Exhibit 99.4
[FORM OF AMENDMENT NO. 1 TO THE INVESTMENT AGREEMENT]
This AMENDMENT NO. 1 TO THE INVESTMENT AGREEMENT (this
"Amendment") is dated September 5, 2001, and entered into by and between
THE RIGHT START, INC., a California corporation ("Right Start"), and
ATHANOR HOLDINGS, LLC ("Athanor").
RECITALS
WHEREAS, Right Start and Athanor have entered into that certain
Investment Agreement dated as of August 15, 2001 (the "Investment
Agreement"), pursuant to which Athanor originally agreed to purchase 20,000
shares of Convertible Preferred Stock (as defined in the Investment
Agreement) and Warrants (as defined in the Investment Agreement) in
exchange for $20 million;
WHEREAS, Right Start and Athanor have determined that Athanor will
instead purchase (in lieu of the $20 million and corresponding equity set
forth in the preceding paragraph) 11,918.815 shares of Series E Convertible
Preferred Stock for $11,918,815 and a convertible subordinated pay-in-kind
note due September 4, 2004, in the principal amount of $4,900,000 (the
"Convertible Note") and to be purchased for such amount on the terms 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:
AGREEMENT
1. Defined Terms. Capitalized terms used but not otherwise defined
herein shall have the meanings given in the Investment Agreement.
2. Amendment to Section A of the Investment Agreement. Section A
of the Investment Agreement is hereby deleted in its entirety and the
following substituted therefor:
"Athanor or its designee shall purchase for $11,918,815 payable as
set forth below and Right Start shall sell 11,918.815 shares of convertible
preferred stock of Right Start to be designated the "Series E Convertible
Preferred Stock" (the "Convertible Preferred Stock") on the terms set forth
in this Agreement. In exchange for Athanor's investment, Right Start shall
issue its Convertible Preferred Stock which, when the conditions to
conversion set forth below are met, shall automatically convert into
8,334,836 shares of common stock, no par value, of Right Start ("Common
Stock"). Additionally, Athanor or its designee shall purchase for
$4,900,000 payable as set forth below and Right Start shall sell the
Convertible Note for $4,900,000 on the terms set forth in this Agreement.
In exchange for Athanor's investment, Right Start shall issue the
Convertible Note which, if the conditions to conversion set forth below are
met, shall be convertible into 3,426,573 shares of Common Stock (based on a
price of $1.43 per share).
Except as set forth in the Investment Agreement and not hereby
amended (including, but not limited to, the allocation of board of
directors seats), holders of the Convertible Preferred Stock shall have no
rights or privileges in preference over the holders of any other equity of
Right Start (including the Common Stock) other than an aggregate
liquidation preference equal to $11,918,815 payable after payment of any
liquidation preference existing under any senior outstanding preferred
stock of Right Start. Right Start shall use reasonable efforts (which
specifically shall not include the payment of money) to obtain the approval
from the holders of its Series A Preferred Stock, Series B Convertible
Preferred Stock, Series C Convertible Preferred Stock and Series D
Convertible Preferred Stock, respectively, to permit the Convertible
Preferred Stock to be issued pari passu in right of payment upon
liquidation and payment of dividends to the Convertible Preferred Stock.
Holders of the Convertible Preferred Stock shall have the right to vote as
a separate class until such time as the outstanding Convertible Preferred
Stock has an aggregate liquidation preference less than $4 million and with
the holders of the Common Stock thereafter (with the number of votes of the
Convertible Preferred Stock being calculated on an as-converted basis) with
respect to any merger, acquisition or sale of all or substantially all
assets to which Right Start is a party and any equity issuance by Right
Start (other than the issuance of (i) 1,100,000 shares of its Common Stock
issuable in connection with the bankruptcy of Zany Brainy, Inc. ("Zany"),
(ii) 2,200 shares of its Series G Convertible Preferred Stock convertible
into 2,200,000 shares of its Common Stock to affiliates of Xxxxx Xxxxxxxx
Investment Management and Xxxx Xxxxx at a purchase price of $2.50 per
share, (iii) shares issuable upon conversion of its currently outstanding
convertible equity and the 1,313,684 shares issuable upon conversion of
Right Start's outstanding Senior Subordinated Pay-In-Kind Notes dues 2005,
(iv) options, and shares issuable under such options, issued to directors
or employees and (v) 1,800 shares of its Series F Convertible Preferred
Stock convertible into 1,800,000 shares of Common Stock (the "Online
Shares"), issued to owners of the online and internet business (the "Online
Business") conducted through the license of Right Start's intellectual
property (items i through v above, the "Approved Issuances"). Subject to
the immediately following sentence, the Convertible Preferred Stock shall
automatically convert into Common Stock (without a liquidation preference)
immediately upon (and not before) (i) approval of the conversion feature in
the Convertible Preferred Stock by Right Start's shareholders and (ii)
authorization by Right Start's shareholders of sufficient additional Common
Stock to permit such conversion; and Right Start shall use reasonable
efforts (which specifically shall not include the payment of money) to
obtain the approval set forth in items (i) and (ii) above from the holders
of its Common Stock as soon as practicable but in no event later than six
months from the date of this Agreement. To the extent that any convertible
securities of Right Start (other than employee or director options,
outstanding warrants to purchase Common Stock, the Convertible Preferred
Stock or the Convertible Note) remain outstanding (the "Remaining
Convertible Securities") at the time the Convertible Preferred Stock would
otherwise automatically convert under the immediately preceding sentence,
that portion of the Convertible Preferred Stock convertible into the number
of shares of Common Stock issuable upon conversion of the Remaining
Convertible Securities, shall not be converted except to the extent the
Remaining Convertible Securities are later converted. Notwithstanding the
foregoing, the parties agree that Athanor, at its option and from time to
time, may convert any or all of its Convertible Preferred Stock into Common
Stock once the conditions in (i) and (ii) above have been met regardless of
whether any Remaining Convertible Securities remain outstanding, but that
Convertible Preferred Stock outstanding because of the foregoing shall be
automatically converted into Common Stock as, and to the extent, the
Remaining Convertible Securities are converted into Common Stock.
The Convertible Note issued in accordance with the provisions
hereof shall be junior to all other indebtedness of Right Start, and shall
be junior to all existing and future trade payables of Right Start. The
Convertible Note shall accrue interest at an annual rate of 4% per year
(the "Interest Rate") payable annually on September 4 of each year (each
such date, an "Interest Payment Date"). Interest shall be paid in cash or,
at the election of Right Start, through the issuance of additional notes
(the "PIK Notes") in an aggregate principal amount equal to the amount of
interest that would be payable if such interest were paid in cash. The PIK
Notes shall be convertible into whole shares of Common Stock of Right
Start, such conversion price for each PIK Note to be determined based on
the average closing price of the Common Stock for the ten trading days
prior to the Interest Payment Date for which such PIK Note is issued. In
the event of conversion of any PIK Notes, the value of any fractional
shares of Common Stock shall be paid in cash. On each such Interest Payment
Date that the Company elects to deliver PIK Notes, the Company shall issue
and deliver the PIK Notes to Athanor. Notwithstanding the subordination
provisions of the Convertible Note, if on any Interest Payment Date Right
Start is unable to pay interest in cash, the subordination provisions of
the Convertible Note shall not prevent the payment of PIK Notes in lieu of
such cash interest payment. All accrued but unpaid interest which should
have been paid but for a default in payment shall, to the extent lawful,
accrue interest at the Interest Rate. Each PIK Note shall be an additional
obligation of the Company and shall be governed by and entitled to the
benefits of, and shall be subject to the terms of the Agreement and shall
rank pari passu with and be subject to the same terms (including the
interest rate from time to time payable thereon) as any other Note (except,
as the case may be, with respect to the issuance date, aggregate principal
amount and the conversion price with respect to such PIK Notes which shall
be calculated in the manner set forth above).
At any time, and from time to time, prior to September 4, 2004
(the "Maturity Date"), Athanor shall have the right to convert the
aggregate outstanding balance of the Convertible Note, including any
accrued but unpaid interest, into Common Stock at a price of $1.43 per
share, and any PIK Notes at the conversion price stated therein, provided
that except in the case of a Material Event (as defined below) or a
Redemption Notice (as defined below), such conversion right may not be
exercised prior to September 4, 2002. Prior to and up to the Maturity Date,
Right Start may redeem the aggregate outstanding balance of the Convertible
Note and any PIK Notes, including any accrued but unpaid interest thereon,
in whole but not in part, at a price equal to 105% of such aggregate
outstanding balance, provided that the Convertible Note and any PIK Notes
(i) may not be redeemed prior to September 5, 2002 and (ii) Athanor shall
have 45 days from Right Start's notice of its intention to redeem the
Convertible Note and the PIK Notes (a "Redemption Notice") to determine if
it would like to exercise its conversion privilege in lieu of any such
redemption by Right Start.
Athanor shall have the right to convert the Convertible Note and
the PIK Notes, in the case of certain material events as specified in the
Convertible Note, which include any proposed or actual (i) transfer, sale,
or other change of control of, and shares convertible into, Common Stock
representing at least 20% of all outstanding shares of, and shares
convertible into, Common Stock (excluding shares of, and shares convertible
into, Common Stock held by the Holder), provided that in the case of this
item (a), the Holder may exercise its conversion privileges prior to such
transfer, sale or other change of control so that it may participate
therein,; (ii) liquidation, dissolution or winding up of Right Start; (iii)
event of default under the Convertible Note, or an "Event of Default" (as
defined in Right Start's Loan and Security Agreement with Xxxxx Fargo
Retail Finance, LLC, dated January 2001, as amended from time to time,
which in each case is continuing and has not been waived, or under any
refinancing, extension or renewal thereof; or (iv) merger, consolidation or
sale of all or substantially all of Right Start's assets; (v) proposal to
shareholders of Right Start requiring their approval (other than ordinary,
uncontested directorship elections, ratification of accountants and other
routine matters, approval of the acquisition of the assets of Zany Brainy,
Inc., the amendment of the Company's articles of incorporation to authorize
of additional shares of Common Stock for the specific issuances set forth
in the Agreement related to the conversion feature of the Company's Series
E Convertible Preferred Stock, this Note, the PIK Notes, the Series F
Convertible Preferred Stock and the Series G Convertible Preferred Stock;
or (vi) other material corporate transaction (any of the foregoing, a
"Material Event").
The parties hereto covenant and agree to promptly execute, and
Right Start covenants to promptly deliver to Athanor, the Convertible Note
containing the provisions set forth above and other customary conditions
for an instrument such as the Convertible Note. Right Start also covenants
to obtain (i) the prompt consent of any creditors of Right Start and of the
holders of any series of Preferred Stock of Right Start, in each case as
required, to the issuance of the Convertible Note on the terms set forth
herein; (ii) approval of the conversion feature in the Convertible Note
(including in the PIK Notes) by Right Start's shareholders, and each of the
classes of Right Start securities, as required; and (iii) authorization by
Right Start's shareholders of sufficient additional Common Stock to permit
the conversion of the Convertible Note and of the maximum number of PIK
Notes issuable pursuant to the Convertible Note. Right Start covenants and
agrees that it shall use reasonable efforts (which specifically shall not
include the payment of money) to obtain the approval set forth in items
(ii) and (iii) above from the holders of its Common Stock as soon as
practicable but in no event later than six months from the date of this
Agreement.
Right Start represents and warrants that upon obtaining the
approvals set forth in items (i), (ii) and (iii) of the preceding
paragraph, there shall be no other consents required for the valid issuance
of the Convertible Note and that the Convertible Note shall represent the
valid and legally binding obligation of Right Start enforceable in
accordance with its terms."
3. Amendment to Section B of the Investment Agreement. The last
paragraph of Section B of the Investment Agreement is hereby deleted in its
entirety and the following substituted therefore:
"Right Start agrees that it will not issue additional shares of
its equity or securities convertible into or exercisable for its equity
(other than the Approved Issuances simultaneously with the issuance of the
Convertible Preferred Stock and the Convertible Note) without the consent
of Athanor."
4. Amendment to Section D of the Investment Agreement. Section D
of the Investment Agreement is hereby deleted in its entirety and the
following substituted therefor:
"Right Start shall acquire the Online Business in
exchange for 1,800 shares of its Series F Convertible Preferred Stock
convertible into 1,800,000 shares of its Common Stock (valued at the
closing bid of $2.22 per share on August 15, 2001), such Series F to be
junior in all respects to every other series or class of Right Start equity
other than the Common Stock, within a reasonable time after the date of
this Agreement but in any event not later than October 15, 2001."
5. Amendment to Section E of the Investment Agreement. The last
paragraph of Section E of the Investment Agreement is hereby deleted in its
entirety and the following substituted therefor:
"The parties agree that the Escrow Agreement executed
between them and Union Bank of California, N.A. dated as of August 27, 2001
is consistent with this Agreement and reasonably acceptable to both
parties. The parties have executed and delivered to the escrow agent the
Joint Escrow Instruction Letter (the "Joint Instructions"), as amended and
supplemented, in the form previously agreed to by the parties. Right Start
covenants and agrees promptly upon receipt of funds from Escrow to apply
such funds to cause the Closing to occur simultaneously with the release of
such funds and covenants and agrees that no later than the transmission of
the Joint Instructions, Right Start shall have received directly, or shall
have caused to be released from an escrow account, $5.5 million pursuant to
the issuance of the Series G Convertible Preferred Stock and that all such
$5.5 million shall be applied to cause the Closing to occur; provided,
however, that if the Closing and necessary issuances of Right Start equity
and the Convertible Note (as set forth herein) have not occurred on or
before 3:00 P.M. Pacific Standard Time on September 19, 2001, then the
Escrow Agent shall release the monies in Escrow to Athanor."
6. Amendments to the Certificate of Determinations of the
Series E Convertible Preferred Stock; Other Filings. Right Start covenants
that it shall not issue additional shares of the Series E Convertible
Preferred Stock, other than those shares issued pursuant to this Agreement,
without the consent of the holders of the majority of shares of the Series
E Convertible Preferred Stock then outstanding, in addition to any other
consents required under Right Start's organizational documents. Right Start
shall also cause to be filed, on a timely basis, any and all filings
required to be filed by Right Start or Zany in connection with the
transactions contemplated under this Amendment, the Investment Agreement,
the Stockholders Agreement, as amended, or the acquisition by Right Start
of the assets of Zany (i) by the State of California or any other State and
(ii) under the federal securities laws.
7. Exhibit A. Exhibit A attached to this Amendment is hereby made
Exhibit A to the Agreement.
8. Series G to be Junior to or Pari Passu with Series E; Consent
to Certain Issuances. Notwithstanding the provisions of the Certificate of
Determinations of the Series E Convertible Preferred Stock of Right Start
(the "Series E"), Athanor hereby agrees that the Series G Convertible
Preferred Stock of Right Start shall rank on a parity with the Series E
upon a liquidation, dissolution or winding up of Right Start.
Notwithstanding the provisions of the Certificate of Determinations of the
Series E, Athanor hereby consents to the Approved Issuances. Right Start
agrees that the Certificate of Determinations for the Series G Convertible
Preferred Stock shall cause the Series G Convertible Preferred Stock to
rank either junior to, or on a parity with, the Series E Convertible
Preferred Stock in all respects and that the Certificate of Determinations
for the Online Shares shall cause the Online Shares to rank junior in all
respects to the Series E Convertible Preferred Stock.
9. Notices. Any communication, demand or notice to be given
hereunder, or under any security delivered pursuant hereto, will be duly
given when delivered in writing or by telecopy to a party at its address as
indicated below or such other address as such party may specify in a notice
to each other party hereto. Such notice must be followed by notice via
telephone informing the receiving party of the telecopy and, thereafter
written notice should be sent to be received by the non-noticing party
within three business days via registered mail, or by the next business day
via overnight mail. A communication, demand or notice given pursuant to
this Agreement shall be addressed:
If to Athanor to:
----------------
Athanor Holdings, LLC
0000 Xxxxxx Xxxx.
Xxx Xxxxxxx, XX 00000
Attention: Xxx Xxxxxxx
Tel: (000) 000-0000
Fax: (000) 000-0000
and to:
------
Mr. Xxxxxxx Xxxxx
0000 Xxxxxx Xxxxxx Xxxxx, Xxxxx 000
Xxxxxx, XX 00000
Tel: (000) 000-0000
Fax: (000) 000-0000
with required copies to (which, in and of itself, shall
not constitute notice):
Xxxxxxxx & Xxxxxxxx
0000 Xxxxxxx Xxxx Xxxx, Xxxxx 0000
Xxx Xxxxxxx, XX 00000
Attention: Xxxxxx X. Xxxxxxx, Esq.
Tel: (000) 000-0000
Fax: (000) 000-0000
and to:
Skadden, Arps, Slate, Xxxxxxx & Xxxx
000 Xxxxx Xxxxx Xxxxxx
Xxx Xxxxxxx, XX 00000
Attention: Xxx Xxxxxx, Esq.
Tel: (000) 000-0000
Fax: (000) 000-0000
If to Right Start to:
--------------------
The Right Start, Inc.
00000 Xxxxxx Xxxx, Xxxxx 000
Xxxxxxxxx, XX 00000
Attention: General Counsel
Tel: (000) 000-0000
Fax: (000) 000-0000
with required copy to (which, in and of itself, shall not
constitute notice):
Fulbright & Xxxxxxxx
000 Xxxxx Xxxxxxxx Xxxxxx, 00xx Xxxxx
Xxx Xxxxxxx, XX 00000
Attention: Xxxxxx Xxx, Esq.
Tel: (000) 000-0000
Fax: (000) 000-0000
10. Effect of Amendment; Ratification. From and after the date of
this Amendment, all references in the Investment Agreement to the
Investment Agreement shall mean the Investment Agreement as amended hereby.
The terms and provisions set forth in this Amendment are in addition to and
supplemental to the terms and provisions set forth in the Investment
Agreement and the terms and provisions of the Investment Agreement are
hereby ratified and confirmed, together with the terms and provisions set
forth in this Amendment, and are and shall continue in full force and
effect.
11. Counterparts. This Amendment 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.
12. Governing Law. This Amendment shall be governed by, and shall
be construed and enforced in accordance with, the internal laws of the
State of California, without regard to conflicts of laws principles.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to the Investment Agreement to be duly executed by a duly
authorized officer as of the date first above written.
THE RIGHT START, INC.
By: __________________________
Xxxxx X. Xxxxx
Chairman and Chief Executive Officer
ATHANOR HOLDINGS, LLC
By: __________________________
Xxxxxxx Xxxxxxx
Manager
By: __________________________
Xxxxxxx Xxxxx
Manager
