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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934)
For the fiscal year ended January 29, 2000
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period from ______________ to _____________.
Commission file number 0-19536
THE RIGHT START, INC.
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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., 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 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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. [_]
As of April 25, 2000, approximately 3,262,124 shares of the Registrant's Common
Stock held by non-affiliates were outstanding and the aggregate market value of
such shares was approximately $14,679,558.
As of April 25, 2000 there were outstanding 5,614,175 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 August 24, 2000 (the "Proxy Statement") are
incorporated by reference into Part III hereof.
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PART I
ITEM 1. BUSINESS
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Forward-Looking Statements
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When used in this report and elsewhere by management from time to time, the
words "believes," "anticipates," and "expects" and similar expressions are
intended to identify forward-looking statements with respect to our financial
condition, results of operations and business and that of our majority-owned
online subsidiary, RightStart.com, a Delaware corporation ("RightStart.com").
Certain important factors, including but not limited to competition from other
children's product retailers, losses expected in the online business,
limitations on access to capital to fund the expansion and the growth in the
number of our physical stores and in RightStart.com's online business, the
dependence of RightStart.com on its technology services provider, consumer
acceptance of online retailing and RightStart.com's online stores and the lack
of operating experience at RightStart.com, could cause actual results to differ
materially from those expressed in our forward-looking statements. Further
information on potential factors that could affect our financial condition and
that of RightStart.com, is included in our filings and the filings of
RightStart.com with the Securities and Exchange Commission. We caution readers
not to place undue reliance on forward-looking statements, which speak only as
of the date of this filing. We undertake no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after that date.
General
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The Right Start, Inc., a California corporation, is a leading specialty
retailer of high-quality developmental, educational and care products for
infants and children. RightStart.com is our majority-owned online subsidiary.
Together, we market our products through our 53 retail stores located throughout
the United States, RightStart.com's nationally distributed catalog, and
RightStart.com's online store located at www.rightstart.com. We are a market
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leader offering approximately 1,500 items targeting infants and children through
age three in our 53 retail stores. RightStart.com is also a market leader
online and offers approximately 4,500 items for infants and children through age
twelve. Together, we are dedicated to providing our customers with a unique
shopping experience by offering a trusted assortment of products, carefully
selected with regard to quality, safety and developmental value and by providing
a high level of customer service.
History
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We were formed as a catalog company 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 our formation, new parents' alternatives
were limited to low-service, mass merchandise stores or sparsely-stocked, high-
priced infants' and children's specialty stores. To counter this, we carefully
screen infant and toddler products in order to identify those we consider to be
the "best of the best," that is, the safest, most durable, best designed and
best valued items. We and RightStart.com currently select this kind of product
from over 350 vendors worldwide.
We then expanded our distribution channels beyond The Right Start catalog
and into specialty retail sales through The Right Start stores. Based on the
results of the retail stores, our strategy evolved to include a reduction in The
Right Start catalog circulation and plans for a major retail expansion. Since
1996 when we began this expansion, we have grown to 53 retail stores currently
in operation nationwide.
We formed RightStart.com in April 1999 and in June 1999, RightStart.com
launched its online store. RightStart.com expanded the available offerings
under the Right Start brand name by establishing online stores that
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feature products for children through age twelve and their caregivers; as well
as a Teachers' Store carrying educational items for the home and classroom.
In our physical stores, we focus on customer service by offering customers
carefully selected products presented by sales associates with extensive product
knowledge. RightStart.com's online stores provide a number of customer
services aimed at bringing the specialty retail experience of our physical
stores to RightStart.com's online customers, including free ground shipping on
orders over $30, deluxe gift wrapping, guaranteed same-day shipping, guaranteed
in-stock availability of products featured on RightStart.com's online store, 24-
hour customer service, live online help and product returns to any of our
physical stores nationwide. In addition, RightStart.com's online store provides
editorial content, including articles from leading parenting publications and
interactive content from child development and health care professionals.
Retail Store Operations
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Currently, we have 53 physical stores in operation. The stores' product mix
includes a wide variety of items to meet the needs of parents of infants and
small children up to age three, all presented within a store designed to provide
a safe, baby-friendly environment for the shopping ease of new parents.
The number of physical stores open reflects the rapid growth that we
experienced in 1996 and 1997, during which period we opened 24 mall stores.
After studying the results of both mall and street locations, we concluded that
street-location stores provide our customers more convenient access and shopping
since many are shopping with infants and small children. Further, street-
location stores are more cost efficient to build and operate. Accordingly, we
adopted a store opening plan that provided for the opening of eight street-
location stores in 1998, and thirteen street-location stores in 1999.
In addition to reevaluating store location strategy, in 1997 we determined
that some of our existing mall locations were not performing at an acceptable
level and implemented a store closing plan for those stores. Nine mall stores
were closed in 1998 and one mall store was closed in 1999.
Our growth strategy for retail operations includes continued street-
location store openings.
Investment in RightStart.com
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RightStart.com is our majority-owned subsidiary. As part of its formation
we contributed assets comprising our catalog and online operations to
RightStart.com. In July 1999, RightStart.com raised $15 million in a private
equity offering to third-party investors and used that money to create and
market each of the following online stores: the Baby Store (infant through two
years old), the Kids' Development Store (three through six years old), the Big
Kids' Store (six through twelve years old) and the Teachers' Store.
Together with RightStart.com, we now offer a multi-faceted retail platform
designed to leverage the Right Start brand name and increase sales from existing
and new customers for ourselves and RightStart.com. In July 1999 we entered
into a management services agreement pursuant to which we supply corporate,
administrative and marketing services, promotional services and inventory to
RightStart.com and an intellectual property agreement pursuant to which we
assigned intellectual property intrinsically related to the online stores and
catalog operations to RightStart.com, granted a license to RightStart.com to use
our customer lists and granted to RightStart.com a license to use our trademarks
and trade names and other intellectual property in connection with the online
stores. We received rights to use information collected about users by
RightStart.com, the lists of catalog customers we assigned to RightStart.com as
well as intellectual property associated with RightStart.com's online stores
(though not to be used for any other online business).
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RightStart.com has employed a strategy of outsourcing some activities
essential to the online business. Since the launch of the online store in June
1999, RightStart.com has outsourced its technology department and its
fulfillment activities, including its warehousing and logistics operations and
its call center and customer service activities. As a result, RightStart.com
has engaged employees primarily in managerial, merchandising and marketing
roles. RightStart.com is substantially dependent on the technology services it
receives from its technology services providers who host, maintain and develop
its website and provide technical assistance to its third-party distribution
provider and its in-house logistics team. RightStart.com's principal
technology service provider is also a shareholder of RightStart.com and we
believe their relationship to be good and, if necessary, RightStart.com could
locate replacement services without material difficulty. RightStart.com
recently employed a Chief Technical Officer and expects to develop its own
technology department and assume day-to-day operations and maintenance of its
online stores in early 2001. Neither we nor RightStart.com has long-term
contracts with our respective fulfillment services providers but we believe that
replacement providers could be found without material difficulty should the need
arise. Nonetheless, a failure in any of these outsourced services could have a
material adverse effect on us or RightStart.com.
The Right Start catalog offers a mail order alternative for Right Start
customers. The Right Start catalog has been in existence over fifteen years and
continues to offer a quality selection of Right Start products through national
distribution. Several attractive glossy issues are mailed each year, targeting
our principal customers: educated, first-time parents from 23-40 years old, with
an average annual income in excess of $60,000 who also constitute a substantial
portion of RightStart.com's customers. The Right Start catalog is sent to
qualified segments of the customer list we and RightStart.com have compiled and
to selected rented lists. In order to target customers efficiently, the customer
list is segmented by frequency, recency and size of purchase. Rented lists are
evaluated based on historical performance of mailings and the availability of
names meeting the Right Start customer profile.
Marketing and Promotion
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We have implemented a number of national, regional and local marketing
programs to reinforce our brand name and increase customer awareness of our new
store locations. These programs include print ads in national and regional
publications, direct mail and local newspaper advertisements and promotions such
as our January Travel Department discount program.
RightStart.com also purchases print ads in national publications and uses
its catalogs and other direct mail pieces to promote its online stores.
RightStart.com has entered into a strategic alliance with Oxygen Media, which
provides advertising across multiple formats. In addition, RightStart.com has
entered into affiliations with companies such as E-greetings in the online
greeting card sector, MP3.com in the online music sector, Allpets.com in the
online pets supplies sector and MyEvents.com in the online event and family
organizer sector and is exploring additional relationships.
Together, we and RightStart.com use a marketing database consisting of
approximately 2.7 million names and addresses we have collected. In addition,
RightStart.com recently has purchased an additional 1.4 million names and
addresses from another specialty retailer of products for children ages four to
twelve. We and RightStart.com each also collect e-mail addresses from our
respective customers. Customers' names and addresses are used, consistent with
RightStart.com's published privacy policy and general direct marketing
standards, for promotional mailings, e-mails and other direct marketing
activities.
Finally, we have taken advantage of the cross-promotional opportunities
that exist between our physical stores and RightStart.com's online stores. We
promote RightStart.com in our physical stores through in-store signage.
RightStart.com promotes our physical stores through our returns policy and store
locator in
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RightStart.com's online stores, as well as in our joint alliances with online
entities and Oxygen Media which we believe promote brand awareness in addition
to increasing the value in RightStart.com.
Purchasing
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We and RightStart.com now purchase products from over 350 different vendors
worldwide. In total, we import approximately 12% of the products sold in our
physical stores and RightStart.com imported approximately 9% of the products it
sold online from launch through January 1, 2000.
Employees
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As of April 18, 2000, we employed 348 employees, 169 of whom were part-
time. As of April 18, 2000, RightStart.com had 34 full-time employees and 3
part-time employees. Neither our employees nor RightStart.com's employees have
entered into any collective bargaining agreements nor are they represented by
unions. We and RightStart.com each consider our employee relations to be good.
Competition
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The retail market for infant and toddler products served by our physical
stores is very competitive. Significant competition currently comes from "big
box" concept stores, such as Babies "R" Us, Burlington Baby and Target, as well
as a few specialty retailers such as Zany Brainy and Noodle Kidoodle. The "big
box" 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 and the competition for RightStart.com impacts
us as well.
The online market for developmental, educational and care products for
children is also intensely competitive. This market is newly developing and
rapidly evolving. In addition, access to capital in this market has been
constricting. We expect competition may intensify in the future as the market
consolidates and as large competitors with physical assets enter the market.
RightStart.com's online business principally competes with online retailers,
traditional store-based retailers and catalog retailers, including specialty
stores, mass-market retailers, discount chains, department stores and mail-order
catalogs. RightStart.com's competitors include Amazon.com, KB Kids.com, eToys,
Toys "R" Us, Zany Brainy, Noodle Kidoodle, Target, Wal-Mart, FAO Schwartz, Baby
Center, iBaby, AOL, Yahoo! and others.
There are a variety of general and specialty catalogs selling infants' and
children's items in competition with The Right Start catalog. Competition for
The Right Start catalog, however, has come primarily from "One Step Ahead,"
"Kids Club" by Perfectly Safe, and "Sensational Beginnings." These catalogs
emerged several years after The Right Start catalog was launched and directly
compete by offering a very similar product line at comparable price points to
the same target market.
We believe that competition for us in traditional retail business and for
RightStart.com in the online retail and catalog businesses is based on brand
name recognition, product selection, price, convenience, customer service and,
for the online and catalog businesses, the speed and reliability of fulfillment.
We believe that we distinguish ourselves and that RightStart.com distinguishes
itself by offering a full assortment of children's developmental, educational
and care products carefully selected with regard to quality, safety,
developmental and educational value. As specialty retailers, we each also focus
on providing the highest levels of customer service. In addition, we believe
the relationship between ourselves and RightStart.com provides us and
RightStart.com with advantages relative to single channel retailers in our
respective markets, including cross-marketing opportunities, vendor
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relationships, distribution capabilities and enhanced customer convenience. We
believe RightStart.com will be able to differentiate itself from its competitors
by drawing on the strong Right Start brand name, our long-standing vendor
relationships and our extensive knowledge and experience successfully marketing
products for infants and children.
Trademarks
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We have registered and continue to register, when deemed appropriate, our
trademarks, trade names and domain names, including "The Right Start,"
"RightStart.com," and "The Right Start Catalog." We consider these trademarks
and tradenames to be readily identifiable with, and valuable to, our business
and to the business of RightStart.com. We license much of our intellectual
property to RightStart.com for use in its online business on a royalty-free
basis.
ITEM 2. PROPERTIES
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Currently, we operate 53 retail stores in the following 15 states:
California, Colorado, Massachusetts, Minnesota, New Jersey, Illinois,
Pennsylvania, New York, Connecticut, Michigan, Washington, Missouri, Virginia,
Maryland and Ohio. We lease each of our retail locations under operating leases
with lease terms ranging from five to ten years. At some locations, we have
options to extend the term of the lease. In most cases, rent provisions include
a fixed minimum rent and, in some cases, a contingent percentage rent based on
net sales of the store in excess of a defined threshold.
We currently lease approximately 23,000 square feet as a sub-tenant in a
mixed-use building in Westlake Village, California. Our corporate offices and
those of RightStart.com both reside in this space. The sub-lease agreement
terminates in June 2001.
Both we and RightStart.com use third-party distribution and fulfillment
providers and therefore do not directly lease or own any warehouse space. The
inventory for our physical stores is located in Pennsylvania and California and
the inventory for RightStart.com is located primarily in Pennsylvania.
RightStart.com's web servers are located in third-party hosting facilities in
Los Angeles, California.
ITEM 3. LEGAL PROCEEDINGS
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We are a party to various legal actions arising in the ordinary course of
business. In the opinion of management, any claims that may arise from these
actions are adequately covered by insurance or are without significant merit.
We believe that the ultimate outcome of these matters will not have a material
adverse effect on our financial position or results of operations.
RightStart.com is not a party to any litigation.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS'
- ------- ---------------------------------------------------------------
MATTERS
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Our common stock is traded on the Nasdaq National Market system under the
symbol RTST. Our common stock is held of record by approximately 86 registered
shareholders as of April 25, 2000. The following table sets
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forth the range of high and low bid prices on the Nasdaq National Market for our
common stock for the fiscal year ended January 30, 1999 ("Fiscal 1998") and the
fiscal year ended January 29, 2000 ("Fiscal 1999"). The bid price quotations
listed below reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Bid Price (1)
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Fiscal 1999 High Low
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<S> <C> <C>
First Quarter $ 8.50 $ 5.00
Second Quarter 10.00 6.50
Third Quarter 15.00 6.63
Fourth Quarter 23.75 13.00
Fiscal 1998
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First Quarter $ 4.50 $ 2.75
Second Quarter 3.75 1.75
Third Quarter 2.75 1.50
Fourth Quarter 4.50 2.00
</TABLE>
(1) Bid prices have been restated to give effect to our one-for-two reverse
stock split which was reflected on Nasdaq at the opening of trading on
December 16, 1998.
As of April 25, 2000 our High Bid Price was $5.00 and our Low Bid Price was
$4.25.
We have never paid dividends on our common stock and currently do not
expect to pay dividends in the future. In addition, our credit agreement
contains a number of financial covenants which may, among other things, limit
our ability to pay dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
ITEM 6. SELECTED FINANCIAL DATA - The selected consolidated financial data
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presented below as of and for our fiscal year ended June 1, 1996 ("Fiscal
1996"), the 33-Week Transition Period ended February 1, 1997, the fiscal year
ended January 31, 1998 ("Fiscal 1997"), Fiscal 1998 and Fiscal 1999 have been
derived from consolidated financial statements which, except for 1996 and the
33-Week Transition Period, are contained elsewhere in this Annual Report on
Form 10-K. The selected consolidated financial data set forth below are
qualified in their entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, the notes thereto and
other financial and statistical information included elsewhere in this Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
Fiscal 33-Week
-------------------------------------- Transition Fiscal
1999 1998 1997 Period 1996
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(Dollars in thousands except share data)
<S> <C> <C> <C> <C> <C>
Earnings Data
Revenues:
Net sales $ 49,079 $ 36,611 $ 38,521 $ 27,211 $ 40,368
Other revenues 877
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49,079 36,611 38,521 27,211 41,245
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net loss (10,842) (5,680) (9,241) (5,378) (3,899)
Basic and diluted loss (2.14) (1.13) (2.01) (1.34) (1.19)
per share
Share Data
Weighted average shares
outstanding 5,355,756 5,051,820 4,594,086 4,003,095 3,268,407
Fiscal 33-Week
-------------------------------------- Transition Fiscal
1999 1998 1997 Period 1996
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(Dollars in thousands)
Balance Sheet Data
Current assets $ 17,424 $ 8,300 $ 8,908 $ 11,704 $ 8,353
Total assets 30,727 17,671 18,462 22,982 17,475
Current liabilities 12,943 6,572 4,796 8,457 4,649
Long-term debt 3,000 -- 8,734 5,643 --
Shareholders' equity 7,921 7,861 3,307 7,172 11,902
</TABLE>
All share data has been restated to give effect to our one-for-two reverse stock
split which was effective December 15, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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Overview
The Right Start, Inc. sells developmental, educational and care products
for infants and children through retail stores ("Retail Store Operations") and
holds a majority ownership in RightStart.com, which sells a similar type of
product to a broader age group on the Internet and through a mail order catalog.
To facilitate the analysis of our historical results, each of the two distinct
operations is discussed separately below.
Retail Store Operations
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The Right Start, Inc. operates 53 retail stores in 15 states throughout the
United States. The stores' product mix includes a wide variety of items to meet
the needs of infants, small children and their care givers, all presented within
a store designed to provide a safe, baby-friendly environment for the shopping
ease of new parents.
The following table sets forth the unaudited statement of operations data
for the periods indicated for Retail Store Operations:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
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<S> <C> <C> <C> <C> <C> <C>
Retail Net Sales 38,043,000 100.00% 31,875,000 100.00% 31,107,000 100.00%
Cost of goods sold 18,878,000 49.62% 16,396,000 51.44% 15,691,000 50.44%
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Gross Profit 19,165,000 50.38% 15,479,000 48.56% 15,416,000 49.56%
Operating expense 14,418,000 37.90% 12,880,000 40.41% 14,927,000 47.99%
Marketing and advertising costs 830,000 2.18% 387,000 1.21% 193,000 0.62%
General and administrative expenses 3,310,000 8.70% 2,899,000 9.09% 3,096,000 9.95%
Non-cash compensation expense 1,794,000 4.72% - 0.00% - 0.00%
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Depreciation and amortization expense 1,672,000 4.40% 1,470,000 4.61% 1,590,000 5.11%
Other expense - 0.00% - 0.00% 698,000 2.24%
Store closing (income) expense 151,000 0.40% (113,000) -0.35% 1,207,000 3.88%
Pre-opening costs 323,000 0.85% 209,000 0.66% 711,000 2.29%
Non-cash beneficial conversion feature - 0.00% 3,850,000 12.08% - 0.00%
Interest expense 465,000 1.22% 640,000 2.01% 1,143,000 3.67%
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Loss before income taxes and extraordinary items (3,798,000) -9.98% (6,743,000) -21.15% (8,149,000) -26.20%
Extraordinary gain on debt restructure, net - 0.00% 1,211,000 3.80% - 0.00%
Tax provision 68,000 0.18% 22,000 0.07% 27,000 0.09%
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Net loss (3,866,000) -10.16% (5,554,000) -17.42% (8,176,000) -26.28%
============ ========== ==========
</TABLE>
Fiscal 1999 Compared With Fiscal 1998
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Net Sales. Retail net sales consist of gross product sales to customers net
of returns. Retail net sales increased by $6.2 million, or 19.4%, from $31.9
million in Fiscal 1998 to $38.0 million in Fiscal 1999. The net sales growth
reflects the impact of same store sales increases of 10.1% and the opening of
thirteen new street -location stores, offset by the impact of one store closure.
Cost of goods sold. Cost of goods sold consists primarily of the cost of
products sold, inbound freight costs and inventory shrinkage costs. Retail
gross margin increased from 48.6% in Fiscal 1998 to 50.4% in Fiscal 1999 as a
result of changes in the product mix to include significantly more developmental
toys, books, videos and other media that have higher gross margins.
Operating expense. Retail operating expense consists of store operational
expenses, retail personnel costs, and costs related to the distribution and
warehousing of our retail merchandise. Retail operating expense was $14.4
million in Fiscal 1999 as compared to $12.9 million in Fiscal 1998. The $1.5
million or 11.9% increase primarily reflects the addition of thirteen new store
locations offset by a reduction in per store payroll and occupancy costs.
Marketing and advertising expense. Retail marketing and advertising expense
generally consists of print advertising in national and regional publications,
as well as promotional mailings to our customers. Marketing and advertising
expense increased from $0.4 million in Fiscal 1998 to $0.8 million in Fiscal
1999. This growth reflects our increased utilization of promotional mailings to
our customer database, as well as expenses incurred to increase brand awareness
in our regional markets.
General and administrative expense. General and administrative expense
consists primarily of the costs related to management, financial, merchandising,
inventory, professional service fees and other administrative support
attributable to Retail Store Operations. General and administrative expense
increased 14.2 % to $3.3 million for Fiscal 1999 compared to $2.9 million for
Fiscal 1998.
Pre-opening costs. Pre-opening costs consist primarily of non-recurring
marketing, advertising, and other expenses related to the opening of new store
locations. Pre-opening costs increased $0.1 million from $0.2 million in Fiscal
1998 to $0.3 million in Fiscal 1999. The increase was due to the opening of
thirteen new stores in Fiscal 1999 versus eight stores in 1998, offset by a 10%
reduction in per store costs.
Depreciation and amortization. Depreciation and amortization expense
increased $0.2 million or 13.7% from $1.5 million in Fiscal 1998 to $1.7
million in Fiscal 1999. The increase was due to the additional assets placed in
service related to new store openings.
Non-cash compensation expense. During the second quarter of 1999, we
recorded $1.8 million of non-
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cash compensation expense associated with the vesting of performance options
that had been granted to our executive officers. This expense results from the
increase in the price of our common stock from the date of grant of the options
to the date on which vesting occurred.
Store closing expense. Store closing expense in Fiscal 1999 represents the
net book value of assets written off related to the stores closed during the
second quarter of Fiscal 1999. Store closing income in Fiscal 1998 represents
the net amount recognized from the sale of leaseholds on closed stores, offset
by store closing costs.
Interest expense. Interest expense, net decreased to $0.5 million in
Fiscal 1999 from $0.6 million in Fiscal 1998. The decrease reflects a reduction
in our outstanding borrowings. In 1998, we recorded a non-cash charge of $3.85
million related to the amortization of the discount associated with the $3.85
million of non-interest bearing senior subordinated notes issued during the
first quarter of Fiscal 1998. The senior subordinated notes were exchanged for
preferred stock in December 1998. See "Liquidity and Capital Resources -
Recapitalization."
Tax provision. Provision for income taxes is related to state income taxes.
No federal or state income tax benefit was recorded for Fiscal 1999 or Fiscal
1998 due to the uncertainty surrounding realizing any tax benefits in future
years.
Fiscal 1998 Compared With Fiscal 1997
- -------------------------------------
Net Sales. Retail net sales were $31.9 million in Fiscal 1998 and $31.1
million in Fiscal 1997. Retail net sales increased $.8 million or 2.5%,
reflecting the impact of same-store sales increases of 6.5% and the opening of
eight new street location stores, offset by the impact of eleven store closures.
Cost of goods sold. Retail cost of goods sold represented 51.4% of sales in
Fiscal 1998 compared to 50.4% of sales in Fiscal 1997. The slight decline in
gross margin resulted from the additional markdowns taken in conjunction with
the closing of certain mall stores and from the conversion of three of our
remaining mall stores to a discount format. The discount store format was
adopted in three poor performing stores in an effort to better meet the
demographics of the customers in those markets.
Operating expense. Retail operating expenses declined 13.7% or $2.0 million
in Fiscal 1998 as compared to Fiscal 1997. The retail reductions include $0.5
million of occupancy costs related to store closings (offset somewhat by street
location openings), $0.8 million of distribution cost reductions and $0.7
million of payroll and other operating cost reductions.
General and administrative expense. General and administrative expense
decreased to $2.9 million in Fiscal 1998 as compared to $3.1 million in Fiscal
1997. The decrease was primarily due to payroll and occupancy cost reductions
in conjunction with management's ongoing expense management.
Pre-opening costs. Pre-opening costs decreased $0.5 million from $0.7
million in Fiscal 1997 to $0.2 million in Fiscal 1998. The reduction was due to
the reduction in pre-opening costs per store opened as well as the impact, in
Fiscal 1997, of our previous policy of recognizing store opening costs evenly
over the stores' first twelve months of operations for the stores opened in
1996. In the third quarter of Fiscal 1997, we changed our method of accounting
for pre-opening costs and began expensing them as incurred.
Depreciation and amortization. Depreciation and amortization expense
decreased $0.1 million or 7.5% in Fiscal 1997 to $1.5 million in Fiscal 1998.
The decrease resulted from the closure of eleven stores, most of which were
closed during the first half of Fiscal 1998, offset by the depreciation expense
recognized on assets for the eight
10
<PAGE>
new stores opened in the second half of the fiscal year.
Other expense. Other expense in Fiscal 1997 represents $0.2 million of
severance expense for a former senior executive and $0.4 million in fixed assets
and leasehold improvements written off in conjunction with our corporate office
and distribution center moves.
Store closing expense. Store closing income of $0.1 million in Fiscal 1998
is comprised of net revenues generated from store closings. We recovered the
value of certain of the leases through either landlords or future tenants of the
leased space. In the prior year, store closing expense includes $1.3 million of
fixed assets and leasehold improvements written off in conjunction with planned
store closures.
Non-cash beneficial conversion feature amortization. This line item
represents the one-time expense recognition associated with the issuance of our
Series C convertible Preferred Stock in connection with our recapitalization.
See "Liquidity and Capital Resources - Recapitalization."
Interest (income) expense. Interest expense decreased $0.5 million from
$1.1 million in Fiscal 1997 to $0.6 million in Fiscal 1998. The 44.0% decrease
results from the restructuring of our subordinated debt to eliminate interest on
that debt and lower overall borrowings.
RightStart.com Operations
- --------------------------
RightStart.com was formed in April 1999 to focus on sales on the Internet.
As part of its initial capitalization, RightStart.com acquired the catalog
operations from The Right Start, Inc. in order to obtain an existing fulfillment
infrastructure as well as a significant, cost-effective marketing vehicle for
promoting our online store. In addition, management of RightStart.com believes
the online store will benefit from the merchandising and marketing experience
acquired through the catalog operations as well as the catalog's database of
customer information. Management of RightStart.com intends to continue to
leverage the catalog to market and promote RightStart.com's online stores
aggressively. Each of the approximately 2.6 million catalogs distributed in
Fiscal 1999 prominently promoted RightStart.com's online stores.
Online sales are presented on a gross basis, which is after product returns
but before promotional discounts, and on a net basis after promotional
discounts. Promotional discounts have been used to attract customers to
RightStart.com's recently launched online stores. Management of RightStart.com
may continue to offer promotional discounts in order to rapidly develop a
customer base and expand product offerings to additional age groups although it
has reduced the size of its discounts and may consider further reductions as it
deems appropriate.
The online stores were launched on June 29, 1999. As a result, Fiscal 1999
is comprised of 52 weeks of catalog operations from January 31, 1999 through
January 29, 2000 and 31 weeks of online store operations from June 29, 1999
through January 29, 2000. Fiscal 1998 and Fiscal 1997 are each comprised of 52
weeks of catalog operations and no online store operations.
The following table sets forth the unaudited statement of operations data
for the periods indicated for RightStart.com:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Catalog Sales $ 3,645,000 33.0% $4,736,000 100.0% $ 7,414,000 100.0%
Online store sales before promotional discounts 9,020,000 81.7% - -
--------------------------------------------------------------------------
Total Sales 12,665,000 114.8% 4,736,000 100.0% 7,414,000 100.0%
Promotional discounts related to online store 1,629,000 14.8% - -
--------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net sales 11,036,000 100.0% 4,736,000 100.0% 7,414,000 100.0%
Cost of goods sold 6,401,000 58.0% 2,180,000 46.0% 3,553,000 47.9%
--------------------------------------------------------------------------
Gross Profit 4,635,000 42.0% 2,556,000 54.0% 3,861,000 52.1%
Operating Expense 5,952,000 53.9% 2,226,000 47.0% 4,092,000 55.2%
Marketing and advertising expense 6,403,000 58.0% - 0.0% - 0.0%
General and administrative expense 1,996,000 18.1% 438,000 9.2% 816,000 11.0%
Non-cash compensation expense 220,000 2.0% - 0.0% - 0.0%
Depreciation expense 278,000 2.5% 18,000 0.4% 18,000 0.2%
Interest income (238,000) -2.2% - 0.0% - 0.0%
--------------------------------------------------------------------------
Loss before income taxes and minority interest (9,976,000) -90.4% (126,000) -2.7% (1,065,000) -14.4%
Tax provision (benefit) - 0.0% - 0.0% - 0.0%
Minority Interest in consolidated subsidiary loss 3,000,000 27.2% - 0.0% - 0.0%
--------------------------------------------------------------------------
Net loss (6,976,000) -63.2% (126,000) -2.7% (1,065,000) -14.4%
</TABLE>
Sales. Gross sales consist of product sales to customers and are net of
product returns. Net sales are net of promotional discounts. Since
RightStart.com, during the periods presented, provided free shipping on a
substantial number of its sales, net sales does not include revenues related to
shipping charges. Net sales increased by $6.3 million, or 133.0%, to $11.0
million in Fiscal 1999 from $4.7 million in Fiscal 1998. This growth in net
sales was attributable to the launch of the online stores on June 29, 1999,
partially offset by a decline in catalog sales. Online store net sales were $7.4
million in Fiscal 1999, compared to no sales in Fiscal 1998. Fiscal 1999 online
store net sales are net of promotional discounts of $1.6 million. Catalog net
sales decreased $1.1 million, or 23.0%, to $3.6 million in Fiscal 1999 from $4.7
million in Fiscal 1998. The majority of the decline in catalog net sales was
attributable to a planned reduction in catalog circulation and a shift of a
portion of the direct-mail business from catalog to the online store operations.
Cost of goods sold. Cost of goods sold consists primarily of the cost of
products sold, inbound freight costs and inventory shrinkage costs. Gross profit
as a percentage of net sales, or gross margin, decreased to 42.0% in Fiscal 1999
from 54.0% in Fiscal 1998. Gross margin on catalog net sales increased to 56.4%
in Fiscal 1999 from 54.0% in Fiscal 1998, due to a more favorable product mix.
Gross margin on online store net sales was 34.7% in Fiscal 1999. Gross margin on
online store net sales was lower than gross margin on catalog net sales in
Fiscal 1999 due to the introductory promotional discounting offered to customers
during the initial start-up of the online store operations as well as a
different mix of products offered in the online store.
Operating expenses. Operating expenses consist primarily of net fulfillment
expenses (including shipping and handling expenses net of amounts paid by
customers), credit card processing fees and expenses related to catalog
production and distribution, product distribution and customer service, as well
as related personnel costs. Operating expenses increased by $3.7 million, or
167.4 %, to $5.9 million in Fiscal 1999 from $2.2 million in Fiscal 1998. As a
percentage of net sales, operating expenses increased to 53.9 % in Fiscal 1999
from 47.0% in Fiscal 1998. Operating expenses related to the catalog decreased
by $0.2 million, or 8.0%, to $2.0 million in Fiscal 1999 from $2.2 million in
Fiscal 1998. As a percentage of net catalog sales, operating expenses related to
the catalog increased to 56.2% in Fiscal 1999 from 47.0% in Fiscal 1998. This
increase as a percent to sales was due to lower sales. Operating expenses
related to the online store were $3.9 million in Fiscal 1999.
Marketing and advertising expense. Marketing and advertising expense
consists of radio, television, magazines, newspaper, direct mail, e-mail and on-
line solicitations, including all production and distribution, incurred in
connection with solely promoting our online store which amounted to $6.4 million
or 71.0% of online store sales in Fiscal 1999. There was no comparable activity
in the prior year.
General and administration expenses. General and administration expenses
consist primarily of the costs related to website hosting and maintenance,
management and support personnel, fees paid to The Right Start, Inc.
12
<PAGE>
for accounting, payroll, and administrative support services under a management
services agreement, professional service fees and office lease expenses. General
and administration expenses increased $1.6 million, or 355.7 %, to $2.0 million
in Fiscal 1999 from $0.4 million in Fiscal 1998. As a percentage of net sales,
general and administrative expenses increased to 18.1% in Fiscal 1999 from 9.2%
in Fiscal 1998. Fiscal 1999 general and administrative included direct fees paid
to The Right Start, Inc. of $0.4 million.
Depreciation Expense. Depreciation expense increased $260,000 from $18,000
in Fiscal 1998 to $278,000 in Fiscal 1999. This increase was due primarily to
web site hardware and software additions which are being depreciated over a
three year period.
Non-cash compensation expenses. Non-cash compensation expenses relates to
stock options granted at exercise prices below the deemed fair value of
RightStart.com common stock. A non-cash compensation expense of $220,000 was
recorded in Fiscal 1999. There was no non-cash compensation expense in Fiscal
1998.
Interest income. Interest income related to earnings on cash generated from
the sale of preferred stock in July 1999 totaled $238,000 in Fiscal 1999. There
was no interest income in Fiscal 1998.
Tax provision. Tax provision has been computed as if RightStart.com had
operated as a separate entity for all periods presented. As a result of net
losses, no benefit for income taxes was recorded for Fiscal 1999, Fiscal 1998 or
Fiscal 1997. As of January 29, 2000, RightStart.com had net operating loss
carryforwards for federal tax purposes of $9.7 million and for state tax
purposes of $4.8 million. These carryforwards expire in 2020 for federal tax
purposes and in 2005 for state tax purposes, if not previously utilized. A tax
benefit has not been recorded for any period presented due to uncertainties
surrounding the timing of realizing any benefits in future years.
Minority interest in consolidated subsidiary. Minority interest represents
minority stockholders' share of RightStart.com losses. The allocation of the
loss to the minority interest in the amount of $3,000,000 in Fiscal 1999 was due
to the conversion of preferred stock into common stock of RightStart.com. The
allocation of the loss was on a proportional basis from the date of conversion.
Fiscal 1998 Compared to Fiscal 1997
- -----------------------------------
Net sales. Net sales for Fiscal 1998 and Fiscal 1997 were comprised of
sales from the catalog. Net sales decreased $2.7 million, or 36.1%, to $4.7
million in Fiscal 1998 from $7.4 million in Fiscal 1997. The decline in net
sales resulted from the mailing of 44.9% fewer catalogs in accordance with The
Right Start, Inc. management's operating plan to de-emphasize the catalog
business in favor of The Right Start, Inc.'s retail store operations.
Cost of goods sold. Gross margin increased to 54.0% in Fiscal 1998 from
52.1% in Fiscal 1997 due to a more favorable mix of products sold.
Operating expenses. Operating expenses decreased by $1.9 million, or 45.6%,
to $2.2 million in Fiscal 1998 from $4.1 million in Fiscal 1997. As a
percentage of net sales, operating expenses decreased to 47.0% in Fiscal 1998
from 55.2% in Fiscal 1997. This reduction is attributable to the decrease in
the number of catalogs produced and distributed as well as improved cost
controls. Distribution expenses of $45,000 in Fiscal 1998 and $473,000 in
Fiscal 1997 were allocated from The Right Start, Inc.. This decrease in the
allocations was due to a reduction in the ratio of net catalog sales to total
net sales between the periods.
13
<PAGE>
General and administrative expenses. General and administrative expenses
decreased by $378,000, or 46.3%, to $438,000 in Fiscal 1998 from $816,000 in
Fiscal 1997. As a percentage of net sales, general and administrative expenses
decreased to 9.2% in Fiscal 1998 from 11.0% in Fiscal 1997. General and
administrative expenses of $402,000 in Fiscal 1998 and $730,000 in Fiscal 1997
were allocated from The Right Start, Inc. This decrease in the allocations was
due to a reduction in the ratio of net catalog sales to total net sales between
the periods.
Depreciation expense. No capital additions were made to the catalog
business in fiscal 1998 and depreciation expense was unchanged from the prior
year.
Liquidity and Capital Resources
- --------------------------------
Recapitalization
- ----------------
In April 1998 we completed a private placement of non-interest bearing
senior subordinated notes in an aggregate principal amount of $3,850,000,
together with detachable warrants to purchase an aggregate of 1,925,000 shares
of common stock exercisable at $2.00 per share. The new securities were issued
for an aggregate purchase price of $3,850,000 and were purchased principally by
our affiliates. In connection with the sale of the new securities, we entered
into an agreement (the "Agreement") with all of the holders of our existing
subordinated debt securities, representing an aggregate principal amount of
$6,000,000. Pursuant to the Agreement, each holder (of new and old securities)
agreed to exchange all of its subordinated debt securities, together with any
warrants issued in connection therewith, for newly issued shares of preferred
stock. Ten shares of newly issued preferred stock were issued for each $1,000
principal amount of subordinated debt securities exchanged. The total number of
shares issued were 30,000, 30,000 and 38,500 for Preferred Stock Series A, B and
C, respectively. Holders of $3,000,000 principal amount of existing subordinated
debt securities elected to receive Series A Preferred Stock which has no fixed
dividend rights, is not convertible into common stock, is mandatorily redeemable
by us in May 2002 and will not accrue dividends unless we are unable to redeem
the Series A Preferred Stock at the required redemption date, at which point
dividends would begin to accumulate and accrue at a rate of $15 per share per
annum. Holders of $3,000,000 principal amount of subordinated debt securities
elected to receive Series B convertible preferred stock which has no fixed
dividend rights and is convertible into common stock at a price per share of
$3.00. Holders of the $3,850,000 principal amount of newly issued, non-interest
bearing senior subordinated notes exchanged such debt securities (and the
warrants issued in connection therewith) for Series C convertible preferred
stock, which has no fixed dividend rights and is convertible into common stock
at a price of $2.00 per share. The issuance of the shares of preferred stock
occurred upon exchange of the subordinated debt securities in December 1998.
General
- -------
In Fiscal 1999, on a consolidated basis, we used $9.3 million in cash in
our operating activities compared to the $340,000 in cash provided by our
operating activities in Fiscal 1998. In Fiscal 1999, on a consolidated basis, we
used $3.6 million in cash in investing activities for fixed asset additions
compared to $1.3 million in Fiscal 1998 for fixed asset additions. The primary
source of funds for this use of cash in Fiscal 1999 was the sale by
RightStart.com to third-party investors of its preferred stock which netted
proceeds of $13.7 million and borrowings under our $13 million senior credit
facility (the "Credit Facility") totaling approximately $3.4 million.
Retail Store Operations
- -----------------------
During Fiscal 1999, our primary sources of liquidity for Retail Store
Operations were from borrowings under the Credit Facility. The Credit Facility
consists of a $10.0 million revolving line of credit for working capital (the
"Revolving Line") and a $3.0 million capital expenditure facility (the "Capex
Line"). Availability under the Revolving Line is subject to a defined borrowing
base. As of January 29, 2000 borrowings of $3.4 million were outstanding under
the Revolving Line and $3.0 million was outstanding under the Capex Line; $1.5
14
<PAGE>
million was available at January 29, 2000 under the Revolving Line. Interest
accrues on the Revolving Line at prime plus 1.0% and at prime plus 1.5% on the
Capex Line. At January 29, 2000, the bank's prime rate of interest was 8.5%.
The Credit Facility terminates on February 19, 2001, and on such date, all
borrowings thereunder are immediately due and payable. Borrowings under the
Credit Facility are secured by substantially all of our assets (including our
stock in RightStart.com but excluding the assets of RightStart.com). We plan to
replace the Credit Facility by January 2001.
The Credit Facility, as amended, required us, excluding any contribution
from RightStart.com, at all times during Fiscal 1999, to maintain net worth
(defined to include equity, additional paid-in capital, retained earnings
(accumulated deficit) and subordinated debt and excluding the operating results
of RightStart.com) of at least $8.0 million. The Credit Facility also required
that our earnings before interest, taxes, depreciation and amortization and non
recurring charges ("EBITDA") exceed $500,000 for each of the twelve months ended
January 31, 2000, the twelve months ending April 30, 2000, the twelve months
ending July 31, 2000, the twelve months ending October 31, 2000 and the twelve
months ending January 31, 2001. In addition, our capital expenditures are
limited to $1,750,000 in Fiscal 2000. We entered into an amendment to the Credit
Facility in April 2000 that reduced our minimum required EBITDA from $500,000 to
$250,000 for the first quarter of Fiscal 2000, changed our required minimum net
worth to amounts decreasing to a low of $6,772,000 as of the end of July 2000
and returning to $8,000,000 as of the end of August 2000 and added an
amortization requirement to the Capex Line of $100,000 per month beginning May
1, 2000. We also received a waiver of compliance with the financial covenants
under the Credit Facility for periods between the fiscal year end and the date
of the amendment.
We have a deferred tax asset of $13.8 million, which is reserved against by
a valuation allowance of $12.4 million, for a net deferred tax asset of $1.4
million. Management expects that we will generate $4.0 million of taxable income
within the next 15 years to utilize a minimum of $1.4 million of the net
deferred tax asset. The taxable income will be generated through a combination
of improved operating results and tax planning strategies. Rather than lose the
tax benefit, we could implement certain tax planning strategies including the
sale of certain of our operations or some of our investment in RightStart.com.
Based on the expected operating improvements combined with tax planning
strategies in place, management believes that adequate taxable income will be
generated over the next 15 years in which to utilize a portion of the NOL
carryforwards.
Our ability to fund our operations, open new stores on our planned
timeframe and maintain compliance with our Credit Facility is dependent on our
ability to generate sufficient cash flow from operations and secure financing.
We are considering our financing alternatives. Historically, we have incurred
losses and may continue to incur losses in the near term. Depending on the
success of our business strategy, we may continue to incur losses. Losses could
negatively affect working capital and the extension of credit by our suppliers
and impact operations.
RightStart.com
- --------------
During Fiscal 1999, RightStart.com's primary sources of liquidity were from
the issuance of Series A Convertible Preferred Stock in RightStart.com to third-
party investors which provided net proceeds of $13.7 million. RightStart.com
used those proceeds to create and stock the Baby Store, Kids' Development Store,
Big Kids' Store and Teachers' Store and build an online business. The Credit
Facility does not permit us to make investments in RightStart.com without lender
consent. The offering and the purchase of website development and maintenance
services for RightStart.com from its technology services provider through the
exchange of common stock for these services has reduced our ownership of
RightStart.com to approximately 60% of its outstanding common stock. In April
2000, RightStart.com sold secured bridge notes in the aggregate principal amount
$2,180,000 (the "Bridge Notes") and warrants to purchase 109,000 shares of its
common stock at an exercise price of $6.70 to affiliates, to provide funding
until RightStart.com can obtain additional equity financing. A default on the
Bridge Notes would permit such holders to foreclose on the assets of
RightStart.com and require RightStart.com, to the extent it has not already done
so, to issue to the holders of the notes, warrants to purchase an aggregate of
8,720,000 shares, or approximately 48.9% of the outstanding common stock of
RightStart.com, at an exercise price of $0.25 per share. RightStart.com's
ability to fund its operations and grow its market share is dependant upon its
ability to raise
15
<PAGE>
additional capital. On January 18, 2000, RightStart.com filed a registration
statement with the Securities and Exchange Commission with respect to an
offering of its common stock. It has delayed that offering because of adverse
market conditions. RightStart.com is considering its financing alternatives. In
the event additional funds are not available, RightStart.com would reduce its
spending on advertising, marketing and other operating costs.
RightStart.com entered into a term sheet in November 1999 with Oxygen Media,
LLC. The term sheet contemplates that over the three-year term of the proposed
agreement RightStart.com would provide consideration approximating $13.7 million
including in-kind consideration provided by us.
Impact of Inflation
- -------------------
The impact of inflation on results of operations has not been significant
during our last three fiscal years.
Seasonality
- -----------
Our business is not significantly impacted by seasonal fluctuations, when
compared to many other specialty retail and catalog operations. Our products are
for the most part need-driven and the customer is often the end user of the
product. We do, however, experience increased sales during the Christmas holiday
season and expect that this seasonality may increase as RightStart.com's
business for children through age twelve increases and forms a greater portion
of our financial results.
Other Matters
- -------------
Year 2000
- ---------
The year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Any of our
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000 which could result in miscalculations or
system failures.
We were adequately prepared for year 2000 and did not experience any
meaningful disruptions related to our information technology ("IT") and non-IT
systems. Additionally, we did not encounter any disruptions in service or
communications with our mission critical service vendors, suppliers of products,
logistics vendors or it's customers.
New Accounting Requirements
- ---------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards FAS 133, "Accounting for Derivative Instruments
and Hedging Activities," effective beginning in the first quarter of 2000. FAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires companies to recognize all derivatives as either
assets or liabilities on the balance sheet and measure those instruments at fair
value. FAS 133 was amended by Standard FAS No. 137 which defers the effective
date of the FAS 133 to all fiscal quarters of fiscal years beginning after June
15, 2000. FAS No. 133 is effective for our first fiscal quarter in the year
2001 and is not expected to have a material effect on our financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
16
<PAGE>
In the ordinary course of operations, we face no significant market risk.
Our purchase of imported products subjects us to a minimum amount of foreign
currency risk. Foreign currency risk is that risk associated with recurring
transactions with foreign companies, such as purchases of goods from foreign
vendors. If the strength of foreign currencies increases compared to the United
States dollar, the price of imported products could increase. We have no
commitments, however, for future purchases with foreign vendors and,
additionally, we have the ability to source products domestically in the event
of import price increases.
See "Management's Discussion and Analysis of Financial condition and
Results of Operations -- Liquidity and Capital Resources" above for a discussion
of our debt obligations, the interest rates of which are linked to the prime
rate. We have not entered into any derivative financial instruments to mange
interest rate risk, currency risk or for speculative purposes and we are
currently not evaluating the future use of these instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
Our financial statements and supplementary data is as set forth in Item
14(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
We have not had any disagreements with our accountants on our accounting
and financial disclosure. As previously disclosed, we selected Arthur Andersen
LLP to be our independent public accountants beginning in our last fiscal year
which selection was approved by our stockholders at our last annual meeting held
September 9, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The information contained in our Proxy Statement under the captions
"Executive Officers" and "Election of Directors" is incorporated herein by
reference. Our Proxy Statement will be filed with the Securities and Exchange
Commission no later than 120 days after the close of Fiscal 1999.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information contained in our Proxy Statement under the caption
"Executive Compensation and Other Information" is incorporated herein by
reference. Our Proxy Statement will be filed with the Securities and Exchange
Commission no later than 120 days after the close of Fiscal 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
17
<PAGE>
The information contained in our Proxy Statement under the caption
"Principal Shareholders and Management" is incorporated herein by reference. Our
Proxy Statement will be filed with the Securities and Exchange Commission no
later than 120 days after the close of Fiscal 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information contained in our Proxy Statement under the caption
"Certain Relationships and Related Transactions" is incorporated herein by
reference. Our Proxy Statement will be filed with the Securities and Exchange
Commission no later than 120 days after the end of Fiscal 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) The following documents are filed as part of this report.
<TABLE>
<CAPTION>
(1) Financial Statements: Page
----
<S> <C>
Report of Independent Public Accountants F - 1
Report of Independent Accountants F - 1-A
Consolidated Balance Sheets - January 29, 2000 and January 30, 1999 F - 2
Consolidated Statements of Operations - Periods Ended January 29, 2000, F - 3
January 30, 1999 and January 31, 1998
Consolidated Statements of Shareholders' Equity - Periods Ended F - 4
January 29, 2000, January 30, 1999 and January 31, 1998
Consolidated Statements of Cash Flows - Periods Ended January 29, 2000, F - 5
January 30, 1999 and January 31, 1998
Notes to Consolidated Financial Statements F - 6
(2) Financial Statement Schedules:
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.
(3) Listing of Exhibits
</TABLE>
18
<PAGE>
The following exhibits are filed as part of, or incorporated by reference
into, this annual report:
19
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
- ------
<TABLE>
<CAPTION>
<C> <S>
3.1 Amended and Restated Articles of Incorporation of the company, dated August 12, 1991(1)
3.2 Amendment to Articles of Incorporation, dated August 20, 1991(1)
3.3 Form of Amendment to Articles of Incorporation, dated August 24, 1991(1)
3.4 Bylaws of the company, as amended(2)
3.5 Specimen Certificate of the Common Stock (without par value)(1)
4.1 Warrant to purchase 5,000 shares of common stock issued to Heller Financial, Inc.
4.2 Warrant to purchase 54,600 shares of common stock issued to Jonathan Davidson (3)
4.3 Warrant to purchase 119,700 shares of common stock issued to Sierra Ventures VII, L.P. (4)
4.4 Warrant to purchase 136,500 shares of common stock issued to Oxygen Media, LLC
10.1 1991 Key Employee Stock Option Plan (5)
10.2 Form of Indemnification Agreement between Registrant and its directors and executive officers
(5)
10.3 Asset Purchase Agreement for Acquisition of the Assets of Small People, Inc. and Jimash
Corporation by Right Start Subsidiary I, Inc.(6)
10.4 1995 Non-employee Directors Option Plan (7)
10.5 Registration Rights Agreement dated August 3, 1995 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(7)
10.6 Asset Purchase Agreement dated as of July 29, 1996 by and between Blasiar, Inc. (DBA Alert
Communications Company) and The Right Start, Inc.(7)
10.7 Convertible Debenture Purchase Agreement between The Right Start, Inc. and Cahill Warnock
Strategic Partners, LP dated as of October 11, 1996(8)
10.8 First Amendment to Convertible Debenture Purchase Agreement between The Right Start, Inc. and
Cahill Warnock Strategic Partners, LP dated as of May 30, 1997 (9)
10.9 Convertible Debenture Purchase Agreement between The Right Start, Inc. and Strategic
Associates, LP dated as of October 11, 1996 (8)
10.10 First Amendment to Convertible Debenture Purchase Agreement between The Right Start, Inc. and
Strategic Associates, LP dated as of May 30, 1997 (9)
10.11 Registration Rights Agreement dated October 11, 1996 between The Right Start, Inc. and
Strategic Associates, L.P. (10)
10.12 Registration Rights Agreement dated October 11, 1996 between The Right Start, Inc. and Cahill,
Warnock Strategic Partners Fund, L.P. (10)
</TABLE>
20
<PAGE>
<TABLE>
<C> <S>
10.13 Loan and Security Agreement dated as of November 14, 1996 between The Right Start, Inc. and
Heller Financial, Inc. (8)
10.14 First Amendment to Loan and Security Agreement and Limited Waiver and Consent dated as of April
30, 1997 (11)
10.15 Second Amendment to Loan and Security Agreement and Limited Waiver and Consent dated as of June
10, 1997 (12)
10.16 Third Amendment to Loan and Security Agreement and Limited Waiver and Consent dated as of
September 3, 1997 (12)
10.17 Fourth Amendment to Loan and Security Agreement and Limited Waiver and Consent dated as of
January 30, 1998 (10)
10.18 Waiver and Fifth Amendment to Loan and Security Agreement dated as of December 9, 1998 (13)
10.19 Consent by Heller Financial, Inc. to transactions relating to RightStart.com Inc. and
modification of Loan Agreement, dated as of July 8, 1999.
10.20 Sixth Amendment to Loan and Security Agreement and First Amendment to Secured Capex Note dated
as of November 8, 1999 (13)
10.21 Seventh Amendment to Loan and Security Agreement and Second Amendment to Secured Capex Note
dated as of January 18, 2000
10.22 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)
10.23 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)
10.24 The Right Start, Inc. Letter Agreement dated as of April 6, 1998(14)
10.25 The Right Start, Inc. Amendment to Letter Agreement dated as of April 13, 1998(14)
10.26 The Right Start, Inc. Securities Purchase Agreement dated as of May 6, 1997 between the company
and certain investors listed therein with respect to the company's 11.5% Senior Subordinated
Notes due May 6, 2000 and warrants to purchase the company's common stock (14)
10.27 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 (14)
10.28 Registration Rights Agreement dated April 13, 1998 between The Right Start, Inc. and the
investors named therein (10)
10.29 The Right Start, Inc. Securities Purchase Agreement dated as of September 4, 1997 between the
company and the investors named therein with respect to 1,510,000 shares of the company's
common stock (12)
10.30 Management Services Agreement dated July 9, 1999 between The Right Start and RightStart.com (15)
10.31 Intellectual Property Agreement dated July 9, 1999 between The Right Start and RightStart.com
(15)
10.32 Series A Preferred Stock Purchase Agreement dated July 9, 1999 (15)
</TABLE>
21
<PAGE>
<TABLE>
<C> <S>
10.33 Investors' Rights Agreement dated July 9, 1999 among RightStart.com, Sierra Ventures VII, L.P.,
Sierra Ventures Associates VII, L.L.C., Ajit Shah, Robert Simon and Palomar Ventures I, L.P.
(15)
10.34 Form of Indemnification Agreement between RightStart.com and its directors
10.35 1999 RightStart.com Stock Option Plan
10.36 Subscription Agreement dated July 9, 1999 between RightStart.com and Johnathan Davidson
10.37 Subscription Agreement dated December 30, 1999 between RightStart.com and Oxygen Media, LLC
10.38 Stock Grant Agreement dated October 30, 1999 between The Right Start, RightStart.com and
Guidance Solutions
10.39 Registration Rights Agreement dated October 30, 1999 between RightStart.com and Guidance
Solutions
23.1 Consent of Independent Public Accountants - Arthur Andersen
23.2 Consent of Independent Accountants - PricewaterhouseCoopers
27.1 Financial Data Schedule
</TABLE>
__________________________
(1) Previously filed as an Exhibit to the company's Registration Statement of
Form S-1 dated August 29, 1991.
(2) Previously filed as an Exhibit to Amendment Number 2 to the company's
Registration Statement on Form S-1 dated October 3, 1991.
(3) Substantially identical warrants have been granted to each of James W.
Montgomery (for 58,240 shares of common stock), Kim Enterprises, L.L.C.
(for 49,140 shares of common stock), Michael Holton(for 5,460 shares of
common stock), David P. Michaels (for 5,460 shares of common stock) and
David A. Burns (for 9,100 shares of common stock).
(4) Substantially identical warrants have been granted to Sierra Ventures
Associates VII, L.L.C. (for 11,970 shares of common stock), Ajit Shah (for
165 shares of common stock), Robert Simon (for 165 shares of common stock)
and Palomar Ventures I, L.P. (for 33,000 shares of common stock).
(5) Previously filed as an Exhibit to Amendment Number 1 to the company's
Registration Statement on Form S-1 dated September 11, 1991.
(6) Previously filed as an Exhibit to the company's 10-K for the fiscal year
ended May 26, 1993.
(7) Previously filed as an Exhibit to the company's 10-K for the year ended
June 1, 1996.
(8) Previously filed as an Exhibit to the company's 10-Q for the period ended
November 30, 1996.
(9) Previously filed as an Exhibit to the company's 10-Q for the period ended
May 3, 1997.
(10) Previously filed as an Exhibit to the company's 10-K for the fiscal year
ended January 31, 1998, as amended.
22
<PAGE>
(11) Previously filed as an Exhibit to the company's 10-K for the transition
period from June 2, 1996 to February 1, 1997.
(12) Previously filed as an Exhibit to the company's 10-Q for the period ended
August 2, 1997.
(13) Previously filed as an Exhibit to the company's 10-Q for the period ended
October 30, 1999.
(14) Previously filed as an Exhibit to the company's 8-K dated April 23, 1998.
(15) Previously filed as an Exhibit to the company's 8-K dated July 9, 1999.
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed by the company during the last
quarter of Fiscal 1999.
(c) A list of exhibits included as part of this report is set forth in Part IV
of this Annual Report on Form 10-K above and is hereby incorporated by
reference herein.
(d) Not applicable
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 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: April 28, 2000 / 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jerry R. Welch Chairman of the Board, April 28, 2000
- ------------------------- Chief Executive Officer and President
Jerry R. Welch
/s/ Richard A. Kayne Director April 28, 2000
- -------------------------
Richard A. Kayne
/s/ Andrew D. Feshbach Director April 28, 2000
- -------------------------
Andrew D. Feshbach
/s/ Robert R. Hollman Director April 28, 2000
- -------------------------
Robert R. Hollman
/s/ Fred Kayne Director April 28, 2000
- -------------------------
Fred Kayne
/s/ Howard M. Zelikow Director April 28, 2000
- -------------------------
Howard M. Zeliko
/s/ Gina M. Engelhard Chief Financial Officer (Principal April 28, 2000
- ------------------------- Financial and Accounting Officer)
Gina M. Engelhard
</TABLE>
24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and
Shareholders of The Right Start, Inc.
We have audited the accompanying consolidated balance sheet of The Right Start,
Inc. (a California Corporation) and subsidiary as of January 29, 2000 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards 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 accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Right Start, Inc. and
subsidiary as of January 29, 2000, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
April 28, 2000
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of The Right Start, Inc.
In our opinion, the accompanying balance sheet as of January 30, 1999 and the
related statements of operations, of changes in shareholders' equity and of cash
flows for each of the two years in the period ended January 30, 1999 present
fairly, in all material respects, the financial position, results of operations
and cash flows of The Right Start, Inc. at January 30, 1999 and for each of the
two years in the period ended January 30, 1999, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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. We have not audited the consolidated financial statements of The Right
Start, Inc. for any period subsequent to January 30, 1999.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 12, 1999
F-1-A
<PAGE>
THE RIGHT START, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
January 29, 2000 January 30, 1999
---------------- ----------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 5,199,000 $ 626,000
Accounts and other receivables 682,000 585,000
Merchandise inventories 9,694,000 5,797,000
Other current assets 1,849,000 1,292,000
-------------- --------------
Total current assets 17,424,000 8,300,000
Noncurrent assets:
Property, fixtures and equipment, net 10,648,000 7,884,000
Deferred income taxes 1,400,000 1,400,000
Other noncurrent assets 1,255,000 87,000
-------------- --------------
$ 30,727,000 $ 17,671,000
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 9,566,000 $ 3,822,000
Revolving line of credit 3,377,000
Term note payable 2,750,000
-------------- --------------
Total current liabilities 12,943,000 6,572,000
Term note payable 3,000,000
Deferred rent 1,378,000 1,449,000
Minority interest in consolidated subsidiary 3,397,000
Commitments and contingencies
Mandatorily redeemable preferred stock Series A,
$3,000,000 redemption value 2,088,000 1,789,000
Shareholders' equity:
Convertible preferred stock Series B 1,875,000 2,813,000
Convertible preferred stock Series C 3,850,000 3,850,000
Common stock (25,000,000 shares authorized
at no par value; 5,417,666 and 5,051,820
issued and outstanding, respectively) 22,593,000 22,337,000
Paid in capital 16,142,000 3,571,000
Deferred compensation (671,000)
Accumulated deficit (35,868,000) (24,710,000)
-------------- --------------
Total shareholders' equity 7,921,000 7,861,000
-------------- --------------
$ 30,727,000 $ 17,671,000
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE>
THE RIGHT START, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------
January 29, 2000 January 30, 1999 January 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Retail Store Sales $ 38,043,000 $ 31,875,000 $ 31,107,000
Online sales before promotional discounts 9,020,000
Catalog sales 3,645,000 4,736,000 7,414,000
--------------- --------------- --------------
Total sales 50,708,000 36,611,000 38,521,000
Promotional discounts related to online sales 1,629,000
--------------- ------------- ------------
Net sales 49,079,000 36,611,000 38,521,000
Costs and expenses:
Cost of goods sold 25,279,000 18,576,000 19,244,000
Operating expense 20,370,000 15,106,000 19,019,000
Non-cash compensation 2,014,000
Marketing and advertising expense 7,233,000 387,000 193,000
General and administrative expense 5,306,000 3,337,000 3,912,000
Pre-opening costs 323,000 209,000 711,000
Depreciation and amortization expense 1,950,000 1,488,000 1,608,000
Other (income) and expense:
Other expense 698,000
Store closing (income) expense 151,000 (113,000) 1,207,000
--------------- --------------- --------------
62,626,000 38,990,000 46,592,000
--------------- --------------- --------------
Operating loss (11,918,000) (2,379,000) (8,071,000)
Non-cash beneficial conversion feature amortization 3,850,000
Minority interest in consolidated subsidiary loss (3,000,000)
Interest expense, net 227,000 640,000 1,143,000
--------------- --------------- --------------
Loss before income taxes and extraordinary item (9,145,000) (6,869,000) (9,214,000)
Income tax provision 68,000 22,000 27,000
--------------- --------------- --------------
Loss before extraordinary item (9,213,000) (6,891,000) (9,241,000)
Extraordinary gain on debt restructuring, net 1,211,000
--------------- --------------- --------------
Net loss $ (9,213,000) $ (5,680,000) $ (9,241,000)
=============== =============== ==============
Basic and diluted loss per share:
Loss before extraordinary item $ (1.84) $ (1.37) $ (2.01)
Extraordinary item 0.24
--------------- --------------- --------------
Net loss $ (1.84) $ (1.13) $ (2.01)
=============== =============== ==============
Weighted average number of shares
outstanding 5,355,756 5,051,820 4,594,086
=============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
THE RIGHT START, INC. AND SUBSIDIARY
STATEMENTS OF SHAREHOLDERS' EQUITY
----------------------------------
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------------
Series B Series C Common Stock
------------------------- ------------------------ ------------
Shares Amount Shares Amount Shares
--------- -------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance February 1, 1997 4,076,820
Exercise of stock options 220,000
Issuance of shares in private placement 755,000
Proceeds related to Senior subordinated notes
Net loss
--------- ----------- ---------- ------------ ----------
Balance January 31, 1998 5,051,820
Issuance of preferred stock 30,000 $2,813,000 38,500 $3,850,000
Issuance of subordinated debt in conjunction
with recapitalization, net
Preferred dividend accretion
Net loss
--------- ----------- ---------- ------------ ----------
Balance January 30, 1999 30,000 $2,813,000 38,500 $3,850,000 5,051,820
Preferred shares converted to common (10,000) ($938,000) 333,333
Issuance of shares pursuant to the exercise of stock options 27,383
Recapitalization costs
Preferred dividend accretion
Induced conversion of Subsidiary's preferred stock
Issuance of shares to Lender 5,130
Issuance of warrants to Lender
Performance options
Subsidiary options
Director's options
Amortization of deferred compensation
Gain on issuance of common stock of subsidiary
Net loss
--------- ----------- ---------- ------------ ----------
Balance January 29, 2000 20,000 $1,875,000 38,500 $3,850,000 5,417,666
========= =========== ========== ============ ==========
<CAPTION>
Common Stock
------------ Paid in Deferred Accumulated
Amount Capital Compensation Deficit Net Equity
------------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance February 1, 1997 $16,961,000 ($9,789,000) $7,172,000
Exercise of stock options 1,320,000
Issuance of shares in private placement 1,320,000 3,705,000
Proceeds related to Senior subordinated notes 3,705,000 351,000
Net loss 351,000 (9,241,000) (9,241,000)
----------- ----------- -------- ---------- -------------
Balance January 31, 1998 22,337,000 ($19,030,000) 3,307,000
-
Issuance of preferred stock 6,663,000
Issuance of subordinated debt in conjunction $3,590,000 3,590,000
with recapitalization, net (19,000) (19,000)
Preferred dividend accretion
Net loss (5,680,000) (5,680,000)
------------ ----------- -------- ------------ -------------
Balance January 30, 1999 22,337,000 3,571,000 ($24,710,000) 7,861,000
Preferred shares converted to common 938,000
Issuance of shares pursuant to the exercise of stock options 155,000 155,000
Recapitalization costs (56,000) (56,000)
Preferred dividend accretion (301,000) (301,000)
Induced conversion of Subsidiary's preferred stock 316,000 (316,000)
Issuance of shares to financial institution 101,000 101,000
Issuance of warrants to financial institution 58,000 58,000
Performance options 1,770,000 1,770,000
Subsidiary options 815,000 (815,000)
Director's options 100,000 (100,000)
Amortization of deferred compensation 244,000 244,000
Gain on issuance of common stock of Subsidiary 8,931,000 8,931,000
Net loss (10,842,000) (10,842,000)
----------- ----------- --------- ------------ -------------
Balance January 29, 2000 $22,593,000 $16,142,000 ($671,000) ($35,868,000) $7,921,000
=========== =========== ========= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
THE RIGHT START, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------------
January 29, 2000 January 30, 1999 January 31, 1998
----------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (10,842,000) $ (5,680,000) $ (9,241,000)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,950,000 1,538,000 2,319,000
Non-cash compensation 2,014,000
Non-cash beneficial conversion feature amortization 3,850,000
Non-cash advertising expense 9,000
Store closing expense 151,000 39,000 1,580,000
Minority interest in consolidated subsidiary loss (3,000,000)
Amortization of discount on senior subordinated notes 44,000 85,000
Extraordinary gain (1,211,000)
Change in assets and liabilities affecting operations 442,000 1,760,000 (1,316,000)
------------- ------------- ------------
Net cash provided by (used in) operating activities (9,276,000) 340,000 (6,573,000)
------------- ------------- ------------
Net cash used in investing activities:
Additions to property, fixtures and equipment (3,603,000) (1,296,000) (2,063,000)
Cash flows from financing activities:
Net proceeds from (payments on) revolving line of credit 3,377,000 (2,014,000) 181,000
Net proceeds from (payments on ) term note payable 250,000 (250,000) 357,000
Proceeds from private placement of common stock 3,705,000
Proceeds from common stock issued upon exercise of
stock options 155,000 1,320,000
Sale of preferred stock in consolidated subsidiary, net 13,670,000
Proceeds from issuance of senior subordinated notes, net 3,606,000 3,000,000
------------- ------------- ------------
Net cash provided by financing activities 17,452,000 1,342,000 8,563,000
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents 4,573,000 386,000 (73,000)
Cash at beginning of period 626,000 240,000 313,000
------------- ------------- ------------
Cash and cash equivalents at end of period $ 5,199,000 $ 626,000 $ 240,000
============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
THE RIGHT START, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
- ------------------------------------------------------------
The Company
- -----------
The Right Start, Inc. (the "Company" or "Parent") is a specialty retailer of
high quality developmental, educational and care products for infants and
children. The consolidated financial statements include the results of the
"Company and its majority-owned subsidiary, RightStart.com Inc.
("RightStart.com" or the "Subsidiary"). RightStart.com was formed in April 1999
for the purpose of engaging in electronic commerce over the Internet. Effective
May 1, 1999, the Company contributed its catalog assets to RightStart.com and in
July 1999, RightStart.com issued preferred stock to certain investors then
representing 33%, on a fully-diluted basis, of RightStart.com's outstanding
capital stock. The preferred stock converted to common stock of RightStart.com
in October 1999. The Company's ownership interest in RightStart.com was 60.2%
at January 29, 2000.
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. The fiscal years
ended January 29, 2000 ("Fiscal 1999"), January 30, 1999 ("Fiscal 1998") and
January 31, 1998 ("Fiscal 1997") were fifty-two week periods.
Revenue Recognition
- -------------------
Retail sales are recorded at time of sale or when goods are delivered. Catalog
and internet sales net of discounts, coupon redemptions and promotional
allowances are recorded at the time of shipment to customers. 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 weighted average
basis.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments purchased with an original
maturity date of three months or less to be cash equivalents. At various times
the Company maintains cash accounts with financial institutions in excess of
federally insured amounts.
Concentrations of Credit Risks and Significant Customers
- --------------------------------------------------------
At January 29, 2000 and January 30, 1999 accounts receivable were due from
credit card companies and others. There were no single customers who accounted
for more than 10% of the revenues during any period.
F-6
<PAGE>
Concentration of Product Fulfillment and Technology Risk
- --------------------------------------------------------
Since the launch of the online store in June 1999, the Subsidiary has outsourced
its technology department and its fulfillment activities, such as its
warehousing and logistics operations and its call center and customer service
activities. The Company has outsourced its distribution and fulfillment
activities. The Subsidiary is substantially dependent on the technology
services it receives from its technology services providers who host, maintain
and develop its website and provide technical assistance to its third-party
distribution provider and its in-house logistics team. The Subsidiary's
principal technology service provider is also a shareholder of the Subsidiary
and the Company believes RightStart.com's relationship with them to be very good
and, if necessary, the Subsidiary could locate replacement services without
material difficulty. Neither the Company nor the Subsidiary has long-term
contracts with its respective fulfillment services providers but the Company and
the Subsidiary have been operating under agreements setting forth the terms at
which we will purchase those services and believes that replacement providers
could be found without material difficulty should the need arise. Nonetheless,
a failure in any of these outsourced services could have a material adverse
effect on the Company or the Subsidiary.
Prepaid Catalog Costs
- ---------------------
Prepaid catalog costs consist of the costs to produce, print and distribute
catalogs. These costs are amortized over the expected sales life of each
catalog, which typically does not exceed four months. Catalog production
expenses of $1,334,000, $1,363,000 and $2,753,000 were recorded in Fiscal 1999,
Fiscal 1998 and Fiscal 1997, respectively.
Product Development Expenses
- ----------------------------
During Fiscal 1999, the Subsidiary used a third party ("Guidance Solutions") to
develop and maintain its online store. Expenses associated with the online
store consist of costs related to software development, maintenance, online
store operations, systems and telecommunications infrastructure and acquired
content.
The Company capitalizes software costs incurred related to the application
development stage. All other software development costs are expensed as
incurred. Software and website costs are amortized over a three-year period.
Long-lived Assets
- -----------------
The Company periodically evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful lives of long-lived assets
may warrant revision or that the remaining balance may not be recoverable. When
factors indicate that an asset should be evaluated for possible impairment, the
Company uses an estimate of the asset's undiscounted net cash flows over its
remaining life in measuring whether the asset is recoverable. There are no
assets that have been determined to require an impairment provision.
Property, Fixtures and Equipment
- --------------------------------
Property, fixtures and equipment are stated at cost less accumulated
depreciation and amortization. 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-7
<PAGE>
Pre-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 charged to expense as incurred.
The impact of this change was not significant to the Company's results of
operations or financial position.
Advertising
- -----------
Advertising costs are expensed as incurred or at the time of the initial print
or media broadcast. Advertising expenses of $7,233,000, $387,000 and $193,000
were recorded in Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
Deferred Rent
- -------------
The Company recognizes rent expense on a straight-line basis over the life of
the underlying lease. The benefit from tenant allowances and landlord
concessions are recorded as deferred rent and recognized over the lease term.
Income Taxes
- ------------
The Company accounts for income taxes using 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 assets and liabilities. A valuation allowance is
established against deferred tax assets when it is more likely than not that
all, or some portion, of such deferred tax assets will not be realized.
Per Share Data
- --------------
On December 15, 1998, the Company's shareholders approved a one-for-two reverse
split of the Company's common stock, which had previously been approved by the
Company's Board of Directors. The reverse split was effective December 15,
1998. All references in the financial statements to shares and related prices,
weighted average number of shares, per share amounts and stock plan data have
been adjusted to reflect the reverse split.
Basic and diluted loss per share data is computed by dividing net loss
applicable to common shareholders by the weighted average number of common
shares outstanding. Diluted income per share data is computed by dividing
income available to common shareholders plus adjustment for costs associated
with dilutive securities by the weighted average number of shares outstanding
plus any potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock in each year.
F-8
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
----------- ----------- -----------
<S> <C> <C> <C>
Loss before extraordinary item $10,842,000 $6,891,000 $9,241,000
Plus: Preferred stock accretion 301,000 19,000
Subsidiary dividend to preferred
shareholders 316,000
----------- ---------- ----------
Basic and diluted loss before
extraordinary item applicable to common
shareholders $11,459,000 $6,910,000 $9,241,000
=========== ========== ==========
Weighted average shares 5,355,756 5,051,820 4,594,086
Loss before extraordinary item per
share, basic and diluted $ 2.14 $ 1.37 $ 2.01
</TABLE>
Certain securities of the Parent were not included in the computation of diluted
EPS because to do so would have been antidilutive for the periods presented.
Such securities include options outstanding to purchase 1,001,407, 890,519 and
326,005 shares of common stock at January 29, 2000, January 30, 1999 and January
31, 1998, respectively, Series B preferred stock convertible into 666,667 and
1,000,000 shares of common stock at January 29, 2000 and January 30, 1999 and
Series C preferred stock convertible into 1,925,000 shares of common stock at
January 29, 2000 and January 30, 1999.
Stock-Based Compensation
- ------------------------
Stock options issued to employees and members of the Company's board of
directors are accounted for in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Accordingly, compensation expense is recorded for options awarded to employees
and directors to the extent that the exercise prices are less than the fair
market value of the common stock on the date of grant where the number of
options and the exercise price are fixed. The difference between the fair value
of the common stock and the exercise price of the stock option is recorded as
deferred compensation, which is charged to expense over the vesting period of
the underlying stock option. The Company follows the disclosure requirements of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock Based Compensation".
In April 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation", an interpretation of APB opinion No. 25 which is effective July
1, 2000. The interpretation requires that any options granted to non-employees
of the Company after December 15, 1998 be accounted for under statement of
Financial Accounting Standard No. 123. As of January 29, 2000 there were no
options issued by the Company to non-employees.
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
F-9
<PAGE>
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Comprehensive Income
- --------------------
The Company has not had any items of other comprehensive income in any period
presented.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of all receivables, payables and accrued expenses
approximate fair value due to the short-term nature of such instruments. The
carrying amount of the revolving and Capex credit facilities approximates fair
value due to the floating rate on such instruments.
New Accounting Pronouncements
- -----------------------------
In June 1999, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting For Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Company currently does not have
or use derivative instruments.
NOTE 2 - CONSOLIDATED OPERATING RESULTS AND RISKS
- -------------------------------------------------
For Fiscal 1999, the Company had a net loss of $10,842,000 and a use of cash
from operating activities of approximately $9,276,000. The Company is currently
projecting to have operating losses through Fiscal 2000.
The Subsidiary launched its online store in June 1999 and has incurred
significant development and marketing expenditures which have contributed
significantly to the consolidated loss in Fiscal 1999. The Company and
Subsidiary currently plan to continue to grow the Subsidiary's market share
through advertising, strategic partnerships and alliances. In order to continue
to fund operations and grow its market share it will be necessary for the
Subsidiary to raise additional capital. On January 18, 2000, the Subsidiary
filed a registration statement on Form S-1 with the Securities and Exchange
Commission. A portion of the proceeds from this offering were to be used by the
Subsidiary to fund operations and for working capital. Due to adverse market
conditions, this offering has been delayed. The Subsidiary is considering its
financing alternatives. ( see Note 18) The risks associated with the development
of an online business are significant and include, among others, competition
from other children's product retailers, losses expected in the online business,
limitations on access to capital to fund the online business, the dependence of
RightStart.com on its technology services provider, consumer acceptance of
online retailing and RightStart.com's online stores and the lack of operating
experience at RightStart.com.
At January 29, 2000 approximately $757,000 of professional fees and other costs
associated with the initial filing of an initial public offering related to
RightStart.com, were included in other assets. The Subsidiary expects these
costs to be offset against capital raised through the initial public offering or
other equity or debt financing in Fiscal year 2000.
Historically, the Company has incurred losses and may 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
F-10
<PAGE>
Company's operations.
NOTE 3 - PROPERTY, FIXTURES AND EQUIPMENT, NET:
- ----------------------------------------------
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
---- ----
<S> <C> <C>
Property, fixtures and equipment, at cost:
Fixtures and equipment $ 5,623,000 $ 4,015,000
Leaseholds and leasehold improvements 8,770,000 7,511,000
Computer software 2,597,000 840,000
----------- -----------
16,990,000 12,366,000
Accumulated depreciation and amortization (6,342,000) (4,482,000)
----------- -----------
$10,648,000 $ 7,884,000
=========== ===========
</TABLE>
In October 1999, approximately 288,333 shares of RightStart.com common stock
owned by the Company were issued to Guidance Solutions for services rendered
through October 30, 1999 and as an incentive for Guidance Solutions to continue
to provide services to the Subsidiary over the next ten months. The Subsidiary
has recorded the fair market value of the shares at the date of transfer as a
capital contribution and capitalized or expensed the pro rata value related to
services performed through January 29, 2000. The total capitalized amounts
related to development of the online store approximated $1,819,000 and are being
amortized over 36 months. Amounts expensed related to the services provided by
Guidance Solutions through January 29, 2000 were approximately $707,000.
Depreciation and amortization expense for property, fixtures and equipment
amounted to $1,950,000, $1,488,000 and $1,608,000 for Fiscal 1999, Fiscal 1998
and Fiscal 1997, respectively.
NOTE 4 - CREDIT AGREEMENTS:
- --------------------------
In November 1996, the Company entered into an agreement with a financial
institution for a $13 million credit facility (the "Credit Facility"). The
Credit Facility consists of a $10.0 million revolving line of credit for working
capital (the "Revolving Line") and a $3.0 million capital expenditure facility
(the "Capex Line"). Availability under the Revolving Line is subject to a
defined borrowing base. As of January 29, 2000 borrowings of $3.4 million were
outstanding under the Revolving Line and $3.0 million was outstanding under the
Capex Line; $1.5 million was available at January 29, 2000 under the Revolving
Line. Interest accrues on the Revolving Line at prime plus 1.0% and at prime
plus 1.5% on the Capex Line. At January 29, 2000, the bank's prime rate of
interest was 8.5%. The Credit Facility terminates on February 19, 2001, 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 (including the Company's stock in the Subsidiary but excluding
the assets of the Subsidiary).
The Credit Facility, as amended, required us, excluding any contribution from
RightStart.com, to maintain net worth (defined to include equity, additional
paid-in capital, retained earnings (accumulated deficit), subordinated debt and
excluding the operating results of the subsidiary) during Fiscal 1999 of at
least $8.0
F-11
<PAGE>
million. The Credit Facility also required that our earnings before interest,
taxes, depreciation and amortization and excluding non recurring items
("EBITDA") to exceed $500,000 for each of the twelve months ended January 31,
2000, the twelve months ending April 30, 2000, the twelve months ending July 31,
2000, the twelve months ending October 31, 2000 and the twelve months ending
January 31, 2001. In addition, our capital expenditures are limited to
$1,750,000 in Fiscal 2000. The Company entered into an amendment to the Credit
Facility in April 2000 that reduced minimum required EBITDA from $500,000 to
$250,000 for the first quarter of Fiscal 2000, changed the required minimum net
worth to amounts decreasing to a low of $6,772,000 as of the end of July 2000
and returning to $8,000,000 as of the end of August 2000 and added an
amortization requirement to the Capex Line of $100,000 per month beginning May
1, 2000. The Company also received a waiver of compliance with the financial
covenants under the Credit Facility for periods between the fiscal year end and
the date of the amendment.
Effective May 6, 1997, the Company issued subordinated notes in the aggregate
principal amount of $3,000,000 and warrants to purchase common stock. Certain
of the purchasers were affiliates of the Company. The subordinated notes bore
interest at 11.5% and were due in full on May 6, 2000. Warrants to purchase an
aggregate of 237,500 shares of common stock at $6.00 per share were issued in
connection with the subordinated notes. Proceeds from the sale of the
subordinated notes and warrants were allocated to the debt security and the
warrants based on the fair value of the securities at the date of issuance. The
value assigned to the warrants was $351,000. The resulting debt discount was
amortized over the term of the notes. In December 1998, the holders of the notes
exchanged the notes and warrants in connection with a capital restructuring.
(see Note 6)
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, permitted the holders to convert the principal amount
into 375,000 shares of the Company's common stock at $8.00 per share at any time
prior to May 31, 2002, the due date of the debentures. The debentures bore
interest at a rate of 8% per annum. The holders of the debentures exchanged the
debentures in conjunction with a capital restructuring in December 1998. (see
Note 6)
NOTE 5 - MANDATORILY REDEEMABLE PREFERRED STOCK:
- -----------------------------------------------
In connection with the Company's recapitalization (see Note 6), the Company
issued 30,000 shares of mandatorily redeemable preferred stock Series A. The
stock has a par value of $.01 per share and a liquidation preference of $100 per
share; it is mandatorily redeemable at the option of the holders on May 31, 2002
at a redemption price of $100 per share or $3,000,000. The Series A preferred
stock shall also be redeemed by the Company upon a change of control or upon the
issuance of equity securities by the Company for proceeds in excess of
$15,000,000, both as defined in the Certificate of Determination for the Series
A preferred stock.
The difference in the fair value of the mandatorily redeemable Series A
preferred stock at the date of issuance and the redemption amount is being
accreted, using the interest method, over the period from the issuance date to
the required redemption date as a charge to paid-in capital.
There shall be no dividends on the Series A preferred stock unless the Company
is unable to redeem the stock at the required redemption date, at which point
dividends shall cumulate and accrue on a daily basis, without interest, at the
rate of $15.00 per share per annum, payable quarterly.
NOTE 6 - SHAREHOLDERS' EQUITY:
- -----------------------------
F-12
<PAGE>
Recapitalization
- ----------------
In April 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 detachable warrants to purchase an aggregate of 1,925,000 shares
of common stock exercisable at $2.00 per share. The new securities were issued
for an aggregate purchase price of $3,850,000 and were purchased principally by
the Company's affiliates. In connection with the sale of the new securities,
the Company entered into an agreement (the "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 (of new and old securities) agreed to exchange all of its subordinated
debt securities, together with any warrants issued in connection therewith, for
newly issued shares of preferred stock. Ten shares of newly issued preferred
stock ("the Preferred Stock") were issued for each $1,000 principal amount of
subordinated debt securities exchanged. The total number of shares issued were
30,000, 30,000 and 38,500 for Preferred Stock Series A, B and C, respectively.
Holders of $3,000,000 principal amount of existing subordinated debt securities
elected to receive Series A Preferred Stock which has no fixed dividend rights,
is not convertible into common stock, is mandatorily redeemable by us in May
2002 and will not accrue dividends unless the Company is unable to redeem the
Series A Preferred Stock at the required redemption date, at which point
dividends would begin to accumulate and accrue at a rate of $15 per share per
annum. Holders of $3,000,000 principal amount of subordinated debt securities
elected to receive Series B convertible preferred stock which has no fixed
dividend rights and is convertible into common stock at a price per share of
$3.00. Holders of the $3,850,000 principal amount of newly issued, non-interest
bearing senior subordinated notes exchanged such debt securities (and the
warrants issued in connection therewith) for Series C convertible preferred
stock, which has no fixed dividend rights and is convertible into common stock
at a price of $2.00 per share. The issuance of the shares of preferred stock
occurred upon exchange of the subordinated debt securities in December 1998.
The Preferred Shares are non-voting. However, holders of at least a majority of
the Preferred Shares acting as a class, must consent to certain corporate
actions, including the sale of the Company, as defined in the respective
Certificates of Determination. Both Series B and Series C preferred stock have a
par value of $.01 per share and a liquidation preference of $100 per share.
During Fiscal 1999, 10,000 shares of Series B preferred stock converted into
333,333 shares of common stock.
F-13
<PAGE>
NOTE 7 - INCOME TAXES:
- ---------------------
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current provision:
Federal
State $68,000 $22,000 $27,000
Deferred provision:
Federal
State __________ __________ __________
$68,000 $22,000 $27,000
=========== =========== ===========
</TABLE>
The Company's effective income tax rate differed from the federal statutory rate
as follows:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
State income taxes, net of federal
benefit 3 3
Stock options
Valuation allowance (34) (11) (39)
Debt discount amortization (23)
Other (3) 2
----- ----- -----
Effective income tax rate 0% 0% 0%
===== ===== =====
</TABLE>
F-14
<PAGE>
Deferred tax (liabilities) assets are comprised of the following:
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
------------ -----------
<S> <C> <C>
Depreciation and amortization $ (167,000) $ (87,000)
Other (27,000) (27,000)
------------ -----------
Deferred tax liabilities (194,000) (114,000)
------------ -----------
Net operating loss carryforwards 12,054,000 7,672,000
Deferred rent 625,000 604,000
Deferred compensation 820,000
Other reserves 98,000 868,000
Other 280,000 69,000
Sales returns 96,000 29,000
------------ -----------
Deferred tax assets 13,973,000 9,242,000
------------ -----------
Valuation allowance (12,379,000) (7,728,000)
------------ -----------
Net deferred tax asset $ 1,400,000 $ 1,400,000
============ ===========
</TABLE>
In evaluating the realizability of the deferred tax asset, management considered
the Company's projections and available tax planning strategies. Management
expects that the Company will generate $4 million of taxable income within the
next 15 years to utilize the net deferred tax asset. The taxable income will be
generated through a combination of improved operating results and tax planning
strategies. Rather than lose the tax benefit, the Company could implement
certain tax planning strategies including the sale some of its operations or a
portion of the Company's stock ownership in RightStart.com in order to generate
income to enable the Company to realize its NOL carryforwards. Based on the
expected operating improvements, combined with tax planning strategies,
management believes that adequate taxable income will be generated over the next
15 years in which to utilize at least a portion of the NOL carryforwards
The Company has federal and state net operating loss carryforwards at January
29, 2000 of $23.7 million and $9.4 million, respectively. The Subsidiary had
federal and state net operating loss carryforwards at January 29, 2000 of
approximately $9.7 million and $4.8 million which expire in fiscal year 2020.
These carryforwards will expire in fiscal years ending 2002 through 2020.
NOTE 8 - EMPLOYEE BENEFITS AND STOCK OPTIONS:
- --------------------------------------------
On March 15, 1991, two now former executives were granted options to acquire up
to 450,000 shares of the Company's common stock under a non-qualified stock
option plan. The options were granted at fair market value of $6.66 per share.
One hundred fifty 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 194,000
F-15
<PAGE>
options exercisable at $6.00 per share, the fair market value at the time of
reissuance. At January 29, 2000, 21,500 shares were outstanding under this plan
and there were no additional options available for future grants.
One of the executives covered by these option agreements was the Company's chief
executive officer who resigned in March 1996. The other executive covered by
these option agreements was the Company's president who resigned in October
1996. The employment contracts for these individuals called for severance
payments in aggregate of approximately $930,000. A significant portion of each
individual's severance represented the cash surrender value of a life insurance
policy and the remainder was paid out through December 1997.
In October 1991, the Company adopted the 1991 Employee Stock Option Plan, which,
as amended, covers an aggregate of 900,000 shares of the Company's common stock.
Options outstanding under this plan have terms ranging from three to ten years
(depending on the terms of the individual grant). In May 1998, certain option
holders were given the right to cancel their existing options (many of which
were vested) (the "Existing Options") and have new options issued to them at the
fair market value on the date of grant of $3.50 per share (the "New Options.
The New Options vest in accordance with the terms of the individual grants. At
January 29, 2000, there were no Existing Options outstanding. Options for
375,960 shares were exercisable at January 29, 2000.
In October 1995, the Company adopted the 1995 Non-Employee Directors Option
Plan, as amended, to cover an aggregate of 200,000 shares of common stock. This
Plan provides for the annual issuance, to each non-employee director, of options
to purchase 1,500 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 using
the Black-Scholes option-pricing model such that the fair value of the options
issued is equivalent to the fees that the director would be otherwise entitled
to receive. Prior to Fiscal 1999, the amount of additional options was
determined based on an independent valuation. Options issued under this plan
vest on the anniversary date of their grant and upon termination of Board
membership. These options expire three to five years from the date of grant.
Options to purchase 172,130 shares of common stock were issued under this plan
at exercise prices ranging from $2.50 to $10.46 per share, such exercise price
being equal to the closing price of the Company's common stock on the date of
grant. In Fiscal 1999, the Company recorded $100,000 of deferred compensation
for options granted under this plan, of which $24,000 was charged to expense
during the period. At January 29, 2000, 146,477 of the options issued under this
plan were exercisable.
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 Company matches employees' contributions to the ESPP at
a rate of 50%. The Company's contributions to the ESPP amounted to $12,000,
$14,000 and $24,000 in Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
F-16
<PAGE>
The following table summarizes the Company' option activity through January 29,
2000:
<TABLE>
<CAPTION>
Fair Value Options Exercisable
Number of Weighted Average of Options Exercisable Weighted Average
Options Exercise Price Granted at Year End Exercise Price
---------- ---------------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Outstanding at February 1, 1997 489,960 $7.40
Granted 98,295 5.00 $1.55
Canceled (42,250) 8.08
Exercised (220,000) 6.00
Outstanding at January 31, 1998 326,005 7.62 323,921 $4.17
Granted 785,014 3.03 $1.07
Canceled (220,500) 7.13
Outstanding at January 30, 1999 890,519 3.72 148,006 $7.15
Granted 148,270 8.20 5.31
Canceled (9,999) 3.50
Exercised (27,383) 5.64
Outstanding at January 29, 2000 1,001,407 4.33 543,937 $3.75
</TABLE>
The following table summarizes information concerning the Company's outstanding
and exercisable stock options at January 29, 2000:
<TABLE>
<CAPTION>
Number Weighted Average Weighted Average
Range of Outstanding at Remaining Contractual Exercise Price of Number Exercisable
Exercise Prices January 29,2000 Life Options Outstanding at January 29,2000
- ---------------- ----------------- ---------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
$2.50 - $3.50 731,514 7.9 years $ 3.03 422,314
$5.00 - $7.88 173,412 7.9 years 6.67 58,412
$8.50 - $17.25 96,481 3.0 years 10.02 63,211
--------- ------ -------
1,001,407 $ 4.33 543,937
========= ====== =======
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Sholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rates 5.27% 5.17% 6.00%
Expected life (in years) 4 4 4
Dividend yield 0% 0% 0%
Expected volatility 85.33% 76.91% 79.34%
</TABLE>
The Company and the Subsidiary have adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In
accordance with the provisions of SFAS 123,
F-17
<PAGE>
the Company and the Subsidiary apply 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 SFAS 123. If the
Company and the Subsidiary had elected to recognize compensation expense based
upon the fair value at the grant date for awards under their plans consistent
with the methodology prescribed by SFAS 123, the Company's consolidated net loss
and consolidated loss per share, including the Company's share of compensation
expense related to the Subsidiary's option grants, would be increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended
----------
January 29, 2000 January 30, 1999 January 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net loss:
As reported ($ 10,842,000) ($5,680,000) ($9,241,000)
Pro forma (11,922,000) (6,258,000) (9,640,000)
Basic and diluted loss per share :
As reported ($2.14) ($1.13) ($2.01)
Pro forma (2.34) (1.24) (2.10)
</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 Black-Scholes option-pricing 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-pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's and the Subsidiary'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.
In Fiscal 1999, 100,000 options were granted at an exercise price of $7.25 and a
fair value at date of grant of $8.25. The Company recorded $100,000 of deferred
compensation related to these options, of which $24,000 was amortized in Fiscal
1999.
Subsidiary Options
- ------------------
In June 1999, RightStart.com adopted the RightStart.com Inc. 1999 Stock Option
Plan. The total number of shares that can be issued under the plan is
1,818,000. This plan provides for the granting to employees, including officers
and directors, of incentive stock options ("ISO") and for the granting to
employees, consultants and non-employee directors of non-statutory stock
options. Included in the Subsidiary's options granted through January 29, 2000
are 359,000 options granted to employees of The Right Start who are not
employees of the subsidiary. Generally, options granted under this Plan have a
term of ten years, are nontransferable, and vest 25% on the first anniversary of
grant and monthly thereafter over three years.
F-18
<PAGE>
The following table summarizes RightStart.com's stock option activity from
inception through January 29, 2000:
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Number of Shares Price Per Share Exercise Price
---------------- --------------- --------------
<S> <C> <C> <C>
Granted 1,769,500 $0.45 to $4.50 $1.18
Exercised
Canceled
1,769,500
=========
</TABLE>
Weighted average fair value of options granted in Fiscal 1999 was $1.29. In
Fiscal 1999, 535,400 options were granted at an exercise price of $0.45 and a
fair market value at date of grant of $1.67 and 300,000 options were granted at
an exercise price of $3.75 and a fair market value at date of grant of $4.29.
The estimated fair value of the stock at the grant dates were based on third
party appraisals or based on the conversion price of the Subsidiary's preferred
stock converted into common stock of the Subsidiary. For Fiscal 1999 the
Subsidiary recorded $815,000 of deferred compensation in connection with options
granted under the RightStart.com Inc. 1999 Stock Option Plan and recognized
compensation expense in the amount of $220,000.
Additional information with respect to the outstanding options as of January 29,
2000 was as follows:
<TABLE>
<CAPTION>
Weighted Average Life in Options
Range of Exercise Prices Number of Shares Exercise Price years Exercisable
------------------------- ---------------- -------------- ----- -----------
<S> <C> <C> <C> <C>
$0.45 1,396,000 $0.45 9.4 494,000
$3.75 300,000 $3.75 9.8
$4.50 73,500 $4.50 9.9
--------- ---
1,769,500 9.6
========= ===
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Sholes option-pricing model with the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rates 5.80%
Expected life (in years) 7
Dividend yield 0%
Expected volatility 85%
</TABLE>
Had compensation cost been determined and recorded based on the fair value at
the date of grant consistent with the provisions of SFAS 123, the Company's
share of the Subsidiary's compensation expense in Fiscal 1999 would have been
$296,000 which is included in the pro forma loss above.
NOTE 9 - RELATED PARTY TRANSACTIONS:
- -----------------------------------
Kayne Anderson Investment Management ("KAIM"), a shareholder, provides certain
management services to the Company and charges the Company for such services.
Annual management fees of $112,500
F-19
<PAGE>
were paid to KAIM in Fiscal 1999, Fiscal 1998 and Fiscal 1997.
NOTE 10 - OPERATING LEASES:
- --------------------------
The Company leases real property and equipment under non-cancelable agreements
expiring from 2000 through 2007. Certain retail store lease agreements provide
for contingent rental payments if the store's net sales exceed stated levels
("percentage rents"). Certain other 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
-----------
<S> <C>
2000 $ 4,348,000
2001 4,255,000
2002 3,951,000
2003 3,606,000
2004 2,707,000
Thereafter 2,875,000
-----------
$21,742,000
-----------
</TABLE>
Net rental expense under operating leases was $3,584,000, $3,233,000, and
$3,802,000 for Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. No
percentage rents were incurred in Fiscal 1999, Fiscal 1998 or Fiscal 1997.
NOTE 11 - STORE CLOSINGS:
- ------------------------
In 1999 the Company closed one store and wrote off approximately $151,000 of the
net book value of the assets related to this store.
On December 16, 1997, the Board of Directors of the Company approved
management's plan to close seven poor-performing retail stores. The Company
wrote off $1.3 million of the net carrying value of capitalized leasehold
improvements and fixed assets related to these stores. The revenues from the
stores which closed were $1,904,000 and $4,663,000 for Fiscal 1998 and Fiscal
1997, respectively. Operating losses from these stores were $17,000 and
$435,000 for Fiscal 1998 and Fiscal 1997, respectively. All but one of these
stores were closed in Fiscal 1998. The remaining store was closed in Fiscal
1999.
On January 28, 1997, the Board of Directors of the Company approved management's
plan to close two poor-performing retail stores. The Company wrote off $425,000
of the net carrying value of capitalized leasehold improvements and fixed assets
related to these stores, which is included in other expenses in the statement of
operations. The revenues from these stores were $99,000 and $802,000 Fiscal
1998 and Fiscal 1997, respectively. Operating losses from these stores were
$42,000 and $167,000 for Fiscal 1998 and Fiscal 1997, respectively. These
stores were closed in Fiscal 1998.
NOTE 12 - RECAPITALIZATION AND EXTRAORDINARY GAIN:
- -------------------------------------------------
F-20
<PAGE>
In connection with its recapitalization, effective April 13, 1998, the holders
of the Company's $3.0 million subordinated notes and $3.0 million subordinated
convertible debentures agreed to waive their right to receive any and all
interest payments accrued and owing on or after February 28, 1998. This
modification of terms was accounted for prospectively, from the effective date,
under Statement of Financial Accounting Standards No. 15, "Accounting of Debtors
and Creditors for Troubled Debt Restructurings", as follows.
The carrying amount of the subordinated notes as of April 13, 1998 was not
changed as the carrying amount of the debt did not exceed the total future cash
payments of $3.0 million specified by the new terms. Interest expense was
computed using the interest method to apply a constant effective interest rate
to the payable balance between the modification date of April 13, 1998, and the
original maturity date of the payable in May 2000.
The total future cash payments specified by the new terms of the convertible
debentures of $3.0 million is less than the carrying amount of the liability to
the debenture holders of $3,027,000, therefore, the carrying amount was reduced
to an amount equal to the total future cash payments specified by the new terms
and the Company recognized a gain on restructuring of payables equal to the
amount of the reduction as of April 13, 1998. No interest expense was
recognized on the payable for any period between the modification date of April
13, 1998 and the date the debentures were exchanged for preferred stock.
Proceeds from the Company's private placement of New Securities in the amount of
$3,850,000 were used to pay off the Company's revolving line of credit.
Additionally, holders of subordinated debt and warrant securities exchanged such
securities for either Series A or Series B preferred stock. The fair value of
each preferred stock series was determined as of the issuance date of the stock.
The difference between the fair value of the Series A preferred stock granted of
$1,769,000 and the carrying amount of the related subordinated debt security's
balance exchanged of $3,000,000 was recognized as a gain on the extinguishment
of debt, net of transaction expenses, in the amount of $1,231,000. The
difference between the fair value of the Series B preferred stock series granted
of $2,812,000 and the carrying amount of the related subordinated debt
security's balance plus accrued interest exchanged of $2,828,000 was recognized
as a gain on the extinguishment of debt, net of transaction expenses, in the
amount of $16,000 with $8,000 of the gain on the exchange of notes held by
principal shareholders recorded as a credit to additional paid-in capital.
There was no gain or loss recognized on the conversion of the New Securities.
(See Note 6)
F-21
<PAGE>
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ----------------------------------------------------------
Changes in assets and liabilities which increased (decreased) cash are as
follows:
<TABLE>
<CAPTION>
Year Ended
----------
January 29, 2000 January 30, 1999 January 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Accounts and other receivables ($ 97,000) ($ 180,000) $ 733,000
Merchandise inventories (3,897,000) 805,000 1,062,000
Other current assets (61,000) 319,000 217,000
Other non-current assets (1,168,000) (48,000) (2,000)
Accounts payable and accrued expenses 5,736, 000 1,040,000 (3,641,000)
Deferred rent (71,000) (176,000) 315,000
----------- ----------- ------------
$ 442,000 $ 1,760,000 ($1,316,000)
=========== =========== ============
</TABLE>
Supplementary disclosure of cash flow information:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash paid for income taxes $ 11,000 $ 3,000 $ 5,000
Cash paid for interest 447,000 483,000 954,000
</TABLE>
Non-cash investing and financing activities:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
----------- ----------- -----------
<S> <C> <C> <C>
Conversion of Series B preferred stock to
common stock $ 938,000
Issuance of common stock and warrants in
connection with financing agreement 159,000
Preferred dividend accretion 301,000 $19,000
Exchange of subsidiary stock for software 1,243,000
</TABLE>
NOTE 14 - SEGMENT INFORMATION
- -----------------------------
The Company has two reportable segments; Direct-to-customers, which includes
online and catalog operations, and Retail, which includes activities related to
the Company's retail stores. Both segments sell products to meet the needs of
the parents of infants and small children. The Direct-to-customers segment also
sells products directed to older children through preteen.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes.
The Company charges a management fee on inventory transferred from the Retail
segment to the Direct-to-
F-22
<PAGE>
customers segment and a fee on services provided by the Retail segment on behalf
of the Direct-to-customers segment.
The Company's reportable segments have operations that offer the same or similar
products but have a different method of delivery to its customers.
Segment information for Fiscal 1999 is as follows:
<TABLE>
<CAPTION>
Online Catalog Direct-to-Customers Retail Total
--------------- --------------- -------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Net sales $ 7,394,000 $3,642,000 $11,036,000 $38,043,000 $ 49,079,000
Interest income 238,000 238,000 238,000
Interest expense 465,000 465,000
Depreciation 278,000 278,000 1,672,000 1,950,000
Non-cash compensation 220,000 220,000 1,794,000 2,014,000
Pre-opening costs 323,000 323,000
Minority interest 3,000,000 3,000,000
Store closing expense 151,000 151,000
Pre-tax loss (6,673,000) (303,000) (6,976,000) (3,798,000) (10,774,000)
Total assets 4,294,000 252,000 4,546,000 26,181,000 30,727,000
Fixed asset additions 2,456,000 2,456,000 2,390,000 4,846,000
</TABLE>
Segment information for Fiscal 1998 is as follows:
<TABLE>
<CAPTION>
Catalog Retail Total
-------------- ------------------ -----------------
<S> <C> <C> <C>
Net Sales $4,736,000 $31,875,000 $36,611,000
Interest expense 640,000 640,000
Depreciation 18,000 1,470,000 1,488,000
Pre-opening costs 209,000 209,000
Store closing (income) (113,000) (113,000)
Pre-tax loss (126,000) (6,743,000) (6,869,000)
Total assets 252,000 17,419,000 17,671,000
Fixed asset additions 1,296,000 1,296,000
</TABLE>
NOTE 15 -WARRANTS
- -----------------
At January 29, 2000 there were 347,000 warrants outstanding to purchase
RightStart.com common stock at $4.50 per share exercisable for five years and
expiring in 2004. Also outstanding at January 29, 2000 were 136,500 warrants to
purchase RightStart.com common stock at $11.25 per share exercisable for five
years and expiring in 2004. These warrants were issued in connection with a
strategic alliance with a third party. The value of the 136,500 warrants, using
the Black-Sholes pricing model, was determined to be approximately $337,000 and
will be amortized over the three-year term of the agreement.
NOTE 16 - OTHER FINANCIAL DATA
- ------------------------------
F-23
<PAGE>
Allowance for Doubtful Accounts
- -------------------------------
The Activity in the allowance for doubtful accounts was as follows:
<TABLE>
<CAPTION>
Beginning Balance Provision Write-offs Ending Balance
----------------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Fiscal 1997 $14,000 $12,000 ($9,000) $17,000
Fiscal 1998 17,000 15,000 (5,000) 27,000
Fiscal 1999 27,000 60,000 87,000
</TABLE>
Accounts payable and accrued expenses
- -------------------------------------
The components of accounts payable and accrued expenses are as follows:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
----------- -----------
<S> <C> <C>
Accounts Payable $5,963,000 $2,333,000
Accrued payroll and related expenses 504,000 431,000
Accrued merchandise costs 1,876,000 518,000
Accrued professional fees 485,000 62,000
Sales returns and allowances 175,000 69,000
Sales and use tax accruals 235,000 218,000
Other accrued expenses 328,000 191,000
---------- ----------
$9,566,000 $3,822,000
========== ==========
</TABLE>
NOTE 17 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Future Advertising
- ------------------
The Company typically commits to run advertising approximately three months in
advance. As of January 29, 2000, the Company had commitments of approximately
$800,000 for future advertising. In November 1999 the Subsidiary entered into a
term sheet with an integrated media company. The term sheet contemplates that
over the three-year term of the proposed agreement the Subsidiary would provide
consideration approximating $13.7 million.
F-24
<PAGE>
Leases
- ------
Since May 1, 1999, the Company has subleased office space on a month-to-month
basis. Rent expense under this sublease totaled $151,000 for Fiscal 1999. The
monthly rent cost is approximately $22,500 effective January 29, 2000.
Legal Matters
- -------------
The Company is involved in legal matters that arise in the normal course of
business. Management is aware of no material claims or actions pending or
threatened against the Company and the Subsidiary.
NOTE 18 - SUBSEQUENT EVENT
- --------------------------
In April 2000, the Subsidiary sold secured bridge notes to affiliates in the
aggregate principal amount of $2,180,000 (the "Bridge Notes"), and warrants to
purchase 109,000 shares of its common stock at an exercise price of $6.70 to
provide funding until the Subsidiary can obtain additional equity financing. A
default on the Bridge Notes would permit such holders to foreclose on the assets
of the Subsidiary and require the Subsidiary, to the extent it has not already
done so, to issue to the holders of the notes, additional warrants to purchase
an aggregate of 8,720,000 shares, or approximately 48.9% of the outstanding
common stock of the Subsidiary, at an exercise price of $0.25 per share.
F-25
<PAGE>
NOTE 19 - 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 29, 2000
- ----------------------------------
Allowance for deferred tax asset $7,728,000 $4,651,000 $12,379,000
Inventory reserve 68,000 439,000 $429,000 78,000
Allowance for sales returns 69,000 106,000 175,000
------------ -------------- ----------- ------------
$7,865,000 $4,962,000 $195,000 $12,632,000
============ ============== =========== ============
Fiscal year ended January 30, 1999
- ----------------------------------
Allowance for deferred tax asset $7,079,000 $649,000 $7,728,000
Inventory reserve 121,000 369,000 $422,000 68,000
Allowance for sales returns 69,000 69,000
------------ -------------- ----------- ------------
$7,269,000 $1,018,000 $422,000 $7,865,000
============ ============== =========== ============
Fiscal year ended January 31, 1998
- ----------------------------------
Allowance for deferred tax asset $3,280,000 $3,799,000 $7,079,000
Inventory reserve 81,000 425,000 $385,000 121,000
Allowance for sales returns 103,000 34,000 69,000
------------ -------------- ----------- ------------
$3,464,000 $4,224,000 $419,000 $7,269,000
============ ============== =========== ============
</TABLE>
F-26
<PAGE>
EXHIBIT 4.1
No. of Stock Units: 5,000 Warrant No. A-1
WARRANT
to Purchase Common Stock of
The Right Start, Inc.
THIS IS TO CERTIFY THAT Heller Financial, Inc., a Delaware corporation, or its
registered assigns, is entitled to purchase from The Right Start Inc., a
California corporation (hereinbelow called the "Company"), at any time on and
-------
after the Closing Date, but not later than 5:00 p.m., Pacific Standard time, on
January 18, 2005 (the "Expiration Date"), Five Thousand (5,000) Stock Units, in
----------------
whole or in part, at a purchase price per Stock Unit of $19.50, adjusted as
provided below, all on the terms and conditions hereinbelow provided.
This Warrant has been issued in accordance with a Subscription Agreement dated
as of the date hereof between the Company and Heller Financial, Inc. (as amended
from time to time, the "Subscription Agreement").
----------------------
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER ANY
STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS PURSUANT TO
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY REQUIRED
REGISTRATION OR QUALIFICATION UNDER ANY STATE SECURITIES LAWS, OR THE PROPOSED
TRANSACTION DOES NOT REQUIRE REGISTRATION OR QUALIFICATION UNDER FEDERAL OR
STATE SECURITIES LAWS.
Section 1. Certain Definitions. As used in this Warrant, unless the context
-------------------
otherwise requires:
"Affiliate" of any Person means a Person (1) that directly or indirectly
---------
controls, or is controlled by, or is under common control with, such other
Person, (2) that beneficially owns ten percent (10%) or more of the Voting Stock
of such other Person, or (3) ten percent (10%) or more of the Voting Stock (or
in the case of a Person which is not a corporation, ten percent (10%) or more of
the equity interest) of which is owned by such other Person. The term
1
<PAGE>
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.
"Appraised Value" shall mean the fair market value of all outstanding
---------------
shares of Common Stock (on a fully diluted basis including any fractional shares
and assuming the exercise in full of all then-outstanding options, warrants or
other rights to purchase shares of Common Stock that are then currently
exercisable at exercise prices less than the Current Market Price), as
determined by a written appraisal prepared by an appraiser acceptable to the
Company and the holders of Warrants evidencing a majority in number of the total
number of Stock Units at the time purchasable upon the exercise of all then
outstanding Warrants. "Fair market value" is defined for this purpose as the
-----------------
price in a single transaction determined on a going-concern basis that would be
agreed upon by the most likely hypothetical buyer for a 100% controlling
interest in the equity capital of the Company (on a fully diluted basis
including any fractional shares and assuming the exercise in full of all then-
outstanding options, warrants or other rights to purchase shares of Common Stock
that are then currently exercisable at exercise prices less than the Current
Market Price), with consideration given to the effect of a noncompete covenant
signed by the seller and employment agreements signed by key management
personnel of the Company (and of its subsidiaries), each extending for a period
of time considered sufficient by all parties to effect the transfer of goodwill
from the seller to the buyer and disregarding any discounts for nonmarketability
of Common Stock of the Company. In the event that the Company and said holders
cannot, in good faith, agree upon an appraiser, then the Company, on the one
hand, and said holders, on the other hand, shall each select an appraiser, the
two appraisers so selected shall select a third appraiser who shall be directed
to prepare such a written appraisal (the "Appraisal") and the term Appraised
---------
Value shall mean the appraised value set forth in the Appraisal prepared in
accordance with this definition. The fees and expenses of any appraisers shall
be paid by the Company, except in the case where the valuation of any appraiser
who renders an Appraisal is within ten percent (10%) of the value originally
determined by the Board of Directors, in which case the holders shall pay the
fees and expenses of any appraisers. In the event that the Company bears the
cost of the appraisal process, such cost shall be deemed an account payable of
the Company and shall be considered in the determination of the Appraised Value.
"Board of Directors" shall mean either the board of directors of the
------------------
Company or any duly authorized committee of that board.
"Business Day" shall mean any day other than a Saturday, Sunday or a day on
------------
which banks in the States of Illinois or California are required or permitted to
close.
"Commission" shall mean the Securities and Exchange Commission and any
----------
other similar or successor agency of the federal government administering the
Securities Act and the Exchange Act.
2
<PAGE>
"Common Stock" shall mean the Company's authorized Common Stock, no par
------------
value per share, irrespective of class unless otherwise specified, as
constituted on the date of original issuance of this Warrant, and any stock into
which such Common Stock may thereafter be changed, and shall also include stock
of the Company of any other class, which is not preferred as to dividends or
assets over any other class of stock of the Company issued to the holders of
shares of stock upon any reclassification thereof.
"Company" shall mean The Right Start, Inc., a California corporation.
-------
"Current Market Price" per share of Common Stock for the purposes of any
--------------------
provision of this Warrant at the date herein specified, shall be deemed to be
the price determined pursuant to the first applicable of the following methods:
(i) If the Common Stock is traded on a national securities
exchange or is traded in the over-the-counter market, the Current
Market Price per share of Common Stock shall be deemed to be the
average of the daily market prices for the 20 consecutive Business Days
immediately prior to such date. The market price for each such Business
Day shall be (a) if the Common Stock is traded on a national securities
exchange or in the over-the-counter market, its last sale price on the
preceding Business Day on such national securities exchange or
over-the-counter market or, if there was no sale on that day, the last
sale price on the next preceding Business Day on which there was a sale
or (b) if the Common Stock is quoted on The Nasdaq Stock Market, Inc.
("Nasdaq"), the last sale price reported on Nasdaq on the preceding
Business Day or, if the Common Stock is an issue for which last sale
prices are not reported on Nasdaq, the closing bid quotation on such
day, but, in each of the next preceding two cases, if the relevant
Nasdaq price or quotation did not exist on such day, then the price or
quotation on the next preceding Business Day in which there was such a
price or quotation.
(ii) If the Current Market Price per share of Common Stock
cannot be ascertained by any of the methods set forth in paragraph (i)
immediately above, the Current Market Price per share of Common Stock
shall be deemed to be the price equal to the quotient determined by
dividing the Appraised Value by the number of outstanding shares of
Common Stock (on a fully diluted basis including any fractional shares
and assuming the exercise in full of all then-outstanding options,
warrants or other rights to purchase shares of Common Stock that are
then currently exercisable at exercise prices equal to or less than the
Current Market Price).
"Current Warrant Price" per share of Common Stock, for the purpose of any
---------------------
provision of this Warrant at the date herein specified, shall mean the amount
equal to the quotient resulting from dividing the Exercise Price in effect on
such date by the number of shares (including any fractional share) of Common
Stock comprising a Stock Unit on such date.
3
<PAGE>
"Exchange Act" shall mean the Securities and Exchange Act of 1934, as
------------
amended, and any similar or successor federal statute, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at
any applicable time.
"Exercise Date" shall mean the date on which this Warrant is exercised from
-------------
time to time in part or in whole, as such date is set forth on the applicable
subscription form.
"Exercise Price" shall mean the purchase price per Stock Unit as set forth
--------------
on the first page of this Warrant on the date of first issuance of this Warrant
and thereafter shall mean such dollar amount as shall result from the
adjustments specified in Section 4.
"Holder" means, initially, Heller Financial, Inc., a Delaware corporation,
------
and thereafter any Person that is or Persons that are the registered holder(s)
of the Warrant or Warrant Stock as registered on the books of the Company.
"Nonpreferred Stock" shall mean the Common Stock and shall also include
------------------
stock of the Company of any other class which is not preferred as to dividends
or assets over any other class of stock of the Company and which is not subject
to redemption.
"Person" shall include an individual, a corporation, an association, a
------
partnership, a limited liability company, a trust or estate, a government,
foreign or domestic, and any agency or political subdivision thereof, or any
other entity.
"Restricted Certificate" shall mean a certificate for Common Stock or a
----------------------
Warrant bearing the restrictive legend set forth in the preamble.
"Restricted Securities" shall mean Restricted Stock and the Restricted
---------------------
Warrant.
"Restricted Stock" shall mean Common Stock evidenced by a Restricted
----------------
Certificate.
"Restricted Warrant" shall mean a Warrant evidenced by a Restricted
------------------
Certificate.
"Securities" shall mean the Warrant issued to the Holder, and the
----------
certificates and other instruments from time to time evidencing the same.
"Securities Act" shall mean the Securities Act of 1933, as amended, and any
--------------
similar or successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at any applicable
time.
"Stock Unit" shall constitute one share of Common Stock, as such Common
----------
Stock was constituted on the date hereof and thereafter shall constitute such
number of shares
4
<PAGE>
(including any fractional shares) of Common Stock as shall result from the
adjustments specified in Section 4.
"Subscription Agreement" has the meaning assigned to such term in the
----------------------
second paragraph of this Warrant.
"Voting Stock" shall mean any equity security entitling the holder of such
-------------
security to vote at meetings of shareholders except an equity security which
entitles the holder of such security to vote only upon the occurrence of some
contingency, unless that contingency shall have occurred and be continuing.
"Warrant" shall mean this Warrant to purchase up to an aggregate of 5,000
-------
Stock Units initially issued to Heller Financial, Inc., a Delaware corporation,
and all Warrants issued upon transfer, division or combination of, or in
substitution therefor.
"Warrant Stock" shall mean the shares of Common Stock purchasable by the
-------------
holder of any Warrants upon the exercise thereof.
Section 2. Exercise of Warrant. The holder of this Warrant may, at any
-------------------
time on and after the date hereof, but not later than the Expiration Date,
exercise this Warrant in whole at any time or in part from time to time for the
number of Stock Units which such holder is then entitled to purchase hereunder.
The Holder may exercise this Warrant, in whole or in part, by either of the
following methods (or a combination thereof or as otherwise determined by the
Company's Board of Directors):
(a) the Holder may deliver to the Company at its office
maintained pursuant to Section 13 for such purpose (i) a written notice of such
Holder's election to exercise this Warrant, which notice shall specify the
number of Stock Units to be purchased, (ii) this Warrant and (iii) a sum equal
to the aggregate Exercise Price therefor in immediately available funds; or
(b) the Holder may also exercise this Warrant, in whole or in
part, in a "cashless" or "net issue" exercise by delivering to the Company at
its office maintained pursuant to Section 13 for such purpose (i) a written
notice of such Holder's election to exercise this Warrant, which notice shall
specify the number of Stock Units to be delivered to such Holder and the number
of Stock Units with respect to which this Warrant is being surrendered in
payment of the aggregate Exercise Price for the Stock Units to be delivered to
the Holder, and (ii) this Warrant. For purposes of this subparagraph (b), each
Stock Unit as to which this Warrant is surrendered will be attributed a value on
the Exercise Date equal to the product of (x) the Current Market Price per share
of Common
5
<PAGE>
Stock on the Exercise Date minus the Current Warrant Price per share
of Common Stock on the Exercise Date, multiplied by (y) the number of shares of
Common Stock then comprising a Stock Unit.
Any notice required under this Section 2 may be in the form of a
subscription set out at the end of this Warrant. Upon delivery thereof, the
Company shall as promptly as practicable cause to be executed and delivered to
such holder a certificate or certificates representing the aggregate number of
fully-paid and nonassessable shares of Common Stock issuable upon such exercise.
The stock certificate or certificates for Warrant Stock so delivered shall
be in such denominations as may be specified in said notice and shall be
registered in the name of such Holder or, subject to Section 9, such other name
or names as shall be designated in said notice. Such certificate or certificates
shall be deemed to have been issued and such Holder or any other Person so
designated to be named therein shall be deemed to have become a holder of record
of such shares, including to the extent permitted by law the right to vote such
shares or to consent or to receive notice as a stockholder, as of the time said
notice is delivered to the Company as aforesaid. If this Warrant shall have been
exercised only in part, the Company shall, at the time of delivery of said
certificate or certificates, deliver to such Holder a new Warrant dated the date
it is issued, evidencing the rights of such Holder to purchase the remaining
Stock Units called for by this Warrant, which new Warrant shall in all other
respects be identical with this Warrant.
The Company shall pay all expenses, taxes and other charges payable in
connection with the preparation, issue and delivery of stock certificates under
this Section 2.
All shares of Common Stock issuable upon the exercise of this Warrant shall
be validly issued, fully paid and nonassessable, and free from all liens and
other encumbrances thereon.
The Company shall not issue certificates for fractional shares of stock
upon any exercise of this Warrant whenever, in order to implement the provisions
of this Warrant, the issuance of such fractional shares is required. Instead,
the Company shall pay cash in lieu of such fractional share upon such exercise.
Section 3. Transfer, Division and Combination. Subject to Section 9, this
----------------------------------
Warrant and all rights hereunder are transferable, in whole or in part, on the
books of the Company to be maintained for such purpose, upon surrender of this
Warrant at the office of the Company maintained for such purpose pursuant to
Section 13, together with (a) a written assignment in the form set out at the
end of this Warrant duly executed by the Holder hereof or its agent or attorney,
(b) a copy of the Subscription Agreement duly executed by an authorized
representative of the transferee (substantially in the form executed by the
Holder or in such other form as reasonably acceptable to counsel to the Company)
and (c) payment of funds sufficient to pay any stock transfer taxes payable upon
the making of such transfer. Upon such surrender, execution and payment, the
Company shall, subject to Section 9, execute and deliver a new
6
<PAGE>
Warrant or Warrants in the name of the assignee or assignees and in the
denominations specified in such instrument of assignment, and this Warrant shall
promptly be canceled. If and when this Warrant is assigned in blank (in case the
restrictions on transferability in Section 9 shall have been terminated), the
Company may (but shall not be obliged to) treat the bearer hereof as the
absolute owner of this Warrant for all purposes and the Company shall not be
affected by any notice to the contrary. This Warrant, if properly assigned in
compliance with this Section 3 and Section 9, may be exercised by an assignee
for the purchase of shares of Common Stock without having a new Warrant issued.
This Warrant may, subject to Section 9, be divided upon presentation at the
aforesaid office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued, signed by the
holder hereof or its agent or attorney. Subject to compliance with the preceding
paragraph and with Section 9, as to any transfer which may be involved in such
division or combination, the Company shall execute and deliver a new Warrant or
Warrants in exchange for the Warrant to be divided or combined in accordance
with such notice.
The Company shall pay all expenses, taxes and other charges incurred by the
Company in the performance of its obligations in connection with the
preparation, issue and delivery of Warrants under this Section 3.
The Company agrees to maintain at its aforesaid office books for the
registration and transfer of the Warrants.
Section 4. Adjustment of Stock Unit or Exercise Price. The number of
------------------------------------------
shares of Common Stock comprising a Stock Unit, and the Exercise Price per Stock
Unit, shall be subject to adjustment from time to time as set forth in this
Section 4 and in Section 5. The Company will not take any action with respect to
its Nonpreferred Stock of any class requiring an adjustment pursuant to any of
the following Subsections 4.1 or 4.3 without at the same time taking like action
with respect to its Nonpreferred Stock of each other class.
4.1. Stock Dividends, Subdivisions and Combinations. In case at any time or
----------------------------------------------
from time to time the Company shall
(a) pay a dividend payable in, or other distribution of, Nonpreferred
Stock, or
(b) subdivide its outstanding shares of Nonpreferred Stock into a larger
number of shares of Nonpreferred Stock, or
(c) combine its outstanding shares of Nonpreferred Stock into a smaller
number of shares of Nonpreferred Stock,
7
<PAGE>
then the number of shares of Common Stock comprising a Stock Unit immediately
after the happening of any such event shall be adjusted automatically so as to
consist of the number of shares of Common Stock which a record holder of the
number of shares of Common Stock comprising a Stock Unit immediately prior to
the happening of such event would own or be entitled to receive after the
happening of such event; provided, however, that no such event may take place
with respect to any shares of Nonpreferred Stock unless it shall also take place
for all shares of Nonpreferred Stock.
4.2. Other Provisions Applicable to Adjustments. The following provisions
------------------------------------------
shall be applicable to the making of adjustments of the number of shares of
Common Stock comprising a Stock Unit hereinbefore provided for in this Section
4:
(a) When Adjustments to Be Made. The adjustments required by Section 4.1
---------------------------
shall be made whenever and as often as any specified event requiring an
adjustment shall occur. For the purpose of any adjustment, any specified event
shall be deemed to have occurred at the close of business on the date of its
occurrence.
(b) Fractional Interests. In computing adjustments under this Section 4,
--------------------
fractional interests in Nonpreferred Stock shall be taken into account to the
nearest one-thousandth of a share.
(c) When Adjustment Not Required. If the Company shall take a record of the
----------------------------
holders of its Nonpreferred Stock for the purpose of entitling them to receive a
dividend or distribution and shall, thereafter and before the distribution
thereof to shareholders, abandon its plan to pay or deliver such dividend or
distribution, then thereafter no adjustment shall be required by reason of the
taking of such record and any such adjustment previously made in respect thereof
shall be rescinded and annulled.
4.3. Merger, Consolidation or Disposition of Assets. In case the Company
----------------------------------------------
shall merge or consolidate into another corporation, or shall sell, transfer or
otherwise dispose of all or substantially all of its property, assets or
business to another corporation and pursuant to the terms of such merger,
consolidation or disposition of assets, shares of common stock of the successor
or acquiring corporation are to be received by or distributed to the holders of
Nonpreferred Stock of the Company, then each holder of a Warrant shall have the
right thereafter to receive, upon exercise of such Warrant, Stock Units each
comprising the number of shares of common stock of the successor or acquiring
corporation receivable upon or as a result of such merger, consolidation or
disposition of assets by a holder of the number of shares of Nonpreferred Stock
comprising a Stock Unit immediately prior to such event. If, pursuant to the
terms of such merger, consolidation or disposition of assets, any cash, shares
of stock or other securities or property of any nature whatsoever (including
warrants or other subscription or purchase rights) are to be received by or
distributed to the holders of Nonpreferred Stock of the Company, there shall be
either, at the Holder's option, (i) a reduction of the Exercise Price equal to
the amount applicable to the number of shares of Common Stock then comprising a
Stock
8
<PAGE>
Unit of any such cash and of the fair value of any and all such shares of
stock or of other securities or property to be received by or distributed to the
holders of Nonpreferred Stock of the Company, or (ii) such Holder shall have the
right to receive, upon exercise of its Warrant, such cash, shares of stock or
other securities or property of any nature as a holder of the number of shares
of Nonpreferred Stock underlying a Stock Unit would have been entitled to
receive upon the occurrence of such event. Such fair value shall be determined
in good faith by the Board of Directors of the Company, provided that if such
determination is objected to by the holders of Warrants evidencing a majority in
number of the total number of Stock Units at the time purchasable upon the
exercise of all then outstanding Warrants, such determination shall be made by
an independent appraiser selected by the Company and said holders. In the event
that the Company and said holders cannot, in good faith, agree upon an
appraiser, then the Company, on the one hand, and said holders, on the other
hand, shall each select an appraiser, the two appraisers so selected shall
select a third appraiser who shall be directed to prepare such a written
appraisal which shall be conclusive and binding on the parties. The fees and
expenses of any appraisers shall be paid by the Company, except in the case
where the valuation of any appraiser who renders an Appraisal is within ten
percent (10%) of the value originally determined by the Board of Directors, in
which case the holders shall pay the fees and expenses of any appraisers. In
case of any such merger, consolidation or disposition of assets, the successor
acquiring corporation shall expressly assume the due and punctual observance and
performance of each and every covenant and condition of this Warrant to be
performed and observed by the Company and all of the obligations and liabilities
hereunder, subject to such modification as shall be necessary to provide for
adjustments of Stock Units which shall be as nearly equivalent as practicable to
the adjustments provided for in this Section 4. For the purposes of this Section
4 "common stock of the successor or acquiring corporation" shall include stock
------------------------------------------------------
of such corporation of any class, that is not preferred as to dividends or
assets over any other class of stock of such corporation and that is not subject
to redemption, and shall also include any evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable for any
such stock, either immediately or upon the arrival of a specified date or the
happening of a specified event, and any warrants or other rights to subscribe
for or purchase any such stock. The foregoing provisions of this Subsection 4.3
shall similarly apply to successive mergers, consolidations or dispositions of
assets.
Section 5. Notice to Warrant Holders.
-------------------------
5.1. Notice of Adjustment of Stock Unit or Exercise Price. Whenever the
----------------------------------------------------
number of shares of Common Stock comprising a Stock Unit, or the price at which
a Stock Unit may be purchased upon exercise of the Warrants, shall be adjusted
pursuant to Section 4, the Company shall forthwith obtain a certificate signed
by independent accountants, of recognized national standing, selected by the
Company and reasonably acceptable to the Holder(s) of the Warrants, setting
forth, in reasonable detail, the event requiring the adjustment and the method
by which such adjustment was calculated (including a statement of the fair
value, as determined by the Board of Directors of the Company or by appraisal
(if applicable), of any evidences of indebtedness, shares of stock, other
securities or property or warrants or other subscription or
9
<PAGE>
purchase rights referred to in Section 4.3) and specifying the number of shares
of Common Stock comprising a Stock Unit and (if such adjustment was made
pursuant to Section 4.3) describing the number and kind of any other shares of
stock comprising a Stock Unit, and any change in the purchase price or prices
thereof, after giving effect to such adjustment or change. The Company shall
promptly, and in any case within three days after the making of such adjustment,
cause a signed copy of such certificate to be delivered to each holder of a
Warrant in accordance with Section 14. The Company shall keep at its office or
agency, maintained for the purpose pursuant to Section 13, copies of all such
certificates and cause the same to be available for inspection at said office
during normal business hours by any holder of a Warrant or any prospective
purchaser of a Warrant designated by a holder thereof.
5.2. Notice of Certain Corporate Action. In case the Company shall propose
----------------------------------
(a) to pay any dividend payable in stock of any class to the holders of its
Nonpreferred Stock or to make any other distribution to the holders of its
Nonpreferred Stock (other than a cash dividend) or (b) to effect any
consolidation, merger or sale, organic change, transfer or other disposition of
all or substantially all of its property, assets or business, then in each such
case, the Company shall deliver to each holder of a Warrant, in accordance with
Section 14, a notice of such proposed action, which shall specify the date on
which a record is to be taken for the purposes of such stock dividend,
distribution or rights, consolidation, merger, sale, organic change or transfer
is to take place and the date of participation therein by the holders of
Nonpreferred Stock, if any such date is to be fixed, and shall also set forth
such facts with respect thereto as shall be reasonably necessary to indicate the
effect of such action on the Nonpreferred Stock and the number and kind of any
other shares of stock which will comprise a Stock Unit, and the purchase price
or prices thereof, after giving effect to any adjustment which will be required
as a result of such action. Such notice shall be so delivered as promptly as
reasonably possible.
Section 6. Reservation and Authorization of Common Stock. The Company shall
---------------------------------------------
at all times reserve and keep available for issue upon the exercise of Warrants
such number of its authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of all outstanding Warrants. All
shares of Common Stock which shall be so issuable, when issued upon exercise of
any Warrant or upon such conversion, as the case may be, shall be duly and
validly issued, fully-paid, nonassessable, free of preemptive rights and free
from all taxes, liens, charges and security interests.
Section 7. Taking of Record; Stock and Warrant Transfer Books. In the case
--------------------------------------------------
of all dividends or other distributions by the Company to the holders of its
Nonpreferred Stock with respect to which any provision of Section 4 refers to
the taking of a record of such holders, the Company will in each such case take
such a record and will take such record as of the close of business on a
Business Day. The Company will not at any time, except upon dissolution,
liquidation or winding up or as otherwise may be required by law, close its
stock transfer books or Warrant transfer books so as to result in preventing or
delaying the exercise or transfer of any Warrant.
10
<PAGE>
Section 8. Taxes. The Company will pay all taxes (other than federal,
-----
state, local or foreign income taxes) which may be payable in connection with
the execution and delivery of this Warrant or the issuance and sale of the
Restricted Securities hereunder or in connection with any modification of the
Restricted Securities and will save the Holder harmless without limitation as to
time against any and all liabilities with respect to or resulting from any delay
in paying, or omission to pay, such taxes. The obligations of the Company under
this Section 8 shall survive any redemption, repurchase or acquisition of
Restricted Securities by the Company.
Section 9. Restrictions on Transferability. The Restricted Securities shall
-------------------------------
not be transferable except upon the conditions specified in this Section 9.
9.1 Restrictions on Exercise, Transfer. This Warrant may not be exercised
----------------------------------
by a Holder hereof that qualifies as a "subsidiary" of a "bank holding company"
(as such terms are defined in Section 225.2 of Regulation Y issued by the Board
of Governors of the Federal Reserve System ("Regulation Y")) (a "BHC
------------ ---
Subsidiary") unless such Holder advises the Company in writing that the exercise
- ----------
of the Warrant by such Holder complies with Regulation Y and the Bank Holding
Company Act of 1956, as amended (the "BHCA").
----
Neither this Warrant nor any Warrant Stock shall be transferable without
the prior written consent of the Company except (a) to an Affiliate of the
Holder, (b) to a successor entity of the Holder as a result of a merger or
consolidation with, or sale of all or substantially all of the stock or assets
of, the Holder, (c) as is or may be required by the Holder to comply with any
federal or state law or any rule or regulation of any governmental or public
body or authority, or (d) in a public offering pursuant to an effective
registration statement under the Securities Act or in an offering constituting
an exempt transaction under Rule 144 or Rule 144A.
At any time at which this Warrant, upon exercise, would result in a BHC
Subsidiary owning or controlling five percent (5%) or more of the Company's
Common Stock (including after taking into consideration any rebuttable
presumptions of control contained in Section 225.31(d) of Regulation Y), this
Warrant may not be transferred by such BHC Subsidiary unless the BHC Subsidiary
advises the Company in writing that the transfer will be made: (i) in a widely
dispersed public distribution; (ii) to a Person or group of Persons that already
had "control" (as defined in Section 225.2 of Regulation Y) of the Company
immediately prior to the transfer to such Person or group of Persons; (iii) in a
private sale to a person independent from and unrelated to the BHC Subsidiary in
which no Person or group of Persons acting in concert receives rights to acquire
more than two percent (2%) of the Company's outstanding Common Stock; (iv) to a
"broker" or "dealer" (as those terms are defined in Section 3(a) of the Exchange
Act) for the purpose of conducting a wifely dispersed public distribution; or
(v) in a transaction which has been approved by the Board of Governors of the
Federal Reserve system or is otherwise not inconsistent with Regulation Y or the
BHCA.
Notwithstanding any other provision of this Warrant, if the Company
redeems, purchases or otherwise acquires, directly or indirectly, or converts or
takes any action with respect to the voting rights of, any shares of any class
of its capital stock or any securities
11
<PAGE>
convertible into or exchangeable for any shares of any class of its capital
stock, so as to increase the proportion of the Company's Voting Stock which this
Warrant entitles the Holder of this Warrant to purchase or which the holder of
shares of Common Stock issuable hereunder then owns, then the Company shall
notify such holder as to such action at least fifteen (15) Business Days prior
to the taking of such action and the Notice and Repurchase Right shall be
triggered. The following shall constitute the "Notice and Repurchase Right:"
---------------------------
Holder shall have five (5) Business Days after receipt of such notice to
determine whether, after giving effect to such action, such Holder would have a
Regulatory Problem (as defined below). If Holder determines it would have a
Regulatory Problem based thereon, Holder shall have ten (10) additional Business
Days to demand the Company (in each case, either in whole or in part, as Holder
may elect in its sole discretion) (i) repurchase such Holder's Common Stock or
(ii) exchange such Holder's Common Stock for non-voting stock of the Company at
the election of Holder (if such stock is then available and subject to
applicable laws and regulations, including those of the exchange or stock market
where the Company's securities are then listed), in each case, prior to the
Company's taking of the action triggering such Regulatory Problem (and in each
case, at the per-share price paid by such Holder to initially purchase such
securities based on the closing price of the Common Stock on NASDAQ on January
3, 2000 in the case that the Company must repurchase such securities). If such
Holder with a Regulatory Problem does not elect to have the Company repurchase
any of its securities (or exchange any of such securities for non-voting stock,
as the case may be) within such ten (10) Business Day-Period, then the Company
shall be free to undertake such transaction.
In addition, if the Company is a party to any merger, consolidation,
recapitalization or other transaction pursuant to which the Holder of this
Warrant or a Holder of share of Common Stock issuable hereunder would be
required to take any Voting Stock, or any securities convertible into Voting
Stock, which might reasonably be expected to cause such Holder to have a
Regulatory Problem such event will again trigger the Notice and Repurchase Right
set forth above. In the event that a Regulatory Problem exists and in lieu of
exercise of the Notice and Repurchase Right, the Company agrees in good faith to
amend this Warrant upon the request of the Holder in such a way so that the
Regulatory Problem no longer exists, provided that the Company shall not be
--------
required to agree to any amendment that would have a materially adverse effect
on the Company's rights under this Warrant. For purposes of this paragraph, a
Person will be deemed to have a "Regulatory Problem" when such Person or such
------------------
Person's Affiliates would own, or could reasonably be deemed to own, control or
have power, directly or indirectly, over a greater quantity of securities of any
kind issued by the Company than is permitted under any requirement of any
governmental authority binding on such Person.
9.2 Compliance with Laws. Each of the Company and Holder agrees that any
--------------------
such transfer shall be made in compliance with all applicable securities laws.
9.3 Restrictive Legend. Unless and until the Registrable Securities have
------------------
been registered under the Securities Act, this Warrant, each Warrant issued to
any transferee of the Holder, each certificate for any Warrant Stock issued upon
exercise of any Warrant and each
12
<PAGE>
certificate for any Warrant Stock issued to any transferee of any such
certificate, shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR
QUALIFIED UNDER ANY STATE SECURITIES LAWS. THE SECURITIES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED,
PLEDGED OR HYPOTHECATED UNLESS PURSUANT TO REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY REQUIRED
REGISTRATION OR QUALIFICATION UNDER ANY STATE SECURITIES LAWS,
OR THE PROPOSED TRANSACTION DOES NOT REQUIRE REGISTRATION OR
QUALIFICATION UNDER FEDERAL OR STATE SECURITIES LAWS."
Section 10. Limitation of Liability. No provision hereof, in the absence
-----------------------
of affirmative action by the Holder to purchase shares of Common Stock, and no
mere enumeration herein of the rights or privileges of the Holder, shall give
rise to any liability of the Holder for the purchase price of the Warrant Stock
or as a stockholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.
Section 11. Loss or Destruction of Warrant Certificates. Upon receipt of
-------------------------------------------
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Company
(the original Holder's or any other institutional Holder's indemnity being
satisfactory indemnity in the event of loss, theft or destruction of any Warrant
owned by such institutional Holder), or, in the case of any such mutilation,
upon surrender and cancellation of such Warrant, the Company will make and
deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new
Warrant of like tenor and representing the right to purchase the same aggregate
number of shares of Common Stock.
Section 12. Amendments. The terms of this Warrant may be amended, and the
----------
observance of any term therein may be waived, but only with the written consent
of the holders of Warrants evidencing a majority in number of the total number
of Stock Units at the time purchasable upon the exercise of all then outstanding
Warrants, provided that no such action may change the number of shares of stock
comprising a Stock Unit or the Exercise Price, without the written consent of
the holders of Warrants evidencing 100% in number of the total number of Stock
Units at the time purchasable upon the exercise of all then outstanding
Warrants. For the purposes of determining whether the holders of outstanding
Warrants entitled to purchase a requisite number of Stock Units at any time have
taken any action authorized by this Warrant, any Warrants owned by the Company
or any Affiliate of the Company (other than an institutional investor which may
be deemed an Affiliate solely by reason of the ownership of Warrants) shall be
deemed not to be outstanding.
13
<PAGE>
Section 13. Office of the Company. So long as any Warrant remains
---------------------
outstanding, the Company shall maintain an office where the Warrants may be
presented for exercise, transfer, division or combination as in this Warrant
provided. Such office shall be at 5388 Sterling Center Drive, Unit C, Westlake
Village, California 91361, FAX: (818) 707-7132, unless and until the Company
shall designate and maintain some other office for such purposes and deliver
written notice thereof to the Holders of all outstanding Warrants.
Section 14. Notices Generally.
-----------------
14.1. All communications (including all required or permitted notices)
pursuant to the provisions hereof shall be in writing and shall be sent (i) to
any registered Holder of any Warrants or Warrant Stock, to the address of such
Holder as it appears in the stock or warrant ledger of the Company or at such
other address as such Holder may have furnished in writing to the Company and
(ii) to the Company, at the offices designated in Section 13 hereof.
14.2. Any notice shall be deemed to have been duly delivered when
delivered by hand, if personally delivered, and if sent by mail to a party whose
address is in the same country as the sender, one Business Day by nationally
recognized express courier (postage prepaid), two Business Days after being
deposited in the mail, postage prepaid, and if sent by recognized international
courier, freight prepaid, with a copy sent by telecopier, to a party whose
address is not in the same country as the sender, three Business Days after the
later of (a) being telecopied and (b) delivery to such courier.
Section 15. Governing Law. This Warrant shall be governed by and construed
-------------
in accordance with the laws of the State of California (without regard to
conflicts of law provisions thereof).
14
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its
name by its President or a Vice President and attested by its Secretary or an
Assistant Secretary.
Dated: January 18, 2000
THE RIGHT START, INC.
/s/ Jerry R. Welch
-------------------
By: Jerry R. Welch
Its: President
ATTEST:
/s/ Gina M. Engelhard
- -----------------------
Name: Gina M Engelhard
Title: Secretary
<PAGE>
SUBSCRIPTION FORM
(to be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably
exercises this Warrant for and purchases Stock Units of The Right Start, Inc., a
California corporation, purchasable with this Warrant, and herewith makes
payment therefor (by check in the amount of $_____), or hereby tenders
_______________ Stock Units as payment therefor, all at the price and on the
terms and conditions specified in this Warrant and requests that certificates
for the shares of Common Stock hereby purchased (and any securities or other
property issuable upon such exercise) be issued in the name of and delivered to
_________________________ whose address is and, if such Stock Units shall not
include all of the Stock Units issuable as provided in this Warrant that a new
Warrant of like tenor and date for the balance of the Stock Units issuable
thereunder be delivered to the undersigned.
Dated: _____________, _____
-------------------------------
(Signature of Registered Owner)
-------------------------------
(Street Address)
-------------------------------
(City) (State) (Zip Code)
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this
Warrant hereby sells, assigns and transfers unto the Assignee named below all of
the rights of the undersigned under this Warrant, with respect to the number of
Stock Units set forth below:
Number of Stock Units Name and Address of Assignee
- --------------------- ----------------------------
and does hereby irrevocably constitute and appoint_______________________
Attorney to make sure transfer occurs on the books of The Right Start, Inc., a
California corporation, maintained for the purpose, with full power of
substitution in the premises.
Dated:
---------------------------
Signature
---------------------------
Witness
NOTICE: The signature to the assignment must correspond with the name
as written upon the face of the Warrant in every particular
instance, without alteration or enlargement or any change
whatsoever.
The signature to this assignment must be guaranteed by a bank
or trust company having an office or correspondent in New
York, New York, Los Angeles, California or Chicago, Illinois
or by a firm having membership on the New York Stock Exchange.
<PAGE>
EXHIBIT 4.4
No. of Stock Units: 136,500 Warrant No. B-1
---
WARRANT
to Purchase Common Stock of
RightStart.com Inc.
THIS IS TO CERTIFY THAT Oxygen Media, LLC, a Delaware limited liability company,
or its registered assigns, is entitled to purchase from RightStart.com Inc., a
Delaware corporation (hereinbelow called the "Company"), at any time on and
-------
after the Closing Date, but not later than 5:00 p.m., Pacific Standard time, on
December 30, 2004 (the "Expiration Date"), One Hundred Thirty-six Thousand Five
---------------
Hundred (136,500) Stock Units, in whole or in part, at a purchase price per
Stock Unit of $11.25, adjusted as provided below, all on the terms and
conditions hereinbelow provided.
This Warrant has been issued in accordance with a Subscription Agreement dated
as of the date hereof between the Company and Oxygen Media, LLC (the
"Subscription Agreement").
----------------------
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER ANY
STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS PURSUANT TO
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY REQUIRED
REGISTRATION OR QUALIFICATION UNDER ANY STATE SECURITIES LAWS, OR THE PROPOSED
TRANSACTION DOES NOT REQUIRE REGISTRATION OR QUALIFICATION UNDER FEDERAL OR
STATE SECURITIES LAWS.
Section 1. Certain Definitions. As used in this Warrant, unless the
-------------------
context otherwise requires:
"Affiliate" of any Person means a Person (1) that directly or
---------
indirectly controls, or is controlled by, or is under common control with, such
other Person, (2) that beneficially owns ten percent (10%) or more of the Voting
Stock of such other Person, or (3) ten percent (10%) or more of the Voting Stock
(or in the case of a Person which is not a corporation, ten percent (10%) or
more of the equity interest) of which is owned by such other Person. The term
1
<PAGE>
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.
"Appraised Value" shall mean the fair market value of all
----------------
outstanding shares of Common Stock (on a fully diluted basis including any
fractional shares and assuming the exercise in full of all then-outstanding
options, warrants or other rights to purchase shares of Common Stock that are
then currently exercisable at exercise prices less than the Current Market
Price), as determined by a written appraisal prepared by an appraiser acceptable
to the Company and the holders of Warrants evidencing a majority in number of
the total number of Stock Units at the time purchasable upon the exercise of all
then outstanding Warrants. "Fair market value" is defined for this purpose as
the price in a single transaction determined on a going-concern basis that would
be agreed upon by the most likely hypothetical buyer for a 100% controlling
interest in the equity capital of the Company (on a fully diluted basis
including any fractional shares and assuming the exercise in full of all then-
outstanding options, warrants or other rights to purchase shares of Common Stock
that are then currently exercisable at exercise prices less than the Current
Market Price), with consideration given to the effect of a noncompete covenant
signed by the seller and employment agreements signed by key management
personnel of the Company (and of its subsidiaries), each extending for a period
of time considered sufficient by all parties to effect the transfer of goodwill
from the seller to the buyer and disregarding any discounts for nonmarketability
of Common Stock of the Company. In the event that the Company and said holders
cannot, in good faith, agree upon an appraiser, then the Company, on the one
hand, and said holders, on the other hand, shall each select an appraiser, the
two appraisers so selected shall select a third appraiser who shall be directed
to prepare such a written appraisal (the "Appraisal") and the term Appraised
Value shall mean the appraised value set forth in the Appraisal prepared in
accordance with this definition. The fees and expenses of any appraisers shall
be paid by the Company, except in the case where the valuation of any appraiser
who renders an Appraisal is within ten percent (10%) of the value originally
determined by the Board of Directors, in which case the holders shall pay the
fees and expenses of any appraisers. In the event that the Company bears the
cost of the appraisal process, such cost shall be deemed an account payable of
the Company and shall be considered in the determination of the Appraised Value.
"Board of Directors" shall mean either the board of directors
------------------
of the Company or any duly authorized committee of that board.
"Business Day" shall mean any day other than a Saturday, Sunday or a
------------
day on which banks in the States of New York or California are required or
permitted to close.
"Commission" shall mean the Securities and Exchange Commission and any
----------
other similar or successor agency of the federal government administering the
Securities Act and the Exchange Act.
2
<PAGE>
"Common Stock" shall mean the Company's authorized Common Stock, $.01
------------
par value per share, irrespective of class unless otherwise specified, as
constituted on the date of original issuance of this Warrant, and any stock into
which such Common Stock may thereafter be changed, and shall also include stock
of the Company of any other class, which is not preferred as to dividends or
assets over any other class of stock of the Company issued to the holders of
shares of stock upon any reclassification thereof.
"Company" shall mean RightStart.com Inc., a Delaware corporation.
-------
"Current Market Price" per share of Common Stock for the purposes of
--------------------
any provision of this Warrant at the date herein specified, shall be deemed to
be the price determined pursuant to the first applicable of the following
methods:
(i) If the Common Stock is traded on a national securities
exchange or is traded in the over-the-counter market, the Current
Market Price per share of Common Stock shall be deemed to be the
average of the daily market prices for 20 consecutive Business Days
commencing 20 Business Days before such date. The market price for each
such Business Day shall be (a) if the Common Stock is traded on a
national securities exchange or in the over-the-counter market, its
last sale price on the preceding Business Day on such national
securities exchange or over-the-counter market or, if there was no sale
on that day, the last sale price on the next preceding Business Day on
which there was a sale, all as made available over the Consolidated
Last Sale Reporting System of the CTA Plan (the "CLSRS") or, if the
-----
Common Stock is not then eligible for reporting over the CLSRS, its
last reported sale price on the preceding Business Day on such national
securities exchange or, if there was no sale on that day, on the next
preceding Business Day on which there was a sale reported on such
exchange or (b) if the principal market for the Common Stock is the
over-the-counter market, but the Common Stock is not then eligible for
reporting over the CLSRS, but the Common Stock is quoted on The Nasdaq
Stock Market, Inc. ("Nasdaq"), the last sale price reported on Nasdaq
------
on the preceding Business Day or, if the Common Stock is an issue for
which last sale prices are not reported on Nasdaq, the closing bid
quotation on such day, but, in each of the next preceding two cases, if
the relevant Nasdaq price or quotation did not exist on such day, then
the price or quotation on the next preceding Business Day in which
there was such a price or quotation.
(ii) If the Current Market Price per share of Common Stock
cannot be ascertained by any of the methods set forth in paragraph (i)
immediately above, the Current Market Price per share of Common Stock
shall be deemed to be the price equal to the quotient determined by
dividing the Appraised Value by the number of outstanding shares of
Common Stock (on a fully diluted basis including any fractional shares
and assuming the exercise in full of all then-outstanding options,
warrants or other rights to purchase shares of Common Stock that are
then currently exercisable at exercise prices equal to or less than the
Current Market Price).
3
<PAGE>
"Current Warrant Price" per share of Common Stock, for the purpose of
---------------------
any provision of this Warrant at the date herein specified, shall mean the
amount equal to the quotient resulting from dividing the Exercise Price in
effect on such date by the number of shares (including any fractional share) of
Common Stock comprising a Stock Unit on such date.
"Exchange Act" shall mean the Securities and Exchange Act of 1934, as
------------
amended, and any similar or successor federal statute, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at
any applicable time.
"Exercise Price" shall mean the purchase price per Stock Unit as set
--------------
forth on the first page of this Warrant on the Closing Date and thereafter shall
mean such dollar amount as shall result from the adjustments specified in
Section 4.
"Holder" means, initially, Oxygen Media, LLC, a Delaware limited
-----
liability company, and thereafter any Person that is or Persons that are the
registered holder(s) of the Warrant or Warrant Stock as registered on the books
of the Company.
"Liquidity Event" shall mean (i) the sale of all or substantially all
---------------
the assets of the Company for cash, (ii) a merger, acquisition, sale or
recapitalization of the Company whereby the Holder of this Warrant is entitled
by the terms of such transaction to receive cash in lieu of this Warrant or its
exercise or (iii) the initial firm-commitment public offering by the Company of
its Common Stock.
"Nonpreferred Stock" shall mean the Common Stock and shall also
------------------
include stock of the Company of any other class which is not preferred as to
dividends or assets over any other class of stock of the Company and which is
not subject to redemption.
"Person" shall include an individual, a corporation, an association, a
------
partnership, a limited liability company, a trust or estate, a government,
foreign or domestic, and any agency or political subdivision thereof, or any
other entity.
"Restricted Certificate" shall mean a certificate for Common Stock or
----------------------
a Warrant bearing the restrictive legend set forth in the preamble.
"Restricted Securities" shall mean Restricted Stock and the Restricted
---------------------
Warrant.
"Restricted Stock" shall mean Common Stock evidenced by a Restricted
----------------
Certificate.
"Restricted Warrant" shall mean a Warrant evidenced by a Restricted
------------------
Certificate.
4
<PAGE>
"Securities" shall mean the Warrant issued to the Holder, and the
----------
certificates and other instruments from time to time evidencing the same.
"Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
and any similar or successor federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at any applicable
time.
"Stock Unit" shall constitute one share of Common Stock, as such
----------
Common Stock was constituted on the date hereof and thereafter shall constitute
such number of shares (including any fractional shares) of Common Stock as shall
result from the adjustments specified in Section 4.
"Subscription Agreement" has the meaning assigned to such term in the
----------------------
second paragraph of this Warrant.
"Voting Stock" shall mean any equity security entitling the holder of
------------
such security to vote at meetings of shareholders except an equity security
which entitles the holder of such security to vote only upon the occurrence of
some contingency, unless that contingency shall have occurred and be continuing.
"Warrant" shall mean this Warrant to purchase up to an aggregate of
-------
136,500 Stock Units initially issued to Oxygen Media, LLC, a Delaware limited
liability company, and all Warrants issued upon transfer, division or
combination of, or in substitution therefor.
"Warrant Stock" shall mean the shares of Common Stock purchasable by
-------------
the holder of any Warrants upon the exercise thereof.
Section 2. Exercise of Warrant. The holder of this Warrant may, at
-------------------
any time on and after the date hereof, but not later than the Expiration Date,
exercise this Warrant in whole at any time or in part from time to time for the
number of Stock Units which such holder is then entitled to purchase hereunder.
The Holder may exercise this Warrant, in whole or in part, by either of the
following methods (or a combination thereof or as otherwise determined by the
Company's Board of Directors):
(a) the Holder may deliver to the Company at its office
maintained pursuant to Section 13 for such purpose (i) a written
notice of such Holder's election to exercise this Warrant, which
notice shall specify the number of Stock Units to be purchased,
(ii) this Warrant and (iii) a sum equal to the aggregate Exercise
Price therefor in immediately available funds; or
(b) on or after the occurrence of a Liquidity Event, the
Holder may also exercise this Warrant, in whole or in part, in a
"cashless" or "net
5
<PAGE>
issue" exercise by delivering to the Company at its office
maintained pursuant to Section 13 for such purpose (i) a written
notice of such Holder's election to exercise this Warrant, which
notice shall specify the number of Stock Units to be delivered to
such Holder and the number of Stock Units with respect to which
this Warrant is being surrendered in payment of the aggregate
Exercise Price for the Stock Units to be delivered to the Holder,
and (ii) this Warrant. For purposes of this subparagraph (b),
each Stock Unit as to which this Warrant is surrendered will be
attributed a value equal to the product of (x) the Current Market
Price per share of Common Stock minus the Current Warrant Price
per share of Common Stock, multiplied by (y) the number of shares
of Common Stock then comprising a Stock Unit.
Any notice required under this Section 2 may be in the form of a
subscription set out at the end of this Warrant. Upon delivery thereof, the
Company shall as promptly as practicable cause to be executed and delivered to
such holder a certificate or certificates representing the aggregate number of
fully-paid and nonassessable shares of Common Stock issuable upon such exercise.
The stock certificate or certificates for Warrant Stock so delivered
shall be in such denominations as may be specified in said notice and shall be
registered in the name of such Holder or, subject to Section 9, such other name
or names as shall be designated in said notice. Such certificate or certificates
shall be deemed to have been issued and such Holder or any other Person so
designated to be named therein shall be deemed to have become a holder of record
of such shares, including to the extent permitted by law the right to vote such
shares or to consent or to receive notice as a stockholder, as of the time said
notice is delivered to the Company as aforesaid. If this Warrant shall have been
exercised only in part, the Company shall, at the time of delivery of said
certificate or certificates, deliver to such Holder a new Warrant dated the date
it is issued, evidencing the rights of such Holder to purchase the remaining
Stock Units called for by this Warrant, which new Warrant shall in all other
respects be identical with this Warrant.
The Company shall pay all expenses, taxes and other charges payable in
connection with the preparation, issue and delivery of stock certificates under
this Section 2.
All shares of Common Stock issuable upon the exercise of this Warrant
shall be validly issued, fully paid and nonassessable, and free from all liens
and other encumbrances thereon. The Company will from time to time take all such
action as may be necessary to assure that the par value per share of the
unissued Common Stock acquirable upon exercise of this Warrant is at all times
equal to or less than the Exercise Price then in effect.
The Company shall not issue certificates for fractional shares of
stock upon any exercise of this Warrant whenever, in order to implement the
provisions of this Warrant, the
6
<PAGE>
issuance of such fractional shares is required. Instead, the Company shall pay
cash in lieu of such fractional share upon such exercise.
Section 3. Transfer, Division and Combination. Subject to Section 9,
----------------------------------
this Warrant and all rights hereunder are transferable, in whole or in part, on
the books of the Company to be maintained for such purpose, upon surrender of
this Warrant at the office of the Company maintained for such purpose pursuant
to Section 13, together with (a) a written assignment in the form set out at the
end of this Warrant duly executed by the Holder hereof or its agent or attorney,
(b) a copy of the Subscription Agreement duly executed by an authorized
representative of the transferee (substantially in the form executed by the
Holder or in such other form as reasonably acceptable to counsel to the Company)
and (c) payment of funds sufficient to pay any stock transfer taxes payable upon
the making of such transfer. Upon such surrender, execution and payment, the
Company shall, subject to Section 9, execute and deliver a new Warrant or
Warrants in the name of the assignee or assignees and in the denominations
specified in such instrument of assignment, and this Warrant shall promptly be
canceled. If and when this Warrant is assigned in blank (in case the
restrictions on transferability in Section 9 shall have been terminated), the
Company may (but shall not be obliged to) treat the bearer hereof as the
absolute owner of this Warrant for all purposes and the Company shall not be
affected by any notice to the contrary. This Warrant, if properly assigned in
compliance with this Section 3 and Section 9, may be exercised by an assignee
for the purchase of shares of Common Stock without having a new Warrant issued.
This Warrant may, subject to Section 9, be divided upon presentation
at the aforesaid office of the Company, together with a written notice
specifying the names and denominations in which new Warrants are to be issued,
signed by the holder hereof or its agent or attorney. Subject to compliance with
the preceding paragraph and with Section 9, as to any transfer which may be
involved in such division or combination, the Company shall execute and deliver
a new Warrant or Warrants in exchange for the Warrant to be divided or combined
in accordance with such notice.
The Company shall pay all expenses, taxes and other charges incurred
by the Company in the performance of its obligations in connection with the
preparation, issue and delivery of Warrants under this Section 3.
The Company agrees to maintain at its aforesaid office books for the
registration and transfer of the Warrants.
Section 4. Adjustment of Stock Unit or Exercise Price. The number of
------------------------------------------
shares of Common Stock comprising a Stock Unit, and the Exercise Price per Stock
Unit, shall be subject to adjustment from time to time as set forth in this
Section 4 and in Section 5. The Company will not take any action with respect to
its Nonpreferred Stock of any class requiring an adjustment pursuant to any of
the following Subsections 4.1 or 4.3 without at the same time taking like action
with respect to its Nonpreferred Stock of each other class.
7
<PAGE>
4.1. Stock Dividends, Subdivisions and Combinations. In case at any
----------------------------------------------
time or from time to time the Company shall
(a) take a record of the holders of its Nonpreferred Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Nonpreferred Stock, or
(b) subdivide its outstanding shares of Nonpreferred Stock into a
larger number of shares of Nonpreferred Stock, or
(c) combine its outstanding shares of Nonpreferred Stock into a
smaller number of shares of Nonpreferred Stock,
then the number of shares of Common Stock comprising a Stock Unit immediately
after the happening of any such event shall be adjusted so as to consist of the
number of shares of Common Stock which a record holder of the number of shares
of Common Stock comprising a Stock Unit immediately prior to the happening of
such event would own or be entitled to receive after the happening of such
event; provided, however, that no such event may take place with respect to any
shares of Nonpreferred Stock unless it shall also take place for all shares of
Nonpreferred Stock.
4.2. Other Provisions Applicable to Adjustments. The following
------------------------------------------
provisions shall be applicable to the making of adjustments of the number of
shares of Common Stock comprising a Stock Unit hereinbefore provided for in this
Section 4:
(a) When Adjustments to Be Made. The adjustments required by Section
---------------------------
4.1 shall be made whenever and as often as any specified event requiring an
adjustment shall occur. For the purpose of any adjustment, any specified event
shall be deemed to have occurred at the close of business on the date of its
occurrence.
(b) Fractional Interests. In computing adjustments under this Section
--------------------
4, fractional interests in Nonpreferred Stock shall be taken into account to the
nearest one-thousandth of a share.
(c) When Adjustment Not Required. If the Company shall take a record
----------------------------
of the holders of its Nonpreferred Stock for the purpose of entitling them to
receive a dividend or distribution and shall, thereafter and before the
distribution thereof to shareholders, abandon its plan to pay or deliver such
dividend or distribution, then thereafter no adjustment shall be required by
reason of the taking of such record and any such adjustment previously made in
respect thereof shall be rescinded and annulled.
4.3. Merger, Consolidation or Disposition of Assets. In case
----------------------------------------------
the Company shall merge or consolidate into another corporation, or shall sell,
transfer or otherwise dispose of all or
8
<PAGE>
substantially all of its property, assets or business to another corporation and
pursuant to the terms of such merger, consolidation or disposition of assets,
shares of common stock of the successor or acquiring corporation are to be
received by or distributed to the holders of Nonpreferred Stock of the Company,
then each holder of a Warrant shall have the right thereafter to receive, upon
exercise of such Warrant, Stock Units each comprising the number of shares of
common stock of the successor or acquiring corporation receivable upon or as a
result of such merger, consolidation or disposition of assets by a holder of the
number of shares of Nonpreferred Stock comprising a Stock Unit immediately prior
to such event. If, pursuant to the terms of such merger, consolidation or
disposition of assets, any cash, shares of stock or other securities or property
of any nature whatsoever (including warrants or other subscription or purchase
rights) are to be received by or distributed to the holders of Nonpreferred
Stock of the Company, there shall be either, at the Holder's option, (i) a
reduction of the Exercise Price equal to the amount applicable to the number of
shares of Common Stock then comprising a Stock Unit of any such cash and of the
fair value of any and all such shares of stock or of other securities or
property to be received by or distributed to the holders of Nonpreferred Stock
of the Company, or (ii) such Holder shall have the right to receive, upon
exercise of its Warrant, such cash, shares of stock or other securities or
property of any nature as a holder of the number of shares of Nonpreferred Stock
underlying a Stock Unit would have been entitled to receive upon the occurrence
of such event. Such fair value shall be determined in good faith by the Board of
Directors of the Company, provided that if such determination is objected to by
the holders of Warrants evidencing a majority in number of the total number of
Stock Units at the time purchasable upon the exercise of all then outstanding
Warrants, such determination shall be made by an independent appraiser selected
by the Company and said holders. In the event that the Company and said holders
cannot, in good faith, agree upon an appraiser, then the Company, on the one
hand, and said holders, on the other hand, shall each select an appraiser, the
two appraisers so selected shall select a third appraiser who shall be directed
to prepare such a written appraisal which shall be conclusive and binding on the
parties. The fees and expenses of any appraisers shall be paid by the Company,
except in the case where the valuation of any appraiser who renders an Appraisal
is within ten percent (10%) of the value originally determined by the Board of
Directors, in which case the holders shall pay the fees and expenses of any
appraisers. In case of any such merger, consolidation or disposition of assets,
the successor acquiring corporation shall expressly assume the due and punctual
observance and performance of each and every covenant and condition of this
Warrant to be performed and observed by the Company and all of the obligations
and liabilities hereunder, subject to such modification as shall be necessary to
provide for adjustments of Stock Units which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 4. For the purposes
of this Section 4 "common stock of the successor or acquiring corporation" shall
------------------------------------------------------
include stock of such corporation of any class, that is not preferred as to
dividends or assets over any other class of stock of such corporation and that
is not subject to redemption, and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event, and any warrants or other
rights to subscribe for or purchase any
9
<PAGE>
such stock. The foregoing provisions of this Subsection 4.3 shall similarly
apply to successive mergers, consolidations or dispositions of assets.
Section 5. Notice to Warrant Holders.
-------------------------
5.1. Notice of Adjustment of Stock Unit or Exercise Price.
-------------------------------------------------------
Whenever the number of shares of Common Stock comprising a Stock Unit, or the
price at which a Stock Unit may be purchased upon exercise of the Warrants,
shall be adjusted pursuant to Section 4, the Company shall forthwith obtain a
certificate signed by independent accountants, of recognized national standing,
selected by the Company and reasonably acceptable to the Holder(s) of the
Warrants, setting forth, in reasonable detail, the event requiring the
adjustment and the method by which such adjustment was calculated (including a
statement of the fair value, as determined by the Board of Directors of the
Company or by appraisal (if applicable), of any evidences of indebtedness,
shares of stock, other securities or property or warrants or other subscription
or purchase rights referred to in Section 4.3) and specifying the number of
shares of Common Stock comprising a Stock Unit and (if such adjustment was made
pursuant to Section 4.3) describing the number and kind of any other shares of
stock comprising a Stock Unit, and any change in the purchase price or prices
thereof, after giving effect to such adjustment or change. The Company shall
promptly, and in any case within three days after the making of such adjustment,
cause a signed copy of such certificate to be delivered to each holder of a
Warrant in accordance with Section 14. The Company shall keep at its office or
agency, maintained for the purpose pursuant to Section 13, copies of all such
certificates and cause the same to be available for inspection at said office
during normal business hours by any holder of a Warrant or any prospective
purchaser of a Warrant designated by a holder thereof.
5.2. Notice of Certain Corporate Action. In case the Company shall
----------------------------------
propose (a) to pay any dividend payable in stock of any class to the holders of
its Nonpreferred Stock or to make any other distribution to the holders of its
Nonpreferred Stock (other than a cash dividend) or (b) to effect any
consolidation, merger or sale, organic change, transfer or other disposition of
all or substantially all of its property, assets or business, then in each such
case, the Company shall deliver to each holder of a Warrant, in accordance with
Section 14, a notice of such proposed action, which shall specify the date on
which a record is to be taken for the purposes of such stock dividend,
distribution or rights, consolidation, merger, sale, organic change or transfer
is to take place and the date of participation therein by the holders of
Nonpreferred Stock, if any such date is to be fixed, and shall also set forth
such facts with respect thereto as shall be reasonably necessary to indicate the
effect of such action on the Nonpreferred Stock and the number and kind of any
other shares of stock which will comprise a Stock Unit, and the purchase price
or prices thereof, after giving effect to any adjustment which will be required
as a result of such action. Such notice shall be so delivered as promptly as
reasonably possible.
Section 6. Reservation and Authorization of Common Stock. The Company
---------------------------------------------
shall at all times reserve and keep available for issue upon the exercise of
Warrants such number of its authorized but unissued shares of Common Stock as
will be sufficient to permit the exercise in
10
<PAGE>
full of all outstanding Warrants. All shares of Common Stock which shall be so
issuable, when issued upon exercise of any Warrant or upon such conversion, as
the case may be, shall be duly and validly issued, fully-paid and nonassessable.
Section 7. Taking of Record; Stock and Warrant Transfer Books. In the
--------------------------------------------------
case of all dividends or other distributions by the Company to the holders of
its Nonpreferred Stock with respect to which any provision of Section 4 refers
to the taking of a record of such holders, the Company will in each such case
take such a record and will take such record as of the close of business on a
Business Day. The Company will not at any time, except upon dissolution,
liquidation or winding up or as otherwise may be required by law, close its
stock transfer books or Warrant transfer books so as to result in preventing or
delaying the exercise or transfer of any Warrant.
Section 8. Taxes. The Company will pay all taxes (other than federal,
-----
state, local or foreign income taxes) which may be payable in connection with
the execution and delivery of this Warrant or the issuance and sale of the
Restricted Securities hereunder or in connection with any modification of the
Restricted Securities and will save the Holder harmless without limitation as to
time against any and all liabilities with respect to or resulting from any delay
in paying, or omission to pay, such taxes. The obligations of the Company under
this Section 8 shall survive any redemption, repurchase or acquisition of
Restricted Securities by the Company.
Section 9. Restrictions on Transferability. The Restricted
-------------------------------
Securities shall not be transferable except upon the conditions specified in
this Section 9.
9.1 Transfer to an Affiliate. The Holder shall have the right to
------------------------
transfer any Restricted Securities to any Affiliate of the Holder, in each case
free of the restrictions imposed by this Section 9 other than the requirement as
to the legending of the certificates for such Restricted Securities specified in
Section 9.3. No opinion of counsel shall be required for a transfer of
Restricted Securities to an Affiliate of the Holder.
9.2 Transfer to a Non-Affiliate. The Holder and his or her or her
---------------------------
subsequent transferees shall have the right to transfer any Restricted
Securities to a non-Affiliate of Holder as follows:
(a) Prior to any transfer or attempted transfer of any Restricted
Securities to a non-Affiliate of Holder, the holder of such Restricted
Certificate shall give written notice to the Company of such holder's intention
to effect such transfer. Each such notice shall describe the manner and
circumstances of the proposed transfer in reasonable detail.
(b) Upon receipt of such notice, the Company may request an opinion of
counsel of a transferring holder to the effect that such proposed transfer may
be effected without registration under the Securities Act. Upon receipt of such
opinion, or if the Company does not request such an opinion, within five (5)
Business Days after receiving notice of the proposed transfer, the Company
shall, as promptly as practicable, so notify the holder of such Restricted
11
<PAGE>
Certificate and such holder shall thereupon be entitled to transfer such
Restricted Securities in accordance with the terms of the notice delivered by
such holder to the Company. Each certificate evidencing the Restricted
Securities thus to be transferred (and each certificate evidencing any
untransferred balance of the Restricted Securities evidenced by such Restricted
Certificate) shall bear the restrictive legend set forth in Section 9.3, unless
in the opinion of the Company or the opinion of such counsel, if requested,
pursuant to Rule 144(k) of the Securities Act or otherwise, such legend is not
required in order to ensure compliance with the Securities Act. The fees and
expenses of counsel for any such opinion shall be paid by the Company.
9.3 Restrictive Legend. Unless and until the Restricted
-------------------
Securities have been registered under the Securities Act, this Warrant, each
Warrant issued to any transferee of the Holder, each certificate for any Warrant
Stock issued upon exercise of any Warrant and each certificate for any Warrant
Stock issued to any transferee of any such certificate, shall be stamped or
otherwise imprinted with a legend in substantially the following form:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER
ANY STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND ANY REQUIRED REGISTRATION OR QUALIFICATION UNDER ANY
STATE SECURITIES LAWS, OR THE PROPOSED TRANSACTION DOES NOT REQUIRE
REGISTRATION OR QUALIFICATION UNDER FEDERAL OR STATE SECURITIES LAWS."
Section 10. Limitation of Liability. No provision hereof, in the
-----------------------
absence of affirmative action by the Holder to purchase shares of Common Stock,
and no mere enumeration herein of the rights or privileges of the Holder, shall
give rise to any liability of the Holder for the purchase price of the Warrant
Stock or as a stockholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company.
Section 11. Loss or Destruction of Warrant Certificates. Upon receipt
-------------------------------------------
of evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Company
(the original Holder's or any other institutional Holder's indemnity being
satisfactory indemnity in the event of loss, theft or destruction of any Warrant
owned by such institutional Holder), or, in the case of any such mutilation,
upon surrender and cancellation of such Warrant, the Company will make and
deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new
Warrant of like tenor and representing the right to purchase the same aggregate
number of shares of Common Stock.
Section 12. Amendments. The terms of this Warrant may be amended,
----------
and the observance of any term therein may be waived, but only with the written
consent of the holders
12
<PAGE>
of Warrants evidencing a majority in number of the total number of Stock Units
at the time purchasable upon the exercise of all then outstanding Warrants,
provided that no such action may change the number of shares of stock comprising
a Stock Unit or the Exercise Price, without the written consent of the holders
of Warrants evidencing 100% in number of the total number of Stock Units at the
time purchasable upon the exercise of all then outstanding Warrants. For the
purposes of determining whether the holders of outstanding Warrants entitled to
purchase a requisite number of Stock Units at any time have taken any action
authorized by this Warrant, any Warrants owned by the Company or any Affiliate
of the Company (other than an institutional investor which may be deemed an
Affiliate solely by reason of the ownership of Warrants) shall be deemed not to
be outstanding.
Section 13. Office of the Company. So long as any Warrant remains
---------------------
outstanding, the Company shall maintain an office where the Warrants may be
presented for exercise, transfer, division or combination as in this Warrant
provided. Such office shall be at 5388 Sterling Center Drive, Unit C, Westlake
Village, California 91361, FAX: (818) 707-7132, unless and until the Company
shall designate and maintain some other office for such purposes and deliver
written notice thereof to the Holders of all outstanding Warrants.
Section 14. Notices Generally.
-----------------
14.1. All communications (including all required or permitted notices)
pursuant to the provisions hereof shall be in writing and shall be sent, to any
registered Holder of any Warrants or Warrant Stock, to the address of such
Holder as it appears in the stock or warrant ledger of the Company or at such
other address as such Holder may have furnished in writing to the Company.
14.2. Any notice shall be deemed to have been duly delivered when
delivered by hand, if personally delivered, and if sent by mail to a party whose
address is in the same country as the sender, two Business Days after being
deposited in the mail, postage prepaid, and if sent by recognized international
courier, freight prepaid, with a copy sent by telecopier, to a party whose
address is not in the same country as the sender, three Business Days after the
later of (a) being telecopied and (b) delivery to such courier.
Section 15. Governing Law. This Warrant shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware (without regard
to conflicts of law provisions thereof).
13
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
in its name by its President and attested by its Senior Vice President.
Dated: December 30, 1999
RIGHTSTART.COM INC.
/s/ Jerry R. Welch
-------------------------------
By: Jerry R. Welch
Its: President
ATTEST:
/s/ Kendrick F. Royer
- -------------------------------------------------
Name: Kendrick F. Royer
Title: Senior Vice President and General Counsel
<PAGE>
SUBSCRIPTION FORM
(to be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for and purchases Stock Units of RightStart.com Inc., a Delaware
corporation, purchasable with this Warrant, and herewith makes payment therefor
(by check in the amount of $_____), or hereby tenders _______________ Stock
Units as payment therefor, all at the price and on the terms and conditions
specified in this Warrant and requests that certificates for the shares of
Common Stock hereby purchased (and any securities or other property issuable
upon such exercise) be issued in the name of and delivered to _______________
_________________________ whose address is __________________________________
__________________________________________________________________________and,
if such Stock Units shall not include all of the Stock Units issuable as
provided in this Warrant that a new Warrant of like tenor and date for the
balance of the Stock Units issuable thereunder be delivered to the undersigned.
Dated: _____________, _____
-------------------------------
(Signature of Registered Owner)
-------------------------------
(Street Address)
-------------------------------
(City) (State) (Zip Code)
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
Stock Units set forth below:
Number of Stock Units Name and Address of Assignee
- --------------------- ----------------------------
and does hereby irrevocably constitute and appoint ______________________
Attorney to make sure transfer occurs on the books of RightStart.com Inc., a
Delaware corporation, maintained for the purpose, with full power of
substitution in the premises.
Dated:
---------------------------
Signature
---------------------------
Witness
NOTICE: The signature to the assignment must correspond with the name
as written upon the face of the Warrant in every particular
instance, without alteration or enlargement or any change
whatsoever.
The signature to this assignment must be guaranteed by a bank
or trust company having an office or correspondent in New
York, New York or Los Angeles, California or by a firm having
membership on the New York Stock Exchange.
<PAGE>
EXHIBIT 10.19
July 8, 1999
The Right Start, Inc.
5388 Sterling Center Drive
Unit C
Westlake Village, CA 91361
Attention: President
Re: Consent to transactions relating to RightStart.com Inc.
-------------------------------------------------------
and modification of Loan Agreement
----------------------------------
Ladies and Gentlemen:
The Right Start, Inc. (the "Borrower") is a party to that certain Loan
and Security Agreement dated as of November 14, 1996, as amended, waived or
otherwise modified prior to the date hereof (the "Loan Agreement") with Heller
Financial, Inc., as lender ("Lender"). Capitalized terms used herein without
definition shall have the meanings set forth in the Loan Agreement.
At the request of Borrower, Lender has previously consented to
Borrower's forming a new subsidiary, RightStart.com Inc., a Delaware corporation
(the "New Subsidiary"), to engage in outline retailing of Borrower's products.
Borrower and New Subsidiary now propose to enter into the following transactions
in connection with the capitalization and operations of New Subsidiary
(collectively, the "Transactions"):
1. Borrower may contribute to New Subsidiary the assets described on
Exhibit A hereto (the "Transferred Assets").
- ---------
2. New Subsidiary will issue to Sierra Ventures VII LP and Palomar
Ventures (the "Investors") an aggregate of 3,333,333 shares of its Series A
Preferred Stock, representing an interest in approximately 33% of the
outstanding equity interests of New Subsidiary, all pursuant to that certain
Series A Preferred Stock Purchase Agreement in the form attached hereto as
Exhibit B (the "Purchase Agreement"), with the Preferred Stock having the
- ---------
rights, preferences and privileges set forth on the exhibits thereto. New
Subsidiary, the Investors and Borrower will enter into that certain Investors'
Rights Agreement in the form attached hereto as Exhibit C (the "Rights
---------
Agreement").
3. Borrower and New Subsidiary will enter into that certain
Management Services Agreement in the form attached hereto as Exhibit D (the
---------
"Services Agreement").
4. Borrower and New Subsidiary will enter into that certain
Intellectual Property Agreement in the form attached hereto as Exhibit E (the
---------
"IP Agreement").
<PAGE>
Borrower has requested that Lender consent to the Transactions, and agree
to release its Lien on and security interest in the Transferred Assets in order
to permit the Transactions to be consummated and that Lender agree that New
Subsidiary shall not be considered a "Subsidiary" under the Loan Agreement and,
therefore, not subject to its restrictions.
Lender hereby consents to the Transactions, notwithstanding the
restrictions contained in subsections 7.3(A) (Transfers), 7.4 (Investments and
Loans), 7.8 (Transactions with Affiliates), 7.10 (Conduct of Business) and 7.13
(New Subsidiaries) of the Loan Agreement subject to the following conditions:
------- --
(a) Borrower shall execute and deliver to Lender a Pledge Agreement, in
form and substance satisfactory to Lender, pledging to Lender the stock of New
Subsidiary owned by it, and shall deliver the shares of such stock to Lender
with stock assignments duly executed in blank;
(b) Borrower shall execute and deliver to Lender an amendment to the
Trademark Security Agreement, in form and substance satisfactory to Lender,
granting to Lender Liens on the Intellectual Property acquired by Borrower after
the Closing Date;
(c) This consent to the consummation of the Transactions shall be deemed a
consent only to the investment by Borrower in New Subsidiary consisting of the
Transferred Assets, and not to any additional investment in New Subsidiary after
such contribution, whether in the form of a capital contribution, loans or
advances or the purchase of additional stock in New Subsidiary (pursuant to the
terms of the Rights Agreement or otherwise) or to any guarantee or other credit
support by Borrower of any obligations of New Subsidiary;
(d) All Inventory sold by Borrower to New Subsidiary shall be segregated
from the Inventory owned by Borrower, and Borrower's and New Subsidiary's books
and records shall clearly show the ownership of such Inventory, it being
understood that Inventory owned by New Subsidiary shall not be Eligible
Inventory;
(e) Borrower shall deliver to Lender an agreement of New Subsidiary, in
form and substance satisfactory to Lender, acknowledging that Lender has a Lien
on certain Intellectual Property, including that Intellectual Property licensed
to New Subsidiary pursuant to the IP Agreement, and that Lender shall be free to
enforce its rights in such Intellectual Property;
(f) Borrower shall deliver to Lender such amendments to the Schedules to
the Loan Documents as are necessary to reflect the consummation of the
Transactions;
(g) Both before and after giving effect to the Transactions, no Default or
Event of Default shall have occurred and be continuing, and all representations
and warranties of Borrower contained in the Loan Documents, after giving effect
to the amendments referred to in paragraph (f) above, shall be true and correct
in all material respects, the closing of the Transactions constituting
Borrower's representation and warranty that the matters set forth in this
paragraph are true and correct; and
2
<PAGE>
(h) Borrower shall pay to Lender all reasonable costs and expenses,
including attorneys' fees and filing or recording fees, incurred in connection
with this letter and the Transactions.
Lender further agrees that, for all purposes of the Loan Agreement
(including without limitation the financial covenants contained in Section 6),
New Subsidiary shall not be a "Subsidiary".
In consideration of Lender's consent and agreements contained in this
letter, Borrower agrees that it shall at all times own and control at least
fifty-one percent (51%) of the shares of capital stock of New Subsidiary
entitled to vote for the election of a majority of the members of the board of
directors of New Subsidiary, and shall at all times have the right to appoint at
least the same number of members of the board of directors of New Subsidiary as
the Investors. Any breach of the agreements set forth in this paragraph shall
constitute an Event of Default under the Loan Agreement.
If the terms of this consent are acceptable to you, please execute and
deliver to Lender a copy of this consent, evidencing your acceptance of its
terms.
By your signature below, Borrower agrees that, except to the extent
expressly set forth herein, nothing in this consent shall be construed to be an
amendment, waiver, modification or release of any provisions of the Loan
Documents, each of which shall remain in full force and effect.
Very truly yours,
HELLER FINANCIAL, INC.
By: /s/ Barry S. O'Neall
------------------------
Name: Barry S. O'Neall
----------------------
Title: Sr. Vice President
---------------------
ACCEPTED AND AGREED
this 9th day of July, 1999
THE RIGHT START,INC.
By: /s/ Gina Engelhard
---------------------------
Name: Gina Engelhard
-------------------------
Title: Chief Financial Officer
------------------------
3
<PAGE>
EXHIBIT 10.21
SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
AND SECOND AMENDMENT TO SECURED CAPEX NOTE
This SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT AND SECOND AMENDMENT
TO SECURED CAPEX NOTE (this "Amendment") is dated as of January 18, 2000, and
---------
entered into by and between THE RIGHT START, INC., a California corporation
("Borrower"), and HELLER FINANCIAL, INC. ("Lender").
-------- ------
RECITALS
WHEREAS, Borrower and Lender have entered into that certain Loan and
Security Agreement dated as of November 14, 1996, as amended by that certain
First Amendment to Loan and Security Agreement and Limited Waiver and Consent
dated as of April 30, 1997, as further amended by that certain Second Amendment
to Loan and Security Agreement and Limited Waiver dated July 10, 1997, as
further amended by that certain Third Amendment to Loan and Security Agreement,
Limited Waiver and Consent dated September 3, 1997, as further amended by that
certain Fourth Amendment to Loan and Security Agreement and Limited Consent
effective as of January 30, 1998, as further amended by that certain Waiver and
Fifth Amendment to Loan and Security Agreement dated as of December 9, 1998, as
further amended by that certain Sixth Amendment to the Loan and Security
Agreement and First Amendment to Secured CAPEX Note dated as of November 8, 1999
(as so amended, the "Loan Agreement");
--------------
WHEREAS, in connection with the Loan Agreement, Borrower made that certain
Secured CAPEX Note dated November 14, 1996, in favor of Lender in the principal
amount of $3,000,000, as amended by that certain Sixth Amendment to the Loan and
Security Agreement and First Amendment to Secured CAPEX Note dated as of
November 8, 1999 (as so amended, the "CAPEX Note");
----------
WHEREAS, Borrower has requested certain amendments to the Loan Documents
(as defined in the Loan Agreement), including that the term of each of the Loan
Agreement and the CAPEX Note be extended;
WHEREAS, Lender is willing to grant such extension and other amendments,
all upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of these premises, the agreements,
provisions and covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
<PAGE>
AGREEMENT
1. Defined Terms. Capitalized terms used but not otherwise
-------------
defined herein shall have the meanings given in the Loan Agreement.
2. Amendment to Subsection 1.1 of the Loan Agreement. The
-------------------------------------------------
following defined terms are added alphabetically to subsection 1.1 of the Loan
--------------
Agreement:
"Seventh Amendment Effective Date" means January 18, 2000."
--------------------------------
"Subscription Agreement" means that certain Subscription
----------------------
Agreement dated as of January 18, 2000, regarding the issuance to
Lender of 5,130 shares of the common stock of Borrower."
"Warrant" means the warrant to purchase 5,000 shares of the
-------
common stock of Borrower issued or to be issued to Heller Financial,
Inc."
3. Amendment to Subsection 2.1(C) of the Loan Agreement. Subsection
---------------------------------------------------- ----------
2.1(C) is hereby deleted in its entirety and the following substituted therefor:
- ------
"(C) CAPEX Line. Subject to the terms and conditions of this
----------
Agreement and in reliance upon the representations and warranties of
Borrower and the other Loan Parties set forth herein and in the other
Loan Documents, Lender agrees to lend to Borrower each CAPEX Advance
from time to time requested by Borrower to be applied to Permitted
CAPEX Expenditures, the aggregate amount of which shall not exceed
$3,000,000; provided that on the Seventh Amendment Effective Date,
Borrower hereby requests, and Lender agrees to lend to Borrower,
CAPEX Advances in the amount of $1,250,000 such that the outstanding
principal balance of the CAPEX Loan as of such Seventh Amendment
Effective Date, after giving effect to such CAPEX Advances, shall be
$3,000,000. Amounts borrowed under this subsection 2.1(C) and prepaid
-----------------
on or after the Seventh Amendment Effective Date (after giving effect
to the CAPEX Advances described in the proviso in the preceding
sentence) may not be reborrowed. Interest on the outstanding
principal balance of the CAPEX Advances shall be due and payable on
each Interest Payment Date. The outstanding principal balance of all
CAPEX Advances, together with interest accrued and
2
<PAGE>
unpaid on such amount, shall be due and payable on the Termination
Date."
4. Amendment to Subsection 2.5 of the Loan Agreement. The first
-------------------------------------------------
sentence of Subsection 2.5 of the Loan Agreement is deleted in its entirety and
--------------
the following substituted therefor:
"This Agreement shall be effective until February 18, 2001 (the
"Termination Date")."
5. Amendment to Subsection 6.3 of the Loan Agreement. Subsection
------------------------------------------------- ----------
6.3 of the Loan Agreement is hereby deleted in its entirety and the following
- ---
substituted therefor:
"6.3 Minimum EBITDA. Borrower shall have a minimum EBITDA for
------------------
the periods set forth below in the amounts set forth below:
Period Amount
------ ------
Three months ended April 30, 1998 ($1,200,000)
Six months ended July 31, 1998 ($1,200,000)
Nine months ended October 31, 1998 ($ 900,000)
Twelve months ended January 31, 1999 ($ 900,000)
Twelve months ended April 30, 1999 ($ 500,000)
Twelve months ended July 31, 1999 $ 0
Twelve months ended October 31, 1999 $ 400,000
Twelve months ended January 31, 2000 $ 500,000
Twelve months ended April 30, 2000 $ 500,000
Twelve months ended July 31, 2000 $ 500,000
Twelve months ended October 31, 2000 $ 500,000
Twelve months ended January 31, 2001 $ 500,000"
6. Amendment to Subsection 6.4 of the Loan Agreement. Subsection
------------------------------------------------- ----------
6.4 of the Loan Agreement is hereby deleted in its entirety and the following
- ---
substituted therefor:
6.4 Capital Expenditure Limits. The aggregate amount of all
--------------------------
Capital Expenditures of Borrower and its Subsidiaries (excluding
trade-ins and excluding Capital Expenditures in respect of
replacement assets to the extent funded with casualty insurance
proceeds) will not exceed the amount set forth below for each period
set forth below. In the event that Borrower or any of its
Subsidiaries enters into a Capital Lease or other contract with
respect to fixed assets, for purposes of calculating Capital
3
<PAGE>
Expenditures under this subsection only, the amount of the Capital
Lease or contract initially capitalized on Borrower's or any
Subsidiary's balance sheet prepared in accordance with GAAP shall be
considered expended in full on the date that Borrower or any of its
Subsidiaries enters into such Capital Lease or contract.
Fiscal Year Ending Amount
------------------ ------
January 30, 2000 $1,750,000
January 29, 2001 $1,750,000
Permitted Capital Expenditures not made in Fiscal Year 1999 may be
carried over for one year only to the next Fiscal Year; provided,
however, any carried-over Capital Expenditure will be deemed used
only after all otherwise Permitted Capital Expenditures for that
Fiscal Year have been used.
Notwithstanding anything herein to the contrary, on and after the
Seventh Amendment Effective Date, each Capital Expenditure made with
the proceeds of (i) a third-party financing (other than under this
Agreement) on terms not less favorable to Borrower or any of its
Subsidiaries, as applicable, than then-existing market terms, (ii) an
equity offering of Borrower's securities in which any of the proceeds
thereof are used for Capital Expenditures (in each of case (i) and
(ii) to the extent of such proceeds so applied) or (iii) the gain
realized on a sale of assets of Borrower (including securities held
by Borrower) or any of its Subsidiaries, in each case to the extent
the foregoing financing, equity offering or sale is permitted under
this Agreement, shall not be subject to, or considered in the
calculations of, the limitations of this subsection 6.4.
--------------
7. Amendment to Secured CAPEX Note. The reference to "February 18,
-------------------------------
2000" in the first paragraph of the CAPEX Note is hereby deleted and "February
18, 2001" substituted therefor.
8. Representations and Warranties. Borrower represents and warrants
------------------------------
to Lender as follows:
a. Borrower has been duly organized and is validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, as well as in each jurisdiction in which Borrower is
required to be qualified to transact business.
b. Borrower has full power and authority and legal right to
execute and deliver this Amendment and to perform its obligations under the
Loan Agreement
4
<PAGE>
and the CAPEX Note, each as amended hereby, and has taken all necessary
action to authorize such execution, delivery and performance.
c. This Amendment has been duly executed and delivered by
Borrower and such Amendment, and each of the Loan Agreement and the CAPEX
Note as amended hereby, each constitutes the legally valid and binding
obligations of Borrower, enforceable against Borrower in accordance with
its terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally and subject to the availability of
equitable remedies.
9. Conditions to the Effectiveness of this Amendment. Each of the
-------------------------------------------------
following shall be conditions precedent to the effectiveness of this Amendment
(the date on which such conditions are met being the "Effective Date"):
--------------
a. Borrower shall have duly executed and delivered a
counterpart of this Amendment to Lender or its counsel.
b. Before and after giving effect to this Amendment, (a) no
Default or Event of Default has occurred and is continuing, (b) all of the
representations and warranties contained in the Loan Documents shall be
true and correct in all material respects (except for any representation or
warranty limited by its terms to a specific date), (c) Borrower shall have
performed in all material respects all agreements and satisfied all
conditions which any Loan Document provides shall be performed by it on or
prior to such date, and (d) Borrower shall have delivered to Lender a
certificate to such effect in the form attached hereto as Exhibit A.
---------
c. Borrower shall have delivered to Lender or its counsel a
certificate of its Secretary or an Assistant Secretary, certifying as to
(i) the resolutions of its Board of Directors authorizing (A) this
Amendment and (B) the Subscription Agreement, the Warrant and the issuance
of stock under each of the Subscription Agreement and the Warrant, (ii) the
incumbency of the officers executing this Amendment and any other documents
in connection herewith, (iii) the articles of incorporation of Borrower and
(iv) the bylaws of Borrower, each as in effect on the Effective Date,
together with a good standing certificate from the Secretary of State of
the State of California with respect to the Borrower.
d. Lender or its counsel shall have received (i) a duly
executed and delivered Subscription Agreement, in form and substance
satisfactory to Lender, and (ii) as a closing fee, a stock certificate
issued to "Heller Financial, Inc." for 5,130 shares of common stock of
Borrower.
e. Borrower shall have duly executed and delivered the
Warrant to Lender or its counsel, in form and substance satisfactory to
Lender.
5
<PAGE>
f. Lender or its counsel shall have received an opinion of
Milbank, Tweed, Hadley & McCloy LLP, special counsel to Borrower, in form
and substance satisfactory to Lender.
10. Effect of Amendment; Ratification. From and after the Effective
---------------------------------
Date, all references in the Loan Documents to the Loan Agreement shall mean the
Loan Agreement as amended hereby, and all references in the Loan Documents to
the CAPEX Note or the Secured CAPEX Note shall mean the CAPEX Note as amended
hereby. The terms and provisions set forth in this Amendment shall amend and
supersede all inconsistent terms and provisions set forth in the Agreement or
the CAPEX Note and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement and the CAPEX Note are
hereby ratified and confirmed and are and shall continue in full force and
effect.
11. No Waiver. Nothing contained herein or in any other instrument
---------
or document executed in connection herewith, nor any action taken by Lender in
connection with this Amendment or any other action contemplated hereby shall in
any event be construed or deemed to constitute a waiver of any past, present or
future Default or Event of Default or a waiver or an estoppel of any cause of
action Lender may have against Borrower for any reason whatsoever, and Lender
hereby reserves all rights and remedies under the Agreement or the other Loan
Documents.
12. Fees and Expenses. Borrower acknowledges that all fees and
-----------------
expenses (including reasonable attorneys fees) incurred by Lender in connection
with this Amendment are for the account of Borrower pursuant to the Loan
Agreement.
13. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument. Delivery via facsimile of an executed counterpart of a
signature page of this Amendment shall be effective as delivery of a manually-
executed counterpart of this Amendment.
14. Severability. The illegality or unenforceability of any
------------
provision of this Amendment, the Loan Agreement (including as amended hereby),
the CAPEX Note (including as amended hereby) or any other document or any other
instrument or agreement required hereunder or thereunder shall not in any way
affect or impair the legality or enforceability of the remaining provisions of
this Amendment, the Loan Agreement (including as amended hereby), the CAPEX Note
(including as amended hereby) or such other document or any other instrument or
agreement required hereunder or thereunder.
15. Successors and Assigns. This Amendment shall be binding upon and
----------------------
shall inure to the benefit of Lender and Borrower and their respective
successors and assigns.
16. Governing Law. This Amendment shall be governed by, and shall be
-------------
construed and enforced in accordance with, the internal laws of the State of
Illinois, without regard to conflicts of laws principles.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by a duly authorized officer as of the date first above
written.
THE RIGHT START, INC.
By: /s/ Gina Engelhard
-----------------------------
Name: Gina Engelhard
---------------------------
Its: Chief Financial Officer
----------------------------
HELLER FINANCIAL, INC.
By: /s/ David A. Coleman
-----------------------------
Name: David A. Coleman
---------------------------
Its: Assistant Vice President
----------------------------
7
<PAGE>
Exhibit A
BORROWER'S CLOSING CERTIFICATE
------------------------------
This certificate is delivered pursuant to that certain Seventh
Amendment to Loan and Security Agreement and Second Amendment to Secured CAPEX
Note dated as of January 18, 2000 (the "Amendment") between The Right Start,
---------
Inc., a California corporation ("Borrower"), and Heller Financial, Inc.
--------
("Lender"). Except as provided herein, all capitalized terms used herein which
------
are defined in the Loan Agreement shall have the meanings given therein. The
undersigned hereby certifies to Lender that he or she, as applicable, is the
duly elected, qualified and acting Chief Executive Officer or Chief Financial
Officer of Borrower, as applicable, and on behalf of Borrower (and not
individually), further certifies to Lender that:
1. Each representation and warranty made in Section 4 of the Loan
---------
Agreement and in the other Loan Documents is true, correct and complete in all
material respects as of the Effective Date (as defined in the Amendment) to the
same extent as though made on and as of that date, except for any representation
and warranty limited by its terms to a specific date.
2. No event has occurred and is continuing or would result from the
consummation of the transactions contemplated under the Amendment on the
Effective Date which event would constitute a Default or Event of Default.
3. Borrower has performed in all material respects all agreements and
satisfied all conditions which any Loan Document provides shall be performed by
it on or before the Effective Date.
4. No order, judgment or decree of any court, arbitrator or
governmental authority purports to enjoin or restrain Lender from making any
Loans or issuing any Lender Letters of Credit to Borrower, or to extend the
maturity date of any Loans or Letters of Credit outstanding on the date hereof.
5. There is not pending, or to my knowledge threatened, any action,
charge, claim, demand, suit, proceeding, petition, governmental investigation or
arbitration against or affecting Borrower or any of its property that has not
been disclosed by Borrower in writing, and there has occurred no development in
any such action, charge, claim, demand, suit, proceeding, petition, governmental
investigation or arbitration so disclosed that could reasonably be expected to
have a Material Adverse Effect.
6. No event or condition has occurred since the fiscal quarter ending
on October 31, 1999, which constitutes or could reasonably be expected to
constitute a Material Adverse Effect or which has not been previously and fully
disclosed to Lender in writing.
<PAGE>
7. On the date hereof after giving effect to the transactions
contemplated by the Amendment on the date hereof and the payment by Borrower of
all costs, fees and expenses related thereto, Borrower (a) owns assets the fair
salable value of which are (i) greater than the total amount of its liabilities
(including contingent liabilities) and (ii) greater than the amount that will be
required to pay the probable liabilities of Borrower as they mature; (b) has
capital that is not unreasonably small in relation to its business as presently
conducted or any contemplated or undertaken transaction; and (c) does not intend
to incur and does not believe that it will incur debts beyond its ability to pay
such debts as they become due.
8. The conditions precedent set forth in Section 9 of the Amendment
have been satisfied.
IN WITNESS WHEREOF, the undersigned has duly executed this Borrower's
Closing Certificate on behalf of Borrower this 18th day of January, 2000.
THE RIGHT START, INC.
By: /s/ Jerry R. Welch
Name: Jerry R. Welch
Title: Chief Executive Officer
By: /s/ Gina Engelhard
Name: Gina Engelhard
Title: Chief Financial Officer
2
<PAGE>
EXHIBIT 10.34
FORM OF INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is entered into as of
the 9th day of July, 1999, by and among RightStart.com, Inc. a Delaware
corporation (the "Company") and ________________ ("Indemnitee") executing this
Agreement.
RECITALS
A. The Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for its directors, officers, employees,
stockholders (as defined in Section 10(g)), controlling persons, agents and
fiduciaries, the significant increases in the cost of such insurance and the
general reductions in the coverage of such insurance.
B. The Company and Indemnitee further recognize the substantial increase
in corporate litigation in general, subjecting directors, officers, employees,
controlling persons, stockholders (as defined in Section 10(g)), agents and
fiduciaries to expensive litigation risks at the same time as the availability
and coverage of liability insurance has been severely limited.
C. Indemnitee does not regard the current protection available as adequate
under the present circumstances, and Indemnitee and other directors, officers,
employees, stockholders (as defined in Section 10(g)), controlling persons,
agents and fiduciaries of the Company may not be willing to serve in such
capacities without additional protection.
D. The Company (i) desires to attract and retain the involvement of highly
qualified groups, such as Indemnitee, to serve the Company and, in part, in
order to induce each Indemnitee to be involved with the Company and (ii) wishes
to provide for the indemnification and advancing of expenses to each Indemnitee
to the maximum extent permitted by law.
E. In view of the considerations set forth above, the Company desires that
each Indemnitee be indemnified by the Company as set forth herein.
NOW THEREFORE, the Company and each Indemnitee hereby agrees as
follows:
1. Indemnification.
(a) Indemnification of Expenses. The Company shall indemnify and hold
harmless each Indemnitee (including its respective directors, officers, general
partners, limited partners, members, managing members, employees, agents and
spouses) and each person who controls any of them or who may be liable within
the meaning of Section 15 of the Securities Act of 1933, as amended (the
"Securities Act"), or Section 20 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), to the fullest extent permitted by law if such
Indemnitee was or is or becomes a party to or witness or other participant in,
or is threatened to be made a party to or witness or other participant in, any
threatened, pending or completed action, suit,
-1-
<PAGE>
that such Indemnitee believes might lead to the institution of any such action,
suit, proceeding or alternative dispute resolution mechanism, or any hearing,
inquiry or investigation that such Indemnitee believes might lead to the
institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other (hereinafter a "Claim") by reason of (or arising in part out of) any event
or occurrence related to the fact that Indemnitee is or was or may be deemed a
director, officer, stockholder (as defined in Section 10(g)), employee,
controlling person, agent or fiduciary of the Company, or any subsidiary of the
Company, or is or was or may be deemed to be serving at the request of the
Company as a director, officer, stockholder (as defined in Section 10(g)),
employee, controlling person, agent or fiduciary of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of any
action or inaction on the part of such Indemnitee while serving in such capacity
including, without limitation, any and all losses, claims, damages, expenses and
liabilities, joint or several (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of, any
action, suit, proceeding or any claim asserted) under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, at common
law or otherwise, which relate directly or indirectly to the registration,
purchase, sale or ownership of any securities of the Company or to any fiduciary
obligation owed with respect thereto or as a result of any claim (a) made by any
stockholder (as defined in Section 10(g)) of the Company against an Indemnitee
and arising out of or related to any round of financing of the Company
(including, but not limited to, claims regarding non-participation, or non-pro
rata participation, in such round by such stockholder (as defined in Section
10(g)), (b) made by a third party against an Indemnitee based on any
misstatement or omission of a material fact by the Company in violation of any
duty of disclosure imposed on the Company by Federal or state securities or
common laws, (c) made by a third party against an Indemnitee based (in whole or
in part) on, or arising in any way out of, or relating to conduct attributed to
the Company or anyone alleged to be acting on the Company's behalf, or (d) made
by a third party against an Indemnitee based (in whole or in part) on, or
arising in any way out of, or relating to (i) the Indemnitee being an investor
in the Company, (ii) the Indemnitee's alleged participation in the management or
direction of the Company, (iii) the Indemnitee's alleged participation in
providing any assistance or advice to the Company, or (iv) Indemnitee being a
person described in Section 15 of Securities Act or Section 20 of the Exchange
Act (hereinafter an individually an "Indemnification Event" and collectively the
"Indemnification Events") against any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including an
appeal), or preparing to defend, be a witness in or participate in, any such
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if, and only if, such settlement is approved in advance by the
Company, which approval shall not be unreasonably withheld) of such Claim and
any federal, state, local or foreign taxes imposed on Indemnitee as a result of
the actual or deemed receipt of any payments under this Agreement (collectively,
hereinafter "Expenses"), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses. Such payment
of Expenses shall be made by the Company as soon as practicable but in any event
no later than ten (10) days after written demand by the Indemnitee therefor is
presented to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the obligations of
the Company under Section 1(a) shall be subject to the condition that it shall
not have been finally determined that Indemnitee would not be permitted to be
indemnified under applicable law
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<PAGE>
(initial determination shall be made by the Reviewing Party as described in
Section 10(e) hereof in a written opinion, in any case in which the Independent
Legal Counsel referred to in Section 1(e) hereof is involved), and (ii) and each
Indemnitee acknowledges and agrees that the obligation of the Company to make an
advance payment of Expenses to Indemnitee pursuant to Section 2(a) (an "Expense
Advance") shall be subject to the condition that, if, when and to the extent
that it is so determined that Indemnitee would not be permitted to be so
indemnified under applicable law, the Company shall be entitled to be reimbursed
by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts
theretofore paid; provided, however, that if Indemnitee has commenced or
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee should be indemnified under applicable
law, any initial determination made by the Reviewing Party that Indemnitee would
not be permitted to be indemnified under applicable law shall not be binding and
Indemnitee shall not be required to reimburse the Company for any Expense
Advance until a final judicial determination is made with respect thereto (as to
which all rights of appeal therefrom have been exhausted or lapsed).
Indemnitee's obligation to reimburse the Company for any Expense Advance shall
be unsecured and no interest shall be charged thereon. If there has not been a
Change in Control (as defined in Section 10(c) hereof), the Reviewing Party
shall be selected by the Board of Directors, and if there has been such a Change
in Control (other than a Change in Control which has been approved by a majority
of the Company's Board of Directors who were directors immediately prior to such
Change in Control), the Reviewing Party shall be the Independent Legal Counsel
referred to in Section 1(e) hereof. If there has been no determination by the
Reviewing Party or if the Reviewing Party determines that Indemnitee
substantively would not be permitted to be indemnified in whole or in part under
applicable law, Indemnitee shall have the right to commence litigation seeking
an initial determination by the court or challenging any such determination by
the Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to service of process and to appear in
any such proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
(c) Contribution. If the indemnification provided for in Section 1(a) above
for any reason is held by a court of competent jurisdiction to be unavailable to
an Indemnitee in respect of any losses, claims, damages, expenses or liabilities
referred to therein, then the Company, in lieu of indemnifying such Indemnitee
thereunder, shall contribute to the amount paid or payable by such Indemnitee as
a result of such losses, claims, damages, expenses or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Indemnitee, or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Indemnitee in connection with the
action or inaction which resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. In
connection with the registration of the Company's securities, the relative
benefits received by the Company and the Indemnitee shall be deemed to be in the
same respective proportions that the net proceeds from the offering (before
deducting expenses) received by the Company and the Indemnitee, in each case as
set forth in the table on the cover page of the applicable prospectus, bear to
the aggregate public offering price of the securities so offered. The relative
fault of the Company and the Indemnitee shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement
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<PAGE>
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Indemnitee and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Indemnitee agree that it would not be just and equitable if
contribution pursuant to this Section 1(c) were determined by pro rata or per
capita allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. In connection with the registration of the Company's securities, in
no event shall Indemnitee be required to contribute any amount under this
Section 1(c) in excess of the lesser of (i) that proportion of the total of such
losses, claims, damages or liabilities indemnified against equal to the
proportion of the total securities sold under such registration statement which
is being sold by such Indemnitee or (ii) the proceeds received by such
Indemnitee from its sale of securities under such registration statement. No
person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not found guilty of such fraudulent misrepresentation.
(d) Survival Regardless of Investigation. The indemnification and
contribution provided for in this Section 1 will remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnitee or any
officer, director, general partner, limited partner, member, managing member,
employee, agent or controlling person of the Indemnitee.
(e) Change in Control. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then, with respect to all matters thereafter
arising concerning the rights of Indemnitee to payments of Expenses under this
Agreement or any other agreement or under the Company's Restated Certificate of
Incorporation (the "Restated Certificate") or Bylaws as now or hereafter in
effect, Independent Legal Counsel (as defined in Section 10(d) hereof) shall be
selected by the Indemnitee and approved by the Company (which approval shall not
be unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law. The
Company agrees to abide by such opinion and to pay the reasonable fees of the
Independent Legal Counsel referred to above and to fully indemnify such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto.
(f) Mandatory Payment of Expenses. Notwithstanding any other provision of
this Agreement, to the extent that Indemnitee has been successful on the merits
or otherwise, including, without limitation, the dismissal of an action without
prejudice, in the defense of any action, suit, proceeding, inquiry or
investigation referred to in Section 1(a) hereof or in the defense of any claim,
issue or matter therein, each Indemnitee shall be indemnified against all
Expenses incurred by such Indemnitee in connection herewith.
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<PAGE>
2. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. The Company shall advance all Expenses
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than
fifteen (15) days after written demand by such Indemnitee therefor to the
Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall give the
Company notice as soon as practicable of any Claim made against Indemnitee for
which indemnification will or could be sought under this Agreement. Notice to
the Company shall be directed to the Chief Executive Officer of the Company at
the address shown on the signature page of this Agreement (or such other address
as the Company shall designate in writing to Indemnitee).
(c) No Presumptions; Burden of Proof. For purposes of this Agreement,
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
---- ----------
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law, shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief. In connection with any determination by the Reviewing Party
or otherwise as to whether Indemnitee is entitled to be indemnified hereunder,
the burden of proof shall be on the Company to establish that Indemnitee is not
so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company
of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt written notice of the commencement of such Claim to the insurers in
accordance with the procedures set forth in each of the policies. The Company
shall thereafter take all necessary or desirable action to cause such insurers
to pay, on behalf of Indemnitee, all amounts payable as a result of such action,
suit, proceeding, inquiry or investigation in accordance with the terms of such
policies.
(e) Selection of Counsel. In the event the Company shall be obligated
hereunder to pay the Expenses of any Claim, the Company shall be entitled to
assume the defense of such Claim, with counsel reasonably approved by the
applicable Indemnitee, upon the delivery to such Indemnitee of written notice of
its election to do so. After delivery of such notice, approval of such counsel
by the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to such Indemnitee under this Agreement for any fees of
counsel subsequently incurred by such Indemnitee with respect to the same Claim;
provided that, (i) the Indemnitee shall have the right to employ such
Indemnitee's counsel in any such Claim at the Indemnitee's expense; (ii) the
Indemnitee shall have the right to employ his own counsel in connection with
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<PAGE>
any such proceeding, at the expense of the Company, if such counsel serves in a
review, observer, advice and counseling capacity and does not otherwise
materially control or participate in the defense of such proceeding; and (iii)
if (A) the employment of counsel by the Indemnitee has been previously
authorized by the Company, (B) such Indemnitee shall have reasonably concluded
that there is a conflict of interest between the Company and such Indemnitee in
the conduct of any such defense, or (C) the Company shall not continue to retain
such counsel to defend such Claim, then the fees and expenses of the
Indemnitee's counsel shall be at the expense of the Company.
3. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. The Company hereby agrees to indemnify Indemnitee to the
fullest extent permitted by law, even if such indemnification is not
specifically authorized by the other provisions of this Agreement or any other
agreement, the Company's Restated Certificate, the Company's Bylaws or by
statute. In the event of any change after the date of this Agreement in any
applicable law, statute or rule which expands the right of a Delaware
corporation to indemnify a member of its Board of Directors or an officer,
stockholder (as defined in Section 10(g)), employee, controlling person, agent
or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy
by this Agreement the greater benefits afforded by such change. In the event of
any change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its Board of Directors or an
officer, stockholder (as defined in Section 10(g)), employee, agent or
fiduciary, such change, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement, shall have no effect on this
Agreement or the parties' rights and obligations hereunder except as set forth
in Section 8(a) hereof.
(b) Nonexclusivity. The indemnification provided by this Agreement
shall be in addition to any rights to which Indemnitee may be entitled under the
Company's Restated Certificate, its Bylaws, any agreement, any vote of
stockholders or disinterested directors, the laws of the State of California or
the State of Delaware, or otherwise. The indemnification provided under this
Agreement shall continue as to each Indemnitee for any action such Indemnitee
took or did not take while serving in an indemnified capacity even though the
Indemnitee may have ceased to serve in such capacity and such indemnification
shall inure to the benefit of each Indemnitee from and after Indemnitee's first
day of service as a director with the Company or affiliation with a director
from and after the date such director commences services as a director with the
Company.
4. No Duplication of Payments. The Company shall not be liable under
this Agreement to make any payment in connection with any Claim made against any
Indemnitee to the extent such Indemnitee has otherwise actually received payment
(under any insurance policy, Restated Certificate, Bylaws or otherwise) of the
amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If any Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for any portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company
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<PAGE>
shall nevertheless indemnify Indemnitee for the portion of such Expenses to
which such Indemnitee is entitled.
6. Mutual Acknowledgement. The Company and each Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, stockholders (as defined
in Section 10(g)), employees, controlling persons, agents or fiduciaries under
this Agreement or otherwise.
7. Liability Insurance. To the extent the Company maintains liability
insurance applicable to directors, officers, stockholders (as defined in Section
10(g)), employees, control persons, agents or fiduciaries, each Indemnitee shall
be covered by such policies in such a manner as to provide Indemnitee the same
rights and benefits as are accorded to the most favorably insured of the
Company's directors, if such Indemnitee is a director, or of the Company's
officers, if such Indemnitee is not a director of the Company but is an officer,
or of the Company's key employees, controlling persons, agents or fiduciaries,
if such Indemnitee is not an officer or director but is a key employee, agent,
control person, or fiduciary.
8. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses to
any Indemnitee with respect to Claims initiated or brought voluntarily by such
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings to establish or enforce a right to indemnification under this
Agreement or any other agreement or insurance policy or under the Company's
Restated Certificate or Bylaws now or hereafter in effect relating to Claims for
Indemnifiable Events, (ii) in specific cases if the Board of Directors has
approved the initiation or bringing of such Claim, or (iii) as otherwise
required under Delaware statute or law, regardless of whether such Indemnitee
ultimately is determined to be entitled to such indemnification, advance expense
payment or insurance recovery, as the case may be; or
b) Claim Under Section 16(b). To indemnify any Indemnitee for expenses
and the payment of profits arising from the purchase and sale by such Indemnitee
of securities in violation of Section 16(b) of the Exchange Act or any similar
successor statute; or
c) Unlawful Indemnification. To indemnify an Indemnitee if a final
decision by a court having jurisdiction in the matter shall determine that such
indemnification is not lawful.
9. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against any
Indemnitee, any Indemnitee's estate, spouse, heirs, executors or personal or
legal representatives after the expiration of five (5) years from the date of
accrual of such cause of action, and any claim or cause of action of the Company
shall be extinguished and deemed released unless asserted by the timely filing
of a legal action within such five (5) year period; provided, however, that if
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any shorter period of limitations is otherwise applicable to any such cause of
action, such shorter period shall govern.
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<PAGE>
10. Construction of Certain Phrases.
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, stockholders (as defined in
Section 10(g)), employees, agents or fiduciaries, so that if Indemnitee is or
was or may be deemed a director, officer, stockholder (as defined in Section
10(g)), employee, agent, control person, or fiduciary of such constituent
corporation, or is or was or may be deemed to be serving at the request of such
constituent corporation as a director, officer, stockholder (as defined in
Section 10(g)), employee, control person, agent or fiduciary of another
corporation, partnership, joint venture, employee benefit plan, trust or other
enterprise, each Indemnitee shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as each Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on any Indemnitee with respect to an employee benefit
plan; and references to "serving at the request of the Company" shall include
any service as a director, officer, stockholder (as defined in Section 10(g)),
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, stockholder (as defined in Section 10(g)),
employee, agent or fiduciary with respect to an employee benefit plan, its
participants or its beneficiaries; and if any Indemnitee acted in good faith and
in a manner such Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, such Indemnitee
shall be deemed to have acted in a manner "not opposed to the best interests of
the Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if (i) any "person" (as such term is used in Section
13(d)(3) and 14(d)(2) of the Exchange Act), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders (as defined in
Section 10(g)) of the Company in substantially the same proportions as their
ownership of stock of the Company, (A) who is or becomes the beneficial owner,
directly or indirectly, of securities of the Company representing twenty percent
(20%) or more of the combined voting power of the Company's then outstanding
Voting Securities, increases his beneficial ownership of such securities by five
percent (5%) or more over the percentage so owned by such person, or (B) becomes
the "beneficial owner" (as defined in Rule 13d-3 under said Exchange Act),
directly or indirectly, of securities of the Company representing more than
thirty percent (30%) of the total voting power represented by the Company's then
outstanding Voting Securities, (ii) during any period of two (2) consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors of the Company and any new director whose election by the Board of
Directors or combination for election by the Company's stockholders (as defined
in Section 10(g)) was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to
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<PAGE>
constitute a majority thereof, or (iii) the stockholders (as defined in Section
10(g)) of the Company approve a merger or consolidation of the Company with any
other corporation other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least two-thirds (2/3) of the
total voting power represented by the Voting Securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
the stockholders (as defined in Section 10(g)) of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of (in one transaction or a series of transactions) all or
substantially all of the Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall
mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(e) hereof, who shall not have otherwise performed
services for the Company or any Indemnitee within the last three (3) years
(other than with respect to matters concerning the right of any Indemnitee under
this Agreement, or of other indemnitees under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean any
appropriate person or body consisting of a member or members of the Company's
Board of Directors or any other person or body appointed by the Board of
Directors who is not a party to the particular Claim for which Indemnitee is
seeking indemnification or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean any
securities of the Company that vote generally in the election of directors.
(g) For purposes of this Agreement, "stockholder" shall include any
holder of any capital stock of the Company and an affiliate thereof. For
purposes of this Agreement, "affiliate" shall constitute any limited partner,
general partner, or any member or managing member of such general partner.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, partnership,
spouses, heirs, and personal and legal representatives. The Company shall
require and cause any successor (whether direct or indirect by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business and/or assets of the Company, by written agreement in form and
substance satisfactory to each Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place. This
Agreement shall continue in effect with respect to Claims relating to
Indemnifiable Events regardless of whether any Indemnitee continues to serve as
a director, officer, employee, agent, controlling person, or fiduciary of the
Company or of any other enterprise, including subsidiaries of the Company, at
the Company's request.
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<PAGE>
13. Attorneys' Fees. In the event that any action is instituted by an
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, such Indemnitee shall be entitled to be paid all Expenses incurred by
such Indemnitee with respect to such action, regardless of whether such
Indemnitee is ultimately successful in such action, and shall be entitled to the
advancement of Expenses with respect to such action, unless, as a part of such
action, a court of competent jurisdiction over such action determines that each
of the material assertions made by such Indemnitee as a basis for such action
was not made in good faith or was frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement to enforce or
interpret any of the terms of this Agreement, the Indemnitee shall be entitled
to be paid all Expenses incurred by such Indemnitee in defense of such action
(including costs and expenses incurred with respect to Indemnitee counterclaims
and cross-claims made in such action), and shall be entitled to the advancement
of Expenses with respect to such action.
14. Notice. All notices and other communications required or permitted
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given (a) five (5) days after deposit with the U.S. Postal
Service or other applicable postal service, if delivered by first class mail,
postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day
after the business day of deposit with Federal Express or similar overnight
courier, freight prepaid, or (d) one day after the business day of delivery by
facsimile transmission, if deliverable by facsimile transmission, with copy by
first class mail, postage prepaid, and shall be addressed, if to Indemnitee, at
each Indemnitee's address as set forth beneath the Indemnitee's signature to
this Agreement, and, if to the Company, at the address of its principal
corporate offices (attention: Secretary), or at such other address as such party
may designate by ten (10) days' advance written notice to the other parties
hereto.
15. Consent to Jurisdiction. The Company and each Indemnitee each hereby
irrevocably consent to the jurisdiction and venue of the courts of the State of
California for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement and agree that any action instituted
under this Agreement shall be commenced, prosecuted and continued only in the
courts of the State of California.
16. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the extent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement shall be governed by and its provisions
construed and enforced in accordance with the laws of the State of California,
as applied to contracts between California residents, entered into and to be
performed entirely within the State of California, without regard to the
conflict of laws principles thereof.
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<PAGE>
18. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination
or cancellation of this Agreement shall be effective unless it is in writing
signed by the parties to be bound thereby. Notice of same shall be provided to
all parties hereto. No waiver of any of the provisions of this Agreement shall
be deemed or shall constitute a waiver of any other provisions hereof (whether
or not similar) nor shall such waiver constitute a continuing waiver.
20. No Construction as Employment Agreement. Nothing contained in this
Agreement shall be construed as giving any Indemnitee any right to be retained
in the employ of the Company or any of its subsidiaries.
21. Corporate Authority. The Board of Directors of the Company and its
stockholders in accordance with Delaware law have approved the terms of this
Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
RightStart.com Inc.,
A Delaware corporation
By:
---------------------------------
Name: Jerry R. Welch
Title: President
Address:
RightStart.com Inc.
5388 Sterling Center Drive, Unit C
Westlake Village, CA 91361
INDEMNITEE:
--------------------------------
Address:
By:
---------------------------------
Address:
By:
---------------------------------
Address:
3000 Sand Hill Road
Building 4
Suite 210
Menlo Park, CA 94025
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<PAGE>
EXHIBIT 10.35
RightStart.com Inc.
1999 STOCK OPTION PLAN
* * * * *
1. Purpose. The purpose of the RightStart.com Inc. 1999 Stock Option Plan
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(the "Plan") is to further and promote the interests of RightStart.com Inc. (the
"Company"), its Subsidiaries and its shareholders by enabling the Company and
its Subsidiaries to attract, retain and motivate key employees, directors and
consultants, or those who will become key employees, and directors or
consultants, and to align the interests of those individuals and the Company's
shareholders.
2. Certain Definitions. For purposes of the Plan, the following terms shall
-------------------
have the meanings set forth below:
2.1 "Affiliate" means any person or entity of any kind effectively
controlling, effectively controlled by or under common control with The Right
Start, Inc., a California corporation ("Right Start").
2.2 "Award Agreement" means the agreement executed by a Participant
pursuant to Sections 3.2 and 11.5 of the Plan in connection with the granting of
a Stock Option (as defined in Section 6.1 below).
2.3 "Board" means the Board of Directors of the Company, as
constituted from time to time.
2.4 "Cause" means (a) the commission of an act of fraud or
embezzlement, or the commission of any felony by a Participant; (b) willful
misconduct by a Participant that brings the Company, or any Subsidiary, or any
officer, director, employee or owner of the Company, its Parent or any
Subsidiary, into disrepute or causes material injury to the Company, its Parent
or any Subsidiary; (c) a Participant's breach of any confidentiality agreement
or any other contractual agreement with the Company, its Parent or any
Subsidiary, or the unauthorized disclosure or use of confidential or proprietary
information of the Company, its Parent or any Subsidiary; or (d) the willful and
continued failure of Participant to perform his or her duties other than such
failure resulting from the Participant's incapacity due to physical or mental
illness or injury.
2.5 "Code" means the Internal Revenue Code of 1986, as in effect and
as amended from time to time, or any successor statute thereto, together with
any rules, regulations and interpretations promulgated thereunder or with
respect thereto.
<PAGE>
-2-
2.6 "Committee" means the committee of the Board established from time
to time in the sole discretion of the Board to administer the Plan, as described
in Section 3 of the Plan.
2.7 "Common Stock" means the Common Stock, par value $.01 per share,
of the Company or any security of the Company issued by the Company in
substitution or exchange therefor.
2.8 "Company" means RightStart.com Inc., a Delaware corporation, or
any successor corporation to RightStart.com Inc.
2.9 "Disability" means any physical or mental disability which is
reasonably likely to prevent the Participant from performing the Participant's
assigned duties or responsibilities for the Company or any Subsidiary for more
than six months, as determined by the Board or the Committee in good faith.
2.10 "Fair Market Value" means on, or with respect to, any given
date(s), the fair market value of a share of Common Stock, as determined in good
faith by the Board in its sole discretion, using the most recent prior annual
valuation of the Company (as determined pursuant to Section 3.4 of the Plan) or
the price to be paid pursuant to a bona fide offer from a third party for a
share of Common Stock (in the case of any Merger Event).
2.11 "Incentive Stock Option" means any stock option granted pursuant
to the provisions of Section 6 of the Plan (and the relevant Award Agreement)
that is intended to be (and is specifically designated as) an "incentive stock
option" within the meaning of Section 422 of the Code.
2.12 "Merger Event" shall have the meaning assigned to such term in
Section 9.3.1 of this Plan.
2.13 "Non-Qualified Stock Option" means any stock option granted
pursuant to the provisions of Section 6 of the Plan (and the relevant Award
Agreement) that is not (and is specifically designated as not being) an
Incentive Stock Option.
2.14 "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations, including and ending with the Company, if each
of such corporations, other than the first corporation in the unbroken chain, is
majority owned by, directly or indirectly, one of the other corporations in such
chain.
2.15 "Participant" means any individual who is selected from time to
time under Sections 5 and 6 to receive an award under the Plan.
2.16 "Plan" means the RightStart.com Inc. 1999 Stock Option Plan, as
set forth herein and as in effect and as amended from time to time (together
with any rules and regulations promulgated by the Committee with respect
thereto).
<PAGE>
-3-
2.17 "Rule 701" means Rule 701 promulgated under the Securities Act of
1933, as amended or any successor law or regulation.
2.18 "Rule 701 Exemption" means an exemption from federal registration
under the Securities Act of 1933, as amended, pursuant to Rule 701.
2.19 "Subsidiary(ies)" means any corporation (other than the Company)
in an unbroken chain of corporations, including and beginning with the Company,
if each of such corporations, other than the last corporation in the unbroken
chain, owns, directly or indirectly, more than fifty percent (50%) of the voting
stock in one of the other corporations in such chain.
3. Administration.
--------------
3.1 General. The Plan shall be administered by the Board or a Committee
-------
of the Board, as determined by the Board in its sole discretion. The Committee
may be appointed from time to time by the Board and shall be comprised of not
less than two of the then members of the Board. Consistent with the Bylaws of
the Company, members of the Committee shall serve at the pleasure of the Board
and the Board, subject to the immediately preceding sentence, may at any time
and from time to time remove members from, or add members to, the Committee.
3.2 Plan Administration and Plan Rules. The Board or the Committee, is
----------------------------------
authorized to construe and interpret the Plan and to promulgate, amend and
rescind rules and regulations relating to the implementation and administration
of the Plan. Subject to the terms and conditions of the Plan, the Board or the
Committee shall make all determinations necessary or advisable for the
implementation and administration of the Plan including, without limitation, (a)
selecting the Plan's Participants, (b) making awards in such amounts and form as
the Board or the Committee shall determine, (c) imposing such restrictions,
terms and conditions upon such awards as the Board or the Committee shall deem
appropriate, and (d) correcting any technical defect(s) or technical
omission(s), or reconciling any technical inconsistency(ies), in the Plan and/or
any Award Agreement. The Board or the Committee may designate persons other than
members of the Board or the Committee to carry out the day-to-day ministerial
administration of the Plan under such conditions and limitations as it may
prescribe, except that the Board or the Committee shall not delegate its
authority with regard to the selection for participation in the Plan and/or the
granting of any awards to Participants. The Board's or the Committee's
determinations under the Plan need not be uniform and may be made selectively
among Participants, whether or not such Participants are similarly situated. Any
determination, decision or action of the Board or the Committee in connection
with the construction, interpretation, administration, or implementation of the
Plan shall be final, conclusive and binding upon all Participants and any
person(s) claiming under or through any Participants. The Company shall effect
the granting of awards under the Plan, in accordance with the determinations
made by the Board or the Committee, by execution of written agreements and/or
other instruments in such form as is approved by the Board or the Committee.
3.3 Liability Limitation. Neither the Board nor the Committee,
--------------------
nor any member of either, nor any officer of the Company, its Parent or its
Subsidiaries, if any, shall be
<PAGE>
-4-
liable for any act, omission, interpretation, construction or determination made
in good faith in connection with the Plan (or any Award Agreement), and the
members of the Board and the Committee and the officers of the Company, its
Parent and its Subsidiaries, if any, shall be entitled to indemnification and
reimbursement by the Company in respect of any claim, loss, damage or expense
(including, without limitation, attorneys' fees) arising or resulting therefrom
to the fullest extent permitted by law and/or under any directors and officers
liability insurance coverage which may be in effect from time to time.
3.4 Annual Valuation. An annual valuation of the Company shall be
----------------
performed in respect of each fiscal year of the Company during which awards are
granted or remain outstanding under the Plan. Such valuation shall be performed
by a valuation expert or an investment banking firm selected by the Board in
good faith. The final determination as to the annual valuation shall be made
solely by the Board in its sole discretion. The initial Fair Market Value of the
Company for purposes of initial option grants under the Plan shall be $0.45 per
share.
4. Term of Plan/Common Stock Subject to Plan.
-----------------------------------------
4.1 Term. The Plan shall terminate on July 12, 2009, except with
----
respect to awards then outstanding. After such date no further awards shall be
granted under the Plan.
4.2 Common Stock. The maximum number of shares of Common Stock in
------------
respect of which awards may be granted under the Plan, subject to adjustment as
provided in Section 9.2 of the Plan, shall not exceed 1,818,000 shares of Common
Stock; provided, however, that no more than fifteen percent (15%) of the
-------- -------
outstanding number of shares of Common Stock on the date the Plan is approved by
the Board (or such larger percentage permitted by Rule 701) shall be issued
under a Rule 701 Exemption. In the event of a change in the Common Stock of the
Company that is limited to a change in the designation thereof to "Capital
Stock" or other similar designation, or to a change in the par value thereof, or
from par value to no par value, without increase or decrease in the number of
issued shares, the shares resulting from any such change shall be deemed to be
the Common Stock for purposes of the Plan. Common Stock which may be issued
under the Plan may be either authorized and unissued shares or issued shares
which have been reacquired by the Company (in the open-market or in private
transactions) and which are being held as treasury shares. No fractional shares
of Common Stock shall be issued under the Plan.
5. Eligibility. Individuals eligible for awards under the Plan shall
-----------
consist of (i) all employees, directors and consultants, or those who will
become such employees, directors or consultants of the Company, its Parent or
any Subsidiary and (ii) directors of the Company, who are responsible for the
management, growth and protection of the business of the Company and/or its
Subsidiaries or whose performance or contribution, in the sole discretion of the
Board or the Committee benefits or will benefit the Company or any Subsidiary.
<PAGE>
-5-
6. Stock Options.
-------------
6.1 Terms and Conditions. Stock options granted under the Plan shall
--------------------
be in respect of Common Stock and may be in the form of Incentive Stock Options
or Non-Qualified Stock Options (sometimes referred to collectively herein as the
"Stock Option(s)"); provided, however, that non-employee directors of the
-------- -------
Company shall not be eligible to receive Incentive Stock Options under the Plan.
Such Stock Options shall be subject to the terms and conditions set forth in
this Section 6 and any additional terms and conditions, not inconsistent with
the express terms and provisions of the Plan, as the Board or the Committee
shall set forth in the relevant Award Agreement.
6.2 Grant. Stock Options may be granted under the Plan in such form as
-----
the Board or the Committee may from time to time approve; provided, however,
-------- -------
that non-employee directors of the Company shall not be eligible to receive
Incentive Stock Options under the Plan. Special provisions shall apply to
Incentive Stock Options granted to any employee who owns (within the meaning of
Section 422(b)(6) of the Code) more than ten percent of the total combined
voting power of all classes of stock of the Company or its parent corporation or
any Subsidiary of the Company, within the meaning of Sections 424(e) and (f) of
the Code (a "10% Shareholder").
6.3 Exercise Price. The exercise price per share of Common Stock
---------------
subject to an Incentive Stock Option shall not be less than one hundred percent
(100%) of the Fair Market Value of the Common Stock on the date of the grant of
such Stock Option; provided, however, that, in the case of a 10% Shareholder,
-------- -------
the exercise price of an Incentive Stock Option shall not be less than 110% of
the Fair Market Value of the Common Stock on the date of grant.
6.4 Term. The term of each Stock Option shall expire not more than ten
----
years (five years, in the case of an Incentive Stock Option granted to a 10%
Shareholder) after the date immediately preceding the date on which the Stock
Option is granted.
6.5 Method of Exercise. A Stock Option may be exercised, in whole or
------------------
in part, by giving written notice of exercise to the Secretary of the Company
specifying the number of shares to be purchased. Such notice shall be
accompanied by payment in full of the exercise price in cash, by certified
check, bank draft or money order payable to the order of the Company. Payment
instruments shall be received by the Company subject to collection. The proceeds
received by the Company upon exercise of any Stock Option may be used by the
Company for general corporate purposes. Any portion of a Stock Option that is
exercised may not be exercised again.
6.6 Exercisability. In respect of any Stock Option granted under the
--------------
Plan, unless otherwise provided in the Participant's Award Agreement or in the
Participant's employment agreement in respect of any such Stock Option, such
Stock Option shall become exercisable as to the aggregate number of shares of
Common Stock underlying such Stock Option as follows:
<PAGE>
-6-
11.5.1 on the first anniversary of the date of grant of the
Stock Option, one-fourth of the shares of Common Stock underlying such
Stock Option shall become exercisable; and
11.5.2 thereafter, the remaining unvested Common Stock
underlying such Stock Option shall become exercisable in thirty-six
(36) equal monthly installments.
Notwithstanding the foregoing, such vesting shall continue to occur only if the
Participant is then employed by the Company, its Parent and/or one of its
Subsidiaries.
Notwithstanding anything to the contrary contained in this Section 6.6, any such
Stock Option shall become one hundred percent (100%) exercisable, in accordance
with Section 9.3 below, as to the aggregate number of shares of Common Stock
underlying such Stock Option upon the occurrence of a Merger Event (as defined
in Section 9.3.1 below).
11 Termination of Employment.
-------------------------
7.1 General. If a Participant's employment with the Company, its
-------
Parent or any Subsidiary terminates for any reason, any then unexercisable Stock
Options shall be forfeited and canceled by the Company, except as otherwise
provided in the Participant's Award Agreement or in the Participant's Employment
Agreement.
7.2 For Cause. If a Participant's employment with the Company, its
---------
Parent or any Subsidiary or service as a director of Company is terminated for
Cause, such Participant's rights, if any, to exercise any then exercisable Stock
Options shall terminate on the date of such termination for Cause and such Stock
Options shall be forfeited and canceled by the Company, except as otherwise
provided in the Participant's Award Agreement or in the Participant's Employment
Agreement.
7.3 Voluntary Termination. If a Participant voluntarily terminates
---------------------
employment with the Company, its Parent or any Subsidiary or service as a
director of the Company (other than a termination due to death or Disability),
such Participant's rights, if any, to exercise any then exercisable Stock
Options shall terminate thirty days after the date of such voluntary termination
(but not beyond the stated term of any such Stock Option as determined under
Section 6.4) and thereafter such Stock Options shall be forfeited and canceled
by the Company, except as otherwise provided in the Participant's Award
Agreement or in the Participant's Employment Agreement.
7.4 Death/Disability. If a Participant's employment with the
----------------
Company, its Parent or any Subsidiary or service as a director of the Company is
terminated due to death or Disability, such Participant's Stock Options shall
immediately become one hundred percent (100%) exercisable (regardless of the
exercisability or vesting schedule set forth in the Award Agreement or the Plan
relating to such Stock Options) and such Participant (and such Participant's
estate, designated beneficiary or other legal representative, as the case may be
and as determined by the Board or the Committee) shall have the right to
exercise such Participant's
<PAGE>
-7-
Stock Options at any time within the one-year period following such termination
due to death or Disability (but not beyond the term of any such Stock Option as
determined under Section 6.4) and thereafter such Stock Options shall be
forfeited and canceled by the Company, except as otherwise provided in the
Participant's Award Agreement or in the Participant's Employment Agreement.
7.5 Without Cause. If a Participant's employment with the Company,
-------------
its Parent or any Subsidiary or service as a director of the Company is
terminated without Cause, such Participant's rights, if any, to exercise any
then exercisable Stock Options shall terminate ninety days after the date of
such termination (but not beyond the stated term of any such Stock Options as
determined under Section 6.4) and thereafter such Stock Options shall be
forfeited and canceled by the Company, except as otherwise provided in the
Participant's Award Agreement or in the Participant's Employment Agreement.
7.6 Board or Committee Discretion. The Board or the Committee, in
-----------------------------
their sole discretion, may determine that any Participant's Stock Options, to
the extent exercisable immediately prior to any termination of employment or as
a result thereof, may remain exercisable for an additional specified time period
after the period specified above in this Section 7 expires (subject to any other
applicable terms and provisions of the Plan and the relevant Award Agreement),
but not beyond the stated term of any such Stock Option.
11 Non-transferability of Awards.
-----------------------------
11.5 Stock Options. Unless otherwise provided in the Participant's
--------------
Award Agreement, no award under the Plan or any Award Agreement, and no rights
or interests herein or therein, shall or may be assigned, transferred, sold,
exchanged, encumbered, pledged, or otherwise hypothecated or disposed of by a
Participant or any beneficiary(ies) of any Participant, except by testamentary
disposition by the Participant or pursuant to the laws of intestate succession.
No such interest shall be subject to execution, attachment or similar legal
process, including, without limitation, seizure for the payment of the
Participant's debts, judgments, alimony, or separate maintenance. During the
lifetime of a Participant, Stock Options are exercisable only by the
Participant.
11.6 Shares of Common Stock. No voluntary or involuntary sale,
----------------------
transfer, pledge, encumbrance or other disposition or hypothecation of shares of
the Company after issuance thereof to the Participant (or of any shares
subsequently issued in respect of such shares, whether as a stock dividend or
otherwise), shall or may, prior to the occurrence of the Initial Public Offering
(as defined below), be made or suffered by the Participant or such Participant's
estate, designated beneficiary or other legal representative, other than by the
Participant to a trust for the sole benefit of the Participant's Immediate
Family (as defined below); provided, however, that any such trust shall be
-------- -------
subject to the restrictions set forth in the Plan. For purposes of the Plan, (a)
"Initial Public Offering" means the sale in a public offering by the Company of
its ordinary common shares representing not less than ten percent (10%) of its
outstanding ordinary shares (after giving effect to such offering), and (b)
"Immediate Family" means the Participant's spouse and/or lineal descendants
(including without limitation legally adopted children).
<PAGE>
-8-
8.3 Purchase Right.
--------------
8.3.1 If, prior to the occurrence of the Initial Public
Offering, a Participant terminates employment with the Company, its Parent or
any Subsidiary for any reason, all shares of the Common Stock acquired by such
Participant upon the exercise of any Stock Options under the Plan or otherwise
are subject, at the election of the Company, to purchase by the Company at a per
share price equal to their then Fair Market Value (the "Purchase Right"). If the
Company elects to exercise such Purchase Right, the Company must make such
election within 60 days after any such Participant terminates employment with
the Company, its Parent or any Subsidiary (or, in the case of securities issued
upon exercise of Stock Options after the date of a Participant's termination of
employment, within 60 days after the date of exercise). If the Company elects in
a timely fashion to exercise the Purchase Right hereunder to purchase such
shares from the terminated Participant, the Company shall notify the Participant
in writing of its intention to do so (the "Purchase Notice") and shall set forth
in the Purchase Notice the aggregate purchase price payable to such Participant,
as determined in accordance with this Section 8.3. Such aggregate purchase price
shall be payable in accordance with the following three sentences. No later than
30 days after the date on which the Company notifies the Participant of its
election to exercise its Purchase Right (the "Election Date"), the Company shall
pay to such Participant, without interest, the aggregate purchase price payable
by the Company to purchase the shares of Common Stock pursuant to the Purchase
Right; provided, however, that if the aggregate purchase price payable by the
-------- -------
Company to purchase the shares of Common Stock pursuant to the Purchase Right
exceeds the aggregate exercise price paid by such Participant to acquire such
shares, but is less than $1,000,000, the Company shall pay the total aggregate
purchase price to the Participant in a lump sum within 30 days after the
Election Date. If the remaining aggregate purchase price payable, if any, equals
or exceeds $1,000,000, the Company may elect to pay such remaining purchase
price in excess of $1,000,000 to such Participant in two substantially equal
annual installments due and payable, bearing simple interest at then prevailing
rates, on the first and second anniversaries, respectively, of the Election
Date. The Company may prepay any such installments, in whole or in part, at any
time without penalty or premium.
8.3.2 The Purchase Notice shall specify the place, time and date
for the delivery of the shares of the Common Stock which are the subject of the
Purchase Notice. Such delivery shall take place at the principal executive
offices of the Company during normal business hours on a business day not fewer
than 15 nor more than 90 calendar days after delivery of the Purchase Notice. At
the place, time, and date so specified, the Participant (or his or her estate,
designated beneficiary or legal representative, as the case may be) shall
deliver certificates for such shares of the Common Stock, duly endorsed for
transfer, along with such other instruments of transfer pertaining to such
shares as may be reasonably required by the Board or the Committee.
8.3.3 If a Participant (o his or her estate, designated
beneficiary or legal representative, as the case may be) is obligated to sell
any shares of the Common Stock to the Company pursuant to the Purchase Right,
and such Participant fails to deliver the certificate(s) or otherwise comply
with the terms of this Section 8.3, the Company, upon delivery to such
Participant of payment therefor in accordance with this Section 8.3, shall
transfer on its records
<PAGE>
-9-
the certificate(s) representing such shares of the Common Stock required to be
sold pursuant to this Section 8.3 and such shares shall thereupon cease to be
held for any purpose by such Participant. Thereupon all of the rights of such
Participant in and to such shares shall be deemed transferred to the Company and
the Company may thereupon cancel the certificate(s) representing such shares.
8.4 Lock-Up. No shares of the Common Stock may be sold,
-------
transferred pledged or otherwise disposed of or hypothecated in violation of or
contrary to any restrictions imposed on such sales or transfers by any
underwriters in connection with the offering for sale of any capital stock or
other security of the Company. All Participants receiving Stock Options
<PAGE>
-10-
under the Plan shall promptly execute all lock-up agreements or letters required
by any such underwriters upon the Company's request.
9. Changes in Capitalization and Other Matters.
-------------------------------------------
9.1 No Corporate Action Restriction. The existence of the Plan, any
-------------------------------
Award Agreement and/or the awards granted hereunder shall not limit, affect or
restrict in any way the right or power of the Board or the shareholders of the
Company to make or authorize (a) any adjustment, recapitalization,
reorganization or other change in the Company's, its Parent's or any
Subsidiary's capital structure or its business, (b) any merger, consolidation or
change in the ownership of the Company, its Parent or any Subsidiary (other than
the effect of a Merger Event as set forth in Section 6.6 hereof), (c) any issue
of bonds, debentures, capital, preferred or prior preference stocks ahead of or
affecting the Company's, its Parent's or any Subsidiary's capital stock or the
rights thereof, (d) any dissolution or liquidation of the Company, its Parent or
any Subsidiary, (e) any sale or transfer of all or any part of the Company's,
its Parent's or any Subsidiary's assets or business, or (f) any other corporate
act or proceeding by the Company, its Parent or any Subsidiary. No Participant,
beneficiary or any other person shall have any claim against any member of the
Board or the Committee, the Company, its Parent or any Subsidiary, or any
employees, officers or agents of the Company, its Parent or any Subsidiary, as a
result of any such action.
9.2 Recapitalization Adjustments. In the event of any change in
----------------------------
capitalization affecting the Common Stock of the Company, including, without
limitation, a stock dividend or other distribution, stock split, reverse stock
split, recapitalization, consolidation, subdivision, split-up, spin-off, split-
off, combination or exchange of shares or other form of reorganization or
recapitalization, or any other change affecting the Common Stock, the Board or
the Committee shall authorize and make such proportionate adjustments to reflect
such change in order to preserve (but not to increase) the benefits to holders
of Stock Options, including, without limitation, with respect to the aggregate
number of shares of the Common Stock for which awards in respect thereof may be
granted under the Plan, the number of shares of the Common Stock covered by each
outstanding award, and the exercise price per share of Common Stock in respect
of outstanding awards.
9.3 Mergers.
-------
9.3.1 If the Company enters into or is involved in any Merger
Event, a Participant's Stock Options shall immediately become one hundred
percent (100%) exercisable (regardless of the exercisability or vesting schedule
set forth in the Award Agreement or the Plan relating to such Stock Options) and
such Participant, at his or her option, shall be entitled (a) to exercise his or
her Stock Options and participate in the Merger Event at the same price and on
substantially the same terms and conditions as the Company or (b) to receive
substitute stock options, if applicable, in respect of the shares of the
surviving corporation on such terms and conditions, as to the number of shares,
pricing and otherwise, which shall substantially preserve the value, rights and
benefits of any affected Stock Options granted hereunder as of the date of
<PAGE>
-11-
the consummation of the Merger Event. For purposes of this Plan and any Award
Agreement relating to a Stock Option granted hereunder, a "Merger Event" means
(i) a merger, reorganization or other business combination with, or a sale of
all or substantially all of the assets of the Company to, any person or entity
other than an Affiliate, or (ii) during any consecutive twelve (12) -month
period, individuals who at the beginning of such period constituted the
Company's Board (together with any replacement directors whose appointment by
the Company's Board, or whose nomination for election by the Company's
stockholders, was approved by a vote of at least a majority of the directors
then still in office either who were directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the directors then in office.
9.3.2 Upon receipt by any affected Participant of any such
substitute stock options as a result of any such Merger Event, such
Participant's affected Stock Options for which such substitute options were
received shall be thereupon cancelled without the need for obtaining the consent
of any such affected Participant.
9.3.3 The foregoing adjustments and the manner of application of
the foregoing provisions, including, without limitation, the issuance of any
substitute stock options, shall be determined in good faith by the Board or the
Committee in its sole discretion. Any such adjustment may provide for the
elimination of fractional shares.
11.5 Drag-Along Rights.
-----------------
9.4.1 If, prior to the occurrence of an Initial Public Offering,
the Right Start (the "Drag Shareholder") desires to sell all or substantially
all of the then outstanding shares of the Common Stock beneficially or legally
owned by the Right Start to any third party, other than an Affiliate, at which
time the Right Start owns at least fifty percent (50%), on a fully diluted
basis, of the Company's voting securities (a "Drag Sale"), then, if requested or
required by any such third party purchaser, each Participant or such
Participant's permitted transferee under Section 8.2 of the Plan, estate,
designated beneficiary or other legal representative, who has acquired Common
Stock pursuant to the exercise of Stock Options granted under the Plan or
otherwise (the "Drag Seller"), shall sell all such shares of Common Stock, and
all shares issued in respect of such shares, whether as a stock dividend or
otherwise, to such third party purchaser, in accordance with the terms and
provisions of this Section 9.4. All shares of Common Stock sold or transferred
pursuant to this Section 9.4.1 shall be sold at the same price and upon the same
terms and conditions as the shares of Common Stock being sold by the Right
Start.
9.4.2 The Company shall give each Drag Seller at least 15 days
prior written notice of any Drag Sale, containing a description of all material
terms and conditions of such Drag Sale. In connection with any Drag Sale, each
Drag Seller shall take such actions as may be reasonably required by the Drag
Shareholder and shall otherwise cooperate in good faith with the Drag
Shareholder. At the closing of a Drag Sale, each Drag Seller shall deliver to
the purchaser the certificates for all shares of the Common Stock being sold or
transferred by such Drag Seller, duly endorsed for transfer, against payment of
the appropriate purchase price.
<PAGE>
-12-
9.4.3 Upon consummation of a Drag Sale, if a Drag Seller has not
delivered his or her certificates, as contemplated by this Section 9.4, such
Drag Seller shall no longer be considered a shareholder of the Company, and such
Drag Seller's sole rights shall be to receive the consideration receivable in
connection with such Drag Sale upon delivery of the certificates held by such
Drag Seller, as contemplated by Section 9.4.2.
10. Amendment, Suspension and Termination.
-------------------------------------
10.1 In General. The Board may suspend or terminate the Plan (or any
----------
portion thereof) at any time and may amend the Plan at any time and from time to
time in such respects as the Board may deem advisable or in the best interests
of the Company, its Parent or any Subsidiary. No such amendment, suspension or
termination shall (a) materially adversely affect the rights of any Participant
under any outstanding Stock Options, without the consent of such Participant, or
(b) make any change that would disqualify the Plan, or any other plan of the
Company or any Subsidiary intended to be so qualified, from the benefits
provided under Section 422 of the Code, or any successor provisions thereto.
10.2 Award Agreement Modifications. The Board or the Committee may
-----------------------------
(in their sole discretion) amend or modify at any time and from time to time the
terms and provisions of any outstanding Stock Options in any manner to the
extent that the Board or the Committee under the Plan or any Award Agreement
could have initially determined the restrictions, terms and provisions of such
Stock Options, including, without limitation, changing or accelerating the date
or dates as of which such Stock Options shall become exercisable. No such
amendment or modification shall, however, materially adversely affect the rights
of any Participant under any such award without the consent of such Participant.
11. Miscellaneous.
-------------
11.1 Tax Withholding. The Company shall have the right to deduct
----------------
from any payment or settlement under the Plan, including, without limitation,
the exercise of any Stock Option, any federal, state, local, foreign or other
taxes of any kind which the Board or the Committee, in their sole discretion,
deems necessary to be withheld to comply with the Code and/or any other
applicable law, rule or regulation.
11.2 No Right to Employment. Neither the adoption of the Plan, the
----------------------
granting of any award, nor the execution of any Award Agreement, shall confer
upon any employee of the Company, its Parent or any Subsidiary any right to
continued employment with the Company, its Parent or any Subsidiary, as the case
may be, nor shall it interfere in any way with the right, if any, of the
Company, its Parent or any Subsidiary to terminate the employment of any
employee at any time for any reason.
11.3 Unfunded Plan. The Plan shall be unfunded and the Company shall
-------------
not be required to segregate any assets in connection with any awards under the
Plan. Any liability of the Company to any person with respect to any award under
the Plan or any Award Agreement shall be based solely upon the contractual
obligations that may be created as a result of the Plan
<PAGE>
-13-
or any such award or agreement. No such obligation of the Company shall be
deemed to be secured by any pledge of, encumbrance on, or other interest in, any
property or asset of the Company or any Subsidiary. Nothing contained in the
Plan or any Award Agreement shall be construed as creating in respect of any
Participant (or beneficiary thereof or any other person) any equity or other
interest of any kind in any assets of the Company or any Subsidiary or creating
a trust of any kind or a fiduciary relationship of any kind between the Company,
its Parent, any Subsidiary and/or any such Participant, any beneficiary thereof
or any other person.
11.4 Listing, Registration and Other Legal Compliance. No
------------------------------------------------
awards or shares of the Common Stock shall be required to be issued or granted
under the Plan unless legal counsel for the Company shall be satisfied that such
issuance or grant will be in compliance with all applicable securities laws and
regulations and any other applicable laws or regulations, including, without
limitation, Section 260.140.45 of the Rules promulgated under the California
Corporate Securities Law of 1968. The Board or the Committee may require, as a
condition of any payment or share issuance, that certain agreements,
undertakings, representations, certificates, and/or information, as the Board or
the Committee may deem necessary or advisable, be executed or provided to the
Company to assure compliance with all such applicable laws or regulations.
Certificates for shares of Common Stock delivered under the Plan may bear
appropriate legends and may be subject to such stock-transfer orders and such
other restrictions as the Board or the Committee may deem advisable under the
rules, regulations, or other requirements of the Securities and Exchange
Commission, any stock exchange upon which the Common Stock is listed, and any
applicable securities law. In addition, if, at any time specified herein (or in
any Award Agreement or otherwise) for (a) the making of any award, or the making
of any determination, (b) the issuance or other distribution of Common Stock, or
(c) the payment of amounts to or through a Participant with respect to any
award, any law, rule, regulation or other requirement of any governmental
authority or agency shall require either the Company, its Parent, any Subsidiary
or any Participant (or any estate, designated beneficiary or other legal
representative thereof) to take any action in connection with any such
determination, any such shares to be issued or distributed, any such payment, or
the making of any such determination, as the case may be, shall be deferred
until such required action is taken.
11.5 Award Agreements. Each Participant receiving an award
----------------
under the Plan shall enter into an Award Agreement with the Company in a form
specified by the Board or the Committee. Each such Participant shall agree to
the restrictions, terms and conditions of the award set forth therein and in the
Plan.
11.6 Financial Information. Each Participant receiving an award
---------------------
under the Plan shall be provided with the Company's annual unaudited financial
statements. Such unaudited financial statements shall be provided promptly after
their preparation after the Company's fiscal year end; provided, that each
Participant shall be provided with unaudited financial statements of the Company
at least once annually.
11.7 Designation of Beneficiary. Each Participant to whom an
--------------------------
award has been made under the Plan may designate a beneficiary or beneficiaries
to exercise any option or to receive any payment which under the terms of the
Plan and the relevant Award Agreement may become exercisable or payable on or
after the Participant's death. At any time, and from time to
<PAGE>
-14-
time, any such designation may be changed or cancelled by the Participant
without the consent of any such beneficiary. Any such designation, change or
cancellation must be on a form provided for that purpose by the Board or the
Committee and shall not be effective until received by the Board or the
Committee. If no beneficiary has been designated by a deceased Participant, or
if the designated beneficiaries have predeceased the Participant, the
beneficiary shall be the Participant's estate. If the Participant designates
more than one beneficiary, any payments under the Plan to such beneficiaries
shall be made in equal shares unless the Participant has expressly designated
otherwise, in which case the payments shall be made in the shares designated by
the Participant.
11.8 Leaves of Absence/Transfers. The Board or the Committee
---------------------------
shall have the power to promulgate rules and regulations and to make
determinations, as it deems appropriate, under the Plan in respect of any leave
of absence from the Company, its Parent or any Subsidiary granted to a
Participant. Without limiting the generality of the foregoing, the Board or the
Committee may determine whether any such leave of absence shall be treated as if
the Participant has terminated employment with the Company, its Parent or any
such Subsidiary. If a Participant transfers within the Company, or to or from
its Parent or any Subsidiary, such Participant shall not be deemed to have
terminated employment as a result of such transfers.
11.9 Governing Law. The Plan and all actions taken thereunder
-------------
shall be governed by and construed in accordance with the laws of the State of
California, without reference to the principles of conflict of laws thereof. Any
titles and headings herein are for reference purposes only, and shall in no way
limit, define or otherwise affect the meaning, construction or interpretation of
any provisions of the Plan.
11.10 Effective Date. The Plan shall be effective upon its
--------------
approval by the Board and adoption by the Company, subject to the approval of
the Plan by the Company's shareholders in accordance with Section 422 of the
Code.
<PAGE>
-15-
IN WITNESS WHEREOF, this Plan is adopted by the Company on
this 10th day of April, 1999.
RIGHTSTART.COM INC.
By: /s/ Jerry R. Welch
---------------------------------
Name: Jerry R. Welch
Title: Chief Executive Officer
and President
By: /s/ Gina M. Engelhard
----------------------------------
Name: Gina M. Engelhard
Title: Secretary and Chief
Financial Officer
<PAGE>
EXHIBIT 10.36
SUBSCRIPTION AGREEMENT
This Subscription Agreement (this "Agreement") is made as of July 9,
1999, by and between RightStart.com Inc., a Delaware corporation (the
"Company"), and Jonathan Davidson (the "Investor").
The parties hereto agree as follows:
1. Purchase and Sale of Securities.
-------------------------------
(a) Authorization of Issuance. The Company's Board of Directors (the
-------------------------
"Board") has authorized the issuance and sale to the Investors (as defined
below) of warrants, substantially in the form attached hereto as Exhibit A (the
"Warrants"), to purchase an aggregate of 182,000 shares of common stock, par
value $.01 per share of the Company (the "Common Stock"). The Warrants are to be
issued to each of James W. Montgomery, Kim Enterprises, L.L.C., Jonathan
Davidson, Michael Holton, David P. Michaels, and David A. Burns (the
"Investors"). Each Investor shall enter into a separate Agreement substantially
in this form that will provide the number of Warrant shares to be granted to
such Investor. Such Warrants are being issued pursuant to the Financing
Representation Agreement, dated February 4, 1999, by and between CEA Montgomery
Media, L.L.C. ("CEAM") and The Right Start, Inc. ("Parent") , a copy of which
has been attached hereto as Exhibit B (the "Engagement Letter"), in
consideration for the services provided by CEAM to the Company and its Parent
set forth in the Engagement Letter.
(b) Purchase and Sale. Subject to the terms and conditions set forth
-----------------
in this Agreement, including the covenants contained in this paragraph, the
Investor agrees to purchase, and the Company agrees to issue and sell to the
Investor, a Warrant to purchase that number of shares of Common Stock set forth
opposite the Investor's name on the signature pages hereof.
(c) Investor Representation and Warranties. In connection with the
--------------------------------------
purchase and sale of the Common Stock, the Investor represents and warrants to
the Company that:
(i) the Common Stock to be acquired by the Investor pursuant to
this Agreement will be acquired for the Investor's own accounts and not
with a view to, or intention of, distribution thereof in violation of the
Securities Act of 1933, as amended (the "Securities Act"), or any
applicable state securities laws, and the Common Stock will not be disposed
of in contravention of the Securities Act or any applicable state
securities laws;
(ii) the Investor is familiar with the term "accredited
investor" as defined in Rule 501 under the Securities Act and the Investor
is an "accredited investor" within the meaning of such term in Rule 501
under the Securities Act;
(iii) the Investor is sophisticated in financial matters and is
able to evaluate the risks and benefits of the investment in the Common
Stock;
<PAGE>
(iv) the Investor is able to bear the economic risk of his or
her investment in the Common Stock for an indefinite period of time because
the Common Stock (A) has not been registered under the Securities Act and,
therefore, cannot be sold unless subsequently registered under the
Securities Act or an exemption from such registration is available and (B)
is subject to additional restrictions as provided herein;
(v) the Investor has had an opportunity to ask questions and
receive answers concerning the terms and conditions of the offering of the
Common Stock and has had full access to such other information concerning
the Company as he or she has requested; and
(vi) this Agreement constitutes the legal, valid and binding
obligation of the Investor, enforceable in accordance with its terms, and
the execution, delivery and performance of this Agreement by the Investor
does not and will not conflict with, violate or cause a breach of any
agreement, contract or instrument to which the Investor is party or any
judgment, order or decree to which the Investor is subject which would have
a material adverse effect on the Investor or the Company.
2. Registration Rights.
-------------------
(a) Demand Registration. If the Company shall receive at any
--------------------
time after its initial firm-commitment public offering (so long as such request
is not within 180 days after the effective date of a registration statement
filed by the Company covering an underwritten offering of an of its securities
to the public) a written request from Sellers holding at least 100,000 shares of
Common Stock issued or to be issued upon exercise of any Warrants ("Warrant
Stock") that the Company file a registration statement for its Common Stock,
then the Company shall use its best efforts to effect such registration, on Form
S-3 or successor form replacing Form S-3, if practicable, as would permit or
facilitate the sale and distribution of all or such portion of such Warrant
Stock as is specified in such request. For purposes of this Agreement, the term
"Seller" or "Sellers" shall mean a holder of Restricted Securities of the
Company for which the Company shall be required to file a registration statement
or which shall be registered under the Securities Act at the request of such
holder pursuant to the provisions of this Section 2. Neither the Company nor any
of its Affiliates (as defined in the Warrants) shall be deemed a "Seller" for
any purposes of this Agreement.
If the managing underwriter for the respective offering, if any,
advises the Company in writing that the inclusion in such registration of some
or all of the Warrant Stock sought to be registered by the Seller or Sellers in
its opinion will cause the proceeds or the price per unit the Company or the
requesting or demanding holder of securities will derive from such registration
to be reduced or that the number of securities to be registered at the instance
of the Company or such requesting or demanding holder plus the number of
securities sought to be registered by the Sellers is too large a number to be
reasonably sold, the number of securities sought to be registered for each
Seller shall be reduced pro rata, in proportion to the number of securities
sought to be registered by all Sellers, to the extent necessary to reduce the
number of securities to be registered to the number recommended by the managing
underwriter (the
2
<PAGE>
"Recommended Number"), subject at all times to those registration rights granted
to certain holders of the Company's securities set forth in the Investors'
Rights Agreement dated July 9, 1999 between the Company and the investors listed
therein.
(b) Incidental Registration. If the Company at any time proposes to
-----------------------
register any of its securities under the Securities Act on Form S-1, S-2 or S-3
or the equivalent (otherwise than to register debt securities under Form S-3, or
any comparable successor form), whether of its own accord or at the request of
any holder or holders of such securities, it will each such time give written
notice to all holders of outstanding Restricted Securities of its intention so
to do. For purposes of this Agreement, the term "Restricted Securities" shall
mean all Warrants and Warrant Stock that bear the restrictive legend set forth
in Section 9.3 of the Warrants.
Upon the written request of a holder or holders of any such Restricted
Securities given within 30 days after receipt of any such notice, the Company
will use its best efforts to cause all Restricted Securities, the holder or
holders of which shall have so requested registration thereof, to be registered
under the Securities Act pursuant to such registration statement, all to the
extent requisite to permit the sale or other disposition (in accordance with the
intended methods thereof as aforesaid) by the prospective Seller or Sellers of
the Restricted Securities so registered.
If the managing underwriter for the respective offering, if any,
advises the Company in writing that the inclusion in such registration of some
or all of the Restricted Securities sought to be registered by the Seller or
Sellers in its opinion will cause the proceeds or the price per unit the Company
or the requesting or demanding holder of securities will derive from such
registration to be reduced or that the number of securities to be registered at
the instance of the Company or such requesting or demanding holder plus the
number of securities sought to be registered by the Sellers is too large a
number to be reasonably sold, the number of securities sought to be registered
for each Seller shall be reduced pro rata, in proportion to the number of
securities sought to be registered by all Sellers, to the extent necessary to
reduce the number of securities to be registered to the Recommended Number,
subject at all times to those registration rights granted to certain holders of
the Company's securities set forth in the Investors' Rights Agreement dated July
9, 1999 between the Company and the investors listed therein.
(c) Registration Procedures.
-----------------------
(i) If and whenever the Company is required by the provisions of
this Section 2 to use its best efforts to effect the registration of
any of the Restricted Securities under the Securities Act, the Company
will (except as otherwise provided in this Agreement), as
expeditiously as possible,
(A) cooperate with any underwriters for, and the Sellers
of, such Restricted Securities, and will enter into a usual and
customary underwriting agreement with respect thereto (provided that
the Company shall not be required to enter into more than two such
underwriting agreements (one for a domestic
3
<PAGE>
offering and one for an international offering) in connection with any
such registration) and take all such other reasonable actions as are
necessary or advisable to permit, expedite and facilitate the
disposition of such Restricted Securities in the manner contemplated
by the related registration statement, in each case to the same extent
as if all the securities then being offered were for the account of
the Company, and the Company will provide to any Seller of Restricted
Securities, any underwriter participating in any distribution thereof
pursuant to a registration statement, and any attorney, accountant or
other agent retained by any Seller or underwriter, reasonable access
to appropriate Company officers and employees to answer questions and
to supply information reasonably requested by any such Seller,
underwriter, attorney, accountant or agent in connection with such
registration statement;
(B) furnish or cause to be furnished to each Seller of
Restricted Securities covered by such registration statement,
addressed to such Sellers, a copy of the opinion of counsel for the
Company, and a copy of the "comfort" letter signed by the independent
public accountants who have certified the Company's financial
statements included in the registration statement, delivered on the
closing date to the underwriters of such Restricted Securities;
(C) prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to
cause such registration statement to become and remain effective; and
prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the Securities Act with
respect to the sale or other disposition of all securities covered by
such registration statement whenever the Seller or Sellers of such
securities shall desire to sell or otherwise dispose of the same;
provided that no such registration statement will be filed by the
Company until counsel for the Sellers of securities included therein
shall have had a reasonable opportunity to review the same and to
exercise their rights under clause (A) above with respect thereto and
no amendment to any such registration statement naming such Sellers as
selling shareholders shall be filed with the Commission until such
Sellers shall have had at least seven days to review such registration
statement as originally filed and theretofore amended and to exercise
their rights under clause (A) above;
(D) furnish to each Seller such numbers of
copies of a summary prospectus or other prospectus, including a
preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents, as such Seller may
reasonably request in order to facilitate the public sale or other
disposition of the securities owned by such Seller;
(E) use its best efforts to register or
qualify the securities covered by such registration statement under
such other securities or blue sky laws of such
4
<PAGE>
jurisdictions as each Seller shall request, and do any and all other
acts and things which may be necessary or advisable to enable such
Seller to consummate the public sale or other disposition in such
jurisdictions of the securities owned by such Seller, except that the
Company shall not for any such purpose be required to qualify to do
business as a foreign corporation in any jurisdiction wherein it is
not so qualified or to file therein any general consent to service;
(F) in the event of the issuance of any stop order
suspending the effectiveness of any registration statement or of any
order suspending or preventing the use of any prospectus or suspending
the qualification of any Restricted Securities for sale in any
jurisdiction, use its best efforts promptly to obtain its withdrawal;
(G) in the event any prospectus used in connection with
the distribution of Restricted Securities registered under the
Securities Act pursuant to the provisions of this Section 2 is
discovered to contain any untrue statement of any material fact or any
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
promptly provide each Holder that shall have requested registration of
Restricted Securities with amended prospectuses correcting such
statements;
(H) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission; and
(I) list such securities on any securities exchange on
which any stock of the Company is then listed, if the listing of such
securities is then permitted under the rules of such exchange;
provided, however, that notwithstanding any other provision of this
-------- -------
Section 2, the Company shall not be required to maintain the
effectiveness of any registration statement for a period in excess of
one year (plus any period during which the effectiveness of such
----
registration has been suspended). From time to time after a transfer
of Warrants or Warrant Stock pursuant to a registration statement the
Company will file all reports required to be filed by it under the
Securities Act, the Exchange Act and the rules and regulations adopted
by the Securities and Exchange Commission thereunder, and will take
such further action as any holder or holders of Restricted Securities
may reasonably request, all to the extent required to enable such
holders to sell Restricted Securities pursuant to such laws and
regulations thereunder. Upon written request, the Company will deliver
to such holders a written statement as to whether it has complied with
such requirements.
(ii) In connection with the registration of Restricted
Securities under the Securities Act pursuant to the provisions of this
Section 2, each holder of Restricted Securities requesting such
registration will (except as otherwise provided in this Agreement), as
expeditiously as possible,
5
<PAGE>
(A) in the event of the issuance of any stop order
suspending the effectiveness of any registration statement or of any
order suspending or preventing the use of any prospectus or suspending
the qualification of any Restricted Securities for sale in any
jurisdiction, use its best efforts promptly to discontinue the
disposition of such Restricted Securities owned by such holder in such
jurisdiction until such order has been withdrawn; and
(B) in the event any prospectus used in connection with
the distribution of Restricted Securities registered under the
Securities Act pursuant to the provisions of this Section 2 is
discovered to contain any untrue statement of any material fact or any
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
use its best efforts promptly to discontinue the disposition of such
Restricted Securities owned by such holder until amended prospectuses
correcting such statements have been provided to such holder.
(d) Expenses; Limitations on Registration. All expenses incident to
-------------------------------------
the Company's performance of its obligations in connection with any registration
of the Sellers' Restricted Securities under this Agreement including, without
limitation, printing expenses, fees and disbursements of counsel for the
Company, fees of the National Association of Securities Dealers, Inc. in
connection with its review of any offering contemplated in any registration
statement and expenses of any special audits to which the Company shall agree or
which shall be necessary to comply with governmental requirements in connection
with any such registration shall be paid by the Company. In addition, the
Company shall pay (i) all registration and filing fees for the Sellers'
Restricted Securities under federal and state securities laws, and (ii) expenses
of registering or qualifying under or complying with the securities or blue sky
laws of any jurisdictions. Notwithstanding the foregoing, in the event a Seller
withdraws its request for registration of Restricted Securities other than by
reason of (1) the Company's failure to perform its obligations in connection
with such registration, (2) the failure to be timely satisfied of any closing
condition contained in any underwriting agreement entered into in connection
with such registration and not within the exclusive control of such Seller, (3)
the termination of such underwriting agreement by the underwriters party thereto
other than by reason of the failure on the part of such Seller to perform its
obligations thereunder, or (4) the occurrence of any change that, in the sole
judgment of such Seller, may materially adversely affect the selling price or
marketability of the Restricted Securities for which registration was requested,
including, without limitation, (A) any material adverse change in the business,
business prospects, properties, condition (financial or otherwise) or operations
of the Company, (B) the suspension of trading in the Common Stock by the
Commission or any national securities exchange or automated quotation system or
trading in securities generally on the New York Stock Exchange or the
establishment of limited or minimum prices on any such national exchange or
quotation system, (C) the declaration of any banking moratorium by Federal, New
York or California State authorities, or (D) the occurrence of any outbreak or
escalation of hostilities, the declaration by the United States of any national
emergency or war or the occurrence of any other calamity or crisis the effect of
which on financial markets is such, in the sole judgment of the managing
underwriter for such Seller, as to make it impracticable or inadvisable to
proceed with the
6
<PAGE>
offering of the Restricted Securities, then such Seller shall bear such
expenses. In addition, under all circumstances, each Seller shall pay one
hundred percent (100%) of the gross underwriting spread or fees with respect to
such Seller's Restricted Securities covered by any registration pursuant to this
Section 2.
It shall be a condition precedent to the obligation of the Company to
take any action pursuant to this Section 2 in respect of the securities which
are to be registered at the request of any prospective Seller that such
prospective Seller shall furnish to the Company such information regarding such
Seller and the securities held by such Seller and the intended method of
disposition thereof as the Company shall reasonably request and as shall be
required in connection with the action to be taken by the Company.
The holders of Warrants and Warrant Stock shall be entitled to an
aggregate of two effective demand registrations pursuant to Section 2(a) and an
unlimited number of registrations pursuant to requests made under this Section
2(b); provided that any such registration request made by the requisite number
--------
of holders which request shall be withdrawn (other than by reason of the
Company's failure to perform its obligations hereunder or a material adverse
change in its financial position or business) by the holders of a majority in
number of shares evidenced or covered by the Restricted Securities sought to be
so registered, after the respective registration statement shall have become
effective, shall be treated as an "effective" registration for purposes of this
Agreement.
(e) Indemnification.
---------------
(i) In the event of any registration of any Restricted Securities
under the Securities Act pursuant to this Section 2, the Company shall
indemnify and hold harmless the Seller of such Restricted Securities and
any underwriter thereof, and their respective directors and officers, and
each other Person, if any, who controls such Seller or any such underwriter
within the meaning of the Securities Act ("Controlling Person"), against
------------------
any losses, claims, damages or liabilities, joint or several, to which such
Seller or underwriter or any such director or officer or Controlling Person
may become subject under the Securities Act or any other statute or at
common law, insofar as such losses, claims, expenses, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
(A) any alleged untrue statement of any material fact contained, on the
effective date thereof, in any registration statement under which such
securities were registered under the Securities Act, or in any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereto, or (B) any alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse such Seller or such director,
officer or Controlling Person for any legal or any other expenses
reasonably incurred by such Seller or such director, officer or Controlling
Person in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company shall not
-------- -------
be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon any alleged untrue statement or
alleged omission made in such registration statement, preliminary
prospectus, prospectus, or
7
<PAGE>
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company through an instrument duly executed by
such Seller specifically for use therein. The indemnity provided in this
subsection shall remain in full force and effect regardless of any
investigation made by or on behalf of such Seller or such director, officer
or Controlling Person, and shall survive the transfer of such securities by
such Seller.
(ii) Each holder of any Restricted Securities shall, by acceptance
thereof, severally and not jointly, indemnify and hold harmless the Company
and any underwriter of such Restricted Securities and their respective
directors and officers and each other Person, if any, who controls the
Company or such underwriter (within the meaning of the Securities Act)
against any losses, claims, expenses, damages or liabilities, joint or
several, to which the Company or such underwriter or any such director or
officer or any such Person may become subject under the Securities Act or
any other statute or at common law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based
upon (A) any alleged untrue statement of any material fact contained, on
the effective date thereof, in any registration statement under which
Restricted Securities were registered under the Securities Act, or in any
preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, or (B) any alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only
to the extent, that such alleged untrue statement or alleged omission was
contained in written information furnished to the Company through an
instrument duly executed by such holder specifically for use therein, and
shall reimburse the Company or such director, officer or other Person for
any legal or any other expenses reasonably incurred in connection with
investigating or defending any such loss, claim, damage, liability or
action.
(iii) Indemnification similar to that specified in clauses (i) and
(ii) of this Section 2(e) shall be given by the Company and each holder of
any Restricted Security (with such modifications as shall be to each other
and to any underwriter with respect to any required registration or other
qualification of any Restricted Securities under any federal or state law
or regulation of governmental authority other than the Securities Act. The
indemnity and expense reimbursements obligations of the Company under
clauses (i) and (ii) of this Section 2(e) shall be in addition to any
liability the Company may otherwise have.
(iv) Each Person (an "Indemnitor") who under the preceding provisions
----------
of this Section 2(e) agrees to indemnify another Person (the "Indemnitee")
----------
shall have the right, subject to the provisions hereto, to designate
counsel (acceptable to the Indemnitee) to defend any case or proceeding
against the Indemnitee arising in respect of any claim of liability for
which such indemnification may be claimed, to the end that duplication of
legal expense may be minimized; provided that, if the Indemnitee notifies
the Indemnitor that the former has been advised by its counsel that any
single counsel in such case or proceeding would have a conflict of interest
in representing both the Indemnitor and the
8
<PAGE>
Indemnitee, the Indemnitee may designate its own counsel in such case or
proceeding and, to the extent so provided above in this Section 2(e), shall
be entitled to be reimbursed by Indemnitor for its legal expenses
reasonably incurred in connection with defending itself in such case or
proceeding.
3. Legends. The Investor agrees that a legend in substantially the form
-------
set forth below shall be placed on all certificates evidencing the Warrants or
Warrant Stock (in addition to any legend required under applicable state
securities laws). Such legend shall read as follows:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
SUCH ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR
OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED.
4. Notices. Any notice delivered in connection with this Agreement must
-------
be in writing and must be either personally delivered, mailed by first class
mail (postage prepaid and return receipt requested), sent by reputable overnight
courier service (charges prepaid) or sent by facsimile (with follow-up telephone
confirmation of receipt) to the recipient at the address and facsimile number
below indicated (unless such information is subsequently modified in writing by
such recipient and delivered pursuant to this notice provision):
If to the Company, addressed to:
RightStart.com Inc.
5388 Sterling Center Drive, Unit C
Westlake Village, California 91361
Attn: Secretary
Facsimile: (818) 707-7132
with a copy to:
Milbank, Tweed, Hadley & McCloy LLP
601 South Figueroa Street, 30th Floor
Los Angeles, California 90017
Attn: Kenneth J. Baronsky, Esq.
Facsimile: (213) 629-5063
If to the Investor, addressed to the address set forth under the Investor's
name on the signature pages hereof.
9
<PAGE>
5. General Provisions.
------------------
(a) This Agreement shall be binding upon and inure to the benefit of
each of the parties hereto and their respective, permitted successors and
assigns. The Company may assign any of its rights or obligations hereunder
without the prior written consent of the other parties hereto, to a successor to
substantially all of the Company's business or assets, provided that such
successor agrees to be bound by this Agreement.
(b) So long as the Warrants and Warrant Stock have not been
registered under the Securities Act, prior to transfer of a Warrant or Warrant
Stock by an Investor, such transferring Investor agrees that his or her
transferee will execute and deliver a copy of this Agreement to the Company and
the transferring Investor.
(c) This Agreement shall be governed by and construed in accordance
with the law of the State of Delaware (excluding the law of conflicts thereof).
(d) No course of dealing or any delay or failure to exercise any
right, power or remedy hereunder on the party of any party hereto shall operate
as a waiver of or otherwise prejudice such party's rights, powers or remedies.
(e) Notwithstanding anything in this Agreement, the Company shall not
be obligated to issue or sell any of the Common Stock if, in the judgment of the
Board, such issuance or sale may violate Federal or applicable state securities
laws or regulations or may require the Company to register or qualify any such
Common Stock under any Federal or state securities laws, or require the Company
or any of its agents or representatives to register or qualify with any
governmental agency or organization, pursuant to such laws or regulations.
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10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
RIGHTSTART.COM INC.,
a Delaware corporation
/s/ Jerry R. Welch
--------------------------------------------
Name: Jerry R. Welch
Title: President and Chief Executive Officer
Attest:
/s/ Gina M. Engelhard
- ---------------------------------
Name: Gina M. Engelhard
Title: Secretary and Chief Financial Officer
11
<PAGE>
The Investor:
/s/ Jonathan Davidson Warrant to purchase 54,600 shares of
- ------------------------------ ------
Jonathan Davidson Common Stock of RightStart.com Inc.
Address:
c/o CEA Montgomery Media, L.L.C.
100 Wilshire Blvd., Suite 400
Santa Monica, CA 90401
Fax: (310) 260-6095
12
<PAGE>
EXHIBIT 10.37
WARRANT
SUBSCRIPTION AGREEMENT
This Subscription Agreement (this "Agreement") is made as of December
30, 1999, by and between RightStart.com Inc., a Delaware corporation (the
"Company"), and Oxygen Media, LLC, a Delaware limited liability company (the
"Oxygen").
The parties hereto agree as follows:
1. Purchase and Sale of Securities.
-------------------------------
(a) Authorization of Issuance. The Company's Board of Directors (the
-------------------------
"Board") has authorized the issuance and sale to Oxygen of a warrant,
substantially in the form attached hereto as Exhibit A (the "Warrant"), to
purchase an aggregate of 136,500 shares of common stock, par value $.01 per
share of the Company (the "Common Stock"). The Warrant is being issued pursuant
to that certain Term Sheet dated October 28, 1999, between the Company, Oxygen
and The Right Start, Inc., a copy of which has been attached hereto as Exhibit B
(the "Term Sheet").
(b) Purchase and Sale. Subject to the terms and conditions set forth
-----------------
in the Warrant and this Agreement, including the covenants contained in this
paragraph, Oxygen agrees to purchase, and the Company agrees to issue and sell
to Oxygen, a Warrant to purchase 136,500 shares of Common Stock, subject to
adjustment from time to time as set forth in the Warrant.
(c) Oxygen Representation and Warranties. In connection with the
------------------------------------
purchase and sale of the Warrant and the Common Stock issuable upon conversion
of the Warrant (the "Warrant Stock"), Oxygen represents and warrants to the
Company that:
(i) the Warrant and the Warrant Stock to be acquired by Oxygen
pursuant to this Agreement will be acquired for Oxygen's own accounts and
not with a view to, or intention of, distribution thereof in violation of
the Securities Act of 1933, as amended (the "Securities Act"), or any
applicable state securities laws, and the Warrant and the Warrant Stock
will not be disposed of in contravention of the Securities Act or any
applicable state securities laws;
(ii) Oxygen is familiar with the term "accredited investor" as
defined in Rule 501 under the Securities Act and Oxygen is an "accredited
investor" within the meaning of such term in Rule 501 under the Securities
Act;
(iii) Oxygen is sophisticated in financial matters and is able
to evaluate the risks and benefits of the investment in the Company's
securities;
(iv) Oxygen is able to bear the economic risk of its investment
in the Warrant and the Common Stock issuable on conversion thereof for an
indefinite period of
<PAGE>
time because the Warrant and the Common Stock (A) have not been registered
under the Securities Act and, therefore, cannot be sold unless subsequently
registered under the Securities Act or an exemption from such registration
is available and (B) are subject to additional restrictions as provided
herein;
(v) Oxygen has had an opportunity to ask questions
and receive answers concerning the terms and conditions of the sale of the
Warrant and the Warrant Stock and has had full access to such other
information concerning the Company as it has requested; and
(vi) this Agreement constitutes the legal, valid and binding
obligation of Oxygen, enforceable in accordance with its terms, and the
execution, delivery and performance of this Agreement by Oxygen does not
and will not conflict with, violate or cause a breach of any agreement,
contract or instrument to which Oxygen is party or any judgment, order or
decree to which Oxygen is subject which would have a material adverse
effect on Oxygen or the Company.
2. Legends. Oxygen agrees that a legend in substantially the form set
-------
forth below shall be placed on all certificates evidencing the Warrant or the
Warrant Stock (in addition to any legend required under applicable state
securities laws). Such legend shall read as follows:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR
TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND
ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
3. Representations and Warranties of the Company.
---------------------------------------------
(a) Corporate Existence; Authority. The Company is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of Delaware, and
it has all requisite power and authority to carry on its business as it is being
conducted.
(b) Authorization. All corporate action necessary for the
-------------
authorization, execution and delivery of this Agreement and the Warrant by the
Company, and the performance of all obligations of the Company hereunder and
thereunder, has been taken, and this Agreement and the Warrant, each when
executed and delivered, will constitute valid and legally binding obligations of
the Company, enforceable in accordance with their respective terms except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
other laws of general application affecting creditors' rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief, or other equitable remedies, and (iii) as to rights to indemnity and
contribution that may be limited by applicable laws.
2
<PAGE>
(c) Valid Issuance of Common Stock. Upon issuance in accordance with
------------------------------
the terms of Warrant, the Common Stock issuable upon exercise of the Warrant
will be duly authorized and validly issued, fully paid, and nonassessable and
will be free of restrictions on transfer other than restrictions on transfer
under this Agreement, the Warrant and under applicable state and federal
securities laws.
(d) No Conflicts. The execution, delivery and performance by the
------------
Company of this Agreement and the Warrant, and the consummation of the
transactions contemplated hereby and thereby, will not result in any violation,
be in conflict with or constitute, with or without the passage of time or giving
of notice, a default under the Company's certificate of incorporation or bylaws
or, to the Company's knowledge, any agreement, contract or instrument to which
the Company is a party, the effect which would have a material adverse effect on
the Company.
4. Registration Rights.
-------------------
(a) Incidental Registration. If the Company at any time proposes to
-----------------------
register any of its securities under the Securities Act on Form S-1, S-2 or S-3
or the equivalent (otherwise than to register debt securities under Form S-3, or
any comparable successor form), whether of its own accord or at the request of
any holder or holders of such securities, it will each such time give written
notice to Oxygen of its intention so to do.
Upon the written request of Oxgyen given within 20 days after receipt
of any such notice, the Company will use its best efforts to cause all
Restricted Securities (including Restricted Securities issuable upon conversion
of a Warrant that is converted at least 15 days prior to the effective date of
the registration for such securities) to be registered under the Securities Act
pursuant to such registration statement, all to the extent requisite to permit
the sale or other disposition (in accordance with the intended methods thereof
as aforesaid) by the prospective Seller or Sellers of the Restricted Securities
so registered. For purposes of this Agreement, the term "Restricted Securities"
shall mean all Warrant Stock that bears the restrictive legend set forth in
Section 2. For purposes of this Agreement, the term "Seller" or "Sellers" shall
mean a holder of Restricted Securities of the Company for which the Company
shall be required to file a registration statement or which shall be registered
under the Securities Act at the request of such holder pursuant to the
provisions of this Section 4. Neither the Company nor any of its Affiliates (as
defined in the Warrants) shall be deemed a "Seller" for any purposes of this
Agreement.
If the managing underwriter for the respective offering, if any,
advises the Company in writing that the inclusion in such registration of some
or all of the Restricted Securities sought to be registered by the Seller or
Sellers in its opinion will cause the proceeds or the price per unit the Company
or the requesting or demanding holder of securities will derive from such
registration to be reduced or that the number of securities to be registered at
the instance of the Company or such requesting or demanding holder plus the
number of securities sought to be registered by the Sellers is too large a
number to be reasonably sold, the number of securities sought to be registered
for each Seller shall be reduced pro rata, in proportion to the
3
<PAGE>
number of securities sought to be registered by all Sellers holding pari passu
registration rights, to the extent necessary to reduce the number of securities
to be registered to the number recommended by the managing underwriter. It is
the intention of the Company that Oxygen's registration rights rank pari passu
as to cutbacks with that of registration rights granted to other holders of the
Company's securities, except as set forth in that certain Investors' Rights
Agreement dated as of July 9, 1999 between the Company and the investors named
therein.
(b) Registration Procedures.
-----------------------
(i) If and whenever the Company is required by the provisions of
this Section 4 to use its best efforts to effect the registration of any of
the Restricted Securities under the Securities Act, the Company will
(except as otherwise provided in this Agreement), as expeditiously as
possible,
(A) cooperate with any underwriters for, and the Sellers
of, such Restricted Securities, and will enter into a usual and
customary underwriting agreement with respect thereto (provided that
the Company shall not be required to enter into more than two such
underwriting agreements (one for a domestic offering and one for an
international offering) in connection with any such registration) and
take all such other reasonable actions as are necessary or advisable
to permit, expedite and facilitate the disposition of such Restricted
Securities in the manner contemplated by the related registration
statement, in each case to the same extent as if all the securities
then being offered were for the account of the Company, and the
Company will provide to any Seller of Restricted Securities, any
underwriter participating in any distribution thereof pursuant to a
registration statement, and any attorney, accountant or other agent
retained by any Seller or underwriter, reasonable access to
appropriate Company officers and employees to answer questions and to
supply information reasonably requested by any such Seller,
underwriter, attorney, accountant or agent in connection with such
registration statement;
(B) furnish or cause to be furnished to each Seller of
Restricted Securities covered by such registration statement,
addressed to such Sellers, a copy of the opinion of counsel for the
Company, and a copy of the "comfort" letter signed by the independent
public accountants who have certified the Company's financial
statements included in the registration statement, delivered on the
closing date to the underwriters of such Restricted Securities;
(C) prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to
cause such registration statement to become and remain effective; and
prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the Securities Act with
respect to the sale or other disposition of all securities covered by
such
4
<PAGE>
registration statement whenever the Seller or Sellers of such
securities shall desire to sell or otherwise dispose of the same;
provided that no such registration statement will be filed by the
Company until counsel for the Sellers of securities included therein
shall have had a reasonable opportunity to review the same and to
exercise their rights under clause (A) above with respect thereto and
no amendment to any such registration statement naming such Sellers as
selling shareholders shall be filed with the Commission until such
Sellers shall have had at least seven days to review such registration
statement as originally filed and theretofore amended and to exercise
their rights under clause (A) above;
(D) furnish to each Seller such numbers of copies of a
summary prospectus or other prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act,
and such other documents, as such Seller may reasonably request in
order to facilitate the public sale or other disposition of the
securities owned by such Seller;
(E) use its best efforts to register or qualify the
securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as each Seller shall
request, and do any and all other acts and things which may be
necessary or advisable to enable such Seller to consummate the public
sale or other disposition in such jurisdictions of the securities
owned by such Seller, except that the Company shall not for any such
purpose be required to qualify to do business as a foreign corporation
in any jurisdiction wherein it is not so qualified or to file therein
any general consent to service;
(F) in the event of the issuance of any stop order
suspending the effectiveness of any registration statement or of any
order suspending or preventing the use of any prospectus or suspending
the qualification of any Restricted Securities for sale in any
jurisdiction, use its best efforts promptly to obtain its withdrawal;
(G) in the event any prospectus used in connection with the
distribution of Restricted Securities registered under the Securities
Act pursuant to the provisions of this Section 4 is discovered to
contain any untrue statement of any material fact or any omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, promptly
provide each holder that shall have requested registration of
Restricted Securities with amended prospectuses correcting such
statements;
(H) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission; and
(I) list such securities on any securities exchange on
which any stock of the Company is then listed, if the listing of such
securities is then permitted under the rules of such exchange;
provided, however, that notwithstanding any other provision of this
-------- -------
5
<PAGE>
notwithstanding any other provision of this Section 4, the Company
shall not be required to maintain the effectiveness of any
registration statement for a period in excess of one year (plus any
period during which the effectiveness of such registration has been
suspended). From time to time after a transfer of Warrant Stock
pursuant to a registration statement the Company will file all reports
required to be filed by it under the Securities Act, the Exchange Act
of 1934, as amended (the "Exchange Act") and the rules and regulations
adopted by the Securities and Exchange Commission thereunder, and will
take such further action as any holder or holders of Restricted
Securities may reasonably request, all to the extent required to
enable such holders to sell Restricted Securities pursuant to such
laws and regulations thereunder. Upon written request, the Company
will deliver to such holders a written statement as to whether it has
complied with such requirements.
(ii) In connection with the registration of Restricted
Securities under the Securities Act pursuant to the provisions of this
Section 4, each holder of Restricted Securities requesting such
registration will (except as otherwise provided in this Agreement), as
expeditiously as possible,
(A) in the event of the issuance of any stop order
suspending the effectiveness of any registration statement or of any
order suspending or preventing the use of any prospectus or suspending
the qualification of any Restricted Securities for sale in any
jurisdiction, use its best efforts promptly to discontinue the
disposition of such Restricted Securities owned by such holders in
such jurisdiction until such order has been withdrawn; and
(B) in the event any prospectus used in connection with the
distribution of Restricted Securities registered under the Securities
Act pursuant to the provisions of this Section 4 is discovered to
contain any untrue statement of any material fact or any omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, use its best
efforts promptly to discontinue the disposition of such Restricted
Securities owned by such holder until amended prospectuses correcting
such statements have been provided to such holder.
(c) Expenses; Limitations on Registration. All expenses incident to
-------------------------------------
the Company's performance of its obligations in connection with any registration
of the Sellers' Restricted Securities under this Agreement including, without
limitation, printing expenses, fees and disbursements of counsel for the
Company, fees of the National Association of Securities Dealers, Inc. in
connection with its review of any offering contemplated in any registration
statement and expenses of any special audits to which the Company shall agree or
which shall be necessary to comply with governmental requirements in connection
with any such registration shall be paid by the Company. In addition, the
Company shall pay (i) all registration and filing fees for the Sellers'
Restricted Securities under federal and state securities laws, and (ii) expenses
of registering or qualifying under or complying with the securities or blue sky
laws of any
6
<PAGE>
jurisdictions. Notwithstanding the foregoing, in the event a Seller withdraws
its request for registration of Restricted Securities other than by reason of
(1) the Company's failure to perform its obligations in connection with such
registration, (2) the failure to be timely satisfied of any closing condition
contained in any underwriting agreement entered into in connection with such
registration and not within the exclusive control of such Seller, (3) the
termination of such underwriting agreement by the underwriters party thereto
other than by reason of the failure on the part of such Seller to perform its
obligations thereunder, or (4) the occurrence of any change that, in the sole
judgment of such Seller, may materially adversely affect the selling price or
marketability of the Restricted Securities for which registration was requested,
including, without limitation, (A) any material adverse change in the business,
business prospects, properties, condition (financial or otherwise) or operations
of the Company, (B) the suspension of trading in the Common Stock by the
Commission or any national securities exchange or automated quotation system or
trading in securities generally on the New York Stock Exchange or the
establishment of limited or minimum prices on any such national exchange or
quotation system, (C) the declaration of any banking moratorium by Federal, New
York or California State authorities, or (D) the occurrence of any outbreak or
escalation of hostilities, the declaration by the United States of any national
emergency or war or the occurrence of any other calamity or crisis the effect of
which on financial markets is such, in the sole judgment of the managing
underwriter for such Seller, as to make it impracticable or inadvisable to
proceed with the offering of the Restricted Securities, then such Seller shall
bear such expenses. In addition, under all circumstances, each Seller shall pay
one hundred percent (100%) of the gross underwriting spread or fees with respect
to such Seller's Restricted Securities covered by any registration pursuant to
this Section 2.
It shall be a condition precedent to the obligation of the Company to
take any action pursuant to this Section 4 in respect of the securities which
are to be registered at the request of any prospective Seller that such
prospective Seller shall furnish to the Company such information regarding such
Seller and the securities held by such Seller and the intended method of
disposition thereof as the Company shall reasonably request and as shall be
required in connection with the action to be taken by the Company.
(d) Indemnification.
---------------
(i) In the event of any registration of any Restricted Securities
under the Securities Act pursuant to this Section 4, the Company shall
indemnify and hold harmless the Seller of such Restricted Securities and
any underwriter thereof, and their respective directors and officers, and
each other Person, if any, who controls such Seller or any such underwriter
within the meaning of the Securities Act ("Controlling Person"), against
any losses, claims, damages or liabilities, joint or several, to which such
Seller or underwriter or any such director or officer or Controlling Person
may become subject under the Securities Act or any other statute or at
common law, insofar as such losses, claims, expenses, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
(A) any alleged untrue statement of any material fact contained, on the
effective date thereof, in any registration statement under which such
securities were registered under the Securities Act, or in any preliminary
prospectus or final prospectus contained
7
<PAGE>
therein, or any amendment or supplement thereto, or (B) any alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and shall
reimburse such Seller or such director, officer or Controlling Person for
any legal or any other expenses reasonably incurred by such Seller or such
director, officer or Controlling Person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is
based upon any alleged untrue statement or alleged omission made in such
registration statement, preliminary prospectus, prospectus, or amendment or
supplement in reliance upon and in conformity with written information
furnished to the Company through an instrument duly executed by such Seller
specifically for use therein. The indemnity provided in this subsection
shall remain in full force and effect regardless of any investigation made
by or on behalf of such Seller or such director, officer or Controlling
Person, and shall survive the transfer of such securities by such Seller.
(ii) Each holder of any Restricted Securities shall, by acceptance
thereof, severally and not jointly, indemnify and hold harmless the
Company, each other selling stockholder and any underwriter of such
Restricted Securities and their respective directors and officers and each
other Person, if any, who controls the Company or such underwriter (within
the meaning of the Securities Act) against any losses, claims, expenses,
damages or liabilities, joint or several, to which the Company or such
underwriter or any such director or officer or any such Person may become
subject under the Securities Act or any other statute or at common law,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (A) any alleged untrue
statement of any material fact contained, on the effective date thereof, in
any registration statement under which Restricted Securities were
registered under the Securities Act, or in any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereto,
or (B) any alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such alleged
untrue statement or alleged omission was contained in written information
furnished to the Company through an instrument duly executed by such holder
specifically for use therein, and shall reimburse the Company or such
director, officer or other Person for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
loss, claim, damage, liability or action; provided that in no event shall
such indemnification amount to be paid hereunder be in excess of the net
proceeds received by such selling stockholder in such offering .
(iii) Indemnification similar to that specified in clauses (i) and
(ii) of this Section 4(d) shall be given by the Company and each holder of
any Restricted Security (with such modifications as shall be appropriate)
to each other and to any underwriter with respect to any required
registration or other qualification of any Restricted Securities under any
federal or state law or regulation of governmental authority other than the
Securities Act. The indemnity and expense reimbursements obligations of the
Company under clauses (i)
8
<PAGE>
and (ii) of this Section 4(d) shall be in addition to any liability the
Company may otherwise have.
(iv) Each Person (an "Indemnitor") who under the preceding provisions
----------
of this Section 4(d) agrees to indemnify another Person (the "Indemnitee")
----------
shall have the right, subject to the provisions hereto, to designate
counsel (acceptable to the Indemnitee) to defend any case or proceeding
against the Indemnitee arising in respect of any claim of liability for
which such indemnification may be claimed, to the end that duplication of
legal expense may be minimized; provided that, if the Indemnitee notifies
the Indemnitor that the former has been advised by its counsel that any
single counsel in such case or proceeding would have a conflict of interest
in representing both the Indemnitor and the Indemnitee, the Indemnitee may
designate its own counsel in such case or proceeding and, to the extent so
provided above in this Section 4(d), shall be entitled to be reimbursed by
Indemnitor for its legal expenses reasonably incurred in connection with
defending itself in such case or proceeding.
(e) Termination of Registration Rights. The right of any holder to
-------------------------------------
request registration or inclusion in any registration pursuant to this Section 4
shall terminate on the closing of the first Company-initiated registered public
offering of Common Stock of the Company, if all shares of Warrant Stock held by
such holder (assuming exercise in full of the Warrant) may immediately be sold
under Rule 144 during any 90-day period, or the earlier of (i) such date after
the closing of the first Company-initiated registered public offering of Common
Stock of the Company as all shares of Warrant Stock held by such holder
(assuming exercise in full of the Warrant) may immediately be sold under Rule
144 during any 90-day period, and (ii) five (5) years after the closing of the
first Company-initiated registered public offering.
5. "Lock-Up" Agreement. If requested by the Company or any representative
------------------
of an underwriter of Common Stock (or other securities) of the Company following
the Company's initial public offering, Oxygen shall not sell or otherwise
transfer or dispose of any Common Stock or other securities of the Company held
by it (other than those included in the registration) during the one hundred
eighty (180) day period following the effective date of a registration statement
of the Company filed under the Securities Act. If requested by the Company or
any representative of an underwriter of Common Stock (or other securities) of
the Company following the first public offering of the Company, Oxygen shall not
sell or otherwise transfer or dispose of any Common Stock or other securities of
the Company held by such holders (other than those included in the registration)
during the ninety (90) day period following the effective date of a registration
statement of the Company filed under the Securities Act. The obligations
described in this Section 5 shall not apply to a registration relating solely to
employee benefit plans on Form S-1 or Form S-8 or similar forms that may be
promulgated in the future, or a registration relating solely to a transaction on
Form S-4 or similar forms that may be promulgated in the future. The Company may
impose stop-transfer instructions with respect to the shares of Common Stock (or
other securities) subject to the foregoing restriction until the end of such
lock-up periods.
9
<PAGE>
6. Notices. Any notice delivered in connection with this Agreement must
-------
be in writing and must be either personally delivered, mailed by first class
mail (postage prepaid and return receipt requested), sent by reputable overnight
courier service (charges prepaid) or sent by facsimile (with follow-up telephone
confirmation of receipt) to the recipient at the address and facsimile number
below indicated (unless such information is subsequently modified in writing by
such recipient and delivered pursuant to this notice provision):
If to the Company, addressed to:
RightStart.com Inc.
5388 Sterling Center Drive, Unit C
Westlake Village, California 91361
Attn: Chief Financial Officer or General Counsel
Facsimile: (818) 707-7132
with a copy to:
Milbank, Tweed, Hadley & McCloy LLP
601 South Figueroa Street, 30th Floor
Los Angeles, California 90017
Attn: Kenneth J. Baronsky, Esq.
Facsimile: (213) 629-5063
If to Oxygen, addressed to:
Oxygen Media
75 9th Avenue
New York, New York 10011
Attn: Abe Hsuan, Esq.
Facsimile: (212) 651-2052
with a copy to:
Debevoise & Plimpton
875 Third Avenue, 27th Floor
New York, New York 10022
Attn: Michael Gillespie, Esq.
Facsimile: (212) 909-6836
6. General Provisions.
------------------
(a) This Agreement shall be binding upon and inure to the
benefit of each of the parties hereto and their respective, permitted successors
and assigns. Either party may assign any of its rights or obligations hereunder
without the prior written consent of the other party
10
<PAGE>
hereto to a successor to substantially all of such assigning party's business or
assets, provided that such successor agrees to be bound by this Agreement.
(b) So long as the Warrant and the Warrant Stock have not been
registered under the Securities Act, prior to transfer of a Warrant or Warrant
Stock by Oxygen, Oxygen agrees that its transferee will execute and deliver a
copy of this Agreement to the Company and Oxygen.
(c) This Agreement shall be governed by and construed in accordance
with the law of the State of Delaware (excluding the law of conflicts thereof).
(d) No course of dealing or any delay or failure to exercise any
right, power or remedy hereunder on the party of any party hereto shall operate
as a waiver of or otherwise prejudice such party's rights, powers or remedies.
(e) Notwithstanding anything in this Agreement, the Company shall not
be obligated to issue or sell any of the Warrant Stock if, in the judgment of
the Board, such issuance or sale may violate Federal or applicable state
securities laws or regulations or may require the Company to register or qualify
any such Warrant Stock under any Federal or state securities laws, or require
the Company or any of its agents or representatives to register or qualify with
any governmental agency or organization, pursuant to such laws or regulations.
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11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
RIGHTSTART.COM INC.,
a Delaware corporation
By: /s/ Jerry R. Welch
-----------------------------------------
Name: Jerry R. Welch
Title: President and Chief Executive Officer
OXYGEN MEDIA, LLC,
a Delaware limited liability company
By: /s/ Daniel M. Taltz
-----------------------------------------
Name: Daniel M. Taltz
Title: General Counsel
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EXHIBIT 10.38
STOCK GRANT AGREEMENT
This Stock Grant Agreement (this "Agreement") is made as of the 30th
day of October, 1999 by and among The Right Start, Inc., a California
corporation (the "Company"), RightStart.com Inc., a Delaware corporation (the
"Subsidiary") and Guidance Solutions, Inc. (the "Developer"); (the Company and
the Subsidiary shall be collectively referred to herein as the "Right Start");
WHEREAS, the Company, as of the date hereof, owns a majority of the
outstanding common stock, par value $.01 per share of Subsidiary (the "Common
Stock");
WHEREAS, Developer has provided services to the Company and Subsidiary
in connection with Subsidiary's electronic commerce Internet web site currently
located at www.rightstart.com (the "Web Site");
------------------
WHEREAS, the Board of Directors of each of the Company and Subsidiary
(each a "Board") believes that an ongoing relationship between the Subsidiary
and the Developer will be instrumental in increasing the value of the Subsidiary
and, accordingly, that it is in the best interests of the Subsidiary and its
stockholders to provide Developer with a direct interest in the success of the
Subsidiary; and
WHEREAS, in order to provide the Developer with an equity incentive in
the Subsidiary, the Company, in accordance with the terms of this Agreement, has
agreed to transfer to the Developer an aggregate of 288,333 shares of the
Subsidiary's Common Stock (the "Shares").
NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto mutually agree as follows:
SECTION 1
Authorization and Grant of Stock
--------------------------------
.1 Authorization of Restricted Stock. The Company has authorized the
---------------------------------
transfer to the Developer of 288,333 shares of the Subsidiary's Common Stock
held by the Company, on the terms set forth herein.
.2 Grant of the Shares; Consideration. The Company hereby grants to the
----------------------------------
Developer the Shares, 171,000 of which shall be granted on the date hereof to
Developer for services previously rendered by Developer in connection with the
performance of that certain Services Agreement dated as of February 15, 1999,
between the Company and Developer, and 117,333 shares of which shall be granted
on the date hereof to Developer as an incentive to continue to provide
partnering and development services to the Right Start.
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.3 Stock Issuance. On the date hereof, the Company shall issue the Shares
--------------
to Developer. Upon issuance, Developer shall be entitled to exercise all rights
as a Common Stock holder of Subsidiary without limitation.
SECTION 2
Representations and Warranties
------------------------------
.1 Representations and Warranties of the Company and Subsidiary.
------------------------------------------------------------
.1 Organization; Good Standing; Qualification. The Company and the
------------------------------------------
Subsidiary are corporations duly organized, validly existing, and in good
standing under the laws of their states of incorporation, have all requisite
corporate power and authority to execute and deliver this Agreement and to carry
out the provisions of this Agreement, and the Company has all requisite
corporate power and authority to transfer the Shares.
.2 Authorization. All corporate action on the part of the Company
-------------
and the Subsidiary, and their respective officers, directors and stockholders
necessary for the authorization, execution and delivery of this Agreement, the
performance of all obligations of the Company and Subsidiary hereunder, and the
transfer and delivery of the Shares being granted hereunder, has been taken and
this Agreement, when executed and delivered, will constitute the valid and
legally binding obligations of the Company and the Subsidiary, each enforceable
in accordance with its terms except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
affecting creditors' rights generally, (ii) as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) as to rights to indemnity and contribution that may be
limited by applicable laws.
.3 Valid Transfer of Common Stock.
-------------------------------
(a) The Company is the sole legal and the beneficial owner of the
Shares to be granted to Developer hereunder and is conveying to the Developer
such Shares, free and clear of any liens, claims, interests, charges and
encumbrances.
(b) The Company has neither previously sold, assigned, conveyed,
transferred or otherwise disposed of, in whole or in part, the Shares to be
transferred by it hereunder, nor entered into any agreement to sell, assign,
convey, transfer or otherwise dispose of, in whole or in part, such Shares.
.4 Capitalization and Voting Rights. As of the date hereof, the
--------------------------------
authorized capital of the Subsidiary consists of:
(a) Preferred Stock. 5,000,000 shares of blank check Preferred
Stock, par value $.01, of which 3,333,333 shares have been designated as Series
A Convertible Preferred Stock; no shares of Preferred Stock are issued and
outstanding.
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(b) Common Stock. 20,000,000 shares of common stock, par value
$.01, of which 9,100,000 shares are issued and outstanding.
SECTION 3
Transferability; Registration Rights; Financial Information
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.1 Transferability of Common Stock. The Shares may be transferred by
-------------------------------
Developer in compliance with applicable state and federal securities laws,
provided each person or entity to whom all or a portion of such Common Stock is
transferred agrees to be bound by this Section 3.1. Each certificate
representing any shares of Common Stock constituting all or a portion of the
Shares (unless Subsidiary shall have received an opinion from counsel at
Developer's expense (which counsel may be counsel to the Subsidiary) reasonably
acceptable to the Subsidiary to the effect that such securities may lawfully be
disposed of without registration, qualification or legend) shall be imprinted
with the following legend (a "'33 Act Legend"):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
SUCH ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR
OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED.
.2 Registration Rights. The Subsidiary shall also grant to
--------------------
Developer registration rights with respect to the Shares. Such registration
rights to be granted to Developer shall consist of one demand registration and
unlimited piggyback registrations for the Shares held by Developer at the time
of registration, all of which registration rights may be exercised only after
the Subsidiary's initial public offering. Such registration rights shall be
subject to customary terms regarding cut-backs, allocation among shareholders
and indemnification.
.3 Securities Laws; Investor Representations; Legends.
--------------------------------------------------
.1 No Issuance in Violation of Securities Laws; Legends.
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Notwithstanding the foregoing, the Shares shall not be delivered to Developer if
such delivery would constitute a violation of any applicable Federal or state
securities or other laws or regulations. As a condition to the delivery of the
Shares to Developer, the Company may require Developer to make certain
representations and warranties that may be required by applicable law or
regulation, and, specifically, may require Developer to provide evidence
satisfactory to the Company that the Shares are being acquired only for
investment purposes and without any present intention to sell or distribute such
shares in violation of any federal or state securities or other laws or
regulations.
.2 Investor Representations and Warranties. In connection
---------------------------------------
with the grant of the Shares, the Developer represents and warrants to the
Company that:
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4.5.2.1 the Shares to be acquired by the Developer
pursuant to this Agreement will be acquired for the Developer's own
accounts and not with a view to, or intention of, distribution thereof
in violation of the Securities Act or any applicable state securities
laws, and the Shares will not be disposed of in contravention of the
Securities Act or any applicable state securities laws.
4.5.2.2 the Developer is familiar with the term
"accredited investor" as defined in Rule 501 under the Securities Act
and the Developer is an "accredited investor" within the meaning of
such term in Rule 501 under the Securities Act;
4.5.2.3 the Developer is sophisticated in financial
matters and is able to evaluate the risks and benefits of the
investment in the Common Stock;
4.5.2.4 the Developer is able to bear the economic risk
of its investment in the Common Stock constituting the Shares for an
indefinite period of time because the Shares have not been registered
under the Securities Act and, therefore, cannot be sold unless
subsequently registered under the Securities Act or an exemption from
such registration is available;
4.5.2.5 is Agreement constitutes the legal, valid and
binding obligation of the Developer, enforceable in accordance with its
terms, and the execution, delivery and performance of this Agreement by
the Developer does not and will not conflict with or violate any law,
regulation, judgment, order or decree to which Developer is subject
which would have a material adverse effect on Developer; and
4.5.2.6 the Developer is not an "investment company" or
a person directly or indirectly controlled by or acting on behalf of a
"investment company" within the meaning of the Investment Company Act
of 1940, as amended.
.3 Financial Information. Unless notified by Developer to
---------------------
the contrary, the Subsidiary shall provide to Developer (so long as Subsidiary
is not a reporting company under the Securities Exchange Act of 1934, as
amended) audited annual financial information and unaudited quarterly financial
information (each including a balance sheet as of such period end date, and
statements of cash-flows and statements of operations of Subsidiary for such
period).
.4 California Corporate Securities Law. The grant of the
-----------------------------------
securities which are the subject of this Agreement has not been qualified with
the Commissioner of Corporations of the State of California and the issuance of
such securities or the payment or receipt of any part of the consideration
therefor prior to such qualification is unlawful, unless an exemption from such
qualification is available. The rights of all parties to this Agreement are
expressly conditioned upon such qualification being obtained, or such exemption
being available.
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SECTION 4
Miscellaneous
-------------
.1 Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of California.
.2 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto,
provided, however, that the rights of the Developer to receive the Shares shall
not be assignable other than to an affiliate of Developer without the prior
written consent of the Company.
.3 Entire Agreement; Amendment. This Agreement and the other
---------------------------
documents delivered pursuant hereto constitute the full and entire understanding
and agreement between the parties with regard to the subjects hereof and
thereof, and no party shall be liable or bound to any other party in any manner
by any warranties, representations or covenants except as specifically set forth
herein or therein. Except as expressly provided herein, neither this Agreement
nor any term hereof may be amended, waived, discharged or terminated other than
by a written instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge or termination is sought.
.4 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (a) if to the Developer, to 4134 Del Rey Avenue, Marina del Rey,
California 90292; attention: Gary Burison, Chief Financial Officer (or to such
other address as Developer shall have furnished to the Company in writing), or
(b) if to the Company or Subsidiary, to 5388 Sterling Center Drive, Unit C,
Westlake Village, California 91361; attention: President (or to such other
address as the Company or Subsidiary shall have furnished to the Developer).
Each such notice or other communication shall for all purposes of this Agreement
be treated as effective or having been given when delivered if delivered
personally, or, if sent by mail, at the earlier of its receipt or 72 hours after
the same has been deposited in a regularly maintained receptacle for the deposit
of the United States mail, addressed and mailed as aforesaid.
.5 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be enforceable against the party actually
executing such counterpart, and all of which together shall constitute one
instrument.
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IN WITNESS WHEREOF, the foregoing Agreement is hereby executed as of
the date first above written.
COMPANY: THE RIGHT START, INC.
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By: /s/ Jerry R. Welch
------------------------------------
Name: Jerry R. Welch
Title: President and Chief Executive Officer
SUBSIDIARY: RIGHTSTART.COM INC.
- ----------
By: /s/ Jerry R. Welch
------------------------------------
Name: Jerry R. Welch
Title: President and Chief Executive Officer
DEVELOPER: GUIDANCE SOLUTIONS, INC.
- ---------
By: /s/ Gary Burnison
------------------------------------
Name: Gary Burnison
Title: Chief Financial Officer
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EXHIBIT 10.39
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of the 30th day of October, 1999 by and among RightStart.com
Inc., a Delaware corporation (the "Company") and Guidance Solutions, Inc. (the
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"Developer").
---------
Recitals
WHEREAS, the Company, The Right Start, Inc., a California corporation
("Parent") and Developer are parties to the Stock Grant Agreement dated as of
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even date herewith (the "Grant Agreement"); and
---------------
WHEREAS, certain of Parent's and the Developer's obligations under the
Grant Agreement are conditioned upon the execution and delivery by the Company
of this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereto further agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms shall
have the meanings set forth below:
1.1 "Affiliate" of any party means any person (or group of persons) who
--------
effectively controls, is effectively controlled by or is under common control
with such party.
1.2 "Closing" shall mean the date of the sale of shares by Parent to Developer
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of the Company's Common Stock.
1.3 "Commission" shall mean the Securities and Exchange Commission or any other
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federal agency at the time administering the Securities Act.
1.4 "Common Stock" shall mean the common stock of the Company, $.01 par value
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per share.
1.5 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
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amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
1.6 "Holder" shall mean Developer so long as it holds any Common Stock and
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any holder of Common Stock who acquired such Securities from Developer in
accordance with this Agreement.
1.7 "Other Stockholders" shall mean persons other than Holders who, by virtue of
------------------
agreements with the Company, are entitled to include their securities in certain
registrations hereunder.
<PAGE>
1.8 "Registrable Securities" shall mean any Securities held by a Holder granted
----------------------
or receiving registration rights under Section 3 of this Agreement; provided,
--------- --------
however, that Registrable Securities shall not include any shares of Common
- -------
Stock which have previously been registered or which have been sold to the
public either pursuant to a registration statement or Rule 144, or which have
been sold in a private transaction in which the transferor's rights under this
Agreement are not assigned.
1.9 The terms "register," "registered" and "registration" shall refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
1.10 "Registration Expenses" shall mean all expenses incurred in effecting
---------------------
any registration pursuant to this Agreement, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and expenses of any regular or special audits incident to or required by any
such registration, but shall not include Selling Expenses.
1.11 "Rule 144" shall mean Rule 144 as promulgated by the Commission under the
--------
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
1.12 "Rule 415" shall mean Rule 415 as promulgated by the Commission
--------
under the Securities Act, as such Rule may be amended from time to time, or and
similar successor rule that may be promulgated by the Commission.
1.13 "Securities" shall mean shares of the Company's Common Stock granted under
----------
the Grant Agreement and any shares issued upon or in exchange for such
securities.
1.14 "Securities Act" shall mean the Securities Act of 1933, as amended, or any
--------------
similar successor federal statute and the rules and regulations thereunder, all
as the same shall be in effect from time to time.
1.15 "Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the sale of Registrable
Securities and fees and disbursements of special counsel to the selling
stockholder.
2. Restrictions on Transfer.
2.1 Legend.
------
(a) Each certificate representing Securities now or hereafter owned by Developer
shall be endorsed with the following legend:
"THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND
CONDITIONS OF
<PAGE>
A CERTAIN REGISTRATION RIGHTS AGREEMENT BY AND BETWEEN THE
COMPANY AND CERTAIN HOLDERS OF STOCK OF THE COMPANY. COPIES OF
SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE
SECRETARY OF THE COMPANY."
(b) Developer agrees that the Company may instruct its transfer agent to impose
transfer restrictions on the shares represented by certificates bearing the
legend referred to in this Section 2.1 to enforce the provisions of this
------------
Agreement and the Company agrees promptly to do so. The legend shall be removed
upon termination of this Agreement.
(c) Each certificate representing Securities shall (unless otherwise permitted
by the provisions of this Agreement) be imprinted with a legend substantially
similar to the following (in addition to any legend required under applicable
state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
SUCH ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR
OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED.
(d) The Company shall be obligated to reissue promptly unlegended certificates
at the request of any Holder thereof if the Holder shall have obtained an
opinion of counsel at such Holder's expense (which counsel may be counsel to the
Company) reasonably acceptable to the Company to the effect that the securities
proposed to be disposed of may lawfully be so disposed of without registration,
qualification or legend.
2.2 General Restrictions on Transfer. Each Holder agrees not to make any
----------------------------------
disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 2.2, and provided that:
-----------
(a) There is then in effect a registration statement under the Securities Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement; or
(b) (i) In addition to complying with Section 3.7 hereof, such Holder shall have
-----------
notified the Company of the proposed disposition and shall have furnished the
Company with a detailed statement of the circumstances surrounding the proposed
disposition, and (ii) if reasonably requested by the Company, such Holder shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration of such
shares under the Securities Act.
(c) Notwithstanding the provisions of paragraphs (a) and (b) above, no such
registration statement or opinion of counsel shall be necessary for a transfer
by a Holder (i) which is a partnership to its partners or retired partners in
accordance with partnership interests or to a partnership under common control
with such Holder, (ii) which is a corporation to its shareholders in accordance
with their interest in the corporation, (iii) which is a limited liability
3
<PAGE>
company to its members or former members in accordance with their interest in
the limited liability company, (iv) to such Holder's family member or trust for
the benefit of an individual Holder, or (v) to such Holder's Affiliates,
provided the aforementioned transferees will be subject to the terms of this
- --------
Section 2.2 to the same extent as if such transferee were an original Holder
- -----------
hereunder.
3. Registration RIGHTS.
3.1 Demand Registration.
-------------------
(a) If the Company shall receive at any time after the Company's initial
underwritten public offering of its Common Stock (so long as such request is not
within 180 days after the effective date of a registration statement filed by
the Company covering an underwritten offering of any of its securities to the
general public) a written request from Developer that the Company file a
registration statement registering Registrable Securities constituting at least
twenty-five percent (25%) of the Registrable Securities held by the Developer on
the date hereof, then the Company will:
(i) promptly give written notice of the proposed registration to all other
Holders holding Registrable Securities; and
(ii) as soon as practicable, use its best efforts to effect such
registration, on Form S-3 or successor form replacing Form S-3, if practicable,
(including, without limitation, filing post-effective amendments, appropriate
qualifications under applicable blue sky or other state securities laws, and
appropriate compliance with the Securities Act) as would permit or facilitate
the sale and distribution of all or such portion of such Registrable Securities
as are specified in such request, together with all or such portion of the
Registrable Securities of any Holder or Holders joining in such request (as
permitted hereunder) as are specified in a written request received by the
Company within ten (10) business days after such written notice from the Company
is mailed or delivered.
Notwithstanding the foregoing provisions, the Company shall not be
obligated to effect, or to take any action to effect, any such registration
pursuant to this Section 3 if:
---------
(A) in any particular jurisdiction, the Company would be required to
execute a general consent to service of process in effecting such registration,
qualification, or compliance (unless the Company is already subject to service
in such jurisdiction and except as may be required by the Securities Act);
(B) the Company has initiated one registration pursuant to Section 3.1(a)
--------------
(counting for these purposes only (1) a registration which has been declared or
ordered effective and pursuant to which securities have been sold and (2) a
registration which has been withdrawn by the initiating Holders as to which the
Holders have not paid the Registration Expenses pursuant to Section 3.3 hereof
-----------
and were required to bear such expenses);
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<PAGE>
(C) such request for registration is made during the period starting with the
date sixty (60) days prior to the Company's good faith estimate of the date of
filing of, and ending on a date one hundred eighty (180) days after the
effective date of, a Company-initiated registration; provided that the Company
--------
is actively employing in good faith all reasonable efforts to cause such
registration statement to become effective;
(b) Subject to the foregoing clauses (A) through (C), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request of Developer (or
its transferees), as the case may be; provided, however, that if (i) in the good
-------- -------
faith judgment of the Board of Directors of the Company (the "Board of
--------
Directors"), such registration would be seriously detrimental to the Company and
- ---------
the Board of Directors concludes, as a result, that it is essential to defer the
filing of such registration statement at such time, and (ii) the Company shall
furnish to such Holders a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors, it would be
seriously detrimental to the Company for such registration statement to be filed
in the near future and that it is, therefore, essential to defer the filing of
such registration statement, then the Company shall have the right to defer such
filing (except as provided in clause (C) above) for a period of not more than
one hundred twenty (120) days after receipt of the request of the Developer (or
its permitted Affiliate transferees), as the case may be, and, provided further,
-------- -------
that the Company shall not defer its obligation in this manner more than once in
any twelve-month period.
The registration statement filed pursuant to the request of the
Developer (or its transferees) may, subject to the provisions of Sections 3.1(d)
---------------
and 3.9 hereof, include other securities of the Company, with respect to which
---
registration rights have been granted, and may include securities of the Company
being sold for the account of the Company.
(c) Underwriting. The right of any Holder to registration pursuant to Section
-------
3.1 shall be conditioned upon such Holder's participation in such underwriting
- ---
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein and such other restrictions as may be reasonably imposed
by the underwriter.
(d) Procedures. The Company shall (together with all Holders and other persons
proposing to distribute their securities through such underwriting) enter into
an underwriting agreement in customary form with the representative of the
underwriter or underwriters selected for such underwriting by a majority in
interest of the initiating Holder(s), which underwriters are reasonably
acceptable to the Company. If the Company shall request inclusion in any
registration pursuant to Section 3.1 of securities being sold for its own
-----------
account, or if other persons shall request inclusion in any registration
pursuant to Section 3.1, the initiating Holder(s) shall, on behalf of all
-----------
Holders, offer to include such securities in the underwriting and may condition
such offer on their acceptance of the further applicable provisions of this
Section 3 (including Section 3.9). Notwithstanding any other provision of this
- --------- -----------
Section 3.1, if the representative of the underwriters advises the initiating
- -----------
Holder(s) in writing that marketing factors require a limitation on the number
of shares to be underwritten, the number of shares to be included in the
underwriting or registration shall be allocated as set forth in Section 3.9
-----------
5
<PAGE>
hereof; provided that the Holder(s) exercising its demand registration rights
--------
under this Section 3.1 shall first be entitled to register all of its securities
-----------
subject to such request before any other person or entity shall be entitled to
include securities in such offering. If a person who has requested inclusion in
such registration as provided above does not agree to the terms of any such
underwriting, such person shall be excluded therefrom by written notice from the
Company, the underwriter or the initiating Holder(s). The securities so excluded
shall also be withdrawn from registration. Any Registrable Securities or other
securities excluded or withdrawn from such underwriting shall also be withdrawn
from such registration. If shares are so withdrawn from the registration and if
the number of shares to be included in such registration was previously reduced
as a result of marketing factors pursuant to this Section 3.1(d), then the
---------------
Company shall offer to all Holders who have retained rights to include
securities in the registration the right to include additional securities in the
registration in an aggregate amount equal to the number of shares so withdrawn,
with such shares to be allocated among such Holders requesting additional
inclusion in accordance with Section 3.9.
-----------
3.2 Piggyback Registration.
----------------------
(a) If the Company shall determine to register any of its securities either for
its own account or the account of a security holder or holders exercising their
respective demand registration rights (other than a registration relating solely
to employee benefit plans, or a registration relating to a corporate
reorganization or other transaction on Form S-4, or a registration on any
registration form that does not permit secondary sales), the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) use its best efforts to include in such registration (and any related
qualification under blue sky laws or other compliance), except as set forth in
Section 3.2(b) below, and in any underwriting involved therein, all the
- --------------
Registrable Securities specified in a written request or requests, made by any
Holder and received by the Company within ten (10) business days after the
written notice from the Company described in clause (i) above is mailed or
delivered by the Company. Such written request may specify all or a part of a
Holder's Registrable Securities.
(b) Underwriting. If the registration of which the Company gives notice is for
a registered public offering involving an underwriting, the Company shall so
advise the Holders as a part of the written notice given pursuant to Section
-------
3.2(a)(i). In such event, the right of any Holder to registration pursuant to
- ---------
this Section 3.2 shall be conditioned upon such Holder's participation in such
-----------
underwriting, the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein and such other restrictions as may be
reasonably imposed by the underwriter and the Company. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders of securities of the Company with registration
rights to participate therein distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected by the Company.
Notwithstanding any other provision of this Section 3.2, if the
------------
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the
6
<PAGE>
number of shares to be underwritten or the Company's Board of Directors
reasonably determines that the number of shares proposed to be registered must
be reduced in view of then existing market conditions, the Company shall be
required to include in the offering only that number of Registrable Securities
and Other Shares (as defined in Section 3.9 below) that the Board of Directors
-----------
determine in its sole discretion will not jeopardize the success of the offering
(the securities so included to be apportioned pro rata among the selling Holders
and Other Stockholders requesting to participate in such registration in
accordance with Section 3.9 hereof, or in such other proportions as shall
-----------
mutually be agreed to be such selling Holders). If any person does not agree to
the terms of any such underwriting, he or she shall be excluded therefrom by
written notice from the Company or the underwriter. Any Registrable Securities
or other securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
If shares are so withdrawn from the registration and if the number of
shares of Registrable Securities to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among the persons requesting additional inclusion in accordance
with Section 3.9 hereof.
-----------
3.3 Expenses of Registration. All Registration Expenses incurred in
--------------------------
connection with any registration, qualification or compliance pursuant to
Sections 3.1 or 3.2 hereof shall be borne by the Company; provided, however,
- ------------- --- -------- -------
that if the Holders bear the Registration Expenses for any registration
proceeding begun pursuant to Section 3.1 and subsequently withdrawn by the
------------
Holders registering shares therein, such registration proceeding shall not be
counted as a requested registration pursuant to Section 3.1 hereof. Furthermore,
------------
in the event that a withdrawal by the Holders is based upon material adverse
information relating to the Company that is different from the information known
or available (upon request from the Company or otherwise) to the Holders
requesting registration at the time of their request for registration under
Section 3.1, such registration shall not be treated as a counted registration
- ------------
for purposes of Section 3.1 hereof, even though the Holders do not bear the
------------
Registration Expenses for such registration. All Selling Expenses relating to
securities so registered shall be borne by the holders of such securities pro
rata on the basis of the number of shares of securities so registered on their
behalf, as shall any other expenses in connection with the registration required
to be borne by the Holders of such securities.
3.4 Registration Procedures. In the case of each registration effected by
------------------------
the Company pursuant to this Section 3, the Company will keep each Holder
---------
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of ninety (90) days or until
the Holder or Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs; provided,
--------
however, that (i) such 90-day period shall be extended for a period of time
- -------
equal to the period the Holder refrains from selling any securities included in
such
7
<PAGE>
registration at the request of an underwriter of Common Stock (or other
securities) of the Company; and (ii) in the case of any registration of
Registrable Securities on Form S-3 which are intended to be offered on a
continuous or delayed basis, such 90-day period shall be extended, if necessary,
to keep the registration statement effective until all such Registrable
Securities are sold, however in no event longer than two (2) years from the
effective date of the registration statement and provided that Rule 415, or any
--------
successor rule under the Securities Act, permits an offering on a continuous or
delayed basis for such period; and provided further that applicable rules under
-------- -------
the Securities Act governing the obligation to file a post-effective amendment
permit, in lieu of filing a post-effective amendment that (A) includes any
prospectus required by Section 10(a)(3) of the Securities Act or (B) reflects
facts or events representing a material or fundamental change in the information
set forth in the registration statement, the incorporation by reference of
information required to be included in (A) and (B) above to be contained in
periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in
the registration statement;
(b) Prepare and file with the Commission such amendments and supplements to such
registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish such number of prospectuses and other documents incident thereto,
including any amendment of or supplement to the prospectus, as a Holder from
time to time may reasonably request;
(d) Cause all such Registrable Securities registered pursuant hereunder to be
listed on each securities exchange on which similar securities issued by the
Company are then listed, if any;
(e) Provide a transfer agent and registrar for all Registrable Securities
registered pursuant to such registration statement and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration;
(f) In connection with any underwritten offering pursuant to a registration
statement filed pursuant to Section 3.1 hereof, the Company will enter into an
underwriting agreement in form reasonably necessary to effect the offer and sale
of Common Stock.
3.5 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers, directors and
partners, legal counsel, and accountants and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification, or compliance has been effected pursuant to this
Section 3, against all expenses, claims, losses, damages, and liabilities (or
- ---------
actions, proceedings, or settlements in respect thereof) arising out of or based
on any untrue statement of a material fact contained in any prospectus, offering
circular, or other document (including any related registration statement,
notification, or the like) incident to any such registration, qualification, or
compliance, or based on any omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or
8
<PAGE>
any violation by the Company of the Securities Act or any rule or regulation
thereunder applicable to the Company and relating to action or inaction required
of the Company in connection with any such registration, qualification, or
compliance, and will reimburse each such Holder, each of its officers,
directors, partners, legal counsel, and accountants and each person controlling
such Holder, each such underwriter, and each person who controls any such
underwriter, as incurred, for any legal and any other expenses reasonably
incurred in connection with investigating and defending or settling any such
claim, loss, damage, liability, or action; provided, however, that the Company
-------- -------
will not be liable in any such case to the extent that any such claim, loss,
damage, liability, or expense arises out of or is based on any untrue statement
or omission based upon written information furnished to the Company by such
Holder or underwriter. It is agreed that the indemnity agreement contained in
this Section 3.5(a) shall not apply to amounts paid in settlement of any such
--------------
loss, claim, damage, liability, or action if such settlement is effected without
the consent of the Company.
(b) Each Holder will, if Registrable Securities held by such Holder are included
in the securities as to which such registration, qualification, or compliance is
being effected, indemnify the Company, each of its directors, officers,
partners, legal counsel, and accountants, each person who controls the Company
within the meaning of Section 15 of the Securities Act, and each Other
Stockholder, and each of their officers, directors, and partners, and each
person controlling such Other Stockholder, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement of a material fact contained in any such registration
statement, prospectus, offering circular, or other document, or any omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Company and such
Other Stockholders, directors, officers, partners, legal counsel, and
accountants, persons, underwriters, or control persons, as incurred, for any
legal or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability, or action, in each case to
the extent, but only to the extent, that such untrue statement or omission is
made in such registration statement, prospectus, offering circular, or other
document in reliance upon and in conformity with written information furnished
to the Company by such Holder; provided, however, that the obligations of such
-------- -------
Holder hereunder shall not apply to amounts paid in settlement of any such
claims, losses, damages, or liabilities (or actions in respect thereof) if such
settlement is effected without the consent of such Holder (which consent shall
not be unreasonably withheld); and provided further that in no event shall any
-------- -------
indemnity under this Section 3.5(b) exceed the net proceeds from the offering
--------------
received by such Holder.
(c) Each party entitled to indemnification under this Section 3.5 (the
-----------
Indemnified Party") shall give notice to the party required to provide
- -----------------
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
--------
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
be unreasonably withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
" -------- -------
Indemnified Party to give notice as provided herein shall not relieve the
9
<PAGE>
Indemnifying Party of its obligations under this Section 3, to the extent such
---------
failure is not prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 3.5 is held by a court
of competent jurisdiction to be unavailable to an Indemnified Party with respect
to any loss, liability, claim, damage, or expense referred to therein, then the
Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder,
shall contribute to the amount paid or payable by such Indemnified Party as a
result of such loss, liability, claim, damage, or expense in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party on the
one hand and of the Indemnified Party on the other in connection with the
statements or omissions that resulted in such loss, liability, claim, damage, or
expense as well as any other relevant equitable considerations. The relative
fault of the Indemnifying Party and of the Indemnified Party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the Indemnifying Party or by the Indemnified Party and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in an underwriting agreement entered
into in connection with the underwritten public offering are in conflict with
the foregoing provisions, the provisions in the underwriting agreement shall
control and the foregoing Section 3.5 shall have no further force and effect.
-----------
3.6 Information by Holder. Each Holder of Registrable Securities shall
-----------------------
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any registration,
qualification, or compliance referred to in this Section 3.
---------
3.7 Transfer or Assignment of Registration Rights. The rights to cause the
------------------------------------------------
Company to register a Holder's Registrable Securities (as presently
constituted and subject to subsequent adjustments for stock splits, stock
dividends, reverse stock splits, and the like) granted under Section 3.1 and
-----------
under Section 3.2 may be transferred or assigned to a transferee or assignee (in
-----------
accordance with Section 2 hereof) (a) who acquires at least twenty-five percent
---------
(25%) of such Holder's Securities, which assignee or transferee is acceptable to
the Company (which acceptance shall not be unreasonably withheld) or (b) to an
Affiliate of Holder regardless of the number of Securities transferred to such
Affiliate; provided that the Company is given written notice at the time of or
--------
within a reasonable time after said transfer or assignment, stating the name and
address of the proposed transferee or assignee and identifying the securities
with respect to which such
10
<PAGE>
registration rights are being transferred or assigned; and provided further,
-------- -------
that the transferee or assignee of such rights assumes in writing the
obligations of such Holder under this Section 3.
---------
11
<PAGE>
3.8 "Lock-Up" Agreement. If requested by the Company or any representative of an
------------------
underwriter of Common Stock (or other securities) of the Company following an
initial public offering, each of the holders of the Securities shall not sell or
otherwise transfer or dispose of any Common Stock or other securities of the
Company held by such holders (other than those included in the registration)
during the one hundred eighty (180) day period following the effective date of a
registration statement of the Company filed under the Securities Act. If
requested by the Company or any representative of an underwriter of Common Stock
(or other securities) of the Company following the first public offering of the
Company after the Company's initial public offering, each of the holders of the
Securities shall not sell or otherwise transfer or dispose of any Common Stock
or other securities of the Company held by such holders (other than those
included in the registration) during the ninety (90) day period following the
effective date of a registration statement of the Company filed under the
Securities Act. The obligations described in this Section 3.8 shall not apply to
-----------
a registration relating solely to employee benefit plans on Form S-1 or Form S-8
or similar forms that may be promulgated in the future, or a registration
relating solely to a transaction on Form S-4 or similar forms that may be
promulgated in the future. The Company may impose stop-transfer instructions
with respect to the shares of Common Stock (or other securities) subject to the
foregoing restriction until the end of such lock-up periods.
3.9 Allocation of Registration Opportunities. In any circumstance in which all
-----------------------------------------
of the securities of the Company with registration rights (the "Other Shares")
-------------
requested to be included in a registration on behalf of the Holders or
Other Stockholders cannot be so included as a result of limitations of the
aggregate number of shares of Registrable Securities and Other Shares that may
be so included, the number of shares of Registrable Securities and Other Shares
that may be so included shall be allocated among the Holders and Other
Stockholders requesting inclusion of shares pro rata on the basis of the number
of shares of Registrable Securities and Other Shares such parties requested to
have registered in such offering; provided, however, that such allocation shall
-------- -------
not operate to reduce the aggregate number of Registrable Securities and Other
Shares to be included in such registration if any Holder or Other Stockholder
does not request inclusion of the maximum number of shares of Registrable
Securities and Other Shares allocated to him pursuant to the above-described
procedure, in which case the remaining portion of his allocation shall be
reallocated among those requesting Holders and other selling stockholders whose
allocations did not satisfy their requests pro rata on the basis of the number
of shares of Registrable Securities and Other Shares for which registration had
been requested, and this procedure shall be repeated until all of the shares of
Registrable Securities and Other Shares which may be included in the
registration on behalf of the Holders and Other Stockholders have been so
allocated.
3.10 Delay of Registration. No Holder shall have any right to take any action to
---------------------
restrain, enjoin, or otherwise delay any registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Section 3.
---------
12
<PAGE>
3.11 Termination of Registration Rights. The right of any Holde to request
-------------------------------------
registration or inclusion in any registration pursuant to Section 3.1 or 3.2
----------- ---
shall terminate on the closing of the first Company-initiated registered public
offering of Common Stock of the Company if all shares of Registrable Securities
held may immediately be sold under Rule 144 during any 90-day period, or the
earlier of (i) such date after the closing of the first Company-initiated
registered public offering of its Common Stock as all shares of Registrable
Securities held may immediately be sold under Rule 144 during any 90-day period,
and (ii) five (5) years after the closing of the first Company-initiated
registered public offering.
4. MISCELLANEOUS.
4.1 Governing Law. This Agreement shall be governed in all respects by the laws
-------------
of the State of Delaware (except choice of law provisions thereof).
4.2 Arbitration. The parties hereto agree that any dispute or controversy
-----------
arising out of or relating to any interpretation, construction, performance
or breach of this Agreement (other than disputes involving confidentiality or
infringement of intellectual property rights) shall be settled by arbitration to
be held in Los Angeles County, California, in accordance with the rules then in
effect of the American Arbitration Association. The arbitrator, who shall be
mutually agreed upon by the parties hereto, may grant injunctions or other
relief in such dispute or controversy. The decision of the arbitrator shall be
final, conclusive and binding on the parties to the arbitration. Judgement may
be entered on the arbitrator's decision in any court of competent jurisdiction.
The non-prevailing party shall pay the costs and expenses of such arbitration,
and each party hereto shall separately pay its respective counsel fees and
expenses.
4.3 Successors and Assigns. Except as otherwise expressly provided herein,
----------------------
this Agreement shall not be assignable by the parties hereto. To the extent
assignable as otherwise provided herein, the provisions hereof shall inure to
the benefit of, and be binding upon, the successors, assigns, heirs, executors
and administrators of the parties hereto.
4.4 Entire Agreement; Amendment; Waiver. Except as set forth in Section 2.1(f),
----------------------------------- ---------------
this Agreement (including the Exhibits and Schedules hereto) constitutes the
fulland entire understanding and agreement between the parties with regard to
the subjects hereof. Neither this Agreement nor any term hereof may be amended,
waived, discharged or terminated, except by a written instrument signed by the
Company and a majority of the Holders of the Securities, and any such amendment,
waiver, discharge or termination shall be binding on all the Holders, but in no
event shall the obligation of any Holder hereunder be materially increased,
except upon the written consent of such Holder.
4.5 Notices, etc. All notices and other communications required or permitted
-------------
hereunder shall be in writing and shall be mailed by United States
first-class mail, postage prepaid, sent by facsimile or delivered personally by
hand or nationally recognized courier addressed (a) if to Developer, to the
address set forth below, (b) if to a Holder other than Developer [(or a member
thereof)], at such address or facsimile number as such holder or permitted
assignee shall have furnished to the Company in writing, or (c) if to the
Company, at the following address:
13
<PAGE>
If to Developer:
Guidance Solutions, Inc.
4134 Del Ray Avenue
Marina Del Ray, CA 90292
Attention: Gary Burnison
Facsimile: (310) 754-4010
with a copy to:
Bruce Meyer, Esq.
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Facsimile: 213-229-6979
If to the Company:
RightStart.com Inc.
5388 Sterling Center Drive - Unit C
Westlake Village, CA 91361
Attention: President
Facsimile: (818) 707-7132
with a copy to:
Kenneth J. Baronsky, Esq.
Milbank, Tweed, Hadley & McCloy LLP
601 So. Figueroa Street, 30th Floor
Los Angeles, California 90017
Facsimile: (213) 629-5063
All such notices and other written communications shall be effective on
the date of mailing, confirmed facsimile transfer or delivery.
14
<PAGE>
4.6 Delays or Omissions. No delay or omission to exercise any right, power
or remedy accruing to any Holder, upon any breach or default of the Company
under this Agreement shall impair any such right, power or remedy of such Holder
nor shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default therefore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
Holder of any breach or default under this Agreement or any waiver on the part
of any Holder of any provisions or conditions of this Agreement must be made in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any Holder, shall be cumulative and not alternative.
4.7 Rights; Separability. Unless otherwise expressly provided herein, a
Holder's rights hereunder are several rights, not rights jointly held with any
of the other Holders.
4.8 Information Confidential. Each Holder acknowledges that the information
received by them pursuant hereto may be confidential and for its use only, and
it will not use such confidential information in violation of the Exchange Act
or reproduce, disclose or disseminate such information to any other person
(other than its employees or agents having a need to know the contents of such
information, and its attorneys), except in connection with the exercise of
rights under this Agreement, unless the Company has made such information
available to the public generally or such Holder is required to disclose such
information by a governmental body.
4.9 Headings. The titles of the paragraphs and subparagraphs of this Agreement
are for convenience of reference only and are not to be considered in
construing or interpreting this Agreement.
4.10 Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement effective as of the day and year first above written.
RIGHTSTART.COM INC.
By: /s/ Jerry R. Welch
------------------------------
Name: Jerry R. Welch
Title: President
GUIDANCE SOLUTIONS, INC.
By: /s/ Gary Burnison
------------------------------
Name: Gary Burnison
Title: Chief Financial Officer
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
registration statements on Form S-8 (File Nos. 333-21747, 333-21749, 333-77669,
333-77671, 333-78837 and 333-78891) and on Form S-3 (File No. 333-84319).
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
April 28, 2000
<PAGE>
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-84319) and in the Registration Statements on Form
S-8 (No. 333-21749, No. 333-21747, No. 333-78837, No. 333-78891, No. 333-77669
and No. 333-77671) of The Right Start, Inc. of our report dated March 12, 1999
relating to the financial statements and financial statement schedule as of
January 30, 1999 and for the years ended January 30, 1999 and January 31, 1998,
which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Los Angeles, California
April 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
<CASH> 5,199
<SECURITIES> 0
<RECEIVABLES> 682
<ALLOWANCES> 0
<INVENTORY> 9,694
<CURRENT-ASSETS> 17,424
<PP&E> 16,990
<DEPRECIATION> 6,342
<TOTAL-ASSETS> 30,727
<CURRENT-LIABILITIES> 12,943
<BONDS> 0
2,088
5,725
<COMMON> 22,593
<OTHER-SE> 15,468
<TOTAL-LIABILITY-AND-EQUITY> 30,727
<SALES> 49,079
<TOTAL-REVENUES> 49,079
<CGS> 25,279
<TOTAL-COSTS> 62,626
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 227,000
<INCOME-PRETAX> (10,774)
<INCOME-TAX> 68
<INCOME-CONTINUING> (10,842)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,842)
<EPS-BASIC> (2.14)
<EPS-DILUTED> (2.14)
</TABLE>
