-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AVkK0/k4lxeo7GkM20WC1mv89rotpvxTao+8S4KxB0R3ldKZu2CZ+hvP10D/wbH3 bQuJfuePgino7LFVcy+iKg== 0000898430-99-002816.txt : 19990714 0000898430-99-002816.hdr.sgml : 19990714 ACCESSION NUMBER: 0000898430-99-002816 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990709 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990713 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIGHT START INC /CA CENTRAL INDEX KEY: 0000878720 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 953971414 STATE OF INCORPORATION: CA FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-19536 FILM NUMBER: 99663807 BUSINESS ADDRESS: STREET 1: 5388 STERLING CENTER DR CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 BUSINESS PHONE: 8187077100 MAIL ADDRESS: STREET 1: 5388 STERLING CENTER DRIVE CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 8-K 1 FORM 8-K (JULY 9, 1999) SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported): July 9, 1999 The Right Start, Inc. ------------------------------------------------------------ (Exact Name of Registrant as Specified in Charter) California 0-19536 95-3971414 - -------------------- --------------------------- -------------------- (State or Other (Commission File Number) (IRS Employer Jurisdiction of Identification Incorporation) No.)
5388 Sterling Center Drive, Unit C Westlake Village, California 91361 - ------------------------------------------- ------------ (Address of Principal Executive Offices) (Zip Code) (818) 707-7100 ------------------------------ (Registrant's telephone number, including area code) Not applicable ------------------------------------------------------------ (Former Name or Former Address, if Changed Since Last Report) Item 5. Other Events ------------ The Registrant's press release relating to the financing of RightStart.com Inc. has been filed as an exhibit to this Form 8-K. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits ------------------------------------------------------------------ (c) Exhibits 10.1 Form of Securities Purchase Agreement dated July 9, 1999 (Series A Convertible Preferred Stock of RightStart.com) 10.2 Form of Investors' Rights Agreement dated July 9, 1999 (RightStart.com) 10.3 Management Services Agreement dated July 9, 1999 between The Right Start, Inc. and RightStart.com Inc. 10.4 Intellectual Property Agreement dated July 9, 1999 between The Right Start, Inc. and RightStart.com Inc. 99.1 Press Release of the Registrant dated July 12, 1999. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. THE RIGHT START, INC. Date: July 12, 1999 /s/ Gina M. Engelhard ------------------------------- Gina M. Engelhard Chief Financial Officer and Secretary EXHIBIT INDEX 10.1 Form of Securities Purchase Agreement dated July 9, 1999 (Series A Convertible Preferred Stock of RightStart.com) 10.2 Form of Investors' Rights Agreement dated July 9, 1999 (RightStart.com) 10.3 Management Services Agreement dated July 9, 1999 between The Right Start, Inc. and RightStart.com Inc. 10.4 Intellectual Property Agreement dated July 9, 1999 between The Right Start, Inc. and RightStart.com Inc. 99.1 Press Release of the Registrant dated July 12, 1999. EX-10.1 2 FORM OF SECURITIES PURCHASE AGREEMENT Exhibit 10.1 RightStart.com Inc. SERIES A PREFERRED STOCK PURCHASE AGREEMENT TABLE OF CONTENTS
Page No. 1. PURCHASE AND SALE OF STOCK............................................ 1 1.1 Sale and Issuance of Series A Preferred Stock................... 1 1.2 Closing......................................................... 2 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................... 2 2.1 Organization; Good Standing; Qualification...................... 2 2.2 Authorization................................................... 2 2.3 Valid Issuance of Preferred and Common Stock.................... 3 2.4 Governmental Consents........................................... 3 2.5 Capitalization and Voting Rights................................ 3 2.6 Subsidiaries.................................................... 4 2.7 Contracts and Other Commitments................................. 4 2.8 Related-Party Transactions...................................... 4 2.9 Registration Rights............................................. 5 2.10 Permits......................................................... 5 2.11 Compliance With Other Instruments............................... 5 2.12 Litigation...................................................... 5 2.13 Securities Act.................................................. 6 2.14 Title to Property and Assets; Leases............................ 6 2.15 Financial Position.............................................. 6 2.16 Patents and Trademarks.......................................... 6 2.17 Employees; Employee Compensation................................ 7 2.18 Taxes........................................................... 7 2.19 Insurance....................................................... 7 2.20 Environmental Compliance........................................ 7 2.21 Books and Records............................................... 7 2.22 Finders......................................................... 8 2.23 Investment Company.............................................. 8 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR........................ 8 3.1 Authorization................................................... 8 3.2 Purchase Entirely for Own Account............................... 8 3.3 Reliance Upon Investors' Representations........................ 8 3.4 Receipt of Information.......................................... 9 3.5 Investment Experience........................................... 9 3.6 Accredited Investor............................................. 9 3.7 Restricted Securities........................................... 10 3.8 Legends......................................................... 11 4. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSING....................... 11 4.1 Representations and Warranties.................................. 11 i
4.2 Performance.................................................... 11 4.3 Compliance Certificate......................................... 12 4.4 Qualifications................................................. 12 4.5 Proceedings and Documents...................................... 12 4.6 Board of Directors............................................. 12 4.7 Other Agreements............................................... 12 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING................... 12 5.1 Representations and Warranties................................. 12 5.2 Qualifications................................................. 12 6. MISCELLANEOUS........................................................ 13 6.1 Entire Agreement............................................... 13 6.2 Survival of Warranties......................................... 13 6.3 Successors and Assigns......................................... 13 6.4 Governing Law.................................................. 13 6.5 Counterparts................................................... 13 6.6 Titles and Subtitles........................................... 13 6.7 Notices........................................................ 13 6.8 Finder's Fees.................................................. 14 6.9 Expenses....................................................... 14 6.10 Amendments and Waivers......................................... 14 6.11 California Corporate Securities Law............................ 14 6.12 Effect of Amendment or Waiver.................................. 15
Exhibit A Certificate of Designation of Series A Convertible Preferred Stock Exhibit B Investors' Rights Agreement Exhibit C Ancillary Agreements Exhibit D Insurance Coverage ii RightStart.com Inc. SERIES A PREFERRED STOCK PURCHASE AGREEMENT THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is made as of the 9th day of July, 1999, by and between RightStart.com Inc., a Delaware corporation (the "Company"), Sierra Ventures VII, L.P., a California limited partnership ("Sierra LP"), Sierra Ventures Associates VII, L.L.C., a California limited liability company ("Sierra LLC"), Ajit Shah, an individual ("Shah"), Robert Simon, an individual ("Simon"), and Palomar Ventures I, L.P., a Delaware limited partnership ("Palomar" and together with Sierra LP, Sierra LLC, Shah and Simon, the "Investors"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. PURCHASE AND SALE OF STOCK. 1.1 Sale and Issuance of Series A Preferred Stock. (a) The Company shall adopt and file with the Secretary of State of the State of Delaware on or before the Closing (as defined below) a Certificate of Designation of Series A Convertible Preferred Stock in the form attached hereto as Exhibit A (the "Certificate of Designation"). (b) Subject to the terms and conditions of this Agreement, the Investors agree to purchase shares of the Company's Series A Preferred Stock at a purchase price of $4.50 per share, as more specifically set forth below: (i) Sierra LP agrees to purchase at the Closing, and the Company agrees to sell and issue to Sierra LP at the Closing, 2,423,334 shares of the Company's Series A Preferred Stock. (ii) Sierra LLC agrees to purchase at the Closing, and the Company agrees to sell and issue to Sierra LLC at the Closing, 236,667 shares of the Company's Series A Preferred Stock. (iii) Shah agrees to purchase at the Closing, and the Company agrees to sell and issue to Shah at the Closing, 3,333 shares of the Company's Series A Preferred Stock. (iv) Simon agrees to purchase at the Closing, and the Company agrees to sell and issue to Simon at the Closing, 3,333 shares of the Company's Series A Preferred Stock. (v) Palomar agrees to purchase within twelve (12) days after Closing, and the Company agrees to sell and issue to Palomar within twelve (12) days after 1 Closing (on such date as payment is rendered), 666,666 shares of the Company's Series A Preferred Stock. The Series A Preferred Stock will have the rights, preferences, privileges and restrictions set forth in the Certificate of Designation. Each of the Investors agrees to pay in cash by wire transfer of immediately available funds at Closing (or in the case of Palomar, within twelve (12) days after Closing) to the Company payment in full for the shares of the Company's Series A Preferred Stock so purchased by such Investor. 1.2 Closing. (a) The purchase and sale of the Series A Preferred Stock shall take place at the offices of Milbank, Tweed, Hadley & McCloy LLP, Los Angeles, California, at 10 a.m., on July 9, 1999, or at such other time and place as the Company and the Investor shall mutually agree, either orally or in writing (which time and place are designated as the "Closing"). Upon receipt of payment for the Series A Preferred Stock on or after the Closing (in accordance with Section 1.1 above), the Company shall deliver to an Investor a certificate representing the shares of Series A Preferred Stock that such Investor is purchasing. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Investor that as of the date of this Agreement, except as set forth on a Schedule of Exceptions furnished to each Investor and special counsel for the Investors, which exceptions shall be deemed to supplement and inform the representations and warranties contained in this Agreement, as if made hereunder: 2.1 Organization; Good Standing; Qualification. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware, has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted and as presently proposed to be conducted, to execute and deliver this Agreement, the Investors' Rights Agreement (attached hereto as Exhibit B), and any other agreement to which the Company is a party, as listed on Exhibit C hereto (the "Ancillary Agreements"), to issue and sell the Series A Preferred Stock and the Common Stock issuable upon conversion thereof, and to carry out the provisions of this Agreement, the Investors' Rights Agreement, the Certificate of Designation and any Ancillary Agreement. The Company is duly qualified and is authorized to transact business and is in good standing as a foreign corporation in each jurisdiction in which the failure to so qualify would have a material adverse effect on its business, properties, prospects, or financial condition. 2.2 Authorization. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the Investors' Rights Agreement and any Ancillary Agreement, the performance of all obligations of the Company hereunder and thereunder at the Closing, and the authorization, issuance (or 2 reservation for issuance), sale, and delivery of the Series A Preferred Stock being sold hereunder and the Common Stock issuable upon conversion thereof, has been taken or will be taken prior to the Closing, and this Agreement, the Investors' Rights Agreement, and any Ancillary Agreement, when executed and delivered, will constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) as to rights to indemnity and contribution that may be limited by applicable laws. 2.3 Valid Issuance of Preferred and Common Stock. The Series A Preferred Stock that is being purchased by the Investor hereunder, when issued, sold, and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. The Common Stock issuable upon conversion of the Series A Preferred Stock being purchased under this Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of Series A Preferred Stock, as set forth in the Certificate of Designation, will be duly and validly issued, fully paid, and nonassessable and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. 2.4 Governmental Consents. No consent, approval, qualification, order or authorization of, or filing with, any local, state, or federal governmental authority is required on the part of the Company in connection with the Company's execution, delivery, or performance by it of its obligations under this Agreement, the offer, sale or issuance of the Series A Preferred Stock by the Company or the issuance of Common Stock upon conversion of the Series A Preferred Stock, except (i) the filing of the Certificate of Designation with the Secretary of State of the State of Delaware, (ii) such filings as have been made prior to the Closing, except any notices of sale required to be filed with the Securities and Exchange Commission under Regulation D of the Securities Act of 1933, as amended (the "Securities Act"), or such post-closing filings as may be required under applicable state securities laws, which will be timely filed within the applicable periods therefor and (iii) such consents, approvals, qualifications, orders or authorizations which the failure to obtain could reasonably be expected to have a material adverse effect on the Company. 2.5 Capitalization and Voting Rights. The authorized capital of the Company consists, or will consist immediately prior to the Closing, of: (a) Preferred Stock. Five Million (5,000,000) shares of Preferred Stock, par value $.01, of which 3,333,333 shares have been designated Series A Preferred Stock, all of 3 which may be sold pursuant to this Agreement. The rights, privileges and preferences of the Series A Preferred Stock are as stated in the Certificate of Designation. (b) Common Stock. Twenty Million (20,000,000) shares of common stock, par value $.01 ("Common Stock"), of which 5,766,667 shares are issued and outstanding. (c) The outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable, and were issued in accordance with the registration or qualification provisions of the Securities Act and any relevant state securities laws or pursuant to valid exemptions therefrom. (d) Except for (i) the conversion privileges of the Series A Preferred Stock, and (ii) the rights provided in the Investors' Rights Agreement, (iii) 900,600 options to purchase shares of the Company's Common Stock granted (or to be granted immediately upon Closing) under the RightStart.com Employee Stock Option Plan (the "Option Plan"), (iv) 182,000 shares of Common Stock issuable upon conversion of the warrant issued or to be issued to CEA Montgomery Media L.L.C. or its affiliates (the "Warrant") and (v) 288,333 shares of Common Stock which may be transferred by The Right Start, Inc. to Guidance Solutions, Inc. (at the option of The Right Start, Inc.), there are no outstanding options, warrants, rights (including conversion or preeemptive rights and rights of first refusal), proxy or stockholder agreements or agreements of any kind for the purchase or acquisition from the Company of any of its securities. In addition, the Company has reserved an additional 917,400 shares of its Common Stock for issuance upon exercise of options to be granted after the date hereof under the Option Plan. The Company is not a party or subject to any agreement that affects or relates to the voting or giving of written consents with respect to any security or the voting by a director of the Company. 2.6 Subsidiaries. The Company does not own or control, directly or indirectly, any interest in any other corporation, partnership, limited liability company, association, or other business entity. The Company currently is not a participant in any joint venture, partnership, or similar arrangement (other than the transaction set forth in this Agreement). 2.7 Contracts and Other Commitments. The Company does not have and is not bound by any material contract, agreement, lease, commitment, or proposed transaction, judgment, order, writ or decree, written or oral, absolute or contingent, other than those that have been entered into in the ordinary course of business or are set forth on Schedule 2.7 of the Schedule of Exceptions. 2.8 Related-Party Transactions. No employee, officer, stockholder or director of the Company or member of his or her immediately family is indebted to the Company, nor is the Company indebted or committed to make loans, or other payments, or extend or guarantee credit to any of them, other than (i) indebtedness or commitments in an amount less than $10,000 (ii) for payment of salary for services rendered, (iii) reimbursement for reasonable expenses incurred on behalf of the Company, (iv) for other standard employee benefits made generally available to all employees 4 (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company), (v) pursuant to the terms of a Management Services Agreement dated July 9, 1999 between The Right Start, Inc. and the Company (the "Management Services Agreement"), (vi) pursuant to the terms of an Intellectual Property Agreement dated July 9, 1999 between The Right Start, Inc. and the Company (the "Intellectual Property Agreement"), and (vii) those additional agreements set forth on Schedule 2.8 of the Schedule of Exceptions. 2.9 Registration Rights. Except as granted to Investors in connection with the transactions contemplated by this Agreement and the Investors' Rights Agreement, the Company is presently not under any obligation to file any registration statement under the Securities Act relating to any outstanding securities of the Company or to have any outstanding securities of the Company included in any registration statement filed or to be filed under the Securities Act. 2.10 Permits. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted and as currently proposed to be conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of the Company. To its knowledge, Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.11 Compliance With Other Instruments. The Company is not in violation or default (i) in any material respect of any provision of its Certificate of Incorporation, as amended through the date hereof (the "Certificate of Incorporation") or Bylaws, (ii) in any material respect of any provision of any material agreement, instrument, or contract to which it is a party or by which it is bound, or (iii) to the best of its knowledge, of any federal or state judgment, order, writ, decree, statute, rule, regulation or restriction applicable to the Company, the violation of which would have a material adverse effect on the Company. The execution, delivery, and performance by the Company of this Agreement, the Investors' Rights Agreement and any Ancillary Agreement, and the consummation of the transactions contemplated hereby and thereby, will not result in any such violation or constitute, with or without the passage of time or giving of notice, either a material default under any such provision or an event that results in the creation of any material lien, charge, or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations, or any of its assets or properties. 2.12 Litigation. There is no litigation or governmental proceeding or investigation pending or, to the best of the knowledge of the Company, threatened by or against the Company which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the Company. Neither the Company, nor, to the best knowledge of the Company, any officer 5 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. 2.13 Securities Act. Subject to the truth and accuracy of the Investor's representations set forth in this Agreement, the offer, sale and issuance of the Series A Preferred Stock as set forth in this Agreement are exempt from the registration requirements of the Securities Act. 2.14 Title to Property and Assets; Leases. Except (i) for liens for current taxes not yet delinquent, (ii) for liens imposed by law and incurred in the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like, (iii) for liens in respect of pledges or deposits under workers' compensation laws or similar legislation or (iv) for minor defects in title, none of which, individually or in the aggregate, materially interferes with the use of such property, the Company has good and marketable title to such of its fixed assets as are real property, and good and merchantable title to all of its other assets, free of any mortgages, pledges, charges, claims, liens, security interests or other encumbrances, except as could not reasonably be expected to have a material adverse effect on the Company. 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, subject to clauses (i)(iv) above, and except as would not have a material adverse effect on the Company. 2.15 Financial Position. The Company is not a guarantor or indemnitor of any indebtedness of any other firm, person or corporation, except as set forth on Schedule 2.15 of the Schedule of Exemptions. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.16 Patents and Trademarks. To the best of its knowledge, 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, except Intellectual Property Rights that could not reasonably be expected to have a material adverse effect on the Company and as are being granted to the Company pursuant to the Intellectual Property Agreement; and to the best of the Company's knowledge, the conduct of its business as now operated and as now proposed to be operated does not and will not materially conflict with Intellectual Property Rights of others. The Company has not received any communications alleging that the Company has violated, or by conducting its business as proposed, would violate any of the Intellectual Property Rights of any other person or entity. The Company has no obligation to compensate any person for the use of any Intellectual Property Rights, except as required pursuant to the terms of the Intellectual Property Agreement and the agreement(s) between The Right Start, Inc. and Guidance Solutions, Inc. regarding the development of the Company's web site. The Company has not granted to any person any 6 license or right to use any Intellectual Property Rights of the Company except as required by the terms of the Intellectual Property Agreement and the agreement(s) between the Right Start, Inc. and Guidance Solutions, Inc. regarding the development of the Company's web site. 2.17 Employees; Employee Compensation. To the best of the Company's knowledge, there is no strike, labor dispute or union organization activities pending or threatened between it and its employees. None of the Company's employees belongs to any union or collective bargaining unit. 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. The Company is not a party to or bound by any currently effective employment contract, deferred compensation agreement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation agreement other than the Option Plan. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of the Company is terminable at the will of the Company. To the best knowledge of the Company, relations with employees of the Company are good. 2.18 Taxes. The Company has not elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be treated as an S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that related solely to methods of accounting, depreciation, or amortization) that would have a material effect on the business, properties, prospects, or financial condition of the Company. The Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. 2.19 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 Exhibit D. 2.20 Environmental Compliance. To the best of its knowledge, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 2.21 Books and Records. The books of account, ledgers, order books, records and documents of the Company accurately reflect all material information relating to the business of the Company, the 7 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. 2.22 Finders. The Company has not entered into any agreements for which the Company, its officers, directors, or the Investor will be liable for finders fees relating to the transactions set forth in this Agreement, other than the Company's agreement with CEA Montgomery Media, L.L.C. 2.23 Investment Company. The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or the regulations promulgated thereunder. 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. Each Investor hereby represents and warrants to the Company, separately and not jointly, that: 3.1 Authorization. The Investor has full power and authority to enter into this Agreement, and that this Agreement, when executed and delivered, will constitute a valid and legally binding obligation of the Investor. 3.2 Purchase Entirely for Own Account. This Agreement is made with the Investor in reliance upon the Investor's representation to the Company, which by its execution of this Agreement the Investor hereby confirms, that the Series A Preferred Stock to be purchased by the Investor and the Common Stock issuable upon conversion thereof (collectively, the "Securities") will be acquired for investment for the Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Investor has no present intention of selling, granting any participating in, or otherwise distributing the same. By executing this Agreement, the Investor further represents that the Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. 3.3 Reliance Upon Investors' Representations. The Investor understands that the Series A Preferred Stock is not, and any Common Stock acquired on conversion thereof at the time of issuance will not be, registered under the Securities Act on grounds that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof, and that the Company's reliance on such exemption is predicated on the Investors' representations set forth herein. The Investor realizes that the basis for the exemption may not 8 be present if, notwithstanding such representations, the Investor has in mind merely acquiring shares of the Series A Preferred Stock for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. The Investor has no such intention. 3.4 Receipt of Information. The Investor believes that it has received all the information the Investor considers necessary or appropriate for deciding whether to purchase the Series A Preferred Stock. The Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series A Preferred Stock and the business, properties, prospects, and financial condition of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to the Investor or to which it had access. 3.5 Investment Experience. The Investor represents that it is experienced in evaluating and investing in private placement transactions of securities of companies in a similar stage of development and acknowledges that it is able to fend for itself, can bear the economic risk of the Investor's investment, and has such knowledge and experience in financial and business matters that the Investor is capable of evaluating the merits and risks of the investment in the Series A Preferred Stock. The Investor also represents that it has not been organized for the purpose of acquiring the Series A Preferred Stock. 3.6 Accredited Investor. (a) The term "Accredited Investor" as used herein refers to: (i) A person or entity who is a director or executive officer of the Company; (ii) Any bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; any insurance company as defined in Section 2(13) of the Securities Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered 9 investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors; (iii) Any private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940; (iv) Any organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000; (v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of the purchase exceeds $1,000,000; (vi) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation or reaching the same income level in the current year; (vii) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment; or (viii) Any entity in which all of the equity owners are accredited investors. As used in this Paragraph 3.6(a), the term "net worth" means the excess of total assets over total liabilities. For the purpose of determining a person's net worth, the principal residence owned by an individual should be valued at fair market value, including the cost of improvements, net of current encumbrances. As used in this Paragraph 3.6(a), "income" means actual economic income, which may differ from adjusted gross income for income tax purposes. Accordingly, the Investor should consider whether it should add any or all of the following items to the Investor's gross income for income tax purposes in order to reflect more accurately the Investor's actual economic income: any amounts attributable to tax-exempt income received, losses claimed as a limited partner in any limited partnership, deductions claimed for depletion, contributions to an IRA or Keogh retirement plan, and alimony payments. (b) The Investor further represents to the Company that, except as otherwise disclosed to the Company in writing prior to the Investor's execution hereof, it is an Accredited Investor. 3.7 Restricted Securities The Investor understands that the Series A Preferred Stock (and any Common Stock issued on conversion thereof) may not be sold, transferred, or otherwise disposed of 10 without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Series A Preferred Stock (or the Common Stock issued on conversion thereof) or an available exemption from registration under the Securities Act, the Series A Preferred Stock (and any Common Stock issued on conversion thereof) must be held indefinitely. In particular, the Investor is aware that the Series A Preferred Stock (and any Common Stock issued on conversion thereof) may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. Among the conditions for use of Rule 144 may be the availability of current information to the public about the Company. Such information is not now available and the Company has no present plans to make such information available. 3.8 Legends. To the extent applicable, each certificate or other document evidencing any of the Series A Preferred Stock or any Common Stock issued upon conversion thereof shall be endorsed with the legends substantially in the form set forth below: (a) The following legend under the Securities Act: "The shares represented here have not been registered under the Securities Act of 1933, as amended, and may not be sold, transferred, assigned, pledged, or hypothecated unless and until registered under such Act, or unless the Company has received an opinion of counsel or other evidence, satisfactory to the Company and its counsel, that such registration is not required." (b) Any legend imposed or required by the Company's Bylaws or applicable state securities laws. 4. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSING. The obligations of the Investors under subparagraph 1.1(b) of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against the Investors if each does not consent in writing thereto: 4.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 4.2 Performance. The Company shall have performed and complied with all agreements, obligations, and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 11 4.3 Compliance Certificate. The President of the Company shall deliver to the Investor at the Closing a certificate certifying that the conditions specified in this Section 4 have been fulfilled. 4.4 Qualifications. All authorizations, approvals or permit, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series A Preferred Stock pursuant to this Agreement shall be duly obtained and effective as of the Closing. 4.5 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Investors' counsel. 4.6 Board of Directors. Effective as of the Closing, the directors of the Company shall be Jerry Welch, Richard Kayne, Fred Kayne, David Schwab, Robert Simon and the Company's Chief Executive Officer. 4.7 Other Agreements. The Company and the Investors shall have entered into the Investors' Rights Agreement substantially in the form attached hereto as Exhibit B. The Company and the Investor shall have entered into each of the Ancillary Agreements listed on Exhibit C to which such party is a signatory. 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company to the Investors under this Agreement are subject to the fulfillment, on or before the Closing, of each of the following conditions by each of the Investors: 5.1 Representations and Warranties. The representations and warranties of each of the Investors contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 5.2 Qualifications. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state or the approval or authorization of any other 12 entity that are required in connection with the lawful issuance and sale of the Series A Preferred Stock pursuant to this Agreement shall be duly obtained and effected as of the Closing. 6. MISCELLANEOUS. 6.1 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. 6.2 Survival of Warranties. The warranties, representations, and covenants of the Company and the Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing. 6.3 Successors and Assigns. The parties to this Agreement may not assign or transfer their rights or obligations under this Agreement without the prior written consent of the other parties hereto. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 6.4 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Delaware (excluding the choice of law provisions thereof). 6.5 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 6.6 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 6.7 Notices. Unless otherwise provided, all notices and other communications required or permitted under this Agreement shall be in writing and shall be sent by facsimile or delivered personally by hand or by a nationally recognized courier addressed to the party to be notified at the address or facsimile number indicated for such person on the signature page hereof, or at 13 such other address or facsimile number as such party may designate by ten (10) days' advance written notice to the other parties hereto. All such notices and other written communications shall be effective 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 facsimile) the answer-back being deemed conclusive (but not exclusive) evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. 6.8 Finder's Fees. The investors agree to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finder's fee (and the cost and expenses of defending against such liability or asserted liability) for which the Investors or any of their officers, partners, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless the Investors from any liability for any commission or compensation in the nature of a finder's fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees, or representatives is responsible. 6.9 Expenses. The Company and each of the Investors shall pay all their own costs and expenses (excluding attorneys' fees and expenses) in connection with the preparation, execution and delivery of this Agreement, the Investor's Rights Agreement and other Ancillary Agreements and other documents to be delivered hereunder or thereunder. The Company agrees to pay all its own attorneys' fees and expenses and up to $20,000 of the Investors' reasonable attorneys' fees and expenses incurred in connection with the preparation, execution and delivery of this Agreement, the Investors' Rights Agreement and the other Ancillary Agreements and other documents to be delivered hereunder or thereunder. The Investors agree to pay all of their own attorneys' fees and expenses in excess of $20,000 relating to the transaction described in the foregoing sentence. 6.10 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of more than fifty percent (50%) of the Common Stock not previously sold to the public that is issued or issuable upon conversion of the Series A Preferred Stock. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities have been converted), each future holder of all such securities, and the Company. 6.11 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE 14 CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 6.12 Effect of Amendment or Waiver. The Investors acknowledge that by the operation of paragraph 6.10 hereof the holders of more than fifty percent (50%) of the Common Stock not previously sold to the public that is issued or issuable upon conversion of the Series A Preferred Stock will have the right and power to diminish or eliminate all rights of an Investor under this Agreement. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. RIGHTSTART.COM INC. By ---------------------------------------- Name ---------------------------------------- Title ---------------------------------------- Address: RightStart.com Inc. 5388 Sterling Center Drive, Unit C Westlake Village, California 91361 Facsimile: (818) 707-7132 SIERRA VENTURES VII, L.P.: By: , its ---------------------------------------- general partner By ---------------------------------------- Name ---------------------------------------- Title ---------------------------------------- Address: Sierra Ventures VII LP 3000 Sand Hill Road, Building 4, #210 Menlo Park, CA 94025 Facsimile: (650) 854-5593 16 SIERRA VENTURES ASSOCIATES VII, L.L.C. By -------------------------------- Managing Member -------------------------------- Robert Simon -------------------------------- Ajit Shah 17 PALOMAR VENTURES I, L.P., a Delaware limited partnership: By: _____________________________________ Name: Jim Gauer Its: General Partner Address: Palomar Ventures I, L.P. 100 Wilshire Boulevard, Suite 400 Santa Monica, CA 90401 Facsimile: (310) 656-4150 18 EX-10.2 3 FORM OF INVESTORS' RIGHTS AGREEMENT Exhibit 10.2 RIGHTSTART.COM INC. INVESTORS' RIGHTS AGREEMENT This Investors' Rights Agreement (this "Agreement") is made and entered --------- into as of the 9th day of July, 1999 by and among RightStart.com Inc., a Delaware corporation (the "Company"), Sierra Ventures VII, L.P., a California ------- limited partnership ("Sierra LP"), Sierra Ventures Associates VII, L.L.C., a --------- California limited liability company ("Sierra LLC"), Robert Simon, an individual ---------- ("Simon"), Ajit Shah, an individual ("Shah"), Palomar Ventures I, L.P., a ----- ---- Delaware limited partnership ("Palomar"), and The Right Start, Inc., a ------- California corporation ("Parent"). ------ Recitals WHEREAS, each of the members of the Sierra Group (as defined below), Palomar and the Company are parties to the Series A Preferred Stock Purchase Agreement dated as of even date herewith (the "Purchase Agreement"); ------------------ WHEREAS, Parent owns shares of the Company's Common Stock; and WHEREAS, certain of the Company's and the obligations of the Principal Stockholders (as defined below) under the Purchase Agreement are conditioned upon the execution and delivery by the Principal Stockholders and the Company of this Agreement; NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereto further agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth below: 1.1 "Affiliate" of any party means any person (or group of persons) who --------- effectively controls, is effectively controlled by or is under common control with such party. 1.2 "Closing" shall mean the date of the initial sale of shares of the ------- Company's Series A Preferred Stock. 1.3 "Commission" shall mean the Securities and Exchange Commission or any ---------- other federal agency at the time administering the Securities Act. 1.4 "Common Stock" shall mean the common stock of the Company, $.01 par ------------ value per share. 1.5 "Conversion Shares" shall mean the Common Stock issued upon ----------------- conversion of the Series A Preferred Stock. 1.6 "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. 1.7 "Holder" shall mean any of the Principal Stockholders so long as it ------ holds any Series A Preferred Stock, Conversion Shares or Common Stock and any holder of Series A Preferred Stock or Common Stock who acquired such Securities from a Principal Stockholder pursuant to the terms of this Agreement. 1.8 "Other Stockholders" shall mean persons other than Holders who, by ------------------ virtue of "Other Stockholders" shall mean persons other than Holders who, by ------------------ virtue of agreements with the Company, are entitled to include their securities in certain registrations hereunder. 1.9 "Preferred Stock" shall mean the Company's outstanding Series A ---------------- Preferred Stock and any other class or series of preferred stock of the Company in existence on the date hereof or subsequently issued by the Company. 1.10 "Principal Stockholders" shall mean each of Parent, Palomar and the ---------------------- Sierra Group. 1.11 "Registrable Securities" shall mean (i) Conversion Shares and (ii) any ---------------------- Common Stock (whether issued as a dividend or other distribution with respect to or in exchange for or in replacement of the Conversion Shares or otherwise) held by a Holder granted or receiving registration rights under Section 3 of this --------- Agreement; provided, however, that Registrable Securities shall not include any -------- ------- shares of Common Stock which have previously been registered or which have been sold to the public either pursuant to a registration statement or Rule 144, or which have been sold in a private transaction in which the transferor's rights under this Agreement are not assigned. 1.12 The terms "register," "registered" and "registration" shall refer to a -------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. 1.13 "Registration Expenses" shall mean all expenses incurred in effecting --------------------- any registration pursuant to this Agreement, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and expenses of any regular or special audits incident to or required by any such registration, but shall not include Selling Expenses, fees and disbursements of counsel for the Holders. 1.14 "Rule 144" shall mean Rule 144 as promulgated by the Commission under -------- the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. 1.15 "Rule 415" shall mean Rule 415 as promulgated by the Commission under -------- the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. 1.16 "Securities" shall mean shares of the Company's Common Stock and ---------- Preferred Stock (or warrants or other securities convertible into Common Stock or Preferred Stock) now owned or subsequently acquired. 2 1.17 "Securities Act" shall mean the Securities Act of 1933, as amended, or -------------- any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. 1.18 "Selling Expenses" shall mean all underwriting discounts, selling ---------------- commissions and stock transfer taxes applicable to the sale of Registrable Securities and fees and disbursements of special counsel to the selling stockholder. 1.19 "Series A Preferred Stock" shall mean the Company's Series A ------------------------ Convertible Preferred Stock, par value $.01 per share. 1.20 "Sierra Group" shall mean the group comprised of Sierra LP, Sierra ------------ LLC, Simon and Shah. 2. RESTRICTIONS ON TRANSFER. 2.1 Right of First Refusal. (a) Transfer by a Principal Stockholder. (i) Subject to Section 2.1(b) below, if any of the Principal -------------- Stockholders (or their respective Affiliates to whom Securities have been transferred) propose to sell or transfer any Securities in one or more related transactions which will result in the transfer of any Securities by such Principal Stockholder or its Affiliate, as applicable, then such Principal Stockholder or Affiliate of such Principal Stockholder proposing to transfer Securities, as the case may be (a "Selling Stockholder") shall promptly give ------------------- written notice ("Notice") to the other Principal Stockholders at least twenty ------ (20) days prior to the closing of such sale or transfer. The Notice shall describe in reasonable detail the proposed sale or transfer including, without limitation, the number and type of Securities to be sold or transferred (the "Notice Shares"), the nature of such sale or transfer, the consideration to be ------------- paid, the requested method of payment and the name and address of each prospective purchaser or transferee. In the event that the sale or transfer is being made pursuant to the provisions of Section 2.1(b) hereof, the Notice shall -------------- state under which paragraph and subparagraph the sale or transfer is being made. (ii) Each of the non-transferring Principal Stockholders, or their respective Affiliates acting on their behalf, shall have the right, exercisable upon written notice to such Selling Stockholder within ten (10) days after receipt of the Notice, to purchase a pro rata share (based on the number of Registrable Securities then held by the non-transferring Principal Stockholders) of such proposed transfer and if either of the two other non-transferring Principal Stockholders elects not to purchase all of its pro rata portion, the other eligible purchaser shall be entitled to all of the remaining shares, in each case on the same terms and conditions specified in the Notice. (iii) If the non-transferring Principal Stockholders elect to so purchase all or a portion of the Notice Shares, such Principal Stockholders, or their respective Affiliates acting on their behalf (the "Purchasing Stockholders") ----------------------- shall purchase the Notice Shares by delivering the consideration to be paid for the Notice Shares to the Selling Stockholder pursuant to the payment method specified in the Notice on a date mutually agreed to by the parties. 3 (iv) Simultaneously upon receipt of the consideration specified in the Notice and delivered pursuant to the foregoing paragraph (a)(iii) of this ------------------ Section 2.1, the Selling Stockholder shall deliver to the Purchasing - ----------- Stockholder(s) a stock certificate or certificates representing the Notice Shares in consummation of the sale of such shares pursuant to the terms and conditions specified in the Notice. (v) The exercise or non-exercise of the rights of any Principal Stockholder hereunder (or their respective Affiliates acting on their behalf) to participate as a purchaser in one or more sales of Securities made by a Principal Stockholder (or its Affiliates) shall not adversely affect their rights to participate as purchasers in subsequent sales of Securities subject to paragraph (a)(i) of Section 2.1. - ---------------- ----------- (vi) If the Principal Stockholders do not elect to participate in the purchase of the Notice Shares (or purchase only a portion of the Notice Shares), then the Selling Stockholder may, not later than sixty (60) days following delivery to the other Principal Stockholder(s), enter into an agreement providing for the closing of the transfer of the remaining Notice Shares within sixty (60) days of such agreement on terms and conditions not more favorable to the transferor than those described in the Notice, subject to the provisions of Section 2.2 below. Any proposed transfer on terms and conditions more favorable - ----------- than those described in the Notice, as well as any subsequent proposed transfer of any additional Securities by a Principal Stockholder or its Affiliate, shall again be subject to the rights of the other Principal Stockholders (and their respective Affiliates) set forth herein and shall require compliance with the procedures described in this Section 2.1(a). -------------- (b) Exempt Transfers. (i) Notwithstanding the foregoing, the provisions of paragraphs (a)(i) ----------------- through (a)(vi) of Section 2.1 shall not apply to (A) any pledge of ------- ----------- Securities made pursuant to a bona fide loan transaction that creates a mere security interest, (B) any transfer to an Affiliate of transferor; provided that -------- (1) the Selling Stockholder shall inform the other Principal Stockholders of such pledge or transfer prior to effecting it and (2) the pledgee or transferee shall furnish the other Principal Stockholders with a written agreement to be bound by and comply with all provisions of Section 2.1(a), or (C) the transfer -------------- by Parent to Guidance Solutions, Inc. (or its affiliate) of up to 288,333 shares of Common Stock. Such pledged or transferred Securities under subsections (A) or (B) above shall remain "Securities" hereunder, and such pledgee or transferee under subsections (A) or (B) shall be treated as a "Principal Stockholder" for purposes of this Agreement; provided, however, that Securities transferred pursuant to subsection (C) above shall no longer be subject to this Agreement upon transfer. (ii) Notwithstanding the foregoing, the provisions of Section 2.1(a) shall -------------- not apply to the sale of any Securities (A) to the public pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"); or (B) to the Company. 4 (c) Prohibited Transfers. Any attempt by a Selling Stockholder to transfer Securities in violation of Section 2.1(a) hereof shall be void and the -------------- Company agrees it will not effect such a transfer nor will it treat any alleged transferee as the holder of such shares without the written consent of the non- transferring Principal Stockholders (or their respective Affiliates acting on their behalf). (d) Legend. (i) Each certificate representing Securities now or hereafter owned by the Principal Stockholders or issued to any person in connection with a transfer pursuant to paragraph (a) of Section 2.1 hereof shall be endorsed ------------- ----------- with the following legend: "THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN INVESTORS' RIGHTS AGREEMENT BY AND BETWEEN THE COMPANY AND CERTAIN HOLDERS OF STOCK OF THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY." (ii) Each Principal Stockholder agrees that the Company may instruct its transfer agent to impose transfer restrictions on the shares represented by certificates bearing the legend referred to in paragraph --------- (d)(i) of this Section 2.1 to enforce the provisions of this Agreement and ------ ----------- the Company agrees promptly to do so. The legend shall be removed upon termination of this Agreement. (e) Amendment of Section 2.1. Any provision of this Section 2.1 may be ----------- ----------- amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only by the written consent of the Principal Stockholders adversely affected by such amendment or waiver. Any amendment or waiver effected in accordance with this paragraph shall be binding upon the applicable parties, and such parties' successors and assigns. (f) Term. The rights and obligations set forth in this Section 2.1 shall ----------- terminate upon the earlier of (i) the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of the Company's Common Stock, and (ii) the closing of the Company's sale of all or substantially all of its assets or the acquisition of the Company by another entity by means of a merger or consolidation resulting in the exchange of the outstanding shares of the Company's capital stock for securities or consideration issued, or caused to be issued, by the acquiring entity or its subsidiary. (g) Ownership. For purposes of this Section 2.1, each Principal ----------- Stockholder represents and warrants to the other Principal Stockholders, that such Principal Stockholder is the sole legal and beneficial owner of the shares of stock subject to this Section 2.1 and that no other person has any interest ----------- (other than a community property interest) in such shares, other than the interest of the Parent's senior secured lender in the Securities held by Parent and the individual interests of the members of the Sierra Group in the Securities held by the Sierra Group. 5 2.2 General Restrictions on Transfer. Each Holder agrees not to make any disposition of all or any portion of the Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 2.2, and provided that: ----------- (a) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. (c) Notwithstanding the provisions of paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder (i) which is a partnership to its partners or retired partners in accordance with partnership interests or to a partnership under common control with such Holder, (ii) which is a corporation to its shareholders in accordance with their interest in the corporation, (iii) which is a limited liability company to its members or former members in accordance with their interest in the limited liability company, or (iv) to such Holder's family member or trust for the benefit of an individual Holder, provided the aforementioned transferees -------- will be subject to the terms of this Section 2.2 to the same extent as if such ----------- transferee were an original Holder hereunder. 2.3 Legends. (a) Each certificate representing Securities shall (unless otherwise permitted by the provisions of this Agreement) be imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE cOMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. (b) The Company shall be obligated to reissue promptly unlegended certificates at the request of any Holder thereof if the Holder shall have obtained an opinion of counsel at such Holder's expense (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. 6 3. REGISTRATION RIGHTS. 3.1 Demand Registration. (a) If the Company shall receive at any time after June 1, 2002 (so long as such request is not within 180 days after the effective date of a registration statement filed by the Company covering an underwritten offering of any of its securities to the general public) a written request from one or more Principal Stockholders that the Company file a registration statement registering (x) Registrable Securities constituting at least twenty percent (20%) of the shares of Common Stock issuable upon conversion of the Series A Preferred Stock originally issued to the Principal Stockholders under the Purchase Agreement, or (y) any amount of Registrable Securities if the aggregate offering price for the registration, net of underwriting discounts and commissions, would exceed $5,000,000, then the Company will: (i) promptly give written notice of the proposed registration to all other Holders holding Registrable Securities; and (ii) as soon as practicable, use its best efforts to effect such registration, on Form S-3 or successor form replacing Form S-3, if practicable, (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with the Securities Act) as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request (as permitted hereunder) as are specified in a written request received by the Company within twenty (20) days after such written notice from the Company is mailed or delivered. Notwithstanding the foregoing provisions, the Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 3 if: --------- (A) in any particular jurisdiction, the Company would be required to execute a general consent to service of process in effecting such registration, qualification, or compliance (unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act); (B) the Company has initiated two registrations pursuant to Section 3.1(a) (counting for these purposes only (1) registrations which have - -------------- been declared or ordered effective and pursuant to which securities have been sold and (2) registrations which have been withdrawn by the initiating Holders as to which the Holders have not paid the Registration Expenses pursuant to Section 3.3 hereof and were required to bear such expenses); - ----------- (C) such request for registration is made during the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a Company-initiated registration; provided that the Company -------- is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; 7 (b) Subject to the foregoing clauses (A) through (C), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Principal Stockholders (or their respective permitted Affiliate transferees), as the case may be; provided, however, that if (i) in the good -------- ------- faith judgment of the Board of Directors of the Company (the "Board of -------- Directors"), such registration would be seriously detrimental to the Company - --------- and the Board of Directors concludes, as a result, that it is essential to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors, it would be seriously detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing (except as provided in clause (C) above) for a period of not more than one hundred twenty (120) days after receipt of the request of the initiating Principal Stockholder(s) (or their permitted Affiliate transferees), as the case may be, and, provided further, that the Company shall not defer its -------- ------- obligation in this manner more than once in any twelve-month period. The registration statement filed pursuant to the request of the initiating Principal Stockholder(s) (or their respective permitted Affiliate transferees) may, subject to the provisions of Sections 3.1(d) and 3.11 hereof, include other --------------- ---- securities of the Company, with respect to which registration rights have been granted, and may include securities of the Company being sold for the account of the Company. (c) Underwriting. The right of any Holder to registration pursuant to Section 3.1 shall be conditioned upon such Holder's participation in such - ----------- underwriting, the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein and such other restrictions as may be reasonably imposed by the underwriter. A Holder may elect to include in such underwriting all or a part of the Registrable Securities he holds. (d) Procedures. The Company shall (together with all Holders and other persons proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by a majority in interest of the initiating Holder(s), which underwriters are reasonably acceptable to the Company. If the Company shall request inclusion in any registration pursuant to Section 3.1 of securities being sold for its own ----------- account, or if other persons shall request inclusion in any registration pursuant to Section 3.1, the initiating Holder(s) shall, on behalf of all ----------- Holders, offer to include such securities in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 3 (including Section 3.10). Notwithstanding any other provision of - --------- ------------ this Section 3.1, if the representative of the underwriters advises the ----------- initiating Holder(s) in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated as set forth in Section 3.11 ------------ hereof. If a person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company, the underwriter or the initiating Holder(s). The securities so excluded shall also be withdrawn from registration. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall also be withdrawn from such registration. 8 If shares are so withdrawn from the registration and if the number of shares to be included in such registration was previously reduced as a result of marketing factors pursuant to this Section 3.1(d), then the Company shall offer to all -------------- Holders who have retained rights to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among such Holders requesting additional inclusion in accordance with Section 3.11. - ------------ 3.2 Registration on Form S-3; Shelf Registration. (a) After the Company has qualified for the use of Form S-3, in addition to the rights contained in Sections 3.1 and 3.3 hereof, the Holders of Registrable -------------------- Securities who hold in excess of two percent (2%) of the then outstanding Common Stock of the Company shall have the right to request registrations on Form S-3 on a continuous or delayed basis pursuant to Rule 415 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Holder or Holders), provided, however, that the Company shall not be obligated -------- ------- to effect any such registration (i) if the Holders propose to sell Registrable Securities and such other securities (if any) on Form S-3 at an aggregate price to the public of less than $1,000,000, (ii) in the circumstances described in clauses (A) and (C) of Section 3.1(a), (iii) if the Company shall furnish the - ------------------------------------- certification described in paragraph 1.3(b) (but subject to the limitations set ---------------- forth therein), (iv) if, in a given twelve-month period, the Company has effected one (1) such registration in such period or (v) if it is to be effected more than five (5) years after the Company's initial public offering. (b) If a request complying with the requirements of Section 3.2(a) hereof is -------------- delivered to the Company, the provisions of Sections 3.1(a)(i) and Section ------------------ ------- 3.1(b) hereof shall apply to such registration. If the registration is for - ------ an underwritten offering, the provisions of Sections 3.1(c) and 3.1(d) hereof -------------------------- shall apply to such registration. 3.3 Piggyback Registration. (a) If the Company shall determine to register any of its securities either for its own account or the account of a security holder or holders exercising their respective demand registration rights (other than a registration relating solely to employee benefit plans, or a registration relating to a corporate reorganization or other transaction on Form S-4, or a registration on any registration form that does not permit secondary sales), the Company will: (i) promptly give to each Holder written notice thereof; and (ii) use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 3.3(b) below, and in any underwriting involved therein, all the - -------------- Registrable Securities specified in a written request or requests, made by any Holder and received by the Company within ten (10) days after the written notice from the Company described in clause (i) above is mailed or delivered by the Company. Such written request may specify all or a part of a Holder's Registrable Securities. 9 (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 3.3(a)(i). In such event, the right of any Holder to registration - ----------------- pursuant to this Section 3.3 shall be conditioned upon such Holder's ----------- participation in such underwriting, the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein and such other restrictions as may be reasonably imposed by the underwriter and the Company. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders of securities of the Company with registration rights to participate therein distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. Notwithstanding any other provision of this Section 3.3, if the ----------- representative of the underwriters advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten or the Company's Board of Directors reasonably determines that the number of shares proposed to be registered must be reduced in view of then existing market conditions, the Company shall be required to include in the offering only that number of Registrable Securities that the Board of Directors determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling Holders according to the total amount of Registrable Securities (to be determined assuming full conversion of all securities convertible into Registrable Securities at such time) entitled to be included therein owned by each selling Holder or in such other proportions as shall mutually be agreed to be such selling Holders), but in no event shall the amount of Registrable Securities of the selling Holders included in such offering be reduced below thirty percent (30%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities (in which case, the selling Holders may be excluded if the underwriters make the determination described above and no other shareholder's securities are included in such offering). If any person does not agree to the terms of any such underwriting, he or she shall be excluded therefrom by written notice from the Company or the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares of Registrable Securities to be included in such registration was previously reduced as a result of marketing factors, the Company shall then offer to all persons who have retained the right to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the persons requesting additional inclusion in accordance with Section 3.11 hereof. ------------ 3.4 Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Sections 3.1, 3.2 or 3.3 hereof shall be borne by the Company; provided, - ------------------------ -------- however, that if the Holders bear the Registration Expenses for any - ------- registration proceeding begun pursuant to Section 3.1 and subsequently ----------- withdrawn by the Holders registering shares therein, such registration proceeding shall not be counted as a requested registration pursuant to Section 3.1 hereof. Furthermore, in the event that a withdrawal by the - ----------- Holders is based upon material adverse information relating to the Company 10 that is different from the information known or available (upon request from the Company or otherwise) to the Holders requesting registration at the time of their request for registration under Section 3.1, such registration shall not be ----------- treated as a counted registration for purposes of Section 3.1 hereof, even ----------- though the Holders do not bear the Registration Expenses for such registration. All Selling Expenses relating to securities so registered shall be borne by the holders of such securities pro rata on the basis of the number of shares of securities so registered on their behalf, as shall any other expenses in connection with the registration required to be borne by the Holders of such securities. 3.5 Registration Procedures. In the case of each registration effected by the Company pursuant to this Section 3, the Company will keep each --------- Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will use its best efforts to: (a) Keep such registration effective for a period of ninety (90) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; provided, -------- however, that (i) such 90-day period shall be extended for a period of time - ------- equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company; and (ii) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 90-day period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, however in no event longer than one year from the effective date of the registration statement and provided that Rule 415, or any -------- successor rule under the Securities Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the ---------------- Securities Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment that (A) includes any prospectus required by Section 10(a)(3) of the Securities Act or (B) reflects ---------------- facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (A) and (B) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; (d) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed, if any; 11 (e) Provide a transfer agent and registrar for all Registrable Securities registered pursuant to such registration statement and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; (f) In connection with any underwritten offering pursuant to a registration statement filed pursuant to Section 3.1 hereof, the Company will enter into an ----------- an underwriting agreement in form reasonably necessary to effect the offer and sale of Common Stock. 3.6 Indemnification. (a) The Company will indemnify each Holder, each of its officers, directors and partners, legal counsel, and accountants and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification, or compliance has been effected pursuant to this Section 3, against all expenses, claims, losses, damages, and liabilities (or - --------- actions, proceedings, or settlements in respect thereof) arising out of or based on any untrue statement of a material fact contained in any prospectus, offering circular, or other document (including any related registration statement, notification, or the like) incident to any such registration, qualification, or compliance, or based on any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification, or compliance, and will reimburse each such Holder, each of its officers, directors, partners, legal counsel, and accountants and each person controlling such Holder, each such underwriter, and each person who controls any such underwriter, as incurred, for any legal and any other expenses reasonably incurred in connection with investigating and defending or settling any such claim, loss, damage, liability, or action; provided, however, that the Company ----------------- will not be liable in any such case to the extent that any such claim, loss, damage, liability, or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or underwriter. It is agreed that the indemnity agreement contained in this Section 3.6(a) shall not apply to amounts paid in settlement of any such -------------- loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification, or compliance is being effected, indemnify the Company, each of its directors, officers, partners, legal counsel, and accountants, each person who controls the Company within the meaning of Section 15 of the Securities Act, and each Other Stockholder, and each of their officers, directors, and partners, and each person controlling such Other Stockholder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement of a material fact contained in any such registration statement, prospectus, offering circular, or other document, or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and such Other Stockholders, directors, officers, partners, legal counsel, and accountants, persons, underwriters, or control persons, as incurred, for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action, in each case to the extent, but only to the extent, that such untrue statement or omission is made in such registration 12 statement, prospectus, offering circular, or other document in reliance upon and in conformity with written information furnished to the Company by such Holder; provided, however, that the obligations of such Holder hereunder shall not apply - -------- ------- to amounts paid in settlement of any such claims, losses, damages, or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld); and provided further that in no event shall any indemnity under this -------- ------- Section 3.6(b) exceed the net proceeds from the offering received by such - -------------- Holder. (c) Each party entitled to indemnification under this Section 3.6 (the ----------- "Indemnified Party") shall give notice to the party required to provide - ------------------ indemnification (the "Indemnifying Party") promptly after such Indemnified ------------------ Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying -------- Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any ---------------- Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 3, to the extent such --------- failure is not prejudicial. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. (d) If the indemnification provided for in this Section 3.6 is held by a court ----------- of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in an underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control and the foregoing Section 3.6 shall have no further force and effect. ----------- 13 3.7 Information by Holder. Each Holder of Registrable Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification, or compliance referred to in this Section 3. --------- 3.8 Transfer or Assignment of Registration Rights. Prior to the Company's initial public offering of its Common Stock, a Principal Stockholder's right to cause the Company to register Registrable Securities pursuant to Section 3.1 shall not be transferrable except to its respective Affiliates. The - ----------- rights to cause the Company to register a Holder's Registrable Securities (as presently constituted and subject to subsequent adjustments for stock splits, stock dividends, reverse stock splits, and the like) granted under Section 3.1 ----------- (only after the Company's initial public offering of its Common Stock) and under Section 3.2 or 3.3 may be transferred or assigned (a) to a transferee or - ------------------ assignee (in accordance with Section 2 hereof) who acquires at least twenty --------- percent (20%) of such Holder's Securities, (b) to a transferee or assignee who acquires at least two percent (2%) of the Company's Common Stock from a Holder, which assignee or transferee is acceptable to the Company (which acceptance shall not be unreasonably withheld), (c) to partners or retired partners of the such Holder in accordance with their partnership interests, or (d) to another affiliate of Holder, which assignee or transferee is acceptable to the Company (which acceptance shall not be unreasonably withheld); provided that the Company -------- is given written notice at the time of or within a reasonable time after said transfer or assignment, stating the name and address of the proposed transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned; and provided further, ---------------- that the transferee or assignee of such rights assumes in writing the obligations of such Holder under this Section 3. --------- 3.9 "Lock-Up" Agreement. If requested by the Company or any representative of an underwriter of Common Stock (or other securities) of the Company following an initial public offering, each of the holders of the Securities shall not sell or otherwise transfer or dispose of any Common Stock or other securities of the Company held by such holders (other than those included in the registration) during the one hundred eighty (180) day period following the effective date of a registration statement of the Company filed under the Securities Act. If requested by the Company or any representative of an underwriter of Common Stock (or other securities) of the Company following the first public offering of the Company after the Company's initial public offering, each of the holders of the Securities shall not sell or otherwise transfer or dispose of any Common Stock or other securities of the Company held by such holders (other than those included in the registration) during the ninety (90) day period following the effective date of a registration statement of the Company filed under the Securities Act. The obligations described in this Section 3.10 shall not apply to a registration relating solely to employee - ------------ benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of such lock-up periods. 3.10 Allocation of Registration Opportunities. In any circumstance in which all of the Registrable Securities of the Company (including shares of Common Stock issued or issuable upon conversion of shares of any currently unissued series of preferred stock of the Company) 14 with registration rights (the "Other Shares") requested to be included in a ------------ registration on behalf of the Holders or other selling stockholders cannot be so included as a result of limitations of the aggregate number of shares of Registrable Securities and Other Shares that may be so included, the number of shares of Registrable Securities and Other Shares that may be so included shall be allocated among the Holders and other selling stockholders requesting inclusion of shares pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling stockholders, assuming conversion; provided, however, that such allocation shall -------- ------- not operate to reduce the aggregate number of Registrable Securities and Other Shares to be included in such registration, if any Holder or other selling stockholder does not request inclusion of the maximum number of shares of Registrable Securities and Other Shares allocated to him pursuant to the above- described procedure, in which case the remaining portion of his allocation shall be reallocated among those requesting Holders and other selling stockholders whose allocations did not satisfy their requests pro rata on the basis of the number of shares of Registrable Securities and Other Shares which would be held by such Holders and other selling stockholders, assuming conversion, and this procedure shall be repeated until all of the shares of Registrable Securities and Other Shares which may be included in the registration on behalf of the Holders and other selling stockholders have been so allocated. 3.11 Delay of Registration. No Holder shall have any right to take any action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 3. --------- 3.12 Termination of Registration Rights. The right of any Holder to request registration or inclusion in any registration pursuant to Section 3.1, ------------ 3.2 or 3.3 shall terminate on the closing of the first Company-initiated - ---------- registered public offering of Common Stock of the Company, if all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period, or the earlier of (i) such date after the closing of the first Company-initiated registered public offering of Common Stock of the Company as all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period, and (ii) five (5) years after the closing of the first Company-initiated registered public offering. 4. COVENANTS OF THE COMPANY. The Company hereby covenants and agrees as follows: 4.1 Basic Financial Information (a) Upon request, the Company will furnish the following reports to a Holder so long as such Holder owns at least 300,000 shares of the Series A Preferred Stock, or such number of shares of Common Stock issued upon conversion of 300,000 or more shares of the Series A Preferred Stock, or any combination thereof (as presently constituted and subject to subsequent adjustment for stock splits, stock dividends, reverse stock splits, recapitalizations and the like): (i) monthly financial statements as soon as practicable at the end of each month and (ii) a summary of the financial plan of the Company for each fiscal year as soon as practicable after the end of each fiscal year; provided, however, that -------- ------- the obligation of the Company to furnish 15 such monthly financial statements and annual financial plan shall terminate upon a firmly underwritten public offering of the Common Stock of the Company. (b) Upon request, the Company will furnish, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, to a Holder if it holds at least 150,000 of the outstanding shares of Series A Preferred Stock, or shares of common stock issued upon conversion thereof, or any combination thereof (as presently constituted and subject to subsequent adjustment for stock splits, stock dividends, reverse stock splits, recapitalizations and the like), annual and quarterly financial statements for such period (including a balance sheet of the Company as of the end of such period and statements of income and cash flows of the Company for such period), prepared in accordance with generally accepted accounting principles consistently applied, subject to changes resulting from normal year- end audit adjustments, and except that such financial statements need not contain the notes required by generally accepted accounting principles. Annual financial statements of the Company provided to a Holder under this paragraph shall be certified by independent public accountants of recognized national standing selected by the Company. 4.2 Additional Information and Rights. (a) The Company will permit any Holder, so long as such Holder owns at least 300,000 shares of the Series A Preferred Stock, or such number of shares of Common Stock issued upon conversion of 300,000 or more shares of the Series A Preferred Stock, or any combination thereof (as presently constituted and subject to subsequent adjustment for stock splits, stock dividends, reverse stock splits, recapitalizations and the like) and each Holder which represents that it is a "venture capital operating company" for purposes of Department of Labor Regulation Section 2510.3-101, who requests them (a "Significant Holder") ------------------ (or a representative of any Significant Holder) to visit and inspect any of the properties of the Company, including its books of account and other records, and to discuss its affairs, finances and accounts with the Company's officers and its independent public accountants, all at such reasonable times and as often as any such person may reasonably request. (b) The provisions of Section 4.1 and this Section 4.2 shall not be in ----------- ----------- limitation of any rights which any Holder or Significant Holder may have with respect to the books and records of the Company and its subsidiaries, or to inspect their properties or discuss their affairs, finances and accounts, under the laws of the jurisdictions in which they are incorporated. (c) Anything in this Agreement to the contrary notwithstanding, no Holder by reason of this agreement shall have access to any trade secrets or classified information of the Company. Each Holder hereby agrees to hold in confidence and trust and not to misuse or disclose any confidential information provided pursuant to this Section 4.2. The Company shall not be required to comply with ----------- this Section 4.2 in respect of any Holder whom the Company reasonably determines ----------- to be a competitor or an officer, employee, director or greater than ten percent (10%) stockholder of a competitor. (d) From the date the Company becomes subject to the reporting requirements of the Exchange Act (which shall include any successor federal statute), the Company's obligation to 16 provide financial information required pursuant to Sections 4.1 and 4.2 hereof ------------ --- shall automatically terminate. (e) Each Holder who represents to the Company that it is a "venture capital operating company" for purposes of Department of Labor Regulation Section 2510.3-101 shall, in addition, have the right to consult with and advise the officers of the Company as to the management of the Company. 4.3 Right to Purchase New Securities. The Company hereby grants (a) to each Principal Stockholder (other than Palomar) and its Affiliates who collectively own at least 1,333,333 shares of Series A Preferred Stock, or an equivalent number of shares of Common Stock that would be issued upon conversion of 1,333,333 or more shares of the Series A Preferred Stock, or any combination thereof (as presently constituted and subject to subsequent adjustment for stock splits, stock dividends, reverse stock splits, recapitalizations and the like) and (b) to Palomar and its Affiliates if they collectively own at least 333,333 shares of Series A Preferred Stock, or an equivalent number of shares of Common Stock that would be issued upon conversion of 333,333 or more shares of the Series A Preferred Stock, or any combination thereof (as presently constituted and subject to subsequent adjustment for stock splits, stock dividends, reverse stock splits, recapitalizations and the like), a right to purchase a pro rata share of New Securities (as defined in this Section 4.3) which the Company may, ----------- from time to time, propose to sell and issue. A Principal Holder's pro rata share, for purposes of this right, is the ratio of the number of shares of Common Stock (taken together with Common Stock underlying Series A Preferred Stock) owned by such Principal Holder (and its Affiliates) immediately prior to the issuance of the New Securities, to the total number of shares of Common Stock (taken together with Common Stock underlying Series A Preferred Stock) held by all Holders immediately prior to the issuance of New Securities. Each eligible Principal Holder shall have a right of over-allotment such that if any Principal Holder (or its Affiliates acting on its behalf) fails to exercise its right hereunder to purchase its pro rata share of New Securities, the other eligible Principal Holders (and their respective Affiliates) may purchase the non-purchasing Holder's portion on a pro rata basis within five (5) days from the date such non-purchasing Principal Holder (or Affiliate) fails to exercise its right hereunder to purchase its pro rata share of New Securities. This right shall be subject to the following provisions: (a) "New Securities" shall mean any capital stock (including Common Stock -------------- and/or preferred stock) of the Company whether now authorized or not, and rights, options or warrants to purchase such capital stock, and securities of any type whatsoever that are, or may become, convertible into capital stock; provided that the term "New Securities" does not include (i) securities purchased under the Purchase Agreement; (ii) securities issued upon conversion of the Series A Preferred Stock; (iii) securities issued in connection with a merger, acquisition, reorganization or other similar transaction undertaken by the Company; (iv) any borrowings, direct or indirect, from financial institutions or other persons by the Company, whether or not presently authorized, including any type of loan or payment evidenced by any type of debt instrument, provided such borrowings do not have any equity features including warrants, options or other rights to purchase capital stock and are not convertible into capital stock of the Company; (v) securities issued to employees, consultants, officers or directors of the Company pursuant to any stock option, stock purchase stock bonus plan, warrant, agreement or arrangement approved by the Board of Directors; (vi) securities issued to vendors or customers 17 or to other persons in similar commercial situations with the Company if such issuance is approved by the Board of Directors and such issuance is undertaken for purposes primarily other than equity financing; (vii) securities issued in connection with obtaining lease financing, whether issued to a lessor, guarantor or other person and such issuance is undertaken for purposes primarily other than equity financing; (viii) securities issued in connection with any stock split, stock dividend or recapitalization of the Company; (ix) securities issued in connection with corporate partnering transactions on terms approved by the Board of Directors and such issuance is undertaken for purposes primarily other than equity financing; and (x) any right, option or warrant to acquire any security convertible into the securities excluded from the definition of New Securities pursuant to subsections (i) through (ix) above. (b) In the event the Company proposes to undertake an issuance of New Securities, it shall give each eligible Principal Holder written notice of its intention, describing the type of New Securities, and their price and the general terms upon which the Company proposes to issue the same. Each eligible Principal Holder (or its Affiliate) shall have ten (10) days after any such notice is mailed or delivered to agree to purchase such Principal Holder's pro rata share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (c) In the event the eligible Principal Holders (or their Affiliates) fail to exercise fully the right within said ten (10) day period and after the expiration of the 5-day period for the exercise of the over-allotment provisions of this Section 4.3, the Company shall have sixty (60) days thereafter to sell ----------- or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within sixty (60) days from the date of said agreement) to sell the New Securities respecting which the Principal Holders' (or their Affiliates') right option set forth in this Section 4.3 was not ----------- exercised, at a price and upon terms no more favorable to the purchasers thereof than specified in the Company's notice to eligible Principal Holders pursuant to Section 4.3(b). In the event the Company has not sold within such sixty (60) day - -------------- period or entered into an agreement to sell the New Securities in accordance with the foregoing within sixty (60) days from the date of said agreement, the Company shall not thereafter issue or sell any New Securities, without first again offering such securities to the eligible Principal Holders (and their Affiliates) in the manner provided in Section 4.3(b) above. -------------- (d) The right set forth in this Section 4.3 may not be assigned or transferred ----------- (except as otherwise expressly permitted above in this Section). 4.4 Termination of Covenants. The covenants set forth in this Section 4 shall terminate and be of no further force and effect after the - --------- consummation of the Company's first firm commitment underwritten public offering registered under the Securities Act. 5. COVENANTS OF THE PRINCIPAL STOCKHOLDERS. 5.1 Operating Committee. Until such time as the Company employs a full-time Chief Executive Officer, each of the members of the Sierra Group and Parent agree to use its best efforts to cause its director nominees to vote in favor of creating an operating committee (the "Operating Committee") of the ------------------- Board of Directors of the Company comprised of one 18 representative appointed by Parent, who shall be Jerry R. Welch, and one representative of the Sierra Group, who shall be David Schwab. The Operating Committee shall approve in advance all expenditures of the Company in excess of ten thousand dollars ($10,000) if such expenditures are not in the ordinary course of business of the Company. Upon employment by the Company of a full-time Chief Executive Officer, the Operating Committee shall be dissolved. 5.2 Exclusive On-Line E-Commerce Provider. Parent hereby covenants to the Sierra Group and Palomar that the Company will be the Parent's exclusive channel of on-line sales of products for children under age 12 over the Internet, so long as the Sierra Group continues to hold at least 500,000 shares of the Company's Series A Preferred Stock or shares of Common Stock issued on conversion thereof (or any combination thereof) or Palomar continues to hold at least 300,000 shares of the Company's Series A Preferred Stock or shares of Common Stock issued on conversion thereof (or any combination thereof). 5.3 Board of Directors. (a) So long as a Holder holds at least 67 percent of the Series A Preferred Stock (or Common Stock issued upon conversion thereof), such Holder shall be entitled to designate two (2) members to the Company's Board of Directors. So long as a Holder holds at least 67 percent of the Series A Preferred Stock (or Common Stock issued upon conversion thereof), such Holder shall also be entitled (along with Parent) to propose additional members of the Company's Board of Directors, two (2) of which proposed members shall be appointed to the Company's Board of Directors by mutual agreement between the Parent and such Holder. If a Holder of the Series A Preferred Stock (or Common Stock issued upon conversion thereof) holds less than 67 percent but more than 33 percent of the Series A Preferred Stock (or Common Stock issued upon conversion thereof), then such Holder shall be entitled to designate one (1) member to the Company's Board of Directors. If a Holder of the Series A Preferred Stock (or Common Stock issued upon conversion thereof) holds less than 67 percent but more than 33 percent of the Series A Preferred Stock (or Common Stock issued in conversion thereof), then such Holder shall be entitled (along with Parent) to propose additional members of the Company's Board of Directors, one (1) of which proposed members shall be appointed to the Company's Board of Directors by mutual agreement between the Parent and such Holder. If a Holder holds 33 percent or less of the Series A Preferred Stock (or Common Stock issued on conversion thereof), such Holder shall have no right to designate any member of the Company's Board of Directors. The holders of the Company's Common Stock shall be entitled to elect all members of the Board of Directors not designated pursuant to the above. Additionally, any person entitled to designate a member of the Board of Directors of the Company pursuant to the foregoing also shall be entitled, exclusively and in such person's sole discretion, to designate such member for removal from the Board of Directors. Each of the Principal Stockholders agrees that it will vote shares of Series A Preferred Stock and Common Stock held by it in favor of the foregoing. This paragraph (a) is subject in its entirety to Section 5.3(d) below. - -------------- (b) Each of the members of the Company's Board of Directors shall serve a one- year term or until his successor is elected (in accordance with Section 5.3(a) -------------- above) and has qualified. (c) The makeup of the Board of Directors immediately following the Closing under the Purchase Agreement shall be Jerry R. Welch, David Schwab, Robert Simon, Richard Kayne, 19 Fred Kayne and the Chief Executive Officer of the Company, of which David Schwab and Robert Simon have been nominated solely by the Sierra Group, as holder of more than 67 percent of the Series A Preferred Stock. (d) The rights and obligations under Section 5.3(a) shall be nontransferrable -------------- by Stockholder and shall automatically terminate as to both parties upon the effectiveness of the Company's initial public offering. 5.4 Termination of Covenants. The covenants set forth in this Section 5 shall terminate and be of no further force and effect after the - --------- consummation of the Company's first firm commitment underwritten public offering registered under the Securities Act. 6. MISCELLANEOUS. 6.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of Delaware (except choice of law provisions thereof). 6.2 Arbitration. The parties hereto agree that any dispute or controversy arising out of or relating to any interpretation, construction, performance or breach of this Agreement (other than disputes involving confidentiality or infringement of intellectual property rights) shall be settled by arbitration to be held in Los Angeles County, California, in accordance with the rules then in effect of the American Arbitration Association. The arbitrator, who shall be mutually agreed upon by the parties hereto, may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgement may be entered on the arbitrator's decision in any court of competent jurisdiction. The non-prevailing party shall pay the costs and expenses of such arbitration, and each party hereto shall separately pay its respective counsel fees and expenses. 6.3 Successors and Assigns. Except as otherwise expressly provided herein, this Agreement, nor the provisions hereof, shall be assignable by the parties hereto. To the extent assignable as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 6.4 Entire Agreement; Amendment; Waiver. Except as set forth in Section 2.1(f), this Agreement (including the Exhibits and Schedules hereto) constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by the Company and the holders of at least seventy-five percent (75%) of the Securities, and any such amendment, waiver, discharge or termination shall be binding on all the Holders, but in no event shall the obligation of any Holder hereunder be materially increased, except upon the written consent of such Holder. 6.5 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by United States first-class mail, postage prepaid, sent by facsimile or delivered personally by hand or nationally recognized courier addressed (a) if to the Sierra Group (or any member thereof), to the address set forth below, (b) if to a Holder other than the Sierra Group (or a member thereof), at such address or facsimile 20 number as such holder or permitted assignee shall have furnished to the Company in writing, or (c) if to the Company, at the following address: If to the Sierra Group: Sierra Ventures 3000 Sand Hill Road Building 4, #210 Menlo Park, CA 94025 Attn: Robert J. Simon Facsimile: (650) 854-5593 with a copy to: Jeff Higgins, Esq. Gunderson Dettmer 155 Constitution Drive Menlo Park, CA 94025 Facsimile: (650) 321-2800 If to Palomar: Palomar Ventures 2190 Palomar Airport Road Carlsbad, CA 92009 Attn: Jim Gauer Facsimile: (310) 656-4150 If to the Company or Parent: RightStart.com Inc. or The Right Start, Inc. Each at the following address: 5388 Sterling Center Drive - Unit C Westlake Village, CA 91361 Attn: President Telecopy: (818) 707-7132 with a copy to: Kenneth J. Baronsky, Esq. Milbank, Tweed, Hadley & McCloy LLP 601 So. Figueroa Street, 30th Floor Los Angeles, California 90017 Telecopy: (213) 629-5063 21 All such notices and other written communications shall be effective on the date of mailing, confirmed facsimile transfer or delivery. 6.6 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Holder, upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default therefore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Holder of any breach or default under this Agreement or any waiver on the part of any Holder of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Holder, shall be cumulative and not alternative. 6.7 Rights; Separability. Unless otherwise expressly provided herein, a Holder's rights hereunder are several rights, not rights jointly held with any of the other Holders. 6.8 Information Confidential. Each Holder acknowledges that the information received by them pursuant hereto may be confidential and for its use only, and it will not use such confidential information in violation of the Exchange Act or reproduce, disclose or disseminate such information to any other person (other than its employees or agents having a need to know the contents of such information, and its attorneys), except in connection with the exercise of fights under this Agreement, unless the Company has made such information available to the public generally or such Holder is required to disclose such information by a governmental body. 6.9 Headings. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing or interpreting this Agreement. 6.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 22 Exhibit 10.2 IN WITNESS WHEREOF, the parties hereto have executed this Investors' Rights Agreement effective as of the day and year first above written. RIGHTSTART.COM INC. By:____________________________ Jerry R. Welch President THE RIGHT START, INC. By:____________________________ Gina M. Engelhard Chief Financial Officer and Secretary SIERRA VENTURES VII, L.P. By:___________________________, its general partner By:___________________________, Name: Title: SIERRA VENTURES ASSOCIATES VII, L.L.C. By:_____________________________________, Managing Member _____________________________________ Robert Simon _____________________________________ Ajit Shah PALOMAR VENTURES I, L.P., a Delaware limited partnership: By:_____________________________________ Name: Jim Gauer Its: General Partner Address: Palomar Ventures I, L.P. 100 Wilshire Boulevard, Suite 400 Santa Monica, CA 90401 Facsimile: (310) 656-4150 EX-10.3 4 MANAGEMENT SERVICES AGREEMENT EXHIBIT 10.3 MANAGEMENT SERVICES AGREEMENT This MANAGEMENT SERVICES AGREEMENT (this "Agreement") is dated as of July 9, 1999, by and among The Right Start, Inc., a California corporation (the "Company") and RightStart.com Inc., a Delaware Corporation ("Sub"). W I T N E S S E T H: WHEREAS, Sub is a subsidiary of the Company formed for the purpose of engaging in online retailing of the Company's products for infants and young children; WHEREAS, Sub desires to obtain and the Company desires to provide administrative and other services to Sub in connection with its online retailing business; NOW, THEREFORE, in consideration of the mutual promises and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Basic Services. (a) During the term of this Agreement and subject to the ultimate authority of Sub, the Company shall, either directly, through one or more of its subsidiaries or through one or more of its third party service providers, provide and/or arrange the following basic services and benefits to Sub (the "Basic Services"): (i) Personnel. The Company shall provide Sub with substantially the same personnel/human resource services that it performs for itself including, without limitation, hiring, termination, personnel transfer, benefits administration and employee relations services. (ii) Payroll. The Company shall provide Sub with substantially the ------- same payroll services that it performs for itself including, without limitation, processing payroll, preparing payroll tax returns, mailing payroll checks, participating in payroll related audits and preparing W-2 and 1099 forms. (iii) Insurance. The Company shall obtain for Sub property, casualty --------- (including general liability and workers' compensation), product liability, crime and fiduciary insurance on an annual basis, and surety insurance on an as needed basis, provided that Sub shall be solely liable for workers' compensation claims of employees incurred after the date hereof, and the discharge of any such workers' compensation liability by the Company shall be considered a service rendered by the Company to Sub under this Section 1(a). (iv) Employee Benefits. The Company shall provide all Sub employees ----------------- with benefits substantially similar to benefits provided by the Company to its employees. (v) General Corporate. The Company shall provide Sub with ----------------- substantially the same general corporate services that it performs for itself using Company employees or that it procures through third-party service providers including, without limitation, tax services, cash management services, merchandising services, advertising, inventory management services, customer relations services, financial services and legal services. (vi) Order Fulfillment and Collection. The Company's distribution -------------------------------- centers located in Pennsylvania and California shall provide fulfillment and collection services with respect to orders placed by Sub's customers in substantially the same manner and with priority at least as high as it performs for itself or any third party. Fulfillment and collection services shall consist of, without limitation, receiving, quality control, storage, picking, packing, shipping and handling of product, and processing customer returns, warranty service, invoicing, collections, etc. and will include electronic integration of such functions with Sub's Internet site(s). (vii) General Accounting. The Company shall provide Sub with ------------------ substantially the same general accounting services that it performs for itself including sales audit, accounts payable and general ledger services, receipt and opening of all vendor mail, maintenance of a vendor master file, processing and forwarding payment of all vendor invoices, invoice exception reporting and resolution, periodic financial reporting and vendor relations. (viii) Telecommunications. The Company shall provide Sub with access ------------------ to the Company's internet/telecommunications hardware and facilities including access to data, networking and computing resources, telephone and facsimile equipment and services, internet service providers providing connectivity to internet over dedicated DS-3 line, internet traffic, data routing and email services, relay services for Sub's back office operations and hardware services. (ix) Catalog Production. The Company shall provide Sub with catalog ------------------ production assistance, in substantially the same form as the Company performed for itself prior to the date of this Agreement, including, without limitation, catalog photography, copyrighting, catalog editing, catalog product selection, production management, customer list and customer information management, catalog circulation and mailing services. (x) Credit Services. During the term of this Agreement, the Company --------------- shall, either directly, through one or more of its subsidiaries or through one or more of its third party service providers, provide credit services to Sub including without limitation full credit checking and analysis and credit card processing for customer orders. (xi) Miscellaneous. The Company shall provide to Sub such other ------------- services and benefits as the parties hereto shall mutually agree from time to time. 2. Inventory Supply Services. (a) During the term of this Agreement, the Company shall, either directly or through one or more of its subsidiaries, supply inventory to Sub when and as requested and solely for resale or promotion by Sub through its catalogs or online Website (or Sub's other online or electronic mode or promotional methods) (the "Inventory Supply Services") as follows: 2 (i) Until January 31, 2000, Sub shall purchase Common Inventory from the Company on an as needed basis in order to immediately fulfill individual customer orders. (ii) At all times after the date of this Agreement if Sub desires to purchase Internet-Only Inventory from the Company, then Sub shall purchase such inventory on a forward basis as needed to meet expected customer demand. After January 31, 2000 if Sub desires to purchase Common Inventory from the Company, then Sub shall also purchase Common Inventory to be sold by it on a forward basis as needed to meet expected customer demand. In all cases under this subsection (ii), Sub will be required to take delivery of such inventory purchased on a forward basis and record it as inventory on its books. For purposes of this Agreement, the term "Internet-Only Inventory" shall mean inventory of products sold or carried for sale only by Sub in its Internet or catalog operations and not sold or carried for sale by the Company in its stores. The term "Common Inventory" shall mean all inventory purchased by the Company on behalf of Sub that is sold or carried for sale in both the Company's stores and in Sub's Internet or catalog operations. (b) The Company agrees to accept any inventory originally purchased by Sub from the Company returned by Sub's customer to Sub, a Right Start store or their distribution centers ("Returned Inventory"), subject to the following: (i) For Common Inventory (which for purposes of this Section 2(b) shall also include inventory purchased by the Company on behalf of Sub that has at any time been carried for sale in the Company's stores), the Company shall accept the Returned Inventory and provide credit to the customer. In order to properly reflect the accounting for such transactions on the books of each company, the transaction shall be recorded as follows: (A) the amount refunded to the customer will be charged to the account of Sub and (B) the Company's cost of the inventory, including freight, will be credited to the account of Sub, provided the inventory is saleable or a credit is obtained from the inventory's vendor. (ii) For Internet-Only Inventory, the Company shall accept the Returned Inventory and provide a credit to the customer. In order to properly reflect the accounting for such transactions on the books of each company, the transactions shall be recorded as follows: (A) the amount refunded to the customer will be charged to the account of Sub and (B) provided the returned inventory is in salable condition, the Company will transfer the inventory to Sub's Internet-Only Inventory balance at Sub's cost of the inventory, including freight. If the returned Internet-Only Inventory is not in salable condition, the Company will obtain a credit from the vendor, if available, and credit Sub's account for such vendor credit. If the returned Internet-Only Inventory is not salable and not returnable to its vendor for credit, no credit will be made to Sub's account for such inventory. (c) The Company shall not buy any inventory for Sub without the prior approval of an officer of Sub. (d) All vendor warranties with respect to inventory purchased by Sub from the Company hereunder are hereby assigned to Sub. 3 3. Promotional Services. During the term of this Agreement the Company shall, either directly, through one or more of its subsidiaries or through one or more of its third party service providers, provide and/or arrange the following promotional benefits to Sub at no additional cost to Sub (the "Promotional Services"): (a) Until termination of the Intellectual Property Agreement dated as of even date herewith between the Company and Sub (even after the term of this Agreement): (a) Company will vigorously promote Sub as its exclusive online and catalog channel for products for parents, childcare providers, infants and children under age seventeen; (b) Company agrees that neither it nor any affiliates it controls will promote in any way any other online or catalog retailer that offers products, as a material part of its business, for parents, childcare providers, infants and children under age seventeen; (c) Company agrees that Company will include prominent reference to Sub where such reference can be accomplished at a low incremental cost to the Company (by way of example, and not limitation, all the following created or manufactured or obtained after the Effective Date will contain a prominent reference to Sub: customer bags, customer receipts, labels, invoices, counter cards, in-store audio programming, emails, letterhead, and other stationary, mailers, print publications, advertising (including, without limitation, print, radio, television, billboard and the Internet, etc.)); and (d) Company agrees that it will have in-store signs promoting Sub in all Company retail stores and any retail store controlled or licensed by the Company. (b) Company shall cause its marketing and merchandising employees to assist Sub in the development of Sub's marketing and merchandising programs to be implemented by the Company; Company shall also cause its retail store personnel to execute and carry out reasonable marketing and merchandising programs of Sub. 4. Payment. (a) Basic Services. In full consideration for the Basic Services set forth -------------- in Section 1 above, Sub shall pay the Company for each such service, an amount equal to the Company's Direct Cost (as defined below) plus an additional five percent (5%). "Direct Cost" means, with respect to each service provided pursuant to this Agreement, the direct out-of-pocket expenses paid or incurred to third parties or by the Company and a proportionate share of all overhead expenses directly and demonstrably attributable to providing such service, including, without limitation, shipping, handling, travel expenses, personnel costs, professional fees, printing and postage. (b) Inventory Supply Services. In full consideration for the Inventory ------------------------- Supply Services referred to in Section 2(a) above, Sub shall pay the Company 105%, multiplied by the sum of (x) the direct cost of the goods supplied to Sub, (y) the inbound freight charges, and (z) all other costs charged to the Company by its suppliers. (c) Invoices. -------- (i) On or as soon as possible after the last day of each month and in reasonable detail, the Company shall deliver an invoice to Sub setting forth the Basic Services, 4 and the amount of fees payable for such services rendered to Sub during such month. Sub shall pay the invoiced amount to the Company for Basic Services within ten (10) days after the date on which such invoice is received by Sub. (ii) On or prior to January 31, 2000 as to the Common Inventory purchased for Sub, each week the Company shall deliver an invoice to Sub in reasonable detail setting forth the Common Inventory purchased from the Company for filling customer orders during such week. Sub shall pay the invoiced amount to the Company for the Common Inventory of Sub under this provision within three (3) days after the date on which such invoice is received by Sub. (iii) On or as soon as possible after the last day of each month as to the Common Inventory purchased for Sub at any time after January 31, 2000 and at all times for the Internet-Only Inventory, the Company shall deliver an invoice to Sub in reasonable detail setting forth the Common Inventory and the Internet-Only Inventory purchased for Sub during the month. Sub shall pay the invoiced amount within fifteen (15) days after the date on which such invoice is received by Sub. 5. Inspection. Sub and its agents and representatives, at Sub's expense ---------- (unless a five percent (5%) or greater discrepancy is discovered), shall have the right to examine the books and records of the Company that relate to the costs and expenses referred to in this Agreement, provided, however, that such examination may only be conducted during regular business hours and upon reasonable prior written notice. 6. No Agency. The parties hereto are independent contractors and nothing --------- in this Agreement is intended to, nor shall it, create any agency, partnership or joint venture relationship between them. With respect to any third party, no party hereto, or any of its officers, directors, employees or agents, shall have the right or authority to bind or otherwise obligate the other party hereto in any way as a consequence of this Agreement. 7. Termination. ----------- (a) The term of this Agreement shall begin as of the date hereof and shall continue for an indefinite period in full force and effect until it is terminated in accordance with this Section 7. (b) This Agreement may be terminated in full or on a service-by-service basis at the option of either the Company or Sub as follows: (i) Sub may terminate this Agreement or any of the Basic Services, Inventory Supply Services or Promotional Services (or any other services under this Agreement) at any time upon thirty (30) days prior written notice to the Company; provided that if Sub terminates the Inventory Supply Services or this -------- Agreement in full, Sub must pay for and take delivery of (in accordance with this Agreement) all Common Inventory and Internet-Only Inventory purchased by the Company at Sub's request prior to the termination date. (ii) The Company may terminate this Agreement or any service(s) under this Agreement at any time after January 31, 2000 upon one hundred twenty (120) days 5 prior written notice to Sub when the annual run rate of Sub's sales is projected to be in excess of $40 million or, in order to meet demand for Sub's sales (even if Sub's annual run rate is less than $40 million), the Company would be required to make additional Expenditures in providing Basic Services or Inventory Services that exceed $15,000 in any one-month period and that could not be passed through to or reimbursed by Sub under this Agreement or that Sub does not otherwise agree to pay. For purposes of this section, the term "Expenditures" shall mean any capital expenditures made by the Company for facilities, space, equipment or software. (c) Notwithstanding the foregoing clause (b), the Company shall have the right, but not the obligation, to terminate this Agreement immediately if: (i) Sub is in material breach of any of this Agreement, which breach is not cured within sixty (60) days of receipt of written notice from the Company of such breach; except that any material breach relating to or arising ------ out of Section 4 of this Agreement must be cured within thirty (30) days of receipt of written notice from the Company of such breach; (ii) Sub is the subject of a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if such petition or proceeding is not dismissed within ninety (90) days of filing, or becomes the subject of any involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if such petition or proceeding is not dismissed within ninety (90) days of filing; (iii) Sub's business, or all or substantially all of its assets, are liquidated or otherwise terminated, sold or transferred due to insolvency or any other basis; or (iv) Sub makes an assignment for the benefit of its creditors. (d) Notwithstanding the foregoing clause (b), Sub shall have the right, but not the obligation, to terminate immediately this Agreement if: (i) the Company is in material breach of any of its obligations or representations hereunder, which breach is not cured within thirty (30) days of receipt of written notice from Sub of such breach; (ii) the Company is the subject of a voluntary petition in bankruptcy or any voluntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if such petition or proceeding is not dismissed within sixty (60) days of filing, or becomes the subject of any involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation, or composition for the benefit of creditors, if such petition or proceeding is not dismissed within sixty (60) days of filing; (iii) the Company's business, or substantially all of its assets, are liquidated or otherwise terminated, sold or transferred due to insolvency or any other basis; or (iv) the Company becomes insolvent or unable to pay its debts as they mature or Company makes an assignment for the benefit of its creditors. 6 (e) If Sub wishes to obtain any inventory or services on its own through third parties or in the event of a termination of this Agreement in whole or in part, the Company shall use its best efforts to effect a smooth transition and to assist Sub in establishing direct third party relationships on reasonable terms. This obligation will continue after termination of this Agreement for any reason with the intent that Sub will have the ability to acquire for resale all products Company sells from time to time for a period of at least three years after termination of this Agreement in whole. (f) A party may exercise its right to terminate pursuant to this Section 7 by sending appropriate notice to the other party pursuant to Section 8(f) hereof specifying the subsection of this Section 7 on which the party is relying and, if this Agreement is not terminated in full, the specific services to which such termination relates. No exercise by a party of its rights under this Section 7 will limit its remedies by reason of the other party's default, the party's rights to exercise any other rights under this Section 7, or any of that party's other rights. 8. Miscellaneous. ------------- (a) This Agreement shall be governed by the internal laws of the State of California without giving effect to the conflict of law principles thereof. (b) This Agreement sets forth the entire agreement between the parties hereto with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements. No provision of this Agreement may be waived or amended, except by a writing signed by the Company and Sub. (c) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one and the same instrument. (d) The failure of any party to exercise any right or remedy provided for herein shall not be deemed a waiver of any right or remedy hereunder. (e) If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or otherwise unenforceable, such determination shall not affect the validity or enforceability of any remaining provisions of this Agreement. If any provision of this Agreement is invalid under any applicable statute or rule of law, it shall be enforced to the maximum extent possible so as to effect the intent of the parties, and the remainder of this Agreement shall continue in full force and effect. (f) All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally, via overnight courier, by facsimile transmission or mailed, certified or registered mail, postage prepaid, return receipt requested: 7 If to the Company: The Right Start, Inc. 5388 Sterling Center Drive, Unit C Westlake Village, California 91361 Attn: President Fax: (818) 707-7132 If to Sub: RightStart.com Inc. 5388 Sterling Center Drive, Unit C Westlake Village, California 91361 Attn: President Fax: (818) 707-7132 (g) This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective, permitted successors and assigns. Sub may not assign any of its rights hereunder without the prior written consent of the Company, except to a successor to substantially all of Sub's business or assets; provided, that if Sub assigns its rights under this Agreement as permitted by the foregoing, the Company may terminate this Agreement six (6) months following such assignment, unless earlier terminated during such six- month period by Sub (notwithstanding anything to the contrary set forth in Section 7 hereof). (h) The section headings used herein are for the convenience of the parties only, are not substantive and shall not be used to interpret or construe any of the provisions contained herein. 8 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. The Right Start, Inc., a California corporation /s/ Gina M. Engelhard ------------------------ Name: Gina M. Engelhard Title: Chief Financial Officer and Secretary RightStart.com Inc., a Delaware corporation /s/ Jerry R. Welch -------------------------- Name: Jerry R. Welch Title: President EX-10.4 5 INTELLECTUAL PROPERTY AGREEMENT Exhibit 10.4 INTELLECTUAL PROPERTY AGREEMENT This INTELLECTUAL PROPERTY AGREEMENT, (the "Agreement"), dated as of --------- July 9, 1999 (the "Effective Date"), is by and among The Right Start, Inc., a -------------- California corporation (the "Company") and RightStart.com Inc., a Delaware ------- Corporation ("Sub"). --- W I T N E S S E T H: -------------------- WHEREAS, Company is the owner of all right, title and interest in the Intellectual Property as defined herein; and WHEREAS, Sub is a subsidiary of the Company formed for the purpose of conducting the Company's catalog business, and engaging in the online retailing of the Company's products for parents, infants and children and the other activities more fully defined below as the Online Business; WHEREAS, the Company desires to assign to Sub the Website IP, and to grant Sub a non-exclusive, non-transferable, fully-paid up and royalty-free license (except as otherwise set forth herein) to use the Right Start IP and the goodwill associated therewith solely in connection with the Online Business, and Sub desires to grant to the Company a non-exclusive, non-transferable, fully- paid up and royalty-free license to use the Website IP and the goodwill associated therewith solely in connection with the Retail Business. NOW, THEREFORE, in consideration of the mutual promises and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. DEFINITIONS 1.01 Affiliate means any person or entity of any kind effectively controlling, effectively controlled by or under common control with Company or Sub. 1.02 Change in Control shall mean, and shall be deemed to have occurred on the date the Sub enters into or is involved in any merger, reorganization, consolidation or other business combination with any person or entity other than an Affiliate or financial adviser, immediately after which Sub's stockholders immediately prior to such transaction hold less than fifty percent (50%) of the general voting power of Sub. 1.03 Confidential Information shall mean any information relating to technical, marketing, product, customer and/or business affairs which is disclosed in the course of this Agreement, including information relating to products, trade secrets, software research and developments, inventions, processes, techniques, designs or other technical and business information. Confidential information shall not include any information which becomes generally available to the public without breach of this Agreement, is in the possession of the recipient party prior to its disclosure by the disclosing party or becomes available from a third party not in breach of any obligations of confidentiality to the disclosing party. 1.04 Content shall mean all information, marketing data, text, audio files, video files, graphics or other material provided by Company for use in connection with the Online Business. 1.05 Customer Information shall mean all lists of customers and prospective customers and any other information regarding customers (and prospective customers) of the Company's Retail Business in any format or medium of expression existing on or after the Effective Date. 1.06 Derivative Work shall have the meaning in accordance with the United States Copyright Act of 1976, as amended, 17 U.S.C. (S)101, namely, a work based upon one or more pre-existing works that is embodied in any form in which a work may be recast, transformed or adapted, including any work consisting of editorial revisions, annotations, elaborations or other modifications which, as a whole, represents an original work of authorship. 1.07 Guidance Solutions Content shall mean the source code (human readable) and object code (machine readable), technology, methods, techniques, software, algorithms, electronic commerce and database applications and rights thereto owned by Guidance Solutions, Inc. which has been engaged by Company to develop the Website. 1.08 Intellectual Property shall mean the Right Start IP and the Website IP. 1.09 Marks refers to all trademarks, service marks, trade dress, logos, brands and designs, trade names, Internet domain names, metatags, and hyperlinks and any similar designation of source now known or hereafter devised (and any combination thereof) owned or used by Company, including, without limitation, those set forth on Exhibit A. Marks (excluding trade dress, designs, domain names, metatags and hyperlinks) may also be referred to herein as Trademarks. 1.10 Online Business shall mean the catalog and online retailing of the Company's and Sub's products (including, without limitation, third party products sold or distributed by either) or similar products for parents, childcare providers, infants and children under age seventeen, together with original or third party content presented or offered on the Website or otherwise online or electronically by Sub, including, without limitation, the production, procurement, sales, marketing, promotion and distribution of all of the foregoing, and the collection, sale, and distribution of information regarding the use and users of the Website and other customers. 1.11 Retail Business shall mean the retail sales of products for parents, childcare providers, infants or children under age seventeen through any sales medium except through online sales (or in any other electronic format) or through catalog sales. 1.12 Right Start IP shall mean all Customer Information, and any other information regarding customers of the Company's Retail Business, and all Marks, and all goodwill associated therewith, copyrights and works subject to copyright protection, patents, 2 trade secrets and other proprietary and intangible property rights, and all applications and registrations therefor and renewals and extensions thereof of the Company, including, without limitation, those Marks set forth on Exhibit A and the Patents set forth on Exhibit C; provided, however, that the term ----------------- "Right Start IP" shall not include the Website IP (or anything else developed by or for Sub on or after the Effective Date). Company shall use its best efforts to provide to Sub Exhibits updated to reflect any after-acquired Right Start IP which is necessary or useful to conduct, or material to, the Retail Business. 1.13 The Right Start Website Content shall include, without limitation, all files (including all Hypertext Markup Language (HTML) files), text, graphics, graphics files in any file format, images, artwork, audio files, audiovisual materials, and electronic commerce and database applications (including such Content utilizing or displaying the name "Right Start") which are (i) provided by third parties or the Company or (ii) created by or for Sub in connection with the Website and in accordance with the terms and conditions of this Agreement. 1.14 User Information shall mean any and all information with respect to the use and users of the Website, including, without limitation, all user profiles, click streams, cookie files, and information regarding frequency of use, page views, hits, purchase history and all demographic data collected by or on behalf of the Company or Sub. User Information shall also include all catalog customer lists of the Company or Sub in existence on the Effective Date. 1.15 Website shall mean all content of the interactive electronic commerce website located at the domain name www.RightStart.com. ------------------ 1.16 Website IP refers to the Right Start Website Content and all of the following as they relate to the Website or the Online Business: the copyright registrations set forth on Exhibit B, the domain names set forth on Exhibit D, and all trademarks, service marks, trade dress, logos ,brands and designs, trade names, Internet domain names, metatags, and hyperlinks and any similar designation of source now known or hereafter devised (and any combination thereof) used in connection with the Website or the Online Business (the "Sub Marks"), and all goodwill associated therewith, copyrights and works subject to copyright protection, patents, trade secrets, the Content and other proprietary and intangible property rights, and all applications and registrations therefor and renewals and extensions thereof, including all intellectual property hereafter created, developed or acquired by or for the Company or Sub in the conduct of the Online Business. 2. GRANT OF LICENSE. ---------------- 2.01 (a) License to Sub. Company hereby grants to Sub a worldwide, -------------- non-exclusive (except as provided below), non-transferable (except as provided below) fully paid-up and royalty-free license to use and fully exploit the Right Start IP (and the goodwill associated therewith) and the Customer Information, solely in connection with the Online Business and in accordance with the terms and conditions of the Agreement (subject to the provisions of Article 4). Such --------- license will be exclusive with respect to the Online Business and such exclusivity will exclude the Company or any Affiliate of the Company or successor from (1) using, exploiting, exercising or licensing any rights to the Right Start IP or Customer Information in connection with any online, e-commerce or catalog business retailing products for parents, 3 childcare providers, infants or children under age seventeen (provided that the Company may maintain hyperlinks, sites or pages (that utilize domain names other than those within the definition of Website IP) that provide access exclusively to (A) corporate information regarding the Company, and (B) a list of the Company's retail locations, so long as such hyperlink, site or page provides a link to the Website) or (2) engaging in or promoting any online, e-commerce or catalog business retailing products for parents, childcare providers, infants or children under age seventeen (provided that the Company may maintain hyperlinks, sites or pages (that utilize domain names other than those within the definition of Website IP) that provide access exclusively to (A) corporate information regarding the Company, and (B) a list of the Company's retail locations, so long as such hyperlink, site or page provides a link to the Website). (b) License to Company. Sub hereby grants to Company a worldwide, ------------------ non-exclusive, fully paid-up and royalty-free license to use and fully exploit the User Information and the Website IP for any purpose of the Retail Business other than an electronic or online presence (provided that the Company may maintain hyperlinks, sites or pages (that utilize domain names other than those within the definition of Website IP) that provide access exclusively to (A) corporate information regarding the Company, and (B) a list of the Company's retail locations, so long as such hyperlink, site or page provides a link to the Website) (Subject to the provisions of Article 4 and Article 7). ----------------------- 2.02. Assignment. Company hereby assigns to Sub all of its right, ---------- title and interest in and to the User Information and the Website IP (and the goodwill associated therewith), in accordance with the terms and conditions of the Agreement. 2.03 Ownership by the Company. All right, title and interest in and ------------------------ to the Customer Information and the Right Start IP, including all goodwill associated therewith, shall remain vested in Company. Sub covenants that it will not in any way challenge (1) Company's ownership of the Right Start IP or the Customer Information or (2) the validity of the Right Start IP. 2.04. Ownership by Sub. All right, title and interest in and to the ---------------- User Information and the Website IP (including all goodwill associated therewith) shall be the property of Sub. The Company covenants that it will not in any way challenge (1) Sub's ownership of the Website IP or User Information or (2) the validity of the Website IP. 2.05. Transferability. (a) Neither party hereto shall have the --------------- right to assign or sublicense its licenses or sublicenses under this Agreement unless (1) such party obtains the other party's prior written consent to such a transfer of rights, and (2) such assignee or sublicensee shall assume in writing the obligations of the licensing or sub-licensing party under this Agreement and agree to be bound hereunder for the benefit of the other party; provided that without regard to such restrictions (A) either party may assign such licenses or sublicenses to a successor to substantially all its assets and (B) either party may sublicense its licenses and sublicenses in connection with a partnership, alliance, joint venture, distribution, advertising or similar arrangement that does not constitute a mere brokering of the license or sublicense. (b) Notwithstanding the immediately foregoing paragraph, both the Company and Sub shall be prohibited from assigning or sublicensing (or in the case of the Company, a 4 further licensing) the "Right Start" name in a particular circumstance if, in the opinion of an independent arbitrator recognized by American Arbitration Association (the "AAA") appointed by consensus of the Board of Directors of the Company and the Board of Directors of Sub, such assignment or sublicense would substantially harm the image or reputation of the non-assigning/non- sublicensing/non-licensing party or otherwise substantially diminish the value of the non-assigning/non-sublicensing/non-licensing party's Intellectual Property rights or the "Right Start" name in a particular circumstance. The non- prevailing party shall pay the costs and expenses of such arbitrator if utilized hereunder, and the arbitrator shall allocate between the parties fees and expenses of counsel in connection with any such arbitration. (c) Notwithstanding Section 2.05(a) and (b) above, the Company shall ----------------------- be permitted to assign, pledge and grant a security interest in its Intellectual Property to its Senior Lender to secure its obligations under any loan or credit agreement with its Senior Lender without the consent of Sub, and the Company's Intellectual Property and rights may be assigned, transferred or sublicensed by the Company or its Senior Lender, by foreclosure or transfer in lieu thereof, in connection with such Senior Lender's exercise of any remedies with respect to such indebtedness without the consent of Sub; provided that any transferee, including Senior Lender, who acquires ownership of or a sublicense in such Intellectual Property or rights shall have principal offices or branches located within the United States and shall assume in writing the obligations of the Company under this Agreement and agree to be bound hereby. No consent of Sub, and no assumption of Company's rights under this Agreement, shall be required for any Senior Lender of the Company to exercise its rights against any inventory of the Company bearing the trademarks or tradenames included in the Intellectual Property and the exercise of such rights shall not be a breach hereunder. Notwithstanding Section 2.05(a) and (b) above, Sub shall be permitted ----------------------- to assign, pledge and grant a security interest in its Intellectual Property to its Senior Lender to secure its obligations under any loan or credit agreement with its Senior Lender without the consent of the Company, and Sub's Intellectual Property and rights may be assigned, transferred or sublicensed by Sub or its Senior Lender, by foreclosure or transfer in lieu thereof, in connection with such Senior Lender's exercise of any remedies with respect to such indebtedness without the consent of the Company; provided that any transferee, including Senior Lender, who acquires ownership of or a sublicense in such Intellectual Property or rights shall have principal offices or branches located within the United States and shall assume in writing the obligations of Sub under this Agreement and agree to be bound hereby. No consent of the Company, and no assumption of Sub's rights under this Agreement, shall be required for any Senior Lender of Sub to exercise its rights against any inventory of Sub bearing the trademarks or tradenames included in the Intellectual Property and the exercise of such rights shall not be a breach hereunder. For purposes of this section, "Senior Lender" shall mean one or more major financial institutions of good repute with principal offices or branches located in the United States. After foreclosure by or transfer in lieu thereof to a Senior Lender as set forth in the immediately preceding paragraph, if such Senior Lender transfers its rights in or to any Intellectual Property under this Section ------- 2.05(c), it shall be released from any obligations under this Agreement upon - ------- consummation of such transfer. 5 3. GRANT OF SUB-LICENSE. -------------------- 3.01 Sub-License. Company hereby grants to Sub a perpetual, ----------- worldwide, exclusive, fully paid-up and royalty-free, unrestricted sub-license and right to use, reproduce, modify, transfer, maintain and otherwise fully exploit the Guidance Solutions Content and all of its Derivatives. This sublicense shall survive termination of this Agreement and shall include, without limitation, all rights to: (a) develop, use, reproduce, broadcast, distribute or transmit in any fashion, display, perform or otherwise exploit the Guidance Solutions Content, as well as all Derivatives, in and for all forms, media, platforms, etc. now or hereafter known or invented by anyone; and (b) create Derivatives or otherwise modify the Guidance Solutions Content and Derivatives. 4. FORM OF USE. ----------- 4.01 Notices, Legends and other Intellectual Property. ------------------------------------------------ (a) By Sub: ------ (i) Sub shall use the Right Start IP in connection with the federal registration symbol, (R), or the "TM" symbol, the federal copyright symbol (C), and "Reg'd Patent" or "Patent Pending", as and if applicable, and such other customary symbols, notices and legends as may be reasonably required by Company. (ii) With the exception of the trademarks, service marks, trade dress, logos, brands and designs, trade names, Internet domain names, metatags, and hyperlinks of Sub and its affiliates, Sub shall not use the Trademarks owned by the Company so as to create composite or unitary trademarks consisting or comprised of the Trademarks and any other third party trademarks, service marks, trade dress, logos, brands and designs, trade names, Internet domain names, metatags, or hyperlinks without the prior written approval of Company. (b) By the Company: -------------- (i) The Company shall use the Website IP in connection with the federal registration symbol, (R), or the "TM" symbol, the federal copyright symbol (C), and "Reg'd Patent" or "Patent Pending", as and if applicable, and such other customary symbols, notices and legends as may be reasonably required by Sub. (ii) With the exception of the trademarks, service marks, trade dress, logos, brands and designs, trade names, Internet domain names, metatags, and hyperlinks of the Company and its affiliates, the Company shall not use the Sub Marks so as to create composite or unitary trademarks consisting or comprised of the Trademarks and any other third party trademarks, service marks, trade dress, 6 logos, brands and designs, trade names, Internet domain names, metatags, or hyperlinks without the prior written approval of Sub. 4.02 Quality Standards. ----------------- (a) For Sub: ------- (i) The Trademarks shall at all times be used in a form and manner that is consistent with the registered or applied-for format of the Trademarks or the then current practices of Company, and otherwise in a form and manner that is reasonably in keeping with the image, reputation and goodwill symbolized by and associated with the Trademarks. (ii) Sub shall only use the Trademarks in connection with the Online Business, and goods and services that adhere to the standard of quality exemplified by the then current practices of Company provided by the Company to Sub in writing with reasonable notice (if such practices are then actually followed by the Company and also are enforced against its licensees other than Sub, if any) and which must be in keeping with the image and goodwill symbolized and associated with the Trademarks, the Retail Business and the Company. (iii) Sub's use of the Trademarks shall not injure, disparage, demean, or tarnish the reputation of Company, the Retail Business, the Trademarks or the image, reputation or goodwill associated therewith; provided, however, that legal competitive business practices of Sub against the Company or third parties (or the effects thereof) shall not violate this subsection. (b) For the Company: --------------- (i) The Website IP and the Trademarks shall at all times be used in a form and manner that is consistent with the registered or applied-for format of the Website IP and the Trademarks or the then current practices of Sub, and otherwise in a form and manner that is reasonably in keeping with the image, reputation and goodwill symbolized by and associated with the Website IP and the Trademarks. (ii) The Company shall only use the Website IP in connection with the Retail Business, all of which must adhere to the standard of quality exemplified by the then current practices of Sub provided by Sub to the Company in writing with reasonable notice (if such practices are then actually followed by Sub and also are enforced against its licensees other than the Company, if any) and which must be in keeping with the image and goodwill symbolized and associated with the Website IP, the Online Business and Sub; provided, however, that such ----------------- standards and any criteria for approval will be applied to the Company on a nondiscriminating basis. (iii) The Company's use of the Website IP and the Trademarks shall not injure, disparage, demean or tarnish the reputation of Sub, the Online Business, the 7 Website IP or the image, reputation or goodwill associated therewith; provided, however, that legal competitive business practices of the Company against Sub or third parties (or the effects thereof) shall not violate this subsection. 4.03 Quality Control. (a) Sub shall submit to Company, for ---------------- Company's prior written approval, which approval shall not be unreasonably withheld or delayed, three samples of any proposed use of the Trademarks (other than for routine advertising or any other use consistent with previously approved uses or consistent with Company's generally applicable TM guidelines or any specific guidelines provided by the Company to Sub). Company shall provide its written approval or disapproval of the proposed use of the Trademarks to Sub. If Company does not provide its written approval within 10 days following such submission, approval shall be deemed granted. Company shall provide, at Sub's request, a written explanation of its reasons for withholding approval within 10 days after notice of such request, in sufficient detail to enable Sub to correct the basis for Company's rejection of the submitted material. Sub shall ensure that representative samples of its use of the Trademarks are periodically submitted to Company, in order to further enable Company to exercise control over the nature and quality of the goods and services provided under the Trademarks. (b) The Company shall submit to Sub, for Sub's prior written approval, which approval shall not be unreasonably withheld or delayed, three samples of any proposed use of the Sub Marks (other than for routine advertising or any other use consistent with previously approved uses or consistent with Sub's generally applicable TM guidelines or any specific guidelines provided by Sub to the Company). Sub shall provide its written approval or disapproval of the proposed use of the Sub Marks to the Company. If Sub does not provide its written approval within 10 days following such submission, approval shall be deemed granted. Sub shall provide, at the Company's request, a written explanation of its reasons for withholding approval within 10 days after notice of such request, in sufficient detail to enable the Company to correct the basis for Sub's rejection of the submitted material. The Company shall ensure that representative samples of its use of the Sub Marks are periodically submitted to Sub, in order to further enable Sub to exercise control over the nature and quality of the goods and services provided under the Sub Marks. 4.04 Infringement Proceedings. (a) Subject to 4.4(b), each party ------------------------ shall promptly notify the other party in writing of any actual or suspected unauthorized third party use of the Right Start IP, Confidential Information of the Company and the Customer Information, as such use comes to a party's attention. If the Company elects to defend or enforce its rights relating to such alleged infringement, it shall be entitled to choose counsel for such purpose and the Company shall afford Sub the opportunity to participate in (1) the communication in writing or orally with the alleged infringer; and (2) the enforcement or defense of their rights in, to and under the Right Start IP, Confidential Information of the Company and the Customer Information; and (3) the undertaking of infringement, unfair competition or other proceedings involving the Right Start IP, Confidential Information of the Company or the Customer Information; provided, however, that if the Company elects not to defend or enforce its rights against such alleged infringer, Sub shall be entitled to exercise any of the foregoing rights alone (including retention of its choice of counsel) and the Company agrees to cooperate with Sub in the exercise of such rights. Damages from such alleged infringer, if recovered by either of the 8 parties, shall be equitably apportioned between the Company and Sub in accordance with relative damage suffered by the parties from such infringement. (b) Subject to Section 4.4(a), each party shall promptly notify the other party in writing of any actual or suspected unauthorized third party use of the Website IP, the User Information and the Confidential Information of Sub, as such use comes to a party's attention. If Sub elects to defend or enforce its rights relating to such alleged infringement, it shall be entitled to choose counsel for such purpose and Sub shall afford the Company the opportunity to participate in the (1) communication in writing or orally with the alleged infringer; and (2) the enforcement or defense of their rights in, to and under the Website IP, the User Information and the Confidential Information of Sub; and (3) the undertaking of infringement, unfair competition or other proceedings involving the Website IP, the User Information or the Confidential Information of Sub; provided, however, that if Sub elects not to defend or enforce its rights against such alleged infringer, the Company shall be entitled to exercise any of the foregoing rights alone (including retention of its choice of counsel) and Sub agrees to cooperate with the Company in the exercise of such rights. Damages from such alleged infringer, if recovered by either of the parties, shall be equitably apportioned between the Company and Sub in accordance with relative damage suffered by the parties from such infringement. 5. TERM AND TERMINATION. -------------------- 5.01 Term. The term of this Agreement (and all licenses hereunder) ---- shall commence on the date of this Agreement and shall continue until terminated in accordance with the procedures set forth in this Agreement; provided, however, that to the extent that any license or sub-license granted hereunder continues upon termination of this Agreement (as specifically set forth in Section 5.04 below or otherwise herein) (a "Post-Term License") such Post-Term Licenses shall continue but any particular activity under such Post-Term License shall be subject to termination if, in the opinion of an independent recognized arbitrator by the AAA appointed by the consensus of the Board of Directors of the Company and the Board of Directors of Sub, such activity under such Post- Term License would substantially harm the image of the owner of the Intellectual Property to which the Post-Term License relates or otherwise substantially diminish the value of such party's Intellectual Property rights or the "Right Start" name. The non-prevailing party shall pay the costs and expenses of such arbitrator if utilized, and the arbitrator shall allocate between the parties the fees and expenses of counsel in connection with any such arbitration. 5.02 Termination for Change in Control of Sub. In the event of a ---------------------------------------- Change in Control of Sub in which the acquiror is a direct competitor of the Company, Sub shall provide notice to the Company no less than 10 days prior to entering into a definitive agreement giving effect to such Change of Control. Thereafter, the Company may terminate this Agreement (in accordance with the terms of Section 5.01 and 5.04 hereof) within 30 days by giving Sub notice of termination due to a Change of Control. If Sub fails to provide notice to the Company in accordance with this paragraph, this Agreement may be terminated at the Company's option at any time, within 60 days of the later of when the Change of Control is actually consummated or the date on which the Company discovers that a Change of Control has occurred. 9 5.03 Termination for Cause. If either party materially breaches --------------------- this Agreement and does not cure such failure within 30 business days after written notice is given by the other party specifying the nature of the material breach, the non-breaching party may, upon further notice to the breaching party within 10 days of the end of the 30-day period, terminate this Agreement as of the date specified in such notice of termination. 5.04 Effect of Termination. Subject to Section 5.01 above, in the --------------------- event of a termination of this Agreement for any reason, and with the exception of licenses granted hereunder to the extent they relate to (A) Customer Information used by Sub in the Online Business at the time of termination and (B) the "Right Start" name and other Right Start IP actively used in the Online Business at the time of termination, and selling out inventory, and excluding any intellectual property owned by Sub, Sub shall (1) cease any and all use of the Right Start IP and the Confidential Information of the Company; and (2) deliver to Company all copies of the remaining stock of printed or other material bearing the Right Start IP, any other designation which is the same or confusingly similar to the Right Start IP or the Confidential Information of the Company, and all other materials, files, goods and documentation relating or referring to the Right Start IP or the Confidential Information of the Company in Sub's possession. In the event of a termination of this Agreement for any reason, and with the exception of licenses granted hereunder to the extent they relate to User Information used by the Company in the Retail Business at the time of termination, and selling out inventory, and excluding any intellectual property owned by the Company, the Company shall (1) cease any and all use of the Website IP, the User Information, and the Confidential Information of Sub, and (2) deliver to Sub all copies of the remaining stock of printed or other material bearing the Website IP, any other designation which is the same or confusingly similar to the Website IP or the Confidential Information of Sub, and all other materials, files, goods and documentation relating or referring to the Website IP, the User Information or the Confidential Information of Sub in the Company's possession. 6. REPRESENTATIONS AND WARRANTIES; DISCLAIMER. ------------------------------------------ 6.01 Each party represents and warrants that, except as authorized hereunder, neither it nor any Intellectual Property shall to its knowledge infringe upon any third party intellectual property rights, including, without limitation, trademarks, copyrights, patents and trade secrets. 6.02 DISCLAIMER. NEITHER PARTY MAKES ANY REPRESENTATIONS OR ---------- WARRANTIES, EXPRESS OR IMPLIED, REGARDING OR RELATING TO THE INTELLECTUAL PROPERTY, AND EACH PARTY EXPLICITLY DISCLAIMS ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A SPECIFIC PURPOSE. 7. COVENANTS. --------- (a) Confidentiality. Each party agrees to hold in strict confidence, --------------- and to use reasonable efforts to cause its employees and representatives to hold in strict confidence all Confidential Information of the other party furnished to or obtained by it in the course of this 10 Agreement except to the extent that (i) such information has been in the public domain through no fault of it, (ii) disclosure or release is compelled by judicial or administrative process, or (iii) disclosure or release is necessary pursuant to requirements of law or the requirements of any governmental entity including, without limitation, disclosure requirements under the Securities Exchange Act of 1934, as amended. This Section 7 shall survive termination of this Agreement indefinitely. (b) Promotion. The Management Services Agreement dated as of the date --------- hereof between Parent and Sub contains a promotional covenant that continues in effect until this Agreement is terminated in accordance with Section 5 herein --------- (regardless of termination of such Management Services Agreement prior to the date of termination of this Agreement). 8. MISCELLANEOUS PROVISIONS. ------------------------ 8.01 Notices. Except as otherwise specified in this Agreement, all ------- notices, requests, consents, approvals, agreements, authorizations, acknowledgements, waivers and other communications required or permitted under this Agreement shall be in writing and shall be deemed given when sent by telecopy to the telecopy number specified below. A copy of any such notice shall also be sent by express air mail on the date such notice is transmitted by telecopy to the address specified below: In the case of Company: The Right Start, Inc. 5388 Sterling Center Drive Unit C Westlake Village, CA 91361 Attention: President --------- Telecopy No. (818) 707-7132 with a copy to: Milbank, Tweed, Hadley & McCloy LLP 601 South Figueroa Street, 30th Floor Los Angeles, CA 90017 Attention: Kenneth Baronsky --------- Telecopy No. 213-629-5063 In the case of Sub: RightStart.com Inc. 5388 Sterling Center Drive Unit C Westlake Village, CA 91361 Attention: President --------- Telecopy No. (818) 707-7132 11 with a copy to: Sierra Ventures VII LP 3000 Sand Hill Road Building 4, #210 Menlo Park, CA 94025 Attn: Mr. Robert J. Simon Telecopy No. (650) 854-5593 A party may change its address or telecopy number for notification purposes by giving the other party notice of the new address or telecopy number and the date upon which it shall become effective. 8.02 Headings. The article and section headings are for reference and -------- convenience only and shall not be considered in the interpretation of this Agreement. 8.03 Severability. If any provision of this Agreement is held by a ------------ court of competent jurisdiction to be contrary to law, then the remaining provisions of this Agreement, if capable of substantial performance, shall remain in full force and effect. 8.04 Third Party Beneficiaries. Each party intends that this ------------------------- Agreement shall not benefit, or create and right or cause of action in or on behalf of any person or entity other than the parties. 8.05 Waivers. No delay or omission by either party in the exercise ------- of any right or power it has under this Agreement shall impair or be construed as a waiver of such right or power. A waiver by any party of any breach or covenant shall not be construed to be a waiver of any succeeding breach or any other covenant. All waivers must be in writing and signed by the party waiving its rights. 8.06 Entire Agreement. This Agreement represents the entire ---------------- agreement between the parties with respect to its subject matter, and there are no other representations, understandings or agreements between the parties relative to such subject matter. 8.07 Amendments. No amendment to, or change, waiver or discharge of, ---------- any provision of this Agreement shall be valid unless in writing and signed by an authorized representative of each of the parties. 8.08 Governing Law. This Agreement and the rights and obligations of ------------- the parties hereunder shall be governed by and construed in accordance with United States trademark laws and the laws of the State of California, without giving effect to the principles thereof relating to the conflicts of laws. 8.09 Covenant of Further Assurances. Company and Sub covenant and ------------------------------ agree that, subsequent to the execution and delivery of this Agreement and without additional consideration, each of Company and Sub shall execute and deliver any further legal instruments and perform any acts which are or may become necessary to effectuate the purposes of this 12 Agreement to perfect or otherwise preserve and maintain Company's rights in and to the Intellectual Property. 13 IN WITNESS WHEREOF, each of Company and Sub has caused this Agreement to be signed and delivered by its duly authorized representative. The Right Start, Inc. By: /s/ Gina M. Engelhard ------------------------ Name: Gina M. Engelhard Title: Chief Financial Officer and Secretary RightStart.com Inc. By: /s/ Jerry R. Welch --------------------- Name: Jerry R. Welch Title: President STATE OF ) ------------------ ) SS. COUNTY OF ) ----------------- On this day of , 1999, there appeared before me --- ---------------- , personally known to me, who acknowledged that he/she signed - ---------------- the foregoing Intellectual Property Agreement as his/her voluntary act and deed with full authority to do so. ------------------------ Notary Public 15 EX-99.1 6 PRESS RELEASE OF THE REGISTRANT EXHIBIT 99.1 Monday July 12, 1:25 pm Eastern Time Company Press Release The Right Start Inc. Announces Closing of Financing for Internet Subsidiary WESTLAKE VILLAGE, Calif.--(BUSINESS WIRE)--July 12, 1999--The Right Start Inc. (Nasdaq:RTST - news) Monday announced that its Internet subsidiary, ---- ---- Rightstart.com Inc. has entered into an agreement providing for a $15 million private placement of convertible preferred stock of Rightstart.com. Investors funded $12 million of the financing last Friday and an additional $3 million will be funded in approximately a week. The subsidiary owns and, through a service agreement with The Right Start, operates the company's new e-commerce site, www.rightstart.com. ------------------ The site opened for business over the Internet on June 29, 1999. The convertible preferred stock, which represents approximately 33% on a fully diluted basis, of the equity of the subsidiary, was purchased by two prominent venture capital firms, Sierra Ventures and Palomar Ventures, and certain of their affiliates. Proceeds from the financing will be used to fund marketing and advertising expenditures, further site development and for working capital. Jerry R. Welch, chairman and chief executive officer of The Right Start and Rightstart.com, said, "We are very excited about having Sierra Ventures and Palomar Ventures as our partners in Rightstart.com. Their expertise in technology and in the Internet complements our strengths in the retailing of children's products and, together, we intend to make Rightstart.com the leading company in our space on the Internet." David C. Schwab, general partner of Sierra Ventures, said, "Rightstart.com represents the next generation in online retailing. The combination of Right Start's outstanding brand name with both online and physical stores provides customers with an exceptional level of customer service and convenience." "Palomar Ventures is pleased to back the trusted brand of 'The Right Start,'" said Jim Gauer of Palomar Ventures. "Parents know that by shopping at Rightstart.com they will ensure that the best products have been selected for their children." The Right Start Inc. is a leading merchant of unique, high quality products for infants and young children up to age 4. The company was founded in 1985 and capitalizes on the increasing number of baby boomers who have become middle- to upper-income new parents. The company's products are distributed through its 43 retail stores, The Right Start catalog and its Internet site, www.rightstart.com. Statements in this announcement that are not purely historical are forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements with respect to the financial condition and results of operations of the company involve risks and uncertainties which are detailed further in the filings of the company with the Securities and Exchange Commission, including, but not limited to, the company's Registration statement on Form S-3 (File No. 333-08157) and its Annual Report on Form 10-K/A for the year ended Jan. 30, 1999. In addition, the company's new e-commerce site has no online operating history and there can be no assurance it will be profitable. The securities issued in the financing referred to above were not registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Contact: The Right Start Inc., Westlake Village Jerry R. Welch or Gina M. Engelhard, 818/707-7100 2 -----END PRIVACY-ENHANCED MESSAGE-----