Exhibit 99.3
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 to 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 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 RightStart (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);
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.
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 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 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).
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.
This Agreement shall be effective as of August 15, 2001.
ATHANOR HOLDINGS, LLC
By: /s/ Xxxxxxx Xxxxxxx
------------------------
Name: Xxxxxxx Xxxxxxx
Title: Managing Member
By: /s/ Xxxxxxx Xxxxx
------------------------
Name: Xxxxxxx Xxxxx
Title: Managing Member
THE RIGHT START, INC.
By: /s/ Xxxxx X. Xxxxx
-------------------------
Xxxxx X. Xxxxx
Chairman and Chief Executive Officer
