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.
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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 and defined below. Prior to September 4, 2002, Athanor may exercise its
conversion privileges upon the approval by the Board of Directors for, or the
actual occurrence of, and in each case prior to a vote of shareholders of the
Company so that it may participate in any vote thereon, if any, and participate
as a shareholder therein, in connection with (a) a transfer, sale, or other
change of control of shares 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 Athanor); provided that in the case of this item (a), the Athanor
may exercise its conversion privileges prior to such transfer, sale or other
change of control so that it may participate therein, (b) the liquidation,
dissolution or winding up of the Company, (c) an Event of Default or an "Event
of Default" (as defined in Right Start's Loan and Security Agreement with Xxxxx
Fargo Retail Finance, LLC, dated January 23, 2001, as amended from time to time,
the "Xxxxx Loan Agreement"), which, in each case, is continuing and has not been
waived, or under any refinancing, extension or renewal of the Xxxxx Loan
Agreement, (d) a merger, consolidation or sale of all or substantially all of
the Company's assets, (e) a proposal to the Company's shareholders that requires
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their approval (other than (1) ordinary, uncontested directorship elections,
ratifications of accountants and other routine matters, (2) a proposal at the
next occurring special meeting of shareholders of the Company to increase the
size of the Company's stock option plans for management to an amount not in
excess of 5,528,156 shares in aggregate amount of all options issuable under
such plans, (3) approval of the acquisition of the assets of Zany Brainy, Inc.,
the amendment of the Company's articles of incorporation to authorize up to a
total of 75 million shares of Common Stock for issuance, including in such total
number 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, the Convertible Note, the PIK Notes, the Series F
Convertible Preferred Stock and the Series G Convertible Preferred Stock, (4)
the reincorporation of the Company in Delaware (provided that such
reincorporation proposal shall not be submitted to the shareholders of the
Company if the reincorporation will have a materially adverse tax consequence to
the Company or its shareholders), and (5) the change of corporate name of the
Company to "Right Start Zany Brainy, Inc.") or (f) other material corporate
transaction (but excluding redemption of the Company's Series A Mandatorily
Redeemable Preferred Stock for an amount in cash not exceeding its aggregate
liquidation preference) (any of the foregoing (a) through (f), 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
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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
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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
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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]
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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: /s/ Xxxxx X. Xxxxx
Xxxxx X. Xxxxx
Chairman and Chief Executive Officer
ATHANOR HOLDINGS, LLC
By: /s/ Xxxxxxx Xxxxxxx
Xxxxxxx Xxxxxxx
Manager
By: /s/ Xxxxxxx Xxxxx
Xxxxxxx Xxxxx
Manager
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