-----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, FybmK2DSoEWMTFlihOlfKkC7PXqq8TvuhaNQU/9anjZnnbBIhwzeX/5Agrm2yGIk I4x40is+/HFSsSJ+APA2sg== 0000898430-00-001392.txt : 20000501 0000898430-00-001392.hdr.sgml : 20000501 ACCESSION NUMBER: 0000898430-00-001392 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000428 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: 10-K SEC ACT: SEC FILE NUMBER: 000-19536 FILM NUMBER: 613815 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 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED 01/29/2000 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934) For the fiscal year ended January 29, 2000 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from ______________ to _____________. Commission file number 0-19536 THE RIGHT START, INC. ------------------------------------------------- (Exact name of registrant as specified in its charter) California 95-3971414 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5388 Sterling Center Dr., Westlake Village, California 91361 --------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (818) 707-7100 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value -------------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of April 25, 2000, approximately 3,262,124 shares of the Registrant's Common Stock held by non-affiliates were outstanding and the aggregate market value of such shares was approximately $14,679,558. As of April 25, 2000 there were outstanding 5,614,175 shares of Common Stock, no par value, with no treasury stock. Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on August 24, 2000 (the "Proxy Statement") are incorporated by reference into Part III hereof. PART I ITEM 1. BUSINESS - ------- -------- Forward-Looking Statements - -------------------------- When used in this report and elsewhere by management from time to time, the words "believes," "anticipates," and "expects" and similar expressions are intended to identify forward-looking statements with respect to our financial condition, results of operations and business and that of our majority-owned online subsidiary, RightStart.com, a Delaware corporation ("RightStart.com"). Certain important factors, including but not limited to competition from other children's product retailers, losses expected in the online business, limitations on access to capital to fund the expansion and the growth in the number of our physical stores and in RightStart.com's online business, the dependence of RightStart.com on its technology services provider, consumer acceptance of online retailing and RightStart.com's online stores and the lack of operating experience at RightStart.com, could cause actual results to differ materially from those expressed in our forward-looking statements. Further information on potential factors that could affect our financial condition and that of RightStart.com, is included in our filings and the filings of RightStart.com with the Securities and Exchange Commission. We caution readers not to place undue reliance on forward-looking statements, which speak only as of the date of this filing. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after that date. General - ------- The Right Start, Inc., a California corporation, is a leading specialty retailer of high-quality developmental, educational and care products for infants and children. RightStart.com is our majority-owned online subsidiary. Together, we market our products through our 53 retail stores located throughout the United States, RightStart.com's nationally distributed catalog, and RightStart.com's online store located at www.rightstart.com. We are a market ------------------ leader offering approximately 1,500 items targeting infants and children through age three in our 53 retail stores. RightStart.com is also a market leader online and offers approximately 4,500 items for infants and children through age twelve. Together, we are dedicated to providing our customers with a unique shopping experience by offering a trusted assortment of products, carefully selected with regard to quality, safety and developmental value and by providing a high level of customer service. History - ------- We were formed as a catalog company in 1985 to capitalize upon growing trends towards the use of mail order catalogs and the demand for high quality infants' and children's goods. Until our formation, new parents' alternatives were limited to low-service, mass merchandise stores or sparsely-stocked, high- priced infants' and children's specialty stores. To counter this, we carefully screen infant and toddler products in order to identify those we consider to be the "best of the best," that is, the safest, most durable, best designed and best valued items. We and RightStart.com currently select this kind of product from over 350 vendors worldwide. We then expanded our distribution channels beyond The Right Start catalog and into specialty retail sales through The Right Start stores. Based on the results of the retail stores, our strategy evolved to include a reduction in The Right Start catalog circulation and plans for a major retail expansion. Since 1996 when we began this expansion, we have grown to 53 retail stores currently in operation nationwide. We formed RightStart.com in April 1999 and in June 1999, RightStart.com launched its online store. RightStart.com expanded the available offerings under the Right Start brand name by establishing online stores that 2 feature products for children through age twelve and their caregivers; as well as a Teachers' Store carrying educational items for the home and classroom. In our physical stores, we focus on customer service by offering customers carefully selected products presented by sales associates with extensive product knowledge. RightStart.com's online stores provide a number of customer services aimed at bringing the specialty retail experience of our physical stores to RightStart.com's online customers, including free ground shipping on orders over $30, deluxe gift wrapping, guaranteed same-day shipping, guaranteed in-stock availability of products featured on RightStart.com's online store, 24- hour customer service, live online help and product returns to any of our physical stores nationwide. In addition, RightStart.com's online store provides editorial content, including articles from leading parenting publications and interactive content from child development and health care professionals. Retail Store Operations - ----------------------- Currently, we have 53 physical stores in operation. The stores' product mix includes a wide variety of items to meet the needs of parents of infants and small children up to age three, all presented within a store designed to provide a safe, baby-friendly environment for the shopping ease of new parents. The number of physical stores open reflects the rapid growth that we experienced in 1996 and 1997, during which period we opened 24 mall stores. After studying the results of both mall and street locations, we concluded that street-location stores provide our customers more convenient access and shopping since many are shopping with infants and small children. Further, street- location stores are more cost efficient to build and operate. Accordingly, we adopted a store opening plan that provided for the opening of eight street- location stores in 1998, and thirteen street-location stores in 1999. In addition to reevaluating store location strategy, in 1997 we determined that some of our existing mall locations were not performing at an acceptable level and implemented a store closing plan for those stores. Nine mall stores were closed in 1998 and one mall store was closed in 1999. Our growth strategy for retail operations includes continued street- location store openings. Investment in RightStart.com - ---------------------------- RightStart.com is our majority-owned subsidiary. As part of its formation we contributed assets comprising our catalog and online operations to RightStart.com. In July 1999, RightStart.com raised $15 million in a private equity offering to third-party investors and used that money to create and market each of the following online stores: the Baby Store (infant through two years old), the Kids' Development Store (three through six years old), the Big Kids' Store (six through twelve years old) and the Teachers' Store. Together with RightStart.com, we now offer a multi-faceted retail platform designed to leverage the Right Start brand name and increase sales from existing and new customers for ourselves and RightStart.com. In July 1999 we entered into a management services agreement pursuant to which we supply corporate, administrative and marketing services, promotional services and inventory to RightStart.com and an intellectual property agreement pursuant to which we assigned intellectual property intrinsically related to the online stores and catalog operations to RightStart.com, granted a license to RightStart.com to use our customer lists and granted to RightStart.com a license to use our trademarks and trade names and other intellectual property in connection with the online stores. We received rights to use information collected about users by RightStart.com, the lists of catalog customers we assigned to RightStart.com as well as intellectual property associated with RightStart.com's online stores (though not to be used for any other online business). 3 RightStart.com has employed a strategy of outsourcing some activities essential to the online business. Since the launch of the online store in June 1999, RightStart.com has outsourced its technology department and its fulfillment activities, including its warehousing and logistics operations and its call center and customer service activities. As a result, RightStart.com has engaged employees primarily in managerial, merchandising and marketing roles. RightStart.com is substantially dependent on the technology services it receives from its technology services providers who host, maintain and develop its website and provide technical assistance to its third-party distribution provider and its in-house logistics team. RightStart.com's principal technology service provider is also a shareholder of RightStart.com and we believe their relationship to be good and, if necessary, RightStart.com could locate replacement services without material difficulty. RightStart.com recently employed a Chief Technical Officer and expects to develop its own technology department and assume day-to-day operations and maintenance of its online stores in early 2001. Neither we nor RightStart.com has long-term contracts with our respective fulfillment services providers but we believe that replacement providers could be found without material difficulty should the need arise. Nonetheless, a failure in any of these outsourced services could have a material adverse effect on us or RightStart.com. The Right Start catalog offers a mail order alternative for Right Start customers. The Right Start catalog has been in existence over fifteen years and continues to offer a quality selection of Right Start products through national distribution. Several attractive glossy issues are mailed each year, targeting our principal customers: educated, first-time parents from 23-40 years old, with an average annual income in excess of $60,000 who also constitute a substantial portion of RightStart.com's customers. The Right Start catalog is sent to qualified segments of the customer list we and RightStart.com have compiled and to selected rented lists. In order to target customers efficiently, the customer list is segmented by frequency, recency and size of purchase. Rented lists are evaluated based on historical performance of mailings and the availability of names meeting the Right Start customer profile. Marketing and Promotion - ----------------------- We have implemented a number of national, regional and local marketing programs to reinforce our brand name and increase customer awareness of our new store locations. These programs include print ads in national and regional publications, direct mail and local newspaper advertisements and promotions such as our January Travel Department discount program. RightStart.com also purchases print ads in national publications and uses its catalogs and other direct mail pieces to promote its online stores. RightStart.com has entered into a strategic alliance with Oxygen Media, which provides advertising across multiple formats. In addition, RightStart.com has entered into affiliations with companies such as E-greetings in the online greeting card sector, MP3.com in the online music sector, Allpets.com in the online pets supplies sector and MyEvents.com in the online event and family organizer sector and is exploring additional relationships. Together, we and RightStart.com use a marketing database consisting of approximately 2.7 million names and addresses we have collected. In addition, RightStart.com recently has purchased an additional 1.4 million names and addresses from another specialty retailer of products for children ages four to twelve. We and RightStart.com each also collect e-mail addresses from our respective customers. Customers' names and addresses are used, consistent with RightStart.com's published privacy policy and general direct marketing standards, for promotional mailings, e-mails and other direct marketing activities. Finally, we have taken advantage of the cross-promotional opportunities that exist between our physical stores and RightStart.com's online stores. We promote RightStart.com in our physical stores through in-store signage. RightStart.com promotes our physical stores through our returns policy and store locator in 4 RightStart.com's online stores, as well as in our joint alliances with online entities and Oxygen Media which we believe promote brand awareness in addition to increasing the value in RightStart.com. Purchasing - ---------- We and RightStart.com now purchase products from over 350 different vendors worldwide. In total, we import approximately 12% of the products sold in our physical stores and RightStart.com imported approximately 9% of the products it sold online from launch through January 1, 2000. Employees - --------- As of April 18, 2000, we employed 348 employees, 169 of whom were part- time. As of April 18, 2000, RightStart.com had 34 full-time employees and 3 part-time employees. Neither our employees nor RightStart.com's employees have entered into any collective bargaining agreements nor are they represented by unions. We and RightStart.com each consider our employee relations to be good. Competition - ----------- The retail market for infant and toddler products served by our physical stores is very competitive. Significant competition currently comes from "big box" concept stores, such as Babies "R" Us, Burlington Baby and Target, as well as a few specialty retailers such as Zany Brainy and Noodle Kidoodle. The "big box" type of operation offers customers an extensive variety of products for children and is typically located in up to 50,000 square feet of retail space, generally in lower real estate cost locations. In addition, many national and regional mass merchants offer infant and toddler products in conjunction with a full line of hard and soft goods and the competition for RightStart.com impacts us as well. The online market for developmental, educational and care products for children is also intensely competitive. This market is newly developing and rapidly evolving. In addition, access to capital in this market has been constricting. We expect competition may intensify in the future as the market consolidates and as large competitors with physical assets enter the market. RightStart.com's online business principally competes with online retailers, traditional store-based retailers and catalog retailers, including specialty stores, mass-market retailers, discount chains, department stores and mail-order catalogs. RightStart.com's competitors include Amazon.com, KB Kids.com, eToys, Toys "R" Us, Zany Brainy, Noodle Kidoodle, Target, Wal-Mart, FAO Schwartz, Baby Center, iBaby, AOL, Yahoo! and others. There are a variety of general and specialty catalogs selling infants' and children's items in competition with The Right Start catalog. Competition for The Right Start catalog, however, has come primarily from "One Step Ahead," "Kids Club" by Perfectly Safe, and "Sensational Beginnings." These catalogs emerged several years after The Right Start catalog was launched and directly compete by offering a very similar product line at comparable price points to the same target market. We believe that competition for us in traditional retail business and for RightStart.com in the online retail and catalog businesses is based on brand name recognition, product selection, price, convenience, customer service and, for the online and catalog businesses, the speed and reliability of fulfillment. We believe that we distinguish ourselves and that RightStart.com distinguishes itself by offering a full assortment of children's developmental, educational and care products carefully selected with regard to quality, safety, developmental and educational value. As specialty retailers, we each also focus on providing the highest levels of customer service. In addition, we believe the relationship between ourselves and RightStart.com provides us and RightStart.com with advantages relative to single channel retailers in our respective markets, including cross-marketing opportunities, vendor 5 relationships, distribution capabilities and enhanced customer convenience. We believe RightStart.com will be able to differentiate itself from its competitors by drawing on the strong Right Start brand name, our long-standing vendor relationships and our extensive knowledge and experience successfully marketing products for infants and children. Trademarks - ---------- We have registered and continue to register, when deemed appropriate, our trademarks, trade names and domain names, including "The Right Start," "RightStart.com," and "The Right Start Catalog." We consider these trademarks and tradenames to be readily identifiable with, and valuable to, our business and to the business of RightStart.com. We license much of our intellectual property to RightStart.com for use in its online business on a royalty-free basis. ITEM 2. PROPERTIES - ------- ---------- Currently, we operate 53 retail stores in the following 15 states: California, Colorado, Massachusetts, Minnesota, New Jersey, Illinois, Pennsylvania, New York, Connecticut, Michigan, Washington, Missouri, Virginia, Maryland and Ohio. We lease each of our retail locations under operating leases with lease terms ranging from five to ten years. At some locations, we have options to extend the term of the lease. In most cases, rent provisions include a fixed minimum rent and, in some cases, a contingent percentage rent based on net sales of the store in excess of a defined threshold. We currently lease approximately 23,000 square feet as a sub-tenant in a mixed-use building in Westlake Village, California. Our corporate offices and those of RightStart.com both reside in this space. The sub-lease agreement terminates in June 2001. Both we and RightStart.com use third-party distribution and fulfillment providers and therefore do not directly lease or own any warehouse space. The inventory for our physical stores is located in Pennsylvania and California and the inventory for RightStart.com is located primarily in Pennsylvania. RightStart.com's web servers are located in third-party hosting facilities in Los Angeles, California. ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- We are a party to various legal actions arising in the ordinary course of business. In the opinion of management, any claims that may arise from these actions are adequately covered by insurance or are without significant merit. We believe that the ultimate outcome of these matters will not have a material adverse effect on our financial position or results of operations. RightStart.com is not a party to any litigation. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- ---------------------------------------------------- Not applicable. PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDERS' - ------- --------------------------------------------------------------- MATTERS ------- Our common stock is traded on the Nasdaq National Market system under the symbol RTST. Our common stock is held of record by approximately 86 registered shareholders as of April 25, 2000. The following table sets 6 forth the range of high and low bid prices on the Nasdaq National Market for our common stock for the fiscal year ended January 30, 1999 ("Fiscal 1998") and the fiscal year ended January 29, 2000 ("Fiscal 1999"). The bid price quotations listed below reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Bid Price (1) -------------------------------------- Fiscal 1999 High Low ----------- ---- --- First Quarter $ 8.50 $ 5.00 Second Quarter 10.00 6.50 Third Quarter 15.00 6.63 Fourth Quarter 23.75 13.00 Fiscal 1998 ----------- First Quarter $ 4.50 $ 2.75 Second Quarter 3.75 1.75 Third Quarter 2.75 1.50 Fourth Quarter 4.50 2.00
(1) Bid prices have been restated to give effect to our one-for-two reverse stock split which was reflected on Nasdaq at the opening of trading on December 16, 1998. As of April 25, 2000 our High Bid Price was $5.00 and our Low Bid Price was $4.25. We have never paid dividends on our common stock and currently do not expect to pay dividends in the future. In addition, our credit agreement contains a number of financial covenants which may, among other things, limit our ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." ITEM 6. SELECTED FINANCIAL DATA - The selected consolidated financial data - ------- ----------------------- presented below as of and for our fiscal year ended June 1, 1996 ("Fiscal 1996"), the 33-Week Transition Period ended February 1, 1997, the fiscal year ended January 31, 1998 ("Fiscal 1997"), Fiscal 1998 and Fiscal 1999 have been derived from consolidated financial statements which, except for 1996 and the 33-Week Transition Period, are contained elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data set forth below are qualified in their entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, the notes thereto and other financial and statistical information included elsewhere in this Annual Report on Form 10-K.
Fiscal 33-Week -------------------------------------- Transition Fiscal 1999 1998 1997 Period 1996 ---- ---- ---- --------------------------- (Dollars in thousands except share data) Earnings Data Revenues: Net sales $ 49,079 $ 36,611 $ 38,521 $ 27,211 $ 40,368 Other revenues 877 --------------------------------------------------------------------- 49,079 36,611 38,521 27,211 41,245
7
Net loss (10,842) (5,680) (9,241) (5,378) (3,899) Basic and diluted loss (2.14) (1.13) (2.01) (1.34) (1.19) per share Share Data Weighted average shares outstanding 5,355,756 5,051,820 4,594,086 4,003,095 3,268,407 Fiscal 33-Week -------------------------------------- Transition Fiscal 1999 1998 1997 Period 1996 ---- ---- ---- --------------------------- (Dollars in thousands) Balance Sheet Data Current assets $ 17,424 $ 8,300 $ 8,908 $ 11,704 $ 8,353 Total assets 30,727 17,671 18,462 22,982 17,475 Current liabilities 12,943 6,572 4,796 8,457 4,649 Long-term debt 3,000 -- 8,734 5,643 -- Shareholders' equity 7,921 7,861 3,307 7,172 11,902
All share data has been restated to give effect to our one-for-two reverse stock split which was effective December 15, 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Overview The Right Start, Inc. sells developmental, educational and care products for infants and children through retail stores ("Retail Store Operations") and holds a majority ownership in RightStart.com, which sells a similar type of product to a broader age group on the Internet and through a mail order catalog. To facilitate the analysis of our historical results, each of the two distinct operations is discussed separately below. Retail Store Operations - ----------------------- The Right Start, Inc. operates 53 retail stores in 15 states throughout the United States. The stores' product mix includes a wide variety of items to meet the needs of infants, small children and their care givers, all presented within a store designed to provide a safe, baby-friendly environment for the shopping ease of new parents. The following table sets forth the unaudited statement of operations data for the periods indicated for Retail Store Operations:
Fiscal 1999 Fiscal 1998 Fiscal 1997 ---------------------------------------------------------------------------- Retail Net Sales 38,043,000 100.00% 31,875,000 100.00% 31,107,000 100.00% Cost of goods sold 18,878,000 49.62% 16,396,000 51.44% 15,691,000 50.44% ----------------------------------------------------------------------------- Gross Profit 19,165,000 50.38% 15,479,000 48.56% 15,416,000 49.56% Operating expense 14,418,000 37.90% 12,880,000 40.41% 14,927,000 47.99% Marketing and advertising costs 830,000 2.18% 387,000 1.21% 193,000 0.62% General and administrative expenses 3,310,000 8.70% 2,899,000 9.09% 3,096,000 9.95% Non-cash compensation expense 1,794,000 4.72% - 0.00% - 0.00%
8 Depreciation and amortization expense 1,672,000 4.40% 1,470,000 4.61% 1,590,000 5.11% Other expense - 0.00% - 0.00% 698,000 2.24% Store closing (income) expense 151,000 0.40% (113,000) -0.35% 1,207,000 3.88% Pre-opening costs 323,000 0.85% 209,000 0.66% 711,000 2.29% Non-cash beneficial conversion feature - 0.00% 3,850,000 12.08% - 0.00% Interest expense 465,000 1.22% 640,000 2.01% 1,143,000 3.67% ------------------------------------------------------------------------------ Loss before income taxes and extraordinary items (3,798,000) -9.98% (6,743,000) -21.15% (8,149,000) -26.20% Extraordinary gain on debt restructure, net - 0.00% 1,211,000 3.80% - 0.00% Tax provision 68,000 0.18% 22,000 0.07% 27,000 0.09% ----------------------------------------------------------------------------- Net loss (3,866,000) -10.16% (5,554,000) -17.42% (8,176,000) -26.28% ============ ========== ==========
Fiscal 1999 Compared With Fiscal 1998 - ------------------------------------- Net Sales. Retail net sales consist of gross product sales to customers net of returns. Retail net sales increased by $6.2 million, or 19.4%, from $31.9 million in Fiscal 1998 to $38.0 million in Fiscal 1999. The net sales growth reflects the impact of same store sales increases of 10.1% and the opening of thirteen new street -location stores, offset by the impact of one store closure. Cost of goods sold. Cost of goods sold consists primarily of the cost of products sold, inbound freight costs and inventory shrinkage costs. Retail gross margin increased from 48.6% in Fiscal 1998 to 50.4% in Fiscal 1999 as a result of changes in the product mix to include significantly more developmental toys, books, videos and other media that have higher gross margins. Operating expense. Retail operating expense consists of store operational expenses, retail personnel costs, and costs related to the distribution and warehousing of our retail merchandise. Retail operating expense was $14.4 million in Fiscal 1999 as compared to $12.9 million in Fiscal 1998. The $1.5 million or 11.9% increase primarily reflects the addition of thirteen new store locations offset by a reduction in per store payroll and occupancy costs. Marketing and advertising expense. Retail marketing and advertising expense generally consists of print advertising in national and regional publications, as well as promotional mailings to our customers. Marketing and advertising expense increased from $0.4 million in Fiscal 1998 to $0.8 million in Fiscal 1999. This growth reflects our increased utilization of promotional mailings to our customer database, as well as expenses incurred to increase brand awareness in our regional markets. General and administrative expense. General and administrative expense consists primarily of the costs related to management, financial, merchandising, inventory, professional service fees and other administrative support attributable to Retail Store Operations. General and administrative expense increased 14.2 % to $3.3 million for Fiscal 1999 compared to $2.9 million for Fiscal 1998. Pre-opening costs. Pre-opening costs consist primarily of non-recurring marketing, advertising, and other expenses related to the opening of new store locations. Pre-opening costs increased $0.1 million from $0.2 million in Fiscal 1998 to $0.3 million in Fiscal 1999. The increase was due to the opening of thirteen new stores in Fiscal 1999 versus eight stores in 1998, offset by a 10% reduction in per store costs. Depreciation and amortization. Depreciation and amortization expense increased $0.2 million or 13.7% from $1.5 million in Fiscal 1998 to $1.7 million in Fiscal 1999. The increase was due to the additional assets placed in service related to new store openings. Non-cash compensation expense. During the second quarter of 1999, we recorded $1.8 million of non- 9 cash compensation expense associated with the vesting of performance options that had been granted to our executive officers. This expense results from the increase in the price of our common stock from the date of grant of the options to the date on which vesting occurred. Store closing expense. Store closing expense in Fiscal 1999 represents the net book value of assets written off related to the stores closed during the second quarter of Fiscal 1999. Store closing income in Fiscal 1998 represents the net amount recognized from the sale of leaseholds on closed stores, offset by store closing costs. Interest expense. Interest expense, net decreased to $0.5 million in Fiscal 1999 from $0.6 million in Fiscal 1998. The decrease reflects a reduction in our outstanding borrowings. In 1998, we recorded a non-cash charge of $3.85 million related to the amortization of the discount associated with the $3.85 million of non-interest bearing senior subordinated notes issued during the first quarter of Fiscal 1998. The senior subordinated notes were exchanged for preferred stock in December 1998. See "Liquidity and Capital Resources - Recapitalization." Tax provision. Provision for income taxes is related to state income taxes. No federal or state income tax benefit was recorded for Fiscal 1999 or Fiscal 1998 due to the uncertainty surrounding realizing any tax benefits in future years. Fiscal 1998 Compared With Fiscal 1997 - ------------------------------------- Net Sales. Retail net sales were $31.9 million in Fiscal 1998 and $31.1 million in Fiscal 1997. Retail net sales increased $.8 million or 2.5%, reflecting the impact of same-store sales increases of 6.5% and the opening of eight new street location stores, offset by the impact of eleven store closures. Cost of goods sold. Retail cost of goods sold represented 51.4% of sales in Fiscal 1998 compared to 50.4% of sales in Fiscal 1997. The slight decline in gross margin resulted from the additional markdowns taken in conjunction with the closing of certain mall stores and from the conversion of three of our remaining mall stores to a discount format. The discount store format was adopted in three poor performing stores in an effort to better meet the demographics of the customers in those markets. Operating expense. Retail operating expenses declined 13.7% or $2.0 million in Fiscal 1998 as compared to Fiscal 1997. The retail reductions include $0.5 million of occupancy costs related to store closings (offset somewhat by street location openings), $0.8 million of distribution cost reductions and $0.7 million of payroll and other operating cost reductions. General and administrative expense. General and administrative expense decreased to $2.9 million in Fiscal 1998 as compared to $3.1 million in Fiscal 1997. The decrease was primarily due to payroll and occupancy cost reductions in conjunction with management's ongoing expense management. Pre-opening costs. Pre-opening costs decreased $0.5 million from $0.7 million in Fiscal 1997 to $0.2 million in Fiscal 1998. The reduction was due to the reduction in pre-opening costs per store opened as well as the impact, in Fiscal 1997, of our previous policy of recognizing store opening costs evenly over the stores' first twelve months of operations for the stores opened in 1996. In the third quarter of Fiscal 1997, we changed our method of accounting for pre-opening costs and began expensing them as incurred. Depreciation and amortization. Depreciation and amortization expense decreased $0.1 million or 7.5% in Fiscal 1997 to $1.5 million in Fiscal 1998. The decrease resulted from the closure of eleven stores, most of which were closed during the first half of Fiscal 1998, offset by the depreciation expense recognized on assets for the eight 10 new stores opened in the second half of the fiscal year. Other expense. Other expense in Fiscal 1997 represents $0.2 million of severance expense for a former senior executive and $0.4 million in fixed assets and leasehold improvements written off in conjunction with our corporate office and distribution center moves. Store closing expense. Store closing income of $0.1 million in Fiscal 1998 is comprised of net revenues generated from store closings. We recovered the value of certain of the leases through either landlords or future tenants of the leased space. In the prior year, store closing expense includes $1.3 million of fixed assets and leasehold improvements written off in conjunction with planned store closures. Non-cash beneficial conversion feature amortization. This line item represents the one-time expense recognition associated with the issuance of our Series C convertible Preferred Stock in connection with our recapitalization. See "Liquidity and Capital Resources - Recapitalization." Interest (income) expense. Interest expense decreased $0.5 million from $1.1 million in Fiscal 1997 to $0.6 million in Fiscal 1998. The 44.0% decrease results from the restructuring of our subordinated debt to eliminate interest on that debt and lower overall borrowings. RightStart.com Operations - -------------------------- RightStart.com was formed in April 1999 to focus on sales on the Internet. As part of its initial capitalization, RightStart.com acquired the catalog operations from The Right Start, Inc. in order to obtain an existing fulfillment infrastructure as well as a significant, cost-effective marketing vehicle for promoting our online store. In addition, management of RightStart.com believes the online store will benefit from the merchandising and marketing experience acquired through the catalog operations as well as the catalog's database of customer information. Management of RightStart.com intends to continue to leverage the catalog to market and promote RightStart.com's online stores aggressively. Each of the approximately 2.6 million catalogs distributed in Fiscal 1999 prominently promoted RightStart.com's online stores. Online sales are presented on a gross basis, which is after product returns but before promotional discounts, and on a net basis after promotional discounts. Promotional discounts have been used to attract customers to RightStart.com's recently launched online stores. Management of RightStart.com may continue to offer promotional discounts in order to rapidly develop a customer base and expand product offerings to additional age groups although it has reduced the size of its discounts and may consider further reductions as it deems appropriate. The online stores were launched on June 29, 1999. As a result, Fiscal 1999 is comprised of 52 weeks of catalog operations from January 31, 1999 through January 29, 2000 and 31 weeks of online store operations from June 29, 1999 through January 29, 2000. Fiscal 1998 and Fiscal 1997 are each comprised of 52 weeks of catalog operations and no online store operations. The following table sets forth the unaudited statement of operations data for the periods indicated for RightStart.com:
Fiscal 1999 Fiscal 1998 Fiscal 1997 -------------------------------------------------------------------------- Catalog Sales $ 3,645,000 33.0% $4,736,000 100.0% $ 7,414,000 100.0% Online store sales before promotional discounts 9,020,000 81.7% - - -------------------------------------------------------------------------- Total Sales 12,665,000 114.8% 4,736,000 100.0% 7,414,000 100.0% Promotional discounts related to online store 1,629,000 14.8% - - --------------------------------------------------------------------------
11 Net sales 11,036,000 100.0% 4,736,000 100.0% 7,414,000 100.0% Cost of goods sold 6,401,000 58.0% 2,180,000 46.0% 3,553,000 47.9% -------------------------------------------------------------------------- Gross Profit 4,635,000 42.0% 2,556,000 54.0% 3,861,000 52.1% Operating Expense 5,952,000 53.9% 2,226,000 47.0% 4,092,000 55.2% Marketing and advertising expense 6,403,000 58.0% - 0.0% - 0.0% General and administrative expense 1,996,000 18.1% 438,000 9.2% 816,000 11.0% Non-cash compensation expense 220,000 2.0% - 0.0% - 0.0% Depreciation expense 278,000 2.5% 18,000 0.4% 18,000 0.2% Interest income (238,000) -2.2% - 0.0% - 0.0% -------------------------------------------------------------------------- Loss before income taxes and minority interest (9,976,000) -90.4% (126,000) -2.7% (1,065,000) -14.4% Tax provision (benefit) - 0.0% - 0.0% - 0.0% Minority Interest in consolidated subsidiary loss 3,000,000 27.2% - 0.0% - 0.0% -------------------------------------------------------------------------- Net loss (6,976,000) -63.2% (126,000) -2.7% (1,065,000) -14.4%
Sales. Gross sales consist of product sales to customers and are net of product returns. Net sales are net of promotional discounts. Since RightStart.com, during the periods presented, provided free shipping on a substantial number of its sales, net sales does not include revenues related to shipping charges. Net sales increased by $6.3 million, or 133.0%, to $11.0 million in Fiscal 1999 from $4.7 million in Fiscal 1998. This growth in net sales was attributable to the launch of the online stores on June 29, 1999, partially offset by a decline in catalog sales. Online store net sales were $7.4 million in Fiscal 1999, compared to no sales in Fiscal 1998. Fiscal 1999 online store net sales are net of promotional discounts of $1.6 million. Catalog net sales decreased $1.1 million, or 23.0%, to $3.6 million in Fiscal 1999 from $4.7 million in Fiscal 1998. The majority of the decline in catalog net sales was attributable to a planned reduction in catalog circulation and a shift of a portion of the direct-mail business from catalog to the online store operations. Cost of goods sold. Cost of goods sold consists primarily of the cost of products sold, inbound freight costs and inventory shrinkage costs. Gross profit as a percentage of net sales, or gross margin, decreased to 42.0% in Fiscal 1999 from 54.0% in Fiscal 1998. Gross margin on catalog net sales increased to 56.4% in Fiscal 1999 from 54.0% in Fiscal 1998, due to a more favorable product mix. Gross margin on online store net sales was 34.7% in Fiscal 1999. Gross margin on online store net sales was lower than gross margin on catalog net sales in Fiscal 1999 due to the introductory promotional discounting offered to customers during the initial start-up of the online store operations as well as a different mix of products offered in the online store. Operating expenses. Operating expenses consist primarily of net fulfillment expenses (including shipping and handling expenses net of amounts paid by customers), credit card processing fees and expenses related to catalog production and distribution, product distribution and customer service, as well as related personnel costs. Operating expenses increased by $3.7 million, or 167.4 %, to $5.9 million in Fiscal 1999 from $2.2 million in Fiscal 1998. As a percentage of net sales, operating expenses increased to 53.9 % in Fiscal 1999 from 47.0% in Fiscal 1998. Operating expenses related to the catalog decreased by $0.2 million, or 8.0%, to $2.0 million in Fiscal 1999 from $2.2 million in Fiscal 1998. As a percentage of net catalog sales, operating expenses related to the catalog increased to 56.2% in Fiscal 1999 from 47.0% in Fiscal 1998. This increase as a percent to sales was due to lower sales. Operating expenses related to the online store were $3.9 million in Fiscal 1999. Marketing and advertising expense. Marketing and advertising expense consists of radio, television, magazines, newspaper, direct mail, e-mail and on- line solicitations, including all production and distribution, incurred in connection with solely promoting our online store which amounted to $6.4 million or 71.0% of online store sales in Fiscal 1999. There was no comparable activity in the prior year. General and administration expenses. General and administration expenses consist primarily of the costs related to website hosting and maintenance, management and support personnel, fees paid to The Right Start, Inc. 12 for accounting, payroll, and administrative support services under a management services agreement, professional service fees and office lease expenses. General and administration expenses increased $1.6 million, or 355.7 %, to $2.0 million in Fiscal 1999 from $0.4 million in Fiscal 1998. As a percentage of net sales, general and administrative expenses increased to 18.1% in Fiscal 1999 from 9.2% in Fiscal 1998. Fiscal 1999 general and administrative included direct fees paid to The Right Start, Inc. of $0.4 million. Depreciation Expense. Depreciation expense increased $260,000 from $18,000 in Fiscal 1998 to $278,000 in Fiscal 1999. This increase was due primarily to web site hardware and software additions which are being depreciated over a three year period. Non-cash compensation expenses. Non-cash compensation expenses relates to stock options granted at exercise prices below the deemed fair value of RightStart.com common stock. A non-cash compensation expense of $220,000 was recorded in Fiscal 1999. There was no non-cash compensation expense in Fiscal 1998. Interest income. Interest income related to earnings on cash generated from the sale of preferred stock in July 1999 totaled $238,000 in Fiscal 1999. There was no interest income in Fiscal 1998. Tax provision. Tax provision has been computed as if RightStart.com had operated as a separate entity for all periods presented. As a result of net losses, no benefit for income taxes was recorded for Fiscal 1999, Fiscal 1998 or Fiscal 1997. As of January 29, 2000, RightStart.com had net operating loss carryforwards for federal tax purposes of $9.7 million and for state tax purposes of $4.8 million. These carryforwards expire in 2020 for federal tax purposes and in 2005 for state tax purposes, if not previously utilized. A tax benefit has not been recorded for any period presented due to uncertainties surrounding the timing of realizing any benefits in future years. Minority interest in consolidated subsidiary. Minority interest represents minority stockholders' share of RightStart.com losses. The allocation of the loss to the minority interest in the amount of $3,000,000 in Fiscal 1999 was due to the conversion of preferred stock into common stock of RightStart.com. The allocation of the loss was on a proportional basis from the date of conversion. Fiscal 1998 Compared to Fiscal 1997 - ----------------------------------- Net sales. Net sales for Fiscal 1998 and Fiscal 1997 were comprised of sales from the catalog. Net sales decreased $2.7 million, or 36.1%, to $4.7 million in Fiscal 1998 from $7.4 million in Fiscal 1997. The decline in net sales resulted from the mailing of 44.9% fewer catalogs in accordance with The Right Start, Inc. management's operating plan to de-emphasize the catalog business in favor of The Right Start, Inc.'s retail store operations. Cost of goods sold. Gross margin increased to 54.0% in Fiscal 1998 from 52.1% in Fiscal 1997 due to a more favorable mix of products sold. Operating expenses. Operating expenses decreased by $1.9 million, or 45.6%, to $2.2 million in Fiscal 1998 from $4.1 million in Fiscal 1997. As a percentage of net sales, operating expenses decreased to 47.0% in Fiscal 1998 from 55.2% in Fiscal 1997. This reduction is attributable to the decrease in the number of catalogs produced and distributed as well as improved cost controls. Distribution expenses of $45,000 in Fiscal 1998 and $473,000 in Fiscal 1997 were allocated from The Right Start, Inc.. This decrease in the allocations was due to a reduction in the ratio of net catalog sales to total net sales between the periods. 13 General and administrative expenses. General and administrative expenses decreased by $378,000, or 46.3%, to $438,000 in Fiscal 1998 from $816,000 in Fiscal 1997. As a percentage of net sales, general and administrative expenses decreased to 9.2% in Fiscal 1998 from 11.0% in Fiscal 1997. General and administrative expenses of $402,000 in Fiscal 1998 and $730,000 in Fiscal 1997 were allocated from The Right Start, Inc. This decrease in the allocations was due to a reduction in the ratio of net catalog sales to total net sales between the periods. Depreciation expense. No capital additions were made to the catalog business in fiscal 1998 and depreciation expense was unchanged from the prior year. Liquidity and Capital Resources - -------------------------------- Recapitalization - ---------------- In April 1998 we completed a private placement of non-interest bearing senior subordinated notes in an aggregate principal amount of $3,850,000, together with detachable warrants to purchase an aggregate of 1,925,000 shares of common stock exercisable at $2.00 per share. The new securities were issued for an aggregate purchase price of $3,850,000 and were purchased principally by our affiliates. In connection with the sale of the new securities, we entered into an agreement (the "Agreement") with all of the holders of our existing subordinated debt securities, representing an aggregate principal amount of $6,000,000. Pursuant to the Agreement, each holder (of new and old securities) agreed to exchange all of its subordinated debt securities, together with any warrants issued in connection therewith, for newly issued shares of preferred stock. Ten shares of newly issued preferred stock were issued for each $1,000 principal amount of subordinated debt securities exchanged. The total number of shares issued were 30,000, 30,000 and 38,500 for Preferred Stock Series A, B and C, respectively. Holders of $3,000,000 principal amount of existing subordinated debt securities elected to receive Series A Preferred Stock which has no fixed dividend rights, is not convertible into common stock, is mandatorily redeemable by us in May 2002 and will not accrue dividends unless we are unable to redeem the Series A Preferred Stock at the required redemption date, at which point dividends would begin to accumulate and accrue at a rate of $15 per share per annum. Holders of $3,000,000 principal amount of subordinated debt securities elected to receive Series B convertible preferred stock which has no fixed dividend rights and is convertible into common stock at a price per share of $3.00. Holders of the $3,850,000 principal amount of newly issued, non-interest bearing senior subordinated notes exchanged such debt securities (and the warrants issued in connection therewith) for Series C convertible preferred stock, which has no fixed dividend rights and is convertible into common stock at a price of $2.00 per share. The issuance of the shares of preferred stock occurred upon exchange of the subordinated debt securities in December 1998. General - ------- In Fiscal 1999, on a consolidated basis, we used $9.3 million in cash in our operating activities compared to the $340,000 in cash provided by our operating activities in Fiscal 1998. In Fiscal 1999, on a consolidated basis, we used $3.6 million in cash in investing activities for fixed asset additions compared to $1.3 million in Fiscal 1998 for fixed asset additions. The primary source of funds for this use of cash in Fiscal 1999 was the sale by RightStart.com to third-party investors of its preferred stock which netted proceeds of $13.7 million and borrowings under our $13 million senior credit facility (the "Credit Facility") totaling approximately $3.4 million. Retail Store Operations - ----------------------- During Fiscal 1999, our primary sources of liquidity for Retail Store Operations were from borrowings under the Credit Facility. The Credit Facility consists of a $10.0 million revolving line of credit for working capital (the "Revolving Line") and a $3.0 million capital expenditure facility (the "Capex Line"). Availability under the Revolving Line is subject to a defined borrowing base. As of January 29, 2000 borrowings of $3.4 million were outstanding under the Revolving Line and $3.0 million was outstanding under the Capex Line; $1.5 14 million was available at January 29, 2000 under the Revolving Line. Interest accrues on the Revolving Line at prime plus 1.0% and at prime plus 1.5% on the Capex Line. At January 29, 2000, the bank's prime rate of interest was 8.5%. The Credit Facility terminates on February 19, 2001, and on such date, all borrowings thereunder are immediately due and payable. Borrowings under the Credit Facility are secured by substantially all of our assets (including our stock in RightStart.com but excluding the assets of RightStart.com). We plan to replace the Credit Facility by January 2001. The Credit Facility, as amended, required us, excluding any contribution from RightStart.com, at all times during Fiscal 1999, to maintain net worth (defined to include equity, additional paid-in capital, retained earnings (accumulated deficit) and subordinated debt and excluding the operating results of RightStart.com) of at least $8.0 million. The Credit Facility also required that our earnings before interest, taxes, depreciation and amortization and non recurring charges ("EBITDA") exceed $500,000 for each of the twelve months ended January 31, 2000, the twelve months ending April 30, 2000, the twelve months ending July 31, 2000, the twelve months ending October 31, 2000 and the twelve months ending January 31, 2001. In addition, our capital expenditures are limited to $1,750,000 in Fiscal 2000. We entered into an amendment to the Credit Facility in April 2000 that reduced our minimum required EBITDA from $500,000 to $250,000 for the first quarter of Fiscal 2000, changed our required minimum net worth to amounts decreasing to a low of $6,772,000 as of the end of July 2000 and returning to $8,000,000 as of the end of August 2000 and added an amortization requirement to the Capex Line of $100,000 per month beginning May 1, 2000. We also received a waiver of compliance with the financial covenants under the Credit Facility for periods between the fiscal year end and the date of the amendment. We have a deferred tax asset of $13.8 million, which is reserved against by a valuation allowance of $12.4 million, for a net deferred tax asset of $1.4 million. Management expects that we will generate $4.0 million of taxable income within the next 15 years to utilize a minimum of $1.4 million of the net deferred tax asset. The taxable income will be generated through a combination of improved operating results and tax planning strategies. Rather than lose the tax benefit, we could implement certain tax planning strategies including the sale of certain of our operations or some of our investment in RightStart.com. Based on the expected operating improvements combined with tax planning strategies in place, management believes that adequate taxable income will be generated over the next 15 years in which to utilize a portion of the NOL carryforwards. Our ability to fund our operations, open new stores on our planned timeframe and maintain compliance with our Credit Facility is dependent on our ability to generate sufficient cash flow from operations and secure financing. We are considering our financing alternatives. Historically, we have incurred losses and may continue to incur losses in the near term. Depending on the success of our business strategy, we may continue to incur losses. Losses could negatively affect working capital and the extension of credit by our suppliers and impact operations. RightStart.com - -------------- During Fiscal 1999, RightStart.com's primary sources of liquidity were from the issuance of Series A Convertible Preferred Stock in RightStart.com to third- party investors which provided net proceeds of $13.7 million. RightStart.com used those proceeds to create and stock the Baby Store, Kids' Development Store, Big Kids' Store and Teachers' Store and build an online business. The Credit Facility does not permit us to make investments in RightStart.com without lender consent. The offering and the purchase of website development and maintenance services for RightStart.com from its technology services provider through the exchange of common stock for these services has reduced our ownership of RightStart.com to approximately 60% of its outstanding common stock. In April 2000, RightStart.com sold secured bridge notes in the aggregate principal amount $2,180,000 (the "Bridge Notes") and warrants to purchase 109,000 shares of its common stock at an exercise price of $6.70 to affiliates, to provide funding until RightStart.com can obtain additional equity financing. A default on the Bridge Notes would permit such holders to foreclose on the assets of RightStart.com and require RightStart.com, to the extent it has not already done so, to issue to the holders of the notes, warrants to purchase an aggregate of 8,720,000 shares, or approximately 48.9% of the outstanding common stock of RightStart.com, at an exercise price of $0.25 per share. RightStart.com's ability to fund its operations and grow its market share is dependant upon its ability to raise 15 additional capital. On January 18, 2000, RightStart.com filed a registration statement with the Securities and Exchange Commission with respect to an offering of its common stock. It has delayed that offering because of adverse market conditions. RightStart.com is considering its financing alternatives. In the event additional funds are not available, RightStart.com would reduce its spending on advertising, marketing and other operating costs. RightStart.com entered into a term sheet in November 1999 with Oxygen Media, LLC. The term sheet contemplates that over the three-year term of the proposed agreement RightStart.com would provide consideration approximating $13.7 million including in-kind consideration provided by us. Impact of Inflation - ------------------- The impact of inflation on results of operations has not been significant during our last three fiscal years. Seasonality - ----------- Our business is not significantly impacted by seasonal fluctuations, when compared to many other specialty retail and catalog operations. Our products are for the most part need-driven and the customer is often the end user of the product. We do, however, experience increased sales during the Christmas holiday season and expect that this seasonality may increase as RightStart.com's business for children through age twelve increases and forms a greater portion of our financial results. Other Matters - ------------- Year 2000 - --------- The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of our programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000 which could result in miscalculations or system failures. We were adequately prepared for year 2000 and did not experience any meaningful disruptions related to our information technology ("IT") and non-IT systems. Additionally, we did not encounter any disruptions in service or communications with our mission critical service vendors, suppliers of products, logistics vendors or it's customers. New Accounting Requirements - --------------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards FAS 133, "Accounting for Derivative Instruments and Hedging Activities," effective beginning in the first quarter of 2000. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. FAS 133 was amended by Standard FAS No. 137 which defers the effective date of the FAS 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. FAS No. 133 is effective for our first fiscal quarter in the year 2001 and is not expected to have a material effect on our financial position. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------- ---------------------------------------------------------- 16 In the ordinary course of operations, we face no significant market risk. Our purchase of imported products subjects us to a minimum amount of foreign currency risk. Foreign currency risk is that risk associated with recurring transactions with foreign companies, such as purchases of goods from foreign vendors. If the strength of foreign currencies increases compared to the United States dollar, the price of imported products could increase. We have no commitments, however, for future purchases with foreign vendors and, additionally, we have the ability to source products domestically in the event of import price increases. See "Management's Discussion and Analysis of Financial condition and Results of Operations -- Liquidity and Capital Resources" above for a discussion of our debt obligations, the interest rates of which are linked to the prime rate. We have not entered into any derivative financial instruments to mange interest rate risk, currency risk or for speculative purposes and we are currently not evaluating the future use of these instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- ------------------------------------------- Our financial statements and supplementary data is as set forth in Item 14(a) hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- We have not had any disagreements with our accountants on our accounting and financial disclosure. As previously disclosed, we selected Arthur Andersen LLP to be our independent public accountants beginning in our last fiscal year which selection was approved by our stockholders at our last annual meeting held September 9, 1999. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- -------------------------------------------------- The information contained in our Proxy Statement under the captions "Executive Officers" and "Election of Directors" is incorporated herein by reference. Our Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after the close of Fiscal 1999. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- The information contained in our Proxy Statement under the caption "Executive Compensation and Other Information" is incorporated herein by reference. Our Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after the close of Fiscal 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- 17 The information contained in our Proxy Statement under the caption "Principal Shareholders and Management" is incorporated herein by reference. Our Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after the close of Fiscal 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- The information contained in our Proxy Statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference. Our Proxy Statement will be filed with the Securities and Exchange Commission no later than 120 days after the end of Fiscal 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K - -------- ---------------------------------------------------------------- (a) The following documents are filed as part of this report.
(1) Financial Statements: Page ---- Report of Independent Public Accountants F - 1 Report of Independent Accountants F - 1-A Consolidated Balance Sheets - January 29, 2000 and January 30, 1999 F - 2 Consolidated Statements of Operations - Periods Ended January 29, 2000, F - 3 January 30, 1999 and January 31, 1998 Consolidated Statements of Shareholders' Equity - Periods Ended F - 4 January 29, 2000, January 30, 1999 and January 31, 1998 Consolidated Statements of Cash Flows - Periods Ended January 29, 2000, F - 5 January 30, 1999 and January 31, 1998 Notes to Consolidated Financial Statements F - 6 (2) Financial Statement Schedules: All other financial statement schedules are omitted because they are either not applicable or the required information is shown in the financial statements or notes thereto. (3) Listing of Exhibits
18 The following exhibits are filed as part of, or incorporated by reference into, this annual report: 19 INDEX TO EXHIBITS Exhibit Number - ------
3.1 Amended and Restated Articles of Incorporation of the company, dated August 12, 1991(1) 3.2 Amendment to Articles of Incorporation, dated August 20, 1991(1) 3.3 Form of Amendment to Articles of Incorporation, dated August 24, 1991(1) 3.4 Bylaws of the company, as amended(2) 3.5 Specimen Certificate of the Common Stock (without par value)(1) 4.1 Warrant to purchase 5,000 shares of common stock issued to Heller Financial, Inc. 4.2 Warrant to purchase 54,600 shares of common stock issued to Jonathan Davidson (3) 4.3 Warrant to purchase 119,700 shares of common stock issued to Sierra Ventures VII, L.P. (4) 4.4 Warrant to purchase 136,500 shares of common stock issued to Oxygen Media, LLC 10.1 1991 Key Employee Stock Option Plan (5) 10.2 Form of Indemnification Agreement between Registrant and its directors and executive officers (5) 10.3 Asset Purchase Agreement for Acquisition of the Assets of Small People, Inc. and Jimash Corporation by Right Start Subsidiary I, Inc.(6) 10.4 1995 Non-employee Directors Option Plan (7) 10.5 Registration Rights Agreement dated August 3, 1995 between Registrant and Kayne Anderson Non-Traditional Investments LP, ARBCO Associates LP, Offense Group Associates LP, Opportunity Associates LP, Fred Kayne, Albert O. Nicholas and Primerica Life Insurance Company(7) 10.6 Asset Purchase Agreement dated as of July 29, 1996 by and between Blasiar, Inc. (DBA Alert Communications Company) and The Right Start, Inc.(7) 10.7 Convertible Debenture Purchase Agreement between The Right Start, Inc. and Cahill Warnock Strategic Partners, LP dated as of October 11, 1996(8) 10.8 First Amendment to Convertible Debenture Purchase Agreement between The Right Start, Inc. and Cahill Warnock Strategic Partners, LP dated as of May 30, 1997 (9) 10.9 Convertible Debenture Purchase Agreement between The Right Start, Inc. and Strategic Associates, LP dated as of October 11, 1996 (8) 10.10 First Amendment to Convertible Debenture Purchase Agreement between The Right Start, Inc. and Strategic Associates, LP dated as of May 30, 1997 (9) 10.11 Registration Rights Agreement dated October 11, 1996 between The Right Start, Inc. and Strategic Associates, L.P. (10) 10.12 Registration Rights Agreement dated October 11, 1996 between The Right Start, Inc. and Cahill, Warnock Strategic Partners Fund, L.P. (10)
20 10.13 Loan and Security Agreement dated as of November 14, 1996 between The Right Start, Inc. and Heller Financial, Inc. (8) 10.14 First Amendment to Loan and Security Agreement and Limited Waiver and Consent dated as of April 30, 1997 (11) 10.15 Second Amendment to Loan and Security Agreement and Limited Waiver and Consent dated as of June 10, 1997 (12) 10.16 Third Amendment to Loan and Security Agreement and Limited Waiver and Consent dated as of September 3, 1997 (12) 10.17 Fourth Amendment to Loan and Security Agreement and Limited Waiver and Consent dated as of January 30, 1998 (10) 10.18 Waiver and Fifth Amendment to Loan and Security Agreement dated as of December 9, 1998 (13) 10.19 Consent by Heller Financial, Inc. to transactions relating to RightStart.com Inc. and modification of Loan Agreement, dated as of July 8, 1999. 10.20 Sixth Amendment to Loan and Security Agreement and First Amendment to Secured Capex Note dated as of November 8, 1999 (13) 10.21 Seventh Amendment to Loan and Security Agreement and Second Amendment to Secured Capex Note dated as of January 18, 2000 10.22 Registration Rights Agreement dated May 6, 1997 between The Right Start, Inc. and certain Kayne Anderson funds, Cahill, Warnock Strategic Partners Fund, L.P., Strategic Associates, L.P., The Travelers Indemnity Company and certain other investors named therein (10) 10.23 Registration Rights Agreement dated September 4, 1997 between The Right Start, Inc. and certain Kayne Anderson funds, Cahill, Warnock Strategic Partners Fund, L.P., The Travelers Indemnity Company and certain other investors named therein (10) 10.24 The Right Start, Inc. Letter Agreement dated as of April 6, 1998(14) 10.25 The Right Start, Inc. Amendment to Letter Agreement dated as of April 13, 1998(14) 10.26 The Right Start, Inc. Securities Purchase Agreement dated as of May 6, 1997 between the company and certain investors listed therein with respect to the company's 11.5% Senior Subordinated Notes due May 6, 2000 and warrants to purchase the company's common stock (14) 10.27 The Right Start, Inc. Securities Purchase Agreement dated as of April 13, 1998 between the company and certain investors listed therein with respect to the company's Senior Subordinated Notes due May 6, 2000 and warrants to purchase the company's common stock (14) 10.28 Registration Rights Agreement dated April 13, 1998 between The Right Start, Inc. and the investors named therein (10) 10.29 The Right Start, Inc. Securities Purchase Agreement dated as of September 4, 1997 between the company and the investors named therein with respect to 1,510,000 shares of the company's common stock (12) 10.30 Management Services Agreement dated July 9, 1999 between The Right Start and RightStart.com (15) 10.31 Intellectual Property Agreement dated July 9, 1999 between The Right Start and RightStart.com (15) 10.32 Series A Preferred Stock Purchase Agreement dated July 9, 1999 (15)
21 10.33 Investors' Rights Agreement dated July 9, 1999 among RightStart.com, Sierra Ventures VII, L.P., Sierra Ventures Associates VII, L.L.C., Ajit Shah, Robert Simon and Palomar Ventures I, L.P. (15) 10.34 Form of Indemnification Agreement between RightStart.com and its directors 10.35 1999 RightStart.com Stock Option Plan 10.36 Subscription Agreement dated July 9, 1999 between RightStart.com and Johnathan Davidson 10.37 Subscription Agreement dated December 30, 1999 between RightStart.com and Oxygen Media, LLC 10.38 Stock Grant Agreement dated October 30, 1999 between The Right Start, RightStart.com and Guidance Solutions 10.39 Registration Rights Agreement dated October 30, 1999 between RightStart.com and Guidance Solutions 23.1 Consent of Independent Public Accountants - Arthur Andersen 23.2 Consent of Independent Accountants - PricewaterhouseCoopers 27.1 Financial Data Schedule
__________________________ (1) Previously filed as an Exhibit to the company's Registration Statement of Form S-1 dated August 29, 1991. (2) Previously filed as an Exhibit to Amendment Number 2 to the company's Registration Statement on Form S-1 dated October 3, 1991. (3) Substantially identical warrants have been granted to each of James W. Montgomery (for 58,240 shares of common stock), Kim Enterprises, L.L.C. (for 49,140 shares of common stock), Michael Holton(for 5,460 shares of common stock), David P. Michaels (for 5,460 shares of common stock) and David A. Burns (for 9,100 shares of common stock). (4) Substantially identical warrants have been granted to Sierra Ventures Associates VII, L.L.C. (for 11,970 shares of common stock), Ajit Shah (for 165 shares of common stock), Robert Simon (for 165 shares of common stock) and Palomar Ventures I, L.P. (for 33,000 shares of common stock). (5) Previously filed as an Exhibit to Amendment Number 1 to the company's Registration Statement on Form S-1 dated September 11, 1991. (6) Previously filed as an Exhibit to the company's 10-K for the fiscal year ended May 26, 1993. (7) Previously filed as an Exhibit to the company's 10-K for the year ended June 1, 1996. (8) Previously filed as an Exhibit to the company's 10-Q for the period ended November 30, 1996. (9) Previously filed as an Exhibit to the company's 10-Q for the period ended May 3, 1997. (10) Previously filed as an Exhibit to the company's 10-K for the fiscal year ended January 31, 1998, as amended. 22 (11) Previously filed as an Exhibit to the company's 10-K for the transition period from June 2, 1996 to February 1, 1997. (12) Previously filed as an Exhibit to the company's 10-Q for the period ended August 2, 1997. (13) Previously filed as an Exhibit to the company's 10-Q for the period ended October 30, 1999. (14) Previously filed as an Exhibit to the company's 8-K dated April 23, 1998. (15) Previously filed as an Exhibit to the company's 8-K dated July 9, 1999. (b) Reports on Form 8-K There were no Reports on Form 8-K filed by the company during the last quarter of Fiscal 1999. (c) A list of exhibits included as part of this report is set forth in Part IV of this Annual Report on Form 10-K above and is hereby incorporated by reference herein. (d) Not applicable 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. THE RIGHT START, INC. (Registrant) Dated: April 28, 2000 / s/ Jerry R. Welch -------------------------------------- Jerry R. Welch Chairman of the Board, Chief Executive Officer and President Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Jerry R. Welch Chairman of the Board, April 28, 2000 - ------------------------- Chief Executive Officer and President Jerry R. Welch /s/ Richard A. Kayne Director April 28, 2000 - ------------------------- Richard A. Kayne /s/ Andrew D. Feshbach Director April 28, 2000 - ------------------------- Andrew D. Feshbach /s/ Robert R. Hollman Director April 28, 2000 - ------------------------- Robert R. Hollman /s/ Fred Kayne Director April 28, 2000 - ------------------------- Fred Kayne /s/ Howard M. Zelikow Director April 28, 2000 - ------------------------- Howard M. Zeliko /s/ Gina M. Engelhard Chief Financial Officer (Principal April 28, 2000 - ------------------------- Financial and Accounting Officer) Gina M. Engelhard
24 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Board of Directors and Shareholders of The Right Start, Inc. We have audited the accompanying consolidated balance sheet of The Right Start, Inc. (a California Corporation) and subsidiary as of January 29, 2000 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Right Start, Inc. and subsidiary as of January 29, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Arthur Andersen LLP Los Angeles, California April 28, 2000 F-1 Report of Independent Accountants To the Board of Directors and Shareholders of The Right Start, Inc. In our opinion, the accompanying balance sheet as of January 30, 1999 and the related statements of operations, of changes in shareholders' equity and of cash flows for each of the two years in the period ended January 30, 1999 present fairly, in all material respects, the financial position, results of operations and cash flows of The Right Start, Inc. at January 30, 1999 and for each of the two years in the period ended January 30, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of The Right Start, Inc. for any period subsequent to January 30, 1999. /s/ PricewaterhouseCoopers LLP Los Angeles, California March 12, 1999 F-1-A THE RIGHT START, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ---------------------------
January 29, 2000 January 30, 1999 ---------------- ---------------- ASSETS ------ Current assets: Cash and cash equivalents $ 5,199,000 $ 626,000 Accounts and other receivables 682,000 585,000 Merchandise inventories 9,694,000 5,797,000 Other current assets 1,849,000 1,292,000 -------------- -------------- Total current assets 17,424,000 8,300,000 Noncurrent assets: Property, fixtures and equipment, net 10,648,000 7,884,000 Deferred income taxes 1,400,000 1,400,000 Other noncurrent assets 1,255,000 87,000 -------------- -------------- $ 30,727,000 $ 17,671,000 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable and accrued expenses $ 9,566,000 $ 3,822,000 Revolving line of credit 3,377,000 Term note payable 2,750,000 -------------- -------------- Total current liabilities 12,943,000 6,572,000 Term note payable 3,000,000 Deferred rent 1,378,000 1,449,000 Minority interest in consolidated subsidiary 3,397,000 Commitments and contingencies Mandatorily redeemable preferred stock Series A, $3,000,000 redemption value 2,088,000 1,789,000 Shareholders' equity: Convertible preferred stock Series B 1,875,000 2,813,000 Convertible preferred stock Series C 3,850,000 3,850,000 Common stock (25,000,000 shares authorized at no par value; 5,417,666 and 5,051,820 issued and outstanding, respectively) 22,593,000 22,337,000 Paid in capital 16,142,000 3,571,000 Deferred compensation (671,000) Accumulated deficit (35,868,000) (24,710,000) -------------- -------------- Total shareholders' equity 7,921,000 7,861,000 -------------- -------------- $ 30,727,000 $ 17,671,000 ============== ==============
See accompanying notes to consolidated financial statements F-2 THE RIGHT START, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS -------------------------------------
Year Ended ---------------------------------------------------------- January 29, 2000 January 30, 1999 January 31, 1998 ---------------- ---------------- ---------------- Retail Store Sales $ 38,043,000 $ 31,875,000 $ 31,107,000 Online sales before promotional discounts 9,020,000 Catalog sales 3,645,000 4,736,000 7,414,000 --------------- --------------- -------------- Total sales 50,708,000 36,611,000 38,521,000 Promotional discounts related to online sales 1,629,000 --------------- ------------- ------------ Net sales 49,079,000 36,611,000 38,521,000 Costs and expenses: Cost of goods sold 25,279,000 18,576,000 19,244,000 Operating expense 20,370,000 15,106,000 19,019,000 Non-cash compensation 2,014,000 Marketing and advertising expense 7,233,000 387,000 193,000 General and administrative expense 5,306,000 3,337,000 3,912,000 Pre-opening costs 323,000 209,000 711,000 Depreciation and amortization expense 1,950,000 1,488,000 1,608,000 Other (income) and expense: Other expense 698,000 Store closing (income) expense 151,000 (113,000) 1,207,000 --------------- --------------- -------------- 62,626,000 38,990,000 46,592,000 --------------- --------------- -------------- Operating loss (11,918,000) (2,379,000) (8,071,000) Non-cash beneficial conversion feature amortization 3,850,000 Minority interest in consolidated subsidiary loss (3,000,000) Interest expense, net 227,000 640,000 1,143,000 --------------- --------------- -------------- Loss before income taxes and extraordinary item (9,145,000) (6,869,000) (9,214,000) Income tax provision 68,000 22,000 27,000 --------------- --------------- -------------- Loss before extraordinary item (9,213,000) (6,891,000) (9,241,000) Extraordinary gain on debt restructuring, net 1,211,000 --------------- --------------- -------------- Net loss $ (9,213,000) $ (5,680,000) $ (9,241,000) =============== =============== ============== Basic and diluted loss per share: Loss before extraordinary item $ (1.84) $ (1.37) $ (2.01) Extraordinary item 0.24 --------------- --------------- -------------- Net loss $ (1.84) $ (1.13) $ (2.01) =============== =============== ============== Weighted average number of shares outstanding 5,355,756 5,051,820 4,594,086 =============== =============== ==============
See accompanying notes to consolidated financial statements F-3 THE RIGHT START, INC. AND SUBSIDIARY STATEMENTS OF SHAREHOLDERS' EQUITY ----------------------------------
Preferred Stock ---------------------------------------------------- Series B Series C Common Stock ------------------------- ------------------------ ------------ Shares Amount Shares Amount Shares --------- -------------- ------------ ---------- ------------ Balance February 1, 1997 4,076,820 Exercise of stock options 220,000 Issuance of shares in private placement 755,000 Proceeds related to Senior subordinated notes Net loss --------- ----------- ---------- ------------ ---------- Balance January 31, 1998 5,051,820 Issuance of preferred stock 30,000 $2,813,000 38,500 $3,850,000 Issuance of subordinated debt in conjunction with recapitalization, net Preferred dividend accretion Net loss --------- ----------- ---------- ------------ ---------- Balance January 30, 1999 30,000 $2,813,000 38,500 $3,850,000 5,051,820 Preferred shares converted to common (10,000) ($938,000) 333,333 Issuance of shares pursuant to the exercise of stock options 27,383 Recapitalization costs Preferred dividend accretion Induced conversion of Subsidiary's preferred stock Issuance of shares to Lender 5,130 Issuance of warrants to Lender Performance options Subsidiary options Director's options Amortization of deferred compensation Gain on issuance of common stock of subsidiary Net loss --------- ----------- ---------- ------------ ---------- Balance January 29, 2000 20,000 $1,875,000 38,500 $3,850,000 5,417,666 ========= =========== ========== ============ ========== Common Stock ------------ Paid in Deferred Accumulated Amount Capital Compensation Deficit Net Equity ------------ ---------- ------------ ----------- ---------- Balance February 1, 1997 $16,961,000 ($9,789,000) $7,172,000 Exercise of stock options 1,320,000 Issuance of shares in private placement 1,320,000 3,705,000 Proceeds related to Senior subordinated notes 3,705,000 351,000 Net loss 351,000 (9,241,000) (9,241,000) ----------- ----------- -------- ---------- ------------- Balance January 31, 1998 22,337,000 ($19,030,000) 3,307,000 - Issuance of preferred stock 6,663,000 Issuance of subordinated debt in conjunction $3,590,000 3,590,000 with recapitalization, net (19,000) (19,000) Preferred dividend accretion Net loss (5,680,000) (5,680,000) ------------ ----------- -------- ------------ ------------- Balance January 30, 1999 22,337,000 3,571,000 ($24,710,000) 7,861,000 Preferred shares converted to common 938,000 Issuance of shares pursuant to the exercise of stock options 155,000 155,000 Recapitalization costs (56,000) (56,000) Preferred dividend accretion (301,000) (301,000) Induced conversion of Subsidiary's preferred stock 316,000 (316,000) Issuance of shares to financial institution 101,000 101,000 Issuance of warrants to financial institution 58,000 58,000 Performance options 1,770,000 1,770,000 Subsidiary options 815,000 (815,000) Director's options 100,000 (100,000) Amortization of deferred compensation 244,000 244,000 Gain on issuance of common stock of Subsidiary 8,931,000 8,931,000 Net loss (10,842,000) (10,842,000) ----------- ----------- --------- ------------ ------------- Balance January 29, 2000 $22,593,000 $16,142,000 ($671,000) ($35,868,000) $7,921,000 =========== =========== ========= ============ =============
See accompanying notes to consolidated financial statements F-4 THE RIGHT START, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
Year Ended --------------------------------------------------------- January 29, 2000 January 30, 1999 January 31, 1998 ----------------- ---------------- ---------------- Cash flows from operating activities: Net loss $ (10,842,000) $ (5,680,000) $ (9,241,000) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,950,000 1,538,000 2,319,000 Non-cash compensation 2,014,000 Non-cash beneficial conversion feature amortization 3,850,000 Non-cash advertising expense 9,000 Store closing expense 151,000 39,000 1,580,000 Minority interest in consolidated subsidiary loss (3,000,000) Amortization of discount on senior subordinated notes 44,000 85,000 Extraordinary gain (1,211,000) Change in assets and liabilities affecting operations 442,000 1,760,000 (1,316,000) ------------- ------------- ------------ Net cash provided by (used in) operating activities (9,276,000) 340,000 (6,573,000) ------------- ------------- ------------ Net cash used in investing activities: Additions to property, fixtures and equipment (3,603,000) (1,296,000) (2,063,000) Cash flows from financing activities: Net proceeds from (payments on) revolving line of credit 3,377,000 (2,014,000) 181,000 Net proceeds from (payments on ) term note payable 250,000 (250,000) 357,000 Proceeds from private placement of common stock 3,705,000 Proceeds from common stock issued upon exercise of stock options 155,000 1,320,000 Sale of preferred stock in consolidated subsidiary, net 13,670,000 Proceeds from issuance of senior subordinated notes, net 3,606,000 3,000,000 ------------- ------------- ------------ Net cash provided by financing activities 17,452,000 1,342,000 8,563,000 ------------- ------------- ------------ Net increase (decrease) in cash and cash equivalents 4,573,000 386,000 (73,000) Cash at beginning of period 626,000 240,000 313,000 ------------- ------------- ------------ Cash and cash equivalents at end of period $ 5,199,000 $ 626,000 $ 240,000 ============= ============= ============
See accompanying notes to consolidated financial statements F-5 THE RIGHT START, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: - ------------------------------------------------------------ The Company - ----------- The Right Start, Inc. (the "Company" or "Parent") is a specialty retailer of high quality developmental, educational and care products for infants and children. The consolidated financial statements include the results of the "Company and its majority-owned subsidiary, RightStart.com Inc. ("RightStart.com" or the "Subsidiary"). RightStart.com was formed in April 1999 for the purpose of engaging in electronic commerce over the Internet. Effective May 1, 1999, the Company contributed its catalog assets to RightStart.com and in July 1999, RightStart.com issued preferred stock to certain investors then representing 33%, on a fully-diluted basis, of RightStart.com's outstanding capital stock. The preferred stock converted to common stock of RightStart.com in October 1999. The Company's ownership interest in RightStart.com was 60.2% at January 29, 2000. Fiscal Year - ----------- The Company has a fiscal year consisting of fifty-two or fifty-three weeks ending on the Saturday closest to the last day in January. The fiscal years ended January 29, 2000 ("Fiscal 1999"), January 30, 1999 ("Fiscal 1998") and January 31, 1998 ("Fiscal 1997") were fifty-two week periods. Revenue Recognition - ------------------- Retail sales are recorded at time of sale or when goods are delivered. Catalog and internet sales net of discounts, coupon redemptions and promotional allowances are recorded at the time of shipment to customers. The Company provides for estimated returns at the time of the sale. Merchandise Inventories - ----------------------- Merchandise inventories consist of products purchased for resale and are stated at the lower of cost or market value. Cost is determined on a weighted average basis. Cash and Cash Equivalents - ------------------------- The Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. At various times the Company maintains cash accounts with financial institutions in excess of federally insured amounts. Concentrations of Credit Risks and Significant Customers - -------------------------------------------------------- At January 29, 2000 and January 30, 1999 accounts receivable were due from credit card companies and others. There were no single customers who accounted for more than 10% of the revenues during any period. F-6 Concentration of Product Fulfillment and Technology Risk - -------------------------------------------------------- Since the launch of the online store in June 1999, the Subsidiary has outsourced its technology department and its fulfillment activities, such as its warehousing and logistics operations and its call center and customer service activities. The Company has outsourced its distribution and fulfillment activities. The Subsidiary is substantially dependent on the technology services it receives from its technology services providers who host, maintain and develop its website and provide technical assistance to its third-party distribution provider and its in-house logistics team. The Subsidiary's principal technology service provider is also a shareholder of the Subsidiary and the Company believes RightStart.com's relationship with them to be very good and, if necessary, the Subsidiary could locate replacement services without material difficulty. Neither the Company nor the Subsidiary has long-term contracts with its respective fulfillment services providers but the Company and the Subsidiary have been operating under agreements setting forth the terms at which we will purchase those services and believes that replacement providers could be found without material difficulty should the need arise. Nonetheless, a failure in any of these outsourced services could have a material adverse effect on the Company or the Subsidiary. Prepaid Catalog Costs - --------------------- Prepaid catalog costs consist of the costs to produce, print and distribute catalogs. These costs are amortized over the expected sales life of each catalog, which typically does not exceed four months. Catalog production expenses of $1,334,000, $1,363,000 and $2,753,000 were recorded in Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. Product Development Expenses - ---------------------------- During Fiscal 1999, the Subsidiary used a third party ("Guidance Solutions") to develop and maintain its online store. Expenses associated with the online store consist of costs related to software development, maintenance, online store operations, systems and telecommunications infrastructure and acquired content. The Company capitalizes software costs incurred related to the application development stage. All other software development costs are expensed as incurred. Software and website costs are amortized over a three-year period. Long-lived Assets - ----------------- The Company periodically evaluates whether events and circumstances have occurred that indicate the remaining estimated useful lives of long-lived assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that an asset should be evaluated for possible impairment, the Company uses an estimate of the asset's undiscounted net cash flows over its remaining life in measuring whether the asset is recoverable. There are no assets that have been determined to require an impairment provision. Property, Fixtures and Equipment - -------------------------------- Property, fixtures and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method based upon the estimated useful lives of the assets, generally three to ten years. Amortization of leasehold improvements is based upon the term of the lease, or the estimated useful life of the leasehold improvements, whichever is shorter. F-7 Pre-opening Costs - ----------------- Effective October 1, 1997, the Company changed the way costs incurred in opening stores are recognized. Previously, these costs had been deferred and amortized over 12 months commencing with the store opening. After the effective date, any pre-opening costs incurred for new stores were charged to expense as incurred. The impact of this change was not significant to the Company's results of operations or financial position. Advertising - ----------- Advertising costs are expensed as incurred or at the time of the initial print or media broadcast. Advertising expenses of $7,233,000, $387,000 and $193,000 were recorded in Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. Deferred Rent - ------------- The Company recognizes rent expense on a straight-line basis over the life of the underlying lease. The benefit from tenant allowances and landlord concessions are recorded as deferred rent and recognized over the lease term. Income Taxes - ------------ The Company accounts for income taxes using an asset and liability approach under which deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is established against deferred tax assets when it is more likely than not that all, or some portion, of such deferred tax assets will not be realized. Per Share Data - -------------- On December 15, 1998, the Company's shareholders approved a one-for-two reverse split of the Company's common stock, which had previously been approved by the Company's Board of Directors. The reverse split was effective December 15, 1998. All references in the financial statements to shares and related prices, weighted average number of shares, per share amounts and stock plan data have been adjusted to reflect the reverse split. Basic and diluted loss per share data is computed by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding. Diluted income per share data is computed by dividing income available to common shareholders plus adjustment for costs associated with dilutive securities by the weighted average number of shares outstanding plus any potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock in each year. F-8
Fiscal 1999 Fiscal 1998 Fiscal 1997 ----------- ----------- ----------- Loss before extraordinary item $10,842,000 $6,891,000 $9,241,000 Plus: Preferred stock accretion 301,000 19,000 Subsidiary dividend to preferred shareholders 316,000 ----------- ---------- ---------- Basic and diluted loss before extraordinary item applicable to common shareholders $11,459,000 $6,910,000 $9,241,000 =========== ========== ========== Weighted average shares 5,355,756 5,051,820 4,594,086 Loss before extraordinary item per share, basic and diluted $ 2.14 $ 1.37 $ 2.01
Certain securities of the Parent were not included in the computation of diluted EPS because to do so would have been antidilutive for the periods presented. Such securities include options outstanding to purchase 1,001,407, 890,519 and 326,005 shares of common stock at January 29, 2000, January 30, 1999 and January 31, 1998, respectively, Series B preferred stock convertible into 666,667 and 1,000,000 shares of common stock at January 29, 2000 and January 30, 1999 and Series C preferred stock convertible into 1,925,000 shares of common stock at January 29, 2000 and January 30, 1999. Stock-Based Compensation - ------------------------ Stock options issued to employees and members of the Company's board of directors are accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, compensation expense is recorded for options awarded to employees and directors to the extent that the exercise prices are less than the fair market value of the common stock on the date of grant where the number of options and the exercise price are fixed. The difference between the fair value of the common stock and the exercise price of the stock option is recorded as deferred compensation, which is charged to expense over the vesting period of the underlying stock option. The Company follows the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based Compensation". In April 2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation", an interpretation of APB opinion No. 25 which is effective July 1, 2000. The interpretation requires that any options granted to non-employees of the Company after December 15, 1998 be accounted for under statement of Financial Accounting Standard No. 123. As of January 29, 2000 there were no options issued by the Company to non-employees. Reclassifications - ----------------- Certain reclassifications have been made to conform prior period amounts to current year presentation. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts F-9 of revenues and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive Income - -------------------- The Company has not had any items of other comprehensive income in any period presented. Fair Value of Financial Instruments - ----------------------------------- The carrying amounts of all receivables, payables and accrued expenses approximate fair value due to the short-term nature of such instruments. The carrying amount of the revolving and Capex credit facilities approximates fair value due to the floating rate on such instruments. New Accounting Pronouncements - ----------------------------- In June 1999, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting For Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company currently does not have or use derivative instruments. NOTE 2 - CONSOLIDATED OPERATING RESULTS AND RISKS - ------------------------------------------------- For Fiscal 1999, the Company had a net loss of $10,842,000 and a use of cash from operating activities of approximately $9,276,000. The Company is currently projecting to have operating losses through Fiscal 2000. The Subsidiary launched its online store in June 1999 and has incurred significant development and marketing expenditures which have contributed significantly to the consolidated loss in Fiscal 1999. The Company and Subsidiary currently plan to continue to grow the Subsidiary's market share through advertising, strategic partnerships and alliances. In order to continue to fund operations and grow its market share it will be necessary for the Subsidiary to raise additional capital. On January 18, 2000, the Subsidiary filed a registration statement on Form S-1 with the Securities and Exchange Commission. A portion of the proceeds from this offering were to be used by the Subsidiary to fund operations and for working capital. Due to adverse market conditions, this offering has been delayed. The Subsidiary is considering its financing alternatives. ( see Note 18) The risks associated with the development of an online business are significant and include, among others, competition from other children's product retailers, losses expected in the online business, limitations on access to capital to fund the online business, the dependence of RightStart.com on its technology services provider, consumer acceptance of online retailing and RightStart.com's online stores and the lack of operating experience at RightStart.com. At January 29, 2000 approximately $757,000 of professional fees and other costs associated with the initial filing of an initial public offering related to RightStart.com, were included in other assets. The Subsidiary expects these costs to be offset against capital raised through the initial public offering or other equity or debt financing in Fiscal year 2000. Historically, the Company has incurred losses and may continue to incur losses in the near term. Depending on the success of its business strategy, the Company may continue to incur losses beyond such period. Losses could negatively affect working capital and the extension of credit by the Company's suppliers and impact the F-10 Company's operations. NOTE 3 - PROPERTY, FIXTURES AND EQUIPMENT, NET: - ----------------------------------------------
January 29, January 30, 2000 1999 ---- ---- Property, fixtures and equipment, at cost: Fixtures and equipment $ 5,623,000 $ 4,015,000 Leaseholds and leasehold improvements 8,770,000 7,511,000 Computer software 2,597,000 840,000 ----------- ----------- 16,990,000 12,366,000 Accumulated depreciation and amortization (6,342,000) (4,482,000) ----------- ----------- $10,648,000 $ 7,884,000 =========== ===========
In October 1999, approximately 288,333 shares of RightStart.com common stock owned by the Company were issued to Guidance Solutions for services rendered through October 30, 1999 and as an incentive for Guidance Solutions to continue to provide services to the Subsidiary over the next ten months. The Subsidiary has recorded the fair market value of the shares at the date of transfer as a capital contribution and capitalized or expensed the pro rata value related to services performed through January 29, 2000. The total capitalized amounts related to development of the online store approximated $1,819,000 and are being amortized over 36 months. Amounts expensed related to the services provided by Guidance Solutions through January 29, 2000 were approximately $707,000. Depreciation and amortization expense for property, fixtures and equipment amounted to $1,950,000, $1,488,000 and $1,608,000 for Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. NOTE 4 - CREDIT AGREEMENTS: - -------------------------- In November 1996, the Company entered into an agreement with a financial institution for a $13 million credit facility (the "Credit Facility"). The Credit Facility consists of a $10.0 million revolving line of credit for working capital (the "Revolving Line") and a $3.0 million capital expenditure facility (the "Capex Line"). Availability under the Revolving Line is subject to a defined borrowing base. As of January 29, 2000 borrowings of $3.4 million were outstanding under the Revolving Line and $3.0 million was outstanding under the Capex Line; $1.5 million was available at January 29, 2000 under the Revolving Line. Interest accrues on the Revolving Line at prime plus 1.0% and at prime plus 1.5% on the Capex Line. At January 29, 2000, the bank's prime rate of interest was 8.5%. The Credit Facility terminates on February 19, 2001, and on such date, all borrowings thereunder are immediately due and payable. Borrowings under the Credit Facility are secured by substantially all of the Company's assets (including the Company's stock in the Subsidiary but excluding the assets of the Subsidiary). The Credit Facility, as amended, required us, excluding any contribution from RightStart.com, to maintain net worth (defined to include equity, additional paid-in capital, retained earnings (accumulated deficit), subordinated debt and excluding the operating results of the subsidiary) during Fiscal 1999 of at least $8.0 F-11 million. The Credit Facility also required that our earnings before interest, taxes, depreciation and amortization and excluding non recurring items ("EBITDA") to exceed $500,000 for each of the twelve months ended January 31, 2000, the twelve months ending April 30, 2000, the twelve months ending July 31, 2000, the twelve months ending October 31, 2000 and the twelve months ending January 31, 2001. In addition, our capital expenditures are limited to $1,750,000 in Fiscal 2000. The Company entered into an amendment to the Credit Facility in April 2000 that reduced minimum required EBITDA from $500,000 to $250,000 for the first quarter of Fiscal 2000, changed the required minimum net worth to amounts decreasing to a low of $6,772,000 as of the end of July 2000 and returning to $8,000,000 as of the end of August 2000 and added an amortization requirement to the Capex Line of $100,000 per month beginning May 1, 2000. The Company also received a waiver of compliance with the financial covenants under the Credit Facility for periods between the fiscal year end and the date of the amendment. Effective May 6, 1997, the Company issued subordinated notes in the aggregate principal amount of $3,000,000 and warrants to purchase common stock. Certain of the purchasers were affiliates of the Company. The subordinated notes bore interest at 11.5% and were due in full on May 6, 2000. Warrants to purchase an aggregate of 237,500 shares of common stock at $6.00 per share were issued in connection with the subordinated notes. Proceeds from the sale of the subordinated notes and warrants were allocated to the debt security and the warrants based on the fair value of the securities at the date of issuance. The value assigned to the warrants was $351,000. The resulting debt discount was amortized over the term of the notes. In December 1998, the holders of the notes exchanged the notes and warrants in connection with a capital restructuring. (see Note 6) The Company issued and sold subordinated convertible debentures in the aggregate principal amount of $3 million effective October 11, 1996. The terms of such debentures, as amended, permitted the holders to convert the principal amount into 375,000 shares of the Company's common stock at $8.00 per share at any time prior to May 31, 2002, the due date of the debentures. The debentures bore interest at a rate of 8% per annum. The holders of the debentures exchanged the debentures in conjunction with a capital restructuring in December 1998. (see Note 6) NOTE 5 - MANDATORILY REDEEMABLE PREFERRED STOCK: - ----------------------------------------------- In connection with the Company's recapitalization (see Note 6), the Company issued 30,000 shares of mandatorily redeemable preferred stock Series A. The stock has a par value of $.01 per share and a liquidation preference of $100 per share; it is mandatorily redeemable at the option of the holders on May 31, 2002 at a redemption price of $100 per share or $3,000,000. The Series A preferred stock shall also be redeemed by the Company upon a change of control or upon the issuance of equity securities by the Company for proceeds in excess of $15,000,000, both as defined in the Certificate of Determination for the Series A preferred stock. The difference in the fair value of the mandatorily redeemable Series A preferred stock at the date of issuance and the redemption amount is being accreted, using the interest method, over the period from the issuance date to the required redemption date as a charge to paid-in capital. There shall be no dividends on the Series A preferred stock unless the Company is unable to redeem the stock at the required redemption date, at which point dividends shall cumulate and accrue on a daily basis, without interest, at the rate of $15.00 per share per annum, payable quarterly. NOTE 6 - SHAREHOLDERS' EQUITY: - ----------------------------- F-12 Recapitalization - ---------------- In April 1998 the Company completed a private placement of non-interest bearing senior subordinated notes in an aggregate principal amount of $3,850,000, together with detachable warrants to purchase an aggregate of 1,925,000 shares of common stock exercisable at $2.00 per share. The new securities were issued for an aggregate purchase price of $3,850,000 and were purchased principally by the Company's affiliates. In connection with the sale of the new securities, the Company entered into an agreement (the "Agreement") with all of the holders of the Company's existing subordinated debt securities, representing an aggregate principal amount of $6,000,000. Pursuant to the Agreement, each holder (of new and old securities) agreed to exchange all of its subordinated debt securities, together with any warrants issued in connection therewith, for newly issued shares of preferred stock. Ten shares of newly issued preferred stock ("the Preferred Stock") were issued for each $1,000 principal amount of subordinated debt securities exchanged. The total number of shares issued were 30,000, 30,000 and 38,500 for Preferred Stock Series A, B and C, respectively. Holders of $3,000,000 principal amount of existing subordinated debt securities elected to receive Series A Preferred Stock which has no fixed dividend rights, is not convertible into common stock, is mandatorily redeemable by us in May 2002 and will not accrue dividends unless the Company is unable to redeem the Series A Preferred Stock at the required redemption date, at which point dividends would begin to accumulate and accrue at a rate of $15 per share per annum. Holders of $3,000,000 principal amount of subordinated debt securities elected to receive Series B convertible preferred stock which has no fixed dividend rights and is convertible into common stock at a price per share of $3.00. Holders of the $3,850,000 principal amount of newly issued, non-interest bearing senior subordinated notes exchanged such debt securities (and the warrants issued in connection therewith) for Series C convertible preferred stock, which has no fixed dividend rights and is convertible into common stock at a price of $2.00 per share. The issuance of the shares of preferred stock occurred upon exchange of the subordinated debt securities in December 1998. The Preferred Shares are non-voting. However, holders of at least a majority of the Preferred Shares acting as a class, must consent to certain corporate actions, including the sale of the Company, as defined in the respective Certificates of Determination. Both Series B and Series C preferred stock have a par value of $.01 per share and a liquidation preference of $100 per share. During Fiscal 1999, 10,000 shares of Series B preferred stock converted into 333,333 shares of common stock. F-13 NOTE 7 - INCOME TAXES: - --------------------- The provision for income taxes is comprised of the following:
Year Ended --------------------------------------- January 29, January 30, January 31, 2000 1999 1998 ----------- ----------- ----------- Current provision: Federal State $68,000 $22,000 $27,000 Deferred provision: Federal State __________ __________ __________ $68,000 $22,000 $27,000 =========== =========== ===========
The Company's effective income tax rate differed from the federal statutory rate as follows:
Year Ended ------------------------------------------ January 29, January 30, January 31, 2000 1999 1998 ---- ---- ---- Federal statutory rate 34% 34% 34% State income taxes, net of federal benefit 3 3 Stock options Valuation allowance (34) (11) (39) Debt discount amortization (23) Other (3) 2 ----- ----- ----- Effective income tax rate 0% 0% 0% ===== ===== =====
F-14 Deferred tax (liabilities) assets are comprised of the following:
January 29, January 30, 2000 1999 ------------ ----------- Depreciation and amortization $ (167,000) $ (87,000) Other (27,000) (27,000) ------------ ----------- Deferred tax liabilities (194,000) (114,000) ------------ ----------- Net operating loss carryforwards 12,054,000 7,672,000 Deferred rent 625,000 604,000 Deferred compensation 820,000 Other reserves 98,000 868,000 Other 280,000 69,000 Sales returns 96,000 29,000 ------------ ----------- Deferred tax assets 13,973,000 9,242,000 ------------ ----------- Valuation allowance (12,379,000) (7,728,000) ------------ ----------- Net deferred tax asset $ 1,400,000 $ 1,400,000 ============ ===========
In evaluating the realizability of the deferred tax asset, management considered the Company's projections and available tax planning strategies. Management expects that the Company will generate $4 million of taxable income within the next 15 years to utilize the net deferred tax asset. The taxable income will be generated through a combination of improved operating results and tax planning strategies. Rather than lose the tax benefit, the Company could implement certain tax planning strategies including the sale some of its operations or a portion of the Company's stock ownership in RightStart.com in order to generate income to enable the Company to realize its NOL carryforwards. Based on the expected operating improvements, combined with tax planning strategies, management believes that adequate taxable income will be generated over the next 15 years in which to utilize at least a portion of the NOL carryforwards The Company has federal and state net operating loss carryforwards at January 29, 2000 of $23.7 million and $9.4 million, respectively. The Subsidiary had federal and state net operating loss carryforwards at January 29, 2000 of approximately $9.7 million and $4.8 million which expire in fiscal year 2020. These carryforwards will expire in fiscal years ending 2002 through 2020. NOTE 8 - EMPLOYEE BENEFITS AND STOCK OPTIONS: - -------------------------------------------- On March 15, 1991, two now former executives were granted options to acquire up to 450,000 shares of the Company's common stock under a non-qualified stock option plan. The options were granted at fair market value of $6.66 per share. One hundred fifty thousand options were exercisable at the date of grant. These options expire June 1, 2001. In conjunction with the August 1995 renegotiation of the employment contracts with these two executives, certain option terms were amended. Each executive's holdings became 194,000 F-15 options exercisable at $6.00 per share, the fair market value at the time of reissuance. At January 29, 2000, 21,500 shares were outstanding under this plan and there were no additional options available for future grants. One of the executives covered by these option agreements was the Company's chief executive officer who resigned in March 1996. The other executive covered by these option agreements was the Company's president who resigned in October 1996. The employment contracts for these individuals called for severance payments in aggregate of approximately $930,000. A significant portion of each individual's severance represented the cash surrender value of a life insurance policy and the remainder was paid out through December 1997. In October 1991, the Company adopted the 1991 Employee Stock Option Plan, which, as amended, covers an aggregate of 900,000 shares of the Company's common stock. Options outstanding under this plan have terms ranging from three to ten years (depending on the terms of the individual grant). In May 1998, certain option holders were given the right to cancel their existing options (many of which were vested) (the "Existing Options") and have new options issued to them at the fair market value on the date of grant of $3.50 per share (the "New Options. The New Options vest in accordance with the terms of the individual grants. At January 29, 2000, there were no Existing Options outstanding. Options for 375,960 shares were exercisable at January 29, 2000. In October 1995, the Company adopted the 1995 Non-Employee Directors Option Plan, as amended, to cover an aggregate of 200,000 shares of common stock. This Plan provides for the annual issuance, to each non-employee director, of options to purchase 1,500 shares of common stock. In addition, each director is entitled to make an election to receive, in lieu of directors' fees, additional options to purchase common stock. The amount of additional options is determined using the Black-Scholes option-pricing model such that the fair value of the options issued is equivalent to the fees that the director would be otherwise entitled to receive. Prior to Fiscal 1999, the amount of additional options was determined based on an independent valuation. Options issued under this plan vest on the anniversary date of their grant and upon termination of Board membership. These options expire three to five years from the date of grant. Options to purchase 172,130 shares of common stock were issued under this plan at exercise prices ranging from $2.50 to $10.46 per share, such exercise price being equal to the closing price of the Company's common stock on the date of grant. In Fiscal 1999, the Company recorded $100,000 of deferred compensation for options granted under this plan, of which $24,000 was charged to expense during the period. At January 29, 2000, 146,477 of the options issued under this plan were exercisable. In 1993, the Company adopted an employee stock ownership plan ("ESOP") and employee stock purchase plan ("ESPP") for the benefit of its employees. The ESOP is funded exclusively by discretionary contributions determined by the Board of Directors. The Company matches employees' contributions to the ESPP at a rate of 50%. The Company's contributions to the ESPP amounted to $12,000, $14,000 and $24,000 in Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. F-16 The following table summarizes the Company' option activity through January 29, 2000:
Fair Value Options Exercisable Number of Weighted Average of Options Exercisable Weighted Average Options Exercise Price Granted at Year End Exercise Price ---------- ---------------- ---------- ----------- ---------------- Outstanding at February 1, 1997 489,960 $7.40 Granted 98,295 5.00 $1.55 Canceled (42,250) 8.08 Exercised (220,000) 6.00 Outstanding at January 31, 1998 326,005 7.62 323,921 $4.17 Granted 785,014 3.03 $1.07 Canceled (220,500) 7.13 Outstanding at January 30, 1999 890,519 3.72 148,006 $7.15 Granted 148,270 8.20 5.31 Canceled (9,999) 3.50 Exercised (27,383) 5.64 Outstanding at January 29, 2000 1,001,407 4.33 543,937 $3.75
The following table summarizes information concerning the Company's outstanding and exercisable stock options at January 29, 2000:
Number Weighted Average Weighted Average Range of Outstanding at Remaining Contractual Exercise Price of Number Exercisable Exercise Prices January 29,2000 Life Options Outstanding at January 29,2000 - ---------------- ----------------- ---------------------- -------------------- -------------------- $2.50 - $3.50 731,514 7.9 years $ 3.03 422,314 $5.00 - $7.88 173,412 7.9 years 6.67 58,412 $8.50 - $17.25 96,481 3.0 years 10.02 63,211 --------- ------ ------- 1,001,407 $ 4.33 543,937 ========= ====== =======
The fair value of each option grant was estimated on the date of grant using the Black-Sholes option-pricing model with the following assumptions:
Fiscal 1999 Fiscal 1998 Fiscal 1997 ----------- ----------- ----------- Risk-free interest rates 5.27% 5.17% 6.00% Expected life (in years) 4 4 4 Dividend yield 0% 0% 0% Expected volatility 85.33% 76.91% 79.34%
The Company and the Subsidiary have adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In accordance with the provisions of SFAS 123, F-17 the Company and the Subsidiary apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans based on the fair market value method prescribed by SFAS 123. If the Company and the Subsidiary had elected to recognize compensation expense based upon the fair value at the grant date for awards under their plans consistent with the methodology prescribed by SFAS 123, the Company's consolidated net loss and consolidated loss per share, including the Company's share of compensation expense related to the Subsidiary's option grants, would be increased to the pro forma amounts indicated below:
Year Ended ---------- January 29, 2000 January 30, 1999 January 31, 1998 ---------------- ---------------- ---------------- Net loss: As reported ($ 10,842,000) ($5,680,000) ($9,241,000) Pro forma (11,922,000) (6,258,000) (9,640,000) Basic and diluted loss per share : As reported ($2.14) ($1.13) ($2.01) Pro forma (2.34) (1.24) (2.10)
These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's and the Subsidiary's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options. In Fiscal 1999, 100,000 options were granted at an exercise price of $7.25 and a fair value at date of grant of $8.25. The Company recorded $100,000 of deferred compensation related to these options, of which $24,000 was amortized in Fiscal 1999. Subsidiary Options - ------------------ In June 1999, RightStart.com adopted the RightStart.com Inc. 1999 Stock Option Plan. The total number of shares that can be issued under the plan is 1,818,000. This plan provides for the granting to employees, including officers and directors, of incentive stock options ("ISO") and for the granting to employees, consultants and non-employee directors of non-statutory stock options. Included in the Subsidiary's options granted through January 29, 2000 are 359,000 options granted to employees of The Right Start who are not employees of the subsidiary. Generally, options granted under this Plan have a term of ten years, are nontransferable, and vest 25% on the first anniversary of grant and monthly thereafter over three years. F-18 The following table summarizes RightStart.com's stock option activity from inception through January 29, 2000:
Weighted Average Weighted Average Number of Shares Price Per Share Exercise Price ---------------- --------------- -------------- Granted 1,769,500 $0.45 to $4.50 $1.18 Exercised Canceled 1,769,500 =========
Weighted average fair value of options granted in Fiscal 1999 was $1.29. In Fiscal 1999, 535,400 options were granted at an exercise price of $0.45 and a fair market value at date of grant of $1.67 and 300,000 options were granted at an exercise price of $3.75 and a fair market value at date of grant of $4.29. The estimated fair value of the stock at the grant dates were based on third party appraisals or based on the conversion price of the Subsidiary's preferred stock converted into common stock of the Subsidiary. For Fiscal 1999 the Subsidiary recorded $815,000 of deferred compensation in connection with options granted under the RightStart.com Inc. 1999 Stock Option Plan and recognized compensation expense in the amount of $220,000. Additional information with respect to the outstanding options as of January 29, 2000 was as follows:
Weighted Average Life in Options Range of Exercise Prices Number of Shares Exercise Price years Exercisable ------------------------- ---------------- -------------- ----- ----------- $0.45 1,396,000 $0.45 9.4 494,000 $3.75 300,000 $3.75 9.8 $4.50 73,500 $4.50 9.9 --------- --- 1,769,500 9.6 ========= ===
The fair value of each option grant was estimated on the date of grant using the Black-Sholes option-pricing model with the following assumptions: Risk-free interest rates 5.80% Expected life (in years) 7 Dividend yield 0% Expected volatility 85%
Had compensation cost been determined and recorded based on the fair value at the date of grant consistent with the provisions of SFAS 123, the Company's share of the Subsidiary's compensation expense in Fiscal 1999 would have been $296,000 which is included in the pro forma loss above. NOTE 9 - RELATED PARTY TRANSACTIONS: - ----------------------------------- Kayne Anderson Investment Management ("KAIM"), a shareholder, provides certain management services to the Company and charges the Company for such services. Annual management fees of $112,500 F-19 were paid to KAIM in Fiscal 1999, Fiscal 1998 and Fiscal 1997. NOTE 10 - OPERATING LEASES: - -------------------------- The Company leases real property and equipment under non-cancelable agreements expiring from 2000 through 2007. Certain retail store lease agreements provide for contingent rental payments if the store's net sales exceed stated levels ("percentage rents"). Certain other of the leases contain escalation clauses which provide for increases in base rental for increases in future operating cost and renewal options at fair market rental rates. The Company's minimum rental commitments are as follows:
Fiscal Year ----------- 2000 $ 4,348,000 2001 4,255,000 2002 3,951,000 2003 3,606,000 2004 2,707,000 Thereafter 2,875,000 ----------- $21,742,000 -----------
Net rental expense under operating leases was $3,584,000, $3,233,000, and $3,802,000 for Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively. No percentage rents were incurred in Fiscal 1999, Fiscal 1998 or Fiscal 1997. NOTE 11 - STORE CLOSINGS: - ------------------------ In 1999 the Company closed one store and wrote off approximately $151,000 of the net book value of the assets related to this store. On December 16, 1997, the Board of Directors of the Company approved management's plan to close seven poor-performing retail stores. The Company wrote off $1.3 million of the net carrying value of capitalized leasehold improvements and fixed assets related to these stores. The revenues from the stores which closed were $1,904,000 and $4,663,000 for Fiscal 1998 and Fiscal 1997, respectively. Operating losses from these stores were $17,000 and $435,000 for Fiscal 1998 and Fiscal 1997, respectively. All but one of these stores were closed in Fiscal 1998. The remaining store was closed in Fiscal 1999. On January 28, 1997, the Board of Directors of the Company approved management's plan to close two poor-performing retail stores. The Company wrote off $425,000 of the net carrying value of capitalized leasehold improvements and fixed assets related to these stores, which is included in other expenses in the statement of operations. The revenues from these stores were $99,000 and $802,000 Fiscal 1998 and Fiscal 1997, respectively. Operating losses from these stores were $42,000 and $167,000 for Fiscal 1998 and Fiscal 1997, respectively. These stores were closed in Fiscal 1998. NOTE 12 - RECAPITALIZATION AND EXTRAORDINARY GAIN: - ------------------------------------------------- F-20 In connection with its recapitalization, effective April 13, 1998, the holders of the Company's $3.0 million subordinated notes and $3.0 million subordinated convertible debentures agreed to waive their right to receive any and all interest payments accrued and owing on or after February 28, 1998. This modification of terms was accounted for prospectively, from the effective date, under Statement of Financial Accounting Standards No. 15, "Accounting of Debtors and Creditors for Troubled Debt Restructurings", as follows. The carrying amount of the subordinated notes as of April 13, 1998 was not changed as the carrying amount of the debt did not exceed the total future cash payments of $3.0 million specified by the new terms. Interest expense was computed using the interest method to apply a constant effective interest rate to the payable balance between the modification date of April 13, 1998, and the original maturity date of the payable in May 2000. The total future cash payments specified by the new terms of the convertible debentures of $3.0 million is less than the carrying amount of the liability to the debenture holders of $3,027,000, therefore, the carrying amount was reduced to an amount equal to the total future cash payments specified by the new terms and the Company recognized a gain on restructuring of payables equal to the amount of the reduction as of April 13, 1998. No interest expense was recognized on the payable for any period between the modification date of April 13, 1998 and the date the debentures were exchanged for preferred stock. Proceeds from the Company's private placement of New Securities in the amount of $3,850,000 were used to pay off the Company's revolving line of credit. Additionally, holders of subordinated debt and warrant securities exchanged such securities for either Series A or Series B preferred stock. The fair value of each preferred stock series was determined as of the issuance date of the stock. The difference between the fair value of the Series A preferred stock granted of $1,769,000 and the carrying amount of the related subordinated debt security's balance exchanged of $3,000,000 was recognized as a gain on the extinguishment of debt, net of transaction expenses, in the amount of $1,231,000. The difference between the fair value of the Series B preferred stock series granted of $2,812,000 and the carrying amount of the related subordinated debt security's balance plus accrued interest exchanged of $2,828,000 was recognized as a gain on the extinguishment of debt, net of transaction expenses, in the amount of $16,000 with $8,000 of the gain on the exchange of notes held by principal shareholders recorded as a credit to additional paid-in capital. There was no gain or loss recognized on the conversion of the New Securities. (See Note 6) F-21 NOTE 13 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - ---------------------------------------------------------- Changes in assets and liabilities which increased (decreased) cash are as follows:
Year Ended ---------- January 29, 2000 January 30, 1999 January 31, 1998 ---------------- ---------------- ---------------- Accounts and other receivables ($ 97,000) ($ 180,000) $ 733,000 Merchandise inventories (3,897,000) 805,000 1,062,000 Other current assets (61,000) 319,000 217,000 Other non-current assets (1,168,000) (48,000) (2,000) Accounts payable and accrued expenses 5,736, 000 1,040,000 (3,641,000) Deferred rent (71,000) (176,000) 315,000 ----------- ----------- ------------ $ 442,000 $ 1,760,000 ($1,316,000) =========== =========== ============
Supplementary disclosure of cash flow information:
Fiscal 1999 Fiscal 1998 Fiscal 1997 ----------- ----------- ----------- Cash paid for income taxes $ 11,000 $ 3,000 $ 5,000 Cash paid for interest 447,000 483,000 954,000
Non-cash investing and financing activities:
Fiscal 1999 Fiscal 1998 Fiscal 1997 ----------- ----------- ----------- Conversion of Series B preferred stock to common stock $ 938,000 Issuance of common stock and warrants in connection with financing agreement 159,000 Preferred dividend accretion 301,000 $19,000 Exchange of subsidiary stock for software 1,243,000
NOTE 14 - SEGMENT INFORMATION - ----------------------------- The Company has two reportable segments; Direct-to-customers, which includes online and catalog operations, and Retail, which includes activities related to the Company's retail stores. Both segments sell products to meet the needs of the parents of infants and small children. The Direct-to-customers segment also sells products directed to older children through preteen. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes. The Company charges a management fee on inventory transferred from the Retail segment to the Direct-to- F-22 customers segment and a fee on services provided by the Retail segment on behalf of the Direct-to-customers segment. The Company's reportable segments have operations that offer the same or similar products but have a different method of delivery to its customers. Segment information for Fiscal 1999 is as follows:
Online Catalog Direct-to-Customers Retail Total --------------- --------------- -------------------- ----------------- ----------------- Net sales $ 7,394,000 $3,642,000 $11,036,000 $38,043,000 $ 49,079,000 Interest income 238,000 238,000 238,000 Interest expense 465,000 465,000 Depreciation 278,000 278,000 1,672,000 1,950,000 Non-cash compensation 220,000 220,000 1,794,000 2,014,000 Pre-opening costs 323,000 323,000 Minority interest 3,000,000 3,000,000 Store closing expense 151,000 151,000 Pre-tax loss (6,673,000) (303,000) (6,976,000) (3,798,000) (10,774,000) Total assets 4,294,000 252,000 4,546,000 26,181,000 30,727,000 Fixed asset additions 2,456,000 2,456,000 2,390,000 4,846,000
Segment information for Fiscal 1998 is as follows:
Catalog Retail Total -------------- ------------------ ----------------- Net Sales $4,736,000 $31,875,000 $36,611,000 Interest expense 640,000 640,000 Depreciation 18,000 1,470,000 1,488,000 Pre-opening costs 209,000 209,000 Store closing (income) (113,000) (113,000) Pre-tax loss (126,000) (6,743,000) (6,869,000) Total assets 252,000 17,419,000 17,671,000 Fixed asset additions 1,296,000 1,296,000
NOTE 15 -WARRANTS - ----------------- At January 29, 2000 there were 347,000 warrants outstanding to purchase RightStart.com common stock at $4.50 per share exercisable for five years and expiring in 2004. Also outstanding at January 29, 2000 were 136,500 warrants to purchase RightStart.com common stock at $11.25 per share exercisable for five years and expiring in 2004. These warrants were issued in connection with a strategic alliance with a third party. The value of the 136,500 warrants, using the Black-Sholes pricing model, was determined to be approximately $337,000 and will be amortized over the three-year term of the agreement. NOTE 16 - OTHER FINANCIAL DATA - ------------------------------ F-23 Allowance for Doubtful Accounts - ------------------------------- The Activity in the allowance for doubtful accounts was as follows:
Beginning Balance Provision Write-offs Ending Balance ----------------- --------- ---------- -------------- Fiscal 1997 $14,000 $12,000 ($9,000) $17,000 Fiscal 1998 17,000 15,000 (5,000) 27,000 Fiscal 1999 27,000 60,000 87,000
Accounts payable and accrued expenses - ------------------------------------- The components of accounts payable and accrued expenses are as follows:
Fiscal 1999 Fiscal 1998 ----------- ----------- Accounts Payable $5,963,000 $2,333,000 Accrued payroll and related expenses 504,000 431,000 Accrued merchandise costs 1,876,000 518,000 Accrued professional fees 485,000 62,000 Sales returns and allowances 175,000 69,000 Sales and use tax accruals 235,000 218,000 Other accrued expenses 328,000 191,000 ---------- ---------- $9,566,000 $3,822,000 ========== ==========
NOTE 17 - COMMITMENTS AND CONTINGENCIES - --------------------------------------- Future Advertising - ------------------ The Company typically commits to run advertising approximately three months in advance. As of January 29, 2000, the Company had commitments of approximately $800,000 for future advertising. In November 1999 the Subsidiary entered into a term sheet with an integrated media company. The term sheet contemplates that over the three-year term of the proposed agreement the Subsidiary would provide consideration approximating $13.7 million. F-24 Leases - ------ Since May 1, 1999, the Company has subleased office space on a month-to-month basis. Rent expense under this sublease totaled $151,000 for Fiscal 1999. The monthly rent cost is approximately $22,500 effective January 29, 2000. Legal Matters - ------------- The Company is involved in legal matters that arise in the normal course of business. Management is aware of no material claims or actions pending or threatened against the Company and the Subsidiary. NOTE 18 - SUBSEQUENT EVENT - -------------------------- In April 2000, the Subsidiary sold secured bridge notes to affiliates in the aggregate principal amount of $2,180,000 (the "Bridge Notes"), and warrants to purchase 109,000 shares of its common stock at an exercise price of $6.70 to provide funding until the Subsidiary can obtain additional equity financing. A default on the Bridge Notes would permit such holders to foreclose on the assets of the Subsidiary and require the Subsidiary, to the extent it has not already done so, to issue to the holders of the notes, additional warrants to purchase an aggregate of 8,720,000 shares, or approximately 48.9% of the outstanding common stock of the Subsidiary, at an exercise price of $0.25 per share. F-25 NOTE 19 - VALUATION RESERVES ----------------------------
Additional Balance at charged Balance at beginning to costs end Classification of period and expenses Deductions of period - ---------------------------------- ------------ -------------- ----------- ------------ Fiscal year ended January 29, 2000 - ---------------------------------- Allowance for deferred tax asset $7,728,000 $4,651,000 $12,379,000 Inventory reserve 68,000 439,000 $429,000 78,000 Allowance for sales returns 69,000 106,000 175,000 ------------ -------------- ----------- ------------ $7,865,000 $4,962,000 $195,000 $12,632,000 ============ ============== =========== ============ Fiscal year ended January 30, 1999 - ---------------------------------- Allowance for deferred tax asset $7,079,000 $649,000 $7,728,000 Inventory reserve 121,000 369,000 $422,000 68,000 Allowance for sales returns 69,000 69,000 ------------ -------------- ----------- ------------ $7,269,000 $1,018,000 $422,000 $7,865,000 ============ ============== =========== ============ Fiscal year ended January 31, 1998 - ---------------------------------- Allowance for deferred tax asset $3,280,000 $3,799,000 $7,079,000 Inventory reserve 81,000 425,000 $385,000 121,000 Allowance for sales returns 103,000 34,000 69,000 ------------ -------------- ----------- ------------ $3,464,000 $4,224,000 $419,000 $7,269,000 ============ ============== =========== ============
F-26 EX-4.1 2 WARRANT TO PURCHASE 5,000 SHARES-HELLER FINANCIAL EXHIBIT 4.1 No. of Stock Units: 5,000 Warrant No. A-1 WARRANT to Purchase Common Stock of The Right Start, Inc. THIS IS TO CERTIFY THAT Heller Financial, Inc., a Delaware corporation, or its registered assigns, is entitled to purchase from The Right Start Inc., a California corporation (hereinbelow called the "Company"), at any time on and ------- after the Closing Date, but not later than 5:00 p.m., Pacific Standard time, on January 18, 2005 (the "Expiration Date"), Five Thousand (5,000) Stock Units, in ---------------- whole or in part, at a purchase price per Stock Unit of $19.50, adjusted as provided below, all on the terms and conditions hereinbelow provided. This Warrant has been issued in accordance with a Subscription Agreement dated as of the date hereof between the Company and Heller Financial, Inc. (as amended from time to time, the "Subscription Agreement"). ---------------------- THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY REQUIRED REGISTRATION OR QUALIFICATION UNDER ANY STATE SECURITIES LAWS, OR THE PROPOSED TRANSACTION DOES NOT REQUIRE REGISTRATION OR QUALIFICATION UNDER FEDERAL OR STATE SECURITIES LAWS. Section 1. Certain Definitions. As used in this Warrant, unless the context ------------------- otherwise requires: "Affiliate" of any Person means a Person (1) that directly or indirectly --------- controls, or is controlled by, or is under common control with, such other Person, (2) that beneficially owns ten percent (10%) or more of the Voting Stock of such other Person, or (3) ten percent (10%) or more of the Voting Stock (or in the case of a Person which is not a corporation, ten percent (10%) or more of the equity interest) of which is owned by such other Person. The term 1 "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Appraised Value" shall mean the fair market value of all outstanding --------------- shares of Common Stock (on a fully diluted basis including any fractional shares and assuming the exercise in full of all then-outstanding options, warrants or other rights to purchase shares of Common Stock that are then currently exercisable at exercise prices less than the Current Market Price), as determined by a written appraisal prepared by an appraiser acceptable to the Company and the holders of Warrants evidencing a majority in number of the total number of Stock Units at the time purchasable upon the exercise of all then outstanding Warrants. "Fair market value" is defined for this purpose as the ----------------- price in a single transaction determined on a going-concern basis that would be agreed upon by the most likely hypothetical buyer for a 100% controlling interest in the equity capital of the Company (on a fully diluted basis including any fractional shares and assuming the exercise in full of all then- outstanding options, warrants or other rights to purchase shares of Common Stock that are then currently exercisable at exercise prices less than the Current Market Price), with consideration given to the effect of a noncompete covenant signed by the seller and employment agreements signed by key management personnel of the Company (and of its subsidiaries), each extending for a period of time considered sufficient by all parties to effect the transfer of goodwill from the seller to the buyer and disregarding any discounts for nonmarketability of Common Stock of the Company. In the event that the Company and said holders cannot, in good faith, agree upon an appraiser, then the Company, on the one hand, and said holders, on the other hand, shall each select an appraiser, the two appraisers so selected shall select a third appraiser who shall be directed to prepare such a written appraisal (the "Appraisal") and the term Appraised --------- Value shall mean the appraised value set forth in the Appraisal prepared in accordance with this definition. The fees and expenses of any appraisers shall be paid by the Company, except in the case where the valuation of any appraiser who renders an Appraisal is within ten percent (10%) of the value originally determined by the Board of Directors, in which case the holders shall pay the fees and expenses of any appraisers. In the event that the Company bears the cost of the appraisal process, such cost shall be deemed an account payable of the Company and shall be considered in the determination of the Appraised Value. "Board of Directors" shall mean either the board of directors of the ------------------ Company or any duly authorized committee of that board. "Business Day" shall mean any day other than a Saturday, Sunday or a day on ------------ which banks in the States of Illinois or California are required or permitted to close. "Commission" shall mean the Securities and Exchange Commission and any ---------- other similar or successor agency of the federal government administering the Securities Act and the Exchange Act. 2 "Common Stock" shall mean the Company's authorized Common Stock, no par ------------ value per share, irrespective of class unless otherwise specified, as constituted on the date of original issuance of this Warrant, and any stock into which such Common Stock may thereafter be changed, and shall also include stock of the Company of any other class, which is not preferred as to dividends or assets over any other class of stock of the Company issued to the holders of shares of stock upon any reclassification thereof. "Company" shall mean The Right Start, Inc., a California corporation. ------- "Current Market Price" per share of Common Stock for the purposes of any -------------------- provision of this Warrant at the date herein specified, shall be deemed to be the price determined pursuant to the first applicable of the following methods: (i) If the Common Stock is traded on a national securities exchange or is traded in the over-the-counter market, the Current Market Price per share of Common Stock shall be deemed to be the average of the daily market prices for the 20 consecutive Business Days immediately prior to such date. The market price for each such Business Day shall be (a) if the Common Stock is traded on a national securities exchange or in the over-the-counter market, its last sale price on the preceding Business Day on such national securities exchange or over-the-counter market or, if there was no sale on that day, the last sale price on the next preceding Business Day on which there was a sale or (b) if the Common Stock is quoted on The Nasdaq Stock Market, Inc. ("Nasdaq"), the last sale price reported on Nasdaq on the preceding Business Day or, if the Common Stock is an issue for which last sale prices are not reported on Nasdaq, the closing bid quotation on such day, but, in each of the next preceding two cases, if the relevant Nasdaq price or quotation did not exist on such day, then the price or quotation on the next preceding Business Day in which there was such a price or quotation. (ii) If the Current Market Price per share of Common Stock cannot be ascertained by any of the methods set forth in paragraph (i) immediately above, the Current Market Price per share of Common Stock shall be deemed to be the price equal to the quotient determined by dividing the Appraised Value by the number of outstanding shares of Common Stock (on a fully diluted basis including any fractional shares and assuming the exercise in full of all then-outstanding options, warrants or other rights to purchase shares of Common Stock that are then currently exercisable at exercise prices equal to or less than the Current Market Price). "Current Warrant Price" per share of Common Stock, for the purpose of any --------------------- provision of this Warrant at the date herein specified, shall mean the amount equal to the quotient resulting from dividing the Exercise Price in effect on such date by the number of shares (including any fractional share) of Common Stock comprising a Stock Unit on such date. 3 "Exchange Act" shall mean the Securities and Exchange Act of 1934, as ------------ amended, and any similar or successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at any applicable time. "Exercise Date" shall mean the date on which this Warrant is exercised from ------------- time to time in part or in whole, as such date is set forth on the applicable subscription form. "Exercise Price" shall mean the purchase price per Stock Unit as set forth -------------- on the first page of this Warrant on the date of first issuance of this Warrant and thereafter shall mean such dollar amount as shall result from the adjustments specified in Section 4. "Holder" means, initially, Heller Financial, Inc., a Delaware corporation, ------ and thereafter any Person that is or Persons that are the registered holder(s) of the Warrant or Warrant Stock as registered on the books of the Company. "Nonpreferred Stock" shall mean the Common Stock and shall also include ------------------ stock of the Company of any other class which is not preferred as to dividends or assets over any other class of stock of the Company and which is not subject to redemption. "Person" shall include an individual, a corporation, an association, a ------ partnership, a limited liability company, a trust or estate, a government, foreign or domestic, and any agency or political subdivision thereof, or any other entity. "Restricted Certificate" shall mean a certificate for Common Stock or a ---------------------- Warrant bearing the restrictive legend set forth in the preamble. "Restricted Securities" shall mean Restricted Stock and the Restricted --------------------- Warrant. "Restricted Stock" shall mean Common Stock evidenced by a Restricted ---------------- Certificate. "Restricted Warrant" shall mean a Warrant evidenced by a Restricted ------------------ Certificate. "Securities" shall mean the Warrant issued to the Holder, and the ---------- certificates and other instruments from time to time evidencing the same. "Securities Act" shall mean the Securities Act of 1933, as amended, and any -------------- similar or successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at any applicable time. "Stock Unit" shall constitute one share of Common Stock, as such Common ---------- Stock was constituted on the date hereof and thereafter shall constitute such number of shares 4 (including any fractional shares) of Common Stock as shall result from the adjustments specified in Section 4. "Subscription Agreement" has the meaning assigned to such term in the ---------------------- second paragraph of this Warrant. "Voting Stock" shall mean any equity security entitling the holder of such ------------- security to vote at meetings of shareholders except an equity security which entitles the holder of such security to vote only upon the occurrence of some contingency, unless that contingency shall have occurred and be continuing. "Warrant" shall mean this Warrant to purchase up to an aggregate of 5,000 ------- Stock Units initially issued to Heller Financial, Inc., a Delaware corporation, and all Warrants issued upon transfer, division or combination of, or in substitution therefor. "Warrant Stock" shall mean the shares of Common Stock purchasable by the ------------- holder of any Warrants upon the exercise thereof. Section 2. Exercise of Warrant. The holder of this Warrant may, at any ------------------- time on and after the date hereof, but not later than the Expiration Date, exercise this Warrant in whole at any time or in part from time to time for the number of Stock Units which such holder is then entitled to purchase hereunder. The Holder may exercise this Warrant, in whole or in part, by either of the following methods (or a combination thereof or as otherwise determined by the Company's Board of Directors): (a) the Holder may deliver to the Company at its office maintained pursuant to Section 13 for such purpose (i) a written notice of such Holder's election to exercise this Warrant, which notice shall specify the number of Stock Units to be purchased, (ii) this Warrant and (iii) a sum equal to the aggregate Exercise Price therefor in immediately available funds; or (b) the Holder may also exercise this Warrant, in whole or in part, in a "cashless" or "net issue" exercise by delivering to the Company at its office maintained pursuant to Section 13 for such purpose (i) a written notice of such Holder's election to exercise this Warrant, which notice shall specify the number of Stock Units to be delivered to such Holder and the number of Stock Units with respect to which this Warrant is being surrendered in payment of the aggregate Exercise Price for the Stock Units to be delivered to the Holder, and (ii) this Warrant. For purposes of this subparagraph (b), each Stock Unit as to which this Warrant is surrendered will be attributed a value on the Exercise Date equal to the product of (x) the Current Market Price per share of Common 5 Stock on the Exercise Date minus the Current Warrant Price per share of Common Stock on the Exercise Date, multiplied by (y) the number of shares of Common Stock then comprising a Stock Unit. Any notice required under this Section 2 may be in the form of a subscription set out at the end of this Warrant. Upon delivery thereof, the Company shall as promptly as practicable cause to be executed and delivered to such holder a certificate or certificates representing the aggregate number of fully-paid and nonassessable shares of Common Stock issuable upon such exercise. The stock certificate or certificates for Warrant Stock so delivered shall be in such denominations as may be specified in said notice and shall be registered in the name of such Holder or, subject to Section 9, such other name or names as shall be designated in said notice. Such certificate or certificates shall be deemed to have been issued and such Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares, including to the extent permitted by law the right to vote such shares or to consent or to receive notice as a stockholder, as of the time said notice is delivered to the Company as aforesaid. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of said certificate or certificates, deliver to such Holder a new Warrant dated the date it is issued, evidencing the rights of such Holder to purchase the remaining Stock Units called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, issue and delivery of stock certificates under this Section 2. All shares of Common Stock issuable upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable, and free from all liens and other encumbrances thereon. The Company shall not issue certificates for fractional shares of stock upon any exercise of this Warrant whenever, in order to implement the provisions of this Warrant, the issuance of such fractional shares is required. Instead, the Company shall pay cash in lieu of such fractional share upon such exercise. Section 3. Transfer, Division and Combination. Subject to Section 9, this ---------------------------------- Warrant and all rights hereunder are transferable, in whole or in part, on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the office of the Company maintained for such purpose pursuant to Section 13, together with (a) a written assignment in the form set out at the end of this Warrant duly executed by the Holder hereof or its agent or attorney, (b) a copy of the Subscription Agreement duly executed by an authorized representative of the transferee (substantially in the form executed by the Holder or in such other form as reasonably acceptable to counsel to the Company) and (c) payment of funds sufficient to pay any stock transfer taxes payable upon the making of such transfer. Upon such surrender, execution and payment, the Company shall, subject to Section 9, execute and deliver a new 6 Warrant or Warrants in the name of the assignee or assignees and in the denominations specified in such instrument of assignment, and this Warrant shall promptly be canceled. If and when this Warrant is assigned in blank (in case the restrictions on transferability in Section 9 shall have been terminated), the Company may (but shall not be obliged to) treat the bearer hereof as the absolute owner of this Warrant for all purposes and the Company shall not be affected by any notice to the contrary. This Warrant, if properly assigned in compliance with this Section 3 and Section 9, may be exercised by an assignee for the purchase of shares of Common Stock without having a new Warrant issued. This Warrant may, subject to Section 9, be divided upon presentation at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the holder hereof or its agent or attorney. Subject to compliance with the preceding paragraph and with Section 9, as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant to be divided or combined in accordance with such notice. The Company shall pay all expenses, taxes and other charges incurred by the Company in the performance of its obligations in connection with the preparation, issue and delivery of Warrants under this Section 3. The Company agrees to maintain at its aforesaid office books for the registration and transfer of the Warrants. Section 4. Adjustment of Stock Unit or Exercise Price. The number of ------------------------------------------ shares of Common Stock comprising a Stock Unit, and the Exercise Price per Stock Unit, shall be subject to adjustment from time to time as set forth in this Section 4 and in Section 5. The Company will not take any action with respect to its Nonpreferred Stock of any class requiring an adjustment pursuant to any of the following Subsections 4.1 or 4.3 without at the same time taking like action with respect to its Nonpreferred Stock of each other class. 4.1. Stock Dividends, Subdivisions and Combinations. In case at any time or ---------------------------------------------- from time to time the Company shall (a) pay a dividend payable in, or other distribution of, Nonpreferred Stock, or (b) subdivide its outstanding shares of Nonpreferred Stock into a larger number of shares of Nonpreferred Stock, or (c) combine its outstanding shares of Nonpreferred Stock into a smaller number of shares of Nonpreferred Stock, 7 then the number of shares of Common Stock comprising a Stock Unit immediately after the happening of any such event shall be adjusted automatically so as to consist of the number of shares of Common Stock which a record holder of the number of shares of Common Stock comprising a Stock Unit immediately prior to the happening of such event would own or be entitled to receive after the happening of such event; provided, however, that no such event may take place with respect to any shares of Nonpreferred Stock unless it shall also take place for all shares of Nonpreferred Stock. 4.2. Other Provisions Applicable to Adjustments. The following provisions ------------------------------------------ shall be applicable to the making of adjustments of the number of shares of Common Stock comprising a Stock Unit hereinbefore provided for in this Section 4: (a) When Adjustments to Be Made. The adjustments required by Section 4.1 --------------------------- shall be made whenever and as often as any specified event requiring an adjustment shall occur. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (b) Fractional Interests. In computing adjustments under this Section 4, -------------------- fractional interests in Nonpreferred Stock shall be taken into account to the nearest one-thousandth of a share. (c) When Adjustment Not Required. If the Company shall take a record of the ---------------------------- holders of its Nonpreferred Stock for the purpose of entitling them to receive a dividend or distribution and shall, thereafter and before the distribution thereof to shareholders, abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. 4.3. Merger, Consolidation or Disposition of Assets. In case the Company ---------------------------------------------- shall merge or consolidate into another corporation, or shall sell, transfer or otherwise dispose of all or substantially all of its property, assets or business to another corporation and pursuant to the terms of such merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation are to be received by or distributed to the holders of Nonpreferred Stock of the Company, then each holder of a Warrant shall have the right thereafter to receive, upon exercise of such Warrant, Stock Units each comprising the number of shares of common stock of the successor or acquiring corporation receivable upon or as a result of such merger, consolidation or disposition of assets by a holder of the number of shares of Nonpreferred Stock comprising a Stock Unit immediately prior to such event. If, pursuant to the terms of such merger, consolidation or disposition of assets, any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) are to be received by or distributed to the holders of Nonpreferred Stock of the Company, there shall be either, at the Holder's option, (i) a reduction of the Exercise Price equal to the amount applicable to the number of shares of Common Stock then comprising a Stock 8 Unit of any such cash and of the fair value of any and all such shares of stock or of other securities or property to be received by or distributed to the holders of Nonpreferred Stock of the Company, or (ii) such Holder shall have the right to receive, upon exercise of its Warrant, such cash, shares of stock or other securities or property of any nature as a holder of the number of shares of Nonpreferred Stock underlying a Stock Unit would have been entitled to receive upon the occurrence of such event. Such fair value shall be determined in good faith by the Board of Directors of the Company, provided that if such determination is objected to by the holders of Warrants evidencing a majority in number of the total number of Stock Units at the time purchasable upon the exercise of all then outstanding Warrants, such determination shall be made by an independent appraiser selected by the Company and said holders. In the event that the Company and said holders cannot, in good faith, agree upon an appraiser, then the Company, on the one hand, and said holders, on the other hand, shall each select an appraiser, the two appraisers so selected shall select a third appraiser who shall be directed to prepare such a written appraisal which shall be conclusive and binding on the parties. The fees and expenses of any appraisers shall be paid by the Company, except in the case where the valuation of any appraiser who renders an Appraisal is within ten percent (10%) of the value originally determined by the Board of Directors, in which case the holders shall pay the fees and expenses of any appraisers. In case of any such merger, consolidation or disposition of assets, the successor acquiring corporation shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all of the obligations and liabilities hereunder, subject to such modification as shall be necessary to provide for adjustments of Stock Units which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. For the purposes of this Section 4 "common stock of the successor or acquiring corporation" shall include stock ------------------------------------------------------ of such corporation of any class, that is not preferred as to dividends or assets over any other class of stock of such corporation and that is not subject to redemption, and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event, and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Subsection 4.3 shall similarly apply to successive mergers, consolidations or dispositions of assets. Section 5. Notice to Warrant Holders. ------------------------- 5.1. Notice of Adjustment of Stock Unit or Exercise Price. Whenever the ---------------------------------------------------- number of shares of Common Stock comprising a Stock Unit, or the price at which a Stock Unit may be purchased upon exercise of the Warrants, shall be adjusted pursuant to Section 4, the Company shall forthwith obtain a certificate signed by independent accountants, of recognized national standing, selected by the Company and reasonably acceptable to the Holder(s) of the Warrants, setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a statement of the fair value, as determined by the Board of Directors of the Company or by appraisal (if applicable), of any evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or 9 purchase rights referred to in Section 4.3) and specifying the number of shares of Common Stock comprising a Stock Unit and (if such adjustment was made pursuant to Section 4.3) describing the number and kind of any other shares of stock comprising a Stock Unit, and any change in the purchase price or prices thereof, after giving effect to such adjustment or change. The Company shall promptly, and in any case within three days after the making of such adjustment, cause a signed copy of such certificate to be delivered to each holder of a Warrant in accordance with Section 14. The Company shall keep at its office or agency, maintained for the purpose pursuant to Section 13, copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by any holder of a Warrant or any prospective purchaser of a Warrant designated by a holder thereof. 5.2. Notice of Certain Corporate Action. In case the Company shall propose ---------------------------------- (a) to pay any dividend payable in stock of any class to the holders of its Nonpreferred Stock or to make any other distribution to the holders of its Nonpreferred Stock (other than a cash dividend) or (b) to effect any consolidation, merger or sale, organic change, transfer or other disposition of all or substantially all of its property, assets or business, then in each such case, the Company shall deliver to each holder of a Warrant, in accordance with Section 14, a notice of such proposed action, which shall specify the date on which a record is to be taken for the purposes of such stock dividend, distribution or rights, consolidation, merger, sale, organic change or transfer is to take place and the date of participation therein by the holders of Nonpreferred Stock, if any such date is to be fixed, and shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action on the Nonpreferred Stock and the number and kind of any other shares of stock which will comprise a Stock Unit, and the purchase price or prices thereof, after giving effect to any adjustment which will be required as a result of such action. Such notice shall be so delivered as promptly as reasonably possible. Section 6. Reservation and Authorization of Common Stock. The Company shall --------------------------------------------- at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. All shares of Common Stock which shall be so issuable, when issued upon exercise of any Warrant or upon such conversion, as the case may be, shall be duly and validly issued, fully-paid, nonassessable, free of preemptive rights and free from all taxes, liens, charges and security interests. Section 7. Taking of Record; Stock and Warrant Transfer Books. In the case -------------------------------------------------- of all dividends or other distributions by the Company to the holders of its Nonpreferred Stock with respect to which any provision of Section 4 refers to the taking of a record of such holders, the Company will in each such case take such a record and will take such record as of the close of business on a Business Day. The Company will not at any time, except upon dissolution, liquidation or winding up or as otherwise may be required by law, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. 10 Section 8. Taxes. The Company will pay all taxes (other than federal, ----- state, local or foreign income taxes) which may be payable in connection with the execution and delivery of this Warrant or the issuance and sale of the Restricted Securities hereunder or in connection with any modification of the Restricted Securities and will save the Holder harmless without limitation as to time against any and all liabilities with respect to or resulting from any delay in paying, or omission to pay, such taxes. The obligations of the Company under this Section 8 shall survive any redemption, repurchase or acquisition of Restricted Securities by the Company. Section 9. Restrictions on Transferability. The Restricted Securities shall ------------------------------- not be transferable except upon the conditions specified in this Section 9. 9.1 Restrictions on Exercise, Transfer. This Warrant may not be exercised ---------------------------------- by a Holder hereof that qualifies as a "subsidiary" of a "bank holding company" (as such terms are defined in Section 225.2 of Regulation Y issued by the Board of Governors of the Federal Reserve System ("Regulation Y")) (a "BHC ------------ --- Subsidiary") unless such Holder advises the Company in writing that the exercise - ---------- of the Warrant by such Holder complies with Regulation Y and the Bank Holding Company Act of 1956, as amended (the "BHCA"). ---- Neither this Warrant nor any Warrant Stock shall be transferable without the prior written consent of the Company except (a) to an Affiliate of the Holder, (b) to a successor entity of the Holder as a result of a merger or consolidation with, or sale of all or substantially all of the stock or assets of, the Holder, (c) as is or may be required by the Holder to comply with any federal or state law or any rule or regulation of any governmental or public body or authority, or (d) in a public offering pursuant to an effective registration statement under the Securities Act or in an offering constituting an exempt transaction under Rule 144 or Rule 144A. At any time at which this Warrant, upon exercise, would result in a BHC Subsidiary owning or controlling five percent (5%) or more of the Company's Common Stock (including after taking into consideration any rebuttable presumptions of control contained in Section 225.31(d) of Regulation Y), this Warrant may not be transferred by such BHC Subsidiary unless the BHC Subsidiary advises the Company in writing that the transfer will be made: (i) in a widely dispersed public distribution; (ii) to a Person or group of Persons that already had "control" (as defined in Section 225.2 of Regulation Y) of the Company immediately prior to the transfer to such Person or group of Persons; (iii) in a private sale to a person independent from and unrelated to the BHC Subsidiary in which no Person or group of Persons acting in concert receives rights to acquire more than two percent (2%) of the Company's outstanding Common Stock; (iv) to a "broker" or "dealer" (as those terms are defined in Section 3(a) of the Exchange Act) for the purpose of conducting a wifely dispersed public distribution; or (v) in a transaction which has been approved by the Board of Governors of the Federal Reserve system or is otherwise not inconsistent with Regulation Y or the BHCA. Notwithstanding any other provision of this Warrant, if the Company redeems, purchases or otherwise acquires, directly or indirectly, or converts or takes any action with respect to the voting rights of, any shares of any class of its capital stock or any securities 11 convertible into or exchangeable for any shares of any class of its capital stock, so as to increase the proportion of the Company's Voting Stock which this Warrant entitles the Holder of this Warrant to purchase or which the holder of shares of Common Stock issuable hereunder then owns, then the Company shall notify such holder as to such action at least fifteen (15) Business Days prior to the taking of such action and the Notice and Repurchase Right shall be triggered. The following shall constitute the "Notice and Repurchase Right:" --------------------------- Holder shall have five (5) Business Days after receipt of such notice to determine whether, after giving effect to such action, such Holder would have a Regulatory Problem (as defined below). If Holder determines it would have a Regulatory Problem based thereon, Holder shall have ten (10) additional Business Days to demand the Company (in each case, either in whole or in part, as Holder may elect in its sole discretion) (i) repurchase such Holder's Common Stock or (ii) exchange such Holder's Common Stock for non-voting stock of the Company at the election of Holder (if such stock is then available and subject to applicable laws and regulations, including those of the exchange or stock market where the Company's securities are then listed), in each case, prior to the Company's taking of the action triggering such Regulatory Problem (and in each case, at the per-share price paid by such Holder to initially purchase such securities based on the closing price of the Common Stock on NASDAQ on January 3, 2000 in the case that the Company must repurchase such securities). If such Holder with a Regulatory Problem does not elect to have the Company repurchase any of its securities (or exchange any of such securities for non-voting stock, as the case may be) within such ten (10) Business Day-Period, then the Company shall be free to undertake such transaction. In addition, if the Company is a party to any merger, consolidation, recapitalization or other transaction pursuant to which the Holder of this Warrant or a Holder of share of Common Stock issuable hereunder would be required to take any Voting Stock, or any securities convertible into Voting Stock, which might reasonably be expected to cause such Holder to have a Regulatory Problem such event will again trigger the Notice and Repurchase Right set forth above. In the event that a Regulatory Problem exists and in lieu of exercise of the Notice and Repurchase Right, the Company agrees in good faith to amend this Warrant upon the request of the Holder in such a way so that the Regulatory Problem no longer exists, provided that the Company shall not be -------- required to agree to any amendment that would have a materially adverse effect on the Company's rights under this Warrant. For purposes of this paragraph, a Person will be deemed to have a "Regulatory Problem" when such Person or such ------------------ Person's Affiliates would own, or could reasonably be deemed to own, control or have power, directly or indirectly, over a greater quantity of securities of any kind issued by the Company than is permitted under any requirement of any governmental authority binding on such Person. 9.2 Compliance with Laws. Each of the Company and Holder agrees that any -------------------- such transfer shall be made in compliance with all applicable securities laws. 9.3 Restrictive Legend. Unless and until the Registrable Securities have ------------------ been registered under the Securities Act, this Warrant, each Warrant issued to any transferee of the Holder, each certificate for any Warrant Stock issued upon exercise of any Warrant and each 12 certificate for any Warrant Stock issued to any transferee of any such certificate, shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY REQUIRED REGISTRATION OR QUALIFICATION UNDER ANY STATE SECURITIES LAWS, OR THE PROPOSED TRANSACTION DOES NOT REQUIRE REGISTRATION OR QUALIFICATION UNDER FEDERAL OR STATE SECURITIES LAWS." Section 10. Limitation of Liability. No provision hereof, in the absence ----------------------- of affirmative action by the Holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of the Warrant Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. Section 11. Loss or Destruction of Warrant Certificates. Upon receipt of ------------------------------------------- evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security satisfactory to the Company (the original Holder's or any other institutional Holder's indemnity being satisfactory indemnity in the event of loss, theft or destruction of any Warrant owned by such institutional Holder), or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same aggregate number of shares of Common Stock. Section 12. Amendments. The terms of this Warrant may be amended, and the ---------- observance of any term therein may be waived, but only with the written consent of the holders of Warrants evidencing a majority in number of the total number of Stock Units at the time purchasable upon the exercise of all then outstanding Warrants, provided that no such action may change the number of shares of stock comprising a Stock Unit or the Exercise Price, without the written consent of the holders of Warrants evidencing 100% in number of the total number of Stock Units at the time purchasable upon the exercise of all then outstanding Warrants. For the purposes of determining whether the holders of outstanding Warrants entitled to purchase a requisite number of Stock Units at any time have taken any action authorized by this Warrant, any Warrants owned by the Company or any Affiliate of the Company (other than an institutional investor which may be deemed an Affiliate solely by reason of the ownership of Warrants) shall be deemed not to be outstanding. 13 Section 13. Office of the Company. So long as any Warrant remains --------------------- outstanding, the Company shall maintain an office where the Warrants may be presented for exercise, transfer, division or combination as in this Warrant provided. Such office shall be at 5388 Sterling Center Drive, Unit C, Westlake Village, California 91361, FAX: (818) 707-7132, unless and until the Company shall designate and maintain some other office for such purposes and deliver written notice thereof to the Holders of all outstanding Warrants. Section 14. Notices Generally. ----------------- 14.1. All communications (including all required or permitted notices) pursuant to the provisions hereof shall be in writing and shall be sent (i) to any registered Holder of any Warrants or Warrant Stock, to the address of such Holder as it appears in the stock or warrant ledger of the Company or at such other address as such Holder may have furnished in writing to the Company and (ii) to the Company, at the offices designated in Section 13 hereof. 14.2. Any notice shall be deemed to have been duly delivered when delivered by hand, if personally delivered, and if sent by mail to a party whose address is in the same country as the sender, one Business Day by nationally recognized express courier (postage prepaid), two Business Days after being deposited in the mail, postage prepaid, and if sent by recognized international courier, freight prepaid, with a copy sent by telecopier, to a party whose address is not in the same country as the sender, three Business Days after the later of (a) being telecopied and (b) delivery to such courier. Section 15. Governing Law. This Warrant shall be governed by and construed ------------- in accordance with the laws of the State of California (without regard to conflicts of law provisions thereof). 14 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name by its President or a Vice President and attested by its Secretary or an Assistant Secretary. Dated: January 18, 2000 THE RIGHT START, INC. /s/ Jerry R. Welch ------------------- By: Jerry R. Welch Its: President ATTEST: /s/ Gina M. Engelhard - ----------------------- Name: Gina M Engelhard Title: Secretary SUBSCRIPTION FORM (to be executed only upon exercise of Warrant) The undersigned registered owner of this Warrant irrevocably exercises this Warrant for and purchases Stock Units of The Right Start, Inc., a California corporation, purchasable with this Warrant, and herewith makes payment therefor (by check in the amount of $_____), or hereby tenders _______________ Stock Units as payment therefor, all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to _________________________ whose address is and, if such Stock Units shall not include all of the Stock Units issuable as provided in this Warrant that a new Warrant of like tenor and date for the balance of the Stock Units issuable thereunder be delivered to the undersigned. Dated: _____________, _____ ------------------------------- (Signature of Registered Owner) ------------------------------- (Street Address) ------------------------------- (City) (State) (Zip Code) ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of Stock Units set forth below: Number of Stock Units Name and Address of Assignee - --------------------- ---------------------------- and does hereby irrevocably constitute and appoint_______________________ Attorney to make sure transfer occurs on the books of The Right Start, Inc., a California corporation, maintained for the purpose, with full power of substitution in the premises. Dated: --------------------------- Signature --------------------------- Witness NOTICE: The signature to the assignment must correspond with the name as written upon the face of the Warrant in every particular instance, without alteration or enlargement or any change whatsoever. The signature to this assignment must be guaranteed by a bank or trust company having an office or correspondent in New York, New York, Los Angeles, California or Chicago, Illinois or by a firm having membership on the New York Stock Exchange. EX-4.4 3 WARRANT TO PURCHASE 136,500 SHARES-OXYGEN MEDIA EXHIBIT 4.4 No. of Stock Units: 136,500 Warrant No. B-1 --- WARRANT to Purchase Common Stock of RightStart.com Inc. THIS IS TO CERTIFY THAT Oxygen Media, LLC, a Delaware limited liability company, or its registered assigns, is entitled to purchase from RightStart.com Inc., a Delaware corporation (hereinbelow called the "Company"), at any time on and ------- after the Closing Date, but not later than 5:00 p.m., Pacific Standard time, on December 30, 2004 (the "Expiration Date"), One Hundred Thirty-six Thousand Five --------------- Hundred (136,500) Stock Units, in whole or in part, at a purchase price per Stock Unit of $11.25, adjusted as provided below, all on the terms and conditions hereinbelow provided. This Warrant has been issued in accordance with a Subscription Agreement dated as of the date hereof between the Company and Oxygen Media, LLC (the "Subscription Agreement"). ---------------------- THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY REQUIRED REGISTRATION OR QUALIFICATION UNDER ANY STATE SECURITIES LAWS, OR THE PROPOSED TRANSACTION DOES NOT REQUIRE REGISTRATION OR QUALIFICATION UNDER FEDERAL OR STATE SECURITIES LAWS. Section 1. Certain Definitions. As used in this Warrant, unless the ------------------- context otherwise requires: "Affiliate" of any Person means a Person (1) that directly or --------- indirectly controls, or is controlled by, or is under common control with, such other Person, (2) that beneficially owns ten percent (10%) or more of the Voting Stock of such other Person, or (3) ten percent (10%) or more of the Voting Stock (or in the case of a Person which is not a corporation, ten percent (10%) or more of the equity interest) of which is owned by such other Person. The term 1 "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Appraised Value" shall mean the fair market value of all ---------------- outstanding shares of Common Stock (on a fully diluted basis including any fractional shares and assuming the exercise in full of all then-outstanding options, warrants or other rights to purchase shares of Common Stock that are then currently exercisable at exercise prices less than the Current Market Price), as determined by a written appraisal prepared by an appraiser acceptable to the Company and the holders of Warrants evidencing a majority in number of the total number of Stock Units at the time purchasable upon the exercise of all then outstanding Warrants. "Fair market value" is defined for this purpose as the price in a single transaction determined on a going-concern basis that would be agreed upon by the most likely hypothetical buyer for a 100% controlling interest in the equity capital of the Company (on a fully diluted basis including any fractional shares and assuming the exercise in full of all then- outstanding options, warrants or other rights to purchase shares of Common Stock that are then currently exercisable at exercise prices less than the Current Market Price), with consideration given to the effect of a noncompete covenant signed by the seller and employment agreements signed by key management personnel of the Company (and of its subsidiaries), each extending for a period of time considered sufficient by all parties to effect the transfer of goodwill from the seller to the buyer and disregarding any discounts for nonmarketability of Common Stock of the Company. In the event that the Company and said holders cannot, in good faith, agree upon an appraiser, then the Company, on the one hand, and said holders, on the other hand, shall each select an appraiser, the two appraisers so selected shall select a third appraiser who shall be directed to prepare such a written appraisal (the "Appraisal") and the term Appraised Value shall mean the appraised value set forth in the Appraisal prepared in accordance with this definition. The fees and expenses of any appraisers shall be paid by the Company, except in the case where the valuation of any appraiser who renders an Appraisal is within ten percent (10%) of the value originally determined by the Board of Directors, in which case the holders shall pay the fees and expenses of any appraisers. In the event that the Company bears the cost of the appraisal process, such cost shall be deemed an account payable of the Company and shall be considered in the determination of the Appraised Value. "Board of Directors" shall mean either the board of directors ------------------ of the Company or any duly authorized committee of that board. "Business Day" shall mean any day other than a Saturday, Sunday or a ------------ day on which banks in the States of New York or California are required or permitted to close. "Commission" shall mean the Securities and Exchange Commission and any ---------- other similar or successor agency of the federal government administering the Securities Act and the Exchange Act. 2 "Common Stock" shall mean the Company's authorized Common Stock, $.01 ------------ par value per share, irrespective of class unless otherwise specified, as constituted on the date of original issuance of this Warrant, and any stock into which such Common Stock may thereafter be changed, and shall also include stock of the Company of any other class, which is not preferred as to dividends or assets over any other class of stock of the Company issued to the holders of shares of stock upon any reclassification thereof. "Company" shall mean RightStart.com Inc., a Delaware corporation. ------- "Current Market Price" per share of Common Stock for the purposes of -------------------- any provision of this Warrant at the date herein specified, shall be deemed to be the price determined pursuant to the first applicable of the following methods: (i) If the Common Stock is traded on a national securities exchange or is traded in the over-the-counter market, the Current Market Price per share of Common Stock shall be deemed to be the average of the daily market prices for 20 consecutive Business Days commencing 20 Business Days before such date. The market price for each such Business Day shall be (a) if the Common Stock is traded on a national securities exchange or in the over-the-counter market, its last sale price on the preceding Business Day on such national securities exchange or over-the-counter market or, if there was no sale on that day, the last sale price on the next preceding Business Day on which there was a sale, all as made available over the Consolidated Last Sale Reporting System of the CTA Plan (the "CLSRS") or, if the ----- Common Stock is not then eligible for reporting over the CLSRS, its last reported sale price on the preceding Business Day on such national securities exchange or, if there was no sale on that day, on the next preceding Business Day on which there was a sale reported on such exchange or (b) if the principal market for the Common Stock is the over-the-counter market, but the Common Stock is not then eligible for reporting over the CLSRS, but the Common Stock is quoted on The Nasdaq Stock Market, Inc. ("Nasdaq"), the last sale price reported on Nasdaq ------ on the preceding Business Day or, if the Common Stock is an issue for which last sale prices are not reported on Nasdaq, the closing bid quotation on such day, but, in each of the next preceding two cases, if the relevant Nasdaq price or quotation did not exist on such day, then the price or quotation on the next preceding Business Day in which there was such a price or quotation. (ii) If the Current Market Price per share of Common Stock cannot be ascertained by any of the methods set forth in paragraph (i) immediately above, the Current Market Price per share of Common Stock shall be deemed to be the price equal to the quotient determined by dividing the Appraised Value by the number of outstanding shares of Common Stock (on a fully diluted basis including any fractional shares and assuming the exercise in full of all then-outstanding options, warrants or other rights to purchase shares of Common Stock that are then currently exercisable at exercise prices equal to or less than the Current Market Price). 3 "Current Warrant Price" per share of Common Stock, for the purpose of --------------------- any provision of this Warrant at the date herein specified, shall mean the amount equal to the quotient resulting from dividing the Exercise Price in effect on such date by the number of shares (including any fractional share) of Common Stock comprising a Stock Unit on such date. "Exchange Act" shall mean the Securities and Exchange Act of 1934, as ------------ amended, and any similar or successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at any applicable time. "Exercise Price" shall mean the purchase price per Stock Unit as set -------------- forth on the first page of this Warrant on the Closing Date and thereafter shall mean such dollar amount as shall result from the adjustments specified in Section 4. "Holder" means, initially, Oxygen Media, LLC, a Delaware limited ----- liability company, and thereafter any Person that is or Persons that are the registered holder(s) of the Warrant or Warrant Stock as registered on the books of the Company. "Liquidity Event" shall mean (i) the sale of all or substantially all --------------- the assets of the Company for cash, (ii) a merger, acquisition, sale or recapitalization of the Company whereby the Holder of this Warrant is entitled by the terms of such transaction to receive cash in lieu of this Warrant or its exercise or (iii) the initial firm-commitment public offering by the Company of its Common Stock. "Nonpreferred Stock" shall mean the Common Stock and shall also ------------------ include stock of the Company of any other class which is not preferred as to dividends or assets over any other class of stock of the Company and which is not subject to redemption. "Person" shall include an individual, a corporation, an association, a ------ partnership, a limited liability company, a trust or estate, a government, foreign or domestic, and any agency or political subdivision thereof, or any other entity. "Restricted Certificate" shall mean a certificate for Common Stock or ---------------------- a Warrant bearing the restrictive legend set forth in the preamble. "Restricted Securities" shall mean Restricted Stock and the Restricted --------------------- Warrant. "Restricted Stock" shall mean Common Stock evidenced by a Restricted ---------------- Certificate. "Restricted Warrant" shall mean a Warrant evidenced by a Restricted ------------------ Certificate. 4 "Securities" shall mean the Warrant issued to the Holder, and the ---------- certificates and other instruments from time to time evidencing the same. "Securities Act" shall mean the Securities Act of 1933, as amended, -------------- and any similar or successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at any applicable time. "Stock Unit" shall constitute one share of Common Stock, as such ---------- Common Stock was constituted on the date hereof and thereafter shall constitute such number of shares (including any fractional shares) of Common Stock as shall result from the adjustments specified in Section 4. "Subscription Agreement" has the meaning assigned to such term in the ---------------------- second paragraph of this Warrant. "Voting Stock" shall mean any equity security entitling the holder of ------------ such security to vote at meetings of shareholders except an equity security which entitles the holder of such security to vote only upon the occurrence of some contingency, unless that contingency shall have occurred and be continuing. "Warrant" shall mean this Warrant to purchase up to an aggregate of ------- 136,500 Stock Units initially issued to Oxygen Media, LLC, a Delaware limited liability company, and all Warrants issued upon transfer, division or combination of, or in substitution therefor. "Warrant Stock" shall mean the shares of Common Stock purchasable by ------------- the holder of any Warrants upon the exercise thereof. Section 2. Exercise of Warrant. The holder of this Warrant may, at ------------------- any time on and after the date hereof, but not later than the Expiration Date, exercise this Warrant in whole at any time or in part from time to time for the number of Stock Units which such holder is then entitled to purchase hereunder. The Holder may exercise this Warrant, in whole or in part, by either of the following methods (or a combination thereof or as otherwise determined by the Company's Board of Directors): (a) the Holder may deliver to the Company at its office maintained pursuant to Section 13 for such purpose (i) a written notice of such Holder's election to exercise this Warrant, which notice shall specify the number of Stock Units to be purchased, (ii) this Warrant and (iii) a sum equal to the aggregate Exercise Price therefor in immediately available funds; or (b) on or after the occurrence of a Liquidity Event, the Holder may also exercise this Warrant, in whole or in part, in a "cashless" or "net 5 issue" exercise by delivering to the Company at its office maintained pursuant to Section 13 for such purpose (i) a written notice of such Holder's election to exercise this Warrant, which notice shall specify the number of Stock Units to be delivered to such Holder and the number of Stock Units with respect to which this Warrant is being surrendered in payment of the aggregate Exercise Price for the Stock Units to be delivered to the Holder, and (ii) this Warrant. For purposes of this subparagraph (b), each Stock Unit as to which this Warrant is surrendered will be attributed a value equal to the product of (x) the Current Market Price per share of Common Stock minus the Current Warrant Price per share of Common Stock, multiplied by (y) the number of shares of Common Stock then comprising a Stock Unit. Any notice required under this Section 2 may be in the form of a subscription set out at the end of this Warrant. Upon delivery thereof, the Company shall as promptly as practicable cause to be executed and delivered to such holder a certificate or certificates representing the aggregate number of fully-paid and nonassessable shares of Common Stock issuable upon such exercise. The stock certificate or certificates for Warrant Stock so delivered shall be in such denominations as may be specified in said notice and shall be registered in the name of such Holder or, subject to Section 9, such other name or names as shall be designated in said notice. Such certificate or certificates shall be deemed to have been issued and such Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares, including to the extent permitted by law the right to vote such shares or to consent or to receive notice as a stockholder, as of the time said notice is delivered to the Company as aforesaid. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of said certificate or certificates, deliver to such Holder a new Warrant dated the date it is issued, evidencing the rights of such Holder to purchase the remaining Stock Units called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, issue and delivery of stock certificates under this Section 2. All shares of Common Stock issuable upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable, and free from all liens and other encumbrances thereon. The Company will from time to time take all such action as may be necessary to assure that the par value per share of the unissued Common Stock acquirable upon exercise of this Warrant is at all times equal to or less than the Exercise Price then in effect. The Company shall not issue certificates for fractional shares of stock upon any exercise of this Warrant whenever, in order to implement the provisions of this Warrant, the 6 issuance of such fractional shares is required. Instead, the Company shall pay cash in lieu of such fractional share upon such exercise. Section 3. Transfer, Division and Combination. Subject to Section 9, ---------------------------------- this Warrant and all rights hereunder are transferable, in whole or in part, on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the office of the Company maintained for such purpose pursuant to Section 13, together with (a) a written assignment in the form set out at the end of this Warrant duly executed by the Holder hereof or its agent or attorney, (b) a copy of the Subscription Agreement duly executed by an authorized representative of the transferee (substantially in the form executed by the Holder or in such other form as reasonably acceptable to counsel to the Company) and (c) payment of funds sufficient to pay any stock transfer taxes payable upon the making of such transfer. Upon such surrender, execution and payment, the Company shall, subject to Section 9, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denominations specified in such instrument of assignment, and this Warrant shall promptly be canceled. If and when this Warrant is assigned in blank (in case the restrictions on transferability in Section 9 shall have been terminated), the Company may (but shall not be obliged to) treat the bearer hereof as the absolute owner of this Warrant for all purposes and the Company shall not be affected by any notice to the contrary. This Warrant, if properly assigned in compliance with this Section 3 and Section 9, may be exercised by an assignee for the purchase of shares of Common Stock without having a new Warrant issued. This Warrant may, subject to Section 9, be divided upon presentation at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the holder hereof or its agent or attorney. Subject to compliance with the preceding paragraph and with Section 9, as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant to be divided or combined in accordance with such notice. The Company shall pay all expenses, taxes and other charges incurred by the Company in the performance of its obligations in connection with the preparation, issue and delivery of Warrants under this Section 3. The Company agrees to maintain at its aforesaid office books for the registration and transfer of the Warrants. Section 4. Adjustment of Stock Unit or Exercise Price. The number of ------------------------------------------ shares of Common Stock comprising a Stock Unit, and the Exercise Price per Stock Unit, shall be subject to adjustment from time to time as set forth in this Section 4 and in Section 5. The Company will not take any action with respect to its Nonpreferred Stock of any class requiring an adjustment pursuant to any of the following Subsections 4.1 or 4.3 without at the same time taking like action with respect to its Nonpreferred Stock of each other class. 7 4.1. Stock Dividends, Subdivisions and Combinations. In case at any ---------------------------------------------- time or from time to time the Company shall (a) take a record of the holders of its Nonpreferred Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Nonpreferred Stock, or (b) subdivide its outstanding shares of Nonpreferred Stock into a larger number of shares of Nonpreferred Stock, or (c) combine its outstanding shares of Nonpreferred Stock into a smaller number of shares of Nonpreferred Stock, then the number of shares of Common Stock comprising a Stock Unit immediately after the happening of any such event shall be adjusted so as to consist of the number of shares of Common Stock which a record holder of the number of shares of Common Stock comprising a Stock Unit immediately prior to the happening of such event would own or be entitled to receive after the happening of such event; provided, however, that no such event may take place with respect to any shares of Nonpreferred Stock unless it shall also take place for all shares of Nonpreferred Stock. 4.2. Other Provisions Applicable to Adjustments. The following ------------------------------------------ provisions shall be applicable to the making of adjustments of the number of shares of Common Stock comprising a Stock Unit hereinbefore provided for in this Section 4: (a) When Adjustments to Be Made. The adjustments required by Section --------------------------- 4.1 shall be made whenever and as often as any specified event requiring an adjustment shall occur. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (b) Fractional Interests. In computing adjustments under this Section -------------------- 4, fractional interests in Nonpreferred Stock shall be taken into account to the nearest one-thousandth of a share. (c) When Adjustment Not Required. If the Company shall take a record ---------------------------- of the holders of its Nonpreferred Stock for the purpose of entitling them to receive a dividend or distribution and shall, thereafter and before the distribution thereof to shareholders, abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. 4.3. Merger, Consolidation or Disposition of Assets. In case ---------------------------------------------- the Company shall merge or consolidate into another corporation, or shall sell, transfer or otherwise dispose of all or 8 substantially all of its property, assets or business to another corporation and pursuant to the terms of such merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation are to be received by or distributed to the holders of Nonpreferred Stock of the Company, then each holder of a Warrant shall have the right thereafter to receive, upon exercise of such Warrant, Stock Units each comprising the number of shares of common stock of the successor or acquiring corporation receivable upon or as a result of such merger, consolidation or disposition of assets by a holder of the number of shares of Nonpreferred Stock comprising a Stock Unit immediately prior to such event. If, pursuant to the terms of such merger, consolidation or disposition of assets, any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) are to be received by or distributed to the holders of Nonpreferred Stock of the Company, there shall be either, at the Holder's option, (i) a reduction of the Exercise Price equal to the amount applicable to the number of shares of Common Stock then comprising a Stock Unit of any such cash and of the fair value of any and all such shares of stock or of other securities or property to be received by or distributed to the holders of Nonpreferred Stock of the Company, or (ii) such Holder shall have the right to receive, upon exercise of its Warrant, such cash, shares of stock or other securities or property of any nature as a holder of the number of shares of Nonpreferred Stock underlying a Stock Unit would have been entitled to receive upon the occurrence of such event. Such fair value shall be determined in good faith by the Board of Directors of the Company, provided that if such determination is objected to by the holders of Warrants evidencing a majority in number of the total number of Stock Units at the time purchasable upon the exercise of all then outstanding Warrants, such determination shall be made by an independent appraiser selected by the Company and said holders. In the event that the Company and said holders cannot, in good faith, agree upon an appraiser, then the Company, on the one hand, and said holders, on the other hand, shall each select an appraiser, the two appraisers so selected shall select a third appraiser who shall be directed to prepare such a written appraisal which shall be conclusive and binding on the parties. The fees and expenses of any appraisers shall be paid by the Company, except in the case where the valuation of any appraiser who renders an Appraisal is within ten percent (10%) of the value originally determined by the Board of Directors, in which case the holders shall pay the fees and expenses of any appraisers. In case of any such merger, consolidation or disposition of assets, the successor acquiring corporation shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all of the obligations and liabilities hereunder, subject to such modification as shall be necessary to provide for adjustments of Stock Units which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. For the purposes of this Section 4 "common stock of the successor or acquiring corporation" shall ------------------------------------------------------ include stock of such corporation of any class, that is not preferred as to dividends or assets over any other class of stock of such corporation and that is not subject to redemption, and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event, and any warrants or other rights to subscribe for or purchase any 9 such stock. The foregoing provisions of this Subsection 4.3 shall similarly apply to successive mergers, consolidations or dispositions of assets. Section 5. Notice to Warrant Holders. ------------------------- 5.1. Notice of Adjustment of Stock Unit or Exercise Price. ------------------------------------------------------- Whenever the number of shares of Common Stock comprising a Stock Unit, or the price at which a Stock Unit may be purchased upon exercise of the Warrants, shall be adjusted pursuant to Section 4, the Company shall forthwith obtain a certificate signed by independent accountants, of recognized national standing, selected by the Company and reasonably acceptable to the Holder(s) of the Warrants, setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a statement of the fair value, as determined by the Board of Directors of the Company or by appraisal (if applicable), of any evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights referred to in Section 4.3) and specifying the number of shares of Common Stock comprising a Stock Unit and (if such adjustment was made pursuant to Section 4.3) describing the number and kind of any other shares of stock comprising a Stock Unit, and any change in the purchase price or prices thereof, after giving effect to such adjustment or change. The Company shall promptly, and in any case within three days after the making of such adjustment, cause a signed copy of such certificate to be delivered to each holder of a Warrant in accordance with Section 14. The Company shall keep at its office or agency, maintained for the purpose pursuant to Section 13, copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by any holder of a Warrant or any prospective purchaser of a Warrant designated by a holder thereof. 5.2. Notice of Certain Corporate Action. In case the Company shall ---------------------------------- propose (a) to pay any dividend payable in stock of any class to the holders of its Nonpreferred Stock or to make any other distribution to the holders of its Nonpreferred Stock (other than a cash dividend) or (b) to effect any consolidation, merger or sale, organic change, transfer or other disposition of all or substantially all of its property, assets or business, then in each such case, the Company shall deliver to each holder of a Warrant, in accordance with Section 14, a notice of such proposed action, which shall specify the date on which a record is to be taken for the purposes of such stock dividend, distribution or rights, consolidation, merger, sale, organic change or transfer is to take place and the date of participation therein by the holders of Nonpreferred Stock, if any such date is to be fixed, and shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action on the Nonpreferred Stock and the number and kind of any other shares of stock which will comprise a Stock Unit, and the purchase price or prices thereof, after giving effect to any adjustment which will be required as a result of such action. Such notice shall be so delivered as promptly as reasonably possible. Section 6. Reservation and Authorization of Common Stock. The Company --------------------------------------------- shall at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in 10 full of all outstanding Warrants. All shares of Common Stock which shall be so issuable, when issued upon exercise of any Warrant or upon such conversion, as the case may be, shall be duly and validly issued, fully-paid and nonassessable. Section 7. Taking of Record; Stock and Warrant Transfer Books. In the -------------------------------------------------- case of all dividends or other distributions by the Company to the holders of its Nonpreferred Stock with respect to which any provision of Section 4 refers to the taking of a record of such holders, the Company will in each such case take such a record and will take such record as of the close of business on a Business Day. The Company will not at any time, except upon dissolution, liquidation or winding up or as otherwise may be required by law, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. Section 8. Taxes. The Company will pay all taxes (other than federal, ----- state, local or foreign income taxes) which may be payable in connection with the execution and delivery of this Warrant or the issuance and sale of the Restricted Securities hereunder or in connection with any modification of the Restricted Securities and will save the Holder harmless without limitation as to time against any and all liabilities with respect to or resulting from any delay in paying, or omission to pay, such taxes. The obligations of the Company under this Section 8 shall survive any redemption, repurchase or acquisition of Restricted Securities by the Company. Section 9. Restrictions on Transferability. The Restricted ------------------------------- Securities shall not be transferable except upon the conditions specified in this Section 9. 9.1 Transfer to an Affiliate. The Holder shall have the right to ------------------------ transfer any Restricted Securities to any Affiliate of the Holder, in each case free of the restrictions imposed by this Section 9 other than the requirement as to the legending of the certificates for such Restricted Securities specified in Section 9.3. No opinion of counsel shall be required for a transfer of Restricted Securities to an Affiliate of the Holder. 9.2 Transfer to a Non-Affiliate. The Holder and his or her or her --------------------------- subsequent transferees shall have the right to transfer any Restricted Securities to a non-Affiliate of Holder as follows: (a) Prior to any transfer or attempted transfer of any Restricted Securities to a non-Affiliate of Holder, the holder of such Restricted Certificate shall give written notice to the Company of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in reasonable detail. (b) Upon receipt of such notice, the Company may request an opinion of counsel of a transferring holder to the effect that such proposed transfer may be effected without registration under the Securities Act. Upon receipt of such opinion, or if the Company does not request such an opinion, within five (5) Business Days after receiving notice of the proposed transfer, the Company shall, as promptly as practicable, so notify the holder of such Restricted 11 Certificate and such holder shall thereupon be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by such holder to the Company. Each certificate evidencing the Restricted Securities thus to be transferred (and each certificate evidencing any untransferred balance of the Restricted Securities evidenced by such Restricted Certificate) shall bear the restrictive legend set forth in Section 9.3, unless in the opinion of the Company or the opinion of such counsel, if requested, pursuant to Rule 144(k) of the Securities Act or otherwise, such legend is not required in order to ensure compliance with the Securities Act. The fees and expenses of counsel for any such opinion shall be paid by the Company. 9.3 Restrictive Legend. Unless and until the Restricted ------------------- Securities have been registered under the Securities Act, this Warrant, each Warrant issued to any transferee of the Holder, each certificate for any Warrant Stock issued upon exercise of any Warrant and each certificate for any Warrant Stock issued to any transferee of any such certificate, shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY REQUIRED REGISTRATION OR QUALIFICATION UNDER ANY STATE SECURITIES LAWS, OR THE PROPOSED TRANSACTION DOES NOT REQUIRE REGISTRATION OR QUALIFICATION UNDER FEDERAL OR STATE SECURITIES LAWS." Section 10. Limitation of Liability. No provision hereof, in the ----------------------- absence of affirmative action by the Holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of the Warrant Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. Section 11. Loss or Destruction of Warrant Certificates. Upon receipt ------------------------------------------- of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security satisfactory to the Company (the original Holder's or any other institutional Holder's indemnity being satisfactory indemnity in the event of loss, theft or destruction of any Warrant owned by such institutional Holder), or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same aggregate number of shares of Common Stock. Section 12. Amendments. The terms of this Warrant may be amended, ---------- and the observance of any term therein may be waived, but only with the written consent of the holders 12 of Warrants evidencing a majority in number of the total number of Stock Units at the time purchasable upon the exercise of all then outstanding Warrants, provided that no such action may change the number of shares of stock comprising a Stock Unit or the Exercise Price, without the written consent of the holders of Warrants evidencing 100% in number of the total number of Stock Units at the time purchasable upon the exercise of all then outstanding Warrants. For the purposes of determining whether the holders of outstanding Warrants entitled to purchase a requisite number of Stock Units at any time have taken any action authorized by this Warrant, any Warrants owned by the Company or any Affiliate of the Company (other than an institutional investor which may be deemed an Affiliate solely by reason of the ownership of Warrants) shall be deemed not to be outstanding. Section 13. Office of the Company. So long as any Warrant remains --------------------- outstanding, the Company shall maintain an office where the Warrants may be presented for exercise, transfer, division or combination as in this Warrant provided. Such office shall be at 5388 Sterling Center Drive, Unit C, Westlake Village, California 91361, FAX: (818) 707-7132, unless and until the Company shall designate and maintain some other office for such purposes and deliver written notice thereof to the Holders of all outstanding Warrants. Section 14. Notices Generally. ----------------- 14.1. All communications (including all required or permitted notices) pursuant to the provisions hereof shall be in writing and shall be sent, to any registered Holder of any Warrants or Warrant Stock, to the address of such Holder as it appears in the stock or warrant ledger of the Company or at such other address as such Holder may have furnished in writing to the Company. 14.2. Any notice shall be deemed to have been duly delivered when delivered by hand, if personally delivered, and if sent by mail to a party whose address is in the same country as the sender, two Business Days after being deposited in the mail, postage prepaid, and if sent by recognized international courier, freight prepaid, with a copy sent by telecopier, to a party whose address is not in the same country as the sender, three Business Days after the later of (a) being telecopied and (b) delivery to such courier. Section 15. Governing Law. This Warrant shall be governed by and ------------- construed in accordance with the laws of the State of Delaware (without regard to conflicts of law provisions thereof). 13 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name by its President and attested by its Senior Vice President. Dated: December 30, 1999 RIGHTSTART.COM INC. /s/ Jerry R. Welch ------------------------------- By: Jerry R. Welch Its: President ATTEST: /s/ Kendrick F. Royer - ------------------------------------------------- Name: Kendrick F. Royer Title: Senior Vice President and General Counsel SUBSCRIPTION FORM (to be executed only upon exercise of Warrant) The undersigned registered owner of this Warrant irrevocably exercises this Warrant for and purchases Stock Units of RightStart.com Inc., a Delaware corporation, purchasable with this Warrant, and herewith makes payment therefor (by check in the amount of $_____), or hereby tenders _______________ Stock Units as payment therefor, all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to _______________ _________________________ whose address is __________________________________ __________________________________________________________________________and, if such Stock Units shall not include all of the Stock Units issuable as provided in this Warrant that a new Warrant of like tenor and date for the balance of the Stock Units issuable thereunder be delivered to the undersigned. Dated: _____________, _____ ------------------------------- (Signature of Registered Owner) ------------------------------- (Street Address) ------------------------------- (City) (State) (Zip Code) ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of Stock Units set forth below: Number of Stock Units Name and Address of Assignee - --------------------- ---------------------------- and does hereby irrevocably constitute and appoint ______________________ Attorney to make sure transfer occurs on the books of RightStart.com Inc., a Delaware corporation, maintained for the purpose, with full power of substitution in the premises. Dated: --------------------------- Signature --------------------------- Witness NOTICE: The signature to the assignment must correspond with the name as written upon the face of the Warrant in every particular instance, without alteration or enlargement or any change whatsoever. The signature to this assignment must be guaranteed by a bank or trust company having an office or correspondent in New York, New York or Los Angeles, California or by a firm having membership on the New York Stock Exchange. EX-10.19 4 CONSENT OF HELLER FINANCIAL, INC. EXHIBIT 10.19 July 8, 1999 The Right Start, Inc. 5388 Sterling Center Drive Unit C Westlake Village, CA 91361 Attention: President Re: Consent to transactions relating to RightStart.com Inc. ------------------------------------------------------- and modification of Loan Agreement ---------------------------------- Ladies and Gentlemen: The Right Start, Inc. (the "Borrower") is a party to that certain Loan and Security Agreement dated as of November 14, 1996, as amended, waived or otherwise modified prior to the date hereof (the "Loan Agreement") with Heller Financial, Inc., as lender ("Lender"). Capitalized terms used herein without definition shall have the meanings set forth in the Loan Agreement. At the request of Borrower, Lender has previously consented to Borrower's forming a new subsidiary, RightStart.com Inc., a Delaware corporation (the "New Subsidiary"), to engage in outline retailing of Borrower's products. Borrower and New Subsidiary now propose to enter into the following transactions in connection with the capitalization and operations of New Subsidiary (collectively, the "Transactions"): 1. Borrower may contribute to New Subsidiary the assets described on Exhibit A hereto (the "Transferred Assets"). - --------- 2. New Subsidiary will issue to Sierra Ventures VII LP and Palomar Ventures (the "Investors") an aggregate of 3,333,333 shares of its Series A Preferred Stock, representing an interest in approximately 33% of the outstanding equity interests of New Subsidiary, all pursuant to that certain Series A Preferred Stock Purchase Agreement in the form attached hereto as Exhibit B (the "Purchase Agreement"), with the Preferred Stock having the - --------- rights, preferences and privileges set forth on the exhibits thereto. New Subsidiary, the Investors and Borrower will enter into that certain Investors' Rights Agreement in the form attached hereto as Exhibit C (the "Rights --------- Agreement"). 3. Borrower and New Subsidiary will enter into that certain Management Services Agreement in the form attached hereto as Exhibit D (the --------- "Services Agreement"). 4. Borrower and New Subsidiary will enter into that certain Intellectual Property Agreement in the form attached hereto as Exhibit E (the --------- "IP Agreement"). Borrower has requested that Lender consent to the Transactions, and agree to release its Lien on and security interest in the Transferred Assets in order to permit the Transactions to be consummated and that Lender agree that New Subsidiary shall not be considered a "Subsidiary" under the Loan Agreement and, therefore, not subject to its restrictions. Lender hereby consents to the Transactions, notwithstanding the restrictions contained in subsections 7.3(A) (Transfers), 7.4 (Investments and Loans), 7.8 (Transactions with Affiliates), 7.10 (Conduct of Business) and 7.13 (New Subsidiaries) of the Loan Agreement subject to the following conditions: ------- -- (a) Borrower shall execute and deliver to Lender a Pledge Agreement, in form and substance satisfactory to Lender, pledging to Lender the stock of New Subsidiary owned by it, and shall deliver the shares of such stock to Lender with stock assignments duly executed in blank; (b) Borrower shall execute and deliver to Lender an amendment to the Trademark Security Agreement, in form and substance satisfactory to Lender, granting to Lender Liens on the Intellectual Property acquired by Borrower after the Closing Date; (c) This consent to the consummation of the Transactions shall be deemed a consent only to the investment by Borrower in New Subsidiary consisting of the Transferred Assets, and not to any additional investment in New Subsidiary after such contribution, whether in the form of a capital contribution, loans or advances or the purchase of additional stock in New Subsidiary (pursuant to the terms of the Rights Agreement or otherwise) or to any guarantee or other credit support by Borrower of any obligations of New Subsidiary; (d) All Inventory sold by Borrower to New Subsidiary shall be segregated from the Inventory owned by Borrower, and Borrower's and New Subsidiary's books and records shall clearly show the ownership of such Inventory, it being understood that Inventory owned by New Subsidiary shall not be Eligible Inventory; (e) Borrower shall deliver to Lender an agreement of New Subsidiary, in form and substance satisfactory to Lender, acknowledging that Lender has a Lien on certain Intellectual Property, including that Intellectual Property licensed to New Subsidiary pursuant to the IP Agreement, and that Lender shall be free to enforce its rights in such Intellectual Property; (f) Borrower shall deliver to Lender such amendments to the Schedules to the Loan Documents as are necessary to reflect the consummation of the Transactions; (g) Both before and after giving effect to the Transactions, no Default or Event of Default shall have occurred and be continuing, and all representations and warranties of Borrower contained in the Loan Documents, after giving effect to the amendments referred to in paragraph (f) above, shall be true and correct in all material respects, the closing of the Transactions constituting Borrower's representation and warranty that the matters set forth in this paragraph are true and correct; and 2 (h) Borrower shall pay to Lender all reasonable costs and expenses, including attorneys' fees and filing or recording fees, incurred in connection with this letter and the Transactions. Lender further agrees that, for all purposes of the Loan Agreement (including without limitation the financial covenants contained in Section 6), New Subsidiary shall not be a "Subsidiary". In consideration of Lender's consent and agreements contained in this letter, Borrower agrees that it shall at all times own and control at least fifty-one percent (51%) of the shares of capital stock of New Subsidiary entitled to vote for the election of a majority of the members of the board of directors of New Subsidiary, and shall at all times have the right to appoint at least the same number of members of the board of directors of New Subsidiary as the Investors. Any breach of the agreements set forth in this paragraph shall constitute an Event of Default under the Loan Agreement. If the terms of this consent are acceptable to you, please execute and deliver to Lender a copy of this consent, evidencing your acceptance of its terms. By your signature below, Borrower agrees that, except to the extent expressly set forth herein, nothing in this consent shall be construed to be an amendment, waiver, modification or release of any provisions of the Loan Documents, each of which shall remain in full force and effect. Very truly yours, HELLER FINANCIAL, INC. By: /s/ Barry S. O'Neall ------------------------ Name: Barry S. O'Neall ---------------------- Title: Sr. Vice President --------------------- ACCEPTED AND AGREED this 9th day of July, 1999 THE RIGHT START,INC. By: /s/ Gina Engelhard --------------------------- Name: Gina Engelhard ------------------------- Title: Chief Financial Officer ------------------------ 3 EX-10.21 5 SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT EXHIBIT 10.21 SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT AND SECOND AMENDMENT TO SECURED CAPEX NOTE This SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT AND SECOND AMENDMENT TO SECURED CAPEX NOTE (this "Amendment") is dated as of January 18, 2000, and --------- entered into by and between THE RIGHT START, INC., a California corporation ("Borrower"), and HELLER FINANCIAL, INC. ("Lender"). -------- ------ RECITALS WHEREAS, Borrower and Lender have entered into that certain Loan and Security Agreement dated as of November 14, 1996, as amended by that certain First Amendment to Loan and Security Agreement and Limited Waiver and Consent dated as of April 30, 1997, as further amended by that certain Second Amendment to Loan and Security Agreement and Limited Waiver dated July 10, 1997, as further amended by that certain Third Amendment to Loan and Security Agreement, Limited Waiver and Consent dated September 3, 1997, as further amended by that certain Fourth Amendment to Loan and Security Agreement and Limited Consent effective as of January 30, 1998, as further amended by that certain Waiver and Fifth Amendment to Loan and Security Agreement dated as of December 9, 1998, as further amended by that certain Sixth Amendment to the Loan and Security Agreement and First Amendment to Secured CAPEX Note dated as of November 8, 1999 (as so amended, the "Loan Agreement"); -------------- WHEREAS, in connection with the Loan Agreement, Borrower made that certain Secured CAPEX Note dated November 14, 1996, in favor of Lender in the principal amount of $3,000,000, as amended by that certain Sixth Amendment to the Loan and Security Agreement and First Amendment to Secured CAPEX Note dated as of November 8, 1999 (as so amended, the "CAPEX Note"); ---------- WHEREAS, Borrower has requested certain amendments to the Loan Documents (as defined in the Loan Agreement), including that the term of each of the Loan Agreement and the CAPEX Note be extended; WHEREAS, Lender is willing to grant such extension and other amendments, all upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of these premises, the agreements, provisions and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Defined Terms. Capitalized terms used but not otherwise ------------- defined herein shall have the meanings given in the Loan Agreement. 2. Amendment to Subsection 1.1 of the Loan Agreement. The ------------------------------------------------- following defined terms are added alphabetically to subsection 1.1 of the Loan -------------- Agreement: "Seventh Amendment Effective Date" means January 18, 2000." -------------------------------- "Subscription Agreement" means that certain Subscription ---------------------- Agreement dated as of January 18, 2000, regarding the issuance to Lender of 5,130 shares of the common stock of Borrower." "Warrant" means the warrant to purchase 5,000 shares of the ------- common stock of Borrower issued or to be issued to Heller Financial, Inc." 3. Amendment to Subsection 2.1(C) of the Loan Agreement. Subsection ---------------------------------------------------- ---------- 2.1(C) is hereby deleted in its entirety and the following substituted therefor: - ------ "(C) CAPEX Line. Subject to the terms and conditions of this ---------- Agreement and in reliance upon the representations and warranties of Borrower and the other Loan Parties set forth herein and in the other Loan Documents, Lender agrees to lend to Borrower each CAPEX Advance from time to time requested by Borrower to be applied to Permitted CAPEX Expenditures, the aggregate amount of which shall not exceed $3,000,000; provided that on the Seventh Amendment Effective Date, Borrower hereby requests, and Lender agrees to lend to Borrower, CAPEX Advances in the amount of $1,250,000 such that the outstanding principal balance of the CAPEX Loan as of such Seventh Amendment Effective Date, after giving effect to such CAPEX Advances, shall be $3,000,000. Amounts borrowed under this subsection 2.1(C) and prepaid ----------------- on or after the Seventh Amendment Effective Date (after giving effect to the CAPEX Advances described in the proviso in the preceding sentence) may not be reborrowed. Interest on the outstanding principal balance of the CAPEX Advances shall be due and payable on each Interest Payment Date. The outstanding principal balance of all CAPEX Advances, together with interest accrued and 2 unpaid on such amount, shall be due and payable on the Termination Date." 4. Amendment to Subsection 2.5 of the Loan Agreement. The first ------------------------------------------------- sentence of Subsection 2.5 of the Loan Agreement is deleted in its entirety and -------------- the following substituted therefor: "This Agreement shall be effective until February 18, 2001 (the "Termination Date")." 5. Amendment to Subsection 6.3 of the Loan Agreement. Subsection ------------------------------------------------- ---------- 6.3 of the Loan Agreement is hereby deleted in its entirety and the following - --- substituted therefor: "6.3 Minimum EBITDA. Borrower shall have a minimum EBITDA for ------------------ the periods set forth below in the amounts set forth below: Period Amount ------ ------ Three months ended April 30, 1998 ($1,200,000) Six months ended July 31, 1998 ($1,200,000) Nine months ended October 31, 1998 ($ 900,000) Twelve months ended January 31, 1999 ($ 900,000) Twelve months ended April 30, 1999 ($ 500,000) Twelve months ended July 31, 1999 $ 0 Twelve months ended October 31, 1999 $ 400,000 Twelve months ended January 31, 2000 $ 500,000 Twelve months ended April 30, 2000 $ 500,000 Twelve months ended July 31, 2000 $ 500,000 Twelve months ended October 31, 2000 $ 500,000 Twelve months ended January 31, 2001 $ 500,000" 6. Amendment to Subsection 6.4 of the Loan Agreement. Subsection ------------------------------------------------- ---------- 6.4 of the Loan Agreement is hereby deleted in its entirety and the following - --- substituted therefor: 6.4 Capital Expenditure Limits. The aggregate amount of all -------------------------- Capital Expenditures of Borrower and its Subsidiaries (excluding trade-ins and excluding Capital Expenditures in respect of replacement assets to the extent funded with casualty insurance proceeds) will not exceed the amount set forth below for each period set forth below. In the event that Borrower or any of its Subsidiaries enters into a Capital Lease or other contract with respect to fixed assets, for purposes of calculating Capital 3 Expenditures under this subsection only, the amount of the Capital Lease or contract initially capitalized on Borrower's or any Subsidiary's balance sheet prepared in accordance with GAAP shall be considered expended in full on the date that Borrower or any of its Subsidiaries enters into such Capital Lease or contract. Fiscal Year Ending Amount ------------------ ------ January 30, 2000 $1,750,000 January 29, 2001 $1,750,000 Permitted Capital Expenditures not made in Fiscal Year 1999 may be carried over for one year only to the next Fiscal Year; provided, however, any carried-over Capital Expenditure will be deemed used only after all otherwise Permitted Capital Expenditures for that Fiscal Year have been used. Notwithstanding anything herein to the contrary, on and after the Seventh Amendment Effective Date, each Capital Expenditure made with the proceeds of (i) a third-party financing (other than under this Agreement) on terms not less favorable to Borrower or any of its Subsidiaries, as applicable, than then-existing market terms, (ii) an equity offering of Borrower's securities in which any of the proceeds thereof are used for Capital Expenditures (in each of case (i) and (ii) to the extent of such proceeds so applied) or (iii) the gain realized on a sale of assets of Borrower (including securities held by Borrower) or any of its Subsidiaries, in each case to the extent the foregoing financing, equity offering or sale is permitted under this Agreement, shall not be subject to, or considered in the calculations of, the limitations of this subsection 6.4. -------------- 7. Amendment to Secured CAPEX Note. The reference to "February 18, ------------------------------- 2000" in the first paragraph of the CAPEX Note is hereby deleted and "February 18, 2001" substituted therefor. 8. Representations and Warranties. Borrower represents and warrants ------------------------------ to Lender as follows: a. Borrower has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its incorporation, as well as in each jurisdiction in which Borrower is required to be qualified to transact business. b. Borrower has full power and authority and legal right to execute and deliver this Amendment and to perform its obligations under the Loan Agreement 4 and the CAPEX Note, each as amended hereby, and has taken all necessary action to authorize such execution, delivery and performance. c. This Amendment has been duly executed and delivered by Borrower and such Amendment, and each of the Loan Agreement and the CAPEX Note as amended hereby, each constitutes the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally and subject to the availability of equitable remedies. 9. Conditions to the Effectiveness of this Amendment. Each of the ------------------------------------------------- following shall be conditions precedent to the effectiveness of this Amendment (the date on which such conditions are met being the "Effective Date"): -------------- a. Borrower shall have duly executed and delivered a counterpart of this Amendment to Lender or its counsel. b. Before and after giving effect to this Amendment, (a) no Default or Event of Default has occurred and is continuing, (b) all of the representations and warranties contained in the Loan Documents shall be true and correct in all material respects (except for any representation or warranty limited by its terms to a specific date), (c) Borrower shall have performed in all material respects all agreements and satisfied all conditions which any Loan Document provides shall be performed by it on or prior to such date, and (d) Borrower shall have delivered to Lender a certificate to such effect in the form attached hereto as Exhibit A. --------- c. Borrower shall have delivered to Lender or its counsel a certificate of its Secretary or an Assistant Secretary, certifying as to (i) the resolutions of its Board of Directors authorizing (A) this Amendment and (B) the Subscription Agreement, the Warrant and the issuance of stock under each of the Subscription Agreement and the Warrant, (ii) the incumbency of the officers executing this Amendment and any other documents in connection herewith, (iii) the articles of incorporation of Borrower and (iv) the bylaws of Borrower, each as in effect on the Effective Date, together with a good standing certificate from the Secretary of State of the State of California with respect to the Borrower. d. Lender or its counsel shall have received (i) a duly executed and delivered Subscription Agreement, in form and substance satisfactory to Lender, and (ii) as a closing fee, a stock certificate issued to "Heller Financial, Inc." for 5,130 shares of common stock of Borrower. e. Borrower shall have duly executed and delivered the Warrant to Lender or its counsel, in form and substance satisfactory to Lender. 5 f. Lender or its counsel shall have received an opinion of Milbank, Tweed, Hadley & McCloy LLP, special counsel to Borrower, in form and substance satisfactory to Lender. 10. Effect of Amendment; Ratification. From and after the Effective --------------------------------- Date, all references in the Loan Documents to the Loan Agreement shall mean the Loan Agreement as amended hereby, and all references in the Loan Documents to the CAPEX Note or the Secured CAPEX Note shall mean the CAPEX Note as amended hereby. The terms and provisions set forth in this Amendment shall amend and supersede all inconsistent terms and provisions set forth in the Agreement or the CAPEX Note and, except as expressly modified and superseded by this Amendment, the terms and provisions of the Agreement and the CAPEX Note are hereby ratified and confirmed and are and shall continue in full force and effect. 11. No Waiver. Nothing contained herein or in any other instrument --------- or document executed in connection herewith, nor any action taken by Lender in connection with this Amendment or any other action contemplated hereby shall in any event be construed or deemed to constitute a waiver of any past, present or future Default or Event of Default or a waiver or an estoppel of any cause of action Lender may have against Borrower for any reason whatsoever, and Lender hereby reserves all rights and remedies under the Agreement or the other Loan Documents. 12. Fees and Expenses. Borrower acknowledges that all fees and ----------------- expenses (including reasonable attorneys fees) incurred by Lender in connection with this Amendment are for the account of Borrower pursuant to the Loan Agreement. 13. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Delivery via facsimile of an executed counterpart of a signature page of this Amendment shall be effective as delivery of a manually- executed counterpart of this Amendment. 14. Severability. The illegality or unenforceability of any ------------ provision of this Amendment, the Loan Agreement (including as amended hereby), the CAPEX Note (including as amended hereby) or any other document or any other instrument or agreement required hereunder or thereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Amendment, the Loan Agreement (including as amended hereby), the CAPEX Note (including as amended hereby) or such other document or any other instrument or agreement required hereunder or thereunder. 15. Successors and Assigns. This Amendment shall be binding upon and ---------------------- shall inure to the benefit of Lender and Borrower and their respective successors and assigns. 16. Governing Law. This Amendment shall be governed by, and shall be ------------- construed and enforced in accordance with, the internal laws of the State of Illinois, without regard to conflicts of laws principles. 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by a duly authorized officer as of the date first above written. THE RIGHT START, INC. By: /s/ Gina Engelhard ----------------------------- Name: Gina Engelhard --------------------------- Its: Chief Financial Officer ---------------------------- HELLER FINANCIAL, INC. By: /s/ David A. Coleman ----------------------------- Name: David A. Coleman --------------------------- Its: Assistant Vice President ---------------------------- 7 Exhibit A BORROWER'S CLOSING CERTIFICATE ------------------------------ This certificate is delivered pursuant to that certain Seventh Amendment to Loan and Security Agreement and Second Amendment to Secured CAPEX Note dated as of January 18, 2000 (the "Amendment") between The Right Start, --------- Inc., a California corporation ("Borrower"), and Heller Financial, Inc. -------- ("Lender"). Except as provided herein, all capitalized terms used herein which ------ are defined in the Loan Agreement shall have the meanings given therein. The undersigned hereby certifies to Lender that he or she, as applicable, is the duly elected, qualified and acting Chief Executive Officer or Chief Financial Officer of Borrower, as applicable, and on behalf of Borrower (and not individually), further certifies to Lender that: 1. Each representation and warranty made in Section 4 of the Loan --------- Agreement and in the other Loan Documents is true, correct and complete in all material respects as of the Effective Date (as defined in the Amendment) to the same extent as though made on and as of that date, except for any representation and warranty limited by its terms to a specific date. 2. No event has occurred and is continuing or would result from the consummation of the transactions contemplated under the Amendment on the Effective Date which event would constitute a Default or Event of Default. 3. Borrower has performed in all material respects all agreements and satisfied all conditions which any Loan Document provides shall be performed by it on or before the Effective Date. 4. No order, judgment or decree of any court, arbitrator or governmental authority purports to enjoin or restrain Lender from making any Loans or issuing any Lender Letters of Credit to Borrower, or to extend the maturity date of any Loans or Letters of Credit outstanding on the date hereof. 5. There is not pending, or to my knowledge threatened, any action, charge, claim, demand, suit, proceeding, petition, governmental investigation or arbitration against or affecting Borrower or any of its property that has not been disclosed by Borrower in writing, and there has occurred no development in any such action, charge, claim, demand, suit, proceeding, petition, governmental investigation or arbitration so disclosed that could reasonably be expected to have a Material Adverse Effect. 6. No event or condition has occurred since the fiscal quarter ending on October 31, 1999, which constitutes or could reasonably be expected to constitute a Material Adverse Effect or which has not been previously and fully disclosed to Lender in writing. 7. On the date hereof after giving effect to the transactions contemplated by the Amendment on the date hereof and the payment by Borrower of all costs, fees and expenses related thereto, Borrower (a) owns assets the fair salable value of which are (i) greater than the total amount of its liabilities (including contingent liabilities) and (ii) greater than the amount that will be required to pay the probable liabilities of Borrower as they mature; (b) has capital that is not unreasonably small in relation to its business as presently conducted or any contemplated or undertaken transaction; and (c) does not intend to incur and does not believe that it will incur debts beyond its ability to pay such debts as they become due. 8. The conditions precedent set forth in Section 9 of the Amendment have been satisfied. IN WITNESS WHEREOF, the undersigned has duly executed this Borrower's Closing Certificate on behalf of Borrower this 18th day of January, 2000. THE RIGHT START, INC. By: /s/ Jerry R. Welch Name: Jerry R. Welch Title: Chief Executive Officer By: /s/ Gina Engelhard Name: Gina Engelhard Title: Chief Financial Officer 2 EX-10.34 6 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.34 FORM OF INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (this "Agreement") is entered into as of the 9th day of July, 1999, by and among RightStart.com, Inc. a Delaware corporation (the "Company") and ________________ ("Indemnitee") executing this Agreement. RECITALS A. The Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for its directors, officers, employees, stockholders (as defined in Section 10(g)), controlling persons, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. B. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, controlling persons, stockholders (as defined in Section 10(g)), agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. C. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other directors, officers, employees, stockholders (as defined in Section 10(g)), controlling persons, agents and fiduciaries of the Company may not be willing to serve in such capacities without additional protection. D. The Company (i) desires to attract and retain the involvement of highly qualified groups, such as Indemnitee, to serve the Company and, in part, in order to induce each Indemnitee to be involved with the Company and (ii) wishes to provide for the indemnification and advancing of expenses to each Indemnitee to the maximum extent permitted by law. E. In view of the considerations set forth above, the Company desires that each Indemnitee be indemnified by the Company as set forth herein. NOW THEREFORE, the Company and each Indemnitee hereby agrees as follows: 1. Indemnification. (a) Indemnification of Expenses. The Company shall indemnify and hold harmless each Indemnitee (including its respective directors, officers, general partners, limited partners, members, managing members, employees, agents and spouses) and each person who controls any of them or who may be liable within the meaning of Section 15 of the Securities Act of 1933, as amended (the "Securities Act"), or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to the fullest extent permitted by law if such Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed action, suit, -1- that such Indemnitee believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that such Indemnitee believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other (hereinafter a "Claim") by reason of (or arising in part out of) any event or occurrence related to the fact that Indemnitee is or was or may be deemed a director, officer, stockholder (as defined in Section 10(g)), employee, controlling person, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was or may be deemed to be serving at the request of the Company as a director, officer, stockholder (as defined in Section 10(g)), employee, controlling person, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of such Indemnitee while serving in such capacity including, without limitation, any and all losses, claims, damages, expenses and liabilities, joint or several (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit, proceeding or any claim asserted) under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, which relate directly or indirectly to the registration, purchase, sale or ownership of any securities of the Company or to any fiduciary obligation owed with respect thereto or as a result of any claim (a) made by any stockholder (as defined in Section 10(g)) of the Company against an Indemnitee and arising out of or related to any round of financing of the Company (including, but not limited to, claims regarding non-participation, or non-pro rata participation, in such round by such stockholder (as defined in Section 10(g)), (b) made by a third party against an Indemnitee based on any misstatement or omission of a material fact by the Company in violation of any duty of disclosure imposed on the Company by Federal or state securities or common laws, (c) made by a third party against an Indemnitee based (in whole or in part) on, or arising in any way out of, or relating to conduct attributed to the Company or anyone alleged to be acting on the Company's behalf, or (d) made by a third party against an Indemnitee based (in whole or in part) on, or arising in any way out of, or relating to (i) the Indemnitee being an investor in the Company, (ii) the Indemnitee's alleged participation in the management or direction of the Company, (iii) the Indemnitee's alleged participation in providing any assistance or advice to the Company, or (iv) Indemnitee being a person described in Section 15 of Securities Act or Section 20 of the Exchange Act (hereinafter an individually an "Indemnification Event" and collectively the "Indemnification Events") against any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including an appeal), or preparing to defend, be a witness in or participate in, any such action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if, and only if, such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of such Claim and any federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (collectively, hereinafter "Expenses"), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. Such payment of Expenses shall be made by the Company as soon as practicable but in any event no later than ten (10) days after written demand by the Indemnitee therefor is presented to the Company. (b) Reviewing Party. Notwithstanding the foregoing, (i) the obligations of the Company under Section 1(a) shall be subject to the condition that it shall not have been finally determined that Indemnitee would not be permitted to be indemnified under applicable law -2- (initial determination shall be made by the Reviewing Party as described in Section 10(e) hereof in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 1(e) hereof is involved), and (ii) and each Indemnitee acknowledges and agrees that the obligation of the Company to make an advance payment of Expenses to Indemnitee pursuant to Section 2(a) (an "Expense Advance") shall be subject to the condition that, if, when and to the extent that it is so determined that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any initial determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expense Advance shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control (as defined in Section 10(c) hereof), the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), the Reviewing Party shall be the Independent Legal Counsel referred to in Section 1(e) hereof. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee. (c) Contribution. If the indemnification provided for in Section 1(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an Indemnitee in respect of any losses, claims, damages, expenses or liabilities referred to therein, then the Company, in lieu of indemnifying such Indemnitee thereunder, shall contribute to the amount paid or payable by such Indemnitee as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Indemnitee, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Indemnitee in connection with the action or inaction which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In connection with the registration of the Company's securities, the relative benefits received by the Company and the Indemnitee shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Indemnitee, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Company and the Indemnitee shall be determined by reference to, among other things, whether the untrue or alleged untrue statement -3- of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Indemnitee and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 1(c) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In connection with the registration of the Company's securities, in no event shall Indemnitee be required to contribute any amount under this Section 1(c) in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total securities sold under such registration statement which is being sold by such Indemnitee or (ii) the proceeds received by such Indemnitee from its sale of securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. (d) Survival Regardless of Investigation. The indemnification and contribution provided for in this Section 1 will remain in full force and effect regardless of any investigation made by or on behalf of the Indemnitee or any officer, director, general partner, limited partner, member, managing member, employee, agent or controlling person of the Indemnitee. (e) Change in Control. The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) then, with respect to all matters thereafter arising concerning the rights of Indemnitee to payments of Expenses under this Agreement or any other agreement or under the Company's Restated Certificate of Incorporation (the "Restated Certificate") or Bylaws as now or hereafter in effect, Independent Legal Counsel (as defined in Section 10(d) hereof) shall be selected by the Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to abide by such opinion and to pay the reasonable fees of the Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (f) Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in the defense of any action, suit, proceeding, inquiry or investigation referred to in Section 1(a) hereof or in the defense of any claim, issue or matter therein, each Indemnitee shall be indemnified against all Expenses incurred by such Indemnitee in connection herewith. -4- 2. Expenses; Indemnification Procedure. (a) Advancement of Expenses. The Company shall advance all Expenses incurred by Indemnitee. The advances to be made hereunder shall be paid by the Company to Indemnitee as soon as practicable but in any event no later than fifteen (15) days after written demand by such Indemnitee therefor to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall give the Company notice as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). (c) No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its ---- ---------- equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. (d) Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt written notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in each of the policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such action, suit, proceeding, inquiry or investigation in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated hereunder to pay the Expenses of any Claim, the Company shall be entitled to assume the defense of such Claim, with counsel reasonably approved by the applicable Indemnitee, upon the delivery to such Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to such Indemnitee under this Agreement for any fees of counsel subsequently incurred by such Indemnitee with respect to the same Claim; provided that, (i) the Indemnitee shall have the right to employ such Indemnitee's counsel in any such Claim at the Indemnitee's expense; (ii) the Indemnitee shall have the right to employ his own counsel in connection with -5- any such proceeding, at the expense of the Company, if such counsel serves in a review, observer, advice and counseling capacity and does not otherwise materially control or participate in the defense of such proceeding; and (iii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) such Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and such Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of the Indemnitee's counsel shall be at the expense of the Company. 3. Additional Indemnification Rights; Nonexclusivity. (a) Scope. The Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by law, even if such indemnification is not specifically authorized by the other provisions of this Agreement or any other agreement, the Company's Restated Certificate, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its Board of Directors or an officer, stockholder (as defined in Section 10(g)), employee, controlling person, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its Board of Directors or an officer, stockholder (as defined in Section 10(g)), employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 8(a) hereof. (b) Nonexclusivity. The indemnification provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Restated Certificate, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the laws of the State of California or the State of Delaware, or otherwise. The indemnification provided under this Agreement shall continue as to each Indemnitee for any action such Indemnitee took or did not take while serving in an indemnified capacity even though the Indemnitee may have ceased to serve in such capacity and such indemnification shall inure to the benefit of each Indemnitee from and after Indemnitee's first day of service as a director with the Company or affiliation with a director from and after the date such director commences services as a director with the Company. 4. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against any Indemnitee to the extent such Indemnitee has otherwise actually received payment (under any insurance policy, Restated Certificate, Bylaws or otherwise) of the amounts otherwise indemnifiable hereunder. 5. Partial Indemnification. If any Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for any portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company -6- shall nevertheless indemnify Indemnitee for the portion of such Expenses to which such Indemnitee is entitled. 6. Mutual Acknowledgement. The Company and each Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, stockholders (as defined in Section 10(g)), employees, controlling persons, agents or fiduciaries under this Agreement or otherwise. 7. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, stockholders (as defined in Section 10(g)), employees, control persons, agents or fiduciaries, each Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if such Indemnitee is a director, or of the Company's officers, if such Indemnitee is not a director of the Company but is an officer, or of the Company's key employees, controlling persons, agents or fiduciaries, if such Indemnitee is not an officer or director but is a key employee, agent, control person, or fiduciary. 8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to any Indemnitee with respect to Claims initiated or brought voluntarily by such Indemnitee and not by way of defense, except (i) with respect to actions or proceedings to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Restated Certificate or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Delaware statute or law, regardless of whether such Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be; or b) Claim Under Section 16(b). To indemnify any Indemnitee for expenses and the payment of profits arising from the purchase and sale by such Indemnitee of securities in violation of Section 16(b) of the Exchange Act or any similar successor statute; or c) Unlawful Indemnification. To indemnify an Indemnitee if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. 9. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against any Indemnitee, any Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of five (5) years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such five (5) year period; provided, however, that if -------- ------- any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. -7- 10. Construction of Certain Phrases. (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, stockholders (as defined in Section 10(g)), employees, agents or fiduciaries, so that if Indemnitee is or was or may be deemed a director, officer, stockholder (as defined in Section 10(g)), employee, agent, control person, or fiduciary of such constituent corporation, or is or was or may be deemed to be serving at the request of such constituent corporation as a director, officer, stockholder (as defined in Section 10(g)), employee, control person, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, each Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as each Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on any Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, stockholder (as defined in Section 10(g)), employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, stockholder (as defined in Section 10(g)), employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if any Indemnitee acted in good faith and in a manner such Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, such Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (c) For purposes of this Agreement a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d)(3) and 14(d)(2) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders (as defined in Section 10(g)) of the Company in substantially the same proportions as their ownership of stock of the Company, (A) who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding Voting Securities, increases his beneficial ownership of such securities by five percent (5%) or more over the percentage so owned by such person, or (B) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Exchange Act), directly or indirectly, of securities of the Company representing more than thirty percent (30%) of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or combination for election by the Company's stockholders (as defined in Section 10(g)) was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to -8- constitute a majority thereof, or (iii) the stockholders (as defined in Section 10(g)) of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least two-thirds (2/3) of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders (as defined in Section 10(g)) of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Company's assets. (d) For purposes of this Agreement, "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 1(e) hereof, who shall not have otherwise performed services for the Company or any Indemnitee within the last three (3) years (other than with respect to matters concerning the right of any Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). (e) For purposes of this Agreement, a "Reviewing Party" shall mean any appropriate person or body consisting of a member or members of the Company's Board of Directors or any other person or body appointed by the Board of Directors who is not a party to the particular Claim for which Indemnitee is seeking indemnification or Independent Legal Counsel. (f) For purposes of this Agreement, "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. (g) For purposes of this Agreement, "stockholder" shall include any holder of any capital stock of the Company and an affiliate thereof. For purposes of this Agreement, "affiliate" shall constitute any limited partner, general partner, or any member or managing member of such general partner. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, partnership, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to each Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect with respect to Claims relating to Indemnifiable Events regardless of whether any Indemnitee continues to serve as a director, officer, employee, agent, controlling person, or fiduciary of the Company or of any other enterprise, including subsidiaries of the Company, at the Company's request. -9- 13. Attorneys' Fees. In the event that any action is instituted by an Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, such Indemnitee shall be entitled to be paid all Expenses incurred by such Indemnitee with respect to such action, regardless of whether such Indemnitee is ultimately successful in such action, and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court of competent jurisdiction over such action determines that each of the material assertions made by such Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, the Indemnitee shall be entitled to be paid all Expenses incurred by such Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action. 14. Notice. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given (a) five (5) days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid, or (d) one day after the business day of delivery by facsimile transmission, if deliverable by facsimile transmission, with copy by first class mail, postage prepaid, and shall be addressed, if to Indemnitee, at each Indemnitee's address as set forth beneath the Indemnitee's signature to this Agreement, and, if to the Company, at the address of its principal corporate offices (attention: Secretary), or at such other address as such party may designate by ten (10) days' advance written notice to the other parties hereto. 15. Consent to Jurisdiction. The Company and each Indemnitee each hereby irrevocably consent to the jurisdiction and venue of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the courts of the State of California. 16. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the extent manifested by the provision held invalid, illegal or unenforceable. 17. Choice of Law. This Agreement shall be governed by and its provisions construed and enforced in accordance with the laws of the State of California, as applied to contracts between California residents, entered into and to be performed entirely within the State of California, without regard to the conflict of laws principles thereof. -10- 18. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 19. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by the parties to be bound thereby. Notice of same shall be provided to all parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 20. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving any Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries. 21. Corporate Authority. The Board of Directors of the Company and its stockholders in accordance with Delaware law have approved the terms of this Agreement. -11- IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. RightStart.com Inc., A Delaware corporation By: --------------------------------- Name: Jerry R. Welch Title: President Address: RightStart.com Inc. 5388 Sterling Center Drive, Unit C Westlake Village, CA 91361 INDEMNITEE: -------------------------------- Address: By: --------------------------------- Address: By: --------------------------------- Address: 3000 Sand Hill Road Building 4 Suite 210 Menlo Park, CA 94025 -12- EX-10.35 7 1999 RIGHTSTART.COM STOCK OPTION PLAN EXHIBIT 10.35 RightStart.com Inc. 1999 STOCK OPTION PLAN * * * * * 1. Purpose. The purpose of the RightStart.com Inc. 1999 Stock Option Plan ------- (the "Plan") is to further and promote the interests of RightStart.com Inc. (the "Company"), its Subsidiaries and its shareholders by enabling the Company and its Subsidiaries to attract, retain and motivate key employees, directors and consultants, or those who will become key employees, and directors or consultants, and to align the interests of those individuals and the Company's shareholders. 2. Certain Definitions. For purposes of the Plan, the following terms shall ------------------- have the meanings set forth below: 2.1 "Affiliate" means any person or entity of any kind effectively controlling, effectively controlled by or under common control with The Right Start, Inc., a California corporation ("Right Start"). 2.2 "Award Agreement" means the agreement executed by a Participant pursuant to Sections 3.2 and 11.5 of the Plan in connection with the granting of a Stock Option (as defined in Section 6.1 below). 2.3 "Board" means the Board of Directors of the Company, as constituted from time to time. 2.4 "Cause" means (a) the commission of an act of fraud or embezzlement, or the commission of any felony by a Participant; (b) willful misconduct by a Participant that brings the Company, or any Subsidiary, or any officer, director, employee or owner of the Company, its Parent or any Subsidiary, into disrepute or causes material injury to the Company, its Parent or any Subsidiary; (c) a Participant's breach of any confidentiality agreement or any other contractual agreement with the Company, its Parent or any Subsidiary, or the unauthorized disclosure or use of confidential or proprietary information of the Company, its Parent or any Subsidiary; or (d) the willful and continued failure of Participant to perform his or her duties other than such failure resulting from the Participant's incapacity due to physical or mental illness or injury. 2.5 "Code" means the Internal Revenue Code of 1986, as in effect and as amended from time to time, or any successor statute thereto, together with any rules, regulations and interpretations promulgated thereunder or with respect thereto. -2- 2.6 "Committee" means the committee of the Board established from time to time in the sole discretion of the Board to administer the Plan, as described in Section 3 of the Plan. 2.7 "Common Stock" means the Common Stock, par value $.01 per share, of the Company or any security of the Company issued by the Company in substitution or exchange therefor. 2.8 "Company" means RightStart.com Inc., a Delaware corporation, or any successor corporation to RightStart.com Inc. 2.9 "Disability" means any physical or mental disability which is reasonably likely to prevent the Participant from performing the Participant's assigned duties or responsibilities for the Company or any Subsidiary for more than six months, as determined by the Board or the Committee in good faith. 2.10 "Fair Market Value" means on, or with respect to, any given date(s), the fair market value of a share of Common Stock, as determined in good faith by the Board in its sole discretion, using the most recent prior annual valuation of the Company (as determined pursuant to Section 3.4 of the Plan) or the price to be paid pursuant to a bona fide offer from a third party for a share of Common Stock (in the case of any Merger Event). 2.11 "Incentive Stock Option" means any stock option granted pursuant to the provisions of Section 6 of the Plan (and the relevant Award Agreement) that is intended to be (and is specifically designated as) an "incentive stock option" within the meaning of Section 422 of the Code. 2.12 "Merger Event" shall have the meaning assigned to such term in Section 9.3.1 of this Plan. 2.13 "Non-Qualified Stock Option" means any stock option granted pursuant to the provisions of Section 6 of the Plan (and the relevant Award Agreement) that is not (and is specifically designated as not being) an Incentive Stock Option. 2.14 "Parent" means any corporation (other than the Company) in an unbroken chain of corporations, including and ending with the Company, if each of such corporations, other than the first corporation in the unbroken chain, is majority owned by, directly or indirectly, one of the other corporations in such chain. 2.15 "Participant" means any individual who is selected from time to time under Sections 5 and 6 to receive an award under the Plan. 2.16 "Plan" means the RightStart.com Inc. 1999 Stock Option Plan, as set forth herein and as in effect and as amended from time to time (together with any rules and regulations promulgated by the Committee with respect thereto). -3- 2.17 "Rule 701" means Rule 701 promulgated under the Securities Act of 1933, as amended or any successor law or regulation. 2.18 "Rule 701 Exemption" means an exemption from federal registration under the Securities Act of 1933, as amended, pursuant to Rule 701. 2.19 "Subsidiary(ies)" means any corporation (other than the Company) in an unbroken chain of corporations, including and beginning with the Company, if each of such corporations, other than the last corporation in the unbroken chain, owns, directly or indirectly, more than fifty percent (50%) of the voting stock in one of the other corporations in such chain. 3. Administration. -------------- 3.1 General. The Plan shall be administered by the Board or a Committee ------- of the Board, as determined by the Board in its sole discretion. The Committee may be appointed from time to time by the Board and shall be comprised of not less than two of the then members of the Board. Consistent with the Bylaws of the Company, members of the Committee shall serve at the pleasure of the Board and the Board, subject to the immediately preceding sentence, may at any time and from time to time remove members from, or add members to, the Committee. 3.2 Plan Administration and Plan Rules. The Board or the Committee, is ---------------------------------- authorized to construe and interpret the Plan and to promulgate, amend and rescind rules and regulations relating to the implementation and administration of the Plan. Subject to the terms and conditions of the Plan, the Board or the Committee shall make all determinations necessary or advisable for the implementation and administration of the Plan including, without limitation, (a) selecting the Plan's Participants, (b) making awards in such amounts and form as the Board or the Committee shall determine, (c) imposing such restrictions, terms and conditions upon such awards as the Board or the Committee shall deem appropriate, and (d) correcting any technical defect(s) or technical omission(s), or reconciling any technical inconsistency(ies), in the Plan and/or any Award Agreement. The Board or the Committee may designate persons other than members of the Board or the Committee to carry out the day-to-day ministerial administration of the Plan under such conditions and limitations as it may prescribe, except that the Board or the Committee shall not delegate its authority with regard to the selection for participation in the Plan and/or the granting of any awards to Participants. The Board's or the Committee's determinations under the Plan need not be uniform and may be made selectively among Participants, whether or not such Participants are similarly situated. Any determination, decision or action of the Board or the Committee in connection with the construction, interpretation, administration, or implementation of the Plan shall be final, conclusive and binding upon all Participants and any person(s) claiming under or through any Participants. The Company shall effect the granting of awards under the Plan, in accordance with the determinations made by the Board or the Committee, by execution of written agreements and/or other instruments in such form as is approved by the Board or the Committee. 3.3 Liability Limitation. Neither the Board nor the Committee, -------------------- nor any member of either, nor any officer of the Company, its Parent or its Subsidiaries, if any, shall be -4- liable for any act, omission, interpretation, construction or determination made in good faith in connection with the Plan (or any Award Agreement), and the members of the Board and the Committee and the officers of the Company, its Parent and its Subsidiaries, if any, shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, attorneys' fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors and officers liability insurance coverage which may be in effect from time to time. 3.4 Annual Valuation. An annual valuation of the Company shall be ---------------- performed in respect of each fiscal year of the Company during which awards are granted or remain outstanding under the Plan. Such valuation shall be performed by a valuation expert or an investment banking firm selected by the Board in good faith. The final determination as to the annual valuation shall be made solely by the Board in its sole discretion. The initial Fair Market Value of the Company for purposes of initial option grants under the Plan shall be $0.45 per share. 4. Term of Plan/Common Stock Subject to Plan. ----------------------------------------- 4.1 Term. The Plan shall terminate on July 12, 2009, except with ---- respect to awards then outstanding. After such date no further awards shall be granted under the Plan. 4.2 Common Stock. The maximum number of shares of Common Stock in ------------ respect of which awards may be granted under the Plan, subject to adjustment as provided in Section 9.2 of the Plan, shall not exceed 1,818,000 shares of Common Stock; provided, however, that no more than fifteen percent (15%) of the -------- ------- outstanding number of shares of Common Stock on the date the Plan is approved by the Board (or such larger percentage permitted by Rule 701) shall be issued under a Rule 701 Exemption. In the event of a change in the Common Stock of the Company that is limited to a change in the designation thereof to "Capital Stock" or other similar designation, or to a change in the par value thereof, or from par value to no par value, without increase or decrease in the number of issued shares, the shares resulting from any such change shall be deemed to be the Common Stock for purposes of the Plan. Common Stock which may be issued under the Plan may be either authorized and unissued shares or issued shares which have been reacquired by the Company (in the open-market or in private transactions) and which are being held as treasury shares. No fractional shares of Common Stock shall be issued under the Plan. 5. Eligibility. Individuals eligible for awards under the Plan shall ----------- consist of (i) all employees, directors and consultants, or those who will become such employees, directors or consultants of the Company, its Parent or any Subsidiary and (ii) directors of the Company, who are responsible for the management, growth and protection of the business of the Company and/or its Subsidiaries or whose performance or contribution, in the sole discretion of the Board or the Committee benefits or will benefit the Company or any Subsidiary. -5- 6. Stock Options. ------------- 6.1 Terms and Conditions. Stock options granted under the Plan shall -------------------- be in respect of Common Stock and may be in the form of Incentive Stock Options or Non-Qualified Stock Options (sometimes referred to collectively herein as the "Stock Option(s)"); provided, however, that non-employee directors of the -------- ------- Company shall not be eligible to receive Incentive Stock Options under the Plan. Such Stock Options shall be subject to the terms and conditions set forth in this Section 6 and any additional terms and conditions, not inconsistent with the express terms and provisions of the Plan, as the Board or the Committee shall set forth in the relevant Award Agreement. 6.2 Grant. Stock Options may be granted under the Plan in such form as ----- the Board or the Committee may from time to time approve; provided, however, -------- ------- that non-employee directors of the Company shall not be eligible to receive Incentive Stock Options under the Plan. Special provisions shall apply to Incentive Stock Options granted to any employee who owns (within the meaning of Section 422(b)(6) of the Code) more than ten percent of the total combined voting power of all classes of stock of the Company or its parent corporation or any Subsidiary of the Company, within the meaning of Sections 424(e) and (f) of the Code (a "10% Shareholder"). 6.3 Exercise Price. The exercise price per share of Common Stock --------------- subject to an Incentive Stock Option shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock on the date of the grant of such Stock Option; provided, however, that, in the case of a 10% Shareholder, -------- ------- the exercise price of an Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Common Stock on the date of grant. 6.4 Term. The term of each Stock Option shall expire not more than ten ---- years (five years, in the case of an Incentive Stock Option granted to a 10% Shareholder) after the date immediately preceding the date on which the Stock Option is granted. 6.5 Method of Exercise. A Stock Option may be exercised, in whole or ------------------ in part, by giving written notice of exercise to the Secretary of the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the exercise price in cash, by certified check, bank draft or money order payable to the order of the Company. Payment instruments shall be received by the Company subject to collection. The proceeds received by the Company upon exercise of any Stock Option may be used by the Company for general corporate purposes. Any portion of a Stock Option that is exercised may not be exercised again. 6.6 Exercisability. In respect of any Stock Option granted under the -------------- Plan, unless otherwise provided in the Participant's Award Agreement or in the Participant's employment agreement in respect of any such Stock Option, such Stock Option shall become exercisable as to the aggregate number of shares of Common Stock underlying such Stock Option as follows: -6- 11.5.1 on the first anniversary of the date of grant of the Stock Option, one-fourth of the shares of Common Stock underlying such Stock Option shall become exercisable; and 11.5.2 thereafter, the remaining unvested Common Stock underlying such Stock Option shall become exercisable in thirty-six (36) equal monthly installments. Notwithstanding the foregoing, such vesting shall continue to occur only if the Participant is then employed by the Company, its Parent and/or one of its Subsidiaries. Notwithstanding anything to the contrary contained in this Section 6.6, any such Stock Option shall become one hundred percent (100%) exercisable, in accordance with Section 9.3 below, as to the aggregate number of shares of Common Stock underlying such Stock Option upon the occurrence of a Merger Event (as defined in Section 9.3.1 below). 11 Termination of Employment. ------------------------- 7.1 General. If a Participant's employment with the Company, its ------- Parent or any Subsidiary terminates for any reason, any then unexercisable Stock Options shall be forfeited and canceled by the Company, except as otherwise provided in the Participant's Award Agreement or in the Participant's Employment Agreement. 7.2 For Cause. If a Participant's employment with the Company, its --------- Parent or any Subsidiary or service as a director of Company is terminated for Cause, such Participant's rights, if any, to exercise any then exercisable Stock Options shall terminate on the date of such termination for Cause and such Stock Options shall be forfeited and canceled by the Company, except as otherwise provided in the Participant's Award Agreement or in the Participant's Employment Agreement. 7.3 Voluntary Termination. If a Participant voluntarily terminates --------------------- employment with the Company, its Parent or any Subsidiary or service as a director of the Company (other than a termination due to death or Disability), such Participant's rights, if any, to exercise any then exercisable Stock Options shall terminate thirty days after the date of such voluntary termination (but not beyond the stated term of any such Stock Option as determined under Section 6.4) and thereafter such Stock Options shall be forfeited and canceled by the Company, except as otherwise provided in the Participant's Award Agreement or in the Participant's Employment Agreement. 7.4 Death/Disability. If a Participant's employment with the ---------------- Company, its Parent or any Subsidiary or service as a director of the Company is terminated due to death or Disability, such Participant's Stock Options shall immediately become one hundred percent (100%) exercisable (regardless of the exercisability or vesting schedule set forth in the Award Agreement or the Plan relating to such Stock Options) and such Participant (and such Participant's estate, designated beneficiary or other legal representative, as the case may be and as determined by the Board or the Committee) shall have the right to exercise such Participant's -7- Stock Options at any time within the one-year period following such termination due to death or Disability (but not beyond the term of any such Stock Option as determined under Section 6.4) and thereafter such Stock Options shall be forfeited and canceled by the Company, except as otherwise provided in the Participant's Award Agreement or in the Participant's Employment Agreement. 7.5 Without Cause. If a Participant's employment with the Company, ------------- its Parent or any Subsidiary or service as a director of the Company is terminated without Cause, such Participant's rights, if any, to exercise any then exercisable Stock Options shall terminate ninety days after the date of such termination (but not beyond the stated term of any such Stock Options as determined under Section 6.4) and thereafter such Stock Options shall be forfeited and canceled by the Company, except as otherwise provided in the Participant's Award Agreement or in the Participant's Employment Agreement. 7.6 Board or Committee Discretion. The Board or the Committee, in ----------------------------- their sole discretion, may determine that any Participant's Stock Options, to the extent exercisable immediately prior to any termination of employment or as a result thereof, may remain exercisable for an additional specified time period after the period specified above in this Section 7 expires (subject to any other applicable terms and provisions of the Plan and the relevant Award Agreement), but not beyond the stated term of any such Stock Option. 11 Non-transferability of Awards. ----------------------------- 11.5 Stock Options. Unless otherwise provided in the Participant's -------------- Award Agreement, no award under the Plan or any Award Agreement, and no rights or interests herein or therein, shall or may be assigned, transferred, sold, exchanged, encumbered, pledged, or otherwise hypothecated or disposed of by a Participant or any beneficiary(ies) of any Participant, except by testamentary disposition by the Participant or pursuant to the laws of intestate succession. No such interest shall be subject to execution, attachment or similar legal process, including, without limitation, seizure for the payment of the Participant's debts, judgments, alimony, or separate maintenance. During the lifetime of a Participant, Stock Options are exercisable only by the Participant. 11.6 Shares of Common Stock. No voluntary or involuntary sale, ---------------------- transfer, pledge, encumbrance or other disposition or hypothecation of shares of the Company after issuance thereof to the Participant (or of any shares subsequently issued in respect of such shares, whether as a stock dividend or otherwise), shall or may, prior to the occurrence of the Initial Public Offering (as defined below), be made or suffered by the Participant or such Participant's estate, designated beneficiary or other legal representative, other than by the Participant to a trust for the sole benefit of the Participant's Immediate Family (as defined below); provided, however, that any such trust shall be -------- ------- subject to the restrictions set forth in the Plan. For purposes of the Plan, (a) "Initial Public Offering" means the sale in a public offering by the Company of its ordinary common shares representing not less than ten percent (10%) of its outstanding ordinary shares (after giving effect to such offering), and (b) "Immediate Family" means the Participant's spouse and/or lineal descendants (including without limitation legally adopted children). -8- 8.3 Purchase Right. -------------- 8.3.1 If, prior to the occurrence of the Initial Public Offering, a Participant terminates employment with the Company, its Parent or any Subsidiary for any reason, all shares of the Common Stock acquired by such Participant upon the exercise of any Stock Options under the Plan or otherwise are subject, at the election of the Company, to purchase by the Company at a per share price equal to their then Fair Market Value (the "Purchase Right"). If the Company elects to exercise such Purchase Right, the Company must make such election within 60 days after any such Participant terminates employment with the Company, its Parent or any Subsidiary (or, in the case of securities issued upon exercise of Stock Options after the date of a Participant's termination of employment, within 60 days after the date of exercise). If the Company elects in a timely fashion to exercise the Purchase Right hereunder to purchase such shares from the terminated Participant, the Company shall notify the Participant in writing of its intention to do so (the "Purchase Notice") and shall set forth in the Purchase Notice the aggregate purchase price payable to such Participant, as determined in accordance with this Section 8.3. Such aggregate purchase price shall be payable in accordance with the following three sentences. No later than 30 days after the date on which the Company notifies the Participant of its election to exercise its Purchase Right (the "Election Date"), the Company shall pay to such Participant, without interest, the aggregate purchase price payable by the Company to purchase the shares of Common Stock pursuant to the Purchase Right; provided, however, that if the aggregate purchase price payable by the -------- ------- Company to purchase the shares of Common Stock pursuant to the Purchase Right exceeds the aggregate exercise price paid by such Participant to acquire such shares, but is less than $1,000,000, the Company shall pay the total aggregate purchase price to the Participant in a lump sum within 30 days after the Election Date. If the remaining aggregate purchase price payable, if any, equals or exceeds $1,000,000, the Company may elect to pay such remaining purchase price in excess of $1,000,000 to such Participant in two substantially equal annual installments due and payable, bearing simple interest at then prevailing rates, on the first and second anniversaries, respectively, of the Election Date. The Company may prepay any such installments, in whole or in part, at any time without penalty or premium. 8.3.2 The Purchase Notice shall specify the place, time and date for the delivery of the shares of the Common Stock which are the subject of the Purchase Notice. Such delivery shall take place at the principal executive offices of the Company during normal business hours on a business day not fewer than 15 nor more than 90 calendar days after delivery of the Purchase Notice. At the place, time, and date so specified, the Participant (or his or her estate, designated beneficiary or legal representative, as the case may be) shall deliver certificates for such shares of the Common Stock, duly endorsed for transfer, along with such other instruments of transfer pertaining to such shares as may be reasonably required by the Board or the Committee. 8.3.3 If a Participant (o his or her estate, designated beneficiary or legal representative, as the case may be) is obligated to sell any shares of the Common Stock to the Company pursuant to the Purchase Right, and such Participant fails to deliver the certificate(s) or otherwise comply with the terms of this Section 8.3, the Company, upon delivery to such Participant of payment therefor in accordance with this Section 8.3, shall transfer on its records -9- the certificate(s) representing such shares of the Common Stock required to be sold pursuant to this Section 8.3 and such shares shall thereupon cease to be held for any purpose by such Participant. Thereupon all of the rights of such Participant in and to such shares shall be deemed transferred to the Company and the Company may thereupon cancel the certificate(s) representing such shares. 8.4 Lock-Up. No shares of the Common Stock may be sold, ------- transferred pledged or otherwise disposed of or hypothecated in violation of or contrary to any restrictions imposed on such sales or transfers by any underwriters in connection with the offering for sale of any capital stock or other security of the Company. All Participants receiving Stock Options -10- under the Plan shall promptly execute all lock-up agreements or letters required by any such underwriters upon the Company's request. 9. Changes in Capitalization and Other Matters. ------------------------------------------- 9.1 No Corporate Action Restriction. The existence of the Plan, any ------------------------------- Award Agreement and/or the awards granted hereunder shall not limit, affect or restrict in any way the right or power of the Board or the shareholders of the Company to make or authorize (a) any adjustment, recapitalization, reorganization or other change in the Company's, its Parent's or any Subsidiary's capital structure or its business, (b) any merger, consolidation or change in the ownership of the Company, its Parent or any Subsidiary (other than the effect of a Merger Event as set forth in Section 6.6 hereof), (c) any issue of bonds, debentures, capital, preferred or prior preference stocks ahead of or affecting the Company's, its Parent's or any Subsidiary's capital stock or the rights thereof, (d) any dissolution or liquidation of the Company, its Parent or any Subsidiary, (e) any sale or transfer of all or any part of the Company's, its Parent's or any Subsidiary's assets or business, or (f) any other corporate act or proceeding by the Company, its Parent or any Subsidiary. No Participant, beneficiary or any other person shall have any claim against any member of the Board or the Committee, the Company, its Parent or any Subsidiary, or any employees, officers or agents of the Company, its Parent or any Subsidiary, as a result of any such action. 9.2 Recapitalization Adjustments. In the event of any change in ---------------------------- capitalization affecting the Common Stock of the Company, including, without limitation, a stock dividend or other distribution, stock split, reverse stock split, recapitalization, consolidation, subdivision, split-up, spin-off, split- off, combination or exchange of shares or other form of reorganization or recapitalization, or any other change affecting the Common Stock, the Board or the Committee shall authorize and make such proportionate adjustments to reflect such change in order to preserve (but not to increase) the benefits to holders of Stock Options, including, without limitation, with respect to the aggregate number of shares of the Common Stock for which awards in respect thereof may be granted under the Plan, the number of shares of the Common Stock covered by each outstanding award, and the exercise price per share of Common Stock in respect of outstanding awards. 9.3 Mergers. ------- 9.3.1 If the Company enters into or is involved in any Merger Event, a Participant's Stock Options shall immediately become one hundred percent (100%) exercisable (regardless of the exercisability or vesting schedule set forth in the Award Agreement or the Plan relating to such Stock Options) and such Participant, at his or her option, shall be entitled (a) to exercise his or her Stock Options and participate in the Merger Event at the same price and on substantially the same terms and conditions as the Company or (b) to receive substitute stock options, if applicable, in respect of the shares of the surviving corporation on such terms and conditions, as to the number of shares, pricing and otherwise, which shall substantially preserve the value, rights and benefits of any affected Stock Options granted hereunder as of the date of -11- the consummation of the Merger Event. For purposes of this Plan and any Award Agreement relating to a Stock Option granted hereunder, a "Merger Event" means (i) a merger, reorganization or other business combination with, or a sale of all or substantially all of the assets of the Company to, any person or entity other than an Affiliate, or (ii) during any consecutive twelve (12) -month period, individuals who at the beginning of such period constituted the Company's Board (together with any replacement directors whose appointment by the Company's Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then still in office either who were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office. 9.3.2 Upon receipt by any affected Participant of any such substitute stock options as a result of any such Merger Event, such Participant's affected Stock Options for which such substitute options were received shall be thereupon cancelled without the need for obtaining the consent of any such affected Participant. 9.3.3 The foregoing adjustments and the manner of application of the foregoing provisions, including, without limitation, the issuance of any substitute stock options, shall be determined in good faith by the Board or the Committee in its sole discretion. Any such adjustment may provide for the elimination of fractional shares. 11.5 Drag-Along Rights. ----------------- 9.4.1 If, prior to the occurrence of an Initial Public Offering, the Right Start (the "Drag Shareholder") desires to sell all or substantially all of the then outstanding shares of the Common Stock beneficially or legally owned by the Right Start to any third party, other than an Affiliate, at which time the Right Start owns at least fifty percent (50%), on a fully diluted basis, of the Company's voting securities (a "Drag Sale"), then, if requested or required by any such third party purchaser, each Participant or such Participant's permitted transferee under Section 8.2 of the Plan, estate, designated beneficiary or other legal representative, who has acquired Common Stock pursuant to the exercise of Stock Options granted under the Plan or otherwise (the "Drag Seller"), shall sell all such shares of Common Stock, and all shares issued in respect of such shares, whether as a stock dividend or otherwise, to such third party purchaser, in accordance with the terms and provisions of this Section 9.4. All shares of Common Stock sold or transferred pursuant to this Section 9.4.1 shall be sold at the same price and upon the same terms and conditions as the shares of Common Stock being sold by the Right Start. 9.4.2 The Company shall give each Drag Seller at least 15 days prior written notice of any Drag Sale, containing a description of all material terms and conditions of such Drag Sale. In connection with any Drag Sale, each Drag Seller shall take such actions as may be reasonably required by the Drag Shareholder and shall otherwise cooperate in good faith with the Drag Shareholder. At the closing of a Drag Sale, each Drag Seller shall deliver to the purchaser the certificates for all shares of the Common Stock being sold or transferred by such Drag Seller, duly endorsed for transfer, against payment of the appropriate purchase price. -12- 9.4.3 Upon consummation of a Drag Sale, if a Drag Seller has not delivered his or her certificates, as contemplated by this Section 9.4, such Drag Seller shall no longer be considered a shareholder of the Company, and such Drag Seller's sole rights shall be to receive the consideration receivable in connection with such Drag Sale upon delivery of the certificates held by such Drag Seller, as contemplated by Section 9.4.2. 10. Amendment, Suspension and Termination. ------------------------------------- 10.1 In General. The Board may suspend or terminate the Plan (or any ---------- portion thereof) at any time and may amend the Plan at any time and from time to time in such respects as the Board may deem advisable or in the best interests of the Company, its Parent or any Subsidiary. No such amendment, suspension or termination shall (a) materially adversely affect the rights of any Participant under any outstanding Stock Options, without the consent of such Participant, or (b) make any change that would disqualify the Plan, or any other plan of the Company or any Subsidiary intended to be so qualified, from the benefits provided under Section 422 of the Code, or any successor provisions thereto. 10.2 Award Agreement Modifications. The Board or the Committee may ----------------------------- (in their sole discretion) amend or modify at any time and from time to time the terms and provisions of any outstanding Stock Options in any manner to the extent that the Board or the Committee under the Plan or any Award Agreement could have initially determined the restrictions, terms and provisions of such Stock Options, including, without limitation, changing or accelerating the date or dates as of which such Stock Options shall become exercisable. No such amendment or modification shall, however, materially adversely affect the rights of any Participant under any such award without the consent of such Participant. 11. Miscellaneous. ------------- 11.1 Tax Withholding. The Company shall have the right to deduct ---------------- from any payment or settlement under the Plan, including, without limitation, the exercise of any Stock Option, any federal, state, local, foreign or other taxes of any kind which the Board or the Committee, in their sole discretion, deems necessary to be withheld to comply with the Code and/or any other applicable law, rule or regulation. 11.2 No Right to Employment. Neither the adoption of the Plan, the ---------------------- granting of any award, nor the execution of any Award Agreement, shall confer upon any employee of the Company, its Parent or any Subsidiary any right to continued employment with the Company, its Parent or any Subsidiary, as the case may be, nor shall it interfere in any way with the right, if any, of the Company, its Parent or any Subsidiary to terminate the employment of any employee at any time for any reason. 11.3 Unfunded Plan. The Plan shall be unfunded and the Company shall ------------- not be required to segregate any assets in connection with any awards under the Plan. Any liability of the Company to any person with respect to any award under the Plan or any Award Agreement shall be based solely upon the contractual obligations that may be created as a result of the Plan -13- or any such award or agreement. No such obligation of the Company shall be deemed to be secured by any pledge of, encumbrance on, or other interest in, any property or asset of the Company or any Subsidiary. Nothing contained in the Plan or any Award Agreement shall be construed as creating in respect of any Participant (or beneficiary thereof or any other person) any equity or other interest of any kind in any assets of the Company or any Subsidiary or creating a trust of any kind or a fiduciary relationship of any kind between the Company, its Parent, any Subsidiary and/or any such Participant, any beneficiary thereof or any other person. 11.4 Listing, Registration and Other Legal Compliance. No ------------------------------------------------ awards or shares of the Common Stock shall be required to be issued or granted under the Plan unless legal counsel for the Company shall be satisfied that such issuance or grant will be in compliance with all applicable securities laws and regulations and any other applicable laws or regulations, including, without limitation, Section 260.140.45 of the Rules promulgated under the California Corporate Securities Law of 1968. The Board or the Committee may require, as a condition of any payment or share issuance, that certain agreements, undertakings, representations, certificates, and/or information, as the Board or the Committee may deem necessary or advisable, be executed or provided to the Company to assure compliance with all such applicable laws or regulations. Certificates for shares of Common Stock delivered under the Plan may bear appropriate legends and may be subject to such stock-transfer orders and such other restrictions as the Board or the Committee may deem advisable under the rules, regulations, or other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is listed, and any applicable securities law. In addition, if, at any time specified herein (or in any Award Agreement or otherwise) for (a) the making of any award, or the making of any determination, (b) the issuance or other distribution of Common Stock, or (c) the payment of amounts to or through a Participant with respect to any award, any law, rule, regulation or other requirement of any governmental authority or agency shall require either the Company, its Parent, any Subsidiary or any Participant (or any estate, designated beneficiary or other legal representative thereof) to take any action in connection with any such determination, any such shares to be issued or distributed, any such payment, or the making of any such determination, as the case may be, shall be deferred until such required action is taken. 11.5 Award Agreements. Each Participant receiving an award ---------------- under the Plan shall enter into an Award Agreement with the Company in a form specified by the Board or the Committee. Each such Participant shall agree to the restrictions, terms and conditions of the award set forth therein and in the Plan. 11.6 Financial Information. Each Participant receiving an award --------------------- under the Plan shall be provided with the Company's annual unaudited financial statements. Such unaudited financial statements shall be provided promptly after their preparation after the Company's fiscal year end; provided, that each Participant shall be provided with unaudited financial statements of the Company at least once annually. 11.7 Designation of Beneficiary. Each Participant to whom an -------------------------- award has been made under the Plan may designate a beneficiary or beneficiaries to exercise any option or to receive any payment which under the terms of the Plan and the relevant Award Agreement may become exercisable or payable on or after the Participant's death. At any time, and from time to -14- time, any such designation may be changed or cancelled by the Participant without the consent of any such beneficiary. Any such designation, change or cancellation must be on a form provided for that purpose by the Board or the Committee and shall not be effective until received by the Board or the Committee. If no beneficiary has been designated by a deceased Participant, or if the designated beneficiaries have predeceased the Participant, the beneficiary shall be the Participant's estate. If the Participant designates more than one beneficiary, any payments under the Plan to such beneficiaries shall be made in equal shares unless the Participant has expressly designated otherwise, in which case the payments shall be made in the shares designated by the Participant. 11.8 Leaves of Absence/Transfers. The Board or the Committee --------------------------- shall have the power to promulgate rules and regulations and to make determinations, as it deems appropriate, under the Plan in respect of any leave of absence from the Company, its Parent or any Subsidiary granted to a Participant. Without limiting the generality of the foregoing, the Board or the Committee may determine whether any such leave of absence shall be treated as if the Participant has terminated employment with the Company, its Parent or any such Subsidiary. If a Participant transfers within the Company, or to or from its Parent or any Subsidiary, such Participant shall not be deemed to have terminated employment as a result of such transfers. 11.9 Governing Law. The Plan and all actions taken thereunder ------------- shall be governed by and construed in accordance with the laws of the State of California, without reference to the principles of conflict of laws thereof. Any titles and headings herein are for reference purposes only, and shall in no way limit, define or otherwise affect the meaning, construction or interpretation of any provisions of the Plan. 11.10 Effective Date. The Plan shall be effective upon its -------------- approval by the Board and adoption by the Company, subject to the approval of the Plan by the Company's shareholders in accordance with Section 422 of the Code. -15- IN WITNESS WHEREOF, this Plan is adopted by the Company on this 10th day of April, 1999. RIGHTSTART.COM INC. By: /s/ Jerry R. Welch --------------------------------- Name: Jerry R. Welch Title: Chief Executive Officer and President By: /s/ Gina M. Engelhard ---------------------------------- Name: Gina M. Engelhard Title: Secretary and Chief Financial Officer EX-10.36 8 SUBSCRIPTION AGREEMENT DATED JULY 9, 1999 EXHIBIT 10.36 SUBSCRIPTION AGREEMENT This Subscription Agreement (this "Agreement") is made as of July 9, 1999, by and between RightStart.com Inc., a Delaware corporation (the "Company"), and Jonathan Davidson (the "Investor"). The parties hereto agree as follows: 1. Purchase and Sale of Securities. ------------------------------- (a) Authorization of Issuance. The Company's Board of Directors (the ------------------------- "Board") has authorized the issuance and sale to the Investors (as defined below) of warrants, substantially in the form attached hereto as Exhibit A (the "Warrants"), to purchase an aggregate of 182,000 shares of common stock, par value $.01 per share of the Company (the "Common Stock"). The Warrants are to be issued to each of James W. Montgomery, Kim Enterprises, L.L.C., Jonathan Davidson, Michael Holton, David P. Michaels, and David A. Burns (the "Investors"). Each Investor shall enter into a separate Agreement substantially in this form that will provide the number of Warrant shares to be granted to such Investor. Such Warrants are being issued pursuant to the Financing Representation Agreement, dated February 4, 1999, by and between CEA Montgomery Media, L.L.C. ("CEAM") and The Right Start, Inc. ("Parent") , a copy of which has been attached hereto as Exhibit B (the "Engagement Letter"), in consideration for the services provided by CEAM to the Company and its Parent set forth in the Engagement Letter. (b) Purchase and Sale. Subject to the terms and conditions set forth ----------------- in this Agreement, including the covenants contained in this paragraph, the Investor agrees to purchase, and the Company agrees to issue and sell to the Investor, a Warrant to purchase that number of shares of Common Stock set forth opposite the Investor's name on the signature pages hereof. (c) Investor Representation and Warranties. In connection with the -------------------------------------- purchase and sale of the Common Stock, the Investor represents and warrants to the Company that: (i) the Common Stock to be acquired by the Investor pursuant to this Agreement will be acquired for the Investor's own accounts and not with a view to, or intention of, distribution thereof in violation of the Securities Act of 1933, as amended (the "Securities Act"), or any applicable state securities laws, and the Common Stock will not be disposed of in contravention of the Securities Act or any applicable state securities laws; (ii) the Investor is familiar with the term "accredited investor" as defined in Rule 501 under the Securities Act and the Investor is an "accredited investor" within the meaning of such term in Rule 501 under the Securities Act; (iii) the Investor is sophisticated in financial matters and is able to evaluate the risks and benefits of the investment in the Common Stock; (iv) the Investor is able to bear the economic risk of his or her investment in the Common Stock for an indefinite period of time because the Common Stock (A) has not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available and (B) is subject to additional restrictions as provided herein; (v) the Investor has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of the Common Stock and has had full access to such other information concerning the Company as he or she has requested; and (vi) this Agreement constitutes the legal, valid and binding obligation of the Investor, enforceable in accordance with its terms, and the execution, delivery and performance of this Agreement by the Investor does not and will not conflict with, violate or cause a breach of any agreement, contract or instrument to which the Investor is party or any judgment, order or decree to which the Investor is subject which would have a material adverse effect on the Investor or the Company. 2. Registration Rights. ------------------- (a) Demand Registration. If the Company shall receive at any -------------------- time after its initial firm-commitment public offering (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 an of its securities to the public) a written request from Sellers holding at least 100,000 shares of Common Stock issued or to be issued upon exercise of any Warrants ("Warrant Stock") that the Company file a registration statement for its Common Stock, then the Company shall use its best efforts to effect such registration, on Form S-3 or successor form replacing Form S-3, if practicable, as would permit or facilitate the sale and distribution of all or such portion of such Warrant Stock as is specified in such request. For purposes of this Agreement, the term "Seller" or "Sellers" shall mean a holder of Restricted Securities of the Company for which the Company shall be required to file a registration statement or which shall be registered under the Securities Act at the request of such holder pursuant to the provisions of this Section 2. Neither the Company nor any of its Affiliates (as defined in the Warrants) shall be deemed a "Seller" for any purposes of this Agreement. If the managing underwriter for the respective offering, if any, advises the Company in writing that the inclusion in such registration of some or all of the Warrant Stock sought to be registered by the Seller or Sellers in its opinion will cause the proceeds or the price per unit the Company or the requesting or demanding holder of securities will derive from such registration to be reduced or that the number of securities to be registered at the instance of the Company or such requesting or demanding holder plus the number of securities sought to be registered by the Sellers is too large a number to be reasonably sold, the number of securities sought to be registered for each Seller shall be reduced pro rata, in proportion to the number of securities sought to be registered by all Sellers, to the extent necessary to reduce the number of securities to be registered to the number recommended by the managing underwriter (the 2 "Recommended Number"), subject at all times to those registration rights granted to certain holders of the Company's securities set forth in the Investors' Rights Agreement dated July 9, 1999 between the Company and the investors listed therein. (b) Incidental Registration. If the Company at any time proposes to ----------------------- register any of its securities under the Securities Act on Form S-1, S-2 or S-3 or the equivalent (otherwise than to register debt securities under Form S-3, or any comparable successor form), whether of its own accord or at the request of any holder or holders of such securities, it will each such time give written notice to all holders of outstanding Restricted Securities of its intention so to do. For purposes of this Agreement, the term "Restricted Securities" shall mean all Warrants and Warrant Stock that bear the restrictive legend set forth in Section 9.3 of the Warrants. Upon the written request of a holder or holders of any such Restricted Securities given within 30 days after receipt of any such notice, the Company will use its best efforts to cause all Restricted Securities, the holder or holders of which shall have so requested registration thereof, to be registered under the Securities Act pursuant to such registration statement, all to the extent requisite to permit the sale or other disposition (in accordance with the intended methods thereof as aforesaid) by the prospective Seller or Sellers of the Restricted Securities so registered. If the managing underwriter for the respective offering, if any, advises the Company in writing that the inclusion in such registration of some or all of the Restricted Securities sought to be registered by the Seller or Sellers in its opinion will cause the proceeds or the price per unit the Company or the requesting or demanding holder of securities will derive from such registration to be reduced or that the number of securities to be registered at the instance of the Company or such requesting or demanding holder plus the number of securities sought to be registered by the Sellers is too large a number to be reasonably sold, the number of securities sought to be registered for each Seller shall be reduced pro rata, in proportion to the number of securities sought to be registered by all Sellers, to the extent necessary to reduce the number of securities to be registered to the Recommended Number, subject at all times to those registration rights granted to certain holders of the Company's securities set forth in the Investors' Rights Agreement dated July 9, 1999 between the Company and the investors listed therein. (c) Registration Procedures. ----------------------- (i) If and whenever the Company is required by the provisions of this Section 2 to use its best efforts to effect the registration of any of the Restricted Securities under the Securities Act, the Company will (except as otherwise provided in this Agreement), as expeditiously as possible, (A) cooperate with any underwriters for, and the Sellers of, such Restricted Securities, and will enter into a usual and customary underwriting agreement with respect thereto (provided that the Company shall not be required to enter into more than two such underwriting agreements (one for a domestic 3 offering and one for an international offering) in connection with any such registration) and take all such other reasonable actions as are necessary or advisable to permit, expedite and facilitate the disposition of such Restricted Securities in the manner contemplated by the related registration statement, in each case to the same extent as if all the securities then being offered were for the account of the Company, and the Company will provide to any Seller of Restricted Securities, any underwriter participating in any distribution thereof pursuant to a registration statement, and any attorney, accountant or other agent retained by any Seller or underwriter, reasonable access to appropriate Company officers and employees to answer questions and to supply information reasonably requested by any such Seller, underwriter, attorney, accountant or agent in connection with such registration statement; (B) furnish or cause to be furnished to each Seller of Restricted Securities covered by such registration statement, addressed to such Sellers, a copy of the opinion of counsel for the Company, and a copy of the "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in the registration statement, delivered on the closing date to the underwriters of such Restricted Securities; (C) prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective; and prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities covered by such registration statement whenever the Seller or Sellers of such securities shall desire to sell or otherwise dispose of the same; provided that no such registration statement will be filed by the Company until counsel for the Sellers of securities included therein shall have had a reasonable opportunity to review the same and to exercise their rights under clause (A) above with respect thereto and no amendment to any such registration statement naming such Sellers as selling shareholders shall be filed with the Commission until such Sellers shall have had at least seven days to review such registration statement as originally filed and theretofore amended and to exercise their rights under clause (A) above; (D) furnish to each Seller such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such Seller may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Seller; (E) use its best efforts to register or qualify the securities covered by such registration statement under such other securities or blue sky laws of such 4 jurisdictions as each Seller shall request, and do any and all other acts and things which may be necessary or advisable to enable such Seller to consummate the public sale or other disposition in such jurisdictions of the securities owned by such Seller, except that the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service; (F) in the event of the issuance of any stop order suspending the effectiveness of any registration statement or of any order suspending or preventing the use of any prospectus or suspending the qualification of any Restricted Securities for sale in any jurisdiction, use its best efforts promptly to obtain its withdrawal; (G) in the event any prospectus used in connection with the distribution of Restricted Securities registered under the Securities Act pursuant to the provisions of this Section 2 is discovered to contain any untrue statement of any material fact or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, promptly provide each Holder that shall have requested registration of Restricted Securities with amended prospectuses correcting such statements; (H) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission; and (I) list such securities on any securities exchange on which any stock of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; provided, however, that notwithstanding any other provision of this -------- ------- Section 2, the Company shall not be required to maintain the effectiveness of any registration statement for a period in excess of one year (plus any period during which the effectiveness of such ---- registration has been suspended). From time to time after a transfer of Warrants or Warrant Stock pursuant to a registration statement the Company will file all reports required to be filed by it under the Securities Act, the Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission thereunder, and will take such further action as any holder or holders of Restricted Securities may reasonably request, all to the extent required to enable such holders to sell Restricted Securities pursuant to such laws and regulations thereunder. Upon written request, the Company will deliver to such holders a written statement as to whether it has complied with such requirements. (ii) In connection with the registration of Restricted Securities under the Securities Act pursuant to the provisions of this Section 2, each holder of Restricted Securities requesting such registration will (except as otherwise provided in this Agreement), as expeditiously as possible, 5 (A) in the event of the issuance of any stop order suspending the effectiveness of any registration statement or of any order suspending or preventing the use of any prospectus or suspending the qualification of any Restricted Securities for sale in any jurisdiction, use its best efforts promptly to discontinue the disposition of such Restricted Securities owned by such holder in such jurisdiction until such order has been withdrawn; and (B) in the event any prospectus used in connection with the distribution of Restricted Securities registered under the Securities Act pursuant to the provisions of this Section 2 is discovered to contain any untrue statement of any material fact or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, use its best efforts promptly to discontinue the disposition of such Restricted Securities owned by such holder until amended prospectuses correcting such statements have been provided to such holder. (d) Expenses; Limitations on Registration. All expenses incident to ------------------------------------- the Company's performance of its obligations in connection with any registration of the Sellers' Restricted Securities under this Agreement including, without limitation, printing expenses, fees and disbursements of counsel for the Company, fees of the National Association of Securities Dealers, Inc. in connection with its review of any offering contemplated in any registration statement and expenses of any special audits to which the Company shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration shall be paid by the Company. In addition, the Company shall pay (i) all registration and filing fees for the Sellers' Restricted Securities under federal and state securities laws, and (ii) expenses of registering or qualifying under or complying with the securities or blue sky laws of any jurisdictions. Notwithstanding the foregoing, in the event a Seller withdraws its request for registration of Restricted Securities other than by reason of (1) the Company's failure to perform its obligations in connection with such registration, (2) the failure to be timely satisfied of any closing condition contained in any underwriting agreement entered into in connection with such registration and not within the exclusive control of such Seller, (3) the termination of such underwriting agreement by the underwriters party thereto other than by reason of the failure on the part of such Seller to perform its obligations thereunder, or (4) the occurrence of any change that, in the sole judgment of such Seller, may materially adversely affect the selling price or marketability of the Restricted Securities for which registration was requested, including, without limitation, (A) any material adverse change in the business, business prospects, properties, condition (financial or otherwise) or operations of the Company, (B) the suspension of trading in the Common Stock by the Commission or any national securities exchange or automated quotation system or trading in securities generally on the New York Stock Exchange or the establishment of limited or minimum prices on any such national exchange or quotation system, (C) the declaration of any banking moratorium by Federal, New York or California State authorities, or (D) the occurrence of any outbreak or escalation of hostilities, the declaration by the United States of any national emergency or war or the occurrence of any other calamity or crisis the effect of which on financial markets is such, in the sole judgment of the managing underwriter for such Seller, as to make it impracticable or inadvisable to proceed with the 6 offering of the Restricted Securities, then such Seller shall bear such expenses. In addition, under all circumstances, each Seller shall pay one hundred percent (100%) of the gross underwriting spread or fees with respect to such Seller's Restricted Securities covered by any registration pursuant to this Section 2. It shall be a condition precedent to the obligation of the Company to take any action pursuant to this Section 2 in respect of the securities which are to be registered at the request of any prospective Seller that such prospective Seller shall furnish to the Company such information regarding such Seller and the securities held by such Seller and the intended method of disposition thereof as the Company shall reasonably request and as shall be required in connection with the action to be taken by the Company. The holders of Warrants and Warrant Stock shall be entitled to an aggregate of two effective demand registrations pursuant to Section 2(a) and an unlimited number of registrations pursuant to requests made under this Section 2(b); provided that any such registration request made by the requisite number -------- of holders which request shall be withdrawn (other than by reason of the Company's failure to perform its obligations hereunder or a material adverse change in its financial position or business) by the holders of a majority in number of shares evidenced or covered by the Restricted Securities sought to be so registered, after the respective registration statement shall have become effective, shall be treated as an "effective" registration for purposes of this Agreement. (e) Indemnification. --------------- (i) In the event of any registration of any Restricted Securities under the Securities Act pursuant to this Section 2, the Company shall indemnify and hold harmless the Seller of such Restricted Securities and any underwriter thereof, and their respective directors and officers, and each other Person, if any, who controls such Seller or any such underwriter within the meaning of the Securities Act ("Controlling Person"), against ------------------ any losses, claims, damages or liabilities, joint or several, to which such Seller or underwriter or any such director or officer or Controlling Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, expenses, damages or liabilities (or actions in respect thereof) arise out of or are based upon (A) any alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which such securities were registered under the Securities Act, or in any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or (B) any alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse such Seller or such director, officer or Controlling Person for any legal or any other expenses reasonably incurred by such Seller or such director, officer or Controlling Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not -------- ------- be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any alleged untrue statement or alleged omission made in such registration statement, preliminary prospectus, prospectus, or 7 amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such Seller specifically for use therein. The indemnity provided in this subsection shall remain in full force and effect regardless of any investigation made by or on behalf of such Seller or such director, officer or Controlling Person, and shall survive the transfer of such securities by such Seller. (ii) Each holder of any Restricted Securities shall, by acceptance thereof, severally and not jointly, indemnify and hold harmless the Company and any underwriter of such Restricted Securities and their respective directors and officers and each other Person, if any, who controls the Company or such underwriter (within the meaning of the Securities Act) against any losses, claims, expenses, damages or liabilities, joint or several, to which the Company or such underwriter or any such director or officer or any such Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (A) any alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which Restricted Securities were registered under the Securities Act, or in any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or (B) any alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such alleged untrue statement or alleged omission was contained in written information furnished to the Company through an instrument duly executed by such holder specifically for use therein, and shall reimburse the Company or such director, officer or other Person for any legal or any other expenses reasonably incurred in connection with investigating or defending any such loss, claim, damage, liability or action. (iii) Indemnification similar to that specified in clauses (i) and (ii) of this Section 2(e) shall be given by the Company and each holder of any Restricted Security (with such modifications as shall be to each other and to any underwriter with respect to any required registration or other qualification of any Restricted Securities under any federal or state law or regulation of governmental authority other than the Securities Act. The indemnity and expense reimbursements obligations of the Company under clauses (i) and (ii) of this Section 2(e) shall be in addition to any liability the Company may otherwise have. (iv) Each Person (an "Indemnitor") who under the preceding provisions ---------- of this Section 2(e) agrees to indemnify another Person (the "Indemnitee") ---------- shall have the right, subject to the provisions hereto, to designate counsel (acceptable to the Indemnitee) to defend any case or proceeding against the Indemnitee arising in respect of any claim of liability for which such indemnification may be claimed, to the end that duplication of legal expense may be minimized; provided that, if the Indemnitee notifies the Indemnitor that the former has been advised by its counsel that any single counsel in such case or proceeding would have a conflict of interest in representing both the Indemnitor and the 8 Indemnitee, the Indemnitee may designate its own counsel in such case or proceeding and, to the extent so provided above in this Section 2(e), shall be entitled to be reimbursed by Indemnitor for its legal expenses reasonably incurred in connection with defending itself in such case or proceeding. 3. Legends. The Investor agrees that a legend in substantially the form ------- set forth below shall be placed on all certificates evidencing the Warrants or Warrant Stock (in addition to any legend required under applicable state securities laws). Such legend shall read as follows: 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. 4. Notices. Any notice delivered in connection with this Agreement must ------- be in writing and must be either personally delivered, mailed by first class mail (postage prepaid and return receipt requested), sent by reputable overnight courier service (charges prepaid) or sent by facsimile (with follow-up telephone confirmation of receipt) to the recipient at the address and facsimile number below indicated (unless such information is subsequently modified in writing by such recipient and delivered pursuant to this notice provision): If to the Company, addressed to: RightStart.com Inc. 5388 Sterling Center Drive, Unit C Westlake Village, California 91361 Attn: Secretary Facsimile: (818) 707-7132 with a copy to: Milbank, Tweed, Hadley & McCloy LLP 601 South Figueroa Street, 30th Floor Los Angeles, California 90017 Attn: Kenneth J. Baronsky, Esq. Facsimile: (213) 629-5063 If to the Investor, addressed to the address set forth under the Investor's name on the signature pages hereof. 9 5. General Provisions. ------------------ (a) This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective, permitted successors and assigns. The Company may assign any of its rights or obligations hereunder without the prior written consent of the other parties hereto, to a successor to substantially all of the Company's business or assets, provided that such successor agrees to be bound by this Agreement. (b) So long as the Warrants and Warrant Stock have not been registered under the Securities Act, prior to transfer of a Warrant or Warrant Stock by an Investor, such transferring Investor agrees that his or her transferee will execute and deliver a copy of this Agreement to the Company and the transferring Investor. (c) This Agreement shall be governed by and construed in accordance with the law of the State of Delaware (excluding the law of conflicts thereof). (d) No course of dealing or any delay or failure to exercise any right, power or remedy hereunder on the party of any party hereto shall operate as a waiver of or otherwise prejudice such party's rights, powers or remedies. (e) Notwithstanding anything in this Agreement, the Company shall not be obligated to issue or sell any of the Common Stock if, in the judgment of the Board, such issuance or sale may violate Federal or applicable state securities laws or regulations or may require the Company to register or qualify any such Common Stock under any Federal or state securities laws, or require the Company or any of its agents or representatives to register or qualify with any governmental agency or organization, pursuant to such laws or regulations. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. RIGHTSTART.COM INC., a Delaware corporation /s/ Jerry R. Welch -------------------------------------------- Name: Jerry R. Welch Title: President and Chief Executive Officer Attest: /s/ Gina M. Engelhard - --------------------------------- Name: Gina M. Engelhard Title: Secretary and Chief Financial Officer 11 The Investor: /s/ Jonathan Davidson Warrant to purchase 54,600 shares of - ------------------------------ ------ Jonathan Davidson Common Stock of RightStart.com Inc. Address: c/o CEA Montgomery Media, L.L.C. 100 Wilshire Blvd., Suite 400 Santa Monica, CA 90401 Fax: (310) 260-6095 12 EX-10.37 9 SUBSCRIPTION AGREEMENT DATED DECEMBER 30, 1999 EXHIBIT 10.37 WARRANT SUBSCRIPTION AGREEMENT This Subscription Agreement (this "Agreement") is made as of December 30, 1999, by and between RightStart.com Inc., a Delaware corporation (the "Company"), and Oxygen Media, LLC, a Delaware limited liability company (the "Oxygen"). The parties hereto agree as follows: 1. Purchase and Sale of Securities. ------------------------------- (a) Authorization of Issuance. The Company's Board of Directors (the ------------------------- "Board") has authorized the issuance and sale to Oxygen of a warrant, substantially in the form attached hereto as Exhibit A (the "Warrant"), to purchase an aggregate of 136,500 shares of common stock, par value $.01 per share of the Company (the "Common Stock"). The Warrant is being issued pursuant to that certain Term Sheet dated October 28, 1999, between the Company, Oxygen and The Right Start, Inc., a copy of which has been attached hereto as Exhibit B (the "Term Sheet"). (b) Purchase and Sale. Subject to the terms and conditions set forth ----------------- in the Warrant and this Agreement, including the covenants contained in this paragraph, Oxygen agrees to purchase, and the Company agrees to issue and sell to Oxygen, a Warrant to purchase 136,500 shares of Common Stock, subject to adjustment from time to time as set forth in the Warrant. (c) Oxygen Representation and Warranties. In connection with the ------------------------------------ purchase and sale of the Warrant and the Common Stock issuable upon conversion of the Warrant (the "Warrant Stock"), Oxygen represents and warrants to the Company that: (i) the Warrant and the Warrant Stock to be acquired by Oxygen pursuant to this Agreement will be acquired for Oxygen's own accounts and not with a view to, or intention of, distribution thereof in violation of the Securities Act of 1933, as amended (the "Securities Act"), or any applicable state securities laws, and the Warrant and the Warrant Stock will not be disposed of in contravention of the Securities Act or any applicable state securities laws; (ii) Oxygen is familiar with the term "accredited investor" as defined in Rule 501 under the Securities Act and Oxygen is an "accredited investor" within the meaning of such term in Rule 501 under the Securities Act; (iii) Oxygen is sophisticated in financial matters and is able to evaluate the risks and benefits of the investment in the Company's securities; (iv) Oxygen is able to bear the economic risk of its investment in the Warrant and the Common Stock issuable on conversion thereof for an indefinite period of time because the Warrant and the Common Stock (A) have not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available and (B) are subject to additional restrictions as provided herein; (v) Oxygen has had an opportunity to ask questions and receive answers concerning the terms and conditions of the sale of the Warrant and the Warrant Stock and has had full access to such other information concerning the Company as it has requested; and (vi) this Agreement constitutes the legal, valid and binding obligation of Oxygen, enforceable in accordance with its terms, and the execution, delivery and performance of this Agreement by Oxygen does not and will not conflict with, violate or cause a breach of any agreement, contract or instrument to which Oxygen is party or any judgment, order or decree to which Oxygen is subject which would have a material adverse effect on Oxygen or the Company. 2. Legends. Oxygen agrees that a legend in substantially the form set ------- forth below shall be placed on all certificates evidencing the Warrant or the Warrant Stock (in addition to any legend required under applicable state securities laws). Such legend shall read as follows: 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. 3. Representations and Warranties of the Company. --------------------------------------------- (a) Corporate Existence; Authority. The Company is a corporation duly ------------------------------ organized, validly existing and in good standing under the laws of Delaware, and it has all requisite power and authority to carry on its business as it is being conducted. (b) Authorization. All corporate action necessary for the ------------- authorization, execution and delivery of this Agreement and the Warrant by the Company, and the performance of all obligations of the Company hereunder and thereunder, has been taken, and this Agreement and the Warrant, each 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 (c) Valid Issuance of Common Stock. Upon issuance in accordance with ------------------------------ the terms of Warrant, the Common Stock issuable upon exercise of the Warrant will be duly authorized and validly issued, fully paid, and nonassessable and will be free of restrictions on transfer other than restrictions on transfer under this Agreement, the Warrant and under applicable state and federal securities laws. (d) No Conflicts. The execution, delivery and performance by the ------------ Company of this Agreement and the Warrant, and the consummation of the transactions contemplated hereby and thereby, will not result in any violation, be in conflict with or constitute, with or without the passage of time or giving of notice, a default under the Company's certificate of incorporation or bylaws or, to the Company's knowledge, any agreement, contract or instrument to which the Company is a party, the effect which would have a material adverse effect on the Company. 4. Registration Rights. ------------------- (a) Incidental Registration. If the Company at any time proposes to ----------------------- register any of its securities under the Securities Act on Form S-1, S-2 or S-3 or the equivalent (otherwise than to register debt securities under Form S-3, or any comparable successor form), whether of its own accord or at the request of any holder or holders of such securities, it will each such time give written notice to Oxygen of its intention so to do. Upon the written request of Oxgyen given within 20 days after receipt of any such notice, the Company will use its best efforts to cause all Restricted Securities (including Restricted Securities issuable upon conversion of a Warrant that is converted at least 15 days prior to the effective date of the registration for such securities) to be registered under the Securities Act pursuant to such registration statement, all to the extent requisite to permit the sale or other disposition (in accordance with the intended methods thereof as aforesaid) by the prospective Seller or Sellers of the Restricted Securities so registered. For purposes of this Agreement, the term "Restricted Securities" shall mean all Warrant Stock that bears the restrictive legend set forth in Section 2. For purposes of this Agreement, the term "Seller" or "Sellers" shall mean a holder of Restricted Securities of the Company for which the Company shall be required to file a registration statement or which shall be registered under the Securities Act at the request of such holder pursuant to the provisions of this Section 4. Neither the Company nor any of its Affiliates (as defined in the Warrants) shall be deemed a "Seller" for any purposes of this Agreement. If the managing underwriter for the respective offering, if any, advises the Company in writing that the inclusion in such registration of some or all of the Restricted Securities sought to be registered by the Seller or Sellers in its opinion will cause the proceeds or the price per unit the Company or the requesting or demanding holder of securities will derive from such registration to be reduced or that the number of securities to be registered at the instance of the Company or such requesting or demanding holder plus the number of securities sought to be registered by the Sellers is too large a number to be reasonably sold, the number of securities sought to be registered for each Seller shall be reduced pro rata, in proportion to the 3 number of securities sought to be registered by all Sellers holding pari passu registration rights, to the extent necessary to reduce the number of securities to be registered to the number recommended by the managing underwriter. It is the intention of the Company that Oxygen's registration rights rank pari passu as to cutbacks with that of registration rights granted to other holders of the Company's securities, except as set forth in that certain Investors' Rights Agreement dated as of July 9, 1999 between the Company and the investors named therein. (b) Registration Procedures. ----------------------- (i) If and whenever the Company is required by the provisions of this Section 4 to use its best efforts to effect the registration of any of the Restricted Securities under the Securities Act, the Company will (except as otherwise provided in this Agreement), as expeditiously as possible, (A) cooperate with any underwriters for, and the Sellers of, such Restricted Securities, and will enter into a usual and customary underwriting agreement with respect thereto (provided that the Company shall not be required to enter into more than two such underwriting agreements (one for a domestic offering and one for an international offering) in connection with any such registration) and take all such other reasonable actions as are necessary or advisable to permit, expedite and facilitate the disposition of such Restricted Securities in the manner contemplated by the related registration statement, in each case to the same extent as if all the securities then being offered were for the account of the Company, and the Company will provide to any Seller of Restricted Securities, any underwriter participating in any distribution thereof pursuant to a registration statement, and any attorney, accountant or other agent retained by any Seller or underwriter, reasonable access to appropriate Company officers and employees to answer questions and to supply information reasonably requested by any such Seller, underwriter, attorney, accountant or agent in connection with such registration statement; (B) furnish or cause to be furnished to each Seller of Restricted Securities covered by such registration statement, addressed to such Sellers, a copy of the opinion of counsel for the Company, and a copy of the "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in the registration statement, delivered on the closing date to the underwriters of such Restricted Securities; (C) prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective; and prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities covered by such 4 registration statement whenever the Seller or Sellers of such securities shall desire to sell or otherwise dispose of the same; provided that no such registration statement will be filed by the Company until counsel for the Sellers of securities included therein shall have had a reasonable opportunity to review the same and to exercise their rights under clause (A) above with respect thereto and no amendment to any such registration statement naming such Sellers as selling shareholders shall be filed with the Commission until such Sellers shall have had at least seven days to review such registration statement as originally filed and theretofore amended and to exercise their rights under clause (A) above; (D) furnish to each Seller such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such Seller may reasonably request in order to facilitate the public sale or other disposition of the securities owned by such Seller; (E) use its best efforts to register or qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as each Seller shall request, and do any and all other acts and things which may be necessary or advisable to enable such Seller to consummate the public sale or other disposition in such jurisdictions of the securities owned by such Seller, except that the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service; (F) in the event of the issuance of any stop order suspending the effectiveness of any registration statement or of any order suspending or preventing the use of any prospectus or suspending the qualification of any Restricted Securities for sale in any jurisdiction, use its best efforts promptly to obtain its withdrawal; (G) in the event any prospectus used in connection with the distribution of Restricted Securities registered under the Securities Act pursuant to the provisions of this Section 4 is discovered to contain any untrue statement of any material fact or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, promptly provide each holder that shall have requested registration of Restricted Securities with amended prospectuses correcting such statements; (H) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission; and (I) list such securities on any securities exchange on which any stock of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange; provided, however, that notwithstanding any other provision of this -------- ------- 5 notwithstanding any other provision of this Section 4, the Company shall not be required to maintain the effectiveness of any registration statement for a period in excess of one year (plus any period during which the effectiveness of such registration has been suspended). From time to time after a transfer of Warrant Stock pursuant to a registration statement the Company will file all reports required to be filed by it under the Securities Act, the Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations adopted by the Securities and Exchange Commission thereunder, and will take such further action as any holder or holders of Restricted Securities may reasonably request, all to the extent required to enable such holders to sell Restricted Securities pursuant to such laws and regulations thereunder. Upon written request, the Company will deliver to such holders a written statement as to whether it has complied with such requirements. (ii) In connection with the registration of Restricted Securities under the Securities Act pursuant to the provisions of this Section 4, each holder of Restricted Securities requesting such registration will (except as otherwise provided in this Agreement), as expeditiously as possible, (A) in the event of the issuance of any stop order suspending the effectiveness of any registration statement or of any order suspending or preventing the use of any prospectus or suspending the qualification of any Restricted Securities for sale in any jurisdiction, use its best efforts promptly to discontinue the disposition of such Restricted Securities owned by such holders in such jurisdiction until such order has been withdrawn; and (B) in the event any prospectus used in connection with the distribution of Restricted Securities registered under the Securities Act pursuant to the provisions of this Section 4 is discovered to contain any untrue statement of any material fact or any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, use its best efforts promptly to discontinue the disposition of such Restricted Securities owned by such holder until amended prospectuses correcting such statements have been provided to such holder. (c) Expenses; Limitations on Registration. All expenses incident to ------------------------------------- the Company's performance of its obligations in connection with any registration of the Sellers' Restricted Securities under this Agreement including, without limitation, printing expenses, fees and disbursements of counsel for the Company, fees of the National Association of Securities Dealers, Inc. in connection with its review of any offering contemplated in any registration statement and expenses of any special audits to which the Company shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration shall be paid by the Company. In addition, the Company shall pay (i) all registration and filing fees for the Sellers' Restricted Securities under federal and state securities laws, and (ii) expenses of registering or qualifying under or complying with the securities or blue sky laws of any 6 jurisdictions. Notwithstanding the foregoing, in the event a Seller withdraws its request for registration of Restricted Securities other than by reason of (1) the Company's failure to perform its obligations in connection with such registration, (2) the failure to be timely satisfied of any closing condition contained in any underwriting agreement entered into in connection with such registration and not within the exclusive control of such Seller, (3) the termination of such underwriting agreement by the underwriters party thereto other than by reason of the failure on the part of such Seller to perform its obligations thereunder, or (4) the occurrence of any change that, in the sole judgment of such Seller, may materially adversely affect the selling price or marketability of the Restricted Securities for which registration was requested, including, without limitation, (A) any material adverse change in the business, business prospects, properties, condition (financial or otherwise) or operations of the Company, (B) the suspension of trading in the Common Stock by the Commission or any national securities exchange or automated quotation system or trading in securities generally on the New York Stock Exchange or the establishment of limited or minimum prices on any such national exchange or quotation system, (C) the declaration of any banking moratorium by Federal, New York or California State authorities, or (D) the occurrence of any outbreak or escalation of hostilities, the declaration by the United States of any national emergency or war or the occurrence of any other calamity or crisis the effect of which on financial markets is such, in the sole judgment of the managing underwriter for such Seller, as to make it impracticable or inadvisable to proceed with the offering of the Restricted Securities, then such Seller shall bear such expenses. In addition, under all circumstances, each Seller shall pay one hundred percent (100%) of the gross underwriting spread or fees with respect to such Seller's Restricted Securities covered by any registration pursuant to this Section 2. It shall be a condition precedent to the obligation of the Company to take any action pursuant to this Section 4 in respect of the securities which are to be registered at the request of any prospective Seller that such prospective Seller shall furnish to the Company such information regarding such Seller and the securities held by such Seller and the intended method of disposition thereof as the Company shall reasonably request and as shall be required in connection with the action to be taken by the Company. (d) Indemnification. --------------- (i) In the event of any registration of any Restricted Securities under the Securities Act pursuant to this Section 4, the Company shall indemnify and hold harmless the Seller of such Restricted Securities and any underwriter thereof, and their respective directors and officers, and each other Person, if any, who controls such Seller or any such underwriter within the meaning of the Securities Act ("Controlling Person"), against any losses, claims, damages or liabilities, joint or several, to which such Seller or underwriter or any such director or officer or Controlling Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, expenses, damages or liabilities (or actions in respect thereof) arise out of or are based upon (A) any alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which such securities were registered under the Securities Act, or in any preliminary prospectus or final prospectus contained 7 therein, or any amendment or supplement thereto, or (B) any alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse such Seller or such director, officer or Controlling Person for any legal or any other expenses reasonably incurred by such Seller or such director, officer or Controlling Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any alleged untrue statement or alleged omission made in such registration statement, preliminary prospectus, prospectus, or amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such Seller specifically for use therein. The indemnity provided in this subsection shall remain in full force and effect regardless of any investigation made by or on behalf of such Seller or such director, officer or Controlling Person, and shall survive the transfer of such securities by such Seller. (ii) Each holder of any Restricted Securities shall, by acceptance thereof, severally and not jointly, indemnify and hold harmless the Company, each other selling stockholder and any underwriter of such Restricted Securities and their respective directors and officers and each other Person, if any, who controls the Company or such underwriter (within the meaning of the Securities Act) against any losses, claims, expenses, damages or liabilities, joint or several, to which the Company or such underwriter or any such director or officer or any such Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (A) any alleged untrue statement of any material fact contained, on the effective date thereof, in any registration statement under which Restricted Securities were registered under the Securities Act, or in any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or (B) any alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such alleged untrue statement or alleged omission was contained in written information furnished to the Company through an instrument duly executed by such holder specifically for use therein, and shall reimburse the Company or such director, officer or other Person for any legal or any other expenses reasonably incurred in connection with investigating or defending any such loss, claim, damage, liability or action; provided that in no event shall such indemnification amount to be paid hereunder be in excess of the net proceeds received by such selling stockholder in such offering . (iii) Indemnification similar to that specified in clauses (i) and (ii) of this Section 4(d) shall be given by the Company and each holder of any Restricted Security (with such modifications as shall be appropriate) to each other and to any underwriter with respect to any required registration or other qualification of any Restricted Securities under any federal or state law or regulation of governmental authority other than the Securities Act. The indemnity and expense reimbursements obligations of the Company under clauses (i) 8 and (ii) of this Section 4(d) shall be in addition to any liability the Company may otherwise have. (iv) Each Person (an "Indemnitor") who under the preceding provisions ---------- of this Section 4(d) agrees to indemnify another Person (the "Indemnitee") ---------- shall have the right, subject to the provisions hereto, to designate counsel (acceptable to the Indemnitee) to defend any case or proceeding against the Indemnitee arising in respect of any claim of liability for which such indemnification may be claimed, to the end that duplication of legal expense may be minimized; provided that, if the Indemnitee notifies the Indemnitor that the former has been advised by its counsel that any single counsel in such case or proceeding would have a conflict of interest in representing both the Indemnitor and the Indemnitee, the Indemnitee may designate its own counsel in such case or proceeding and, to the extent so provided above in this Section 4(d), shall be entitled to be reimbursed by Indemnitor for its legal expenses reasonably incurred in connection with defending itself in such case or proceeding. (e) Termination of Registration Rights. The right of any holder to ------------------------------------- request registration or inclusion in any registration pursuant to this Section 4 shall terminate on the closing of the first Company-initiated registered public offering of Common Stock of the Company, if all shares of Warrant Stock held by such holder (assuming exercise in full of the Warrant) 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 Warrant Stock held by such holder (assuming exercise in full of the Warrant) 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. 5. "Lock-Up" Agreement. If requested by the Company or any representative ------------------ of an underwriter of Common Stock (or other securities) of the Company following the Company's initial public offering, Oxygen shall not sell or otherwise transfer or dispose of any Common Stock or other securities of the Company held by it (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, Oxygen 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 5 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. 9 6. Notices. Any notice delivered in connection with this Agreement must ------- be in writing and must be either personally delivered, mailed by first class mail (postage prepaid and return receipt requested), sent by reputable overnight courier service (charges prepaid) or sent by facsimile (with follow-up telephone confirmation of receipt) to the recipient at the address and facsimile number below indicated (unless such information is subsequently modified in writing by such recipient and delivered pursuant to this notice provision): If to the Company, addressed to: RightStart.com Inc. 5388 Sterling Center Drive, Unit C Westlake Village, California 91361 Attn: Chief Financial Officer or General Counsel Facsimile: (818) 707-7132 with a copy to: Milbank, Tweed, Hadley & McCloy LLP 601 South Figueroa Street, 30th Floor Los Angeles, California 90017 Attn: Kenneth J. Baronsky, Esq. Facsimile: (213) 629-5063 If to Oxygen, addressed to: Oxygen Media 75 9th Avenue New York, New York 10011 Attn: Abe Hsuan, Esq. Facsimile: (212) 651-2052 with a copy to: Debevoise & Plimpton 875 Third Avenue, 27th Floor New York, New York 10022 Attn: Michael Gillespie, Esq. Facsimile: (212) 909-6836 6. General Provisions. ------------------ (a) This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective, permitted successors and assigns. Either party may assign any of its rights or obligations hereunder without the prior written consent of the other party 10 hereto to a successor to substantially all of such assigning party's business or assets, provided that such successor agrees to be bound by this Agreement. (b) So long as the Warrant and the Warrant Stock have not been registered under the Securities Act, prior to transfer of a Warrant or Warrant Stock by Oxygen, Oxygen agrees that its transferee will execute and deliver a copy of this Agreement to the Company and Oxygen. (c) This Agreement shall be governed by and construed in accordance with the law of the State of Delaware (excluding the law of conflicts thereof). (d) No course of dealing or any delay or failure to exercise any right, power or remedy hereunder on the party of any party hereto shall operate as a waiver of or otherwise prejudice such party's rights, powers or remedies. (e) Notwithstanding anything in this Agreement, the Company shall not be obligated to issue or sell any of the Warrant Stock if, in the judgment of the Board, such issuance or sale may violate Federal or applicable state securities laws or regulations or may require the Company to register or qualify any such Warrant Stock under any Federal or state securities laws, or require the Company or any of its agents or representatives to register or qualify with any governmental agency or organization, pursuant to such laws or regulations. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. RIGHTSTART.COM INC., a Delaware corporation By: /s/ Jerry R. Welch ----------------------------------------- Name: Jerry R. Welch Title: President and Chief Executive Officer OXYGEN MEDIA, LLC, a Delaware limited liability company By: /s/ Daniel M. Taltz ----------------------------------------- Name: Daniel M. Taltz Title: General Counsel 12 EX-10.38 10 STOCK GRANT AGREEMENT DATED OCTOBER 30, 1999 EXHIBIT 10.38 STOCK GRANT AGREEMENT This Stock Grant Agreement (this "Agreement") is made as of the 30th day of October, 1999 by and among The Right Start, Inc., a California corporation (the "Company"), RightStart.com Inc., a Delaware corporation (the "Subsidiary") and Guidance Solutions, Inc. (the "Developer"); (the Company and the Subsidiary shall be collectively referred to herein as the "Right Start"); WHEREAS, the Company, as of the date hereof, owns a majority of the outstanding common stock, par value $.01 per share of Subsidiary (the "Common Stock"); WHEREAS, Developer has provided services to the Company and Subsidiary in connection with Subsidiary's electronic commerce Internet web site currently located at www.rightstart.com (the "Web Site"); ------------------ WHEREAS, the Board of Directors of each of the Company and Subsidiary (each a "Board") believes that an ongoing relationship between the Subsidiary and the Developer will be instrumental in increasing the value of the Subsidiary and, accordingly, that it is in the best interests of the Subsidiary and its stockholders to provide Developer with a direct interest in the success of the Subsidiary; and WHEREAS, in order to provide the Developer with an equity incentive in the Subsidiary, the Company, in accordance with the terms of this Agreement, has agreed to transfer to the Developer an aggregate of 288,333 shares of the Subsidiary's Common Stock (the "Shares"). NOW THEREFORE, in consideration of the mutual promises, covenants and conditions hereinafter set forth, the parties hereto mutually agree as follows: SECTION 1 Authorization and Grant of Stock -------------------------------- .1 Authorization of Restricted Stock. The Company has authorized the --------------------------------- transfer to the Developer of 288,333 shares of the Subsidiary's Common Stock held by the Company, on the terms set forth herein. .2 Grant of the Shares; Consideration. The Company hereby grants to the ---------------------------------- Developer the Shares, 171,000 of which shall be granted on the date hereof to Developer for services previously rendered by Developer in connection with the performance of that certain Services Agreement dated as of February 15, 1999, between the Company and Developer, and 117,333 shares of which shall be granted on the date hereof to Developer as an incentive to continue to provide partnering and development services to the Right Start. 1 .3 Stock Issuance. On the date hereof, the Company shall issue the Shares -------------- to Developer. Upon issuance, Developer shall be entitled to exercise all rights as a Common Stock holder of Subsidiary without limitation. SECTION 2 Representations and Warranties ------------------------------ .1 Representations and Warranties of the Company and Subsidiary. ------------------------------------------------------------ .1 Organization; Good Standing; Qualification. The Company and the ------------------------------------------ Subsidiary are corporations duly organized, validly existing, and in good standing under the laws of their states of incorporation, have all requisite corporate power and authority to execute and deliver this Agreement and to carry out the provisions of this Agreement, and the Company has all requisite corporate power and authority to transfer the Shares. .2 Authorization. All corporate action on the part of the Company ------------- and the Subsidiary, and their respective officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company and Subsidiary hereunder, and the transfer and delivery of the Shares being granted hereunder, has been taken and this Agreement, when executed and delivered, will constitute the valid and legally binding obligations of the Company and the Subsidiary, each enforceable in accordance with its 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. .3 Valid Transfer of Common Stock. ------------------------------- (a) The Company is the sole legal and the beneficial owner of the Shares to be granted to Developer hereunder and is conveying to the Developer such Shares, free and clear of any liens, claims, interests, charges and encumbrances. (b) The Company has neither previously sold, assigned, conveyed, transferred or otherwise disposed of, in whole or in part, the Shares to be transferred by it hereunder, nor entered into any agreement to sell, assign, convey, transfer or otherwise dispose of, in whole or in part, such Shares. .4 Capitalization and Voting Rights. As of the date hereof, the -------------------------------- authorized capital of the Subsidiary consists of: (a) Preferred Stock. 5,000,000 shares of blank check Preferred Stock, par value $.01, of which 3,333,333 shares have been designated as Series A Convertible Preferred Stock; no shares of Preferred Stock are issued and outstanding. 2 (b) Common Stock. 20,000,000 shares of common stock, par value $.01, of which 9,100,000 shares are issued and outstanding. SECTION 3 Transferability; Registration Rights; Financial Information ----------------------------------------------------------- .1 Transferability of Common Stock. The Shares may be transferred by ------------------------------- Developer in compliance with applicable state and federal securities laws, provided each person or entity to whom all or a portion of such Common Stock is transferred agrees to be bound by this Section 3.1. Each certificate representing any shares of Common Stock constituting all or a portion of the Shares (unless Subsidiary shall have received an opinion from counsel at Developer's expense (which counsel may be counsel to the Subsidiary) reasonably acceptable to the Subsidiary to the effect that such securities may lawfully be disposed of without registration, qualification or legend) shall be imprinted with the following legend (a "'33 Act Legend"): 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. .2 Registration Rights. The Subsidiary shall also grant to -------------------- Developer registration rights with respect to the Shares. Such registration rights to be granted to Developer shall consist of one demand registration and unlimited piggyback registrations for the Shares held by Developer at the time of registration, all of which registration rights may be exercised only after the Subsidiary's initial public offering. Such registration rights shall be subject to customary terms regarding cut-backs, allocation among shareholders and indemnification. .3 Securities Laws; Investor Representations; Legends. -------------------------------------------------- .1 No Issuance in Violation of Securities Laws; Legends. ------------------------------------------------------ Notwithstanding the foregoing, the Shares shall not be delivered to Developer if such delivery would constitute a violation of any applicable Federal or state securities or other laws or regulations. As a condition to the delivery of the Shares to Developer, the Company may require Developer to make certain representations and warranties that may be required by applicable law or regulation, and, specifically, may require Developer to provide evidence satisfactory to the Company that the Shares are being acquired only for investment purposes and without any present intention to sell or distribute such shares in violation of any federal or state securities or other laws or regulations. .2 Investor Representations and Warranties. In connection --------------------------------------- with the grant of the Shares, the Developer represents and warrants to the Company that: 3 4.5.2.1 the Shares to be acquired by the Developer pursuant to this Agreement will be acquired for the Developer's own accounts and not with a view to, or intention of, distribution thereof in violation of the Securities Act or any applicable state securities laws, and the Shares will not be disposed of in contravention of the Securities Act or any applicable state securities laws. 4.5.2.2 the Developer is familiar with the term "accredited investor" as defined in Rule 501 under the Securities Act and the Developer is an "accredited investor" within the meaning of such term in Rule 501 under the Securities Act; 4.5.2.3 the Developer is sophisticated in financial matters and is able to evaluate the risks and benefits of the investment in the Common Stock; 4.5.2.4 the Developer is able to bear the economic risk of its investment in the Common Stock constituting the Shares for an indefinite period of time because the Shares have not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available; 4.5.2.5 is Agreement constitutes the legal, valid and binding obligation of the Developer, enforceable in accordance with its terms, and the execution, delivery and performance of this Agreement by the Developer does not and will not conflict with or violate any law, regulation, judgment, order or decree to which Developer is subject which would have a material adverse effect on Developer; and 4.5.2.6 the Developer is not an "investment company" or a person directly or indirectly controlled by or acting on behalf of a "investment company" within the meaning of the Investment Company Act of 1940, as amended. .3 Financial Information. Unless notified by Developer to --------------------- the contrary, the Subsidiary shall provide to Developer (so long as Subsidiary is not a reporting company under the Securities Exchange Act of 1934, as amended) audited annual financial information and unaudited quarterly financial information (each including a balance sheet as of such period end date, and statements of cash-flows and statements of operations of Subsidiary for such period). .4 California Corporate Securities Law. The grant 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 consideration therefor prior to such qualification is unlawful, unless an exemption from such qualification is available. The rights of all parties to this Agreement are expressly conditioned upon such qualification being obtained, or such exemption being available. 4 SECTION 4 Miscellaneous ------------- .1 Governing Law. This Agreement shall be governed in all respects by ------------- the laws of the State of California. .2 Successors and Assigns. Except 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, provided, however, that the rights of the Developer to receive the Shares shall not be assignable other than to an affiliate of Developer without the prior written consent of the Company. .3 Entire Agreement; Amendment. This Agreement and the other --------------------------- documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, 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. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. .4 Notices, etc. All notices and other communications required or ------------ permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to the Developer, to 4134 Del Rey Avenue, Marina del Rey, California 90292; attention: Gary Burison, Chief Financial Officer (or to such other address as Developer shall have furnished to the Company in writing), or (b) if to the Company or Subsidiary, to 5388 Sterling Center Drive, Unit C, Westlake Village, California 91361; attention: President (or to such other address as the Company or Subsidiary shall have furnished to the Developer). Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid. .5 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be enforceable against the party actually executing such counterpart, and all of which together shall constitute one instrument. 5 IN WITNESS WHEREOF, the foregoing Agreement is hereby executed as of the date first above written. COMPANY: THE RIGHT START, INC. - ------- By: /s/ Jerry R. Welch ------------------------------------ Name: Jerry R. Welch Title: President and Chief Executive Officer SUBSIDIARY: RIGHTSTART.COM INC. - ---------- By: /s/ Jerry R. Welch ------------------------------------ Name: Jerry R. Welch Title: President and Chief Executive Officer DEVELOPER: GUIDANCE SOLUTIONS, INC. - --------- By: /s/ Gary Burnison ------------------------------------ Name: Gary Burnison Title: Chief Financial Officer 6 EX-10.39 11 REGISTRATION RIGHTS AGMT DATED OCTOBER 30, 1999 EXHIBIT 10.39 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of the 30th day of October, 1999 by and among RightStart.com Inc., a Delaware corporation (the "Company") and Guidance Solutions, Inc. (the ------- "Developer"). --------- Recitals WHEREAS, the Company, The Right Start, Inc., a California corporation ("Parent") and Developer are parties to the Stock Grant Agreement dated as of ------ even date herewith (the "Grant Agreement"); and --------------- WHEREAS, certain of Parent's and the Developer's obligations under the Grant Agreement are conditioned upon the execution and delivery by 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 sale of shares by Parent to Developer ------- of the Company's Common 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 "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. 1.6 "Holder" shall mean Developer so long as it holds any Common Stock and ------ any holder of Common Stock who acquired such Securities from Developer in accordance with this Agreement. 1.7 "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. 1.8 "Registrable Securities" shall mean any Securities 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. 1.9 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. 1.10 "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. 1.11 "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. 1.12 "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 and similar successor rule that may be promulgated by the Commission. 1.13 "Securities" shall mean shares of the Company's Common Stock granted under ---------- the Grant Agreement and any shares issued upon or in exchange for such securities. 1.14 "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. 1.15 "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. 2. Restrictions on Transfer. 2.1 Legend. ------ (a) Each certificate representing Securities now or hereafter owned by Developer 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 REGISTRATION 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." (b) Developer 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 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. (c) 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. (d) 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. 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) In addition to complying with Section 3.7 hereof, 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 3 company to its members or former members in accordance with their interest in the limited liability company, (iv) to such Holder's family member or trust for the benefit of an individual Holder, or (v) to such Holder's Affiliates, 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. 3. Registration RIGHTS. 3.1 Demand Registration. ------------------- (a) If the Company shall receive at any time after the Company's initial underwritten public offering of its Common Stock (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 Developer that the Company file a registration statement registering Registrable Securities constituting at least twenty-five percent (25%) of the Registrable Securities held by the Developer on the date hereof, 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 ten (10) business 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 one registration pursuant to Section 3.1(a) -------------- (counting for these purposes only (1) a registration which has been declared or ordered effective and pursuant to which securities have been sold and (2) a registration which has 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); 4 (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; (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 of Developer (or its 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 Developer (or its 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 Developer (or its transferees) may, subject to the provisions of Sections 3.1(d) --------------- and 3.9 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. (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 3.9). 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 3.9 ----------- 5 hereof; provided that the Holder(s) exercising its demand registration rights -------- under this Section 3.1 shall first be entitled to register all of its securities ----------- subject to such request before any other person or entity shall be entitled to include securities in such offering. 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. 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 3.9. ----------- 3.2 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 3.2(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) business 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. (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 ------- 3.2(a)(i). In such event, the right of any Holder to registration pursuant to - --------- this Section 3.2 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 3.2, if the ------------ representative of the underwriters advises the Company in writing that marketing factors require a limitation on the 6 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 and Other Shares (as defined in Section 3.9 below) that the Board of Directors ----------- determine in its sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling Holders and Other Stockholders requesting to participate in such registration in accordance with Section 3.9 hereof, or in such other proportions as shall ----------- mutually be agreed to be such selling Holders). 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 3.9 hereof. ----------- 3.3 Expenses of Registration. All Registration Expenses incurred in -------------------------- connection with any registration, qualification or compliance pursuant to Sections 3.1 or 3.2 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 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. 3.4 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 7 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 two (2) years 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 for such period; 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; (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 underwriting agreement in form reasonably necessary to effect the offer and sale of Common Stock. 3.5 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 8 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 3.5(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 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 3.5(b) exceed the net proceeds from the offering -------------- received by such Holder. (c) Each party entitled to indemnification under this Section 3.5 (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 9 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 3.5 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 3.5 shall have no further force and effect. ----------- 3.6 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. --------- 3.7 Transfer or Assignment of Registration Rights. 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 and ----------- under Section 3.2 may be transferred or assigned to a transferee or assignee (in ----------- accordance with Section 2 hereof) (a) who acquires at least twenty-five percent --------- (25%) of such Holder's Securities, which assignee or transferee is acceptable to the Company (which acceptance shall not be unreasonably withheld) or (b) to an Affiliate of Holder regardless of the number of Securities transferred to such Affiliate; 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 10 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. --------- 11 3.8 "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 3.8 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. 3.9 Allocation of Registration Opportunities. In any circumstance in which all ----------------------------------------- of the securities of the Company with registration rights (the "Other Shares") ------------- requested to be included in a registration on behalf of the Holders or Other 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 Stockholders requesting inclusion of shares pro rata on the basis of the number of shares of Registrable Securities and Other Shares such parties requested to have registered in such offering; 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 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 for which registration had been requested, 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 Stockholders have been so allocated. 3.10 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. --------- 12 3.11 Termination of Registration Rights. The right of any Holde to request ------------------------------------- registration or inclusion in any registration pursuant to Section 3.1 or 3.2 ----------- --- 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 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 its Common Stock as all shares of Registrable Securities held 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. MISCELLANEOUS. 4.1 Governing Law. This Agreement shall be governed in all respects by the laws ------------- of the State of Delaware (except choice of law provisions thereof). 4.2 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. 4.3 Successors and Assigns. Except as otherwise expressly provided herein, ---------------------- this Agreement shall not 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. 4.4 Entire Agreement; Amendment; Waiver. Except as set forth in Section 2.1(f), ----------------------------------- --------------- this Agreement (including the Exhibits and Schedules hereto) constitutes the fulland 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 a majority of the Holders 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. 4.5 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 Developer, to the address set forth below, (b) if to a Holder other than Developer [(or a member thereof)], at such address or facsimile 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: 13 If to Developer: Guidance Solutions, Inc. 4134 Del Ray Avenue Marina Del Ray, CA 90292 Attention: Gary Burnison Facsimile: (310) 754-4010 with a copy to: Bruce Meyer, Esq. Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, California 90071-3197 Facsimile: 213-229-6979 If to the Company: RightStart.com Inc. 5388 Sterling Center Drive - Unit C Westlake Village, CA 91361 Attention: President Facsimile: (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 Facsimile: (213) 629-5063 All such notices and other written communications shall be effective on the date of mailing, confirmed facsimile transfer or delivery. 14 4.6 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. 4.7 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. 4.8 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 rights 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. 4.9 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. 4.10 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. 15 IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement effective as of the day and year first above written. RIGHTSTART.COM INC. By: /s/ Jerry R. Welch ------------------------------ Name: Jerry R. Welch Title: President GUIDANCE SOLUTIONS, INC. By: /s/ Gary Burnison ------------------------------ Name: Gary Burnison Title: Chief Financial Officer EX-23.1 12 CONSENT OF ARTHUR ANDERSEN EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed registration statements on Form S-8 (File Nos. 333-21747, 333-21749, 333-77669, 333-77671, 333-78837 and 333-78891) and on Form S-3 (File No. 333-84319). /s/ Arthur Andersen LLP Arthur Andersen LLP Los Angeles, California April 28, 2000 EX-23.2 13 CONSENT OF PRICEWATERHOUSECOOPERS EXHIBIT 23.2 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-84319) and in the Registration Statements on Form S-8 (No. 333-21749, No. 333-21747, No. 333-78837, No. 333-78891, No. 333-77669 and No. 333-77671) of The Right Start, Inc. of our report dated March 12, 1999 relating to the financial statements and financial statement schedule as of January 30, 1999 and for the years ended January 30, 1999 and January 31, 1998, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Los Angeles, California April 28, 2000 EX-27.1 14 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JAN-29-2000 JAN-31-1999 JAN-29-2000 5,199 0 682 0 9,694 17,424 16,990 6,342 30,727 12,943 0 2,088 5,725 22,593 15,468 30,727 49,079 49,079 25,279 62,626 0 0 227,000 (10,774) 68 (10,842) 0 0 0 (10,842) (2.14) (2.14)
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