-----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, MKCVRjJVdQfm4Vb7cJ0kM23V8/UTkZ6kLp47SdvTHdlAA3aB9qllh2oYBNB/PhtS rEhVvvB+w/aI5p0fp/tbIQ== 0000898430-96-004123.txt : 19960903 0000898430-96-004123.hdr.sgml : 19960903 ACCESSION NUMBER: 0000898430-96-004123 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960601 FILED AS OF DATE: 19960830 SROS: NASD 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: 0529 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19536 FILM NUMBER: 96623853 BUSINESS ADDRESS: STREET 1: 5334 STERLING CENTER DR CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 BUSINESS PHONE: 8187077100 MAIL ADDRESS: STREET 1: 5334 STERLING CENTER DRIVE CITY: WESTLAKE VILLAGE STATE: CA ZIP: 91361 10-K 1 ANNUAL REPORT DATED JUNE 1, 1996 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark one) FORM 10-K (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee required) For the fiscal year ended June 1, 1996 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required) For the transition period from _______ to _______ Commission file no. 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.) 5334 Sterling Center Drive, 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 and 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 August 26, 1996, approximately 2,358,544 shares of the Registrant's Common Stock held by non-affiliates were outstanding and the aggregate market value of such shares was approximately $10,908,266. As of August 26, 1996 there were outstanding 7,949,306 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 November 12, 1996 (the "1996 Proxy Statement") are incorporated into Part III. Total number of pages in this report: 31 ---- (Exhibit index located on page 13 ) ---- PART I ITEM 1. BUSINESS - ------- -------- GENERAL - ------- The Right Start, Inc. ("Right Start" or "the Company") is a leading merchant offering unique, high-quality products for infants and young children. The Company markets its products through 24 retail stores, primarily located in major regional malls across the nation, and The Right Start Catalog. The Company is a market leader offering approximately 500 items targeting children up to age four in such product categories as Baby on the Go, Nursery, Bath Time, Kitchen and Health and Safety. The products offered are primarily the same for both catalog and retail, with a number of items available as either "retail- only" or "catalog-only." HISTORY - ------- The Company was formed 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 formation of the Company, new parents' alternatives were low-service mass merchant stores or sparsely-stocked, high-priced infant and children specialty stores. To counter this, The Right Start carefully screened infant and toddler products in order to identify those considered to be the most unique, safest, most durable, best designed and best valued items. The Right Start then grew its operations beyond The Right Start Catalog and into retail sales through The Right Start stores. Based on the strong results of the retail stores coupled with the extensive challenges facing the catalog industry, the Company's strategy evolved to include a reduction in The Right Start Catalog circulation and plans for a major retail expansion. Management has always made customer service the Company's highest priority. By offering sales associates with extensive product knowledge, carefully selected and tested products, fast shipment that is generally less than 48 hours from receipt of catalog orders, and a 24 hour a day/365 day a year ordering capability, The Right Start is able to differentiate itself from many other infant and children merchants. RETAIL OPERATIONS AND EXPANSION - ------------------------------- The Company operates 24 retail stores. Twenty-two of these stores are mall stores located in major regional malls throughout the United States; two are non-mall locations in California. The Company has plans for continued expansion of its retail operations with 2 18 stores planned for fiscal 1997. New stores will be located primarily in high-traffic major regional malls across the United States. Potential sites are evaluated based on mall strength, relative strength of certain comparable specialty store operators in the same mall, the extent of Right Start Catalog customer/brand development, available census, demographic and psychographic data, as well as lease economics. In many areas, store sites which otherwise meet the Company's criteria may be difficult to lease on acceptable terms. The Company's ability to open and operate new stores profitably is dependent on the identification and availability of suitable locations, the negotiation of acceptable lease terms, the Company's financial resources, the successful hiring and training of store managers and the Company's ability to control the operational aspects of growth. There can be no assurance that the Company will be able to open and operate new stores on a timely and profitable basis or that same store sales will increase in the future. THE RIGHT START CATALOG - ----------------------- The Right Start Catalog offers high quality infants' and children's products through mail order catalogs targeted primarily to middle and upper income new parents and the grandparents of their children. Several attractive glossy issues are mailed each year, targeting the Company's principal customers, educated, first-time parents from 23-40 years old, with average annual household income in excess of $60,000. The Right Start Catalog has minimized the marketing of children's clothing, furniture and bedding items, all of which require different merchandising distribution and marketing strategies. MERCHANDISING - -------------- The Right Start's basic business strategy/concept is to provide exemplary service to customers as a means of building strong loyalty, 3 to offer unique, hard-to-find items, and to increase market share and customer awareness through new store openings and continuous new product introductions. To accomplish its strategy, the Company offers a selection of brand name and private label infant, toddler and preschool products through strategically selected store locations and highly targeted catalog mailings. Items are selected based on their quality, durability, uniqueness, historic product demand, seasonality, appeal to target markets and value. The addition of new products is key to keeping the stores and catalogs fresh and interesting to the customer base. ADVERTISING AND MARKETING - ------------------------- The Right Start Catalog serves as the primary marketing tool for The Right Start stores. Catalogs are distributed in existing and future retail store markets through both direct mail and focused distribution to target groups (e.g. day care centers, hospitals, doctor's offices and other children's stores). In addition, the stores' point of sale system also provides a strong marketing database. Customers' names and addresses are captured and are then used for promotional mailings and other follow up. The Company reaches its catalog customers through extensive mailings of The Right Start Catalog to qualified segments of the Company's own customer list and selected rented lists. In order to achieve this efficiently the customer list is segmented by frequency, recency and size of purchase. Over the past two years, the Company has experienced a decline in the Right Start Catalog response rate. While the Company has made extensive circulation cuts to exclude less profitable mailing lists, there can be no assurance that profitability of the overall catalog business will increase or that the Company will not continue to experience a declining response rate. PURCHASING - ---------- The Right Start purchases products from over 200 vendors. No single vendor represents more than 3% of overall sales. The Company directly imports approximately 5% of the products offered and this source is expected to grow over time as the Company expands its private label and import programs. Imported items have historically had higher gross profit margins and tend to be more unique. SEASONALITY - ----------- The Company's business is not significantly impacted by seasonal fluctuations, as compared to many other retail and catalog operations. The Right Start customer often is the end user of the product so purchases are spread throughout the year, rather than being concentrated between October and December, as are traditional gift purchases. 4 EMPLOYEES - --------- As of August 20, 1996 the Company employed 397 employees, approximately 41 percent of whom were part-time. During the retail holiday season, additional temporary employees are hired. The Company has no collective bargaining agreements nor any unions and considers its employee relations to be good. COMPETITION - ----------- The specialty catalog and retail infants' and children's markets are highly competitive. The Company's specialty mail order catalogs, retail stores and products compete with other retail stores, including specialty stores, mass merchants, discount chains, and department stores, and with a growing number of other mail order catalogs. Some of the Company's competitors have substantially greater financial, distribution and marketing resources than the Company. The substantial sales growth in the mail order catalog industry has encouraged the entry of many new competitors and continues to foster an increase in competition from established companies. The catalog and retail businesses could become even more competitive in the future. The primary competition for The Right Start stores comes from "big box" concept children's stores which are becoming more and more prevalent. This type of operation offers customers an extensive variety of products (including apparel, furniture, bedding, etc.) for children and is typically located in up to 50,000 square feet, generally in lower real estate cost locations. In addition, certain stores face competition from local specialty baby stores. There are a variety of general and specialty catalogs selling infants' and children's items in competition with The Right Start Catalog. The Company considers its primary catalog competition, however, to be "One Step Ahead," "Kids Club" by Perfectly Safe, and "Sensational Beginnings." These catalogs emerged several years after The Right Start Catalog and directly compete by offering a very similar product line at comparable price points to the same target market. The Company's ability to continue to introduce innovative products to customers, to locate its stores in strategic, high-traffic locations, and to provide distinctive customer service is key to its ability to maintain or grow its market share. TRADEMARKS - ---------- The Company has registered and continues to register, when deemed appropriate, certain U.S. trademarks and trade names, including "The Right Start" and "The Right Start Catalog". The Company considers these to be readily identifiable with, and valuable to, its business. RECENT DEVELOPMENTS - ------------------- In July 1996, the Company sold its phone center operations to a telemarketing services provider for approximately $500,000, $250,000 of which was in cash and the remainder of which was in a two-year note secured by the assets in the phone center. There was no gain or loss on the sale. In conjunction with the sale, the Company entered into a telemarketing services agreement for RSC. In April 1996, the Company completed a rights offering which generated approximately $4.9 million of net proceeds to the Company. Pursuant to the rights offering, approximately 1.5 million shares of common stock were issued. The offering was fully subscribed. In February 1996, Lenny Targon, one of the co-founders of The Right Start, resigned from his position as Chief Executive Officer and Director. Jerry Welch, Chairman of the Board, assumed the title of Chief Executive Officer. In August 1995, an investor group led by Kayne, Anderson Investment Management, Inc. acquired 3,937,000 shares of the Company's common stock, representing approximately 62% of the then outstanding shares, from American Recreation Centers, Inc. Richard A. Kayne, Jerry R. Welch and Howard M. Zelikow of Kayne, Anderson and Robert R. Hollman, Fred Kayne and Andrew D. Feshbach were appointed to The Right Start's Board of Directors. Robert Crist, Robert Feuchter and Stanley Schneider resigned from the board, concurrent with the close of the transaction. ITEM 2. PROPERTIES - ------- ---------- The Right Start leases all of its locations under operating leases. Lease terms at the Company's retail locations range from six to ten years, with provisions for early termination in most locations if certain sales levels are not achieved and, at certain locations, the Company has options to extend the term. In most cases, rent provisions include a fixed minimum rent plus a contingent percentage rent based on net sales of the store in excess of a certain threshold. The Right Start currently leases approximately 39,000 square feet of mixed use space in Westlake Village, California. The Company's 5 corporate office and first retail store reside in this space. The building is leased and the agreement includes options to extend through 2001. ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- The Company is not party to any legal actions. 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 ------- The Company's common stock is traded on the Nasdaq National Market System under the symbol RTST. The Company's stock is beneficially held by 1,535 shareholders. 6 ITEM 6. SELECTED FINANCIAL DATA - (Dollars in thousands except share data) - ------- -----------------------
FISCAL YEAR 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- EARNINGS DATA Revenues: Net sales $ 40,368 $ 44,573 $ 49,204 $ 37,261 $ 23,896 Other revenues 1,418 1,168 1,311 992 868 ---------------------------------------------------------------- 41,786 45,741 50,515 38,253 26,764 Net income (loss) (3,899) (2,106) 176 1,032 820 Earnings (loss)per share (0.60) (0.33) 0.03 0.16 0.14 SHARE DATA Weighted average shares outstanding 6,536,813 6,300,000 6,637,142 6,494,133 5,739,670 BALANCE DATA SHEET Current assets $ 8,353 $ 9,660 $ 12,002 $ 13,306 $ 12,975 Total assets 17,475 14,632 18,221 18,274 14,004 Current liabilities 4,649 3,690 4,979 5,650 2,412 Long-term debt Shareholders' equity 11,902 10,694 12,800 12,624 11,592
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------- --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- FISCAL 1996 COMPARED WITH FISCAL 1995 - ------------------------------------- Revenues for fiscal 1996 were $41.8 million compared to $45.7 million in 1995. Catalog net sales declined $13.5 million or 37% reflecting the December 1994 sale of Children's Wear Digest (CWD) and reduced response rates and circulation on The Right Start Catalog (RSC). CWD was a wholly owned subsidiary of the Company selling children's apparel by catalog. For fiscal 1997, the Company has further reduced the circulation of RSC and reduced the number of editions from five to three. 7 Retail net sales increased over 100% from $7.8 million to $17.1 million. The increase results from the additional eleven stores opened in fiscal 1996 and the impact of a full year's sales for the eight stores opened in fiscal 1995. All but the Company's two oldest stores are located in major upscale regional malls across the United States. Cost of goods sold decreased 8.7% or $2.0 million to $21.6 million in fiscal 1996. The decrease is primarily due to the decrease in net sales. Additionally, the Company's cost of goods sold was negatively impacted in fiscal 1996 by inventory write-downs and adjustments totalling approximately $.5 million. Operating expenses decreased $1.1 million or 5% from $19.9 million in fiscal 1995 to $18.8 million in fiscal 1996. The decrease represents a $3.4 million decrease in catalog production costs offset by retail and other operating expense increases. The decrease in catalog production costs results from the decrease in RSC circulation. Retail operating expenses increased due to the additional payroll and occupancy costs associated with the new store openings. General and administrative expense increased to $4.8 million in fiscal 1996 from $3.0 million in fiscal 1995. This increase includes approximately $1.1 million in one-time charges related to employee severance and termination expenses, hiring and relocation expenses for new key management personnel and consulting fees related to the restructuring of the catalog operations. The remaining increase reflects the investment in the Company's infrastructure to position it to manage the accelerated store opening plans. Pre-opening cost amortization increased $304,000 in fiscal 1996 as compared to fiscal 1995. The Company amortizes its store opening costs over the first twelve months of each store's operations. The fiscal 1996 increase reflects the impact of both fiscal 1995 and 1996 store openings. Depreciation and amortization increased $193,000 in fiscal 1996 as more assets were employed in the retail operations due to new store openings. The Company recognized $927,000 of income tax benefit for the year ended June 1, 1996, net of a valuation allowance provided against the deferred tax asset in the fourth quarter of the fiscal year. In evaluating the deferred tax asset, management considered 8 the Company's projections and available tax planning strategies. FISCAL 1995 COMPARED WITH FISCAL 1994 - ------------------------------------- Revenues for fiscal 1995 were $45.7 million, a decrease of $4.8 million or 9.5% from fiscal 1994. Catalog net sales declined $9.2 million or 20.1% as a result of both the December 1994 sale of CWD and the decline in response rates and circulation for RSC. Based on the decline in RSC response rates experienced during the first half of the year, circulation cuts of up to 40% were taken for the spring and summer catalogs. Retail net sales increased over 100% to $7.8 million from $3.2 million in fiscal 1994. The increase resulted from the fall 1994 openings of eight mall stores, two of which were relocations from leased departments in Rich's department stores, and 32% same-store-sales increases (28% as adjusted for the additional week in fiscal 1995) for the remaining three stores experienced during the second half of fiscal 1995. Cost of goods sold decreased $2.4 million or 9.0% from fiscal 1994. The decline is in line with the decrease in sales with a slight degradation in gross margin due to the sale of CWD, typically a higher margin business than RSC and retail. Operating expense decreased $.6 million to $19.9 million from fiscal 1994 to fiscal 1995. The decrease was primarily the result of decreased costs associated with the CWD and improved catalog delivery rates, offset by additional retail selling expenses for the new stores opened in fiscal 1995. General and administrative expenses increased $.3 million or 13.2% to $3.0 million in fiscal 1995 compared to $2.7 million in fiscal 1994. This is primarily a result of increased costs incurred in support of the expanding retail operations and the systems development and support related thereto. These increases were offset by decreases resulting from the sale of CWD. The loss on the sale of CWD of $1.7 million reflects the one-time charge associated with the writedown of goodwill related to the sale of CWD in December 1994. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- During fiscal 1996, the Company's primary sources of liquidity were from borrowings under its credit facility and the issuance of common stock through a rights offering. These sources financed the Company's operating losses and capital expenditures. Capital expenditures of approximately $4.2 million were incurred in opening 9 eleven new retail stores and installing the information systems necessary to support the existing and planned retail growth. The Company's existing credit facility provides for borrowings of up to $5 million, subject to a defined borrowing base. This agreement expires in June 1998. Outstanding borrowings are secured by all of the assets of the Company. At June 1, 1996, there were no borrowings outstanding on the line and approximately $2.8 million was available. The Company opened eight new stores in fiscal 1995, 11 new stores in fiscal 1996, and currently expects to open up to 18 additional new stores in fiscal 1997. The Company expects to expend approximately $400,000 for each new store it opens. The Company expects to fund store openings contemplated by its current plan from borrowings under its credit facility and cash flow from operations. The Company anticipates that it will be profitable in the future, however, there can be no assurance that the Company's expansion strategy will be successful or that the Company will not continue to incur operating losses. Losses could negatively affect working capital, the extension of credit by the Company's suppliers and the Company's ability to implement its expansion strategy. IMPACT OF INFLATION - ------------------- The impact of inflation on results of operations has not been significant ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- ------------------------------------------- The consolidated financial statements and supplementary data are as set forth in Item 14(a). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------- -------------------------------------------------- The information contained in the Company's 1996 Proxy Statement under the captions "Principal Shareholders and Management" and "Election of Directors" is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- The information contained in the Company's 1996 Proxy Statement under the caption "Executive Compensation and Other Information" is incorporated herein by reference. 10 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------- -------------------------------------------------------------- The information contained in the Company's 1996 Proxy Statement under the caption "Principal Stockholders and Management" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- The information contained in the Company's 1996 Proxy Statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference. This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Discussions containing such forward-looking statements may be found in the material set forth under Item 1. Business--Retail Operations and Expansion, --Seasonality, - --Competition, and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources, as well as within this Annual Report generally (including any document incorporated by reference herein). Also, documents subsequently filed by the Company with the Securities and Exchange Commission will contain forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors identified herein or in other public filings by the Company, including but not limited to, the Company's Registration Statement on Form S-3 (File No. 333-08175). 11 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.
PAGE ---- (1) FINANCIAL STATEMENTS: Report of Independent Accountants F-1 Consolidated Balance Sheet-- June 1, 1996 and May 31, 1995 F-2 Consolidated Statement of Operations-- Years Ended June 1, 1996, May 31, 1995 and May 25, 1994 F-3 Consolidated Statement of Changes in Shareholders' Equity-- Years Ended June 1, 1996, May 31, 1995 and May 25, 1994 F-4 Consolidated Statement of Cash Flows-- Years Ended June 1, 1996, May 31, 1995 and May 25, 1994 F-5 Notes to Consolidated Financial Statements F-6 (2) FINANCIAL STATEMENT SCHEDULES: Valuation Reserves F-15
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 12 (3) LISTING OF EXHIBITS The following exhibits are filed as part of, or incorporated by reference into, this annual report: INDEX TO EXHIBITS EXHIBIT NUMBER - ------ 3.1 Amended and Restated Articles of Incorporation of the Company, dated August 12, 1991* 3.1.1 Amendment to Articles of Incorporation, dated August 20, 1991* 3.1.2 Form of Amendment to Articles of Incorporation, dated August 24, 1991* 3.2 Bylaws of the Company, as amended* 3.3 Specimen Certificate of the Common Stock (without par value)* 4.1 Warrant Certificate for Representative's Warrants* 10.1 Lease between the Company and Westlake Industrial Complex, a California Limited Partnership, dated August 9, 1988, as amended February 6, 1991* 10.2 Employment Agreement between the Company and Stanley Fridstein, dated May 30, 1991, as amended* 10.3 1991 Key Employee Stock Option Plan* 10.4 Stock Option Grant to Stanley Fridstein, dated March 15, 1991, as amended (see Exhibit 10.2)* 10.5 Stock Option Grant to Lenny Targon, dated March 15, 1991, as amended* - ----------------- * Previously filed. 13 10.6 Form of Indemnification Agreement between Registrant and its directors and executive officers* 10.7 Westlake Industrial Complex Lease Agreement for 31333 Agoura Road, Westlake Village, CA* 10.8 Software License Agreement between the Registrant and Marriner Systems, Inc., dated April 27, 1994* 10.9 1995 Non-employee Directors Option Plan 10.10 Registration Rights Agreement 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 10.11 Termination and Release Agreement by and between The Right Start, Inc. and Lenny M. Targon dated February 28, 1996 10.12 Loan Agreement dated June 12, 1995 by and between Wells Fargo Bank, National Association and The Right Start, Inc. 10.13 Asset Purchase Agreement dated as of July 29, 1996 by and between Blasiar, Inc. (DBA Alert Communications Company) and The Right Start, Inc. 23.1 Consent of Independent Accountants 27.1 Financial Data Schedule - ----------------- * Previously filed. (b) REPORTS ON FORM 8-K Form 8-K dated March 27, 1996: The Right Start, Inc. issued a press release reporting third quarter results. (c) Not applicable (d) Not applicable 14 SIGNATURES Pursuant to the requirement of Sections 13 and 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: August 28, 1996 /s/ JERRY R. WELCH -------------------------------------- Jerry R. Welch Chairman of the Board and Chief Executive Officer 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. /s/ JERRY R. WELCH August 28, 1996 - --------------------------------------- Jerry R. Welch, Chairman of the Board and Chief Executive Officer /s/ STANLEY M. FRIDSTEIN August 28, 1996 - --------------------------------------- Stanley M. Fridstein, President and Director /s/ RICHARD A. KAYNE August 28, 1996 - --------------------------------------- Richard A. Kayne, Director /s/ ANDREW D. FESHBACH August 28, 1996 - --------------------------------------- Andrew D. Feshbach, Director /s/ ROBERT R. HOLLMAN August 28, 1996 - --------------------------------------- Robert R. Hollman, Director /s/ FRED KAYNE August 28, 1996 - --------------------------------------- Fred Kayne, Director /s/ HOWARD M. ZELIKOW August 28, 1996 - --------------------------------------- Howard M. Zelikow, Director /s/ GINA M. SHAUER August 28, 1996 - --------------------------------------- Gina M. Shauer, Chief Financial Officer (Principal Financial and Accounting Officer) 15 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders of The Right Start, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 12 present fairly, in all material respects, the financial position of The Right Start, Inc. and its subsidiary at June 1, 1996 and May 31, 1995, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 1, 1996, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards 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. PRICE WATERHOUSE LLP Woodland Hills, California July 3, 1996 F-1 THE RIGHT START, INC. CONSOLIDATED BALANCE SHEET --------------------------
June 1, May 31, 1996 1995 ----------- ----------- ASSETS ------ Current assets: Cash and equivalents $ 472,000 $ 1,567,000 Accounts receivable 609,000 483,000 Merchandise inventories 5,264,000 5,142,000 Prepaid catalog expenses 713,000 981,000 Income taxes receivable 472,000 Other current assets 1,295,000 878,000 Deferred income tax benefit 137,000 ----------- ----------- Total current assets 8,353,000 9,660,000 ----------- ----------- Noncurrent assets: Property, plant and equipment, net (Note 2) 7,363,000 4,136,000 Other noncurrent assets 152,000 294,000 Deferred income tax benefit 1,607,000 542,000 ----------- ----------- Total noncurrent assets 9,122,000 4,972,000 ----------- ----------- $17,475,000 $14,632,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable and accrued expenses $ 3,976,000 $ 3,223,000 Accrued salaries and bonuses 530,000 238,000 Advance payments on orders 143,000 158,000 Amounts due to ARC (Note 9) 71,000 ----------- ----------- Total current liabilities 4,649,000 3,690,000 ----------- ----------- Deferred rent 924,000 248,000 Commitments and contingencies (Notes 10 & 11) Shareholders' equity: Common stock (25,000,000 shares authorized, no par value, 7,939,306 and 6,300,000 shares issued and outstanding) (Notes 5 & 8) 16,313,000 11,206,000 Retained deficit (4,411,000) (512,000) ----------- ----------- Total shareholders' equity 11,902,000 10,694,000 ----------- ----------- $17,475,000 $14,632,000 =========== ===========
See accompanying notes to consolidated financial statements. F-2 THE RIGHT START, INC. CONSOLIDATED STATEMENT OF OPERATIONS ------------------------------------
Fiscal Year Ended ------------------------------------------- June 1, May 31, May 25, 1996 1995 1994 ------------ ----------- ------------ Net sales: Catalog $23,293,000 $36,790,000 $ 46,026,000 Retail 17,075,000 7,783,000 3,178,000 Other revenues 1,418,000 1,168,000 1,311,000 ------------ ----------- ------------ 41,786,000 45,741,000 50,515,000 ------------ ----------- ------------ Costs and expenses: Cost of goods sold 21,605,000 23,654,000 25,996,000 Operating expense 18,823,000 19,879,000 20,514,000 General and administrative expense 4,791,000 3,008,000 2,657,000 Pre-opening cost amoritization 418,000 114,000 Depreciation and amortization expense 938,000 745,000 654,000 Write off of Weebok catalog and inventory costs 470,000 ------------ ----------- ------------ 46,575,000 47,400,000 50,291,000 ------------ ----------- ------------ Operating income (loss) (4,789,000) (1,659,000) 224,000 Interest and other income (expense), net (37,000) 43,000 54,000 Loss on sale of Children's Wear Digest (1,744,000) ------------ ----------- ------------ Income (loss) before provision for income taxes (4,826,000) (3,360,000) 278,000 Income tax benefit (provision) 927,000 1,254,000 (102,000) ------------ ----------- ------------ Net income (loss) ($ 3,899,000) ($2,106,000) $ 176,000 ============ =========== ============ Earnings (loss) per share ($ 0.60) ($ 0.33) $ 0.03 ============ =========== ============ Weighted average number of shares outstanding 6,536,813 6,300,000 6,637,142
See accompanying notes to consolidated financial statements. F-3 THE RIGHT START, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY --------------------
Common Stock Retained --------------------------- Earnings Shares Amount (Deficit) ------------- ----------- ------------- Balance, May 26, 1993 6,300,000 $11,206,000 $ 1,418,000 Net income 176,000 ------------- ----------- ------------- Balance, May 25, 1994 6,300,000 11,206,000 1,594,000 Net loss (2,106,000) ------------- ----------- ------------- Balance, May 31, 1995 6,300,000 11,206,000 (512,000) Issuance of shares pursuant to the Rights Offering 1,578,806 4,906,000 Issuance of shares pursuant to the exercise of stock options 60,500 201,000 Net loss ( 3,899,000) ------------- ----------- ------------- Balance, June 1, 1996 7,939,306 $16,313,000 ($4,411,000) ============= =========== =============
See accompanying notes to consolidated financial statements. F-4 THE RIGHT START, INC. CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------
Fiscal Year Ended ------------------------------------------ June 1, May 31, May 25, 1996 1995 1994 ----------- ------------- ------------ Cash flows from operating activities: Net income (loss) ($3,899,000) ($2,106,000) $ 176,000 Adjustments to reconcile net income (loss) to net cash by operating activities: Depreciation and amortization 938,000 745,000 654,000 Pre-opening cost amortization 418,000 114,000 Unrealized loss on marketable securities 35,000 Loss on sale of Children's Wear Digest 1,744,000 Change in assets and liabilities affecting operations (Note 12) 506,000 (2,256,000) (958,000) ---------- ------------ ----------- Net cash used in operating activities (2,037,000) (1,759,000) (93,000) ---------- ------------ ----------- Cash flows from investing activities: Additions to property, plant and equipment (4,165,000) (2,417,000) (1,115,000) Proceeds from sale of marketable securities 1,461,000 6,760,000 Purchase of marketable securities (4,789,000) Proceeds from sale of Children's Wear Digest 2,437,000 Payment for Children's Wear Digest acquisition (399,000) (698,000) ---------- ------------ ----------- Net cash provided by (used in) investing activities (4,165,000) 1,082,000 158,000 ---------- ------------ ----------- Cash flows from financing activities: Proceeds from common stock issued pursuant to the Rights Offering 4,906,000 Proceeds from common stock issued upon exercise of stock options 201,000 ---------- Cash provided by financing activities 5,107,000 ---------- Net increase (decrease) in cash and equivalents (1,095,000) (677,000) 65,000 Cash and equivalents at beginning of period 1,567,000 2,244,000 2,179,000 ---------- ------------ ----------- Cash and equivalents at end of period $ 472,000 $ 1,567,000 $ 2,244,000 ========== ============ ===========
See accompanying notes to consolidated financial statements. F-5 THE RIGHT START, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: - ------------------------------------------------------------ The Company - ----------- The Right Start, Inc. (the Company) is a specialty merchant of infants' and children's products throughout the United States. In 1991, the Company completed the sale of 2,300,000 shares of its common stock in an initial public offering. Prior to that, it was a wholly owned subsidiary of American Recreation Centers, Inc. (ARC). ARC maintained majority ownership of the Company through July 1995. In August 1995, an investment group led by Kayne, Anderson Investment Management, Inc. (KAIM) acquired the 3,937,000 shares of common stock owned by ARC. The Company's financial statements also include the accounts of its wholly owned subsidiary, Children's Wear Digest (CWD) through the date the Company sold CWD (see Note 6). All material intercompany balances and transactions have been eliminated. Fiscal Year - ----------- The Company has a fiscal year consisting of fifty-two or fifty-three weeks ending on the last Saturday (formerly Wednesday) in May. The fiscal year ended May 31, 1995 is a fifty-three week period. The other fiscal years presented consist of fifty-two week periods. Revenue Recognition - ------------------- Retail sales are recorded at time of sale or when goods are delivered. Catalog sales are recorded at the time of shipment. The Company provides for estimated returns at the time of the sale. Cash and Equivalents - -------------------- Cash and equivalents include demand deposits and marketable securities with original maturities of three months or less. These investments are subject to minimal credit and market risk. The carrying amount of cash and equivalents approximates fair value. F-6 NOTE 1: (Continued) - ------ 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 first-in, first- out basis. Catalog Production Expenses - --------------------------- Prepaid catalog expenses consist of the costs to produce, print and distribute catalogs. These costs are amortized over the expected sales life of each catalog, which is three months. The Company adopted Statement of Position Number 93-7 (SOP 93-7), "Reporting on Advertising Costs", in the fourth quarter of fiscal year 1995. The adoption of SOP 93-7 did not result in a material impact on the Company's consolidated financial position or results of operations. Catalog production expenses of $6,061,000, $9,457,000 and $10,068,000 were recorded in fiscal 1996, 1995 and 1994, respectively. Property, Plant and Equipment - ----------------------------- Property, plant and equipment are stated at cost less accumulated depreciation. 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. Store Opening Costs - ------------------- Costs incurred in opening stores are deferred and included in other current assets and are amortized over 12 months commencing with the store opening. Unamortized store opening costs were $531,000 and $277,000 at June 1, 1996 and May 31, 1995, 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 in accordance with Statement of Financial Accounting Standard No. 109 (FAS 109), "Accounting for Income Taxes." FAS 109 requires 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 other assets and liabilities. During the periods that the Company was majority owned by ARC, the Company provided for income taxes as a separate taxpayer. State income taxes were settled pursuant to an informal tax sharing agreement and the Company filed a separate federal income tax return. F-7 NOTE 1: (Continued) - ------ Other Revenues - -------------- Other revenues include rentals of customer mailing lists and revenues from order fulfillment services. Per Share Data - -------------- Earnings per share has been computed in accordance with the treasury stock method based upon the weighted average number of common shares and dilutive common stock equivalents outstanding. Common stock equivalents comprise options outstanding to key executives, employees and directors (see Note 5). Reclassifications - ----------------- Certain reclassifications have been made to conform prior year 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 of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 - PROPERTY, PLANT AND EQUIPMENT, NET: - -------------------------------------------
June 1, May 31, 1996 1995 ------------ ------------ Property, plant and equipment, at cost: Machinery, furniture and equipment $ 3,761,000 $ 3,094,000 Leaseholds and leasehold improvements 5,316,000 2,465,000 Construction in progress 322,000 56,000 Computer software 570,000 225,000 ----------- ----------- 9,969,000 5,840,000 Accumulated depreciation and amortization (2,606,000) (1,704,000) ----------- ----------- $ 7,363,000 $ 4,136,000 =========== ===========
Depreciation and amortization expense for property, plant and equipment amounted to $935,000, $645,000 and $484,000, for fiscal years 1996, 1995 and 1994, respectively. F-8 NOTE 3 - CREDIT AGREEMENTS: - -------------------------- In June 1995, the Company entered into a revolving credit agreement with a bank which expires in June 1998. The credit agreement provides for borrowings up to $5,000,000, including letters of credit, the availability of which is subject to a borrowing base, as defined in the agreement. Interest accrues at the bank's prime lending rate plus 1%. The agreement requires that the Company must comply with certain financial and other covenants, and borrowings are secured by all of the assets of the Company. The Company is required by the agreement to pay annual fees of $25,000 in addition to an unused line fee. The unused line fee is equal to .5% per annum of the amount by which $3,500,000 exceeds the outstanding balance on the line. NOTE 4 - INCOME TAXES: - --------------------- The (benefit) provision for income taxes is comprised of the following:
Fiscal Year Ended -------------------------------------- June 1, May 31, May 25, 1996 1995 1994 ---------- ----------- ----------- Current (benefit) provision: Federal ($ 424,000) ($ 91,000) State $ 1,000 9,000 ---------- ----------- --------- 1,000 (424,000) (82,000) ---------- ----------- --------- Deferred provision: Federal (928,000) (725,000) 175,000 State (105,000) 9,000 ---------- ----------- --------- (928,000) (830,000) 184,000 ---------- ----------- --------- ($927,000) ($1,254,000) $102,000 ========== =========== =========
The Company's effective income tax rate differed from the federal statutory rate as follows:
Fiscal Year Ended ---------------------------------- June 1, May 31, May 25, 1996 1995 1994 --------- --------- -------- Federal statutory rate 34% 34% 34% State income taxes, net of federal benefit 3 2 4 Valuation allowance (19) Other 1 1 (1) --------- --------- -------- Effective tax rate 19% 37% 37% ========= ========= ========
F-9 NOTE 4: (Continued) - ------ Deferred tax liabilities/(assets) are comprised of the following:
June 1, May 31, May 25, 1996 1995 1994 ------------ ----------- ---------- Depreciation and amortization $ 112,000 $ 133,000 $ 274,000 Preopening costs 220,000 115,000 Other 11,000 8,000 ------------ ---------- --------- Deferred tax liabilities 343,000 256,000 274,000 ------------ ---------- --------- Deferred rent (380,000) (102,000) Sales returns and other reserves (184,000) (43,000) (99,000) Net operating loss carryforward (2,256,000) (763,000) Federal tax credit carryforwards (70,000) (27,000) (24,000) ------------ ---------- --------- Deferred tax assets (2,890,000) (935,000) (123,000) Valuation allowance 940,000 ------------ ---------- --------- Net deferred tax (asset) liability ($1,607,000) ($679,000) $ 151,000 ============ ========== =========
The Company's deferred tax asset is net of a valuation allowance of $940,000. In evaluating the deferred tax asset, management considered the Company's projections and available tax planning strategies. The Company has federal and state net operating loss carryforwards at June 1, 1996 of $5,850,000 and $3,612,000, respectively. These carryforwards will expire in fiscal years ending 2002 to 2011, and were not significantly impacted by the August 1995 change in ownership. NOTE 5 - CAPITAL STOCK: - ---------------------- In April 1996, the Company issued 1,578,806 shares of common stock pursuant to a rights offering. Net proceeds to the Company were $4,906,000. In connection with its initial public offering, the Company granted the representative of the underwriters 200,000 warrants to purchase the Company's common stock at an exercise price of $7.19. The warrants provide for registration rights and anti-dilution protection and expire in October 1996. F-10 NOTE 6 - CHILDREN'S WEAR DIGEST: - ------------------------------- Pursuant to an asset purchase agreement dated December 30, 1994 (the Agreement) and a letter of intent agreement entered in November 1994, the Company and its wholly owned subsidiary, Children's Wear Digest, Inc. (CWD), sold substantially all of the assets of CWD to Small People, Inc. (SPI). A significant owner of SPI was the president of CWD until his resignation effective December 30, 1994 and was also the owner of CWD at the time of its purchase by the Company. Under the terms of the Agreement, CWD sold certain assets, consisting primarily of inventory, fixed assets and intangible assets, in exchange for cash of approximately $2,437,000. The transaction resulted in a loss of $1,744,000. In connection with the Agreement, the parties also entered into a separate Telemarketing Agreement, a Confidentiality and Noncompetition Agreement, and termination agreements related to certain employment and management contracts between CWD and its former owners which were entered when the Company purchased CWD in September 1992. The acquisition was accounted for as a purchase and the resultant goodwill was amortized over its estimated useful life. NOTE 7 - WEEBOK CATALOG: - ----------------------- In September 1992, the Company secured the exclusive mail order rights to the Weebok line of children's clothing. Based on the results, management elected to discontinue mailing the Weebok catalog in November 1993. As a consequence, the Company recorded a charge of $470,000 comprised of prepaid catalog expenses and inventory. NOTE 8 - EMPLOYEE BENEFITS AND STOCK OPTIONS: - -------------------------------------------- On March 15, 1991, two key executives were granted options to acquire up to 900,000 shares of the Company's common stock under a non-qualified stock option plan. The options were granted at fair market value of $3.33 per share. These options expire June 1, 2001. In August 1995, the terms of the options were amended. The number of shares subject to such options was reduced to 776,000 with an exercise price of $3.00 per share. At June 1, 1996, 731,000 shares are outstanding under this plan. One of the executives covered by this plan was the Company's chief executive officer who resigned in March 1996. In connection with his resignation, he is entitled to salary and benefits through May 1997 and the cash surrender value of a life insurance policy. The Company adopted the 1991 Employee Stock Option Plan, covering an aggregate of 300,000 shares of the Company's common stock, in October 1991. Options granted vest either 20% or 33% (depending on the terms of the individual grant) each year commencing on grant date and expire 10 years thereafter. In August 1995, those holding options under the 1991 Employee Stock Option Plan were given the right to cancel their options (the "existing options") and have an equal number of options (the "new options") reissued to them at the fair market value of $3.00 per share. The vesting period on the existing options is 20% each year and the new options vest 33% each year, both from date of grant. Options for 254,000 shares were outstanding as of June 1, 1996, 5,200 of which were exercisable. Authorization for the amount by which the outstanding options exceed the amount allowed in the plan is subject to ratification by the Company's shareholders. F-11 NOTE 8: (Continued) - ------ On January 13, 1992, the Company adopted the 1992 Stock Option Plan for Non- Employee Directors covering an aggregate of 50,000 shares. This plan provides that all non-employee directors will automatically receive options to purchase 5,000 shares exercisable at the fair market value at the date of the grant. The Company granted options to purchase 10,000 shares at $4.25 on April 22, 1992 and 5,000 shares at $3.25 on September 14, 1992. These options vest 20% at the grant date and an additional 20% each year thereafter. Upon resignation of non- employee directors from the Company's Board of Directors, all unvested options expire. Of the 15,000 options granted under this plan, 8,000 were exercised in January 1996 and the remaining options expired. In October 1995, the Company adopted the 1995 Non-Employee Directors Option Plan. This Plan provides for the annual issuance, to each non-employee director, of options to purchase 3,000 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 based on an independent valuation such that the value of the options issued is equivalent to the fees that the director would be otherwise entitled to receive. Options issued under this plan vest on the anniversary date of their grant and upon termination of Board membership. 61,902 options were issued under this plan, none of which were exercisable at June 1, 1996. Prior to fiscal 1993, the employees of the Company participated in the ARC Employee Stock Ownership Plan (ARC ESOP) and the ARC Employee Stock Purchase Plan (ARC ESPP). In fiscal 1993, the Company adopted a separate employee stock ownership plan (Company ESOP) and employee stock purchase plan (Company ESPP) for the benefit of its employees. The employee balances in the ARC ESOP were transferred to the Company ESOP. The employee balances in the ARC ESPP remain in that plan. The Company matches employees' contributions to the Company ESPP at a rate of 50%. The Company's contributions amounted to $28,000, $58,000 and $56,000 in fiscal 1996, 1995 and 1994, respectively. The Company ESOP is funded exclusively by discretionary contributions determined by the Board of Directors. The Board of Directors authorized contributions of $70,000 in fiscal 1996 and $50,000 for both fiscal 1995 and 1994. The following table summarizes option activity through June 1, 1996: Outstanding at May 26, 1993 987,500 $3.25 - 4.25 Granted 100,500 $4.38 - 6.00 Cancelled (3,500) $6.00 --------- Outstanding at May 25, 1994 1,084,500 $3.25 - 6.00 Granted 2,500 $2.50 Cancelled (45,000) $4.25 - 6.00 --------- Outstanding at May 31, 1995 1,042,000 $3.25 - 6.00 Granted 306,902 $3.00 - 6.50 Cancelled (241,000) $3.00 - 6.00 Exercised (60,500) $3.25 - 4.25 --------- Outstanding at June 1, 1996 1,047,402 $3.00 - 6.50 =========
F-12 NOTE 9 - RELATED PARTY TRANSACTIONS: - ----------------------------------- KAIM receives a quarterly fee for providing certain management and advisory services to the Company. Management fees of $75,000 were paid to KAIM in fiscal 1996. ARC incurred certain expenses on behalf of the Company and charged the Company for such expenses. These expenses include amounts allocated on an actual basis for income taxes, insurance premiums, telephone charges and professional fees. Corporate office overhead charges of $27,000 for each of fiscal 1995 and 1994 were allocated on the basis of estimated corporate staff effort on behalf of the Company. The Company provided telemarketing services through July 1996, to K.A. Industries, a related party to KAIM. Revenues generated from this service amount to $365,000 for fiscal 1996. Management believes that the terms of this agreement are no less favorable than those that would have been negotiated with an unrelated third party. NOTE 10 - OPERATING LEASES: - -------------------------- The Company leases real property and equipment under non-cancelable agreements expiring from 1997 through 2007. Certain retail store lease agreements provide for contingent rental payments if the store's net sales exceed stated levels ("percentage rents"). A majority 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 Ending - ------------------ 1997 $ 2,538,000 1998 2,761,000 1999 2,344,000 2000 2,272,000 2001 2,279,000 Thereafter 8,413,000 ----------- $20,607,000 ===========
Net rental expense under operating leases was $1,959,000, $1,166,000 and $667,000 for fiscal 1996, 1995 and 1994, respectively. Percentage rents incurred in fiscal 1996 amounted to $82,000. NOTE 11 - COMMITMENTS AND CONTINGENCIES: - --------------------------------------- The Company is not party to any legal actions. F-13 NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - ---------------------------------------------------------- Changes in assets and liabilities, net of the effects of the acquisition and subsequent disposition of CWD, which increased (decreased) cash and equivalents are as follows:
Fiscal Year Ended --------------------------------------- June 1, May 25, May 26, 1996 1995 1994 ------------ ----------- ---------- Accounts receivable ($ 126,000) $ 300,000 ($274,000) Merchandise inventories (122,000) (724,000) 144,000 Prepaid catalog expenses 268,000 731,000 (196,000) Income taxes receivable 472,000 (280,000) Other current assets (835,000) (699,000) (311,000) Other noncurrent assets 142,000 (42,000) (47,000) Accounts payable and accrued expenses 753,000 (491,000) (672,000) Accrued salaries and bonuses 292,000 (84,000) 35,000 Advance payments on orders (15,000) (112,000) 192,000 Amounts due to ARC (71,000) (58,000) (121,000) Income tax liability (31,000) (166,000) Deferred income taxes (928,000) (830,000) 274,000 Other liabilities 676,000 64,000 184,000 ----------- ----------- --------- $ 506,000 ($2,256,000) ($958,000) =========== =========== =========
Cash paid for income taxes was $552,000 for fiscal year 1994. Non-cash investing activity consists of $57,000 accrued in conjunction with the CWD acquisition in fiscal 1994 (see Note 6). NOTE 13 - FOURTH QUARTER ADJUSTMENTS - ------------------------------------ The Company recorded approximately $500,000 in inventory write-downs and adjustments during the fourth quarter of fiscal 1996. NOTE 14 - NEW ACCOUNTING PRONOUNCEMENTS - --------------------------------------- In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 will become effective for the Company in fiscal 1997. The adoption of SFAS 123 is not expected to have a material effect on the Company's consolidated financial position or results of operations. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", will become effective for the Company in fiscal 1997. This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by the Company be reviewed for impairment whenever there is an indication that the carrying amount of the asset may not be recoverable. Measurement of an impairment loss should be based on the fair value of the asset. This Statement also requires that any such assets that are to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Adoption of the Statement is not expected to have a material impact on the Company's financial position and results of operations. F-14 THE RIGHT START, INC. SCHEDULE II - VALUATION RESERVES --------------------------------
Additional Balance at charged Balance at beginning to costs end Classification of period and expenses Deductions of period - --------------------------- ---------- ------------ ---------- ----------- Fiscal year ended June 1, 1996 - ----------------- Allowance for deferred tax asset $940,000 $ 940,000 Allowance for sales returns $103,000 103,000 -------- -------- -------- ---------- $103,000 $940,000 $1,043,000 ======== ======== ======== ========== Fiscal year ended May 31, 1995 - ----------------- Allowance for sales returns $226,000 $123,000 $103,000 -------- -------- -------- -------- $226,000 $123,000 $103,000 ======== ======== ======== ======== Fiscal year ended May 25, 1994 - ----------------- Allowance for sales returns $290,000 $ 64,000 $226,000 -------- -------- -------- -------- $290,000 $ 64,000 $226,000 ======== ======== ======== ========
F-15 EX-10.9 2 1995 NON-EMPLOYEE DIRECTORS OPTION PLAN EXHIBIT 10.9 THE RIGHT START, INC. 1995 NON-EMPLOYEE DIRECTORS OPTION PLAN SECTION 1. PURPOSE. The purpose of The Right Start, Inc. 1995 Non-Employee Directors Option Plan (the "Plan") is to promote the interests of The Right Start, Inc., a California corporation (the "Company") and its shareholders by strengthening the Company's ability to attract and retain the services of experienced and knowledgeable non-employee directors through formula grants and deferral elections of non-qualified stock options to acquire shares of the Company's Common Stock (as defined below). In addition, such grants will encourage the closer alignment of the interests of such directors with those of the Company's shareholders. SECTION 2. DEFINITIONS. For purposes of the Plan, the following terms shall have the meanings set forth below: 2.1. "Annual Meeting" means the annual meeting of the Company's shareholders for any fiscal year held in accordance with the Company's Articles of Incorporation and By-Laws. 2.2. "Board" means the Board of Directors of the Company as constituted from time to time. 2.3. "Change of Control" shall mean: (i) The acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the Company, Kayne, Anderson Investment Management, Inc., any group (as heretofore defined) of which any of them is a member, any affiliate of any of the foregoing or any person who on the effective date of this Plan is an officer or director of the Company, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (A) the shares of the Common Stock, or (B) the combined voting power of the voting securities of the Company entitled to vote generally in the election of directors (the "Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (x) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, or (y) any acquisition by any corporation if, immediately following such acquisition, more than 50% of the outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation (entitled to vote generally in the election of directors), is beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who, immediately prior to such acquisition, were the beneficial owners of the Common Stock and the Voting Securities in substantially the same proportions, respectively, as their ownership, immediately prior to such acquisition, of the Common Stock and Voting Securities; or (ii) Approval by the shareholders of the Company of a reorganization, merger or consolidation, other than a reorganization, merger or consolidation with respect to which all or substantially all of the individuals and entities who were the beneficial owners, immediately prior to such reorganization, merger or consolidation, of the Common Stock and Voting Securities beneficially own, directly or indirectly, immediately after such reorganization, merger or consolidation more than 50% of the then outstanding common stock and voting securities (entitled to vote generally in the election of directors) of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their respective ownership, immediately prior to such reorganization, merger or consolidation, of the Common Stock and the Voting Securities; or (iii) Approval by the shareholders of the Company of (A) a complete liquidation or substantial dissolution of the Company, or (B) the sale or other disposition of all or substantially all of the assets of the Company, other than to a Subsidiary, wholly-owned, directly or indirectly, by the Company. 2.4. "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. 2.5. "Committee" means the Compensation Committee of the Board, which Committee shall administer the Plan. 2.6. "Common Stock" means the common stock, no par value, of the Company or any security of the Company issued in substitution or exchange therefor. 2.7. "Company" means The Right Start, Inc., a California corporation, or any successor corporation to The Right Start, Inc. -2- 2.8. "Deferral Election" means the election to receive Deferral Election Options by an Eligible Director pursuant to and in accordance with this Plan. 2.9. "Deferral Election Option" means any Option granted to an Eligible Director pursuant to a Deferral Election. 2.10. "Disability" means any physical or mental disability which is deemed to be total and permanent by a physician selected in good faith by the Company. 2.11. "Eligible Director" means any director of the Company who is not, and who for at least one year preceding the commencement of his or her membership on the Board has not been, an employee of the Company or any Subsidiary of the Company. 2.12. "Exchange Act" means the Securities Exchange Act of 1934, as in effect and as amended from time to time, or any successor statute thereto, together with any rules, regulations and interpretations promulgated thereunder. 2.13. "Fair Market Value" means on, or with respect to, any given date, the closing per share market trading price for the Common Stock as reported on the consolidated transaction reporting system for any domestic stock exchange or, if the Common Stock is not then listed, on Nasdaq ("Nasdaq") or, if the Common Stock is not then so reported, the average of the closing bid and asked prices quoted on Nasdaq or, if the Common Stock shall not be quoted on Nasdaq, the average of the closing bid and asked prices in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization for such date, or, if the Common Stock was not traded on such date, on the next preceding day on which the Common Stock was traded. 2.14. "Grant Date" means the date of any Annual Meeting on which an Eligible Director is entitled to receive an Annual Grant or has elected to receive Deferral Election Options pursuant to and in accordance with this Plan. 2.15. "Initial Election Date" means, for each member of the Board of Directors, the later of (i) the date the Plan is adopted by the Board of Directors or (ii) the date of such member's initial election or appointment to the Board of Directors. 2.16. "Option" means any option issued to an Eligible Director pursuant an Annual Grant or Deferral Election. -3- 2.17. "Option Agreement" means a written agreement between the Company and an Eligible Director setting forth the terms and conditions of an Option. 2.18. "SEC" means the Securities and Exchange Commission, or any successor governmental agency. 2.19. "Subsidiary" 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 of the voting stock of one of the other corporations in such chain. SECTION 3. OPTIONS. 3.1. Nature of Options. All Options granted under the Plan shall be nonstatutory stock options and are not intended to qualify under Section 422 of the Code as "incentive stock options." 3.2. Annual Grant. An Option to purchase 3,000 shares of Common Stock (as adjusted pursuant to Section 6 of the Plan) shall be granted (an "Annual Grant") automatically to each Eligible Director on the date of the Annual Meeting for such year. 3.3. Deferral Election. In addition to any Options that an Eligible Director may be entitled to receive pursuant to an Annual Grant, each Eligible Director shall be entitled to make an irrevocable election (a "Deferral Election") each year, at least six months prior to the Company's next scheduled annual meeting of shareholders (the "Next Meeting") (or with respect to any Eligible Director whose Initial Election Date falls within the period of six months prior to the Next Meeting, on prior to such Initial Election Date), to receive, in lieu of all or any portion of the compensation to which such Eligible Director would otherwise be entitled to receive as a member of the Board of Directors (other than reimbursement for expenses) (the "Director Fee") for the period from the Next Meeting to the day prior to the annual meeting subsequent to the Next Meeting, Deferral Election Options. Deferral Election Options shall be granted on the day of the Annual Meeting in each year for which a Deferral Election has been made. The number of shares of Common Stock covered by a Deferral Election Option shall be determined by an independent valuation expert, retained by the Committee, such that the value of the Deferral Election Option is equivalent on the Grant Date to the Director Fee which the Eligible Director would otherwise have been entitled to receive for such year. No Eligible Director shall be entitled to receive Deferral Election -4- Options having a value greater than the amount of the Director Fee that such director would have been entitled to receive on the date of the adoption of the Plan, unless, in the event that the amount of the Director Fee is increased subsequent to the date of the adoption of the Plan, such increase has been approved by a majority of the shareholders of the Company. Each Deferral Election shall be set forth in a written notice delivered to the Secretary of the Company. Such election shall remain in effect until terminated or modified by written notice to the Secretary of the Company, in which case such termination or modification shall become effective six months after the receipt of such notice by the Company. 3.4. Exercise Price. The exercise price per share of Common Stock for any Option issued to an Eligible Director pursuant to this Plan shall be the Fair Market Value of the Common Stock on the first trading day (that is, a day on which Nasdaq or any other exchange or association on or through which the stock is traded is open for trading and during which at least one share of Common Stock is traded) preceding the Grant Date of such Option. 3.5. Notice. Upon becoming exercisable in accordance with Section 4 of the Plan, the exercisable portion of an Option may be exercised in whole or in part, at any time, and from time to time, during the Option Period (as defined in Section 3.7 of the Plan) by giving written notice, signed by the person entitled to exercise the Option, to the Secretary of the Company stating the number of shares of Common Stock in respect of which the Option is being exercised, accompanied by payment in full of the aggregate exercise price for the shares of Common Stock to be purchased. The date both such notice and payment are received by the office of the Secretary of the Company shall be the date of exercise of the Option as to such number of shares of Common Stock. No Option may be exercised at any time in respect of a fractional share. 3.6. Payment. Payment of the aggregate option exercise price may be made in cash or by certified or cashier's check, bank draft or money order payable to the order of the Company or, if permitted by the Committee and applicable law, by delivery of, alone or in conjunction with a partial cash or instrument payment (i) shares of Common Stock already owned by the Eligible Director for at least six (6) months and having a Fair Market Value equal to all or a portion of the option exercise price at the time of such exercise, or (ii) some other form of payment acceptable to the Committee. The Committee may also permit Eligible Directors to simultaneously exercise Options and sell the shares of Common Stock thereby acquired, pursuant to a "cashless exercise" -5- arrangement or program, selected by and approved in all respects in advance by the Committee. 3.7. Option Period. Each Option shall expire ten years after its Grant Date (the "Option Period") unless terminated earlier in accordance with Section 3.8 below. 3.8. Rights Upon Termination of Board Membership. In the event that an Eligible Director ceases to be a director of the Company or its Subsidiaries for any reason, all Options held by an Eligible Director shall immediately and fully vest and the Eligible Director or his or her successor shall have the right to exercise any such Option during its term within a period of one year after such Eligible Director ceased to be a director; provided, however, that unless the Eligible Director ceases to be a director of the Company or its Subsidiaries by reason of death or Disability, the number of shares of Common Stock covered by any Deferral Election Options which are not exercisable immediately prior to the date such Eligible Director ceased to be a director shall be reduced to reflect the amount of the Director Fee actually earned in such year. 3.9. Shareholder and Other Rights. Neither the Eligible Director, nor an Eligible Director's successor or successors in interest, shall have any rights as a stockholder of the Company with respect to any shares of Common Stock subject to an Option granted to any such Eligible Director until the date of issuance of a stock certificate in respect of such shares. No shares shall be required to be issued and delivered upon exercise of any Option unless and until all of the requirements of law and of all regulatory agencies having jurisdiction over the issuance and delivery of the securities have been fully complied with. Neither the Plan, nor the granting of an Option, nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that an Eligible Director has a right to continue as a director of the Company for any period of time or at any particular rate of remuneration. SECTION 4. VESTING. Subject to Section 3.7 of the Plan, an Option shall become exercisable in respect of the aggregate number of underlying shares of Common Stock, determined as of the Grant Date, on the first anniversary of the Grant Date (or such longer period as the Committee may set on or prior to the Grant Date). -6- SECTION 5. BOARD AUTHORITY. The existence of the Plan, any Option Agreement and/or the Annual Grants and Deferral Elections made 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 or any Subsidiary's capital structure or its business, (b) any merger, consolidation or change in the ownership of the Company or any Subsidiary, (c) any issue of bonds, debentures, capital, preferred or prior preference stocks ahead of or affecting the Company's or any Subsidiary's capital stock or the rights thereof, (d) any dissolution or liquidation of the Company or any Subsidiary, (e) any sale or transfer of all or any part of the Company's or any Subsidiary's assets or business, or (f) any other corporate act or proceeding by the Company or any Subsidiary. An Eligible Director, any beneficiary(ies) of any such Eligible Director and/or any other person shall not have any claim against any member of the Board or any committee thereof, the Company or any Subsidiary, or any employees, officers or agents of the Company or any Subsidiary, as a result of any such action. SECTION 6. RECAPITALIZATION ADJUSTMENTS. If the outstanding shares of Common Stock are increased, decreased, changed into, or exchanged for a different number or kind of shares or securities through merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares as to which Options may be granted under this Plan. A corresponding adjustment changing the number and kind of shares allocated to unexercised Options or portions thereof, which shall have been granted prior to any such change, shall likewise be made. Any such adjustment in outstanding Options shall be made without change in the aggregate purchase price applicable to the unexercised portion of the Option, but with a corresponding adjustment in the price for each share or other unit of any security covered by the Option. SECTION 7. CERTAIN MERGERS. 7.1. The Company as Surviving Corporation. If the Company enters into or is involved in any merger, reorganization or other business combination with any person or entity (such merger, reorganization or other business combination to be referred to herein as a "Merger Event") and as a result of any such Merger Event, the Company will be or is the surviving corporation, an -7- Eligible Director shall be entitled, as of the date of the execution of the agreement evidencing the Merger Event (the "Execution Date") and with respect to both exercisable and non-exercisable Options (but only to the extent not previously exercised), to receive substitute stock options 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 Option granted hereunder as of the date of the consummation of the Merger Event. Notwithstanding anything to the contrary in this Section, if any Merger Event occurs, the Company shall have the right, but not the obligation, to pay to each affected Eligible Director an amount in cash or certified check equal to the excess of the Fair market Value of the Common Stock underlying any affected unexercised Options as of the Execution Date (whether then exercisable or not) over the aggregate exercise price of such unexercised Options; provided, however, that if the Company chooses to make such a payment to any Eligible Director, it must make such a payment to all Eligible Directors. 7.2. The Company Not the Surviving Corporation. In the case of a Merger Event in which the Company will not be, or is not, the surviving corporation, and the Company determines not to make the cash or certified check payment described in Section 7.1 of the Plan, the Company shall compel and obligate, as a condition of the consummation of the Merger Event, the surviving or resulting corporation and/or the other party to the Merger Event, as necessary, or any parent, Subsidiary or acquiring corporation thereof, to grant, with respect to both exercisable and non-exercisable Options (but only to the extent not previously exercised), substitute options in respect of the shares of common or other capital stock of such surviving or resulting corporation on such terms and conditions, as to the number of shares, pricing and otherwise, as shall substantially preserve the value, rights and benefits of any affected Options previously granted hereunder as of the date of the consummation of the Merger Event. 7.3. Cancellation of Previous Awards. Upon receipt by an affected Eligible Director of any such cash, certified check, or substitute options as a result of any such Merger Event, such Eligible Directors' affected Options for which such cash, certified check or substitute options was received shall be thereupon canceled without the need for obtaining the consent of any such affected Eligible Director. -8- SECTION 8. CHANGE OF CONTROL. 8.1. Acceleration of Awards. Anything in the Plan to the contrary notwithstanding, if a Change of Control of the Company occurs, all Options then unexercised and outstanding shall become fully vested and exercisable as of the date of the Change of Control. The immediately preceding sentence shall apply to only those Eligible Directors who are directors of the Company and/or one of its Subsidiaries as of the date of the Change of Control. 8.2. Payment After Change of Control. Anything in the Plan to the contrary notwithstanding, within thirty (30) days after a Change of Control under subsection (i) of the definition of Change of Control any Eligible Director who holds Options shall have the right, but not the obligation, to elect, within ten (10) business days after the Eligible Director has actual or constructive knowledge of the occurrence of such Change of Control, to require the Company to purchase such Options from the Eligible Director for an aggregate amount equal to the then aggregate Fair Market Value of the Common Stock underlying such Options tendered, less the aggregate exercise price of such tendered Options. SECTION 9. OPTION AGREEMENTS. Each Eligible Director shall enter into an Option Agreement with the Company in a form specified by the Company. Each such Eligible Director shall agree therein to the restrictions, terms and conditions set forth in such Option Agreement and/or the Plan. SECTION 10. BENEFICIARIES. Each Eligible Director may designate a beneficiary or beneficiaries to receive any payment which under the terms of the Plan and the relevant Option Agreement may become payable on or after the Eligible Director's death. At any time, and from time to time, any such designation may be changed or canceled by the Eligible Director without the consent of any such beneficiary. Any such designation, change or cancellation must be on a form provided for that purpose by the Company and shall not be effective until received by the Company. If no beneficiary has been designated by a deceased Eligible Director, or if the designated beneficiaries have predeceased the Eligible Director, the beneficiary shall be the Eligible Director's estate. If the Eligible Director designates more than one beneficiary, any payments under the Plan to such beneficiaries shall be made in equal shares unless the Eligible Director has expressly designated otherwise, in which case the payments shall be made in the shares designated by the Eligible Director. -9- SECTION 11. ADMINISTRATION OF THE PLAN. 11.1. General. The Plan shall be administered by the Committee, and construed, governed, and amended in accordance with its terms; provided, however, in no case shall any action be taken by any member of the Committee if such action would result in the loss of "disinterested administrator" status, within the meaning of Rule 16b-3, as promulgated by the SEC under Section 16(b) of the Exchange Act, or any successor rule or regulation thereto, as such Rule is amended or applied from time to time (the "SEC Rule 16b-3"), of any director who is a member of the Committee. 11.2. Committee Membership. The Committee shall consist of not less than two "disinterested" directors within the meaning of SEC Rule 16b-3. The Board may from time to time remove members from the Committee, fill vacancies on the Committee and may select one of the members of the Committee as the Committee's chairman. 11.3. Plan Administration. The Committee may designate persons other than members of the Committee to carry out the day-to-day ministerial administration of the Plan and may seek independent advice and counsel from such professional advisors as it deems necessary. The Committee shall report all actions taken by it to the Board. 11.4. Limitation of Liability. Neither the Board nor the Committee, nor any member of either or other employees designated to help administer the Plan, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with the Plan and the members of the Board and the Committee and such other employees 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 any directors and officers liability insurance coverage which may be in effect from time to time. SECTION 12. COMMON SHARES SUBJECT TO OPTIONS. The maximum aggregate number of shares of Common Stock with respect to which Options may be granted from time to time under the Plan is 125,000 shares, subject to adjustment as provided in Section 6 the Plan. The Common Stock issued under the Plan may be either previously authorized but unissued shares or treasury shares acquired by the Company. In the event that any Option expires, lapses, is forfeited, is settled in cash in lieu of Common Stock or otherwise terminates, any shares of Common Stock -10- allocable to the terminated portion of such Option may again be made subject to an Option under the Plan; provided, however, if an individual has received the benefits of ownership with respect to the securities underlying any option granted under the Plan, including without limitation, the right to receive dividends, such shares may not again be made subject to an Option under the Plan. SECTION 13. ELIGIBILITY AND PARTICIPATION. Only Eligible Directors may receive Options under the Plan. SECTION 14. EFFECTIVE DATE AND TERM OF THE PLAN. The Plan shall be effective upon its adoption by the Board, subject to the approval of the Plan by the Company's shareholders in accordance with SEC Rule 16b-3 and Sections 162(m) and 422 of the Code. The Plan shall remain in effect until all Options granted thereunder have been satisfied by the issuance of Common Stock or the payment of cash (unless sooner terminated under Section 15 of the Plan). SECTION 15. TERMINATION AND AMENDMENT OF THE PLAN. In general, the Plan shall terminate 10 years from the date it is adopted by the Board of Directors, or the date it is approved by the shareholders, whichever is earlier, or shall terminate at such earlier time as the Board of Directors may so determine. No options shall be granted under the Plan after that date. Subject to the limitation contained in Section 16 of the Plan, the Committee may at any time amend or revise the terms of the Plan, including the form and substance of the Option Agreements to be used hereunder; provided, however, that the terms and provisions of the Plan which determine the eligibility of Eligible Directors to receive grants and the amount, price and timing of the Annual Grants and Deferral Elections shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder; provided further, however, that without approval by the shareholders of the Company representing a majority of the shares entitled to vote thereon (as described in Section 14 of the Plan) no amendment or revision shall (i) except as provided in Section 6 of the Plan, materially increase the maximum number of shares that may be issued under this Plan; (ii) change the minimum purchase price for shares under Section 3 of the Plan; (iii) increase the maximum term established under the Plan for any Option; (iv) materially modify the requirements as to eligibility for participation in the Plan; (v) change the term of the Plan described in Section 14; or (vi) materially increase the -11- benefits accruing to participants under the Plan. In addition, no such amendment or revision shall be effective if it would disqualify the Plan from the exemptions provided by SEC Rule 16b-3. SECTION 16. PRIOR RIGHTS AND OBLIGATIONS. No amendment, suspension, or termination of the Plan shall, without the consent of the individual who has received an Option, alter or impair any of that person's rights or obligations under any Option granted under the Plan prior to that amendment, suspension, or termination. SECTION 17. RESERVATION OF SHARES OF COMMON STOCK. The Company, during the term of this Plan, will at all times reserve and keep available such number of shares of Common Stock as shall be sufficient to satisfy the requirements of the Plan. In addition, the Company will from time to time, as is necessary to accomplish the purposes of this Plan, seek or obtain from any regulatory agency having jurisdiction any requisite authority in order to issue and sell shares of Common Stock hereunder. The inability of the Company to obtain from any regulatory agency having jurisdiction the authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares of its stock hereunder shall relieve the Company of any liability in respect of the non-issuance or sale of the stock as to which the requisite authority shall not have been obtained. SECTION 18. 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 Option, or the delivery, transfer or vesting of any Common Stock, any federal, state, local or other taxes of any kind which the Committee, in its sole discretion, deems necessary to be withheld to comply with the Code and/or any other applicable law, rule or regulation. If the Committee in its sole discretion, permits shares of Common Stock to be used to satisfy any such tax withholding, such Common Stock shall be valued based on the Fair Market Value of such stock as of the date the tax withholding is required to be made, such date to be determined by the Committee. The Committee may establish rules limiting the use of Common Stock to meet withholding requirements by Eligible Directors who are subject to Section 16 of the Exchange Act. SECTION 19. SEC COMPLIANCE. With respect to persons subject to Section 16 of the Exchange Act, transactions under the Plan are intended to comply -12- with all applicable conditions of SEC Rule 16b-3. To the extent any provision of the Plan or any action of the Committee fails to comply with such rule, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. If a person subject to Section 16 of the Exchange Act exercises his or her rights under an Option grant under the Plan before six months have passed from the date of the grant, the Company shall hold in its custody any resulting stock certificate until six months has passed from the date of the grant; provided, however, that upon the occurrence of any Change of Control all such stock certificates which have been withheld shall immediately be delivered to such person. SECTION 20. 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), except to the extent preempted by federal law which shall govern to that extent. SECTION 21. LISTING, REGISTRATION AND OTHER LEGAL COMPLIANCE. No Options or shares of Common Stock shall be required to be granted or issued under the Plan unless legal counsel for the Company shall be satisfied that such issuance or grant will be in compliance with all applicable federal and state securities laws and regulations and any other applicable laws or regulations. The Committee may require, as a condition of any payment or share issuance, that such agreements, undertakings, representations, certificates, and/or information as 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 be subject to such stock transfer orders and such other restrictions as the Committee may deem advisable under the rules, regulations, or other requirements of the SEC, or any stock exchange upon which the Common Stock is then listed, and any applicable federal or state securities law. In addition, if, at any time specified herein (or in any Option Agreement or otherwise) for, (i) the granting of any Option or the making of any determination, (ii) the issuance or other distribution of Common Stock, or (iii) the payment of amounts to or through any Eligible Director with respect to any Option, any law, rule, regulation or other requirement of any governmental authority or agency shall require either the Company, any Subsidiary or any Eligible Director (or any estate, designated beneficiary or other legal representative thereof) to take any action in connection therewith, the granting of such Option, the making of such -13- determination, the issuance or distribution of Common Stock or such payment, as the case may be, shall be deferred until such required action is taken. SECTION 22. TRANSFER OF OPTIONS. Options granted under the Plan and any Option Agreement, and any rights or interests herein or therein, shall not be assigned, transferred, sold, exchanged, or otherwise disposed of in any way at any time by any Eligible Director (or any beneficiary(ies) of any Eligible Director), other than by testamentary disposition by the Eligible Director or intestate succession. Any such Option, Option Agreement, rights or interests shall not be pledged, encumbered or otherwise hypothecated in any way at any time by any Eligible Director (or any beneficiary(ies) of any Eligible Director). Any such Option, Option Agreement, rights or interests shall not be subject to execution, attachment or similar legal process. Any attempt to sell, exchange, transfer, assign, pledge, encumber, or otherwise dispose of or hypothecate in any way any such Options, rights or interests, or the levy of any execution, attachment or similar legal process thereon, contrary to the terms of this Plan shall be null and void and without legal force or effect. IN WITNESS WHEREOF, this Plan is adopted by The Right Start, Inc. on this ____ day of _____________, 1995. THE RIGHT START, INC. By: ____________________________ Name: Title: -14- EX-10.10 3 REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.10 REGISTRATION RIGHTS AGREEMENT ----------------------------- This Registration Rights Agreement (the "Agreement"), dated as of August 3, 1995, is entered into between The Right Start, Inc., a California corporation (the "Company") and the Purchasers (the "Initial Holders") listed in Schedule A to that certain Stock Purchase Agreement, dated as of August 3, 1995, between American Recreation Centers, Inc., a California corporation ("ARC") and the Initial Holders (the "Purchase Agreement") relating to the sale by ARC to the Initial Purchasers of an aggregate of 3,937,000 shares of the Company's common stock (the "Shares"). In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement for the equal benefit of the Initial Holders and their respective direct and indirect transferees. The parties hereby agree as follows: 1. Definitions ----------- As used in this Agreement, the following terms shall have the following meanings: Closing Date shall mean the Closing Date as defined in the Purchase ------------ Agreement. Company shall mean The Right Start, Inc., a California corporation. ------- Effectiveness Date shall mean the 120th day after the Filing Date. ------------------ Exchange Act shall mean the Securities Exchange Act of 1934, as ------------ amended, and the rules and regulations of the SEC promulgated thereunder. Filing Date shall mean the 45th day after the Closing Date. ----------- Holder shall mean any holder of Registrable Shares. ------ Initial Holders shall have the meaning set forth in the forepart of --------------- this Agreement. Initial Shelf Registration shall have the meaning set forth in Section -------------------------- 2 of this Agreement. Person shall mean an individual, trustee, corporation, partnership, ------ joint stock company, trust, unincorporated association, union, business association, firm or other legal entity. Prospectus shall mean the prospectus included in any Registration ---------- Statement (including, without limitation, any prospectus subject to completion and a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Shares covered by such Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. Registrable Shares shall mean the Shares originally issued to the ------------------ Initial Holders and at all times subsequent thereto until (i) a Registration Statement covering such Shares has been declared effective by the SEC and such Shares have been disposed of in accordance with such effective Registration Statement, (ii) such Shares are sold in compliance with Rule 144 or (iii) such Shares cease to be outstanding. Registration Statement shall mean any registration statement of the ---------------------- Company that covers any of the Registrable Shares pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. Rule 144 shall mean rule 144 under the Securities Act, as such Rule -------- may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the SEC providing for offers and sales of securities made in compliance therewith resulting in offers and sales by subsequent holders that are not affiliates of an issuer of such securities being free of the registration and prospectus delivery requirements of the Securities Act. Rule 415 shall mean rule 415 under the Securities Act, as such Rule -------- may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. SEC shall mean the Securities and Exchange Commission. --- -2- Securities Act shall mean the Securities Act of 1933, as amended, and -------------- the rules and regulations of the SEC promulgated thereunder. Shares shall have the meaning set forth in the forepart of this ------ Agreement. Shelf Registration shall have the meaning set forth in Section 2 of ------------------ this Agreement. Subsequent Shelf Registration shall have the meaning set forth in ----------------------------- Section 2 of this Agreement. Underwritten registration or underwritten offering shall mean a -------------------------------------------------- registration in which securities of the Company are sold to an underwriter for reoffering to the public. 2. Shelf Registration ------------------ (a) The Company shall carefully prepare and file with the SEC as soon as practicable after the Closing Date, but in no event later than the Filing Date, a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Registrable Shares (the "Initial Shelf Registration"). The Initial Shelf Registration shall be on Form S-3 or another appropriate form permitting registration of such Registrable Shares for resale by the Holders in the manner or manners designated by them (including, without limitation, one or more underwritten offerings). The Company shall not permit any securities other than the Registrable Shares to be included in the Initial Shelf Registration or any Subsequent Shelf Registration; provided that the Company may permit the inclusion of securities entitled to be included in the Initial Shelf Registration or any Subsequent Shelf Registration pursuant to registration rights in effect prior to the Closing Date. No Holder may include any of its Registrable Shares in any Shelf Registration pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within 15 business days after receipt of a request therefor, such information as the Company may reasonably request for use in connection with any Shelf Registration or Prospectus or preliminary prospectus included therein. Each Holder as to which any Shelf Registration is being effected agrees to furnish promptly to the Company all information to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. The Company shall use its best efforts to cause the Initial Shelf Registration to be declared effective under the Securities Act on or prior to the Effectiveness Date and to keep the Initial Shelf Registration continuously effective under the Securities Act until (i) all Registrable Shares covered by the -3- Initial Shelf Registration have been sold in the manner set forth and as contemplated in the Initial Shelf Registration, (ii) a Subsequent Shelf Registration covering all of the Registrable Shares has been declared effective under the Securities Act or (iii) all Registrable Shares may be sold pursuant to Rule 144(k) under the Securities Act. (b) Subsequent Shelf Registrations. If the Initial Shelf ------------------------------ Registration or any Subsequent Shelf Registration ceases to be effective for any reason at any time (except as provided in clauses (i), (ii) and (iii) of Section 2(a) above), the Company shall use its best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof, and in any event shall within 30 days of such cessation of effectiveness amend the Shelf Registration in a manner reasonably expected to obtain the withdrawal of the order suspending the effectiveness thereof, or file an additional Registration Statement pursuant to Rule 415 covering all of the Registrable Shares (a "Subsequent Shelf Registration"). If a Subsequent Shelf Registration is filed, the Company shall use its best efforts to cause the Subsequent Shelf Registration to be declared effective as soon as practicable after such filing and to keep such Registration Statement continuously effective (except as provided in clauses (i), (ii) and (iii) of Section 2(a) above). As used herein the term "Shelf Registration" means the Initial Shelf Registration and any Subsequent Shelf Registration. (c) Supplements and Amendments. The Company shall promptly -------------------------- supplement and amend the Shelf Registration if required by the rules, regulations or instructions applicable to the registration form used for such Shelf Registration, if required by the Securities Act, or if requested by the holders a majority in aggregate principal amount of the Registrable Shares covered by such Registration Statement or by any underwriter of such Registrable Shares. 3. Incidental Registration ----------------------- If the Company at any time after the Closing Date proposes to register any of its equity securities (as defined in the Exchange Act) under the Securities Act (other than pursuant to a registration statement on Form S-4 or S-8, or any successor forms), whether or not for sale for its own account, and the registration form to be used may be used for the registration of the Registrable Shares, it will each time give prompt written notice to the Holders of its intention to do so and, upon the written request of any such Holder to the Company made within 15 days after the receipt of any such notice (which request shall specify the Registrable Shares intended to be disposed of by such Holder and the intended method of disposition thereof), the -4- Company shall use its reasonable efforts to effect the registration under the Securities Act of all Registrable Shares which the Company has been so requested to register by the Holders thereof, to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Shares so to be registered, provided that: -------- (1) if, at any time after giving written notice of its intention to register any securities and, prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company may, at its election, give written notice of such determination to each Holder and, thereupon, the Company shall be relieved of its obligation to register any Registrable Shares in connection with such registration (but not of its obligation to pay the registration expenses in connection therewith); and (2) if such registration shall be in connection with an underwritten public offering and the managing underwriters shall advise the Company in writing that in their opinion the number of Registrable Shares requested to be included in such registration exceeds the number of such securities which can be sold in such offering, the Company shall include in such registration the number (if any) of Registrable Shares so requested to be included which in the opinion of such underwriters can be sold and shall not include in such registration any securities (other than securities being sold by the Company, which shall have priority in being included in such registration and Securities entitled to be included in such registration pursuant to registration rights in effect prior to the Closing Date) so requested to be included other than Registrable Shares unless all Registrable Shares requested to be so included are included therein (and if in the opinion of such underwriters, some but not all of the Registrable Shares may be so included, all Holders of Registrable Shares requested to be included therein shall share pro rata in the number of shares of Registrable Shares included in such underwritten public offering on the basis of the number of Registrable Shares requested to be included therein). 4. Registration Procedures ----------------------- In connection with the registration of any Registrable Shares hereunder, the Company shall effect such registrations to permit the sale of such Registrable Shares in accordance with the -5- intended method or methods of disposition thereof, and pursuant thereto the Company shall: (a) Prepare and file with the SEC a Registration Statement or Registration Statements as prescribed herein and to use its best efforts to cause each such Registration Statement to become effective and remain effective as provided herein; provided that, before filing any Registration Statement or -------- Prospectus or any amendments or supplements thereto, the Company shall, if requested, furnish to and afford the Holders of the Registrable Shares, one special counsel for the Holders (the "Holders Counsel") and the managing underwriters, if any, a reasonable opportunity to review copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed (at least 5 business days prior to such filing). The Company shall not file any Registration Statement or Prospectus or any amendments or supplements thereto in respect of which the Holders must be afforded an opportunity to review prior to the filing of such document, if the Holders of a majority in aggregate principal amount of the Registrable Shares covered by such Registration Statement, the Holders Counsel, or the managing underwriters, if any, shall reasonably object. (b) Prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement until such time as all of the securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such Registration Statement, but (except in the case of a Shelf Registration Statement) in no even for a period of more than six months after the Registration Statement becomes effective; cause the related Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) under the Securities Act; and comply with the provisions of the Securities Act, the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to it with respect to the disposition of all securities covered by such Registration Statement as so amended or in such Prospectus as so supplemented; the Company shall be deemed not to have used its best efforts to keep a Registration Statement effective during the Effectiveness Period if it voluntarily takes any action that would result in the Holders of the Registrable Shares covered thereby not being able to sell such Registrable Shares during that period unless such action is required by applicable law. -6- (c) Notify the Holders of Registrable Shares, the Holders Counsel and the managing underwriters, if any, promptly (but in any event within two business days), and confirm such notice in writing, (i) when a Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective (including in such notice a written statement that any Holder may, upon request, obtain, without charge, one conformed copy of such Registration Statement or post-effective amendment including financial statements and schedules, documents incorporated or deemed to be incorporated by reference and exhibits), (ii) of the issuance by the SEC of any stop order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the initiation of any proceedings for that purpose, (iii) if at any time when a prospectus is required by the Securities Act to be delivered in connection with sales of the Registrable Shares the representations and warranties of the Company contained in any agreement (including any underwriting agreement) contemplated by Section 4(l) below cease to be true and correct, (iv) of the receipt by any of the Company of any notification with respect to the suspension of the qualification or exemption from qualification of a Registration Statement or any of the Registrable Shares for offer or sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose, (v) of the happening of any event or any information becoming known that makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in such Registration Statement, Prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (vi) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. (d) Use its best efforts to prevent the issuance of any order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of a Prospectus or suspending the qualification (or exemption from qualification) of any of the Registrable Shares for sale in any jurisdiction, and, if any such order is issued, to use its best -7- efforts to obtain the withdrawal of any such order at the earliest possible moment. (e) If requested by the managing underwriters, if any, or the Holders of a majority in aggregate principal amount of the Registrable Shares being sold in connection with an underwritten offering, (i) promptly incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriters, if any, or such Holders or counsel reasonably request to be included therein, (ii) make all required filings of such prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such prospectus supplement or post-effective amendment, and (iii) supplement or make amendments to such Registration Statement. (f) Furnish to each Holder of Registrable Shares and to the Holders Counsel and each managing underwriter, if any, without charge, one conformed copy of the Registration Statement or Registration Statements and each post- effective amendment thereto, including financial statements and schedules, and, if requested, all documents incorporated or deemed to be incorporated therein by reference and all exhibits. (g) Deliver to each Holder of Registrable Shares, their counsel, and the underwriters, if any, without charge, as many copies of the Prospectus or Prospectuses (including each form of preliminary prospectus) and each amendment or supplement thereto and any documents incorporated by reference therein as such Persons may reasonably request; and, subject to the last paragraph of this Section 4, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the Holders of Registrable Shares and the underwriters or agents, if any, and dealers (if any), in connection with the offering and sale of the Registrable Shares covered by such Prospectus and any amendment or supplement thereto. (h) Prior to any public offering of Registrable Shares, to use its best efforts to register or qualify, and to cooperate with the Holders of Registrable Shares, the underwriters, if any, and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder or the managing underwriters, if any, reasonably request in writing as are reasonably necessary to permit the offer and sale of such Shares in such jurisdictions, provided that where Registrable Shares are offered other -------- than through an underwritten offering, the Company agrees to cause its counsel to perform Blue Sky -8- investigations and file registrations and qualifications required to be filed pursuant to this Section 4(h); keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective and do any and all other acts or things reasonably necessary or advisable to enable the disposition in such jurisdictions of the Registrable Shares covered by the applicable Registration Statement, provided -------- that the Company shall not be required to (A) qualify generally to do business in any jurisdiction where it is not then so qualified, (B) take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or (C) subject itself to taxation in excess of a nominal dollar amount in any such jurisdiction. (i) Cooperate with the Holders of Registrable Shares and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Shares to be sold, which certificates shall not bear any restrictive legends; and enable such Registrable Shares to be in such denominations and registered in such names as the managing underwriters, if any, or Holders may reasonably request. (j) Use its best efforts to cause the Registrable Shares covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Shares, except as may be required solely as a consequence of the nature of such Holder's business, in which case the Company will cooperate in all reasonable respects with the filing of such Registration Statement and the granting of such approvals. (k) Upon the occurrence of any event contemplated by Section 4(c)(v) or 4(c)(vi) above, as promptly as practicable prepare and (subject to Section 4(a) above) file with the SEC, at the expense of the Company, a supplement or post-effective amendment to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Shares being sold thereunder any such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. -9- (l) In the event of an underwritten offering of Registrable Shares, enter into an underwriting agreement as is customary in underwritten offerings and take all such other actions as are reasonably requested by the managing underwriters in order to expedite or facilitate the registration or the disposition of such Registrable Shares, and in such connection, (i) make such representations and warranties to the underwriters, with respect to the business of the Company and its subsidiaries and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, as are customarily made by issuers to underwriters in underwritten offerings, and confirm the same if and when requested; (ii) obtain opinions of counsel to the Company and updates thereof in form and substance reasonably satisfactory to the managing underwriters, addressed to the underwriters covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by underwriters; (iii) obtain "cold comfort" letters and updates thereof in form and substance reasonably satisfactory to the managing underwriters from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings and such other matters as reasonably requested by underwriters; and (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable than those set forth in Section 6 hereof (or such other provisions and procedures acceptable to Holders of a majority in aggregate principal amount of Registrable Shares covered by such Registration Statement and the managing underwriters or agents) with respect to all parties to be indemnified pursuant to said Section. The above shall be done at each closing under such underwriting agreement, or as and to the extent required thereunder. (m) Make available for inspection by any Holder of such Registrable Shares being sold, any underwriter participating in any such disposition of Registrable Shares, if any, and any attorney, accountant or other agent retained by any such Holder, or underwriter (collectively, the "Inspectors"), at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the issuers and their respective subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise any applicable due diligence -10- responsibilities, and cause the officers, directors and employees of the Company and its subsidiaries to supply all information in each case reasonably requested by any such Inspector in connection with such Registration Statement. Records which the Company determines, in good faith, to be confidential and any Records which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or (iii) the information in such Records has been made generally available to the public. Each Holder of such Registrable Shares will be required to agree that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company unless and until such is made generally available to the public. Each Holder of such Registrable Shares will be required to further agree that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company to undertake appropriate action to prevent disclosure of the Records deemed confidential at their expense. (n) Comply with all applicable rules and regulations of the SEC and make generally available to its securityholders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Shares are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of a Registration Statement, which statements shall cover said 12-month periods. (o) Cooperate with each seller of Registrable Shares covered by any Registration Statement and each underwriter, if any, participating in the disposition of such Registrable Shares and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD"). (p) Use its best efforts to take all other steps necessary to effect the registration of the Registrable Shares covered by a Registration Statement contemplated hereby. -11- Each Holder of Registrable Shares agrees by acquisition of such Registrable Shares that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 4(c)(ii), 4(c)(iv), 4(c)(v), or 4(c)(vi), such Holder will forthwith discontinue disposition of such Registrable Shares covered by such Registration Statement or Prospectus until such holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 4(k), or until it is advised in writing by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any amendments or supplements thereto. 5. Registration Expenses --------------------- (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company, whether or not a Registration Statement is filed or becomes effective, including, without limitation, (i) all registration and filing fees (including, without limitation, (A) fees with respect to filings required to be made with the NASD in connection with an underwritten offering and (B) fees and expenses of compliance with state securities or Blue Sky laws (including, without limitation, reasonable fees and disbursements of its counsel in connection with Blue Sky qualifications of the Registrable Shares and determination of the eligibility of the Registrable Shares for investment under the laws of such jurisdictions as provided in Section 4(h), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Shares and of printing prospectuses if the printing of prospectuses is requested by the managing underwriters, if any, (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements for the Company and fees and disbursements of the Holders Counsel (subject to the provisions of Section 5(b)), (v) fees and all independent certified public accountants referred to in Section 4(l)(iii) (including, without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance), (vi) the fees and expenses of any "qualified independent underwriter" or other independent appraiser participating in an offering pursuant to Section 2 of Schedule E to the By-laws of the National Association of Securities Dealers, Inc., (vii) Securities Act liability insurance, if the Company desires such insurance, (viii) fees and expenses of all other Persons retained by the Company, (ix) internal expenses of the Company (including, without limitation, all salaries and expenses of officers and employees of the Company performing legal or accounting duties), (x) the expense of any annual audit, (xi) the fees and expenses incurred in connection with the listing of the securities to be registered on any securities exchange and (xii) the expenses relating to printing, word processing and -12- distributing all Registration Statements, underwriting agreements, securities sales agreements, indentures and any other documents necessary in order to comply with this Agreement. Notwithstanding the foregoing, the Company shall not be liable for any underwriting discounts or commissions incident to the sale of any Registrable Shares pursuant to this Agreement. (b) In connection with any registration hereunder, the Company shall reimburse the Holders of the Registrable Shares being registered in such registration for the reasonable fees and disbursements of the Holders Counsel (in addition to appropriate local counsel) chosen by the Holders of a majority in aggregate principal amount of the Registrable Shares to be included in such Registration Statement and other out-of-pocket expenses of the Holders of Registrable Shares incurred in connection with the registration of the Registrable Shares. 6. Indemnification --------------- (a) The Company will indemnify and hold harmless each Holder of Registrable Shares, the directors, officers, employees and agents of each Person, and each Person, if any, who controls any such Person within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (each a "Participant") from and against any and all losses, claims, liabilities, expenses and damages (including any and all investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based on any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus or any amendment or supplement thereto or any preliminary prospectus or the omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading, provided that a Participant will not be entitled to any such indemnification hereunder to the extent that such loss, claim, liability, expense or damage arises from and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to such Participant furnished in writing to the Company by such Participant expressly for inclusion therein. (b) Each Participant will indemnify and hold harmless the Company, each Person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company and each officer of -13- the Company to the same extent as the foregoing indemnity from the Company to each Participant, but only insofar as losses, claims, liabilities, expenses or damages arise out of or are based on any untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to such Participant furnished in writing to the Company by such Participant expressly for use in any Registration Statement or Prospectus or any amendment or supplement thereto or any preliminary prospectus. The liability of any Participant under this paragraph shall in no event exceed the proceeds received by such Participant from sales of Registrable Shares giving rise to such obligations. (c) Any party that proposes to assert the right to be indemnified under this Section 6 will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 6, notify each such indemnifying party of the commencement of such action, enclosing a copy of all papers served, but the omission so to notify such indemnifying party will not relieve it from any liability that it may have to any indemnified party under the foregoing provisions of this Section 6 unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with counsel satisfactory to the indemnified party, and after notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the indemnified party in connection with the defense. The indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such indemnified party unless (1) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the indemnified party has reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (3) a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the -14- indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such fees, disbursements and other charges will be reimbursed by the indemnifying party promptly as they are incurred. An indemnifying party will not be liable for any settlement of any action or claim effected without its written consent (which consent will not be unreasonably withheld). (d) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs of this Section 6 is applicable in accordance with its terms but for any reason is held to be unavailable from the Company or any Participant, the Company and each Participant will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Company from Persons other than a Participant, such as Persons who control the Company within the meaning of the Act, officers of the Company and directors of the Company, who also may be liable for contribution) to which the Company and each Participant may be subject in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and each Participant on the other, with respect to the statements or omissions which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to such offering. Such relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or a Participant, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and each Participant shall agree that it would not be just and equitable if contributions pursuant to this Section 6(d) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the -15- equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense or damage, or action in respect thereof, referred to above in this Section 6(d) shall be deemed to include, for purpose of this Section 6(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(d), a Participant shall not be required to contribute any amount in excess of the amount by which proceeds received by such Participant from sales of Registrable Shares exceeds the amount of any damages that such Participant has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no Person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 6(d), any Person who controls a party to this Agreement within the meaning of the Act will have the same rights to contribution as that party, and each officer of the Company will have the same rights to contribution as the Company, subject in each case to the provisions hereof. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made under this Section 6(d), will notify any such party or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 6(d). No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld). (e) The indemnity and contribution agreements contained in this Section 6 will be in addition to any liability which the indemnifying Persons may otherwise have to the indemnified Persons referred to above. 7. Rule 144 -------- The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder in a timely manner and, if at any time the Company is not required to file such reports, it will, upon the request of any Holder of Registrable Shares, make publicly available other information so long as necessary to permit sales pursuant to Rule 144 under the Act. The Company further covenants that it will take such further action as any Holder of Registrable Shares may reasonably request, all to the extent required from time to time -16- to enable such holder to sell Registrable Shares without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. 8. Underwritten Registrations -------------------------- If any of the Registrable Shares are to be sold in an underwritten offering (other than an incidental registration pursuant to Section 3 hereof), the investment banker or investment bankers and manager or managers that will manage the offering will be selected by the Holders of a majority in aggregate principal amount of such Registrable Shares included in such offering and reasonably acceptable to the Company. No Holder of Registrable Shares may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Shares on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 9. Miscellaneous ------------- (a) Remedies. In the event of a breach by the Company of any of its -------- obligations under this Agreement, each Holder of Registrable Shares, in addition to being entitled to exercise all rights provided herein or, in the case of the Initial Holders, in the Purchase Agreement or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company has not, as of the date -------------------------- hereof, and the Company shall not, after the date of this Agreement, enter into any agreement with respect to any of its securities that is inconsistent with the rights granted to the Holders of Registrable Shares in this Agreement or otherwise conflicts with the provisions hereof. (c) Adjustments Affecting Registrable Shares. The Company shall not, ---------------------------------------- directly or indirectly, take any action with respect to the Shares as a class that would adversely affect the -17- ability of the Holders of Registrable Shares to include such Registrable Shares in a registration undertaken pursuant to this Agreement. (d) Amendments and Waivers. The provisions of this Agreement, ---------------------- including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of Holders of at least a majority of the then outstanding Registrable Shares. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders of Registrable Shares whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect, impair, limit or compromise the rights of other Holders of Registrable Shares may be given by Holders of at least a majority of the Registrable Shares being sold by such Holders pursuant to such Registration Statement, provided that the -------- provisions of this sentence may not be amended, modified or supplemented except in accordance with the provisions of the immediately preceding sentence. (e) Notices. All notices and other communications provided for or ------- permitted hereunder shall be made in writing by hand-delivery, registered first- class mail, next-day air courier or telecopier: (i) if to an Initial Holder, at the address set forth below such Initial Holder's signature on the signature pages attached hereto; (ii) if to a Holder of Registrable Shares, at the most current address given by such Holder to the Company; and (iii) if to the Company, at: The Right Start, Inc. 5334 Sterling Center Drive Westlake Village, CA 91361 Telecopy No.: (818) 707-7132 Attention: Mr. Lenny R. Targon All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; five business days after being deposited in the postage prepaid, if mailed; one business day after being timely delivered to a next-day air courier; and when receipt is acknowledged by the addressee, if telecopied. -18- (f) Successors and Assigns. This Agreement shall inure to the benefit ---------------------- of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders of Registrable Shares; provided, that, with respect to the indemnity and contribution agreements in Section 6, each Holder of Registrable Shares subsequent to the Initial Holders shall be bound by the terms thereof if (i) such Holder elects to include Registrable Shares in a Registration Statement and (ii) such Holder is advised expressly by the Company of the provisions contained in Section 6 and that such Holder's election to include Registrable Shares shall be deemed such Holder's agreement to be bound by such provisions. (g) Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED ------------- IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF CALIFORNIA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. (j) Severability. If any term, provision, covenant or restriction of ------------ this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (k) Entire Agreement. This Agreement, together with the Purchase ---------------- Agreement, is intended by the parties as a final expression of their agreement, and is intended to be a complete -19- and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. THE RIGHT START, INC. By:________________________________ Lenny M. Targon Chief Executive Officer THE INITIAL HOLDERS: Arbco Associates, L.P. Kayne, Anderson Non-Traditional Investments, L.P. Opportunity Associates, L.P. Offense Group Associates, L.P. By: KAIM Non-Traditional, L.P., its General Partner By: Kayne, Anderson Investment Management, Inc., its General Partner By: _____________________________ Jerry R. Welch Senior Vice President Address: c/o Kayne Anderson Investment Management, Inc. 1800 Avenue of the Stars Los Angeles, CA 90067 Telecopy No.: (310) 203-8348 Attention: Mr. Jerry R. Welch -20- __________________________________ Albert O. Nicholas Address: Nicholas Co., Inc. 700 North Water Street Milwaukee, WI 53202 Telecopy No.: (414) 272-4650 __________________________________ Fred Kayne Address: Fortune Fashions 6501 Flotilla Street Commerce, CA 90040 Telecopy No.: (213) 721-0718 PRIMERICA LIFE INSURANCE COMPANY By: _____________________________ Name: Title: Address: 388 Greenwich Street New York, NY 10013 Telecopy No.: (212) 816-3204 Attn: Harvey Eisen -21- EX-10.11 4 TERMINATION AND RELEASE AGREEMENT EXHIBIT 10.11 TERMINATION AND RELEASE AGREEMENT --------------------------------- THIS TERMINATION AND RELEASE AGREEMENT (this "Agreement") is made and entered into as of this 28th day of February, 1996 by and between The Right Start, Inc., a California corporation (the "Company"), and Lenny M. Targon (the "Executive"). W I T N E S E T H: ----------------- WHEREAS, the Executive is employed by the Company as its Chief Executive Officer and Co-Vice Chairman and also serves as a member of its Board of Directors, and WHEREAS, rights and obligations of the Executive and the Company with respect to such employment are subject to an employment agreement entered into between the Executive and the Company, dated as of May 30, 1991, as amended on July 28, 1994 and August 3, 1995 (the "Employment Agreement"), and WHEREAS, the parties hereto desire to set forth the rights and obligations of the Company and the Executive in connection with the resignation of the Executive, the cancellation of the Employment Agreement and the termination of the Executive's employment effective March 8, 1996. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and for other good and valuable consideration, the parties hereto agree as follows: 1. Resignation and Termination of Employment. Effective March 8, ----------------------------------------- 1996, (i) the Executive resigns as a director and officer of the Company and from all positions held with any subsidiary of the Company and on any corporate committee or board of the Company and its subsidiaries and (ii) the Executive's employment with the Company shall terminate. The Executive waives any rights to future employment with the Company except as specifically set forth herein. 2. Consulting Services. ------------------- (a) Services. On and after March 8, 1996 through May 31, 1997 (the -------- "Effective Period"), the Executive shall become an independent consultant and shall provide consulting services to the Company, including management advisory, marketing and financial services (the "Consulting Services"). The Consulting Services shall be provided by the Executive on a project-by-project basis as shall be reasonably requested by the Company. The Company hereby acknowledges that the Consultant shall not be required to commit any specific periods of time with respect to the provision of such Consulting Services. (b) Compensation. As consideration for the provision of such ------------ Consulting Services: (i) the Executive shall be entitled to receive from the Company through the Effective Period (x) all base salary amounts that the Executive was entitled to receive under the Employment Agreement, (y) if the Executive elects to receive COBRA coverage in connection with the termination of his employment hereunder, the Company shall make payments on the Executive's behalf in an amount equal to all COBRA payments which otherwise would be payable by the Executive to the Company, and (z) if the Executive elects not to receive COBRA coverage in connection with the termination of his employment hereunder, the Company shall make payments to the Executive in an amount equal to all COBRA payments which would be payable by the Executive to the Company if the Executive had elected to receive such coverage; (ii) effective March 8, 1996, the Executive's options (the "Stock Options") to purchase 388,000 shares of the Company's common stock shall be fully vested and may be exercised at any time through June 1, 2001, subject to the terms and conditions of such Stock Options which, except as set forth herein, are not amended or modified in any way hereby; and (iii) the Company agrees to continue to participate in the split-dollar insurance program pursuant to the Employment Agreement, and upon completion by the Executive of the Consulting Services through the end of the Effective Period or, if earlier, the termination of such Consulting Services pursuant to Section 2(e) hereof, the Company shall (A) assign to the Executive all of its interest in that certain $1 million face amount split dollar life insurance policy insuring the life of the Executive (the "Policy"), (B) forgive all indebtedness associated with or outstanding against the Policy, and (C) make a cash payment to the Executive (or his estate) such that the amount of the cash payment shall equal the Executive's federal and California income tax liability resulting from the assignment of the Policy, the forgiveness of such indebtedness and the making of such payment. The Company acknowledges and agrees that the Executive may seek and obtain other employment during the Effective Period and the payments and benefits provided for herein will not be affected by -2- reason of any salary or other compensation received by the Executive by reason of such other employment. (c) Expenses. All reasonable out-of-pocket expenses incurred by the -------- Executive in performance of the Consulting Services to be rendered hereunder shall be borne by the Company and reimbursed to the Executive upon presentation of appropriate documentation provided, however, that such expenses shall require the prior written approval of the Company. (d) Relationship. Nothing herein shall be deemed to constitute an ------------ employment or agency relationship between the Executive and the Company. Except as expressly agreed in writing, the Executive shall not have the authority to obligate, bind or commit the Company in any manner whatsoever. The Executive acknowledges that he is an independent contractor and, as such, shall be liable to pay any taxes or assessments with respect to any consideration received under this Agreement. (e) Termination. The rights and obligations of the Company and the ----------- Executive set forth in this Section 2 may be terminated (i) by the Executive, at any time, for any reason whatsoever or (ii) by the Company, if the Executive breaches this Agreement in any material respect and fails to cure such breach within 15 days after written notice by the Company. Notwithstanding the foregoing, any such termination shall not affect the Executive's rights with respect to the Stock Options or the Policy. 3. Inventions and Confidentiality. ------------------------------ (a) Inventions. The Executive agrees that he shall fully inform and ---------- disclose to the Company all products, ideas, designs, improvements and processes (collectively, "Inventions") which he has obtained during his employment with the Company or during the Effective Period and which relate to or are useful in the business of the Company or the subsidiaries or affiliates of the Company, which resulted from tasks assigned to him by the Company or which resulted from the use of premises owned, leased or contracted by, or on behalf of, the Company, whether conceived by the Executive alone or with others and whether or not conceived during regular working hours. All such Inventions, and all patents, copyrights and other rights in connection therewith, shall be the exclusive property of the Company or the subsidiaries or affiliates of the Company, as applicable. The Executive further agrees that he will fully inform and disclose to the Company, and the Company hereby agrees to receive all disclosures in confidence, all Inventions made or conceived or reduced to practice or learned by him, either alone or jointly with others, during the course of his employment with the Company -3- or during the course of providing the Consulting Services to the Company during the Effective Period, for the purposes of determining whether they constitute Inventions relating to the business of the Company or the subsidiaries or affiliates of the Company, as described above. The Executive shall assist the Company or the subsidiaries or affiliates of the Company to obtain and enforce patents, copyrights, and other rights and protections against infringement by others relating to the Inventions in any and all states and countries, and shall execute all documents and do all things necessary to vest the Company or the subsidiaries or affiliates of the Company, as appropriate, with full and exclusive title thereto. In the event that the Company is unable, after reasonable effort to secure the signature of the Executive on any document or documents needed to apply for or prosecute any patent, copyright, or other right or protection relating to an Invention, for any reason whatsoever, the Executive hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as his agent and attorney-in-fact, to act for and in his behalf and to execute and file any such application or applications and to do all other acts to further the prosecution and issuance of patents, copyrights, or similar protections thereon with the same legal force and effect as if executed by the Executive. (b) Confidentiality. The Executive understands and agrees that as an --------------- executive officer and director of the Company, he was privy and had access to certain information which is confidential to the Company and which would put the Company at a competitive disadvantage, if known to its competitors. The Executive represents and warrants that he has returned all Company property, including without limitation Company files, records, drawings and documents, confidential or otherwise, and copies thereof to the Company. Except as may be required in the performance of this Agreement, pursuant to subpoena or other legal process, or otherwise as required by law, for a period of five years from the date hereof, the Executive will not use for his own benefit or to the benefit of anyone other than the Company any Company confidential or trade secret information, including (by way of illustration and not limitation), but only to the extent confidential and not publicly available, the identity of their customers, service providers and suppliers; their arrangements with customers, service providers and suppliers; their data, records, compilations of information, processes, programs, knowhow, improvements, marketing plans, strategies, forecasts, financial statements, budgets, projections, licenses, prices, costs, files, documents, drawings, -4- memoranda, notes, or other documents relating to the business of the Company and the subsidiaries or affiliates of the Company or the business of any customer, service provider or supplier of the Company or the subsidiaries or affiliates of the Company; and the specifications relating to their customers, service providers, suppliers, products and services. 4. Release. ------- (a) The Executive hereby releases and discharges the Company and its respective past and present agents, employees, managers, representatives, officers, directors, attorneys, accountants, trustees, shareholders, partners, insurers, heirs, predecessors-in-interest, advisors, partnerships, successors, assigns, and affiliated persons, organizations, and companies (hereinafter "Released Parties") from any and all suits, causes of action, demands, claims, charges, complaints, obligations, liabilities, costs, losses, damages, injuries, rights, judgments, attorneys' fees, expenses, bonds, bills, penalties, fines, and all other legal responsibilities in any form whatsoever in law or in equity, whether known or unknown, whether suspected or unsuspected, arising out of his employment relationship with Released Parties, or the termination of that relationship, including but not limited to claims of wrongful termination of employment, breach of an implied covenant of good faith and fair dealing, breach of contract, defamation, slander, negligent misrepresentation, fraud, intentional or negligent interference with business relations, and employment discrimination (including, but not limited to discrimination under the Fair Employment and Housing Act, discrimination under Title VII of the Civil Rights Act of 1964, and Civil Rights Act of 1991 and discrimination under the Equal Pay Act). Hereinafter these shall collectively be referred to as the "Released Actions." (b) The Executive shall not file any actions against Released Parties in any court, governmental administrative agency, or private organization with respect to the Released Actions. (c) The Executive shall make no assignment of any Released Actions and the Executive represents that no such assignment has been made. (d) The Executive represents and agrees that he has been given the opportunity to, has been advised to, and has discussed all of the aspects of this Agreement with his attorneys, that he has carefully read and fully understands all of the provisions of this Agreement, and that he is voluntarily entering into this Agreement. -5- (e) The Executive understands and agrees that the nature, extent and result of the Released Actions hereby released may not now be known or anticipated and declares that he nevertheless desires, and hereby agrees, to release in full all possible Released Actions against the Released Parties arising from or related to any and all acts or omissions of any of the Released Parties arising from or relating to any event or transaction occurring on or before the date hereof. The Executive acknowledges that this release shall be effective as a full and final accord, satisfaction and settlement of and as a bar to each and every claim and cause of action referred to and released by virtue of Paragraph 6(a) above. The Executive acknowledges his familiarity with Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release which if known by him must have materially affected his settlement with the debtor." The Executive expressly waives and relinquishes any and all rights and benefits which he has or may have under Section 1542 of the California Civil Code to the full extent that he may lawfully waive all such rights and benefits pertaining to the Released Actions hereinabove specified. The Executive further acknowledges that he is aware that he or his attorneys may hereafter discover facts different from or in addition to the facts of which he or his attorneys now are aware with respect to the subject matter of this release and that he nevertheless intends hereby fully, finally, absolutely and forever to settle the matters released by virtue of Paragraph 6(a) above notwithstanding the discovery of any such different or additional facts. 5. Statements. The parties agree that neither shall make any ---------- disparaging comments about the other to anyone. The Executive specifically agrees that he will not disparage the Company to its investors, customers, or to anyone, and that if asked, he will advise only that he left to pursue other opportunities. The parties acknowledge and agree that this Section 5 constitutes a material provision of this Agreement. 6. No Admissions. Neither the execution nor the performance of this ------------- Agreement shall constitute or be construed as an admission of liability or wrongdoing whatsoever by the Released Parties or by the Executive. -6- 7. Rights Relating to Employment and Termination. This Agreement --------------------------------------------- integrates and embodies all understandings and agreements between the Executive and the Company in connection with the Executive's employment and termination of employment from the Company and its subsidiaries and affiliates and supersedes any other agreements, oral or written, concerning the Released Actions. Except as specifically provided in this Agreement, the Executive shall not be entitled to any payments on account of his having been employed by, or having terminated his employment with, the Company and its subsidiaries and affiliates. Notwithstanding anything to the contrary contained herein, the Executive shall be entitled to such limitation on liability and rights of indemnification as may be provided under applicable law, the Company's articles of incorporation and bylaws or any agreements between the Executive and the Company with regard to any action or omission of the Executive prior to the termination of his employment with the Company. 8. Withholding. The Company may withhold from any amounts payable ----------- to the Executive hereunder any amounts which, in the opinion of its accounting officer or other tax counsel to the Company, are required to be withheld for federal, state or local taxes. 9. Notice. Any notice required or permitted to be given under this ------ Agreement shall be in writing and shall be deemed to have been given when delivered personally, sent by registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such changed address as such party may subsequently give notice of: If to the Company: The Right Start 5334 Sterling Center Drive Westlake Village, CA 91361 Attention: Mr. Jerry Welch If to the Executive: Mr. Lenny M. Targon 4058 Mariner Circle Westlake Village, CA 91361 10. Binding Agreement; Assignment. In entering into this Agreement, ----------------------------- each party assumes the risk of any misrepresentation, concealment, or mistake. If any party shall subsequently discover that any fact relied upon it in entering into this Agreement was untrue or that any fact was concealed -7- from it, or that its understanding of the facts or the law was incorrect, such party shall not be entitled to relief in connection herewith and, including without limitation of the generality of the foregoing, no party shall have any right or claim to set aside or rescind this Agreement. This Agreement is intended to be and is final and binding between the parties hereto and their respective successors, heirs and assigns regardless of any claims of misrepresentation made without the intention to perform, concealment of fact, mistake in fact, or in law, or any other circumstance whatsoever. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive except that his rights to compensation and benefits hereunder, which rights shall remain subject to the limitations of this Agreement, may be transferred by will or operation of law. The Executive's heirs by will or law shall be entitled to the payments hereunder upon the Executive's death. No rights or obligations of the Company under this Agreement may be assigned or transferred except that such rights or obligations may be assigned or transferred in the event of a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement either contractually or as a matter of law. The Company further agrees that in the event of a merger, consolidation, sale of assets, or liquidation as described in the preceding sentence it shall take whatever action it legally can in order to cause such assignee or transferee to assume the liabilities, obligations, and duties of the Company hereunder. 11. Amendment or Waiver. No provision in this Agreement may be ------------------- amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by either party hereto or any breach by the other party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar provision or condition at the same or any prior or subsequent time. 12. Severability and Interpretation. In the event that any provision ------------------------------- of this Agreement shall be held to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. No provision of this Agreement shall be modified or construed by any practice that is inconsistent with such provision, and failure by either the Company or the -8- Executive to comply with any provision, or to require the other to comply with any provision, should not affect the rights of either to thereafter comply or require the other to comply. 13. Governing Law. This Agreement shall be construed in accordance ------------- with and governed by the laws of California without reference to the principles of conflict of laws. 14. Attorney Fees. The parties shall be responsible for their own ------------- attorneys' fees and costs associated with this Agreement and with the Released Actions. Should any action be brought by the Executive or the Released Parties to enforce any of the terms of this Agreement, the prevailing party shall be entitled to recover all costs and expenses in the prosecution or defense of this action, including reasonable attorneys' fees. 15. Counterparts. This Agreement may be executed in one or more ------------ counterparts. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. THE RIGHT START, INC. By:_____________________________ Jerry R. Welch Chairman of the Board ______________________________ Lenny M. Targon -9- EX-10.12 5 LOAN AGREEMENT EXHIBIT 10.12 LOAN AGREEMENT -------------- (LINE OF CREDIT) This Loan Agreement dated June 12, 1995 is entered into by and between ---- Wells Fargo Bank, National Association, a national banking association ("Lender") and The Right Start, Inc., a California Corporation ("Borrower"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Borrower has requested that Lender enter into certain financing arrangements with Borrower pursuant to which Lender may make loans and provide other financial accommodations to Borrower; and WHEREAS, Lender is willing to make such loans and provide such financial accommodations on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Section 1. DEFINITIONS ----------- All terms used herein which are defined in Article 1 or Article 9 of the Uniform Commercial Code shall have the meanings given therein unless otherwise defined in this Agreement. Any accounting term used herein unless otherwise defined or set forth in this Agreement shall have the meanings customarily given to such term in accordance with GAAP. For purposes of this Agreement, the following terms shall have the respective meanings given to them below: 1.1 "Accounts" shall mean all present and future rights of Borrower to payment of or goods sold or leased for services rendered, which are not evidenced by instruments or chattel paper, and whether or not earned by performance. 1.2 "Availability Reserves" shall mean, as of any date of determination, such amounts as Lender may from time to time establish and revise in good faith reducing the amount of Revolving Loans and Letters of Credit which would otherwise be available to Borrower under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Lender in good faith, do or may affect either (i) the Collateral or its value, (ii) the assets, business or prospects of Borrower or any Obligor or (iii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof) or (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Obligor to Lender is or may have been incomplete, inaccurate or misleading in any material respect or (c) in respect of any state of facts which Lender determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default. Without restricting Lender's rights under the preceding portion of this paragraph, Lender shall establish an availability reserve of 5% of Revolving Loans and Letter of Credit Obligations available under this Agreement until Lender determines that less than 10% of the items test counted by Lender (based on Lender's quarterly test count of at least 40 SKU's) have variances in excess of 10% of the amounts indicated in Borrower's then most recent perpetual inventory report submitted to Lender and that the aggregate variance of all such items counted is less than 2% of the amount indicated therefor in such perpetual inventory report as adjusted for any book reserves established by Borrower against such Inventory. 1.3 "Cash Collateral Account" shall have the meaning set forth in Section ------- 6.1 hereof. - --- 1.4 "Collateral" shall mean all the property in which Borrower or an Obligor grants or is required to grant to Lender a security interest or lien, as described in Section 5 hereof. --------- 1.5 "Eligible Inventory" shall mean Inventory owned by Borrower which is and remains acceptable to Lender for lending purposes and is located at one of the addresses set forth in Schedule I to this Agreement, provided however, that if any such location is owned by a party other than Borrower, Lender shall have obtained from the owner thereof an agreement relative to Lender's rights with respect to such Inventory, in form and content satisfactory to Lender. In no event however shall Eligible Inventory include (a) work-in-process; (b) Inventory subject to a security interest or lien in favor of any person other than Lender except those permitted in this Agreement; and (c) Inventory which is not subject to the first priority, valid and perfected security interest of Lender. General criteria for Eligible Inventory may be established and revised from time to time by Lender in good faith. Any Inventory which is not Eligible Inventory shall nevertheless be part of the Collateral. 1.6 "Equipment" shall mean all of Borrower's now owned and hereafter acquired equipment, machinery, computers and computer hardware and software (whether owned or licensed), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located. 1.7 "Event of Default" shall mean the occurrence or existence of any event or condition described in Section 10.1 hereof. 1.8 "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Boards which are applicable to the circumstances as of the date of determination consistently applied, except that, for purposes of Section 8.10 hereof, GAAP shall be determined on the basis of ------------ such principles in effect on the date hereof and consistent with those used in the preparation of the audited financial statements delivered to Lender prior to the date hereof. -2- 1.9 "General Intangibles" shall mean general intangibles (including, but not limited to, tax and duty refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names, applications for the foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer lists, mailing lists, licenses, whether as licensor or licensee, choses in action and other claims and existing and future leasehold interests in equipment). 1.10 "Information Certificate" shall mean the Information Certificate of Borrower constituting Exhibit A hereto containing material information with respect to Borrower, its business and assets provided by or on behalf of Borrower to Lender in connection with the preparation of this Agreement and the other Loan Documents and the financing arrangements provided for herein. 1.11 "Inventory" shall mean all of Borrower's now owned and hereafter existing or acquired raw materials, work in process, finished goods and all other inventory of whatsoever kind or nature, wherever located. 1.12 "Letters of Credit" shall mean commercial or standby letters of credit issued by Lender from time to time under the Line of Credit. 1.13 "Letter of Credit Agreement" shall have the meaning set forth in Section 2.2(c) hereof. 1.14 "Letter of Credit Obligations" shall mean at any time, the aggregate amount available to be drawn, plus amounts drawn and not yet reimbursed, under Letters of Credit. 1.15 "Line of Credit" shall mean a revolving line of credit under which Lender agrees to make Revolving Loans and issue Letters of Credit, subject to the terms and conditions of this Agreement. 1.16 "Line of Credit Note" shall have the meaning set forth in Section 2.1. 1.17 "Loan Documents" shall mean, collectively, this Agreement and all notes, guarantees, security agreements, subordination agreements, and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by Borrower or any Obligor in connection with this Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.18 "Maximum Amount" shall mean Five Million Dollars ($5,000,000.00). 1.19 "Obligor" shall mean any guarantor, endorser, acceptor, surety, party to a Support Agreement, or other person liable on or with respect to the Line of Credit or who is the owner of any property which is security for the Line of Credit, or any of them, other than Borrower. 1.20 "Records" shall mean all of Borrower's present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and -3- other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of Borrower with respect to the foregoing maintained with or by any other person). 1.21 "Revolving Loans" shall mean advances made by Lender to Borrower on a revolving basis under the Line of Credit, as set forth in Section 2.1 hereof. 1.22 "Rights to Payment" shall mean all Accounts, General Intangibles, contract rights, chattel paper, documents, instruments, letters of credit, bankers acceptances and guaranties, and all present and future liens, security interests, rights, remedies, title and interest in, to and in respect of Accounts and other Collateral (including, without limitation, (a) rights and remedies under or relating to guaranties, contracts of suretyship, letters of credit and credit and other insurance related to the Collateral, (b) rights of stoppage in transit, replevin, repossession, reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, (c) goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, Accounts or other Collateral, including, without limitation, returned, repossessed and reclaimed goods, and (d) deposits by and property of account debtors or other persons securing the obligations of account debtors), monies, securities, credit balances, deposits, deposit accounts and other property of Borrower now or hereafter held or received by or in transit to Lender or its affiliates or at any other depository or other institution from or for the account of Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise. 1.23 "Tangible Net Worth" shall mean, at any time, the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. 1.24 "Value" shall mean, as determined by Lender in good faith, with respect to Inventory, the lower of (a) cost computed on a first-in-first-out basis in accordance with GAAP or (b) market value. 1.25 "Working Capital" shall mean, at any time, total current assets less total current liabilities. Section 2. CREDIT FACILITIES ----------------- 2.1 Line of Credit -------------- (a) Lending Formula. Subject to and upon the terms and conditions --------------- contained herein, Lender agrees to make Revolving Loans (pursuant to Section 2.1 hereof) and issue Letters of Credit (pursuant to Section 2.2 hereof) under a line of credit (the "Line of Credit") from time to time in amounts requested by Borrower up to an aggregate outstanding principal amount equal to the lesser of (1) the Maximum Amount; or (2) the sum of: (A) sixty (60%) percent of the Value of Eligible Inventory consisting of finished goods, plus (B) sixty percent (60%) percent of the -4- then outstanding Letter of Credit Obligations incurred for the purpose of importing inventory, less 100% of the then outstanding Letter of Credit ---- Obligations, less any Availability Reserves. ---- (b) Discretionary Reduction of Lending Formula. Lender may, in its ------------------------------------------ discretion, from time to time, upon not less than five (5) days prior notice to Borrower, reduce the lending formula(s) with respect to Eligible Inventory to the extent that Lender determines that: (A) the number of days of the turnover of the Inventory for any period has changed in any material respect or (B) the liquidation value of the Eligible Inventory, or any category thereof, has decreased, or (C) the nature and quality of the Inventory has deteriorated. In determining whether to reduce the lending formula(s), Lender may consider events, conditions, contingencies or risks which are also considered in determining Eligible Inventory or in establishing Availability Reserves. (c) Overadvance. In the event that the outstanding amount of any ----------- component of the Revolving Loans, or the aggregate amount of the outstanding Revolving Loans and Letter of Credit Obligations, exceed the amounts available under the lending formulas, the sublimits for Letters of Credit set forth in Section 2.2(b) or the Maximum Amount, as applicable, such event shall not limit, waive or otherwise affect any rights of Lender in that circumstance or on any future occasions and Borrower shall, upon demand by Lender, which may be made at any time or from time to time, immediately repay to Lender the entire amount of any such excess(es) for which payment is demanded. (d) Line of Credit Note. Borrower's obligation to repay Revolving ------------------- Loans made under the Line of Credit shall be evidenced by a promissory note executed by Borrower, substantially in the form of Exhibit B hereto. 2.2 Letters of Credit. ------------------ (a) Issuance. Subject to, and upon the terms and conditions -------- contained herein, at the request of Borrower, Lender agrees from time to time during the term of this Agreement to issue Letters of Credit for the account of Borrower containing terms and conditions acceptable to Lender, provided however that no Letter of Credit shall have an expiration date beyond sixty (60) days following the maturity date of the Line of Credit set forth in Section 11.1 hereof. (b) Letter of Credit Sublimits. Except in Lender's discretion, the -------------------------- amount of all Letter of Credit Obligations shall not at any time exceed $400,000.00. At any time an Event of Default exists or has occurred and is continuing, upon Lender's request, Borrower shall furnish cash collateral to Lender for the Letter of Credit Obligations. (c) Letter of Credit Agreement. Each Letter of Credit shall be -------------------------- subject to the additional terms and conditions of the Letter of Credit Agreement and related documents, if any, required by Lender in connection with the issuance thereof (each, a "Letter of Credit Agreement"). Each draft paid by Lender under a Letter of Credit shall be deemed a Revolving Loan under the Line of Credit and shall be repaid by Borrower in accordance with the terms and conditions of this Agreement applicable to such Revolving Loans; provided however, that if the Line of Credit is -5- not available, for any reason whatsoever, at the time any draft is paid by Lender, or if Revolving Loans are not available under the Line of Credit at such time due to any limitation on borrowings set forth herein, then the full amount of such draft shall be immediately due and payable, together with interest thereon, from the date such amount is paid by Lender to the date such amount is fully repaid by Borrower, at the rate of interest applicable to Revolving Loans. In such event, Borrower agrees that Lender, at Lender's sole discretion, may debit Borrower's deposit account with Lender for the amount of any such draft. 2.3 Availability Reserves. All Revolving Loans and Letters of Credit --------------------- otherwise available to Borrower pursuant to the lending formulas, sublimits and subject to the Maximum Amount, and other applicable limits hereunder shall be subject to Lender's continuing right to establish and revise Availability Reserves. Section 3. INTEREST AND FEES ----------------- 3.1 Interest. The outstanding principal balance of Revolving Loans shall -------- bear interest at the rate set forth in the Line of Credit Note. 3.2 Letter of Credit Fees. Borrower shall pay to Lender fees upon the --------------------- issuance or amendment of each Letter of Credit and upon the payment by Lender of each draft under any Letter of Credit determined in accordance with Lender's Commercial Finance Division's standard fees and charges in effect at the time any Letter of Credit is issued or amended or any draft is paid. 3.3 Closing Fee. Borrower shall pay to Lender as a closing fee the ----------- amount of $50,000.00, which shall be fully earned as of and payable on the date hereof. 3.4 Facility Fee. Borrower shall pay to Lender annually a facility fee ------------ in an amount equal to $25,000.00 while this Agreement is in effect and for so long thereafter as any of the Revolving Loans or Letter of Credit Obligations are outstanding, which fee shall be fully earned as of and payable in advance on each anniversary of the date hereof. 3.5 Unused Line Fee. Borrower shall pay to Lender monthly an unused line --------------- fee for the Line of Credit equal to a rate per annum of one-half percent (0.50%) of the amount by which $3,500,000.00 exceeds the average daily principal balance of the outstanding Revolving Loans and Letter of Credit Obligations during the immediately preceding month (or part thereof) while this Agreement is in effect, which fee shall be payable on the first day of each month in arrears. 3.6 Computation and Payment. Interest and fees shall be computed on the ----------------------- basis of a 360-day year, actual days elapsed. Interest shall be payable at times and place set forth in the Line of Credit Note. Section 4. CONDITIONS PRECEDENT -------------------- -6- 4.1. Initial Credit. The obligation of Lender to extend any credit -------------- contemplated by this Agreement is subject to the fulfillment to Lender's satisfaction of all of the following conditions: (a) Approval of Lender Counsel. All legal matters incidental to the -------------------------- extension of credit by Lender shall be satisfactory to counsel of Lender. (b) Documentation. Lender shall have received, in form and ------------- substance satisfactory to Lender, each of the following, duly executed: (i) This Agreement (ii) The Line of Credit Note (iii) The Letter of Credit Agreement (iv) UCC-1 Financing Statement(s) (v) Security Agreement(s) (vi) Borrowing Resolution (vii) Trademark Mortgage Agreement (c) Insurance. Borrower shall have delivered to Lender evidence of --------- insurance coverage on all Borrower's property, covering risks, in amounts, issued by companies and in form and substance satisfactory to Lender, with loss payable endorsements in favor of Lender. (d) Financial Condition. There shall have been no material adverse ------------------- change, as determined by Lender, in the financial condition or business of Borrower, nor any material decline, as determined by Lender, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower. (e) Security Interests. Lender shall have received evidence, in ------------------ form and substance satisfactory to Lender, that Lender has valid perfected and first priority security interests in and liens upon the Collateral and any other property which is intended to be security for the Line of Credit, subject only to the security interests and liens permitted herein or in the other Loan Documents. (f) Field Review. Lender shall have completed a field review of the ------------ Records and such other information with respect to the Collateral as Lender may require to determine the amount of Revolving Loans available to Borrower, the results of which shall be satisfactory to Lender. (g) Other Documents. Lender shall have received, in form and --------------- substance satisfactory to Lender, all consents, waivers, acknowledgments and other agreements from third persons which Lender may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral or to effectuate the provisions or purposes of this Agreement and the other Loan Documents, including, without limitation, acknowledgments by lessors, mortgagees and warehousemen of Lender's security interests in the Collateral, waivers by such persons of any security interests, liens or other claims by such persons to the Collateral and agreements permitting Lender access to, and the right to remain on, the -7- premises to exercise its rights and remedies and otherwise deal with the Collateral. (h) Availability. Borrower shall have a minimum of $1,000,000.00 of ------------ availability for Revolving Loans in addition to the amount paid or to be to Borrower's prior lender to retire Borrower's line of credit with such prior lender and bringing all other obligations to a current status. 4.2. Subsequent Credit. The obligation of Lender to make each extension ----------------- of credit requested by Borrower hereunder shall be subject to the fulfillment to Lender's satisfaction of each of the following conditions: (a) Compliance. The representations and warranties contained herein ---------- shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Lender pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. (b) Documentation. Lender shall have received all additional ------------- documents which may be required in connection with such extension of credit. Section 5. GRANT OF SECURITY INTEREST -------------------------- As security for all indebtedness of Borrower to Lender pursuant to this Agreement, Borrower grants to Lender security interests of first priority in the following property and interests in property, whether now owned or hereafter acquired or existing, and wherever located: all Rights to Payment, Inventory, Equipment, Records and all products and proceeds of the foregoing, in any form, including, without limitation, insurance proceeds and all claims against third parties for loss or damage to or destruction of any or all of the foregoing. All of the foregoing shall be evidenced by and subject to the terms of such documents as Lender shall reasonably require, all in form and substance satisfactory to Lender. Borrower shall reimburse Lender, immediately upon demand, for all costs and expenses incurred by Lender in connection with any of the foregoing security, including without limitation filing and recording fees and costs of environmental studies, appraisals, audits and title insurance. Section 6. COLLECTION AND ADMINISTRATION ----------------------------- 6.1 Cash Collateral Account. ----------------------- (a) Cash Collateral Account. Borrower shall maintain with Lender, ----------------------- and Borrower hereby grants to Lender a security interest in, a non-interest bearing deposit account over which Borrower shall have no control ("Cash Collateral Account") and into which the proceeds of all Borrower's accounts and other -8- rights to payment in which Lender has a security interest shall be deposited immediately upon their receipt. Borrower shall cooperate with Lender and execute all necessary documentation to ensure that all credit card collections are deposited directly by the merchant bank into the Cash Collateral Account. (b) Calculations. For purposes of calculating interest on the Line ------------ of Credit, such payments or other funds received will be applied (conditional upon final collection) as a principal reduction on the Line of Credit two (2) business days following the date of receipt by Lender's Commercial Finance Division of the inter-branch advice of deposit that such payments or other funds have been deposited in the Cash Collateral Account. For purposes of calculating the amount of the Revolving Loans available to Borrower such payments will be applied (conditional upon final collection) to the Line of Credit on the business day of receipt by the Commercial Finance Division, if such advices are received within sufficient time (in accordance with Lender's usual and customary practices as in effect from time to time) to credit Borrower's loan account on such day, and if not, then on the next business day. (c) Immediate Deposit. Borrower and all of its affiliates, ----------------- subsidiaries, shareholders, directors, employees or agents shall, acting as trustee for Lender, receive, as the property of Lender, any monies, checks, notes, drafts, or any other payment (collectively "Cash Receipts") relating to and/or proceeds of Accounts or other Collateral which come into their possession or under their control and immediately upon receipt thereof, shall deposit or cause the same to be deposited in the Cash Collateral Account, or remit the same or cause the same to be remitted, in kind, to Lender, provided however that, notwithstanding the foregoing, Borrower shall remit, not later than Wednesday of each week, all Cash Receipts in excess of $5,000.00 per retail store received by its retail stores during the preceding calendar week. In no event shall Cash Receipts be commingled with Borrower's own funds, except for Cash Receipts generated by retail stores until the same are remitted to Lender. 6.2 Statements. Lender shall render to Borrower each month a statement ---------- setting forth the balance in Borrower's loan account(s) maintained by Lender for Borrower pursuant to the provisions of this Agreement, including principal, interest, fees, costs and expenses. Each such statement shall be subject to subsequent adjustment by Lender but shall, absent manifest errors or omissions, be considered correct and deemed accepted by Borrower and conclusively binding upon Borrower as an account stated except to the extent that Lender receives a written notice from Borrower of any specific exceptions of Borrower thereto within thirty (30) days after the date such statement has been mailed by Lender. Until such time as Lender shall have rendered to Borrower a written statement as provided above, the balance in Borrower's loan account(s) shall be presumptive evidence of the amounts due and owing to Lender by Borrower. 6.3 Payments. All amounts due under Loan Documents shall be payable to -------- the Cash Collateral Account as provided in Section 6.1 or such other place as Lender may designate from time to time. Lender shall apply payments received or collected from Borrower or for the account of Borrower (including, without -9- limitation, the monetary proceeds of collections or of realization upon any Collateral) to the Line of Credit, whether or not then due, in such order and manner as Lender determines. At Lender's option, all principal, interest, fees, costs, expenses and other charges provided for in this Agreement or the other Loan Documents may be charged directly to the loan account(s) of Borrower. Borrower shall make all payments due Lender free and clear of, and without deduction or withholding for or on account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions, withholding, restrictions or conditions of any kind. If after receipt of any payment of, or proceeds of Collateral applied to the payment of, any of Borrower's obligations to Lender under this Agreement, Lender is required to surrender or return such payment or proceeds to any person or entity for any reason, then the obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Agreement shall continue in full force and effect as if such payment or proceeds had not been received by Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify and hold Lender harmless for the amount of any payments or proceeds surrendered or returned. This Section 6.3 shall survive the payment of Borrower's obligations under the Loan Documents and the termination of this Agreement. 6.4 Use of Proceeds. All Revolving Loans made or Letters of Credit --------------- provided by Lender to Borrower pursuant to the provisions hereof shall be used by Borrower only for general operating, working capital and other proper corporate purposes of Borrower not otherwise prohibited by the terms of this Agreement. None of the proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or for the purposes of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Revolving Loans to be considered a "purpose credit" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended. Section 7. REPRESENTATIONS AND WARRANTIES ------------------------------ Borrower makes the following representations and warranties to Lender, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Lender subject to this Agreement. 7.1 Legal Status. Borrower is a corporation duly organized and existing ------------ and in good standing under the laws of the State of California, and is qualified or licensed to do business, and is in good standing as a foreign corporation, if applicable, in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. 7.2 Authorization and Validity. The Loan Documents have been duly -------------------------- authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the -10- party which executes the same, enforceable in accordance with their respective terms. 7.3 No Violation. The execution, delivery and performance by Borrower of ------------ each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of Borrower's Articles of Incorporation, or result in a breach of or constitute a default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. 7.4 No Claims. As of the date of this Agreement, there are no pending, --------- or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings before any governmental authority, arbitrator, court or administrative agency which may adversely affect the financial condition or operation of Borrower other than those disclosed by Borrower to Lender in the Information Certificate. 7.5 Correctness of Financial Statement. The financial statement of ---------------------------------- Borrower dated April 26, 1995, heretofore delivered by Borrower to Lender is complete and correct and presents fairly the financial condition of Borrower; discloses all liabilities of Borrower that are required to be reflected or reserved against under GAAP, whether liquidated or unliquidated, fixed or contingent; and has been prepared in accordance with generally accepted accounting principles consistently applied. From the date of such financial statement to the date of this Agreement, there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged or granted a security interest in or encumbered any of its assets or properties except as disclosed by Borrower to Lender in writing in the Information Certificate or as permitted by this Agreement. 7.6 Income Tax Returns. Except as set forth in the Information ------------------ Certificate, Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. 7.7 No Subordination. There is no agreement, indenture, contract or ---------------- instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower. 7.8 Permits, Franchises. Borrower possesses, and will hereafter possess, ------------------- all permits, memberships, franchises, contracts and licenses required and all trademark rights, trade names, trade name rights, patents, patent rights and fictitious name rights necessary to enable it to conduct the business in which it is now engaged without conflict with the rights of others. 7.9 ERISA. Borrower is in compliance in all material respects with all ----- applicable provisions of the Employee Retirement Income Security Act of 1974, as amended from time to time (ERISA); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; -11- Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. 7.10 Other Obligations. Borrower is not in default on any obligation for ----------------- borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. 7.11 Environmental Matters. Except as disclosed by Borrower to Lender in --------------------- writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable environmental, hazardous waste, health and safety statutes and regulations governing its operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), the Superfund Amendments and Reauthorization Act of 1986 (SARA), the Federal Resource Conservation and Recovery Act of 1976, the Federal Toxic Substances Control Act and the California Health and Safety Code. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. Section 8. AFFIRMATIVE COVENANTS --------------------- Borrower covenants that so long as Lender remains committed to extend credit to Borrower pursuant to the terms of this Agreement or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Lender under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall: 8.1 Punctual Payments. Punctually pay the interest and principal on each ----------------- of the Loan Documents requiring any such payments at the times and place and in the manner specified therein, and any fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein, and immediately upon demand by Lender, the amount by which the outstanding principal balance of the Line of Credit is at any time in excess of any limitation on borrowings hereunder. 8.2 Records and Premises. Maintain proper books and records in which -------------------- true and complete entries shall be made of all dealings or transactions of or in relation to Collateral and the business of Borrower in accordance with GAAP. From time to time as requested by Lender, at the cost and expense of Borrower, allow Lender or its designee complete access to all of Borrower's premises during normal business hours and after notice to Borrower, or at any time and without notice to Borrower if an Event of Default exists or has occurred and is continuing, for the purposes of inspecting, verifying and auditing the Collateral and all of Borrower's books and records, including, without limitation, the Records, and promptly furnish to Lender such copies of such books and records or extracts therefrom as Lender -12- may request, and allow Lender during normal business hours to use such of Borrower's personnel, equipment, supplies and premises as may be reasonably necessary for the foregoing and if an Event of Default exists or has occurred and is continuing for the collection of Accounts and realization of other Collateral. 8.3 Collateral Reporting. Borrower shall provide Lender with the -------------------- following in a form satisfactory to Lender: (a) on the first business day of each week and as of the last business day of the preceding week (or more frequently as Lender may request) perpetual inventory report by location; (b) on or before the 10th day after and as of the end of each month, (or more frequently as Lender may request), agings of accounts receivable and of accounts payable; (c) upon Lender's request, (i) copies of customer statements and credit memos, remittance advices and reports, and copies of deposit slips and bank statements, (ii) copies of shipping and delivery documents, and (iii) copies of purchase orders, invoices and delivery documents for Inventory and Equipment acquired by Borrower; (d) upon Lender's request, Borrower shall, at its expense, no more than once in any twelve (12) month period, but at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Collateral in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely; and (e) such other reports as to the Collateral as Lender shall request from time to time. If any of Borrower's records of the Collateral are prepared or maintained by an accounting service, contractor, shipper or other agent, Borrower hereby irrevocably authorizes such service, contractor, shipper or agent to deliver such records, reports, and related documents to Lender and to follow Lender's instructions with respect to further services at any time that an Event of Default exists or has occurred and is continuing. 8.4 Financial Statements. Provide to Lender all of the following, in -------------------- form and detail satisfactory to Lender: (a) not later than ninety (90) days after and as of the end of each fiscal year, an audited financial statement of Borrower, prepared by an independent certified public accountant acceptable to Lender, to include balance sheet, income statement, statement of cash flows and footnotes, if any, and within ten (10) days after filing, but in no event later than each February 25, copies of Borrower's filed federal and state income tax returns for such year, together with a filed SEC Schedule 10K and all exhibits thereto; (b) not later than twenty (20) days after and as of the end of each month, an income statement. (c) not later than forty-five (45) days after and as of the end of each fiscal quarter, a financial statement of -13- Borrower, prepared by Borrower, to include balance sheet and income statement together with a filed SEC Schedules 10Q and all exhibits thereto; (d) contemporaneously with each annual and quarterly financial statement of Borrower required hereby, a certificate of the chief executive officer, president or chief financial officer of Borrower that the financial statements delivered pursuant thereto are accurate and that there exists no Event of Default nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default; and (e) from time to time such other information as Lender may reasonably request, which may include, without limitation, budgets, forecasts, projections and other information respecting the Collateral and the business of Borrower 8.5 Compliance. Maintain all licenses, permits, governmental approvals, ---------- rights, privileges and franchises necessary for the conduct of its business; conduct its business in an orderly and regular manner; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower or its business. 8.6 Insurance. Maintain and keep in force insurance of the types and in --------- amounts customarily carried in lines of business similar to Borrower's, including but not limited to fire, extended coverage, public liability, property damage and workers' compensation, carried with companies and in amounts satisfactory to Lender, and deliver to Lender from time to time at Lender's request schedules setting forth all insurance then in effect. At its option, Lender may apply any insurance proceeds received by Lender at any time to the cost of repairs or replacement of Collateral and/or to payment of the Borrower's Obligations to Lender under this Agreement, whether or not then due, in any order and in such manner as Lender may determine or hold such proceeds as cash collateral for such Obligations. 8.7 Facilities. Keep all Borrower's properties useful or necessary to ---------- Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that Borrower's properties shall be fully and efficiently preserved and maintained. 8.8 Taxes and Other Liabilities. Pay and discharge when due any and all --------------------------- indebtedness, obligations, assessments and taxes, both real or personal and including federal and state income and payroll taxes, except such as Borrower may in good faith contest or as to which a bona fide dispute may arise, provided provision is made to the satisfaction of Lender for eventual payment thereof in the event that it is found that the same is an obligation of Borrower. 8.9 Litigation. Promptly give notice in writing to Lender of any ---------- litigation pending or threatened in writing against Borrower where the damages claimed against Borrower exceed $100,000.00 with respect to any single litigation, or $250,000.00 in the aggregate with respect to all litigation. -14- 8.10 Financial Condition. Maintain Borrower's financial condition as ------------------- follows: (a) Working Capital excluding the outstanding principal balance of Revolving Loans not at any time less than $3,000,000.00. (b) Tangible Net Worth not at any time less than $7,000,000.00. 8.11 Notice to Lender. Promptly (but in no event more than five (5) days ---------------- after the occurrence of each such event or matter) give written notice to Lender in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default; (b) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; (c) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property. Provide no less than thirty (30) days prior notice of any change in the name or the organizational structure of Borrower 8.12 Further Assurances. At the request of Lender at any time and from ------------------ time to time, duly execute and deliver, or cause to be duly executed and delivered, such further agreements, documents and instruments, and do or cause to be done such further acts as may be necessary or proper to evidence, perfect, maintain and enforce the security interests and the priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Loan Documents, at Borrower's expense. Lender may at any time and from time to time request a certificate from an officer of Borrower representing that all conditions precedent to the making of Revolving Loans and issuing Letters of Credit contained herein are satisfied. In the event of such request by Lender, Lender may, at its option, cease to make any further Revolving Loans or provide any further Letters of Credit until Lender has received such certificate and, in addition, Lender has determined that such conditions are satisfied. Where permitted by law, Borrower hereby authorizes Lender to execute and file one or more UCC financing statements signed only by Lender. Section 9. NEGATIVE COVENANTS ------------------ Borrower further covenants that so long as Lender remains committed to Borrower pursuant to the terms of this Agreement or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Lender under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without the prior written consent of Lender: 9.1 Other Indebtedness. Create, incur, assume or permit to exist any ------------------ indebtedness or liabilities resulting from borrowings, loans or advances (excluding unsecured trade payables incurred in the ordinary course of business), whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except the liabilities of Borrower to Lender -15- and any other liabilities of Borrower existing as of, and disclosed to Lender prior to, the date hereof in the Information Certificate. This covenant shall not apply to advances made to Borrower by landlords for tenant improvements or to advances made to Borrower by customers as prepayment for purchases of inventory. 9.2 Merger, Consolidation, Transfer of Assets. Merge into or consolidate ----------------------------------------- with any corporation or other entity, unless (a) Borrower is the surviving entity, (b) Borrower is, following such merger or consolidation, in compliance with all terms and conditions of this Agreement, and (c) Lender has or has been granted a first priority security interest in all personal property assets of Borrower following such merger or consolidation; make any substantial change in the conduct or nature of Borrower's business; acquire all or substantially all of the assets of any corporation or other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material part of its assets except in the ordinary course of business. Borrower shall provide Lender at least 45 days prior written notice of any merger or consolidation permitted under this Section 9.2, together with such supporting documentation (including without limitation pro-forma financial statements and projections) as Lender may require. 9.3 Guaranties. Guarantee or become liable in any way as surety, ---------- endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except as disclosed in the Information Certificate. 9.4 Loans, Advances, Investments. Make any loans or advances to or ---------------------------- investments in any person or entity, except for loans or advances to employees in ordinary cause of business, not to exceed $5,000.00 per employee and $25,000.00 in the aggregate, outstanding at any time. 9.5 Dividends, Distributions. Declare or pay any dividend or ------------------------ distribution either in cash, stock or any other property on Borrower's stock now or hereafter outstanding; nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding. 9.6 Pledge of Assets. Mortgage, pledge, grant or permit to exist a ---------------- security interest in, or lien upon, any of its assets of any kind, now owned or hereafter acquired, except any of the foregoing in favor of Lender and except as set forth in the Information Certificate. 9.7 New Collateral Location. Open any new location unless Borrower (a) ----------------------- gives Lender thirty (30) days prior written notice of the intended opening of any such new location and (b) executes and delivers, or causes to be executed and delivered, to Lender such agreements, documents, and instruments as Lender may deem reasonably necessary or desirable to protect its interests in the Collateral at such location, including, without limitation, UCC financing statements. -16- Section 10. EVENTS OF DEFAULT ----------------- 10.1 Events of Default. The occurrence of any of the following shall ----------------- constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under this Agreement or any of the Loan Documents. (b) Any financial statement or certificate (including the Information Certificate) furnished to Lender in connection with this Agreement or any representation or warranty made by Borrower hereunder shall prove to be false, incorrect or incomplete in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained in this Agreement or any of the Loan Documents (other than those referred to in (a) or (b)). (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower has incurred any debt or other liability to any person or entity, including Lender, subject to applicable cure and/or grace periods set forth in such contracts or instruments. (e) The filing of a notice of judgment lien against Borrower; or the recording of any abstract of judgment against Borrower in any county in which Borrower has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower; or the entry of a judgment against Borrower; and with respect to any of the foregoing, the amount in dispute is in excess of $250,000.00, and the proceeding in question is not vacated or dismissed within 30 days after its occurrence, provided that Lender shall not be required to make Revolving Loans or issue Letters of Credit during such 30 day period. Mechanics' liens recorded against Borrower's real property (other than 5334 Sterling Center Drive, West Lake Village) shall be deemed not to be covered by paragraph (e), provided however that Lender may, in its discretion, declare to be ineligible Inventory located in any real property which is subject to a mechanics' lien pursuant to which any steps to foreclose have been initiated, whether or not such mechanics' lien or steps to foreclose constitutes an Event of Default. (f) Borrower or any Obligor shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower or any Obligor shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any -17- involuntary petition or proceeding pursuant to said Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any Obligor and is not dismissed within 45 days after such involuntary proceeding is filed, provided that Lender shall not be required to make advances during such 45 day period; or Borrower or any Obligor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any Obligor shall be adjudicated a bankrupt, or an order for relief shall be entered by any court of competent jurisdiction under said Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (g) There shall exist or occur any event or condition which Lender in good faith and reasonably believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents. (h) The death or incapacity of any Obligor. The dissolution or liquidation of Borrower; or Borrower or any of its directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower. (i) Any change in ownership during the term of this Agreement of an aggregate of twenty-five percent (25%) or more of the common stock of Borrower in a single or in affiliated transaction which results in an individual or entity unacceptable to Bank, in its reasonable discretion, owing or controlling such common stock. (j) Any Obligor revokes or terminates its support agreement, guarantee, endorsement or other agreement in favor of Lender. Any creditor of Borrower which has executed a subordination in favor of Lender revokes or terminates such subordination. (k) The indictment or threatened indictment of Borrower or any Obligor under any criminal statute, or commencement or threatened commencement of criminal or civil proceedings against Borrower or any Obligor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any of the property of Borrower. (l) Any two (2) members of Borrower's Senior Management shall cease, for any reason and at any time, to be employed by Borrower on a full-time basis. Senior Management means Stanley M. Fridstein, Lenny M. Targon, Gina M. Shauer, Ronald J. Blumenthal. 10.2 Remedies. If an Event of Default shall occur, (a) any indebtedness -------- of Borrower under any of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Lender's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by Borrower; (b) the obligation, if any, of Lender to permit further borrowings hereunder shall immediately cease and terminate; and (c) Lender shall have all rights, powers and remedies available under each -18- of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit accommodation from Lender subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Lender in connection with each of the Loan Documents may be exercised at any time by Lender and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. Section 11. TERM OF AGREEMENT AND MISCELLANEOUS ----------------------------------- 11.1 Term. ---- (a) Maturity Date. This Agreement and the other Loan Documents shall ------------- become effective as of the date set forth on the first page hereof and shall continue in full force and effect for a term ending on the date three (3) years from the date hereof. Upon the date of termination of the Loan Documents, Borrower shall pay to Lender, in full, all outstanding and unpaid obligations under this Agreement and the other Loan Documents and shall furnish cash collateral to Lender in such amounts as Lender determines are reasonably necessary to secure Lender from loss, cost, damage or expense, including attorneys' fees and legal expenses, in connection with any contingent obligations, including issued and outstanding Letters of Credit and checks or other payments provisionally credited to the obligations and/or as to which Lender has not yet received final and indefeasible payment. Interest shall be due until and including the next business day, if the amounts so paid by Borrower to the bank account designated by Lender are received in such bank account later than 12:00 noon, California time. (b) Continuing Obligations. No termination of this Agreement or the ---------------------- other Loan Documents shall relieve or discharge Borrower of its respective duties, obligations and covenants under this Agreement or the other Loan Documents until all Borrower's obligations under this Agreement and the other Loan Documents have been fully and finally discharged and paid, and Lender's continuing security interest in the Collateral and the rights and remedies of Lender hereunder, under the other Loan Documents and applicable law, shall remain in effect until all such obligations have been fully and finally discharged and paid. (c) Early Termination Fee. If for any reason (other than as set --------------------- forth in paragraph 11.1(d)) this Agreement is terminated prior to the end of the then current term of this Agreement, in view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result thereof, Borrower agrees to pay to Lender, upon the effective date of such termination, an early termination fee in the amount set forth below if such termination is effective in the period indicated: -19- Amount Period -------------------- -------------------- (i) 5% of Maximum Amount June 12, 1995 to and including June 11, 1996 (ii) 3% of Maximum Amount June 12, 1996 to and including June 11, 1997 (iii) 1% of Maximum Amount June 12,1997 to and including June 12, 1998 Such early termination fee shall be presumed to be the amount of damages sustained by Lender as a result of such early termination and Borrower agrees that it is reasonable under the circumstances currently existing. (d) No Early Termination Fee. No early termination fee shall be ------------------------ payable if a group or division of Wells Fargo Bank, (other than the Commercial Finance Division or the workout group), or an affiliate of Wells Fargo Bank extends credit to Borrower, which credit refinances and/or replaces in full the credit facilities granted under this Agreement. 11.2 No Waiver. No delay, failure or discontinuance of Lender in --------- exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Lender of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. 11.3 Notices. All notices, requests and demands which any party is ------- required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: BORROWER: THE RIGHT START, INC. 5334 Sterling Center Drive West Lake Village, CA 91361 Attn: Gina M. Shauer, C.F.O. LENDER: WELLS FARGO BANK, NATIONAL ASSOCIATION Commercial Finance Division 9000 Flair Drive, Third Floor El Monte, CA 91731 or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 11.4 Costs, Expenses and Attorneys' Fees. Borrower shall pay to Lender ----------------------------------- immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees (to -20- include outside counsel fees and all allocated costs of Lender's in-house counsel), incurred by Lender in connection with (a) the negotiation and preparation of this Agreement and each other of the Loan Documents, Lender's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) all out-of-pocket expenses and costs heretofore and from time to time hereafter incurred by Lender during the course of periodic field examinations of the Collateral and Borrower's operations, plus a per diem charge for Lender's examiners in the field and office at Lender's Commercial Finance Division's rate in effect from time to time, (c) the enforcement of Lender's rights and/or the collection of any amounts which become due to Lender under any of the Loan Documents, and (d) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation any action for declaratory relief. 11.5 Successors, Assignment. This Agreement shall be binding on and inure ---------------------- to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without the prior written consent of Lender. Lender reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Lender's rights and benefits under each of the Loan Documents. In connection therewith, Lender may disclose all documents and information which Lender now has or may hereafter acquire relating to any credit extended by Lender to Borrower, Borrower or its business, any Obligor or the business of any Obligor, or any collateral required hereunder. 11.6 Entire Agreement, Amendment. This Agreement and each other of the --------------------------- Loan Documents constitute the entire agreement between Borrower and Lender with respect to any extension of credit by Lender subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only by a written instrument executed by each party hereto. In the event of an express conflict or inconsistency between the terms of this Agreement and the terms of any other Loan Document, the terms of this Agreement shall prevail. 11.7 No Third Party Beneficiaries. This Agreement is made and entered ---------------------------- into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. 11.8 Time. Time is of the essence of each and every provision of this ---- Agreement and each other of the Loan Documents. 11.9 Severability of Provisions. If any provision of this Agreement shall -------------------------- be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. -21- 11.10 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of California, except to the extent that Lender has greater rights or remedies under Federal law, whether as a national bank or otherwise, in which case such choice of California law shall not be deemed to deprive Lender of such rights and remedies as may be available under Federal law. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLS FARGO BANK, THE RIGHT START, INC. NATIONAL ASSOCIATION By: __________________________ By: __________________________ Gina M.Shauer Scott James Lorimer Title: Chief Financial Officer Title: Vice President -22- REVOLVING LINE OF CREDIT NOTE $5,000,000.00 Westlake Village, California June 12, 1995 -- FOR VALUE RECEIVED, the undersigned THE RIGHT START, INC. ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at 9000 Flair Drive, El Monte, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Five Million Dollars ($5,000,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement (computed on the basis of a 360-day year, actual days elapsed) at a fluctuating rate per annum one percent (1.00%) above the Prime Rate in effect from time to time. Each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. A. INTEREST: 1. Payment of Interest. Interest accrued on this Note shall be payable on ------------------- the first day of each month, commencing July 1, 1995. 2. Default Interest. During the continuance of an Event of Default under ---------------- this Note, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to three percent (3.00%) above the rate of interest from time to time applicable to this Note. B. BORROWING AND REPAYMENT: 1. Borrowing and Repayment. Borrower may from time to time during the ----------------------- term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on June 12, 1998. -- 2. Advances. Advances hereunder, to the total amount of the principal sum -------- stated above, may be made by the holder at the oral or written request of (a) President , CEO, CFO or Asst.Secretary , any one - ----------------------------- -------------------------------- acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (b) any person, with respect to advances deposited to the credit of any account of any Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower. 3. Application of Payments. Each payment made on this Note shall be ----------------------- credited first, to any interest then due and second, to the outstanding principal balance hereof. 4. Prepayment. Borrower may prepay principal on any portion of this Note ---------- which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty. C. EVENTS OF DEFAULT: This Note is the Line of Credit Note made pursuant to and is subject to the terms and conditions of that certain Loan Agreement between Borrower and Bank dated as of June 12, 1995, as amended from time to time. Any default in the --- payment or performance of any obligation, or any defined event of default, under said Credit Agreement shall constitute an "Event of Default" under this Note. D. MISCELLANEOUS: 1. Remedies. Upon the occurrence of any Event of Default, the holder of -------- this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy proceeding relating to any Borrower. 2. Obligations Joint and Several. Should more than one person or entity ----------------------------- sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. 3. Governing Law. This Note shall be governed by and construed in ------------- accordance with the laws of the State of California, except to the extent Bank has greater rights or remedies under Federal law, whether as a national bank or otherwise, in which case such choice of California law shall not be deemed to deprive Bank of any such rights and remedies as may be available under Federal law. THE RIGHT START, INC. By: /s/ Gina M. Shauer ----------------------------- Gina M.Shauer Title: Chief Financial Officer FIRST AMENDMENT TO LOAN AGREEMENT THIS FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment") is entered into as of 7/24/96, by and between THE RIGHT START, INC., a California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Lender"). RECITALS -------- WHEREAS, Borrower is currently indebted to Lender pursuant to the terms and conditions of that certain Loan Agreement between Borrower and Lender dated as of June 12, 1995, as amended from time to time ("Loan Agreement"). WHEREAS, Lender and Borrower have agreed to certain changes in the terms and conditions set forth in the Loan Agreement and have agreed to amend the Loan Agreement to reflect said changes. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Loan Agreement shall be amended as follows: 1. Section 2.2 (b) is hereby amended by deleting "Four Hundred Thousand Dollars ($400,000.00)" as the maximum amount of all Letter of Credit Obligations under the subfeature therefor under the Line of Credit, and by substituting for said amount "Six Hundred Fifty Thousand Dollars ($650,000.00)." 2. Except as specifically provided herein, all terms and conditions of the Loan Agreement remain in full force and effect, without waiver of modification. All terms defined in the Loan Agreement shall have the same meaning when used in this Amendment. This Amendment and the Loan Agreement shall be read together, as one document. 3. Borrower hereby remakes all representations and warranties contained in the Loan Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Loan Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. WELLS FARGO BANK, THE RIGHT START, INC. NATIONAL ASSOCIATION By:___________________________ By:__________________________ Gina M. Shauer Scott J. Lorimer Title: Chief Financial Officer Vice President EX-10.13 6 ASSET PURCHASE AGREEMENT EXHIBIT 10.13 ASSET PURCHASE AGREEMENT dated as of July 29, 1996 by and between BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY) and THE RIGHT START, INC. with respect to certain of its assets TABLE OF CONTENTS ----------------- This Table of Contents is not part of the Agreement to which it is attached but is inserted for convenience only.
Page No. ---- ARTICLE I SALE OF ASSETS AND CLOSING 1.01 Assets................................................... 1 1.02 Liabilities.............................................. 3 1.03 Purchase Price; Allowance for Continued Use.............. 4 1.04 Closing.................................................. 4 1.05 Third-Party Consents..................................... 5 1.06 Proration of Taxes....................................... 5 ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER 2.01 Corporate Existence of Seller............................ 5 2.02 Authority................................................ 6 2.03 No Conflicts............................................. 6 2.04 Governmental Approvals and Filings....................... 7 2.05 Legal Proceedings........................................ 7 2.06 Compliance With Laws and Orders.......................... 7 2.07 Real Property Lease...................................... 7 2.08 Tangible Personal Property............................... 8 2.09 Business Contracts....................................... 8 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER 3.01 Corporate Existence...................................... 8 3.02 Authority................................................ 8 3.03 No Conflicts............................................. 9 3.04 Governmental Approvals and Filings....................... 9 3.05 Legal Proceedings........................................ 10 ARTICLE IV CONDITIONS TO OBLIGATIONS OF PURCHASER 4.01 Representations and Warranties........................... 10 4.02 Performance.............................................. 10 4.03 Orders and Laws.......................................... 10 4.04 Regulatory Consents and Approvals........................ 10
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Page No. ---- 4.05 Deliveries.............................................. 11 ARTICLE V CONDITIONS TO OBLIGATIONS OF SELLER 5.01 Representations and Warranties.......................... 11 5.02 Performance............................................. 11 5.03 Orders and Laws......................................... 11 5.04 Regulatory Consents and Approvals....................... 11 5.05 Deliveries.............................................. 12 5.06 Telemarketing Agreement................................. 12 ARTICLE VI SURVIVAL; NO OTHER REPRESENTATIONS 6.01 Survival of Representations, Warranties, Covenants and Agreements................................ 12 6.02 No Other Representations................................ 12 ARTICLE VII DEFINITIONS 7.01 Definitions............................................. 12 ARTICLE VIII MISCELLANEOUS 8.01 Notices................................................. 17 8.02 Entire Agreement........................................ 18 8.03 Expenses................................................ 18 8.04 Waiver.................................................. 18 8.05 Amendment............................................... 19 8.06 No Third Party Beneficiary.............................. 19 8.07 No Assignment; Binding Effect........................... 19 8.08 Headings................................................ 19 8.09 Invalid Provisions...................................... 19 8.10 Governing Law........................................... 20 8.11 Counterparts............................................ 20
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Page No. ---- SCHEDULES 1.01(a)(i) Real Property Lease 1.01(a)(ii) Tangible Personal Property 1.01(a)(iii) Personal Property Leases 1.01(a)(iv) Business Contracts 1.01(b)(iv) Excluded Personal Property 1.01(b)(ix) Excluded 800 Numbers EXHIBITS Exhibit A Form of Promissory Note Exhibit B General Assignment and Bill of Sale Exhibit C Assumption Agreement Exhibit D Form of Telemarketing Agreement Exhibit E Form of Security Agreement
iii This ASSET PURCHASE AGREEMENT dated as of July 29, 1996, is made and entered into by and between Blasiar, Inc. (DBA Alert Communications Company)., a California corporation ("Purchaser"), and The Right Start, Inc., a California --------- corporation ("Seller"). Capitalized terms not otherwise defined herein have the ------ meanings set forth in Section 7.01. ------------ WHEREAS, Seller is engaged, among other things, in the business of providing telemarketing services of various types, including telemarketing services for the receipt of incoming calls (the "Business"); and -------- WHEREAS, Seller desires to sell, transfer and assign to Purchaser, and Purchaser desires to purchase and acquire from Seller, certain of the assets of Seller relating to the operation of the Business, and in connection therewith, Purchaser has agreed to assume certain of the liabilities of Seller relating to the Business, all on the terms set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I SALE OF ASSETS AND CLOSING 1.01 Assets. (a) Assets Transferred. On the terms and subject to ------ ------------------ the conditions set forth in this Agreement, Seller will sell, transfer, convey, assign and deliver to Purchaser, and Purchaser will purchase and pay for, at the Closing, free and clear of all Liens other than Permitted Liens, all of Seller's right, title and interest in, to and under the following Assets and Properties of Seller used in connection with the Business, except as otherwise provided in Section 1.01(b), as the same shall exist on the Closing Date (collectively, the - --------------- "Assets"): ------ (i) Real Property Lease. The lease of real property described in Section ------------------- ------- 1.01(a)(i) of the Disclosure Schedule as to which Seller is the lessee (the - ------------------------------------- "Real Property Lease"); - -------------------- (ii) Tangible Personal Property. All furniture, fixtures, equipment, -------------------------- machinery and other tangible personal property used solely in the conduct of the Business at the location at which the Business is conducted (including but not limited to those items listed in Section 1.01(a)(ii) of the Disclosure Schedule ---------------------------------------------- (the "Tangible Personal Property"); -------------------------- (iii) Personal Property Leases. The leases of Tangible Personal ------------------------ Property described in Section 1.01(a)(iii) of the Disclosure Schedule as to ----------------------------------------------- which Seller is the lessee, together with any options to purchase the underlying property (the "Personal Property Leases"); ------------------------ (iv) Business Contracts. The Contracts described in Section ------------------ ------- 1.01(a)(iv) of the Disclosure Schedule as to which Seller is a party and -------------------------------------- which are utilized solely in the conduct of the Business (the "Business -------- Contracts"); --------- (v) Intangible Personal Property. All Intellectual Property used ---------------------------- solely in the conduct of the Business (including Seller's goodwill therein) and all rights, privileges, claims, causes of action and options relating or pertaining to the Business or the Assets (the "Intangible Personal Property"); (vii) Books and Records. All Books and Records used solely in the ----------------- conduct of the Business or otherwise relating solely to the Assets, other than the minute books, stock transfer books and corporate seal of Seller (the "Business Books and Records"). -------------------------- (b) Excluded Assets. Notwithstanding anything in this Agreement to --------------- the contrary, the following Assets and Properties of Seller (the "Excluded -------- Assets") shall be excluded from and shall not constitute Assets: - ------ (i) Cash. Cash, commercial paper, certificates of deposit and other ---- bank deposits, treasury bills and other cash equivalents; (ii) Accounts Receivable. All trade accounts receivable and all notes, bonds and other evidences of Indebtedness of and rights to receive payments arising out of services rendered in the conduct of the Business prior to the Closing Date (the "Accounts Receivable"); ------------------- (iii) Insurance. All insurance policies relating to the operation of --------- the Business; (iv) Personal Property. The personal property described in Section ----------------- ------- 1.01(b)(iv) of the Disclosure Schedule; - -------------------------------------- (v) Corporate Records. The minute books, stock transfer books and ----------------- corporate seal of Seller; (vi) Litigation Claims. Any rights (including indemnification) and ----------------- claims and recoveries under litigation 2 of Seller against third parties arising out of or relating to events prior to the Closing Date; (vii) Excluded Obligations. The rights of Seller in, to and under all -------------------- Contracts of any nature, the obligations of Seller under which expressly are not assumed by Purchaser pursuant to Section 1.02(b); and --------------- (viii) Tradename and Logo. All of Seller's right, title and interest ------------------ in, to and under all tradenames, service marks, source names, copyrights and all pending applications therefor and registrations thereof and rights related thereto, including, without limitation, the names "Right Start" and "Right Answer" . (ix) 800 Numbers. All of Seller's right, title and interest in, to ----------- and under the 800 numbers listed in Section 1.01(b)(ix) of the Disclosure ------------------- Schedule. 1.02 Liabilities. (a) Assumed Liabilities. In connection with the ----------- ------------------- sale, transfer, conveyance, assignment and delivery of the Assets pursuant to this Agreement, on the terms and subject to the conditions set forth in this Agreement, at the Closing, Purchaser will assume and agree to pay, perform and discharge when due the following obligations of Seller arising in connection with the operation of the Business, as the same shall exist on the Closing Date (the "Assumed Liabilities"), and no others: ------------------- (i) Real Property Lease Obligations. All obligations of Seller under ------------------------------- the Real Property Lease arising and to be performed on or after the Closing Date, and excluding any such obligations arising or to be performed prior to the Closing Date; (ii) Personal Property Lease Obligations. All obligations of Seller ----------------------------------- under the Personal Property Leases arising and to be performed on or after the Closing Date, and excluding any such obligations arising or to be performed prior to the Closing Date; and (iii) Obligations under Contracts. All obligations of Seller under the --------------------------- Business Contracts arising and to be performed on or after the Closing Date, and excluding any such obligations arising or to be performed prior to the Closing Date. (b) Retained Liabilities. Except for the Assumed Liabilities, -------------------- Purchaser shall not assume by virtue of this Agreement or the transactions contemplated hereby, and shall have 3 no liability for, any Liabilities of Seller (including, without limitation, those related to the Business) of any kind, character or description whatsoever (the "Retained Liabilities"). Seller shall discharge in a timely manner or -------------------- shall make adequate provision for all of the Retained Liabilities, provided that -------- Seller shall have the ability to contest, in good faith, any such claim of liability asserted in respect thereof by any Person other than Purchaser and its Affiliates. 1.03 Purchase Price; Allowance for Continued Use. (a) Purchase ------------------------------------------- -------- Price. The aggregate purchase price for the Assets is $498,255 (the "Purchase - ----- -------- Price"), of which $250,000 shall be payable in immediately available United - ----- States funds at the Closing in the manner provided in Section 1.04 and the ------------ remainder of which shall be paid pursuant to the terms of a promissory note, in the form attached hereto as Exhibit A (the "Promissory Note"), executed by --------- Purchaser and delivered to Seller at the Closing. (b) Allowance for Continued Use. Seller and Purchaser acknowledge --------------------------- that, notwithstanding Purchaser's assumption of or the assignment to Purchaser of the AT&T Lease (as defined herein), or Purchaser's assumption of Seller's payment obligations thereunder, Seller will continue to use certain of the equipment described in the AT&T Lease. Seller and Purchaser agree that Seller shall pay or credit to Purchaser monthly for such use the sum of $5,000. Seller agrees that, for so long as such monthly payments are required to be paid to Purchaser, Seller shall indemnify Purchaser for any and all damage sustained to such equipment resulting from Seller's use of such equipment as contemplated by this Section 1.03(b). --------------- 1.04 Closing. The Closing will take place at the offices of Milbank, ------- Tweed, Hadley & McCloy, 601 South Figueroa Street, Los Angeles, CA 90017, or at such other place as Purchaser and Seller mutually agree, at 10:00 A.M. local time, on the Closing Date. At the Closing, (a) Seller will assign and transfer to Purchaser good and valid title in and to the Assets (free and clear of all Liens, other than Permitted Liens) by delivery of a General Assignment and Bill of Sale substantially in the form of Exhibit B hereto (the "General --------- ------- Assignment"), duly executed by Seller, and such other instruments of conveyance, - ---------- assignment and transfer, in form and substance reasonably acceptable to Purchaser's counsel, as shall be effective to vest in Purchaser good title to the Assets (the General Assignment and such other instruments being collectively referred to herein as the "Assignment Instruments"), and (b) Purchaser will ---------------------- assume from Seller the due payment, performance and discharge of the Assumed Liabilities by delivery of an Assumption Agreement substantially in the form of Exhibit C hereto (the "Assumption Agreement"), - --------- -------------------- 4 duly executed by Purchaser, and such other instruments of assumption, in form and substance reasonably acceptable to Seller's counsel, as shall be effective to cause Purchaser to assume the Assumed Liabilities as and to the extent provided in Section 1.02(a) (the Assumption Agreement and such other instruments --------------- being collectively referred to herein as the "Assumption Instruments"). ---------------------- 1.05 Third-Party Consents. To the extent that any Business Contract -------------------- is not assignable without the consent of another party, this Agreement shall not constitute an assignment or an attempted assignment thereof if such assignment or attempted assignment would constitute a breach thereof. Seller and Purchaser shall use commercially reasonable efforts to obtain the consent of such other party to the assignment of any such Business Contract to Purchaser in all cases in which such consent is or may be required for such assignment. Notwithstanding the foregoing, Purchaser and Seller understand and agree that AT&T Credit Corporation ("AT&T") has not yet consented to the assignment to and assumption by Purchaser of that certain Master Equipment Lease Agreement dated as of August 15, 1990 by and between AT&T and Seller (the "AT&T Lease") or the release of Seller from all obligations thereunder. To induce Seller to close nonetheless, Purchaser hereby agrees: (i) to cooperate with Seller to use its best efforts to cause AT&T to consent to such assignment, assumption and release; (ii) to make all payments due under the AT&T Lease; and (iii) to indemnify Seller for any damages, claims, losses or liabilities (including legal fees) related to the failure of Purchaser to comply with clause (ii) of this sentence. Purchaser further agrees that, until such time as AT&T consents to the assignment to and assumption by Purchaser of the AT&T Lease, Purchaser shall indemnify Seller for any and all damage sustained to the equipment which is the subject of the AT&T Lease resulting from Purchaser's use and operation of such equipment. 1.06 Proration of Taxes. Any taxes not yet due as of the Closing ------------------ Date with respect to the Assets shall be prorated, with Seller liable to the extent such taxes relate to any time period prior to the Closing Date and Purchaser liable to the extent such taxes relate to periods beginning with and subsequent to the Closing Date. Except as otherwise agreed by the parties, the net amount of any such proration will be settled and paid on or before the date such tax payment is due, provided that prior written notice of such payment has been received. 5 ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Purchaser as follows : 2.01 Corporate Existence of Seller. Seller is a corporation duly ----------------------------- incorporated, validly existing and in good standing under the Laws of the State of California, and has full corporate power and authority to conduct the Business as and to the extent now conducted and to own, use and lease the Assets. 2.02 Authority. Seller has full corporate power and authority to --------- execute and deliver this Agreement and the Operative Agreements to which it is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby, including without limitation to sell and transfer (pursuant to this Agreement) the Assets. The execution and delivery by Seller of this Agreement and the Operative Agreements to which it is a party, and the performance by Seller of its obligations hereunder and thereunder, have been duly and validly authorized by the Board of Directors of Seller, no other corporate action on the part of Seller or its stockholders being necessary. This Agreement has been duly and validly executed and delivered by Seller and constitutes, and upon the execution and delivery by Seller of the Operative Agreements to which it is a party, such Operative Agreements will constitute, legal, valid and binding obligations of Seller enforceable against Seller in accordance with their terms. 2.03 No Conflicts. The execution and delivery by Seller of this ------------ Agreement do not, and the execution and delivery by Seller of the Operative Agreements to which it is a party, the performance by Seller of its obligations under this Agreement and such Operative Agreements and the consummation of the transactions contemplated hereby and thereby will not: (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the articles of incorporation or by-laws of Seller; (b) conflict with or result in a violation or breach of any term or provision of any Law or Order applicable to Seller or any of its Assets and Properties (other than such conflicts, violations or breaches which could not in the aggregate reasonably be expected to adversely affect the validity or enforceability of this Agreement or any of such Operative Agreements or to have a material adverse effect on the Condition of the Business); or 6 (c) except as could not, individually or in the aggregate, reasonably be expected to be materially adverse to the Condition of the Business or to adversely affect the ability of Seller to consummate the transactions contemplated hereby or by any such Operative Agreements or to perform its obligations hereunder or thereunder, (i) conflict with or result in a violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, (iii) require Seller to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, or (iv) result in the creation or imposition of any Lien upon Seller or any of its Assets or Properties under, any Contract or License to which Seller is a party or by which any of its Assets and Properties is bound. 2.04 Governmental Approvals and Filings. No consent, approval or ---------------------------------- action of, filing with or notice to any Governmental or Regulatory Authority on the part of Seller is required in connection with the execution, delivery and performance of this Agreement or any of the Operative Agreements to which it is a party or the consummation of the transactions contemplated hereby or thereby, except (i) where the failure to obtain any such consent, approval or action, to make any such filing or to give any such notice could not reasonably be expected to adversely affect the ability of Seller to consummate the transactions contemplated by this Agreement or any of such Operative Agreements or to perform its obligations hereunder or thereunder, or to have a material adverse effect on the Condition of the Business, and (ii) those as would be required solely as a result of the identity or the legal or regulatory status of Purchaser or any of its Affiliates. 2.05 Legal Proceedings. (a) there are no Actions or Proceedings ----------------- pending or, to the Knowledge of Seller, threatened against, relating to or affecting Seller with respect to the Business or any of its Assets and Properties which could reasonably be expected (i) to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or any of the Operative Agreements, or (ii) individually or in the aggregate with other such Actions or Proceedings, to have a material adverse effect on the Condition of the Business; and (b) there are no Orders outstanding against Seller which, individually or in the aggregate with other such Orders, materially adversely affect the Condition of the Business. 7 2.06 Compliance With Laws and Orders. Seller is not in violation of ------------------------------- or in default under any Law or Order applicable to the Business or the Assets the effect of which, individually or in the aggregate with other such violations and defaults, could reasonably be expected to be materially adverse to the Condition of the Business. 2.07 Real Property Lease. Seller has a valid and subsisting ------------------- leasehold estate in and the right to quiet enjoyment of the real property subject to the Real Property Lease for the full term thereof. The Real Property Lease is a legal, valid and binding agreement, enforceable in accordance with its terms, of Seller and, to the Knowledge of Seller, of each other Person that is a party thereto, and to the Knowledge of Seller there is no default (or any condition or event which, after notice or lapse of time or both, would constitute a default) thereunder. Seller has delivered to Purchaser prior to the execution of this Agreement a true and complete copy of the Real Property Lease (including any amendments and renewal letters). 2.08 Tangible Personal Property. Seller is in possession of and has -------------------------- good title to, or has valid leasehold interests in or valid rights under Contract to use, all the Tangible Personal Property used in and individually or in the aggregate with other such property material to the Condition of the Business. All the Tangible Personal Property is free and clear of all Liens, other than Permitted Liens, and is in all material respects in good working order and condition, ordinary wear and tear excepted. 2.09 Business Contracts. Prior to the execution of this Agreement, ------------------ Seller has delivered to Purchaser true and complete copies of all Business Contracts and (i) each Business Contract is in full force and effect and constitutes a legal, valid and binding agreement, enforceable in accordance with its terms, of the Seller and, to the Knowledge of Seller, of each other party thereto and (ii) neither Seller nor, to the Knowledge of Seller, any other party to such Business Contract is in violation or breach of or default under any such Business Contract (or with notice or lapse of time or both, would be in violation or breach of or default under any such Business Contract) the effect of which, individually or in the aggregate, could reasonably be expected to be materially adverse to the Condition of the Business. 8 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller as follows: 3.01 Corporate Existence. Purchaser is a corporation duly ------------------- incorporated, validly existing and in good standing under the Laws of the State of [California]. Purchaser has full corporate power and authority to enter into this Agreement and the Operative Agreements to which it is a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. 3.02 Authority. The execution and delivery by Purchaser of this --------- Agreement and the Operative Agreements to which it is a party, and the performance by Purchaser of its obligations hereunder and thereunder, have been duly and validly authorized by the Board of Directors of Purchaser, no other corporate action on the part of Purchaser or its stockholders being necessary. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes, and upon the execution and delivery by Purchaser of the Operative Agreements to which it is a party, such Operative Agreements will constitute, legal, valid and binding obligations of Purchaser enforceable against Purchaser in accordance with their terms. 3.03 No Conflicts. The execution and delivery by Purchaser of this ------------ Agreement do not, and the execution and delivery by Purchaser of the Operative Agreements to which it is a party, the performance by Purchaser of its obligations under this Agreement and such Operative Agreements and the consummation of the transactions contemplated hereby and thereby will not: (a) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the [articles] of incorporation or by-laws (or other comparable corporate charter document) of Purchaser; (b) conflict with or result in a violation or breach of any term or provision of any Law or Order applicable to Purchaser or any of its Assets and Properties (other than such conflicts, violations or breaches which could not in the aggregate reasonably be expected to adversely affect the validity or enforceability of this Agreement or any of such Operative Agreements); or (c) except as could not, individually or in the aggregate, reasonably be expected to adversely affect the ability 9 of Seller to consummate the transactions contemplated hereby or by any such Operative Agreements or to perform its obligations hereunder or thereunder, (i) conflict with or result in a violation or breach of, (ii) constitute (with or without notice or lapse of time or both) a default under, (iii) require Purchaser to obtain any consent, approval or action of, make any filing with or give any notice to any Person as a result or under the terms of, or (iv) result in the creation or imposition of any Lien upon Purchaser or any of its Assets or Properties under, any Contract or License to which Purchaser is a party or by which any of its Assets and Properties is bound. 3.04 Governmental Approvals and Filings. No consent, approval or ---------------------------------- action of, filing with or notice to any Governmental or Regulatory Authority on the part of Purchaser is required in connection with the execution, delivery and performance of this Agreement or the Operative Agreements to which it is a party or the consummation of the transactions contemplated hereby or thereby, except where the failure to obtain any such consent, approval or action, to make any such filing or to give any such notice could not reasonably be expected to adversely affect the ability of Seller to consummate the transactions contemplated by this Agreement or any of such Operative Agreements or to perform its obligations hereunder or thereunder. 3.05 Legal Proceedings. There are no Actions or Proceedings pending ----------------- or, to the knowledge of Purchaser, threatened against, relating to or affecting Purchaser or any of its Assets and Properties which could reasonably be expected to result in the issuance of an Order restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or any of the Operative Agreements. ARTICLE IV CONDITIONS TO OBLIGATIONS OF PURCHASER The obligations of Purchaser hereunder to purchase the Assets and to assume and pay, perform and discharge the Assumed Liabilities are subject to the fulfillment, at or before the Closing, of each of the following conditions (all or any of which may be waived in whole or in part by Purchaser in its sole discretion): 4.01 Representations and Warranties. The representations and ------------------------------ warranties made by Seller in this Agreement, taken as a whole, shall be true and correct, in all material respects, on and as of the Closing Date, as though made on and as 10 of the Closing or, in the case of representations and warranties made as of a specified date earlier than the Closing Date, on and as of such earlier date. 4.02 Performance. Seller shall have performed and complied with, in ----------- all material respects, the agreements, covenants and obligations required by this Agreement to be so performed or complied with by Seller at or before the Closing. 4.03 Orders and Laws. There shall not be in effect on the Closing --------------- Date any Order or Law restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or any of the Operative Agreements. 4.04 Regulatory Consents and Approvals. All consents, approvals and --------------------------------- actions of, filings with and notices to any Governmental or Regulatory Authority necessary to permit Purchaser and Seller to perform their obligations under this Agreement and the Operative Agreements and to consummate the transactions contemplated hereby and thereby shall have been duly obtained, made or given and shall be in full force and effect, and all terminations or expirations of waiting periods imposed by any Governmental or Regulatory Authority necessary for the consummation of the transactions contemplated by this Agreement and the Operative Agreements shall have occurred. 4.05 Deliveries. Seller shall have delivered to Purchaser the ---------- General Assignment and the other Assignment Instruments. ARTICLE V CONDITIONS TO OBLIGATIONS OF SELLER The obligations of Seller hereunder to sell the Assets are subject to the fulfillment, at or before the Closing, of each of the following conditions (all or any of which may be waived in whole or in part by Seller in its sole discretion): 5.01 Representations and Warranties. The representations and ------------------------------ warranties made by Purchaser in this Agreement, taken as a whole, shall be true and correct in all material respects on and as of the Closing Date as though made on and as of the Closing Date. 5.02 Performance. Purchaser shall have performed and complied with, ----------- in all material respects, the agreements, covenants and obligations required by this Agreement to be so performed or complied with by Purchaser at or before the Closing. 11 5.03 Orders and Laws. There shall not be in effect on the Closing --------------- Date any Order or Law restraining, enjoining or otherwise prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement or any of the Operative Agreements. 5.04 Regulatory Consents and Approvals. All consents, approvals and --------------------------------- actions of, filings with and notices to any Governmental or Regulatory Authority necessary to permit Seller and Purchaser to perform their obligations under this Agreement and the Operative Agreements and to consummate the transactions contemplated hereby and thereby shall have been duly obtained, made or given and shall be in full force and effect, and all terminations or expirations of waiting periods imposed by any Governmental or Regulatory Authority necessary for the consummation of the transactions contemplated by this Agreement and the Operative Agreements shall have occurred. 5.05 Deliveries. Purchaser shall have delivered to Seller the ---------- Assumption Agreement, the other Assumption Instruments, the Promissory Note and the Security Agreement. 5.06 Telemarketing Agreement. Seller and Purchaser shall have ----------------------- entered into a telemarketing services agreement, substantially in the form attached hereto as Exhibit D. --------- ARTICLE VI SURVIVAL; NO OTHER REPRESENTATIONS 6.01 Survival of Representations, Warranties, Covenants and ------------------------------------------------------ Agreements. The representations and warranties contained in this Agreement - ---------- shall survive for a period of six months after the Closing, and thereafter there shall be no liability in respect thereof, whether such liability has accrued prior to the Closing Date or after the Closing Date, on the part of either party or its officers, directors, employees, agents and Affiliates. This Section shall not limit in any way the survival and enforceability of any covenant or agreement of the parties hereto which by its terms contemplates performance after the Closing Date, which shall survive for the respective periods set forth herein. 6.02 No Other Representations. Notwithstanding anything to the ------------------------ contrary contained in this Agreement, it is the explicit intent of each party hereto that Seller is making no representation or warranty whatsoever, express or implied, including but not limited to any implied representation or warranty as to condition, merchantability or suitability as to any of the Assets or other properties of the Business, except those representations and warranties contained in Article II. It ---------- 12 is understood that, except to the extent otherwise expressly provided herein, Purchaser takes the Assets "as is" and "where is". ARTICLE VII DEFINITIONS 7.01 Definitions. (a) Defined Terms. As used in this Agreement, ----------- ------------- the following defined terms have the meanings indicated below: "Accounts Receivable" has the meaning ascribed to it in Section ------------------- ------- 1.01(b)(ii). - ----------- "Actions or Proceedings" means any action, suit, proceeding, ---------------------- arbitration or Governmental or Regulatory Authority investigation. "Affiliate" means any Person that directly, or indirectly through one --------- of more intermediaries, controls or is controlled by or is under common control with the Person specified. For purposes of this definition, control of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether by Contract or otherwise and, in any event and without limitation of the previous sentence, any Person owning ten percent (10%) or more of the voting securities of another Person shall be deemed to control that Person. "Agreement" means this Asset Purchase Agreement and the Exhibits, the --------- Disclosure Schedule and the Schedules hereto, as the same shall be amended from time to time. "Assets" has the meaning ascribed to it in Section 1.01(a). ------ --------------- "Assets and Properties" of any Person means all assets and properties --------------------- of every kind, nature, character and description (whether real, personal or mixed, whether tangible or intangible and wherever situated), including the goodwill related thereto, operated, owned or leased by such Person. "Assignment Instruments" has the meaning ascribed to it in ---------------------- Section 1.04. - ------------ "Assumed Liabilities" has the meaning ascribed to it in Section ------------------- ------- 1.02(a). - ------- 13 "Assumption Agreement" has the meaning ascribed to it in Section 1.04. -------------------- ------------ "Assumption Instruments" has the meaning ascribed to it in ---------------------- Section 1.04. - ------------ "AT&T" has the meaning ascribed to it in Section 1.05. ---- ------------ "AT&T Lease" has the meaning ascribed to it in Section 1.05. ---------- ------------ "Books and Records" of any Person means all files, documents, ----------------- instruments, papers, books and records relating to the business of such Person. "Business" has the meaning ascribed to it in the forepart of -------- this Agreement. "Business Books and Records" has the meaning ascribed to it in -------------------------- Section 1.01(a)(vii). - -------------------- "Business Contracts" has the meaning ascribed to it in Section ------------------ ------- 1.01(a)(iv). - ----------- "Business Day" means a day other than Saturday, Sunday or any day on ------------ which banks located in the State of California are authorized or obligated to close. "Closing" means the closing of the transactions contemplated by ------- Section 1.04. - ------------ "Closing Date" means (a) July 29, 1996, or (b) such other date as ------------ Purchaser and Seller mutually agree upon in writing. "Condition of the Business" means the business, financial condition, ------------------------- results of operations and Assets and Properties of the Business. "Contract" means any agreement, lease, license, evidence of -------- Indebtedness, mortgage, indenture, security agreement or other contract. "Disclosure Schedule" means the record delivered to Purchaser by ------------------- Seller herewith and dated as of the date hereof, containing all lists, descriptions, exceptions and other information and materials as are required to be included therein by Seller pursuant to this Agreement. 14 "Excluded Assets" has the meaning ascribed to it in Section 1.01(b). --------------- --------------- "GAAP" means generally accepted accounting principles, consistently ---- applied throughout the specified period and in the immediately prior comparable period. "General Assignment" has the meaning ascribed to it in Section 1.04. ------------------ ------------ "Governmental or Regulatory Authority" means any court, tribunal, ------------------------------------ arbitrator, authority, agency, commission, official or other instrumentality of the United States or any state, county, city or other political subdivision. "Indebtedness" of any Person means all obligations of such Person (i) ------------ for borrowed money, (ii) evidenced by notes, bonds, debentures or similar instruments, (iii) for the deferred purchase price of goods or services (other than trade payables or accruals incurred in the ordinary course of business), (iv) under capital leases and (v) in the nature of guarantees of the obligations described in clauses (i) through (iv) above of any other Person. "Intangible Personal Property" has the meaning ascribed to it in ---------------------------- Section 1.01(a)(v). - ------------------ "Intellectual Property" means all patents and patent rights, --------------------- trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, brand names, inventions, copyrights and copyright rights, know-how and all pending applications for and registrations of patents trademarks, service marks and copyrights. "Knowledge of Seller" means the actual knowledge of the officers and ------------------- employees of Seller engaged primarily in the conduct of the Business as well as other material knowledge available to Seller's officers and employees in the exercise of reasonable diligence. "Laws" means all laws, statutes, rules, regulations, ordinances and ---- other pronouncements having the effect of law of the United States or any state, county, city or other political subdivision or of any Governmental or Regulatory Authority. "Liabilities" means all Indebtedness, obligations and other ----------- liabilities of a Person (whether absolute, accrued, contingent, fixed or otherwise, or whether due or to become due). 15 "Licenses" means all licenses, permits, certificates of authority, -------- authorizations, approvals, registrations, franchises and similar consents granted or issued by any Governmental or Regulatory Authority. "Liens" means any mortgage, pledge, assessment, security interest, ----- lease, lien, adverse claim, levy, charge or other encumbrance of any kind, or any conditional sale Contract, title retention Contract or other Contract to give any of the foregoing. "Operative Agreements" means, collectively, the General Assignment and -------------------- the other Assignment Instruments, the Assumption Agreement and the other Assumption Instruments and any support or other agreements to be entered into in connection with the transaction. "Order" means any writ, judgment, decree, injunction or similar order ----- of any Governmental or Regulatory Authority (in each such case whether preliminary or final). "Permitted Lien" means (i) any Lien for taxes not yet due or -------------- delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP; (ii) any statutory Lien arising in the ordinary course of business by operation of Law with respect to a Liability that is not yet due or delinquent; and (iii) any minor imperfection of title or similar Lien which individually or in the aggregate with other such Liens could not reasonably be expected to materially adversely affect the Condition of the Business. "Person" means any natural person, corporation, general partnership, ------ limited partnership, proprietorship, other business organization, trust, union, association or Governmental or Regulatory Authority. "Personal Property Leases" has the meaning ascribed to it in ------------------------ Section 1.01(a)(iii). - -------------------- "Purchase Price" has the meaning ascribed to it in Section 1.03(a). -------------- --------------- "Purchaser" has the meaning ascribed to it in the forepart of --------- this Agreement. "Real Property Lease" has the meaning ascribed to it in ------------------- Section 1.01(a)(i). - ------------------ 16 "Retained Liabilities" has the meaning ascribed to it in Section -------------------- ------- 1.02(b). - ------- "Security Agreement" means an executed security agreement ------------------ substantially in the form of Exhibit E hereto, granting Seller a first priority --------- security interest in the Assets to secure payment of the Promissory Note. "Seller" has the meaning ascribed to it in the forepart of ------ this Agreement. "Tangible Personal Property" has the meaning ascribed to it -------------------------- in Section 1.01(a)(ii). ------------------- (b) Construction of Certain Terms and Phrases. Unless the context of ----------------------------------------- this Agreement otherwise requires, (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms "hereof," "herein," "hereby" and derivative or similar words refer to this entire Agreement; (iv) the terms "Article" or "Section" refer to the specified Article or Section of this Agreement; and (v) the phrase "ordinary course of business" refers to the business of Seller in connection with the Business. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. All accounting terms used herein and not expressly defined herein shall have the meanings given to them under GAAP. Any representation or warranty contained herein as to the enforceability of a Contract shall be subject to the effect of any bankruptcy, insolvency, reorganization, moratorium or other similar law affecting the enforcement of creditors' rights generally and to general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at Law). ARTICLE VIII MISCELLANEOUS 8.01 Notices. All notices, requests and other communications ------- hereunder must be in writing and will be deemed to have been duly given only if delivered personally or by facsimile 17 transmission or mailed (first class postage prepaid) to the parties at the following addresses or facsimile numbers: If to Purchaser, to: ALERT COMMUNICATIONS COMPANY 5515 York Boulevard Los Angeles, California 90042-2499 Facsimile No.: (213) 254-6802 Attn: Mr. Gary K. Blasiar, President with a copy to: Jackson, DeMarco & Peckenpaugh 4 Park Plaza - 16th Floor Post Office Box 19704 Irvine, California 92713-9704 Facsimile No.: (714) 752-0597 Attn: Douglas P. Smith, Esq. If to Seller, to: THE RIGHT START, INC. 5334 Sterling Center Drive Westlake Village, CA 91361 Facsimile No.: 818-707-7132 Attn: Mr. Jerry R. Welch, Chief Executive Officer with a copy to: MILBANK, TWEED, HADLEY & MCCLOY 601 South Figueroa Street Los Angeles, CA 90017 Facsimile No.: 213-629-5063 Attn: Kenneth J. Baronsky, Esq. All such notices, requests and other communications will (i) if delivered personally to the address as provided in this Section, be deemed given upon delivery, (ii) if delivered by facsimile transmission to the facsimile number as provided in this Section, be deemed given upon receipt, and (iii) if delivered by mail in the manner described above to the address as provided in this Section, be deemed given upon receipt (in each case regardless of whether such notice, request or other communication is received by any other Person to whom a copy of such notice, request or other communication is to be delivered pursuant to this Section). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that 18 party by giving notice specifying such change to the other party hereto. 8.02 Entire Agreement. This Agreement and the Operative Agreements ---------------- supersede all prior discussions and agreements between the parties with respect to the subject matter hereof and thereof, and contain the sole and entire agreement between the parties hereto with respect to the subject matter hereof and thereof. 8.03 Expenses. Except as otherwise expressly provided in this -------- Agreement, whether or not the transactions contemplated hereby are consummated, each party will pay its own costs and expenses incurred in connection with the negotiation, execution and closing of this Agreement and the Operative Agreements and the transactions contemplated hereby and thereby. 8.04 Waiver. Any term or condition of this Agreement may be waived ------ at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by any party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. All remedies, either under this Agreement or by Law or otherwise afforded, will be cumulative and not alternative. 8.05 Amendment. This Agreement may be amended, supplemented or --------- modified only by a written instrument duly executed by or on behalf of each party hereto. 8.06 No Third Party Beneficiary. The terms and provisions of this -------------------------- Agreement are intended solely for the benefit of each party hereto and their respective successors or permitted assigns, and it is not the intention of the parties to confer third-party beneficiary rights upon any other Person. 8.07 No Assignment; Binding Effect. Neither this Agreement nor any ----------------------------- right, interest or obligation hereunder may be assigned by any party hereto without the prior written consent of the other party hereto and any attempt to do so will be void, except (a) for assignments and transfers by operation of Law and (b) that Purchaser may assign any or all of its rights, interests and obligations hereunder to a wholly-owned subsidiary, provided that any such subsidiary agrees in writing to be bound by all of the terms, conditions and provisions contained herein, but no such assignment referred to in clause (b) shall relieve Purchaser of its obligations hereunder. Subject to the preceding sentence, 19 this Agreement is binding upon, inures to the benefit of and is enforceable by the parties hereto and their respective successors and assigns. Such consent as required by this Section 8.07 shall not be unreasonably withheld or delayed. ------------ 8.08 Headings. The headings used in this Agreement have been -------- inserted for convenience of reference only and do not define or limit the provisions hereof. 8.09 Invalid Provisions. If any provision of this Agreement is held ------------------ to be illegal, invalid or unenforceable under any present or future Law, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (a) such provision will be fully severable, (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom and (d) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible. 8.10 Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the Laws of the State of California applicable to a contract executed and performed in such State, without giving effect to the conflicts of laws principles thereof. 8.11 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. 20 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officer of each party as of the date first above written. BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY) By:________________________________ Gary K. Blasiar President THE RIGHT START, INC. By:________________________________ Jerry R. Welch Chief Executive Officer 21 Disclosure Schedule 1.01(a)(i) Real Property Lease ------------------- 1. Standard Industrial/Commercial Single-Tenant Lease Net dated as of April 8, 1993 by and between Westlake Industrial Complex, a California limited partnership, and The Right Start, Inc., a California corporation, pertaining to real property located at 31333 Agoura Road, Westlake Village, CA 91361. Disclosure Schedule 1.01(a)(ii) Tangible Personal Property --------------------------
INVENTORY - --------- PHONES - ------ LOCATION DESCRIPTION - -------- ----------- 7406 Plus 7410 Plus 7410 no 8102 Callmaster Callmaster Pac-Bell w/display no display display old model model II payphone --------------------------------------------------------------------------------------------------- Telemarket supervisors 2 - ------------------------------------------------------------------------------------------------------------------------- Telemarket area 2 54 40 - ------------------------------------------------------------------------------------------------------------------------- Billing 1 1 2 5 - ------------------------------------------------------------------------------------------------------------------------- Customer service 2 6 5 - ------------------------------------------------------------------------------------------------------------------------- Computer room 1 2 - ------------------------------------------------------------------------------------------------------------------------- Ursula's office 1 - ------------------------------------------------------------------------------------------------------------------------- Fishbowl 1 - ------------------------------------------------------------------------------------------------------------------------- Lunchroom 1 2 - ------------------------------------------------------------------------------------------------------------------------- CHAIRS - ------ LOCATION DESCRIPTION - -------- ----------- superior HONchair task Comforto Comforto Comforto Comforto craft (grey) chair TR95 TR94 old old (green) (small) (light blue) (burgundy) TR72 (blue) TR15 (grey) --------------------------------------------------------------------------------------------------- Telemarket area 38 21 7 1 - ------------------------------------------------------------------------------------------------------------------------- Billing 9 - ------------------------------------------------------------------------------------------------------------------------- Customer service 11 3 1 - ------------------------------------------------------------------------------------------------------------------------- Fishbowl 9 3 1 3 3 1 - ------------------------------------------------------------------------------------------------------------------------- Computer room 3 - ------------------------------------------------------------------------------------------------------------------------- Ursula's office 1 - ------------------------------------------------------------------------------------------------------------------------- Lunchroom 12 10 1 - ------------------------------------------------------------------------------------------------------------------------- Warehouse storage 3 (broken) 12 4 - ------------------------------------------------------------------------------------------------------------------------- Temporary conference room 3 3 1 3 - -------------------------------------------------------------------------------------------------------------------------
2 INVENTORY BY LOCATION - --------------------- (EXCEPT CHAIRS, PHONES, CUBE & STORAGE COMPONENTS) FISHBOWL - --------
QTY. DESCRIPTION - ---- ----------- 1 T.V. / storage credenza with motorized lift with wireless remote 1 Zenith color 20" T.V. 1 RCA color 12" T.V. 1 Hitachi M270 V.C.R. 1 Overhead projector 1 LCD overhead panel 1 Overhead projector screen 1 Coffee maker - double (owned by Foodcraft) ------------------ 1 Coffee maker - single (owned by Foodcraft) ------------------ 5 white vinyl shelving racks (KA) -- 2 Howe granite 8' rectangular tables 2 Howe granite 30" half-round tables 4 Howe granite 5" rectangular tables 1 aluminum easel 1 dry easel board 2' x 3' LUNCHROOM - --------- QTY. DESCRIPTION - ---- ----------- 7 3' x 3' tables 4 Corkboards 1 Corkboard with glass case 1 2' x 4' rectangular table 2 Microwaves 1 Toaster 1 Fire Extinguisher 1 Can Crusher 1 Coffee Machine (owned by Foodcraft) ------------------ 1 Water machine with hot, cold & neutral dispenser (owned by Foodcraft) ------------------ 1 Paper towel dispenser 1 Hand soap dispenser 1 Refrigerator with ice maker COMPUTER ROOM - ------------- QTY. DESCRIPTION - ---- ----------- 1 6' folding table 1 4' fixed table 1 3' fixed table 1 5' shelf rack (in the closet)
3 1 Halon fire extinguisher URSULA'S OFFICE - ---------------
QTY. DESCRIPTION - ---- ----------- 2 Black guest chairs 1 2 drawer vertical black file cabinet 1 Haworth black "L shaped" freestanding furniture 2 Haworth black pedestal drawers 4 Haworth teal locking flippers MISCELLANEOUS - ------------- QTY. DESCRIPTION - ---- ----------- 1 Ricoh FT 6750 copier 1 Ricoh FT 4727 copier 1 Ricoh 3200 fax with stand 1 Amano MJR-8000 timeclock with 3 card racks 1 Burster 2 4' fixed table 1 3' fixed table (oak) 2 8' folding table 1 4' folding table 3 Corkboards 4 Dry easel boards 3 Easel stands 1 First aid kit 1 Emergency kit 1 Suggestion box 1 Multi-color tackboard 1 Fire extinguisher 1 Fire extinguisher with glass case STORAGE COMPONENTS - ------------------ QTY. MISCELLANEOUS - ---- ------------- 1 4 shelf white/pink storage/bookcase 1 2 drawer black vertical file cabinet 1 2 drawer beige lateral file cabinet 1 Hon 2 drawer grey lateral file cabinet 2 Haworth 2 drawer grey lateral file cabinet 2 Short 4 drawer grey lateral file cabinet 2 Tall 4 drawer grey lateral file cabinet 3 Haworth grey storage cabinet 2 Mail bin sorter 1 Mail bin sorter with storage, pink/blue
4 CUBES - -----
QTY. LOCATION DESCRIPTION - ---- -------- ----------- 2 Supervisor area Haworth stations with glass 4 Supervisor area Pedestal drawers 9 Billing area Haworth stations with double pedestal storage drawers 13 Customer service area Haworth stations with double pedestal storage drawers 1 Customer service area Haworth station with double pedestal storage drawers & overhead flippers 86 Telemarket employee area Haworth stations with worksurface, teal tackboards & CPU holders 2 Telemarket employee area Haworth stations with teal tackboards & CPU holders (no worksurface) 6 Telemarket employee area Haworth blue/grey stations with worksurface & CPU holders 8 Telemarket employee area Haworth cream colored stations with worksurface & CPU holders
TELEMARKETING COMPUTER EQUIPMENT INVENTORY - ------------------------------------------ PC's 486 82 386 39 Total 121 PRINTERS - -------- 3 HP LJ4L 1 HP DJ520 1 EPSON 870 1 HP LJ4 1 Alps P2100 1 OTC Laser 1000 8 Total NETWORK EQUIPMENT - ----------------- 1 Synoptics Lattisnet 3000 Concentrator 3 Synoptics Re-Timing Modules 7 Synoptics 10-BaseT Host Modules 2 Isolan Modular Repeator/Concentrator 4 Isolan Host Modules 121 Isolan / 3 com NIC's
Fiber Optic Cables 5 10-BaseT Cables
MISCELLANEOUS - ------------- 150 Surge Protectors 2 Conner 5 Gig Tape Backup Drive 3 APC Back-UPS 400 2 APC Back-UPS 600 3 VGA Monitors 1 Motorola Codex Modem 2 Prac. Per. Modems SERVERS - ------- 2 Compaq 1500 Pentium Servers with 12 Gig HD and 132 Meg of RAM 2 Novell Netware 3.11 250 user version 1 Fax Server 1 Print Server 1 Access Server 1 Kalpana Etherswitch with 7 modules
6 Disclosure Schedule 1.01(a)(iii) Personal Property Leases ------------------------ 1. Master Equipment Lease Agreement dated as of August 15, 1990 by and between AT&T Credit Corporation and the Right Start, Inc. d/b/a/ the Right Start Catalog. Disclosure Schedule 1.01(a)(iv) Business Contracts ------------------ 1. Telemarketing Agreement (Inbound) dated as of May 24, 1996, between the Right Start, Inc. and Back to Basics Toys, Inc. 2. Telemarketing Agreement (Inbound) dated as of June 7, 1996, between The Right Start, Inc. and KA Industries. 3. Telemarketing Agreement (Inbound) dated as of October 27, 1994, between The Right Start, Inc. and Imperial Bank. 4. Telemarketing Agreement (Inbound) dated as of October 1, 1995, between The Right Start, Inc. and Audio Navigation Systems, Inc. Disclosure Schedule 1.01(b)(iv) Excluded Personal Property -------------------------- 1. All other personal property not listed on Disclosure Schedule 1.01(a)(ii). Disclosure Schedule 1.01(b)(ix) Excluded 800 Numbers --------------------
Number Description - ------ ----------- 800-293-5984 Stores to Fax 800-293-5986 Wendy C Modem 800-455-1298 Modems 800-526-5220 Hotline 800-548-8531 Right Start 800-710-7815 Modems 800-796-6582 Stores to 818
EXHIBIT A SECURED PROMISSORY NOTE DUE AUGUST 1, 1998 $248,255 LOS ANGELES, CALIFORNIA JULY, 29, 1996 FOR VALUE RECEIVED, BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY), a California corporation ("Maker"), unconditionally promises to pay to the order ----- of THE RIGHT START, INC. ("Payee"), in the manner and at the place hereinafter ----- provided, the principal amount of Two Hundred Forty-Eight Thousand Two Hundred Fifty-Five Dollars ($248,255) on August 1, 1998. Maker also promises to pay interest on the unpaid principal amount hereof from the date hereof until paid in full at an interest rate per annum which is at all times equal to eight and one-half percent (8.5%); provided that -------- upon the occurrence of any Event of Default, the outstanding principal amount hereunder and, to the extent permitted by applicable law, any interest not paid when due and all other amounts then due and payable hereunder, shall thereafter bear interest (including post-petition interest in any proceeding under applicable bankruptcy laws) payable upon demand at a rate which is equal to ten and one-half percent (10.5)% per annum. Payments shall be made on the first day of each month without deduction, defense, set-off or counterclaim. Commencing as of August 1, 1996, the principal balance shall be amortized over the remaining twenty-four (24) months of the term hereof and monthly payments of principal and interest shall be in the amount of $11,284.60. All computations of interest shall be made by Payee on the basis of a 360-day year, for the actual number of days elapsed in the relevant period (including the first day but excluding the last day). This is the Promissory Note referred to in the Asset Purchase Agreement dated as of July 29, 1996 between the Maker and the Payee (the "Asset ----- Purchase Agreement"). Capitalized terms used herein but not defined herein - ------------------ shall have the meanings assigned thereto in the Asset Purchase Agreement. This Note is also secured by, and entitled to the benefits provided in, the Security Agreement. 1. Payments. All payments of principal and interest in respect of -------- this Note shall be made in lawful money of the United States of America in same day funds at the office of Payee located at 5334 Sterling Center Drive, Westlake, California 91361, or at such other place as shall be designated in a written notice provided by Payee. If any payment of principal or interest to be made by maker shall become due on a day that is not a Business Day, such payment shall instead be made on the next succeeding Business Day, and such extension of time shall be included in the computation of interest payable on this Note. Each payment made hereunder shall be credited first to interest then due and the remainder of such payment shall be credited to principal, and interest shall thereupon cease to accrue upon the principal so credited. 2. Prepayments. Maker shall have the right at any time and from time ----------- to time to prepay the principal of this Note in whole or in part without premium or penalty upon at least two days' notice; provided that each such prepayment -------- shall be in a minimum amount of $10,000 and integral multiples of $1,000 in excess of that amount. Each prepayment hereunder shall be accompanied by interest on the principal amount of the Note being prepaid to the date of prepayment. 3. Covenants. Maker covenants and agrees that until this Note is --------- paid in full it will promptly after the occurrence of an Event of Default or an event, act or condition which, with notice or lapse of time or both, would constitute an Event of Default, provide Payee with a certificate of an officer of maker specifying the nature thereof and Maker's proposed response thereto. 4. Events of Default. The occurrence of any of the following events ----------------- shall constitute an "Event of Default": ---------------- (a) failure of Maker to pay any principal under this Note when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise, or failure of Maker to pay any interest or other amount due under this Note within seven Business Days after the date due; or (b) failure of Maker to perform or observe any other material term, covenant or agreement on its part to be performed or observed pursuant to this Note or the Asset Purchase Agreement and such failure shall not have been remedied or waived within thirty days after the earlier of (i) an officer of Maker becoming aware of such default or (ii) receipt by Maker of notice from Payee of such default; or 2 (c) any representation or warranty made by Maker to Payee in connection with this Note or the Asset Purchase Agreement shall prove to have been false in any material respect when made; or (d) any final order, judgment or decree shall be entered against Maker decreeing the dissolution or split-up of Maker and such order shall remain undischarged or unstayed for a period in excess of 60 days; or (e) suspension of the usual business activities of Maker for a period in excess of 60 days or the sale or liquidation of all or substantially all of Maker's assets or stock; or (f) (i) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of Maker in an involuntary case under Title 11 of the United States Code entitled "Bankruptcy" (as now and hereinafter in effect, or any successor thereto, the "Bankruptcy Code") or --------------- any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against Maker under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Maker or over all or a substantial part of its property shall have been entered; or the involuntary appointment of an interim receiver, trustee or other custodian of Maker for all or a substantial part of its property shall have occurred; or a writ of execution or similar process shall have been issued against all or substantially all of the property of Maker, and, in the case of any event described in this clause (ii), such event shall have continued for 60 days unless dismissed, bonded or discharged; or (g) an order for relief shall be entered with respect to Maker or Maker shall commence a voluntary case under the Bankruptcy Code or any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or Maker shall make an 3 assignment for the benefit of creditors; or Maker shall be unable or fail, or shall admit in writing its inability to pay its debts as such debts become due; or the Board of Directors of Maker (or any committee thereof) shall adopt any resolution or otherwise authorize action to approve any of the foregoing. 5. Remedies. Upon the occurrence of any Event of Default specified -------- in clauses (g) or (h) above, the principal amount of this Note together with accrued interest thereon shall become immediately due and payable, without presentment, demand, notice, protest or other requirements of any kind (all of which are hereby expressly waived by Maker), and upon the occurrence and during the continuance of any other Event of Default Payee may, by written notice to Maker, declare the principal amount of this Note together with accrued interest thereon to be due and payable, and the principal amount of this Note together with such interest shall thereupon immediately become due and payable without presentment, further notice, protest or other requirements of any kind (all of which are hereby expressly waived by Maker). 6. Miscellaneous. ------------- (a) All notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, telecopier or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered as set forth in the Asset Purchase Agreement. (b) Maker agrees to indemnify Payee against any losses, claims, damages and liabilities and related expenses, including reasonable counsel fees and expenses, incurred by Payee arising out of or in connection with the collection and enforcement of this Note. (c) No failure or delay on the part of Payee or any other holder of this Note to exercise any right, power or privilege under this Note and no course of dealing between Maker and Payee shall impair such right, power or privilege or operate as a waiver of any default or an acquiescence therein, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly provided are cumulative to, and not exclusive of, any rights or remedies which Payee would otherwise have. No notice to or demand on Maker in any case shall entitle Maker to any other or further notice or demand in similar or other circumstances or constitute a waiver of 4 the right of Payee to any other or further action in any circumstances without notice or demand. (d) Maker and any endorser of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. (e) THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. (f) ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST MAKER ARISING OUT OF OR RELATING TO THIS NOTE MAY BE BROUGHT IN STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS NOTE MAKER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS NOTE. IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered by its duly authorized officer as of the day and year and at the place first above written. BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY) By: _______________________ Gary K. Blasiar President 5 EXHIBIT B GENERAL ASSIGNMENT AND BILL OF SALE ----------------------------------- THIS GENERAL ASSIGNMENT AND BILL OF SALE is entered into this 29th day of July, 1996, by and between Blasiar, Inc. (DBA Alert Communications Company), a California corporation ("Purchaser"), and The Right Start, Inc., a California --------- corporation ("Seller"). ------ WHEREAS, Purchaser and Seller have entered into an Asset Purchase Agreement, dated as of July 29, 1996 (the "Asset Purchase Agreement"; ------------------------ capitalized terms not defined herein shall have the meanings ascribed to them in the Asset Purchase Agreement), pursuant to which Seller has agreed to sell, transfer, convey, assign and deliver to Purchaser and Purchaser has agreed to purchase from Seller substantially all of the assets used by Seller in connection with the conduct of the Business, and Purchaser has agreed, in partial consideration therefor, to assume certain obligations in connection therewith by executing an Assumption Agreement of even date herewith; WHEREAS, Seller desires to transfer and assign to Purchaser the assets described below pursuant to Section 1.03 of the Asset Purchase Agreement and Purchaser desires to accept the sale, transfer, conveyance, assignment and delivery thereof; NOW, THEREFORE, for and in consideration of the mutual covenants contained herein and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Seller hereby irrevocably sells, transfers, conveys, assigns and delivers to Purchaser free and clear of all Liens, other than Permitted Liens, all of Seller's right, title and interest in, to and under the following Assets and Properties of Seller used in connection with the Business, other than the Excluded Assets, as the same shall exist on the date hereof: (i) the Real Property Lease, (ii) the Tangible Personal Property, (iii) the Personal Property Leases, (iv) the Business Contracts, (v) the Intangible Personal Property and (vi) the Business Books and Records (collectively, the "Assigned Assets"), TO HAVE AND TO HOLD the same unto --------------- Purchaser, its successors and assigns, forever. Purchaser hereby accepts the sale, transfer, conveyance, assignment and delivery of the Assigned Assets. Seller represents, warrants, covenants and agrees that it: (a) has good and marketable title to the Assigned Assets, free and clear of all Liens other than Permitted Liens; and (b) will warrant and defend the sale of the Assigned Assets against all and every Person or Persons whomsoever claiming against any or all of the same, subject to the terms and provisions of the Asset Purchase Agreement. The representations and covenants contained in this paragraph shall survive only for the applicable period provided in the Asset Purchase Agreement. At any time or from time to time after the date hereof, at Purchaser's request and without further consideration, Seller shall execute and deliver to Purchaser such other instruments of sale, transfer, conveyance, assignment and confirmation, provide such materials and information and take such other actions as Purchaser may reasonably deem necessary or desirable in order more effectively to transfer, convey and assign to Purchaser, and to confirm Purchaser's title to, all of the Assigned Assets, and, to the full extent permitted by Law, to put Purchaser in actual possession and operating control of the Assigned Assets and to assist Purchaser in exercising all rights with respect thereto. This General Assignment and Bill of Sale may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. This General Assignment and Bill of Sale shall be governed by and construed in accordance with the laws of the State of California applicable to a contract executed and performed in such State without giving effect to the conflicts of laws principles thereof, except that if it is necessary in any other jurisdiction to have the law of such other jurisdiction govern this General Assignment and Bill of Sale in order for this General Assignment and Bill of Sale to be effective in any respect, then the laws of such other jurisdiction shall govern this General Assignment and Bill of Sale to such extent. 2 IN WITNESS WHEREOF, the undersigned have caused their duly authorized officers to execute this General Assignment and Bill of Sale on the day and year first above written. BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY) By:________________________________ Gary K. Blasiar President THE RIGHT START, INC. By:________________________________ Jerry R. Welch Chief Executive Officer 3 EXHIBIT C ASSUMPTION AGREEMENT -------------------- THIS ASSUMPTION AGREEMENT is entered into this 29th day of July, 1996, by and between Blasiar, Inc. (DBA Alert Communications Company), a California corporation ("Purchaser"), and The Right Start, Inc., a California corporation --------- ("Seller"). ------ WHEREAS, Purchaser and Seller have entered into an Asset Purchase Agreement, dated as of July 29, 1996 (the "Asset Purchase Agreement"; ------------------------ capitalized terms not defined herein shall have the meanings ascribed to them in the Asset Purchase Agreement), pursuant to which Seller has agreed to sell, transfer, convey, assign and deliver to Purchaser and Purchaser has agreed to purchase from Seller substantially all of the assets used by Seller in connection with the conduct of the Business, and Purchaser has agreed, in partial consideration therefor, to assume certain obligations in connection therewith by executing this Assumption Agreement; WHEREAS, pursuant to Section 1.04 of the Asset Purchase Agreement, Purchaser is required to execute and deliver to Seller this Agreement whereby Purchaser assumes such obligations; NOW, THEREFORE, for and in consideration of the mutual covenants contained herein and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Purchaser hereby undertakes and agrees from and after the date hereof, subject to the limitations contained herein, to assume and to pay, perform and discharge when due the Assumed Liabilities. Nothing contained herein shall require Purchaser to pay or discharge any debts or obligations expressly assumed hereby so long as Purchaser shall in good faith contest or cause to be contested the amount or validity thereof. Other than as specifically stated above or in the Asset Purchase Agreement, Purchaser assumes no debt, liability or obligation of Seller, including without limitation the Retained Liabilities, by this Assumption Agreement, and it is expressly understood and agreed that all debts, liabilities and obligations not assumed hereby by Purchaser shall remain the sole obligation of Seller, its successors and assigns. No Person other than Seller, its successors and assigns shall have any rights under this Assumption Agreement or the provisions contained herein. This Assumption Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. This Assumption Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to a contract executed and performed in such State without giving effect to the conflicts of laws principles thereof, except that if it is necessary in any other jurisdiction to have the law of such other jurisdiction govern this Assumption Agreement in order for this Assumption Agreement to be effective in any respect, then the laws of such other jurisdiction shall govern this Assumption Agreement to such extent. IN WITNESS WHEREOF, the undersigned have caused their duly authorized officers to execute this Assumption Agreement on the day and year first above written. BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY) By:________________________________ Gary K. Blasiar President THE RIGHT START, INC. By:________________________________ Jerry R. Welch Chief Executive Officer 2 EXHIBIT D BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY) AND THE RIGHT START, INC. TELEMARKETING AGREEMENT (INBOUND) This Telemarketing Agreement is entered into as of the 29th day of July, 1996 between Blasiar, Inc. (DBA Alert Communications Company) ("Alert"), a California corporation and The Right Start, Inc., a California corporation ("Customer"). RECITALS A. Alert provides telemarketing services of various types, including telemarketing services for the receipt of incoming calls. B. Customer desires to obtain certain telemarketing services from Alert. AGREEMENTS 1. SERVICES. Alert will provide Customer the services described on Schedule 1 (the "Services") during the term of the Agreement. Alert will not be obligated to provide any services not expressly set forth on Schedule 1. 2. TERM. This Agreement will continue for a period of two (2) years after the date of this Agreement (the "Initial Term"). After the Initial Term, this Agreement shall automatically renew for successive one-year terms unless it is cancelled by either party upon one hundred twenty (120) days written notice prior to the commencement of any such one-year term. In the event of a material breach of this Agreement by either party that is not cured within twenty days following written notice, the non-breaching party may terminate this Agreement. 3. PAYMENT. Customer will pay Alert the fees for Services described in Schedule 2. Invoices will be due and payable within ten (10) days after the date of receipt by Customer of such invoices. Payment will be deemed made when received by Alert. Customer will pay any federal, state, local or foreign taxes, duties, tariffs or other assessments (other than any tax based solely on Alert's net income) and related interest and penalties that Alert is at any time obligated to pay or collect in connection with or arising out of the transactions contemplated under this Agreement. Without limiting Alert's other rights or remedies, late charges at the rate of one and one-half percent (1 1/2%) per month or the maximum rate permitted by applicable law, whichever is lower, will accrue on any amounts not paid when due, including any accrued but unpaid late charges. In addition to the fees, Customer will reimburse Alert for those reasonable out-of-pocket expenses not contemplated by Schedule 2 incurred by Alert in the performance of the Services; provided that Customer shall not be -------- obligated to reimburse Alert for any out-of-pocket expenses which individually or in the aggregate exceed five hundred dollars ($500.00) per month, without the prior written consent of Customer. 4. CUSTOMER OBLIGATIONS. Customer will perform those obligations and provide those materials described on Schedule 1 and 2. 5. WARRANTIES. Alert warrants that the Services will be performed in a commercially reasonable manner. If, within thirty (30) days of its occurrence, Customer reports that Alert has provided Services in a manner that breaches the foregoing warranty, Alert will, at no cost to Customer and at Customer's sole option, promptly repeat such Services in a manner consistent with such warranty or credit the Customer's account for the amount charged to the Customer for the service. 6. LIMITATIONS OF LIABILITY. NOTWITHSTANDING ANY CONTRARY PROVISION CONTAINED HEREIN, IN THE EVENT OF A MATERIAL BREACH BY EITHER PARTY OF ITS OBLIGATIONS UNDER THIS AGREEMENT, DAMAGES PAYABLE BY THE NONDEFAULTING PARTY SHALL NOT EXCEED THE AMOUNTS ACTUALLY PAID BY CUSTOMER TO ALERT HEREUNDER IN THE SIX (6) MONTH'S PRIOR TO SUCH BREACH, PLUS ATTORNEYS FEES AND COSTS INCURRED BY THE NONDEFAULTING PARTY TO OBTAIN, IF NECESSARY, A FINAL JUDGMENT OR ARBITRATION DETERMINATION THAT THE DEFAULTING PARTY HAS MATERIALLY BREACHED ITS OBLIGATIONS UNDER THIS AGREEMENT. NO ACTION, REGARDLESS OF FORM, ARISING OUT OF THE TRANSACTIONS UNDER THE AGREEMENT MAY BE BROUGHT BY EITHER PARTY HERETO MORE THAN ONE (1) YEAR AFTER THE CAUSE OF ACTION HAS ACCRUED, EXCEPT THAT AN ACTION FOR NONPAYMENT MAY BE BROUGHT WITHIN ONE (1) YEAR AFTER THE DATE THE LAST PAYMENT WAS DUE. 7. INDEMNIFICATION; CLAIMS BY THIRD PARTIES. a. Indemnification of Customer. Alert shall indemnify and hold --------------------------- harmless Customer and its directors, officers, parent corporations, sister corporations, subsidiaries, assigns, liability, damage, injury to property or person, death or expense (including reasonable attorneys' fees and expenses) which directly or indirectly arise from Alert's services, actions or omissions, including without limitation, any action or claim 2 brought by Alert's employees, agents and representatives, pertaining to or arising out of Alert's performance under this Agreement; provided, however, that -------- ------- Alert shall not be liable to Account for any claim, litigation, judgment, loss, liability, damage, injury to property or person, death or expense arising from or based upon the negligence of Customer. b. Indemnification of Alert. Customer shall indemnify and hold ------------------------ harmless Alert and its directors, officers, parent corporations, sister corporations, subsidiaries, assigns, agents and employees from any claim, litigation, judgment, loss, liability, damage, injury to property or person, death or expense (including reasonable attorneys' fees and expenses) which directly or indirectly arise from Customer's actions or omissions, including without limitation any action or claim brought by Customer's employees, agents and representatives, pertaining to or arising out of Customer's performance under this Agreement; provided, however, that Customer shall not be liable to -------- ------- Alert for any claim, litigation, judgment, loss, liability, damage, injury to property or person, death or expense arising from or based upon the negligence of Alert. 8. MISCELLANEOUS. (a) Notices. All notices hereunder (other than payment) will be ------- in writing and delivered personally or sent via facsimile, by certified mail, return receipt requested, or by a reputable courier service to addresses shown below or to such other addresses as may be designated in writing by Alert or Customer, as the case may be, to the other party hereto. (b) Integration. This Agreement constitutes the entire agreement ----------- between Alert and Customer with respect to the transactions contemplated herein and supersedes any and all prior or contemporaneous oral or written communications relating to the subject matter hereof. (c) Amendment; Waiver. This Agreement may not be amended except ----------------- by a writing executed by both parties. No waiver of any provision of this Agreement or any rights or obligations of either party hereunder will be effective, except pursuant to a written instrument signed by the party or parties waiving compliance, and any such waiver, will be effective only in the specific instance and for the specific purpose stated in such writing. (d) Other Customers. During and after the term of this Agreement, --------------- Alert will have the right, in its sole discretion, to provide services of any type to any person or entity, regardless of the industry or trade in which such person 3 or entity may conduct any business or in connection with which such services may be provided. The provision of any such services by Alert will not give rise to any liability to Customer on the part of Alert. (e) Independent Contractor. Neither party nor any of its ---------------------- personnel will be considered as an agent or employee of the other party. Alert is an independent contractor with respect to performing the Services on behalf of the Customer and Alert will have full control over, and responsibility for, the manner and means by which the Services are provided. (f) Confidentiality. Customer and Alert shall keep the terms and --------------- conditions of this Agreement strictly confidential, except as otherwise required by law. (g) Agreement Controls. If Customer submits any order or similar ------------------ document containing any provisions that are in addition to or inconsistent with the provisions hereof, the provisions of this Agreement will control, and the provisions of any such order or similar document will be of no force or effect. (h) Severability of Provisions. If any provision hereof is found -------------------------- invalid or unenforceable pursuant to judicial decree or decisions, the remainder of this Agreement will valid and enforceable according to its terms. Further, to the extent any provision hereof is found to be in part enforceable and in part unenforceable, the unenforceable portion will be deemed stricken therefrom, and such provision will be valid and enforceable to the maximum extent permitted under applicable law. WITHOUT LIMITING THE FOREGOING, IT IS UNDERSTOOD AND AGREED THAT EACH AND EVERY PROVISION OF THIS AGREEMENT WHICH PROVIDES FOR LIMITATION OF LIABILITY, DISCLAIMER OR WARRANTIES, OR EXCLUSION OF DAMAGES OR EXCLUSION OF OTHER REMEDIES IS INTENDED BY THE PARTIES TO BE SEVERABLE AND INDEPENDENT OF ANY OTHER PROVISION AND TO BE ENFORCED AS SUCH. FURTHER, IT IS UNDERSTOOD AND AGREED THAT IF ANY REMEDY HEREUNDER IS DETERMINED TO HAVE FAILED OF ITS ESSENTIAL PURPOSE, ALL LIMITATIONS OF LIABILITY, EXCLUSIONS OF DAMAGES AND EXCLUSIONS OF OTHER REMEDIES SET FORTH HEREIN WILL REMAIN IN EFFECT. (i) Governing Law; Forum. This Agreement shall be governed by the -------------------- laws of the State of California. Any action or proceeding brought by Customer or Alert against the other related to this Agreement will be brought in a court located in the County of Los Angeles and the parties each submit to the in -- personam jurisdiction of such courts for purposes of any such action or - -------- proceeding. 4 (j) Assignment. This Agreement shall be binding upon the parties ---------- hereto, as well as their respective legal representatives, successors and assigns. No assignment of this Agreement by Alert shall be effective without the prior written consent of Customer. (k) Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed the Agreement as of the date first above written: BLASIAR, INC. THE RIGHT START, INC. (DBA ALERT COMMUNICATIONS COMPANY) By: By: ------------------------- ------------------------ Gary K. Blasiar Jerry R. Welch President Chief Executive Officer 5515 York Boulevard 5334 Sterling Center Drive Los Angeles, CA 90042-2499 Westlake Village, CA 91361 5 EXHIBIT E SECURITY AGREEMENT THIS SECURITY AGREEMENT, dated as of July 29, 1996 (herein, as the same may be amended from time to time, called this "AGREEMENT") is entered into by BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY), a California corporation (the "DEBTOR"), as debtor, and THE RIGHT START, INC., a California corporation, as secured party ("SECURED PARTY"). W I T N E S S E T H: ------------------- WHEREAS, Debtor, to evidence a loan made to it by Secured Party, has executed and delivered a Promissory Note (the "NOTE") in connection with that certain Asset Purchase Agreement dated as of July 29, 1996 between Debtor and Secured Party (the "ASSET PURCHASE AGREEMENT"); and WHEREAS, Debtor has agreed to enter into this Agreement in favor of Secured Party, as security for the Obligations (as defined below); NOW THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, intending to be legally bound hereby, the parties hereto agree as follows: 1. DEFINITIONS. Unless otherwise defined, all capitalized terms used in ----------- this Agreement shall have the respective meanings assigned to such terms in the Asset Purchase Agreement. In addition, when used herein, the following terms shall have the following meanings: "COLLATERAL" shall mean all property or rights in which a security interest is granted hereunder, as described in Section 3 of this Agreement. --------- "OBLIGATIONS" shall mean, collectively: (a) The Note and all other obligations, covenants, agreements, and liabilities of Debtor to Secured Party; (b) any and all other indebtedness of Debtor to Secured Party now or hereafter owing, whether direct or indirect, primary or secondary, fixed or contingent, joint or several, regardless of how evidenced or arising; (c) all obligations of Debtor under this Agreement; and (d) any extensions, replacements or renewals of all such obligations described in subparagraphs (a) through (c) above, whether or not Security Agreement ------------------ any extension agreements, replacement agreements or renewal instruments are executed. 2. GRANT OF SECURITY INTEREST. As security for the prompt payment and -------------------------- faithful performance of the Obligations, Debtor hereby grants to Secured Party a first priority continuing security interest in, all right, title and interest of Debtor, in and to all of the Assets transferred under the Asset Purchase Agreement (collectively, the "COLLATERAL"): 3. WARRANTIES. Debtor represents and warrants to Secured Party that: ---------- (a) No presently effective security agreement, mortgage, deed of trust or financing statement covering any of the Collateral in which Debtor is named or signs as debtor is on file in any public office. (b) All information with respect to the Collateral set forth in any schedule, certificate or other writing at any time heretofore or hereafter furnished by Debtor to Secured Party, and all other written information heretofore or hereafter furnished by Debtor to Secured Party, is and will be true and correct in all material respects as of the date furnished. (c) The principal place of business of Debtor is at the address of Debtor shown in Subsection 7(c) below. --------------- (d) The only office in which Debtor keeps records concerning the Collateral is at the address shown in Subsection 7(c) below. --------------- 4. UNDERTAKINGS AND AGREEMENTS OF DEBTOR. Debtor shall: ------------------------------------- (a) Deliver to Secured Party, concurrently with the execution and delivery of this Agreement (or, in the case of after-acquired Collateral, promptly upon receipt thereof), all instruments, if any, included in the Collateral, for possession by Secured Party; and do such other acts and things as Secured Party may from time to time request to establish and maintain a valid pledge of, and perfected security interest in, the Collateral, to secure the payment of the Obligations; (b) Keep, at its principal business office set forth below, all its records concerning the Collateral, which records will be of such character as will enable Secured Party or its designees to determine at any time the status thereof and promptly notify Secured Party of any change in the location of the office where such records are kept, and of any additional place or places of business of Debtor. Security Agreement ------------------ 2 (c) Not sell, lease, assign or create or permit the existence of any lien on or security interest in any Collateral in favor of any party other than Secured Party; and defend the Collateral against the claims and demands of all persons; (d) At all times keep all Assets insured against loss, damage, theft and other risks, in such amounts and with such companies, and under such policies and in such form as shall be satisfactory to Secured Party, which policies shall provide, if Secured Party so requests, that loss hereunder shall be payable to Secured Party as its interests may appear (and Secured Party may apply any proceeds of such insurance which may be received by it toward payment of the Obligations; (e) Reimburse Secured Party upon demand for all expenses, including reasonable attorneys' fees and legal expenses, incurred by or on behalf of Secured Party in seeking to collect, preserve, protect or enforce any rights in the Collateral; and (f) Execute and deliver to Secured Party such amendments and supplements to this Agreement, as may from time to time be necessary or appropriate to subject to the security interests granted hereby all property and interests of Debtor contemplated to be subjected thereto, and to provide all information in connection therewith required to be provided pursuant to such section. 5. DEFAULT AND REMEDIES. Upon an Event of Default, Secured Party, in -------------------- addition to any and all other rights and remedies provided for herein or under applicable law, in its discretion and without demand or notice of any kind (except to the extent required by law), may take any one or more of the following actions, without liability except to account for funds actually received; and Debtor hereby irrevocably constitutes and appoints Secured Party and any officer thereof (with full power of substitution) Debtor's true and lawful attorney-in-fact, with full power, in its own name or in Debtor's name and stead, to execute and deliver all documents and to take all other actions necessary or appropriate to accomplish any of the following (all as fully as Debtor might do) and Debtor hereby ratifies all that said attorney shall lawfully do by virtue hereof: (a) Apply toward the payment of the Note and other Obligations, any and all balances, credits, deposits, accounts or monies of or in the name of Debtor then or thereafter held by Secured Party; Security Agreement ------------------ 3 (b) Exercise any and all rights and remedies of a secured party under the Uniform Commercial Code as then in effect in the State of California; (c) Require Debtor, at its expense, to assemble any or all Collateral at a convenient place acceptable to Secured Party (and Debtor hereby undertakes and agrees to do so); (d) Have a receiver appointed to take charge of all or any part of the Collateral; and (e) To the fullest extent permitted by applicable law, without notice, advertisement, hearing or process of law of any kind, sell any or all of the Collateral, free of all rights and claims of Debtor therein and thereto at any public or private sale, and bid for and purchase any or all of the Collateral at any such public or private sale. Any notification of intended disposition of any of the Collateral required by law shall be deemed reasonable and properly given if given at least ten (10) days before such disposition. Any proceeds of any disposition by Secured Party of any of the Collateral may be applied by Secured Party to the payment of reasonable expenses in connection with retaking, holding, preparing for sale, selling and otherwise dealing with the Collateral in any manner permitted hereby, including reasonable attorneys' fees and legal expenses, and any balance of such proceeds shall be applied by Secured Party toward the payment of such of the Obligations, and in such order of application, as Secured Party may from time to time elect. 6. GENERAL PROVISIONS. ------------------ (a) Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral in its possession if it takes such action for that purpose as Debtor requests by notice to Secured Party, but failure to comply with such request shall not of itself be deemed a failure to exercise reasonable care, and no failure of Secured Party to preserve and protect any rights with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by Debtor, shall be deemed a failure to exercise reasonable care in the custody or preservation of such Collateral. Secured Party shall be under no duty to exercise or refrain from exercising any of the rights, powers and privileges granted hereby, and shall not be responsible for any failure to do so or delay in so doing. (b) All notices and communications to be given under this Agreement (including any modifications of, or waivers or consents under, this Agreement) shall be in writing sent by mail, postage prepaid, or by personal service (including courier or Security Agreement ------------------ 4 express service) or by facsimile transmission addressed as follows and the address of the following Persons shall be deemed to be as set forth below: To Debtor: --------- Alert Communications Co. 5515 York Boulevard Los Angeles, CA 90042-2499 Attention: Gary K. Blasiar Facsimile No. (213) 254-6802 With a Copy to: -------------- Jackson, DeMarco & Peckenpaugh 4 Park Plaza - 16th Floor Post Office Box 19704 Irvine, CA 92713-9704 Attention: Douglas P. Smith, Esq. Facsimile No. (714) 752-0597 To Secured Party: ---------------- The Right Start, Inc. 5334 Sterling Center Drive Westlake Village, CA 91361 Attention: Jerry R. Welch Facsimile No. (818) 707-7132 With a Copy to: -------------- Milbank, Tweed, Hadley & McCloy 601 S. Figueroa Street, 30th Floor Los Angeles, California 90017 Attention: Kenneth J. Baronsky, Esq. Facsimile No. (213) 629-5063 Communications sent by mail shall be deemed made on the third business day following the deposit thereof in the U.S. Mail. Communications personally served shall be deemed made upon delivery to the address of the addressee set forth above. Communications transmitted by facsimile transmission shall be deemed made upon receipt by the addressee if a copy of such communication shall be delivered to the addressee on the next business day by express mail service. If such copy is not then so delivered, such communication shall be deemed made upon the day of actual delivery of such copy to the office of the addressee. Any party hereto may, on three days' notice given as hereinabove prescribed, specify a different address for communications. Any person succeeding to all or any part of an interest of the parties hereto shall specify by written notice the address of such person for all notices hereunder. (c) Neither this Agreement nor any provision hereof may be amended, modified, waived, discharged or terminated orally, nor may any of the Collateral be released, except by an instrument in writing duly signed on behalf of the parties. Security Agreement ------------------ 5 (d) Section headings used herein are for convenience of reference only and shall not define or limit the provisions of this Agreement. (e) No delay on the part of Secured Party in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by Secured Party of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. Debtor waives demand, notice, protest, and all demands and notices of any action taken by Secured Party under this Security Agreement except as is specifically elsewhere provided herein and except as to notices which are required (and which may not be waived under the provisions of the California or other applicable version of the Uniform Commercial Code), and any indulgence by Secured Party, substitution for, exchange of, or release of the Collateral is hereby assented to and consented to. (f) THIS SECURITY AGREEMENT SHALL BE CONSTRUED UNDER AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. (g) Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. (h) Secured Party's rights hereunder or the Obligations may be assigned by Secured Party at any time and from time to time, and in such case the assignee shall be entitled to all of the rights, privileges and remedies granted in this Security Agreement to Secured Party. (i) The remedies of Secured Party hereunder are cumulative, and the exercise of any one or more of the remedies provided for herein shall not be construed as a waiver of any of the other remedies of Secured Party. (j) This Agreement shall be binding upon and inure to the benefit of Debtor and Secured Party and their respective successors and assigns. (k) Upon the full performance and satisfaction of all Obligations, the security interest hereby granted in the Collateral shall thereupon terminate. Secured Party shall execute and deliver any documents necessary to effect such termination. Security Agreement ------------------ 6 IN WITNESS WHEREOF, this Agreement has been duly executed as of the day, month and year first above written. DEBTOR: BLASIAR, INC. (DBA ALERT COMMUNICATIONS COMPANY), a California corporation By: ____________________________ Gary K. Blasiar President SECURED PARTY: THE RIGHT START, INC., a California corporation By: _____________________________ Jerry R. Welch Chief Executive Officer Security Agreement ------------------ 7 EX-23.1 7 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statement of Form S-8 of The Right Start, Inc. of our report dated July 3, 1996 which appears on page F-1 of this Form 10-K. PRICE WATERHOUSE LLP Woodland Hills, California August 29, 1996 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-01-1996 JUN-01-1995 JUN-01-1996 472 0 609 0 5,264 2,008 9,969 2,606 17,475 4,649 0 0 0 16,313 0 17,475 40,368 41,786 21,605 18,823 0 0 37 (4,826) (927) (3,899) 0 0 0 (3,899) (.60) (.60)
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