INVESTMENT AGREEMENT
This Investment Agreement (this "Agreement") is dated and effective as
of August 15, 2001, by and between The Right Start, Inc. ("Right Start") and
Athanor Holdings, LLC ("Athanor").
Right Start and Athanor hereby agree as follows:
A. Athanor or its designee shall purchase for $20 million dollars
payable as set forth below and Right Start shall sell 20,000 shares of
convertible preferred stock of Right Start to be designated the "Series E
Convertible Preferred Stock" (the "Convertible Preferred Stock") and warrants
("Warrants") to purchase common stock, no par value of Right Start ("Common
Stock") on the terms set forth in this Agreement. In exchange for Athanor's
investment, Right Start shall issue its shares of Convertible Preferred Stock
which, when the conditions to conversion set forth below are met, shall
automatically convert into 13,482,409 shares of Common Stock, such number of
shares derived from the sum of:
1) The number of outstanding shares of Common Stock on the date hereof
(5,617,275 shares);
2) The number of shares of Common Stock issuable upon conversion of Right
Start's outstanding Senior Subordinated Convertible Pay-In-Kind Notes
due 2005 (1,313,684 shares);
3) The number of shares of Common Stock issuable upon conversion of Right
Start's outstanding Series B Convertible Preferred Stock (550,000
shares), Series C Convertible Preferred Stock (1,866,650 shares) and
Series D Convertible Pay-In-Kind Preferred Stock (2,334,800 shares) on
the date hereof; and
4) 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.
In addition, Right Start shall issue Warrants exercisable, in whole or
in part, for an aggregate of 479,000 shares of Common Stock upon the same terms
and the same conditions as warrants to purchase shares of Common Stock currently
outstanding (meaning, among other things, that the Warrants will have multiple
exercise prices for the purchase of tranches of Common Stock that will match the
various exercise prices and amounts of shares purchasable under the outstanding
warrants to purchase Common Stock).
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 $20 million 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
1
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
an issuance of the Online Shares or 1,100,000 shares in connection with the
bankruptcy of Zany Brainy, Inc. ("Zany") or pursuant to the exercise of
outstanding convertible equity of Right Start). 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
exercise of the Warrants; 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
or the Convertible Preferred Stock) 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.
B. Right Start represents and warrants to Athanor that Right Start's
outstanding convertible securities (other than employee or director options) on
the date hereof are as follows:
1) 46,696 shares of Series D Convertible Pay-In-Kind Preferred Stock;
2) warrants to purchase 449,000 shares of Common Stock (at a strike price
of $2.00 per share subject to adjustment for stock dividends,
subdivisions and combinations and extraordinary events);
2
3) warrants to purchase 30,000 shares of Common Stock (at a strike price
of $5.00 per share for 20,000 of such shares, $4.00 per share for
5,000 of such shares and $19.50 per share for the remaining 5,000 of
such shares, in each case, subject to adjustment for stock dividends,
subdivisions and combinations and extraordinary events);
4) 16,500 shares of Series B Convertible Preferred Stock;
5) 37,333 shares of Series C Convertible Preferred Stock; and
6) $3,120,000 in aggregate principal amount of Senior Subordinated
Convertible Pay-In-Kind Notes.
Right Start agrees that it will not issue additional shares of its equity or
securities convertible into or exercisable for its equity (other than 1,100,000
shares issuable in connection with the bankruptcy of Zany, shares issuable upon
conversion of its currently outstanding convertible equity and options, and
shares issuable under such options, issued to directors or employees) prior to
the issuance of the Convertible Preferred Stock and the Warrants without the
consent of Athanor. Right Start agrees that it will cause the reservation of
sufficient shares of its Common Stock to permit the Warrants issued to Athanor
under this Agreement to be exercisable on their terms at the time of issuance
and cause the authorization of the issuance of the Warrants to Athanor.
C. In addition, Right Start agrees to take all reasonable steps
necessary to obtain the resignations of three of its current directors (other
than Xxxxx Xxxxx) and shall vote to approve and to appoint three new directors
designated by Athanor effective upon designation but no earlier than the Escrow
Closing (as defined below); provided that at least one of such directors shall
be independent for purposes of the audit committee rules published by the
Securities and Exchange Commission. In addition to such three directors, to the
extent that Right Start fails to obtain all such resignations, Right Start shall
amend its bylaws if necessary to approve the appointment of additional directors
sufficient to ensure that Athanor may appoint one director for each director
whose resignation Right Start failed to obtain and shall appoint such additional
directors designated by Athanor to serve in such position unless and until Right
Start obtains the required resignations.
D. Right Start shall acquire the Online Business in exchange for
1,800,000 shares of its Common Stock (valued at the closing bid of $2.22 per
share on August 15, 2001) within a reasonable time after the date of this
Agreement but in any event not later than October 15, 2001.
E. Athanor shall make, or cause to be made, payments totaling $20
million as set forth below to be held in escrow (the "Escrow"), with respect to
its investment in the following amounts and on the following dates and times:
1) $13.0 million in cash on or before 3:00 P.M. Pacific Standard Time
Monday, August 27, 2001; and
2) The Shortfall Amount (as defined below) on or before 3:00 P.M. Pacific
Standard Time on Thursday, August 30, 2001.
3
The "Shortfall Amount" shall be the amount, if any, in cash equal to
$7.0 million minus the amount (set forth in written evidence satisfactory to
Right Start and delivered by Athanor on or before 3:00 P.M. on Monday, August
27, 2001), that the cash payment obligation of Right Start or its subsidiary ZB
Company, Inc. (the acquisition vehicle for the purchase of the assets of Zany)
("ZB Company") under the Asset Purchase Agreement between ZB Company, Zany and
certain of its affiliates (the "Asset Purchase Agreement"), has been reduced
(but not less than zero), as a result of application of the $3,539,190 due to
Athanor for break-up fees and the $3,539,190 plus interest deposited by Athanor
into escrow in connection with the bankruptcy of Zany (the "Identified
Sources"). The amount of such reduction shall also include, without duplication,
any amounts made payable to Right Start or its designee from the Identified
Sources within the timeframe stated above. Right Start shall provide written
notice to Athanor within 24 hours of receipt of the proferred evidence whether
Right Start considers the evidence satisfactory.
Athanor acknowledges that Right Start is obligated pursuant to the Asset
Purchase Agreement and an order of the court in the Zany bankruptcy to complete
the Closing (as such term is defined in the Asset Purchase Agreement) not later
than September 5, 2001. Therefore, Athanor agrees that time is of the essence
with respect to making the foregoing payments into Escrow. Athanor agrees that
if any payment into Escrow required above is not made by the exact date and time
it is due, then this Agreement shall terminate (except for the provisions
regarding liquidated damages, release of claims, governing law, attorney's fees
and expenses) immediately upon written notice ("Termination Notice") being sent
from Right Start to Athanor; provided that if Athanor has funded the required
amounts into Escrow before such notice this Agreement shall not terminate. Upon
Right Start sending such written notice, the following shall automatically and
immediately occur: (a) other than the provisions regarding liquidated damages,
release of claims, governing law, attorney's fees and expenses, this Agreement
shall immediately become null and void and not enforceable by either party and
(b) Right Start shall have the right to complete the Closing using funding from
other sources with no further obligation to Athanor. The parties agree that it
would be extremely difficult or impossible to determine the damages suffered by
Right Start as a result of being required to find other sources of funds to
complete the Closing if Athanor fails to make the required payments into Escrow
and agree further that $2 million would be reasonable liquidated damages. As a
result, if Athanor fails to make any required payment into Escrow by the date
and time required and Athanor has not made such payments prior to Right Start
sending the Termination Notice, Athanor shall promptly pay $2 million to Right
Start as liquidated damages for such failure. The notice to Athanor described
above shall be provided by first class or certified mail, postage prepaid and by
facsimile to Athanor Holdings, LLC, 0000 Xxxxxx Xxxxxxxxx, Xxx Xxxxxxx,
Xxxxxxxxxx 00000 or 310.789.7218. Right Start agrees that if the Closing is not
consummated within 24 hours after release of the amounts in Escrow (and in no
event later than September 19, 2001), that Right Start shall promptly return or
cause the return of such released amounts and all amounts received by Right
Start (including amounts received by Zany for the benefit of Right Start) from
the Identified Sources to Athanor; provided that, if the Closing does not occur
4
after such release as result of events beyond Right Start's control, Right Start
shall return such amounts to Escrow and not to Athanor unless the date for such
return is on or after September 19, 2001.
Athanor and Right Start shall execute an escrow agreement (the "Escrow
Agreement") having terms consistent with this Agreement and reasonably
acceptable to both parties.
The Escrow Agreement shall provide that the Escrow Agent shall release
the amounts in the Escrow to ZB Company or such other entity as the parties
mutually agree in writing, at such time as Right Start provides to the Escrow
Agent (i) a copy of the final court order approving the sale under Section 363
and 365 of Chapter 11 of the United States Code to Right Start of the assets of
Zany in substantially the form jointly delivered by Right Start and Athanor on
or before August 24, 2001, (ii) a certificate from an officer of Right Start
certifying that other than the payment of money as required by the Asset
Purchase Agreement all conditions have been met for the Closing to occur and
(iii) a copy of an executed stock certificate evidencing the issuance of the
Convertible Preferred Stock to Athanor and a copy of the Warrants evidencing
issuance of the Warrants to Athanor (the "Escrow Closing"); provided that if
such Closing and issuance have not occurred on or before 3:00 P.M. Pacific
Standard Time on September 19, 2001 or such earlier time as Athanor pays
liquidated damages to Right Start as set forth above, then the Escrow Agent
shall release the monies in Escrow to Athanor. Right Start agrees promptly upon
receipt of such funds from Escrow to apply such funds to cause the Closing to
occur. Right Start agrees to send the certificate for the Convertible Preferred
Stock and the Warrants to Athanor at the same time it sends copies thereof to
the Escrow Agent.
F. Athanor acknowledges that it has reviewed the publicly filed
information about Right Start, that it has received such other information (from
sources other than Right Start) as it has deemed necessary and appropriate to
make its own investment analysis and decision to purchase securities of Right
Start and that it has independently and without reliance on Right Start or any
oral or written representation or warranty from Right Start, its officers,
shareholders, directors or other representatives (other than representations or
warranties made by Right Start in this Agreement), made its own decision to
purchase such securities and enter into this Agreement. Athanor shall have no
recourse against Right Start, its officers, shareholders, directors or other
representatives, nor shall any such person incur any liability, for any
misstatement (whether material or immaterial) or omission (whether negligent or
otherwise) with respect to such purchase except as set forth in paragraph G
below.
G. Right Start represents and warrants to Athanor that its most recent
Annual Report on Form 10-K and all subsequent documents filed by Right Start
with the United States Securities and Exchange Commission (the "Commission")
pursuant to Section 13(a), 13(c) or 15(d) of the United States Securities
Exchange Act of 1934, as amended (the "Exchange Act") on or prior to the date of
this Agreement (the "Exchange Act Reports"), when they were filed with the
Commission, did not contain any untrue statement of material fact or omit to
5
state a material fact necessary in order to make the statements therein, in
light of the circumstances in which they were made, not misleading.
H. Athanor represents and warrants to Right Start that the securities of
Right Start being purchased under this Agreement are being acquired for its own
account without any view to the "distribution" thereof within the meaning of the
Securities Exchange Act of 1933, as amended (the "Act") and Athanor has no
intention of distributing or reselling such securities or any part thereof,
except in accordance with the Act and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder. Athanor represents
and warrants that it is an "accredited investor" within the meaning of paragraph
(1), (2), (3), (7) or (8) of Rule 501(a) of the Act.
I. This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California without regard to rules or principles
relating to conflicts of laws.
To the extent that the parties to this Agreement litigate its terms with
one another, the prevailing party, as determined by a final court order, shall
be entitled to be reimbursed its reasonable fees for legal counsel by the other
party.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. This Agreement shall be binding upon the respective
parties hereto and their successors and permitted assigns.
Each party to this Agreement shall bear all of its expenses (including
attorney's fees) in connection with the execution, delivery and performance of
this Agreement.
This Agreement may only be amended by a writing signed by each party to
this Agreement.
J. Right Start agrees to indemnify and hold Athanor and its officers,
directors, employees and other affiliates harmless from and against any losses,
claims, damages or liabilities (the "Loss") only to the extent that they result
from any liabilities of XxxxxXxxxx.xxx Inc. or Right Start arising out of the
foreclosure of loans and debt obligations of XxxxxXxxxx.xxx and the transfer
and/or sale of assets of XxxxxXxxxx.xxx as a consequence of such foreclosure,
whether arising before or after the date of this Agreement; provided that such
indemnification shall not apply to losses, claims, damages or liabilities
resulting from actions taken by Athanor. Right Start shall have fulfilled its
obligations under this indemnification provision if it pays to Athanor an amount
equal to the Loss multiplied by a percentage equal to the number of shares of
Common Stock held by Athanor on the Escrow Closing date divided by the number of
shares of Common Stock outstanding on the Escrow Closing date assuming
conversion of all convertible securities (excluding from such calculation all
employee and director options).
6
K. Right Start agrees to file as soon as practicable but in any case
prior to the Escrow Closing date with the Secretary of State a Certificate of
Determination of Rights, Preferences and Privileges setting forth the rights,
preferences and privileges of the Convertible Preferred Stock which certificate
shall be in form and substance reasonably satisfactory to Athanor based upon
this Agreement and containing customary provisions for such a preferred stock of
Right Start.
L. Right Start agrees to enter into a registration rights agreement with
Athanor in substantially the form of the registration rights agreement it has
provided to other of its investors previously that provides Athanor with the
right to have the sale or exchange of its securities registered on Form S-3 on a
continuous basis with customary exceptions.
M. The parties hereby agree that, upon their mutual agreement with
respect to the terms thereof, Right Start may issue securities other than the
Convertible Preferred Stock in exchange for the investment by Athanor; provided
that both parties have agreed in writing to the terms of such issuance and such
securities.
N. Upon the signing of this Agreement, each of the parties (as such, a
"Releasor") hereby releases the other party, its directors, officers,
shareholders and affiliates (the "Released Parties"), and each of them, from any
and all claims, demands, debts, losses, obligations, liabilities, costs,
expenses, and rights of action and causes of action, of any kind or character
whatsoever, whether known or unknown, suspected or unsuspected, that arise on or
before the date of this Agreement, or hereafter are alleged to have arisen on or
before such date, that relate in any manner to the acts or omissions of the
Released Parties (hereinafter, the "Released Claims") in connection with the
bankruptcy of Zany (other than obligations under this Agreement including the
indemnity provisions hereof). In entering into this Release, Releasors, and each
of them, expressly waive any and all rights that they have or may have under
California Civil Code Section 1542 or under any other similar state or federal
statute or under any common law principle of similar effect. California Civil
Code Section 1542 provides as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor.
The consequences of the foregoing waiver have been explained by counsel
to Releasors. This mutual release shall survive termination of this Agreement.
O. This Agreement is the final agreement of the parties with respect to the
matters it addresses and supercedes all prior written or unwritten agreements
with respect to such matters.
7
This Agreement shall be effective as of August 15, 2001.
ATHANOR HOLDINGS, LLC
By: /s/ Xxx Xxxxxxx
-----------------
Name: Xxx Xxxxxxx
Title: Manager
By: /s/ Xxxxxxx X. Xxxxx
----------------------
Name: Xxxxxxx X. Xxxxx
Title: Member
THE RIGHT START, INC.
By: /s/ Xxxxx X. Xxxxx
--------------------------------
Name: Xxxxx X. Xxxxx
Title: Chairman and Chief Executive Officer
