EXHIBIT 10.2
EXECUTION COPY
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
THIS CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (the "Agreement") is
made as of October 11, 1996 between THE RIGHT START, INC., a California
corporation (the "Company"), and STRATEGIC ASSOCIATES, L.P., a limited
partnership organized under the laws of the State of Delaware (the "Purchaser").
WHEREAS, the Company wishes to sell to Purchaser, and Purchaser wishes
to purchase from the Company, the Company's Convertible Debenture;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
ARTICLE I
AUTHORIZATION, PURCHASE AND SALE OF DEBENTURE
1.01 Authorization of the Debenture. The Company has authorized the
------------------------------
issuance and sale to Purchaser of the Company's Convertible Debenture in the
original principal amount of One Hundred Fifty Eight Thousand Dollars
($158,000), which is convertible into 26,333.33 shares of the Company's Common
Stock, no par value (the "Common Stock"). Such Convertible Debenture shall be
substantially in the form set forth as Exhibit 1.01 hereto (the "Debenture").
1.02 Authorization of the Debenture Shares. The Company has
-------------------------------------
authorized and reserved a sufficient number of shares of Common Stock for
issuance upon conversion of the Debenture. (The shares of Common Stock issuable
upon conversion of the Debenture are referred to as the "Debenture Shares.")
1.03. Purchase and Sale of Debenture.
------------------------------
(a) The Closing. The Company agrees to issue and sell to Purchaser,
-----------
and, subject to and in reliance upon the representations, warranties, terms and
conditions of this Agreement, Purchaser agrees to purchase, the Debenture for
the purchase price (the "Purchase Price") of One Hundred Fifty Eight Thousand
Dollars ($158,000). Such purchase and sale shall take place at a closing (the
"Closing") to be held by exchange of documents on October 11, 1996 at 12:00 noon
Eastern Time, or on such other date and at such time as may be mutually agreed,
at the offices of Milbank, Tweed, Xxxxxx & XxXxxx in Los Angeles, California. At
the Closing, the Company will issue to Purchaser the Debenture. At the Closing,
Purchaser will deliver to the
Company, by wire transfer of immediately available funds to an account
designated by the Company by written notice to Purchaser, the Purchase Price.
(b) Use of Proceeds. The Company agrees to use the full proceeds
---------------
form the sale of the Debenture to pay down or retire existing debt of the
Company, for store openings and acquisitions, and for working capital purposes.
ARTICLE II
CERTAIN TERMS OF THE DEBENTURE
2.01 Certain Terms of the Debenture. All principal, interest and any
------------------------------
other amounts outstanding under the Debenture shall be due and payable in full
on May 31, 2002. No payment of principal (except upon acceleration of maturity
pursuant to the terms of this Agreement or the Debenture) shall be required (or
permitted) prior to May 31, 2002. The Debenture shall bear interest at an annual
rate of eight percent (8.0%). Accrued and unpaid interest shall be due and
payable quarterly in arrears on February 28, May 31, August 31, and November 31
of each year until maturity. The Debenture shall not be prepaid except as set
forth in the Debenture. Payments of principal and interest on the Debenture
shall be made directly by wire transfer to an account designated by Purchaser by
written notice to the Company or by check duly mailed or delivered to Purchaser
at its address set forth in Section 8.04. The Debenture shall be convertible at
any time into 26,333.33 shares of Common Stock, subject to adjustment for stock
splits, combinations and similar transactions. The Debenture initially shall
have a conversion price of $6.00 per share of Common Stock, subject to
adjustment in certain circumstances.
2.02 Replacement of Debenture. Upon receipt of evidence satisfactory
------------------------
to the Company of the loss, theft, destruction or mutilation of any Debenture
and, if requested in the case of any such loss, theft or destruction, upon
delivery of an indemnity bond or other agreement or security reasonably
satisfactory to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of such Debenture, the Company will issue a new
Debenture, of like tenor and amount, in lieu of such lost, stolen, destroyed or
mutilated Debenture; provided, however, if any Debenture of which Purchaser, its
nominee, or any of its partners, officers or principals is the registered holder
is lost, stolen or destroyed, the affidavit of such principal or general partner
or any principal or corporate officer of such holder setting forth the
circumstances with respect to such loss, theft or destruction, together with an
agreement to indemnify the Company with respect thereto shall be accepted as
satisfactory evidence thereof, and no bond or other security shall be required
as a condition to the execution and delivery by the Company of a new Debenture
in replacement of such lost, stolen or destroyed Debenture.
-2-
2.03 Registration, etc. The Company shall maintain at its principal
-----------------
office a register with respect to the Debenture and shall record therein the
name(s) and address(es) of the respective registered holder(s) thereof, to which
notices are to be sent and the address(es) to which payments are to be made as
designated by the registered holder if other than the address of such holder,
and the particulars of all transfers, exchanges and replacements of the
Debenture. The Company shall record on such register any and all transfers of
the Debenture by or for the registered holder or such holder's executors or
administrators or their duly appointed attorney, in form reasonably satisfactory
to the Company, in order to maintain an accurate record of the holder(s)
thereof. Each Debenture issued hereunder, whether originally or upon transfer,
exchange or replacement, shall be registered on the date of execution thereof by
the Company. The registered holder of a Debenture issued hereunder shall be that
individual, corporation, partnership, joint venture, trust or unincorporated
organization or other entity (a "Person") in whose name the Debenture has been
so registered by the Company. A registered holder shall be deemed the owner of a
Debenture for all purposes of this Agreement and, subject to the provisions
hereof, shall be entitled to all of the benefits thereof and rights thereunder
free from all equities or rights of setoff or counterclaim between the Company
and the transferor of such registered holder or any previous registered holder
of such Debenture.
ARTICLE III
CONDITIONS TO PURCHASER'S OBLIGATION
The obligation of Purchaser to purchase and pay for the Debenture at
the Closing is subject to the following conditions:
3.01 Representations and Warranties. Each of the representations and
------------------------------
warranties of the Company set forth in Article IV hereof shall have been true
and correct when made and shall be true and correct on the date of the Closing
as if made on the date of the Closing.
3.02 Registration Rights Agreement. The Company and Purchaser shall
-----------------------------
have entered into the Registration Rights Agreement substantially in the form
set forth as Exhibit 3.02 hereto.
3.03 Performance. The Company shall have performed and complied
-----------
with all covenants and agreements contained herein and received any and all
consents, approvals or waivers necessary in order to complete the transactions
required to be performed or complied with by it or prior to or at the Closing
Date.
-3-
3.04 All Proceedings to be Satisfactory. All corporate and other
----------------------------------
proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be satisfactory in
form and substance to Purchaser, and Purchaser shall have received all such
counterpart originals or certified or other copies of such documents as it
reasonably may request.
3.05 Documentation at Closing. Purchaser shall have received prior
------------------------
to or at the Closing all of the following, each in form and substance
satisfactory to Purchaser:
(a) A certified copy of all charter documents of the Company; a
certified copy of the resolutions of the Board of Directors and, to the extent
required, the stockholders of the Company, evidencing approval of this
Agreement, the Debenture, and other matters contemplated hereby; a certified
copy of the By-laws of the Company; and certified copies of all documents
evidencing other necessary corporate or other action and governmental approvals,
if any, with respect to this Agreement, and the Debenture.
(b) A favorable opinion of counsel for the Company, as to
matters set forth in Exhibit 3.05(b), and as to such other matters as Purchaser
may reasonably request, all in scope, form and substance reasonably satisfactory
to Purchaser.
(c) A certificate of the Secretary or an Assistant Secretary of
the Company which shall certify the names of the officers authorized to sign
this Agreement, the Debenture and the other documents or certificates to be
delivered pursuant to this Agreement by the Company or any of its officers,
together with the true signatures of such officers. Purchaser may rely
conclusively on such certificates until it shall receive a further certificate
of the Secretary or an Assistant Secretary of the Company canceling or amending
the prior certificate and submitting the signatures of the officers named in
such further certificate.
(d) A certificate from a duly authorized officer of the Company
stating that (i) the representations and warranties contained in Article IV
hereof and otherwise made by the Company in writing in connection with the
transactions contemplated hereby were true and correct when made and are true
and correct on the date of the Closing as if made on the date of the Closing,
(ii) the Company has performed and complied with all covenants and agreements
contained herein and has received any and all consents, approvals or waivers
necessary in order to complete the transactions required to be performed or
complied with by it prior to or at the Closing Date, and (iii) no condition or
event has occurred and is continuing or will result from execution and delivery
of this Agreement or the issuance of the Debenture which constitutes an Event of
Default or would constitute an Event of Default but for the requirement that
notice be given or time lapse or both.
(e) Such other documents as Purchaser reasonably may request.
-4-
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The representations and warranties in this Article IV are made by and
shall apply to each of the Company and any corporation of which the Company
directly or indirectly owns more than fifty percent (50%) of the outstanding
shares of capital stock (a "Subsidiary") alike so that all references to the
"Company" shall be deemed to include the Company and each Subsidiary
individually or on a consolidated basis, as appropriate to the context and
import of the information provided. Any exceptions or qualifications to the
representations and warranties set forth in this Article IV are set forth in the
Schedule of Disclosures hereto which specifically refers to the section number
identifying the information to which such disclosure relates. Accordingly, the
Company represents and warrants to Purchaser as follows, intending and
acknowledging that Purchaser shall rely upon such information.
4.01 Organization and Standing of the Company. The Company is a duly
----------------------------------------
organized and validly existing corporation in good standing under the laws of
the jurisdiction in which it was organized and has all requisite corporate power
and authority for the ownership and operation of its properties and for the
carrying on of its business as now conducted and as now proposed to be
conducted. The Company is duly licensed or qualified and in good standing as a
foreign corporation authorized to do business in all jurisdictions wherein the
character of the property owned or leased or the nature of the activities
conducted by it makes such licensing or qualification necessary, except when the
failure to be so licensed or qualified would not have a material adverse effect
on the Company.
4.02 Corporate Action. The Company has all necessary corporate power
----------------
and has taken all corporate action required to authorize this Agreement, the
Debenture and any other agreements and instruments executed in connection
herewith and therewith, and each such agreement and instrument is a valid and
binding obligation of the Company, enforceable in accordance with its respective
terms, except as to rights to indemnity and contribution that may be limited by
federal or state securities laws and except as the enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and subject to general principles of equity.
Sufficient shares of authorized but unissued Common Stock of the Company have
been reserved for issuance as Debenture Shares by appropriate corporate action
in connection with the prospective conversion of the Debenture. Neither the
issuance of the Debenture nor the issuance of Debenture Shares upon the
conversion of the Debenture, is subject to preemptive or other similar statutory
or contractual rights of any Person, and will not conflict with any provisions
of any agreement or instrument to which the Company is a party or by which it is
bound.
-5-
4.03 Governmental Approvals. No authorization, consent, approval,
----------------------
license, exemption filing or registration with any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary for, or in connection with, the offer,
issuance, sale, execution or delivery by the Company of, or for the performance
by it of its obligations under, this Agreement, the Debenture or any other
agreement or instrument executed in connection herewith or therewith other than
the filing of a Form D with the Securities and Exchange Commission and a Form
25102(f) with the California Department of Corporations and filings that may be
required pursuant to the Registration Rights Agreement.
4.04 Litigation. There is no litigation or governmental proceeding
----------
or investigation pending or, to the best of the knowledge of the Company,
threatened (a) by or against the Company, or (b) against any officer, key
employee or principal stockholder of the Company where such litigation,
proceeding or investigation, either individually or in the aggregate, could
reasonably be expected to have a material adverse effect on the Company, nor, to
the best of the knowledge of the Company, has there occurred any event or does
there exist any condition on the basis of which any such litigation, proceeding
or investigation might properly be instituted. Neither the Company, nor, to the
best knowledge of the Company, any officer or key employee of the Company, is in
default with respect to any material order, writ, injunction, decree, ruling or
decision of any court, commission, board or other government agency affecting
the Company. There are no actions or proceedings pending or threatened (or any
basis therefor known to the Company) which could reasonably be expected to
result, either in any case or in the aggregate, in any material adverse change
in the business, operations, affairs or condition of the Company or in any of
its properties or assets, or which might call into question the validity of this
Agreement, the Debenture or any other agreement or instrument executed in
connection herewith or therewith, or any action taken or to be taken pursuant
hereto or thereto.
4.05 Compliance. The Company is in compliance in all material
----------
respects with the terms and provisions of this Agreement, its charter and by-
laws, all mortgages, indentures, leases, agreements and other instruments and of
all judgments, decrees, governmental orders, statutes, rules and regulations by
which it is bound or to which its properties or assets are subject. There is no
term or provision in any of the foregoing documents and instruments which
materially adversely affects the business, assets or financial condition of the
Company. Neither the execution and delivery of this Agreement, the Debenture or
any other agreement or instrument executed in connection herewith or therewith,
nor the consummation of any transactions contemplated hereby or thereby has
constituted or resulted in or will constitute or result in a default or
violation of any term or provision in any of the foregoing documents or
instruments.
-6-
4.06 Federal Reserve Regulations. The Company is not engaged in the
---------------------------
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation G of the Board of Governors of the
Federal Reserve System), and no part of the proceeds of the Debenture will be
used to purchase or carry any margin security or to extend credit to others for
the purpose of purchasing or carrying any margin security or in any other manner
which would involve a violation of any of the regulations of the Board of
Governors of the Federal Reserve System.
4.07 Title to Assets, Patents. The Company has good and clear record
------------------------
and marketable title in fee to such of its fixed assets as are real property,
and good and merchantable title to all of its other assets, now carried on its
books including those reflected in the most recent balance sheet of the Company
which forms a part of Exhibit 4.08 attached hereto, or acquired since the date
------------
of such balance sheet (except personal property disposed of since said date in
the ordinary course of business and personal property that is not material to
the business of the Company) free of any mortgages, pledges, charges, claims,
liens, security interests or other encumbrances; provided that substantially all
of the Company's assets are subject to the lien of the Company's senior secured
lender. The Company enjoys peaceful and undisturbed possession under all leases
under which it is the lessee, and all said leases are valid and subsisting and
in full force and effect. The Company owns or has a valid right to use the
patents, patent rights, licenses, permits, trade secrets, trademarks, trade
names, franchises, copyrights, inventions and intellectual property rights
(collectively, "Intellectual Property Rights") being used to conduct its
business as now operated and as now proposed to be operated; and the conduct of
its business as now operated and as now proposed to be operated does not and
will not conflict with Intellectual Property Rights of others. The Company has
no obligation to compensate any Person for the use of any Intellectual Property
Rights nor has the Company granted to any Person any license or right to use any
Intellectual Property Rights of the Company other than the obligation of the
Company to Xxx Xxxxxx pursuant to agreements dated November 9, 1995 and March
20, 1996.
4.08 Financial Information. Attached as Exhibit 4.08 are (a) the
--------------------- ------------
Company's consolidated balance sheets as of May 31, 1996 and May 31, 1995, and
statements of income for the fiscal years then ended, together with the report
thereon of Price Waterhouse, L.L.P. and (b) the Company's unaudited consolidated
balance sheet as of August 31, 1996 and statement of income for the three-month
period ended August 31, 1996 (collectively, the "Financial Statements"). The
Financial Statements have been prepared in accordance with generally accepted
accounting principles consistently applied and present fairly the financial
condition and results of operations of the Company as of the dates and for the
periods indicated, subject, in the case of the unaudited Financial Statements,
to normal year-end adjustments, which in the aggregate are not material. The
Company has no liability, contingent or otherwise, not disclosed in the
Financial Statements or in the notes thereto that could, together with all such
other liabilities, materially affect the financial condition of the Company, nor
does the Company have any reasonable grounds to know of any such liability.
-7-
4.09 Subsequent Events or Changes. Since May 31, 1996, (a) there has
----------------------------
been no adverse change in the business, assets or condition, financial or
otherwise, operations or prospects, of the Company; (b) neither the business,
condition, operations or prospects of the Company or any of its properties or
assets has been adversely affected as a result of any legislative or regulatory
change, any revocation or change in any franchise, license or right to do
business, or any other event or occurrence, whether or not insured against; and
(c) the Company has not entered into any material transaction or made any
distribution with respect to its capital stock.
4.10 Taxes. The Company has accurately prepared and timely filed all
-----
material federal, state and other tax returns required by law to be filed by it,
and has paid or made provision for the payment of all material taxes that are
due and payable. The Company knows of no additional assessments or adjustments
pending or threatened against the Company for any period, nor of any basis for
any such assessment or adjustment.
4.11 ERISA.
-----
(a) Neither the Company nor any Related Person (as defined
below) has breached the fiduciary rules of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or engaged in any transaction in
connection with which the Company or any Related Person could be subjected to a
suit for damages, a civil penalty assessed pursuant to Section 502(i) of ERISA
or a tax imposed by Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), in any such case which would be materially adverse to the
Company. For purposes of this Section 4.11, a "Related Person" shall mean any
trade or business, whether or not incorporated, which, together with the
Company, would be treated as a single employer under Section 414 of the Code.
(b) Neither any employee pension benefit plan (as defined in
Section 3(2) of ERISA) which is or has been established or maintained, or to
which contributions are or have been made, by the Company or any Related Person
or with respect to which the Company or any Related Person is or has been
obligated to contribute (a "Plan") nor any trust created under any Plan has been
terminated within the meaning of Title IV of ERISA since September 2, 1974 under
circumstances that could result in liability which could be materially adverse
to the Company. Other than premiums due and owing in the normal course, no
liability to the Pension Benefit Guaranty Corporation (the "PBGC") has been
incurred and remains unsatisfied or is expected by the Company to be incurred
with respect to any Plan by the Company or any Related Person which is or would
be materially adverse to the Company. There has been no reportable event (within
the meaning of Section 4043(b) of ERISA) or any other event or condition with
respect to any Plan which presents a risk of termination of any such Plan by the
PBGC under circumstances which in any case could result in liability which would
be materially adverse to the Company.
-8-
(c) Neither the Company nor any Related Person has within the
past six years contributed, or had any obligation to contribute, to a single
employer plan that has at least two contributing sponsors not under common
control or has ceased operations at a facility under circumstances which could
result in liability under Section 4068(f) of ERISA.
(d) There is no multiemployer plan (within the meaning of
Section 4001(a)(3) of ERISA) to which the Company or any Related Person is or
has ever been obligated to contribute under Title IV of ERISA.
(e) No accumulated funding deficiency (as defined in Section 302
of ERISA and Section 412 of the Code), whether or not waived, exists with
respect to any Plan. Full payment has been made within the time required under
Section 412 of the Code of all amounts that the Company or any of its Related
Persons is required under the terms of each Plan and applicable law to have paid
as contributions to such Plan as of the date hereof. Each Plan satisfies the
minimum funding standard of Section 412 of the Code.
(f) The present value of the benefit liabilities (within the
meaning of Title IV of ERISA) under all Plans determined as of May 31, 1996 and
on the basis of PBGC assumptions required under Title IV of ERISA did not exceed
the current value of the assets of all such Plans determined as of such date.
(g) Neither the Company nor any Related Person has engaged in
any transaction that could result in the incurrence of any liabilities under
Section 4069 or Section 4212 of ERISA.
(h) The Company is not a party in interest with respect to any
employee benefit plan, except for The Right Start, Inc. Employee Stock Purchase
Plan and securities of the Company are not employer securities with respect to
any employee benefit plan other than the above listed plans. For such purpose,
the term "employee benefit plan" shall have the meaning assigned to such term in
Section 3 of ERISA and the term "employer security" shall have the meaning
assigned to such term in Section 407(d)(1) of ERISA. The execution and delivery
of this Agreement, the Debenture and any other agreements or instruments
executed in connection herewith and therewith will not involve any transaction
which is subject to the prohibitions of Section 406 of ERISA or in connection
with which a tax could be imposed pursuant to Section 4975 of the Code.
4.12 Transactions with Affiliates. There are no loans, leases,
----------------------------
royalty agreements or other continuing transactions between the Company and any
Person owning five percent (5%) or more of any class of capital stock of the
Company or any other entity controlled by such stockholder or any member of such
stockholder's family other than certain management,
-9-
consulting and advisory services provided to the Company by Xxxxx Xxxxxxxx
Investment Management, Inc. for which it is entitled to receive a fee of
$100,000 per year.
4.13 Assumptions or Guaranties of Indebtedness of Other Persons. The
----------------------------------------------------------
Company has not assumed, guaranteed, endorsed or otherwise become directly or
contingently liable (including, without limitation, liability by way of
agreement, contingent or otherwise, to purchase, to provide funds for payment,
to supply funds to or otherwise invest in the debtor or otherwise to assure the
creditor against loss) on any indebtedness of any other Person.
4.14 Investments in Other Persons. The Company has not made any loan
----------------------------
or advance to any Person which is outstanding on the date of this Agreement, nor
is the Company obligated or committed to make any such loan or advance, nor does
the Company own any capital stock or assets comprising the business of,
obligations of, or any interest in, any Person other than a loan in the amount
of $248,255 in connection with the sale of certain assets to Blasiar, Inc. in
July 1996.
4.15 Environmental Compliance. The Company has obtained and is in
------------------------
compliance with all permits, licenses, and other authorizations that are
required under all Environmental Laws (as hereinafter defined), including laws
relating to emissions, discharges, releases or threatened releases of
contaminants into the environment (including, without limitation, ambient air,
surface water, ground water or land) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of contaminants, except to the extent that failure to have any such
permit, license or other authorization does not have a material adverse effect
on the business, condition (financial or other), assets, properties, operations
or prospects of the Company. The term "Environmental Laws" shall mean any and
all federal, state, local and foreign statutes, laws, regulations, ordinances,
rules, judgments, orders, decrees, permits, concessions, grants, franchises,
licenses, agreement or governmental restrictions relating to the environment or
the release of any materials into the environment, including but not limited to
those relating to hazardous substances or wastes, air emissions and discharges
to waste or public systems.
4.16 Securities Act. Neither the Company nor anyone acting on its
--------------
behalf has offered any of the Debenture or the Debenture Shares or similar
securities, or solicited any offers to purchase, or made any attempt by
preliminary conversation or negotiations to dispose of, the Debenture or the
Debenture Shares or similar securities, to any person other than Purchaser.
Neither the Company nor anyone acting on its behalf has offered or will offer to
sell the Debenture or the Debenture Shares or similar securities to, or solicit
offers with respect thereto from, or enter into any preliminary conversations or
negotiations relating hereto with, any Person, so as to bring the offer, sale or
issuance of the Debenture or the Debenture Shares to Purchaser within the
registration provisions of the Securities Act of 1933, as amended (the
"Securities Act").
-10-
4.17 Disclosure. The Company has provided to Purchaser copies of the
----------
Financial Statements and copies of its Annual Report on Form 10K for the fiscal
year ended May 31, 1996, its Annual Report to Shareholders for the fiscal year
ended May 31, 1996 and its Report on Form 10Q for the three months ended August
31, 1996 (collectively, the "Disclosure Documents"). Neither this Agreement, the
Financial Statements, the Disclosure Documents nor any other agreement,
document, certificate or written statement furnished to Purchaser by or on
behalf of the Company in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein not
misleading. There is no fact within the knowledge of the Company or any of its
executive officers which has not been disclosed herein or in the Disclosure
Documents or in writing by them to Purchaser and which materially adversely
affects, or in the future in their opinion may, insofar as they can now
reasonably foresee, materially adversely affect, the business, properties,
assets, operations, prospects or condition, financial or otherwise, of the
Company.
4.18 No Brokers or Finders. No Person has or will have, as result of
---------------------
the transactions contemplated by this Agreement, any right, interest or valid
claim against or upon the Company or the Purchaser for any commission, fee or
other compensation as a finder or broker because of any act or omission by the
Company or any agent of the Company.
4.19 Agreements of Officers. To the best of the knowledge of the
----------------------
Company, no officer or key employee of the Company is a party to or bound by any
agreement, contract or commitment, or subject to any restrictions, particularly
but without limitation in connection with any previous employment of any such
person, which materially and adversely affects, or in the future may (insofar as
it can now reasonably foresee) materially and adversely affect, the business or
operations of the Company or the right of any such person to participate in the
affairs of the Company. To the best of the knowledge of the Company, no officer
or key employee has any present intention of terminating his employment with the
Company and the Company has no present intention of terminating any such
employment.
4.20 Capitalization; Status of Capital Stock. The Company has a
---------------------------------------
total authorized capitalization consisting of 25,000,000 shares of Common Stock,
of which 7,949,306 shares are issued and outstanding. All the outstanding shares
of capital stock of the Company have been duly authorized, are validly issued
and are fully paid and nonassessable. The shares of Common Stock issuable as
Debenture Shares upon conversion of the Debenture, when so issued, will be duly
authorized, validly issued and fully paid and nonassessable. Except as set forth
in the Disclosure Documents, there are no options, warrants or rights to
purchase shares of capital stock or other securities of the Company authorized,
issued or outstanding, nor is the Company obligated in any other manner to issue
shares of its capital stock or other securities. There are no restrictions on
the transfer of shares of capital stock of the Company other than those imposed
by relevant state and federal securities laws. No holder of any security of the
-11-
Company is entitled to preemptive or similar statutory or contractual rights,
either arising pursuant to any agreement or instrument to which the Company is a
party, or which are otherwise binding upon the Company. The issuance of the
Debenture or the Debenture Shares will not result in an adjustment under the
antidilution or exercise rights of any holders of any outstanding shares of
capital stock options, warrants or other rights to acquire any securities of the
Company. The offer and sale of all shares of capital stock and other securities
of the Company issued before the Closing complied with or were exempt from all
federal and state securities laws.
4.21 Labor Relations. To the best of the knowledge of the Company,
---------------
no labor union or any representative thereof has made any attempt to organize or
represent employees of the Company, during the past two years. There are no
unfair labor practice charges, pending trials with respect to unfair labor
practice charges, pending material grievance proceedings or adverse decisions of
a Trial Examiner of the National Labor Relations Board against the Company. To
the best of the knowledge of the Company, relations with employees of the
Company are good and there is no reason to believe that any labor difficulties
will arise in the foreseeable future.
4.22 Insurance. The Company carries insurance covering its
---------
properties and business adequate and customary for the type and scope of the
properties and business. The Company's present insurance coverage is as set
forth on the Schedule of Disclosures.
-----------------------
4.23 Books and Records. The books of account, ledgers, order books,
-----------------
records and documents of the Company accurately and completely reflect all
material information relating to the business of the Company, the nature,
acquisition, maintenance, location and collection of the assets of the Company,
and the nature of all transactions giving rise to the obligations or accounts
receivable of the Company.
4.24 U.S. Real Property Holding Corporation. The Company is not now
--------------------------------------
and has not been a "United States real property holding corporation" as defined
in Section 897(c)(2) of the U.S. Internal Revenue Code of 1986, as amended (the
"Code"), and Section 1.897-2(b) of the Regulations thereunder.
4.25 Registration Rights. Except as granted to Purchaser in
-------------------
connection with the transactions contemplated by this Agreement, no Person has
any right to cause the Company to file any registration statement under the
Securities Act relating to any securities of the Company or any right to have
any securities of the Company in any such registration statement.
-12-
ARTICLE V
COVENANTS OF THE COMPANY
5.01 General Covenants of the Company. Without limiting any other
--------------------------------
covenants and provisions hereof, the Company covenants and agrees that, as long
as any of the Debenture or the Debenture Shares are outstanding, it will perform
and observe the following covenants and provisions and will cause each
Subsidiary to perform and observe such of the following covenants and provisions
as are applicable to such Subsidiary:
(a) Punctual Payment. The Company shall pay the principal of and
----------------
interest on the Debenture at the times and place and in the manner provided in
the Debenture and herein.
(b) Payment of Taxes and Trade Debt. The Company shall pay and
-------------------------------
discharge, and cause each Subsidiary to pay and discharge, all material taxes,
assessments and governmental charges or levies imposed on it or upon its income
or profits or business, or upon any properties belonging to it, prior to the
date on which penalties attach thereto, and all lawful claims which, if unpaid,
might become a lien or charge upon any properties of the Company or any
Subsidiary, provided that neither the Company nor the Subsidiary shall be
required to pay any such tax, assessment, charge, levy or claim which is being
contested in good faith and by appropriate proceedings if the Company or
Subsidiary concerned shall have set aside on its books adequate reserves with
respect thereto. The Company shall pay and cause each Subsidiary to pay, when
due, or in conformity with customary trade terms, all material lease
obligations, all material trade debt, and all other material indebtedness
incident to the operations of the Company or its Subsidiaries, except such as
are being contested in good with and by appropriate proceedings if the Company
or Subsidiary concerned shall have set aside on its books adequate reserves with
respect thereto.
(c) Maintenance of Insurance. The Company shall maintain, and cause
------------------------
each Subsidiary to maintain, insurance with responsible and reputable insurance
companies or associations in such amounts and covering such risks as is usually
carried by companies engaged in similar businesses and owning similar properties
in the same general areas in which the Company or such subsidiary operates.
(d) Preservation of Corporate Existence. The Company shall preserve
-----------------------------------
and maintain, and cause each Subsidiary to preserve and maintain, its corporate
existence, rights, franchises and privileges in the jurisdiction of its
incorporation, and qualify and remain qualified, and cause each Subsidiary to
qualify and remain qualified, as a foreign corporation in each jurisdiction in
which such qualification is necessary or desirable in view of its business and
operations or the ownership of its properties. The Company shall preserve and
maintain, and cause each Subsidiary to preserve and maintain, all licenses and
other rights to use patents,
-13-
processes, licenses, trademarks, trade names, inventions, intellectual property
rights or copyrights owned or used by and necessary to the conduct of its
business; provided, however, that the Company shall not be required to preserve
any such license or right if the Board of Directors shall determine that the
preservation is no longer desirable in the conduct of the Company's business and
that the loss thereof is not, and will not be, adverse in any material respect
to the registered holder of the Debenture.
(e) Compliance with Laws. The Company shall comply, and cause each
--------------------
Subsidiary to comply, with all applicable laws, rules, regulations and orders of
any governmental authority, noncompliance with which could materially adversely
affect its business or condition, financial or otherwise.
(f) Access to Information. In the Event of a Default (as defined in
---------------------
Section 6.01 below), the Company shall permit Purchaser or any representatives
thereof, at any reasonable time and from time to time, to receive, to examine
and make copies of and extract from the records and books of account of
(including, but not limited to, unaudited balance sheets of the Company as at
the end of each month and unaudited statements of income and of cash flows of
the Company for each month and for the current fiscal year to the end of each
month, setting forth in comparative form the Company's projected financial
statements for the corresponding periods for the current fiscal year, all in
reasonable detail and duly certified by the chief financial officer of the
Company as having been prepared in accordance with generally accepted accounting
principles consistently applied), and visit and inspect the properties of, the
Company and any Subsidiary, and to discuss the affairs, finances and accounts of
the Company and any Subsidiary with any of their officers or directors and
independent accountants.
(g) Keeping of Records and Books of Account. The Company shall keep,
---------------------------------------
and cause each Subsidiary to keep, adequate records and books of account, in
which complete entries shall be made in accordance with generally accepted
accounting principles consistently applied, reflecting all financial
transactions of the Company and such Subsidiary, and in which, for each fiscal
year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
(h) Maintenance of Properties, etc. The Company shall maintain and
------------------------------
preserve, and cause each Subsidiary to maintain and preserve, all of its
properties, necessary or useful in the proper conduct of its business, in good
repair, working order and condition, ordinary wear and tear excepted.
(i) Compliance with ERISA. The Company shall comply, and cause each
---------------------
Subsidiary to comply, with the provisions of ERISA and the Code, and the rules
and regulations thereunder, which are applicable to any Plan. Neither the
Company nor any Subsidiary shall permit any event or condition to exist which
could permit any such plan to be terminated under
-14-
circumstances which would cause the lien provided for in Section 4068 of ERISA
to attach to the assets of the Company or any Subsidiary.
(j) Dealings with Affiliates. The Company will not enter or permit
------------------------
any Subsidiary to enter into any transaction with any holder of five percent
(5%) or more of any class of capital stock of the Company, or any member of
their families or any corporation or other entity in which any one or more of
such stockholders or members of their immediate families directly or indirectly
holds five percent (5%) or more of any class of capital stock except in the
ordinary course of business and on terms not less favorable to the Company or
the Subsidiary than it would obtain in a transaction between unrelated parties.
(k) SEC Reports. The Company shall file all reports and other
-----------
information and documents which it is required to file with the Securities and
Exchange Commission ("SEC") pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"). The Company will
cause any quarterly and annual reports, proxy statements and any other documents
which it mails to its stockholders to be mailed to the registered holder of the
Debenture.
If the Company is not subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act, the Company will prepare, for the first three
quarters of each fiscal year, quarterly financial statements substantially
equivalent to the financial statements required to be included in a report on
Form 10-Q under the Exchange Act. The Company will also prepare, on an annual
basis, complete audited consolidated financial statements, including, but not
limited to, a balance sheet, a statement of income and retained earnings, a
statement of changes in financial position and all appropriate notes. All such
financial statements will be prepared in accordance with generally accepted
accounting principles consistently applied, except for changes with which the
Company's independent accountants concur, and except that quarterly statements
may be subject to year-end adjustments. The Company will cause a copy of such
financial statements to be mailed to the registered holder of the Debenture as
soon as available within forty-five (45) days after the close of each of the
first three quarters of each fiscal year and within ninety (90) days after the
close of each fiscal year.
A holder of the Debenture and prospective purchasers designated by
such holder will have the right to obtain from the Company upon request by such
holder or prospective purchasers, during any period in which the Company is not
subject to Section 13 or 15(d) of the Exchange Act, the information required by
paragraph d (4)(i) of Rule 144A under the Securities Act.
-15-
ARTICLE VI
EVENTS OF DEFAULT
6.01 Events of Default. For so long as any indebtedness under the
-----------------
Debenture shall be outstanding, the following events shall constitute an event
of default hereunder ("Events of Default").
(a) The Company shall fail to pay any installment of principal
of or interest on the Debenture when due and any such failure shall not be cured
by full performance thereof within ten (10) days after written notice thereof
shall have been given to the Company by any registered holder of the Debenture;
or
(b) The Company shall default in the performance of any covenant
contained in Article V and any such failure shall not be cured by full
performance thereof within ten (10) days after written notice thereof shall have
been given to the Company by any registered holder of the Debenture; or
(c) Any representation or warranty made by the Company or any
Subsidiary in this Agreement or by the Company or any Subsidiary (or any
officers of the Company or any Subsidiary) in any certificate, instrument or
written statement contemplated by or made or delivered pursuant to or in
connection with this Agreement, shall prove to have been incorrect when made in
any material respect; or
(d) The Company or any Subsidiary shall fail to perform or
observe any other term, covenant or agreement contained in this Agreement, or
the Debenture on its part to be performed or observed and any such failure shall
not be cured or by full performance thereof within ten (10) days after written
notice thereof shall have been given to the Company by any registered holder of
the Debenture; or
(e) The Company or any Subsidiary shall (i) admit in writing its
inability to pay its debts generally as they become due; (ii) commence a
voluntary case under Title 11 of the United States Code as from time to time in
effect, or authorize, by appropriate proceedings of its Board of Directors or
other governing body, the commencement of such a voluntary case; (iii) file an
answer or other pleading omitting or failing to deny the material allegations of
a petition filed against it commencing an involuntary case under such Title 11,
or seek, consent to or acquiesce in the relief therein provided, or fail to
controvert timely the material allegations of any such petition; (iv) suffer the
entry an order for relief in any involuntary case commenced under said Title 11;
(v) seek relief as a debtor under any applicable law, other than said Title 11,
of any jurisdiction relating to the liquidation or reorganization of debtors or
to the modification or alteration of the rights of creditors, or consent to or
acquiesce in
-16-
such relief; (vi) suffer the entry of an order by a court of competent
jurisdiction (A) finding it to be bankrupt or insolvent, (B) ordering or
approving its liquidation, reorganization or any modification or alteration of
the rights of its creditors, or (C) assuming custody of, or appointing a
receiver or other custodian for, all or a substantial part of its property; or
(vii) make an assignment for the benefit of, or enter into a composition with,
its creditors, or appoint or consent to the appointment of a receiver or other
custodian or all or a substantial part of its property; or
(f) Any judgment, writ, warrant of attachment or execution or
similar process shall be issued or levied against the property of the Company or
any Subsidiary in an aggregate amount which exceeds $2,500,000 and such
judgment, writ, or similar process shall not be released, vacated or fully
bonded or stayed pending appeal within sixty (60) days after its issue or levy.
Upon the occurrence of any Event of Default, and in any such event, Purchaser or
any other holder of any Debenture may, by notice to the Company, declare the
entire unpaid principal amount of such Debenture, all interest accrued and
unpaid thereon and all other amounts payable to such holder under such Debenture
or this Agreement to be forthwith due and payable, whereupon such Debenture, all
such accrued interest and all such amounts shall become and be forthwith due and
payable (unless there shall have occurred an Event of Default under Section
6.01(e) in which case all such accounts shall automatically become due and
payable without such declaration), without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Company with respect to itself and its Subsidiaries.
6.02 Annulment of Defaults. Section 6.01 is subject to the condition
---------------------
that, if at any time after the principal of any Debenture shall have become due
and payable, and before any judgment or decree for the payment of the moneys so
due shall have been entered, all arrears of interest upon such Debenture and all
other sums payable to the holder of such Debenture under or such Debenture and
under this Agreement (except the principal amount which by such declaration
shall have become payable) shall have been duly paid, and every other default
and Event of Default shall have been made good or cured, then and in every such
case the holder of such Debenture, by written instrument filed with the Company,
may rescind and annul such declaration and its consequences; but no such
rescission or annulment shall extend to or affect any other or subsequent
default or Event of Default or impair any right of the holders of any other
Debenture consequent thereon.
-17-
ARTICLE VII
CERTAIN SECURITIES LAW MATTERS
7.01 Representations by Purchaser. Purchaser represents and warrants
----------------------------
to the Company that:
(a) Purchaser is an "accredited investor" within the meaning of
Rule 501 under the Securities Act and was not organized for the specific purpose
of acquiring the Debenture or the Debenture Shares.
(b) Purchaser has sufficient knowledge and experience in
investing in companies similar to the Company in terms of the Company's stage of
development so as to be able to evaluate the risks and merits of investment in
the Company, and it is able financially to bear the risks thereof.
(c) Purchaser has had an opportunity to discuss the Company's
business, management and financial affairs with the Company's management.
(d) The Debenture is being acquired for Purchaser's own account
for the purpose of investment and not with a present view to or for sale in
connection with any distribution thereof, subject to the condition that the
disposition of the property of Purchaser shall be at all times within its
control.
(e) Purchaser understands that (i) the Debenture and the
Debenture Shares are being issued in a transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof or Rule 505
or 506 promulgated under the Securities Act, (ii) the Debenture, and the
Debenture Shares must be held indefinitely unless a subsequent disposition
thereof is registered under the Securities Act or an exemption from registration
is available under applicable securities laws then in effect, and (iii) the
Debenture and the Debenture Shares will bear a legend to such effect and the
Company will make a notation on its transfer books to such effect.
7.02 Restrictions on Transfer. The Debenture and the Debenture
------------------------
Shares (collectively the "Restricted Securities") shall be transferable only
upon satisfaction of the applicable conditions specified in this Section 7.02 or
if sold in a Public Sale (as hereinafter defined) or pursuant to an exemption
from the registration requirements of the Securities Act.
(a) Restrictive Legend. Except as otherwise provided in
------------------
Section 7.02(c), each certificate representing the Restricted Securities shall
bear a legend in substantially the following form:
-18-
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under the
securities laws of any state, and may not be sold, or otherwise
transferred, in the absence of such registration or an exemption
therefrom under such Act and under any such applicable state laws."
Each certificate representing such Restricted Securities shall bear the
restrictive legend set forth above, in each case unless the restrictions on
transfer provided for in this Section 7.02 shall have ceased and terminated as
to such Restricted Securities or unless the Restricted Securities shall be
eligible for resale pursuant to Rule 144(k) under the Securities Act.
(b) Notice and Opinion for Transfer. Prior to any transfer of
-------------------------------
the Restricted Securities other than pursuant to an effective registration
statement under the Securities Act (a "Public Sale"), the holder thereof will
give written notice to the Company of such holder's intention to effect such
transfer, describing in reasonable detail the manner of the proposed transfer.
If any such holder delivers to the Company an opinion of counsel in form and
substance reasonably acceptable to the Company to the effect that the proposed
transfer may be effected without registration of such Restricted Securities
under the Securities Act or applicable state securities laws or, in lieu of an
opinion, written evidence from the holder on which the Company shall rely to the
effect that the conditions of Rule 144(k) under the Securities Act are satisfied
with respect to the proposed transfer such holder thereupon shall be entitled to
transfer such Restricted Securities in accordance with the terms of this
Agreement and the notice delivered by such holder to the Company.
Notwithstanding the foregoing, no registration or opinion of counsel shall be
required for a transfer of Restricted Securities by any holder which is a
partnership to a partner or retired partner thereof, or to the estate of any
such partner or retired partner, if the transferee agrees in writing to be
subject to the terms of this Section 7.02 to the same extent as if he were an
original holder hereunder and if such transfer is made by way of distribution
pursuant to the terms of the applicable partnership agreement and without the
receipt of consideration therefor.
(c) Termination of Restrictions. The restrictions imposed by
---------------------------
this Section 7.02 upon the transferability of the Restricted Securities shall
cease and terminate as to any particular Restricted Securities and any
securities issued in exchange therefor or upon transfer thereof when, in the
opinion of counsel reasonably acceptable to the Company, such restrictions are
no longer required in order to assure compliance with the Securities Act.
Whenever any of such restrictions shall cease and terminate as to any Restricted
Securities, the holder thereof shall be entitled to receive from the Company,
without expense, new certificates not bearing the legend set forth in Section
7.02(a).
-19-
ARTICLE VIII
MISCELLANEOUS
8.01 Indemnification. The Company hereby agrees to indemnify,
---------------
exonerate and hold Purchaser and each of its partners, and their stockholders,
officers, directors, employees and agents free and harmless from and against any
and all actions, causes of action, suits, litigation, losses, liabilities and
damages, investigations or proceedings instituted by any governmental agency or
any other Person, and expenses in connection therewith, including without
limitation reasonable attorneys' fees and disbursements, incurred by the
indemnitee or any of them as a result of, or arising out of, or relating to (a)
any transaction financed or to be financed in whole or in part directly or
indirectly with proceeds from the sale by the company of any securities
hereunder, or (b) the execution, delivery, performance or enforcement of this
Agreement or any instrument contemplated hereby by any of the indemnitees,
except in each such case to the extent any such indemnified liabilities arise on
account of such indemnitee's gross negligence, willful misconduct or bad faith.
8.02 No Waiver; Cumulative Remedies. No failure or delay on the part
------------------------------
of Purchaser, or any other holder of Debenture in exercising any right, power or
remedy hereunder or thereunder shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right, power or remedy preclude any other
or further exercise thereof or the exercise of any other right, power or remedy
hereunder or thereunder. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
8.03 Amendments, Waiver and Consents. No amendment, modification or
-------------------------------
addition to this Agreement, and no waiver of or consent to noncompliance with
any covenant or other provision of this Agreement, or the Debenture shall be
effective unless in writing and duly executed by the party against whom
enforcement of such amendment, modification, addition, waiver or consent is
sought. Any waiver or consent may be given subject to satisfaction of conditions
stated therein and any waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
8.04 Notices. All notices, demands, requests, or other
-------
communications which may be or are required to be given, served, or sent by any
party to any other party pursuant to this Agreement shall be in writing and
shall be mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery (including delivery
by courier), telegram, telex, or facsimile transmission, addressed as follows:
-20-
(a) If to the Company:
The Right Start, Inc.
0000 Xxxxxxxx Xxxxxx Xxxxx
Xxxxxxxx Xxxxxxx, Xxxxxxxxxx 00000
Attention: President
Facsimile:
with a copy (which shall not constitute notice) to:
Milbank, Tweed, Xxxxxx & XxXxxx
000 X. Xxxxxxxx, 00xx Xxxxx
Xxx Xxxxxxx, XX 00000
Attention: Xxxxxxx X. Xxxxxxxx, Esq.
Facsimile: (000) 000-0000
(b) If to Purchaser:
Strategic Associates, L.P.
00 Xxxxx Xxxxxxx Xxxxxx, Xxxxx 000
Xxxxxxxxx, Xxxxxxxx 00000
Attention: Xx. Xxxxx X. Xxxxxxx
Facsimile: 410/347-2963
with a copy (which shall not constitute notice) to:
Xxxxxx X. Xxxxxx, Esq.
Xxxxxx, Xxxxxx & Xxxxxxxxx
000 Xxxxx Xxxxxx
Xxxxxxxxx, Xxxxxxxx 00000
Facsimile: 410/986-2828
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a telex) the answerback being deemed conclusive
(but not exclusive) evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
-21-
8.05 Costs and Expenses. The Company and Purchaser each agree to pay
------------------
all their own costs and expenses in connection with the preparation, execution
and delivery of this Agreement, the Debenture and other instruments and
documents to be delivered hereunder.
8.06 Binding Effect; Assignment. This Agreement shall be binding
--------------------------
upon and inure to the benefit of the Company and Purchaser and their respective
successors and assigns, except that the Company shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of Purchaser.
8.07 Survival of Representations and Warranties. All representations
------------------------------------------
and warranties made in this Agreement, the Debenture or any other instrument or
document delivered in connection herewith or therewith, shall survive the
execution and delivery hereof or thereof and the making of the loan as evidenced
by the Debenture.
8.08 Prior Agreements. This Agreement constitutes the entire
----------------
agreement between the parties and supersedes any prior understandings or
agreements concerning the subject matter hereof.
8.09 Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Delaware (excluding the
choice of laws provisions thereof).
8.10 Headings. Article, Section and subsection headings in this
--------
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
8.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument, and each of the parties hereto may execute this Agreement by signing
any such counterpart.
8.12 Further Assurances. From and after the date of this Agreement,
------------------
upon the request of Purchaser, the Company and each Subsidiary shall execute and
deliver such instruments, documents and other writings as may be necessary or
desirable to confirm and carry out and to effectuate fully the intent and
purposes of this Agreement, the Debenture, the Debenture Shares and the other
agreements and instruments contemplated hereby.
-22-
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
THE RIGHT START, INC.
By: /s/ Xxxxx X. Xxxxx
-------------------------------------
Xxxxx X. Xxxxx
President and Chief Executive Officer
STRATEGIC ASSOCIATES, L.P.
By: Xxxxxx, Xxxxxxx & Company, LLC
its general partner
By: /s/ Xxxxx X. Xxxxxxx
-------------------------------------
Xxxxx X. Xxxxxxx
Managing Member
-23-
EXHIBIT 1.01
THE SECURITIES EVIDENCED BY THIS CONVERTIBLE DEBENTURE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF
ANY STATE, AND MAY NOT BE SOLD, OR OTHERWISE TRANSFERRED, IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY SUCH
APPLICABLE STATE LAWS.
THE RIGHT START, INC.
Convertible Debenture
---------------------
$158,000 October 11, 1996
FOR VALUE RECEIVED, The Right Start, Inc., a California corporation
(the "Company"), hereby promises to pay to Strategic Associates, L.P., or
assigns ("Strategic Associates" or the "Holder"), the principal amount of One
Hundred Fifty Eight Thousand Dollars ($158,000), together with interest on the
unpaid principal amount hereof, from the date hereof until paid in full, at the
annual rate of eight percent (8.00%). Interest shall be computed on the basis
of a 360 day year and the actual number of days elapsed. Accrued and unpaid
interest shall be due and payable quarterly in arrears on February 28, May 31,
August 31, and November 30 of each year from the date hereof until May 31, 2002,
when the entire principal amount, together with all accrued and unpaid interest
thereon, shall be due and payable. All amounts due and owing hereunder shall be
payable in lawful money of the United States of America, in immediately
available funds, at the principal office of the Holder or at such other place as
the Holder may designate from time to time in writing to the Company. Any
payment on this Convertible Debenture coming due on a Saturday, a Sunday or a
day which is a legal holiday in the place at which a payment is to be made
hereunder shall be made on the next succeeding day which is a business day in
such place, and any such extension of the time of payment shall be included in
the computation of interest hereunder. This Convertible Debenture is issued
pursuant and subject to and is entitled to the benefits of a certain Convertible
Debenture Purchase Agreement dated as of October 11, 1996 between the Company
and Strategic Associates (the "Purchase Agreement").
Subject to the terms of the Purchase Agreement, upon the occurrence or
existence of an Event of Default (as defined in the Purchase Agreement) the
Holder may, by notice to the Company, declare the entire unpaid principal amount
of this Convertible Debenture, all interest accrued and unpaid hereon, and all
other amounts payable to the Holder hereunder or under the Purchase Agreement to
be forthwith due and payable, whereupon this Convertible Debenture, all
such accrued interest and all such amounts shall become and be forthwith due and
payable, and in addition thereto, and not in substitution therefor, the Holder
shall be entitled to exercise any one or more of the rights and remedies
provided by applicable law. Failure to exercise any right or remedy under this
Convertible Debenture or available under applicable law shall not constitute a
waiver of such option or such other remedies or of the right to exercise any of
the same in the event of any subsequent Event of Default. The Company and all
makers, sureties, guarantors, endorsers and other persons assuming obligations
pursuant to this Convertible Debenture hereby waive presentment, protest,
demand, notice of dishonor and all other notices and all defenses and pleas on
the grounds of any extension or extension of the time of payments or the due
dates hereof, in whole or in part, before or after maturity, with or without
notice. No renewal or extension of this Convertible Debenture, no release of any
obligor and no delay in enforcement of this Convertible Debenture or in
exercising any right or power hereunder shall affect the liability of any
obligor hereunder. The pleading of any statute of limitations as a defense to
any demand against any obligor is expressly waived.
1. Prepayment. Commencing only on October 11, 1999, upon thirty (30)
----------
days prior written notice, the Company may prepay all, but not less than all,
the unpaid principal amount and any outstanding interest thereon, only in the
following circumstances: (a) the Company has filed a Registration Statement
covering, at the option of the Holder, all or a portion of the shares of Common
Stock underlying the Convertible Debenture shares and such Registration
Statement has been declared effective on or before such prepayment date, and (b)
the market price of the Company's Common Stock on the date of such notice is at
least $7.50 per share (as adjusted from time to time in the same manner as the
Conversion Price pursuant to Section 2.4 hereof).
2. Conversion.
----------
2.1 Right of Conversion. Subject to and in compliance with the
-------------------
provisions of this Section 2, the Holder shall have the right, at the Holder's
option, at any time, and before the date on which the entire principal amount
hereof, all accrued and unpaid interest hereon, and all other amounts payable to
the Holder hereunder or under the Purchase Agreement have been paid in full (the
"Expiration Date"), to convert the principal amount of this Convertible
Debenture, or any portion thereof, into the number of fully paid and
nonassessable shares of Common Stock, no par value, of the Company determined by
dividing the principal amount so converted by the purchase price per share of
$6.00, as adjusted from time to time as hereinafter provided (the "Conversion
Price").
2.2 Manner of Conversion. In order to exercise the foregoing
--------------------
conversion right, the Holder shall surrender this Convertible Debenture to the
Company at the address of the Company set forth in the Purchase Agreement (or at
such other address as the Company, in accordance with the Purchase Agreement,
shall specify in writing to the Holder),
-2-
accompanied by written notice (the "Conversion Notice") to the Company stating
that the Holder elects to convert this Convertible Debenture.
2.3 Issuance of Common Stock on Conversion; Payment in Lieu of
----------------------------------------------------------
Fractional Shares; Payment of Interest. As soon as practicable after any such
--------------------------------------
conversion, and in any event within 10 days thereafter, the Company, at its
expense (including the payment by it of any applicable issue or stamp taxes),
will cause to be issued in the name of and delivered to the Holder, or as the
Holder (upon payment by such holder of any applicable transfer taxes) may
direct, a certificate or certificates for the number of fully paid and
nonassessable shares of Common Stock to which the Holder shall be entitled on
such conversion, in such denominations as may be requested by the Holder, plus,
in lieu of any fractional share to which the Holder would otherwise be entitled,
cash equal to the amount of such fractional share multiplied by the then fair
market value (as determined in good faith by the Board of Directors of the
Company) of a single share of Common Stock. Concurrently with the issuance of
such shares, the Company shall pay all unpaid interest which accrued prior to
the date of the Conversion Notice with respect to the portion of the principal
amount of this Convertible Debenture then being converted.
2.4 Adjustment of Conversion Price. In case the Company shall (a)
------------------------------
pay a dividend in shares of Common Stock to holders of Common Stock, (b) make a
distribution in shares of Common Stock to holders of Common Stock, (c) subdivide
its outstanding shares of Common Stock into a greater number of shares of Common
Stock, or (d) combine its outstanding shares of Common Stock, the Conversion
Price in effect immediately prior to such action shall be adjusted so that the
Holder of any Convertible Debenture thereafeter surrendered for conversion shall
be entitled to receive the number of shares of Common Stock which he would have
owned immediately following such action had such Convertible Debenture been
converted immediately prior thereto. Any adjustment made pursuant to this
subsection 2.4 shall become effective immediately after the record date in the
case of a dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision or combination.
2.5 No Adjustment. No adjustment in the Conversion Price shall be
-------------
required until cumulative adjustments amount to one percent (1%) or more of the
Conversion Price as last adjusted; provided, however, that any adjustments which
by reason of this Section 2.5 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 2.5 shall be made to the nearest cent or to the nearest one-
hundredth of a share, as the case may be. No adjustment of the Conversion Price
shall be made for cash dividends.
2.6 Continuation of Terms. In the event that the Company (a) effects
---------------------
a reorganization or (b) consolidates with or merges into or with any other
person, this Convertible
-3-
Debenture shall continue in full force and effect and the terms hereof shall be
applicable to the shares of stock and other securities and property receivable
on the conversion of this Convertible Debenture after the consummation of such
reorganization, consolidation or merger, as the case may be, and shall be
binding upon the issuer of any such stock or other securities or property.
3. Subordination.
-------------
3.1 Agreement to Subordinate. The Company, for itself and its
------------------------
successors, and each Holder, by his acceptance of this Convertible Debenture,
agree that the payment of the principal of or interest on or any other amounts
due on this Convertible Debenture is subordinated in right of payment, to the
extent and in the manner stated in this Section 3, to the prior payment in full
of all Senior Debt. For purposes hereof, "Senior Debt" means the principal of,
interest on (including any interest accruing after the commencement of any
bankruptcy proceeding or which would have accrued but for such proceeding
whether or not allowed) and other amounts due on or with respect to (i)
indebtedness of the Company, whether outstanding on the date hereof or incurred,
assumed or guaranteed by the Company, for money borrowed from banks or other
financial institutions and any refinancings or refundings thereof; (ii)
indebtedness of the company, whether outstanding on the date hereof or hereafter
created, incurred, assumed or guaranteed by the Company, which is not
subordinated in right of payment or in rights upon liquidation to any Senior
Debt; and (iii) indebtedness of the Company under interest rate swaps, caps or
similar hedging agreements and foreign exchange contracts, currency swaps or
similar agreements.
3.2 No Payment on this Convertible Debenture if Senior Debt in
----------------------------------------------------------
Default. Anything in this Convertible Debenture to the contrary
-------
notwithstanding, no payment or other distribution on account of principal of or
redemption of, interest on or other amounts due on this Convertible Debenture,
and no redemption, purchase, or other acquisition of this Convertible Debenture,
shall be made by or on behalf of the Company (i) unless full payment of amounts
then due for principal and interest and of all other amounts then due on all
Senior Debt has been made or duly provided for in cash pursuant to the terms of
the instrument governing such Senior Debt, (ii) if, at the time of such payment,
redemption, purchase or other acquisition, or immediately after giving effect
thereto, there shall exist under any Senior Debt, or any agreement pursuant to
which any Senior Debt is issued, any default, which default shall not have been
cured or waived and which default shall have resulted in the full amount of such
Senior Debt being due and payable or (iii) if, at the time of such payment,
redemption, purchase or other acquisition, the Holder shall have received
written notice from the Holder or holders of any Senior Debt or their
representative or representatives (a "Payment Blockage Notice") that there
exists under such Senior Debt, or any agreement pursuant to which such Senior
Debt is issued, any default, which default shall not have been cured or waived,
permitting the holders there to declare the full amount of such Senior Debt due
and payable, but only for the period (the "Payment Blockage Period") commencing
on the date of receipt of the Payment Blockage Notice and ending (unless
-4-
earlier terminated by notice given to the Holder by the holders of such Senior
Debt) on the earlier of (a) the date on which such event of default shall have
been cured or waived or (b) 180 days from the receipt of the Payment Blockage
Notice unless payment or distribution with respect to this Convertible Debenture
are otherwise not then permitted. Upon termination of Payment Blockage Period,
payments on account of principal of or interest on this Convertible Debenture
(other than amounts due and payable by reason of the acceleration of the
maturity of this Convertible Debenture) and redemptions, purchases or other
acquisitions may be made by or on behalf of the Company, if otherwise permitted
hereunder. Notwithstanding anything herein to the contrary, (A) only one Payment
Blockage Notice may be given during any period of 360 consecutive days with
respect to the same event of default and any other events of default on the same
issue of Senior Debt existing and known to the person giving such notice at the
time of such notice and (B) no new Payment Blockage Period may be commenced by
the Holder or holders of the same issue of Senior Debt or their representative
or representatives during any period of 360 consecutive days unless all events
of default which were the object of the immediately preceding Payment Blockage
Notice, and any other event of default on the same issue of Senior Debt existing
and known to the person giving such notice at the time of such notice, have been
cured or waived.
In the event that, notwithstanding the provisions of this Section 3.2,
payments are made by or on behalf of the Company in contravention of the
provisions of this Section 3.2, such payments shall be held by the Holders in
trust for the benefit of, and shall be paid over to and delivered to, the
holders of Senior Debt or their representative for application to the payment of
all Senior Debt remaining unpaid to the extent necessary to pay all Senior Debt
in full in accordance with the terms of such Senior Debt, after giving effect to
any concurrent payment or distribution to or for the holders of Senior Debt.
The Company shall give prompt written notice to the Holder of any
event of default under any Senior Debt or under any agreement pursuant to which
any Senior Debt may have been issued.
So long as any Senior Debt remains unpaid, the Holders of these
Subordinated Debentures will not accelerate, or cause to be accelerated, the
Subordinated Debentures, or exercise any remedies with respect to any event of
default occurring with respect to the Subordinated Debentures for a period of no
less than 180 days after the holders have delivered to the holders of the Senior
Debt notice of the occurrence of any event of default. If the event of default
is cured or waived or shall have ceased to exist within such 180 day period (and
payment of all amounts then due on the Subordinated Debentures without
acceleration shall constitute a cure of any event of default resulting from the
failure to make such payment when due), then the holders shall not be entitled
to declare these Subordinated Debentures due prior to their stated maturity
because of such event of default.
-5-
3.3 Distribution on Acceleration of this Convertible Debenture;
-----------------------------------------------------------
Dissolution and Reorganization; Subrogation of this Convertible Debenture.
-------------------------------------------------------------------------
(a) Upon (i) any acceleration of the principal amount due on this
Convertible Debenture because of an Event of Default or (ii) any distribution of
assets of the Company upon any dissolution, winding up, liquidation or
reorganization of the Company (whether in bankruptcy, insolvency or receivership
proceedings or upon an assignment for the benefit of creditors or any other
dissolution, winding up, liquidation or reorganization of the Company):
(1) the holders of the Senior Debt shall first be entitled to
receive payment in full of the principal thereof, the interest thereon and any
other amounts due thereon before the Holder is entitled to receive payment on
account of the principal of or interest on or any other amounts due on the
Convertible Debenture.
(2) any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities (other than
securities of the Company as reorganized or readjusted or securities of the
Company or any other corporation provided for by a plan of reorganization or
readjustment the payment of which is subordinate, at least to the extent
provided in this Section 3 with respect to this Convertible Debenture, to the
payment in full without diminution or modification by such plan of all Senior
Debt), to which the Holder would be entitled except for the provisions of this
Section 3, shall be paid by the liquidating trustee or agent or other person
making such a payment or distribution, directly to the holders of Senior Debt
(or their representative(s) or trustee(s) acting on their behalf), ratably
according to the aggregate amounts remaining unpaid on account of the principal
of or interest on and other amounts due on the Senior Debt held or represented
by each, to the extent necessary to make payment in full of all Senior Debt
remaining unpaid, after giving effect to any concurrent payment or distribution
to the holders of such Senior Debt; and
(3) in the event that, notwithstanding the foregoing, any payment
or distribution of assets of the Company of any kind or character, whether in
cash, property or securities shall be received by the Holders before all Senior
Debt is paid in full in cash, such payment or distribution shall be held in
trust for the benefit of, and be paid over to upon request by a holder of the
Senior Debt, the holders of the Senior Debt remaining unpaid (or their
representatives) or trustee(s) acting on their behalf, ratably as aforesaid, for
application to the payment of such Senior Debt until all such Senior Debt shall
have been paid in full, after giving effect to any concurrent payment or
distribution to the holders of such Senior Debt.
Subject to the payment in full of all Senior Debt, the Holder
shall be subrogated to the rights of the holders of Senior Debt to receive
payments or distributions of cash, property or securities of the Company
applicable to the Senior Debt until the principal of
-6-
and interest on this Convertible Debenture shall be paid in full and, for
purposes of such subrogation, no such payments or distributions to the holders
of Senior Debt of cash, property or securities which otherwise would have been
payable or distributable to the Holder shall, as between the Company, its
creditors other than the holders of Senior Debt, and the Holder, be deemed to be
a payment by the Company to or on account of the Senior Debt, it being
understood that the provisions of this Section 3 are and are intended solely for
the purpose of defining the relative rights of the Holder, on the one hand, and
the holders of Senior Debt, on the other hand.
Nothing contained in this Section 3 or elsewhere in this
Convertible Debenture is intended to or shall impair, as between the Company and
its creditors other than the holders of Senior Debt, the obligation of the
Company, which is absolute and unconditional, to pay to the Holder the principal
of and interest on this Convertible Debenture as and when the same shall become
due and payable in accordance with the terms of this Convertible Debenture or is
intended to or shall affect the relative rights of the Holder and creditors of
the Company other than holders of Senior Debt, nor shall anything herein or
therein prevent the Holder from exercising all remedies otherwise permitted by
applicable law upon default under this Convertible Debenture, subject to the
rights, if any, under this Section 3 of the holders of Senior Debt in respect of
cash, property and securities of the Company received upon the exercise of any
such remedy. Upon distribution of assets of the Company referred to in this
Section 3 the Holder shall be entitled to rely upon a certificate of the
liquidating trustee or agent or other person making any distribution to the
Holder for the purpose of ascertaining the persons entitled to participate in
such distribution, the holders of the Senior Debt and other indebtedness of the
Company, the amount hereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Section 3.
3.4 Reliance by Senior Debt on Subordination Provisions. The Holder
---------------------------------------------------
of this Convertible Debenture by his acceptance thereof acknowledges and agrees
that the foregoing subordination provisions are, and are intended to be, an
inducement and a consideration for each holder of any Senior Debt, whether such
Senior Debt was created or acquired before or after the issuance of this
Convertible Debenture, to acquire and continue to hold, or to continue to hold,
such Senior Debt, and such holder of Senior Debt shall be deemed conclusively to
have relied on such subordination provisions in acquiring and continuing to
hold, or in continuing to hold, such Senior Debt. Notice of any default in the
payment of any Senior Debt, except as expressly stated in this Section 3, and
notice of acceptance of the provisions thereof are hereby expressly waived.
Except as otherwise expressly provided herein, no waiver, forbearance or release
by any holder of Senior Debt under such Senior Debt or under this Section 3
shall constitute a release of any of the obligations or liabilities of the
Holders provided in this Section 3. Except as otherwise expressly provided
herein, no right of any present or future holder of Senior Debt to enforce the
subordination provisions hereof shall at any time or in any way be prejudiced or
impaired by any act or failure to act on the part of the Company or any such
holder or by any noncompliance by
-7-
the Company with the terms, provisions or covenants of this Convertible
Debenture, regardless of any knowledge thereof which such holder may have
otherwise been charged with.
4. No Impairment. The Company will not, by amendment of its Articles
-------------
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, or any other similar voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this
Convertible Debenture, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder against
impairment due to such event. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value of any shares of stock
receivable on conversion of this Convertible Debenture above the Conversion
Price then in effect, (b) will take all action that may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of stock, free from all taxes, liens and charges with
respect to the issue thereof, on the conversion of this Convertible Debenture
from time to time and (c) will not consolidate with or merge into any other
person or permit any such person to consolidate with or merge into the Company,
unless such other person (or, in the case of a merger or consolidation in which
the Company is the surviving entity, the person issuing the securities involved
in such merger or consolidation) shall, pursuant to Section 2.6 hereof,
expressly assume in writing and will be bound by all the terms of this
Convertible Debenture.
5. Chief Financial Officer's Certificate as Adjustments. In each
----------------------------------------------------
case of any adjustment or readjustment in the shares of Common Stock issuable on
the conversion of this Convertible Debenture, the Chief Financial Officer of the
Company will promptly compute such adjustment or readjustment in accordance with
the terms of this Convertible Debenture and prepare a certificate setting forth
such adjustment or readjustment, the Purchase Price resulting therefrom and the
increase or decrease, if any, of the number of shares purchasable at such price
upon conversion of the Convertible Debenture, and showing in detail the facts
and computation upon which such adjustment or readjustment is based. The Company
will forthwith mail a copy of each such certificate to each registered holder of
this Convertible Debenture, and will, on the written request at any time of the
holder of this Convertible Debenture, furnish to such holder a like certificate
setting forth the Purchase Price at the time in effect and showing how it was
calculated.
6. Notices of Record Date, etc. In the event the Company (a) takes
---------------------------
by the Company of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend on, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, or (b) consolidates or merges into, or transfers all or
substanitally all of its assets to, another corporation, or (c) dissolves or
liquidates (the events described in the foregoing clauses (b) and (c) being
hereinafter referred to as a "Fundamental Change"), then and
-8-
in each such event the Company will mail or cause to be mailed to the registered
holder of this Convertible Debenture a notice specifying (i) the date on which
any such record is to be taken for the purpose of such dividend, distribution or
right, and stating the amount and character of such dividend, distribution or
right, (ii) the date on which any such Fundamental Change is to be effected, and
the time, if any is to be fixed, as of which the holders of record of Common
Stock shall be entitled to exchange their shares of Common Stock for securities
or other property, if any, deliverable on any Fundamental Change and (iii) the
amount and character of any stock or other securities, or rights or options with
respect thereto, proposed to be issued or granted, the date of such proposed
issue or grant and the persons or class of persons to whom such proposed issue
or grant is to be offered or made. Such notice shall also state that the action
in question or the record date is subject to the effectiveness of a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
or a favorable vote of stockholders, if either is required. Such notice shall be
mailed at least 20 days prior to the date specified in such notice on which any
such action is to be taken or 20 days prior to the record date therefor,
whichever is earlier.
7. Reservation of Conversion Shares. The Company will at all times
--------------------------------
reserve and keep available, solely for issuance and delivery on the conversion
of this Convertible Debenture, all shares of Common Stock from time to time
issuable upon such conversion.
8. Transfer. Subject to applicable federal and state securities laws
--------
the transfer of this Convertible Debenture and all rights hereunder, in whole or
in part, is registrable at the office or agency of the Company by the holder
hereof in person or by his duly authorized attorney, upon surrender of this
Convertible Debenture properly endorsed. Each taker and holder of this
Convertible Debenture, by taking or holding the same, consents and agrees that
this Convertible Debenture, when endorsed in blank, shall be deemed negotiable,
and that the holder hereof, when this Convertible Debenture shall have been so
endorsed, may be treated by the Company and all other persons dealing with this
Convertible Debenture as the absolute owner and holder hereof for any purpose
and as the person entitled to exercise the rights represented by this
Convertible Debenture, or to the registration of transfer hereof on the books of
the Company; and until due presentment for registration of transfer on such
books the Company may treat the registered holder hereof as the owner and holder
for all purposes, and the Company shall not be affected by notice to the
contrary.
9. Register. The Company shall maintain, at the principal office of
--------
the Company (or such other office as it may designate by notice to the holder
hereof), a register for the Convertible Debentures, in which the Company shall
record the name and address of the person in whose name a Convertible Debenture
has been issued, as well as the name and address of each transferee and each
prior owner of such Convertible Debenture.
-9-
10. Replacement. On receipt of evidence reasonably satisfactory to
-----------
the Company of the loss, theft, destruction or mutilation of this Convertible
Debenture and, in the case of any such loss, theft or destruction of this
Convertible Debenture, on delivery of an indemnity agreement or security
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, on surrender and cancellation of such Convertible Debenture,
the Company at its expense will execute and deliver, in lieu thereof, a new
Convertible Debenture of like tenor; provided, however, if a Convertible
-------- -------
Debenture held by Strategic Partners its nominee or any of its partners,
principals, officers or directors is lost, stolen or destroyed, the affidavit of
a general partner or any principal or corporate officer of Strategic Partners
setting forth the circumstances with respect to such loss, theft or destruction
shall be accepted as satisfactory evidence thereof, and no indemnity bond or
other security shall be required as a condition to the execution and delivery by
the company of a new Convertible Debenture in replacement of such lost, stolen
or destroyed Convertible Debenture.
11. Remedies. The Company stipulates that the remedies at law of the
--------
holder of this Convertible Debenture in the event of any default or threatened
default by the Company in the performance of or compliance with any of the terms
of this Convertible Debenture are not and will not be adequate, and that such
terms may be specifically enforced pursuant to a decree for the specific
performance of any agreement contained herein or by an injunction against a
violation of any of the terms hereof or otherwise.
12. No Rights or Liabilities as a Stockholder. This Convertible
-----------------------------------------
Debenture shall not entitle the Holder to any voting rights or other rights as a
stockholder of the Company; provided, however, that nothing herein shall be
-------- -------
construed to affect any rights a Holder may have under the Purchase Agreement.
No provision of this Convertible Debenture, in the absence of affirmative action
by the Holder to purchase 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 Conversion Price or otherwise as a stockholder of the Company,
whether such liability is asserted by the Company or by creditors of the
Company.
13. Notices. All notices, demands, requests, or other communications
-------
which may be or are required to be given, served, or sent pursuant to this
Convertible Debenture shall be given, served and sent in accordance with the
provisions of the Purchase Agreement.
14. Miscellaneous. This Convertible Debenture and any term hereof
-------------
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. This Convertible Debenture shall be
construed and enforced in accordance with and governed by the laws of the State
of Delaware (excluding the choice of law rules thereof). The headings in this
Convertible Debenture are for purposes of reference only, and shall not limit or
otherwise affect
-10-
any of the terms hereof. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
IN WITNESS WHEREOF, the undersigned has caused this Convertible
Debenture to be duly executed on its behalf as of the date first hereinabove set
forth.
THE RIGHT START, INC.
By: /s/ Xxxxx X. Xxxxx
--------------------------------------
Xxxxx X. Xxxxx
President
-11-
EXHIBIT 3.02
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of
October 11, 1996 between The Right Start, Inc., a California corporation (the
"Company"), and Strategic Associates, L.P., a limited partnership organized
under the laws of the State of Delaware ("Purchaser").
WHEREAS, the Company and Purchaser have entered into a Convertible
Debenture Purchase Agreement dated as of October 11, 1996 (the "Purchase
Agreement");
WHEREAS, pursuant to the Purchase Agreement, the Company and Purchaser
desire to enter into this Agreement to provide Purchaser with certain
registration rights and to address related matters;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties agree as follows:
1. Registration Rights
-------------------
1.1 Demand Registration Rights.
--------------------------
(a) Subject to the provisions of this Section 1.1, at any
time after the date hereof, Purchaser may request registration for sale under
the Act of all or part of the Common Stock, no par value, of the Company
("Common Stock") then held by Purchaser or issuable to Purchaser pursuant to
conversion of the Convertible Debenture of even date herewith, issued by the
Company to Purchaser pursuant to the Purchase Agreement (the "Debenture"). The
Company shall thereafter, as expeditiously as practicable, use its best efforts
(i) to file with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Act"), a registration statement on the
appropriate form (using Form S-3 or other "short form," if available) covering
all the shares of Common Stock specified in the demand request and (ii) to cause
such registration statement to be declared effective. The Company shall use its
best efforts to cause each offering pursuant to this Section 1.1 to be managed,
on a firm commitment basis, by a recognized regional or national underwriter.
The Company shall not be required to comply with more than two (2) requests by
Purchaser for demand registration pursuant to this Section 1.1(a).
(b) The Company shall not be required to effect a demand
registration under the Act pursuant to Section 1.1(a) above if (i) the Company
receives such request for registration within 120 days preceding the anticipated
effective date of a proposed underwritten public offering of securities of the
Company approved by the Company's Board of Directors prior to the Company's
receipt of such request; (ii) within 6 months prior to any such
request for registration, a registration of securities of the Company has been
effected in which Purchaser had the right to participate pursuant to Section 1.2
hereof; or (iii) the Board of Directors of the Company reasonably determines in
good faith that effecting such a demand registration at such time would have a
material adverse effect upon a proposed sale of all (or substantially all) the
assets of the Company, or a merger, reorganization, recapitalization, or similar
transaction materially affecting the capital structure or equity ownership of
the Company; provided, however, that the Company may only delay a demand
registration pursuant to this Section 1.1(b)(iii) for a period not exceeding 3
months (or until such earlier time as such transaction is consummated or no
longer proposed). The Company shall promptly notify Purchaser in writing of any
decision not to effect any such request for registration pursuant to this
Section 1.1(b), which notice shall set forth in reasonable detail the reason for
such decision and shall include an undertaking by the Company promptly to notify
Purchaser as soon as a demand registration may be effected.
(c) Purchaser may withdraw a request for demand registration
at any time before a registration statement is declared effective, in which
event the Company shall withdraw such registration statement (and Purchaser
shall not be deemed to have requested a demand registration for purposes of
Section 1.1(a) hereof). If the Company withdraws a registration statement under
this Section 1.1(c) in respect of a registration for which the Company would
otherwise be required to pay expenses under Section 1.4(b) hereof, Purchaser
shall be liable to the Company for all expenses of such registration specified
in Section 1.4(b) hereof in proportion to the number of shares Purchaser shall
have requested to be registered, and Purchaser shall not be deemed to have
requested a demand registration for purposes of Section 1.1(a) hereof.
1.2 Piggyback Registration Rights.
-----------------------------
(a) If at any time or times after the date hereof, the
Company proposes to make a registered public offering of any of its securities
under the Act (whether to be sold by it or by one or more third parties), other
than an offering pursuant to a demand registration under Section 1.1(a) hereof
or an offering registered on Form X-0, Xxxx X-0, or comparable forms, the
Company shall, not less than 45 days prior to the proposed filing date of the
registration form, give written notice of the proposed registration to
Purchaser, and at the written request of Purchaser delivered to the Company
within 20 days after the receipt of such notice, shall include in such
registration and offering, and in any underwriting of such offering, all shares
of Common Stock that may have been designated in Purchaser's request.
(b) If a registration in which Purchaser has the right to
participate pursuant to this Section 1.2 is an underwritten offering for the
account of the Company or for the account of a security holder (other than
Purchaser) pursuant to the exercise of a demand registration right, and the
managing underwriters advise the Company or such
-2-
security holder, as the case may be, in writing that in their opinion the number
of securities requested to be included in such registration, together with the
securities being offered by the Company or such security holder, as the case may
be, exceeds the number which can be effectively sold in such offering, the
Company shall include in such registration (i) first, the securities of the
Company or such security holder proposed to be sold, and (ii) second, to the
extent possible, the Common Stock proposed to be sold by Purchaser and any other
selling stockholders, in proportion to the number of shares of Common Stock with
respect to which they have requested registration.
1.3 Registration Procedures. The Company shall have no
-----------------------
obligation to file a registration statement pursuant to Section 1.1 hereof, or
to include shares of Common Stock owned by or issuable to Purchaser in a
registration statement pursuant to Section 1.2 hereof, unless and until
Purchaser shall have furnished the Company with all information and statements
about or pertaining to Purchaser in such reasonable detail and on such timely
basis as is reasonably required by the Company in connection with the
preparation of the registration statement. Whenever Purchaser has requested that
any shares of Common Stock be registered pursuant to Sections 1.1 or 1.2 hereof,
the Company shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement
with respect to such shares and use its best efforts to cause such registration
statement to become effective as soon as reasonably practicable thereafter
(provided that before filing a registration statement or prospectus or any
amendments or supplements thereto, the Company shall furnish counsel for
Purchaser with copies of all such documents proposed to be filed);
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of not less than nine months (or two years, if the provisions of Rule
415 under the Act are available with respect thereto) or until Purchaser has
completed the distribution described in such registration statement, whichever
occurs first;
(c) furnish to Purchaser such number of copies of such
registration statement, each amendment and supplement thereto, the prospectus
included in such registration statement (including each preliminary prospectus),
and such other documents as Purchaser may reasonably request;
(d) use its best efforts to register or qualify such shares
under such other securities or blue sky laws of such jurisdictions as Purchaser
requests (and to maintain such registrations and qualifications effective for a
period of nine months or until Purchaser has completed the distribution of such
shares, whichever occurs first), and to do any and all other
-3-
acts and things which may be necessary or advisable to enable Purchaser to
consummate the disposition in such jurisdictions of such shares (provided that
the Company will not be required to (i) qualify generally to do business in any
jurisdiction where it would not be required but for this Section 1.3(d), (ii)
subject itself to taxation in any such jurisdiction, or (iii) file any general
consent to service of process in any such jurisdiction);
(e) notify Purchaser, at any time during which a prospectus
relating thereto is required to be delivered under the Act within the period
that the Company is required to keep a registration statement effective, of the
happening of any event as a result of which the prospectus included in such
registration statement contains an untrue statement of a material fact or omits
any fact necessary to make the statements therein not misleading, and prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such shares, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading;
(f) use its best efforts to cause all such shares to be
listed on securities exchanges or interdealer quotation systems (including
NASDAQ National or Small-Cap Market), if any, on which similar securities issued
by the Company are then listed;
(g) enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other actions as
Purchaser reasonably requests (and subject to Purchaser's reasonable approval)
in order to expedite or facilitate the disposition of such shares; and
(h) make reasonably available for inspection by Purchaser, by
any underwriter participating in any distribution pursuant to such registration
statement, and by any attorney, accountant or other agent retained by Purchaser
or by any such underwriter, all relevant financial and other records, pertinent
corporate documents, and properties (other than confidential intellectual
property) of the Company; provided, however, that any information that is
designated in writing by the Company, in good faith, as confidential at the time
of delivery of such information shall be kept confidential by Purchaser or any
such underwriter, attorney, accountant or agent, unless such disclosure is made
in connection with a court proceeding or required by law, or such information
becomes available to the public generally or through a third party without an
accompanying obligation of confidentiality.
1.4 Registration Expenses.
---------------------
The Company will pay all Registration Expenses of all
registrations under this Agreement, provided, however, that if a registration
-------- -------
under Section 1.1 is withdrawn at the request of Purchaser (other than as a
result of information concerning the business or financial condition of the
Company that is made known to the Purchaser after the date on which such
-4-
registration was requested) and if the requesting Purchaser elects not to have
such registration counted as a registration requested under Section 1.1, the
Purchaser shall pay the Registration expenses of such registration. For purposes
of this Section, the term "Registration Expenses" means all expenses incurred by
the Company in complying with this Section, including, without limitation, all
registration and filing fees (other than Natioanl Association of Securities
Dealers, Inc. filing fees pursuant to an underwritten offering), exchange
listing fees, printing expenses, fees, and expenses of counsel for the Company
and the reasonable fees and expenses of one firm or counsel selected by the
Purchaser to represent it, state Blue Sky fees and expenses, and the expense of
any special audits incident to or required by any such registration, but
excluding underwriting discounts and selling commissions.
1.5 Indemnity.
---------
(a) In the event that any shares of Common Stock owned by
Purchaser are sold by means of a registration statement pursuant to Section 1.1
or 1.2 hereof, the Company agrees to indemnify and hold harmless Purchaser, each
of its partners and their officers and directors, and each person, if any, who
controls Purchaser within the meaning of the Act (Purchaser, its partners and
their officers and directors, and any such other persons being hereinafter
referred to individually as an "Indemnified Person" and collectively as
"Indemnified Persons") from and against all demands, claims, actions or causes
of action, assessments, losses, damages, liabilities, costs, and expenses,
including, without limitation, interest, penalties, and reasonable attorneys'
fees and disbursements, asserted against, resulting to, imposed upon or incurred
by such Indemnified Person, directly or indirectly (hereinafter referred to in
this Section 1.5 in the singular as a "claim" and in the plural as "claims"),
based upon, arising out of or resulting from any untrue statement of a material
fact contained in the registration statement or any omission to state therein a
material fact necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading, except insofar as such
claim is based upon, arises out of or results from information furnished to the
Company in writing by Purchaser for use in connection with the registration
statement.
(b) Purchaser agrees to indemnify and hold harmless the
Company, its officers and directors, and each person, if any, who controls the
Company within the meaning of the Act (the Company, its officers and directors,
and any such other persons also being hereinafter referred to individually as an
"Indemnified Person" and collectively as "Indemnified Persons") from and against
all claims based upon, arising out of or resulting from any untrue statement of
a material fact contained in the registration statement or any omission to state
therein a material fact necessary in order to make the statement made therein,
in the light of the circumstances under which they were made, not misleading, to
the extent that such claim is based upon, arises out of or results from
information furnished to the Company in writing by Purchaser for use in
connection with the registration statement.
-5-
(c) The indemnification set forth herein shall be in addition
to any liability the Company or Purchaser may otherwise have to the Indemnified
Persons. Promptly after actually receiving definitive notice of any claim in
respect of which an Indemnified Person may seek indemnification under this
Section 1.5, such Indemnified Person shall submit written notice thereof to
either the Company or Purchaser, as the case may be (sometimes being hereinafter
referred to as an "Indemnifying Person"). The failure of the Indemnified Person
so to notify the Indemnifying Person of any such claim shall not relieve the
Indemnifying Person from any liability it may have hereunder except to the
extent that (a) such liability was caused or materially increased by such
failure, or (b) the ability of the Indemnifying Person to reduce such liability
was materially adversely affected by such failure. In addition, the failure of
the Indemnified Person so to notify the Indemnifying Person of any such claim
shall not relieve the Indemnifying Person from any liability it may have
otherwise than hereunder. The Indemnifying Person shall have the right to
undertake, by counsel or representatives of its own choosing, the defense,
compromise or settlement (without admitting liability of the Indemnified Person)
of any such claim asserted, such defense, compromise or settlement to be
undertaken at the expense and risk of the Indemnifying Person, and the
Indemnified Person shall have the right to engage separate counsel, at such
Indemnified Person's own expense, whom counsel for the Indemnifying Person shall
keep informed and consult with in a reasonable manner. In the event the
Indemnifying Person shall elect not to undertake such defense by its own
representatives, the Indemnifying Person shall give prompt written notice of
such election to the Indemnified Person, and the Indemnified Person may
undertake the defense, compromise or settlement (without admitting liability of
the Indemnified Person) thereof on behalf of and for the account and risk of the
Indemnifying Person by counsel or other representatives designated by the
Indemnified Person. Notwithstanding the foregoing, no Indemnifying Person shall
be obligated hereunder with respect to amounts paid in settlement of any claim
if such settlement is effected without the consent of such Indemnifying Person
(which consent shall not be unreasonably withheld).
(d) If for any reason the foregoing indemnity is unavailable
to, or is insufficient to hold harmless, an Indemnified Person, then the
Indemnifying Person shall contribute to the amount paid or payable by the
Indemnified Person as a result of such claims, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Person and the
Indemnified Person as well as any other relevant equitable considerations. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
1.6 Subsequent Registration Statements. The Company shall not
----------------------------------
cause or permit any new registration statements (except registration statements
on Forms X-0, X-0, or comparable forms) to become effective during the 90 days
after the effective date of a registration statement covering shares of Common
Stock owned by Purchaser.
-6-
2. Miscellaneous.
-------------
2.1 Additional Actions and Documents. Each of the parties hereto
--------------------------------
hereby agrees to use its good faith best efforts to bring about the consummation
of this Agreement, and to take or cause to be taken such further actions, to
execute, deliver and file or cause to be executed, delivered and filed such
further documents and instruments, and to obtain such consents, as may be
necessary or as may be reasonably requested in order to fully effectuate the
purposes, terms and conditions of this Agreement.
2.2 Assignment. Purchaser may assign its rights under this
----------
Agreement to any assignee of the Convertible Debenture or the shares of Common
Stock issuable thereunder.
2.3 Entire Agreement; Amendment. This Agreement, including the
---------------------------
other writings referred to herein or delivered pursuant hereto, constitutes the
entire agreement among the parties hereto with respect to the transactions
contemplated herein, and it supersedes all prior oral or written agreements,
commitments or understandings with respect to the matters provided for herein.
No amendment, modification or discharge of this Agreement shall be valid or
binding unless set forth in writing and duly executed by the party against whom
enforcement of the amendment, modification, or discharge is sought.
2.4 Limitation on Benefits. It is the explicit intention of the
----------------------
parties hereto that no person or entity other than the parties hereto (and their
respective successors and assigns) is or shall be entitled to bring any action
to enforce any provision of this Agreement against any of the parties hereto,
and the covenants, undertakings and agreements set forth in this Agreement shall
be solely for the benefit of, and shall be enforceable only by, the parties
hereto or their respective successors and assigns.
2.5 Binding Effect. This Agreement shall be binding upon and
--------------
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
2.6 Governing Law. This Agreement, the rights and obligations of
-------------
the parties hereto, and any claims or disputes relating thereto, shall be
governed by and construed in accordance with the laws of Delaware (excluding the
choice of law rules thereof).
2.7 Notices. All notices, demands, requests, or other communications
-------
which may be or are required to be given, served, or sent by any party to any
other party pursuant to this Agreement shall be in writing and shall be mailed
by first-class, registered or certified mail, return receipt requested, postage
prepaid, or transmitted by hand delivery (including delivery by courier),
telegram, telex, or facsimile transmission, addressed as follows:
-7-
(a) If to the Company:
The Right Start, Inc.
0000 Xxxxxxxx Xxxxxx Xxxxx
Xxxxxxxx Xxxxxxx, Xxxxxxxxxx 00000
Attention: President
Facsimile:
with a copy (which shall not constitute notice) to:
Milbank, Tweed, Xxxxxx & XxXxxx
000 X. Xxxxxxxx, 00xx Xxxxx
Xxx Xxxxxxx, XX 00000
Attention: Xxxxxxx X. Xxxxxxxx, Esq.
Facsimile: (000) 000-0000
(b) If to Purchaser:
Strategic Associates, L.P.
00 Xxxxx Xxxxxxx Xxxxxx, Xxxxx 000
Xxxxxxxxx, Xxxxxxxx 00000
Attention: Xx. Xxxxx X. Xxxxxxx
Facsimile: 410/347-2963
with a copy (which shall not constitute notice) to:
Xxxxxx X Xxxxxx, Esq.
Xxxxxx, Xxxxxx & Xxxxxxxxx
000 Xxxxx Xxxxxx
Xxxxxxxxx, Xxxxxxxx 00000
Facsimile: 410/986-2828
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request, or communication which shall be mailed, delivered
or transmitted in the manner described above shall be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a telex) the answerback being deemed conclusive
(but not exclusive) evidence of such delivery) or at such time as delivery is
refused by the addressee upon presentation.
-8-
2.8 Headings. Article and Section headings contained in this
--------
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
2.9 Execution in Counterparts. To facilitate execution, this
-------------------------
Agreement may be executed in as many counterparts as may be required; and it
shall not be necessary that the signatures of each party appear on each
counterpart; but it shall be sufficient that the signature of each party appear
on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of this
Agreement to produce or account for more than a number of counterparts
containing the respective signatures of all of the parties hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
THE RIGHT START, INC.
By: /s/ Xxxxx X. Xxxxx
--------------------------------------
Xxxxx X. Xxxxx
President
STRATEGIC ASSOCIATES, L.P.
By: Xxxxxx, Xxxxxxx & Company, LLC
its general partner
By: /s/ Xxxxx X. Xxxxxxx
--------------------------------------
Xxxxx X. Xxxxxxx
Managing Member
-9-
