
Indemnified Person as well as any other relevant equitable considerations. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
1.6 Subsequent Registration Statements. The Company shall not cause
----------------------------------
or permit any new registration statements (except registration statements on
Form S-8, S-4, or comparable forms) to become effective during the 90 days after
the effective date of a registration statement covering shares of Common Stock
owned by Purchasers.
2. Miscellaneous.
-------------
2.1 Additional Actions and Documents. Each of the parties hereto
--------------------------------
hereby agrees to use its good faith best efforts to take or cause to be taken
such further actions, to execute, deliver and file or cause to be executed,
delivered and filed such further documents and instruments, and to obtain such
consents, as may be necessary or as may be reasonably requested in order to
fully effectuate the purposes, terms and conditions of this Agreement.
2.2 Assignment. Any Purchaser may assign its rights under this
----------
Agreement to any assignee of the Warrant or the shares of Common Stock issuable
thereunder.
-7-
<PAGE>
2.3 Entire Agreement; Amendment. This Agreement, including the
---------------------------
other writings referred to herein or delivered pursuant hereto, constitutes the
entire agreement among the parties hereto with respect to the transactions
contemplated herein, and it supersedes all prior oral or written agreements,
commitments or understandings with respect to the matters provided for herein.
No amendment, modification or discharge of this Agreement shall be valid or
binding unless set forth in writing and duly executed by a party against whom
enforcement of the amendment, modification, or discharge is sought.
2.4 Limitation on Benefits. It is the explicit intention of the
----------------------
parties hereto that no person or entity other than the parties hereto (and their
respective successors and assigns) is or shall be entitled to bring any action
to enforce any provision of this Agreement against any of the parties hereto,
and the covenants, undertakings and agreements set forth in this Agreement shall
be solely for the benefit of, and shall be enforceable only by, the parties
hereto or their respective successors and assigns.
2.5 Binding Effect. This Agreement shall be binding upon and
--------------
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
2.6 Governing Law. This Agreement, the rights and obligations of
-------------
the parties hereto, and any claims or disputes relating thereto, shall be
governed by and construed in accordance with the laws of Delaware.
2.7 Notices. All notices, demands, requests, or other communications
-------
which may be or are required to be given, served, or sent by any party to any
other party pursuant to this Agreement shall be in writing and shall be mailed
by first-class, registered or certified mail, return receipt requested, postage
prepaid, or transmitted by hand delivery, including delivery by courier,
telegram, telex, or facsimile transmission, addressed as follows:
(a) If to the Company:
The Right Start, Inc.
5334 Sterling Center Drive
Westlake Village, California 91361
Attention: President
Facsimile: (818) 707-7132
-8-
<PAGE>
with a copy (which shall not constitute notice) to:
Milbank, Tweed, Hadley & McCloy
601 S. Figueroa, 30th Floor
Los Angeles, CA 90017
Attention: Kenneth J. Baronsky, Esq.
Facsimile: (213) 629-5063
(b) If to Purchaser, to the address set
forth in the Securities Purchase
Agreement for such Purchaser.
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a telex) the answer back being deemed conclusive
(but not exclusive) evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
2.8 Headings. Article and Section headings contained in this
--------
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
2.9 Execution in Counterparts. To facilitate execution, this
-------------------------
Agreement may be executed in as many counterparts as may be required; and it
shall not be necessary that the signatures of each party appear on each
counterpart; but it shall be sufficient that the signature of each party appear
on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of
this Agreement to produce or account for more than a number of counterparts
containing the respective signatures of all of the parties hereto.
-9-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
THE RIGHT START, INC.
By: /s/ Jerry R. Welch
------------------
Jerry R. Welch
Chief Executive Officer
THE PURCHASERS:
ARBCO ASSOCIATES, L.P.
By: /s/ David Shladovsky
--------------------
Name: David Shladovsky
Title:
KAYNE ANDERSON NON-TRADITIONAL
INVESTMENTS, L.P.
By: /s/ David Shladovsky
------------------------------
Name: David Shladovsky
Title:
KAYNE ANDERSON OFFSHORE LIMITED
By: /s/ William T. Miller
-----------------------------
Name: William T. Miller
Title: Secretary
S-1
<PAGE>
OFFENSE GROUP ASSOCIATES, L.P.
By: /s/ David Shladovsky
------------------------------
Name: David Shladovsky
Title:
OPPORTUNITY ASSOCIATES, L.P.
By: /s/ David Shladovsky
------------------------------
Name: David Shladovsky
Title:
ARTHUR E. HALL & COMPANY MONEY
PURCHASE PLAN
By: /s/ Arthur E. Hall
------------------------------
Name: Arthur E. Hall
Title: Trustee
S-2
<PAGE>
FRED KAYNE
By: /s/ Fred Kayne
------------------
Name: Fred Kayne
Title:
S-3
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-08157) and
in the Registration Statements on Form S-8 (No. 333-21749 and No. 333-21747) of
The Right Start, Inc. of our report dated March 6, 1998, except as to Note 11
which is as of April 13, 1998 appearing on page F-1 of this Form 10-K.
\s\ Price Waterhouse LLP
Price Waterhouse LLP
Los Angeles, California
April 29, 1998
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 240
<SECURITIES> 0
<RECEIVABLES> 328
<ALLOWANCES> 0
<INVENTORY> 6,602
<CURRENT-ASSETS> 8,908
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0
0
<COMMON> 22,337
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<INCOME-PRETAX> (9,214)
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