<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 1997
OR
[_] Transition Report pursuant to Section 13 of 15 (d) of the
Securities Exchange Act of 1934.
For the transition period from ____________ to ____________.
Commission File Number 0-25916
YES! ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3165290
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3875 Hopyard Road, Suite 375, Pleasanton, CA 94588
--------------------------------------------------
(Address of principal executive offices and zip code)
(510) 847-9444
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the proceeding 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 [_]
As of July 31, 1997 there were 14,287,786 shares of the registrant's common
stock outstanding.
This quarterly report on Form 10-Q contains 21 pages of which this is page
number 1.
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YES! ENTERTAINMENT CORPORATION
FORM 10-Q
JUNE 30, 1996
INDEX
PAGE
----
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations -
Three months and six months ended
June 30, 1997 and June 30, 1996 3
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1997
and June 30, 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE PAGE 21
2
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PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
YES! ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $12,616 $11,551 $21,657 $20,486
Cost of sales 7,615 6,887 12,940 11,192
------- ------- ------- -------
Gross profit 5,001 4,664 8,717 9,294
------- ------- ------- -------
Operating expenses:
Marketing, advertising and promotion 559 1,473 1,439 2,167
Selling, distribution and administrative 6,182 4,696 12,300 9,569
------- ------- ------- -------
Total operating expenses 6,741 6,169 13,739 11,736
------- ------- ------- -------
Operating loss (1,740) (1,505) (5,022) (2,442)
Interest income 12 105 25 212
Interest expense (444) (107) (1,101) (310)
Other expense, net (14) (11) (66) (92)
------- ------- ------- -------
Net loss before provision for income taxes (income tax benefit) (2,186) (1,518) (6,164) (2,632)
Provision for income taxes (income tax benefit) 179 (304) (616) (527)
------- ------- ------- -------
Net loss (2,365) $(1,214) (5,548) $(2,105)
======= =======
Non-cash dividends and discount on preferred stock (1,049) (2,600)
------- -------
Net loss applicable to common stockholders $(3,414) $(8,148)
======= =======
Net loss per share applicable to common stockholders $(0.24) $(0.58)
======= =======
Net loss per share $ (0.09) $ (0.15)
======= =======
Shares used in computing net loss per share 14,237 13,995 14,140 13,761
======= ======= ======= =======
</TABLE>
See accompanying notes.
3
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YES! ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996*
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,302 $ 1,572
Accounts receivable, net 11,307 21,956
Inventories 25,621 26,194
Prepaid royalties 4,457 4,045
Prepaid expenses 1,750 1,868
Other current assets 3,222 1,671
-------- --------
Total current assets 47,659 57,306
Property and equipment, net 4,319 3,869
Intangibles and deposits, net 215 276
-------- --------
Total assets $ 52,193 $ 61,451
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Loans payable $ 8,164 $ 16,712
Accounts payable 7,061 12,565
Accrued royalties 1,529 1,018
Accrued liabilities 881 879
Capital lease obligations due within one year 17 16
Income taxes payable - 182
-------- --------
Total current liabilities 17,652 31,372
Capital lease obligations 6 14
Convertible debentures 1,778 -
Other liabilities 17 -
Redeemable convertible preferred stock 8,723 -
Stockholders' equity:
Undesignated preferred stock - -
Common stock 14 14
Additional paid-in capital 84,807 82,707
Accumulated deficit (60,804) (52,656)
-------- --------
Total stockholders' equity 24,017 30,065
-------- --------
Total liabilities and stockholders' equity $ 52,193 $ 61,451
======== ========
</TABLE>
* Derived from audited consolidated financial statements
See accompanying notes.
4
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YES! ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(5,548) $ (2,105)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,494 1,208
Advertising expenses funded by inventory 118 -
Debt discount and amortization 475 -
Accrued interest converted to convertible debt 67 -
Employer contribution to 401(k) plan funded with 106 -
common stock
Changes in operating assets and liabilities:
Accounts receivable 10,648 13,554
Inventories 573 (4,383)
Prepaid expenses and other current assets (1,962) (3,626)
Other assets - (307)
Accounts payable (5,504) (1,128)
Accrued royalties and liabilities 405 (1,672)
Income taxes payable (182) -
Other long-term liabilities 17 (39)
------- -------
Net cash provided by operating activities 707 1,502
INVESTING ACTIVITIES
Acquisition of property and equipment (1,928) (1,709)
Decrease in intangibles and deposits 45 -
------- -------
Net cash used in investing activities (1,883) (1,709)
FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures 1,433 -
Principal payments on loans payable (8,548) (10,125)
Principal payments on capital lease obligations (8) (43)
Proceeds from issuance of redeemable convertible
preferred stock, net of issuance costs 8,027 -
Proceeds from issuance of common stock, net of
issuance costs 2 13,770
------- -------
Net cash provided by financing activities 906 3,602
------- -------
Net increase (decrease) in cash and cash (270) 3,395
equivalents
Cash and cash equivalents at beginning of period 1,572 2,987
Cash and cash equivalents at end of period $ 1,302 $ 6,382
======= =======
</TABLE>
See accompanying notes.
5
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YES! ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
Interim Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q but do not
include all of the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements and
should, therefore, be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the fiscal year
ended December 31, 1996 included in the Annual Report on Form 10-K filed
with the Securities and Exchange Commission on April 15, 1997. In the
opinion of management, all adjustments (which consist only of normal
recurring accruals) have been made to present fairly the consolidated
operating results for the unaudited periods. The interim operating results
are not necessarily indicative of the results for fiscal 1997.
Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. INVENTORY (IN THOUSANDS)
June 30, December 31,
1997 1996
-------- ------------
Raw Materials $ 2,694 $ 2,940
Work-in-process 1,233 974
Finished goods 21,694 22,280
------- -------
$25,621 $26,194
======= =======
6
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3. RECENT DEVELOPMENTS
Restructured Financing
In July 1997, the Company entered into agreements with the institutional
investors who purchased convertible debentures and Series A preferred stock
in the first quarter of 1997 restructuring the terms of the prior
agreements with respect to those securities. The transaction is deemed
effective April 30, 1997.
The new terms place significant restraints on the conversion into and
sale of the common stock issuable upon conversion, including a prohibition
on conversion until the earlier of November 1, 1997 or until the price of
the Company's common stock exceeds $10 per share for twenty (20)
consecutive trading days after August 1, 1997. The new terms also
generally prohibit short sales. In addition, the conversion of the
securities and sale of common stock is restricted to amounts that vary
based upon the recent the price and trading volume of the Company's
common stock.
The conversion price of the securities is based on a discount to the
weighted average value of the Company's common stock near the time of
conversion. The discount increases monthly from 11.75% in November 1997 to
18.75% in April 1998. The securities are redeemable at the option of the
Company. Any amount of the securities remaining after five years will
convert at the then-prevailing conversion price.
The total face value of the new instruments is $11,727,167. The new
instruments have been issued in the place of instruments with a total value
of $9,439,104, including accrued dividends and interest through April 30,
1997. The transaction will be accounted for by recognizing (1)
approximately $647,000 in imputed interest and dividends in the second
quarter of 1997, representing the difference between the face value of
the new securities and the book value of the old instruments, including
accrued dividends and interest, and (2) approximately $2.2 million in
imputed interest expense and dividends ratably over the 12 month period
beginning May 1, 1997, representing the value of the maximum discount of
18.75% on the face value of the new securities. Approximately $366,000 of
this amount was recognized in the quarter ended June 30, 1997.
Resignation of Director; Appointment of Executive Officer
In June 1997, Gary L. Nemetz resigned as a director of the Company. In
August 1997, the Board appointed Anthony J. Miadich to fill the vacancy
created by Mr. Nemetz's resignation. In July 1997, the Company appointed
Mike Bauer Executive Vice President, Sales.
4. SHAREHOLDER LAWSUITS
On April 15, 1997, a class action lawsuit was filed in the Superior Court
of the State of California, County of Alameda (the "California Action")
against YES! Entertainment Corporation (the "Company") and certain of its
executive officers. The California Action
7
<PAGE>
is purportedly brought on behalf of purchasers of the Company's common
stock between October 23, 1996 and December 12, 1996, inclusive. It alleges
violations of (i) Sections 25400 and 25500 of the California Corporations
Code, (ii) Sections 1709, 1710 and 1711 of the California Civil Code and
(iii) Section 17200 et seq. of the California Business and Professions
Code.
On April 17, 1997, a second class action lawsuit was filed against the
Company and certain of its executive officers in the United States District
Court for the Northern District of California (the "Federal Action" and
together with the California Action, the "Actions"). The Federal Action is
purportedly brought on behalf of purchasers of the Company's common stock
between March 29, 1996 and December 12, 1996, inclusive. The Federal
Action alleges violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended, 65 U.S.C. (S)(S) 78j(b) and 78t(a), and
Rule 10b-5, 17 C.F.R. (S) 240.10b-5 promulgated thereunder by the
Securities and Exchange Commission.
The Actions seek compensatory and punitive damages, interest, attorneys'
fees and other costs, as well as equitable relief to preserve defendants'
assets. The Company believes that it has meritorious defenses to these
Actions and intends to vigorously defend these Actions.
Since the Actions were filed, three additional class action lawsuits were
filed against the Company and certain of its executive officers, one in the
Superior Court of the State of California, County of Alameda and two in the
United States District Court for the Northern District of California. The
causes of action alleged are substantially identical to those raised in the
Actions, although the second state court action is purportedly brought on
behalf of purchasers of the Company's common stock between March 29, 1996
and December 12, 1996, inclusive.
In July 1997, the Superior Court of the State of California, County of
Alameda, sustained a demurrer filed on behalf of the defendants in the
California Action, with leave to amend the Complaint.
5. FASB STATEMENT NO. 128, EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. There was no
impact of Statement 128 on the calculation of the primary or fully diluted
loss per share for the quarters and six months ended June 30, 1997 and
1996.
8
<PAGE>
YES! ENTERTAINMENT CORPORATION -- PART I, ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forward looking statements about the Company that
are based on current expectations. Actual results may differ materially as a
result of any one or more of the risks identified in this section, as well as is
the section captioned "Business Factors."
<TABLE>
<CAPTION>
RESULTS OF OPERATION
- --------------------
(In thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
------------------- -------------------
<S> <C> <C> <C> <C>
Net sales $12,616 $11,551 $21,657 $20,486
Cost of sales 7,615 6,887 12,940 11,192
------- ------- ------- -------
Gross profit 5,001 4,664 8,717 9,294
Gross profit % 40% 40% 40% 45%
Operating expenses 6,741 6,169 13,739 11,736
Operating expenses % 53% 53% 63% 57%
Operating loss (1,740) (1,505) (5,022) (2,442)
Interest and other expense, net (446) (13) (1,143) (190)
------- ------- ------- -------
Net loss before provision for income
taxes (2,186) (1,518) (6,164) (2,632)
Provision for income taxes (income tax
benefit) 179 (304) (616) (527)
------- ------- ------- -------
Net loss $(2,365) $(1,214) $(5,548) $(2,105)
======= ======= ======= =======
Non-cash dividends and discount on
preferred stock (1,049) (2,600)
------- -------
Net loss applicable to common
stockholders $(3,414) $(8,148)
======= =======
</TABLE>
NET SALES:
The Company's net sales for the second quarter of 1997 increased $1.0 million or
approximately 9% to $12.6 million from $11.6 million in the second quarter of
1996. Net sales increased $1.2 million or approximately 6% to $21.7 million for
the first six months of 1997 from $20.5 million for the first six months of
1996. International sales in the second quarter and the first six months of
1997 were higher than in the comparable periods of 1996, primarily as the result
of the Company's efforts to increase international sales. International
shipments represented 40% of shipments in the second quarter of 1997 and 26% of
shipments in the second quarter of 1996.
9
<PAGE>
The Company recognizes revenue upon shipment of product and computes net sales
by concurrently deducting a provision for sales returns and allowances,
including allowances for defective returns, price protection, mark downs and
other returns. Sales allowances may vary as a percentage of gross sales due to
changes in the Company's product mix, defective product allowances or other
sales allowances.
Sales of toys traditionally have been highly seasonal, with a majority of retail
sales occurring during the December holiday season. The Company expects that
its operating results will vary significantly from quarter to quarter, because
the majority of the Company's products are shipped in the quarters ending
September 30 and December 31.
The Company is dependent on a relatively small number of customers, in
particular Toys "R" Us, Inc. and Wal-Mart Stores, Inc., for a significant
percentage of its sales. Significant reductions in sales to any one or more of
the Company's largest customers would have a material adverse effect on the
Company's operating results. Because orders in the toy industry are generally
cancelable at any time without penalty, there can be no assurance that present
or future customers will not terminate their purchase agreements with the
Company or significantly change, reduce or delay the amount of products ordered
from the Company. Any such termination of a customer relationship or change,
reduction or delay in orders would have a material adverse effect on the
Company's operating results.
COST OF SALES:
Cost of sales were approximately 60% of net sales in each of the second quarters
of 1997 and 1996, and approximately 60% and 55% of net sales for the first six
months of 1997 and 1996, respectively. The increases in cost of sales as a
percentage of net sales in the first six months of 1997 from the comparable
period in 1996 was primarily the result of the increase in lower margin
international sales in the first quarter of 1997 compared to the first quarter
of 1996 and the sale of certain slower moving items. In absolute dollars, cost
of sales increased $728,000 or approximately 11% to $7.6 million in the second
quarter of 1997 from $6.9 million in the second quarter of 1996 and increased
$1.7 million or approximately 16% to $12.9 million for the first six months of
1997 from $11.2 million for the first six months of 1996.
OPERATING EXPENSES:
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Marketing, advertising and promotion $ 559 $1,473 $ 1,439 $ 2,167
Selling, distribution and administrative 6,182 4,696 12,300 9,569
------ ------ ------- -------
Total operating expenses $6,741 $6,169 $13,739 $11,736
====== ====== ======= =======
</TABLE>
10
<PAGE>
Operating expenses increased $572,000 or approximately 9% to $6.7 million in the
second quarter of 1997 from $6.2 million in the second quarter of 1996, as the
result of higher variable expense associated with higher revenue and higher
fixed expenses required to support current and expected sales volumes. Operating
expenses increased $2.0 million or approximately 17% to $13.7 million for the
first six months of 1997 from $11.7 million for the first six months of 1996 for
the same reasons.
Marketing, Advertising and Promotion. Marketing, advertising and promotion
expenses decreased $914,000 or approximately 62% to $559,000 in the second
quarter of 1997 from $1.5 million in the second quarter of 1996. Marketing,
advertising and promotion expenses decreased $728,000 or approximately 34% to
$1.4 million for the first six months of 1997 from $2.2 million for the first
six months of 1996. These decreases resulted from the increase in sales to
international customers and the sale of slower-moving items, which do not
require advertising support from the Company. The Company expects advertising
expense in the last two quarters of the year to significantly exceed advertising
expense in the first half of the year to support anticipated seasonal increases
in sales. In the event higher sales volume is not achieved, the increase in
fixed expenses could adversely affect the Company's operating results and
financial condition. See Dependence on 1997 Products; Increase in Fixed
Expenses.
Selling, Distribution and Administrative. Selling, distribution and
administrative expenses increased $1.5 million or approximately 32% to $6.2
million in the second quarter of 1997 from $4.7 million in the second quarter of
1996. Selling, distribution and administrative expenses increased $2.7 million
or approximately 29% to $12.3 million for the first six months of 1997 from $9.6
million for the first six months of 1996. The increase in expenses resulted from
higher variable expense associated with higher revenues and higher costs in
operations and sales support, product development, and general and
administrative expenses required to support expected sales volumes.
INTEREST EXPENSE:
The following table shows interest expense and interest income for the
applicable periods:
<TABLE>
<CAPTION>
(In thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 12 $ 105 $ 25 $ 212
Interest expense $(444) $(107) $(1,101) $(310)
</TABLE>
The increase in interest expense in the quarter and six months ended June 30,
1997 as compared to the comparable periods in 1996 is primarily the result of
the non-cash interest expense recorded in connection with the convertible
debenture and preferred stock financing, and the restructuring thereof,
described under "Liquidity and Capital Resources." The non-cash interest
expenses recorded in the quarter and six months ended June 30, 1997 were
$218,000 and $558,000, respectively. The decrease in interest income and a
portion of the increase in interest expense are the result of the lower cash
balances maintained by the Company and higher bank
11
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borrowings during the quarter and six months ended June 30, 1997 as compared to
the comparable periods in 1996
PROVISION FOR INCOME TAXES (INCOME TAX BENEFIT):
The following table shows the provision for income taxes (income tax benefit)
for the applicable periods:
<TABLE>
<CAPTION>
(In thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
-------------------- -------------------
<S> <C> <C> <C> <C>
Provision for income taxes (income tax benefit) $ 179 $(304) $(616) $(527)
</TABLE>
The income tax benefit for the six months ended June 30, 1997 is computed based
on the projected annualized effective tax rate of 10% applied to the pre-tax
book loss for the period. The projected effective tax rate for the current
year is less than the federal statutory rate (34%) due to the projected benefit
of the utilization of net operating loss carryovers. The projected annualized
effective tax rate used in the quarter ended March 31, 1997 was 20% and was
reduced due to the identification of additional loss carryforwards that may be
utilized in fiscal 1997. The reduction in the projected annualized effective
tax rate resulted in a provision for income taxes in the quarter ended June
30, 1997 of $179,000.
At December 31, 1996, the Company had net operating loss carryforwards for
federal and California tax purposes of approximately $36.5 million and $17.0
million, respectively. The federal losses will expire in the years 2007 though
2011, and the state losses will expire in the years 1999 through 2001, if not
utilized. Utilization of the net operating loss carryovers may be subject to a
substantial annual limitation if it should be determined that there has been a
change in the ownership of more than 50 percent of the value of the Company's
stock, pursuant to Section 382 of the Internal Revenue Code of 1986 and similar
state provisions. The annual limitation may result in the expiration of net
operating loss carryovers before utilization.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1997, the Company had cash and cash equivalents of approximately
$1.3 million, a $270,000 decrease from approximately $1.6 million at December
31, 1996. The decrease in cash and cash equivalents was due to $1.9 million
used in investing activities, partially offset by $707,000 provided by
operating activities and $906,000 provided by financing activities.
The cash generated by operating activities was due primarily to a decrease in
accounts receivable of $10.6 million, a decrease in inventory of $573,000, and
depreciation, amortization and other non-cash expenses of $2.3 million,
partially offset by the net loss, a decrease in accounts payable of $5.5 million
and an increase in prepaid expenses and other current assets of $2.0 million.
12
<PAGE>
The $906,000 provided by financing activities was due to net proceeds from the
issuance of the convertible preferred stock ($8.0 million) and convertible
debentures ($1.4 million), partially offset by principal payments on bank debt
of $8.5 million. Investing activities used cash of $1.9 million primarily due
to the acquisition of tooling and other equipment.
To meet seasonal working capital requirements during the balance of 1997, the
Company anticipates borrowing substantial amounts under an Accounts Receivable
Management and Security Agreement (the "ARM Agreement") entered into with BNY
Financial Corporation ("BNY") in July 1995. The terms of the ARM Agreement, as
amended, provide that BNY may advance YES! up to $30 million on the basis of the
Company's accounts receivable, inventory and product being imported on a letter
of credit basis. Loans to the Company are fully secured by all of the Company's
assets, including intellectual property, and BNY acquired ownership of all of
the Company's trade receivables. The Company is required to remain in
compliance with certain financial and other covenants under the ARM Agreement
with BNY. The Company was not in compliance with a financial covenant under the
ARM Agreement at March 31 and June 30, 1997, but previously had obtained a
waiver from BNY with regard to that covenant violation. The ARM Agreement also
restricts the ability of the Company to obtain working capital in the form of
indebtedness, other than indebtedness incurred in the ordinary course of the
Company's business, to grant security interests in the assets of the Company
or to pay dividends on the Company's securities.
The Company's actual working capital needs will depend upon numerous factors,
including the extent and timing of acceptance of the Company's products in the
market, the Company's operating results, the cost of increasing the Company's
sales and marketing activities and the status of competitive products, none of
which can be predicted with certainty. The Company has experienced severe
working capital shortfalls in the past, which have restricted the Company's
ability to conduct its business as anticipated. The Company anticipates that it
will experience periods of significant negative cash flow in 1997 as a result of
seasonality in the toy industry, the timing of new product introductions and the
Company's planned growth in new product inventory and accounts receivable. There
can be no assurance that additional financing will be available to the Company
on acceptable terms, if at all, when required by the Company. The inability to
obtain such financing would have a material adverse effect on the Company's
operating results.
During March 1997, the Company issued $1,566,667 in convertible debentures and
85,000 shares of Series A convertible preferred stock at a par value of $.001
per share for $100 per share to two investors for a total of $8,500,000 (the
"March Securities"). In April 1997, approximately $696,000 of the convertible
preferred stock, including accrued dividends, were converted. Effective April
30, 1997, the remaining March Securities plus accrued dividends and interest
were cancelled in favor of $1,956,021 in convertible debentures and 390,846
shares of Series B convertible preferred stock at a par value of $.001 per share
for $25 per share to two investors and an investment bank retained by the
Company in connection therewith for a total of $11,727,167 (the "Restructuring
Transactions").
13
<PAGE>
Holders of the Series B convertible preferred stock are entitled to receive,
when and as declared by the Board of Directors out of legally available funds,
cumulative dividends at a rate of $1.28 per annum, payable in shares of
Series B convertible preferred stock, semi-annually, but in no event later
than the date of conversion. The Series B convertible preferred stock has no
voting rights, has a liquidation preference of $25 per share plus all accrued
but unpaid dividends, subject to adjustment, and is convertible at the option
of the holder into shares of common stock at a discount to the weighted
average value of the Company's common stock near the time of conversion. The
discount increases monthly from 11.75% beginning in November 1997 increasing
to 18.75% in April 1998. The Series B convertible preferred stock is
redeemable at any time in cash, at the option of the Company. Any redemption
payments must be approved by BNY, the financial institution with which the
Company has its current accounts receivable management agreement. Any amount
of the Series B convertible preferred stock remaining after five years will
convert at the then-prevailing conversion price.
The convertible debentures earn interest at 5% per annum, are due April 30,
2002, and are convertible any time after the earlier of November 1, 1997 or
until the price of the Company's common stock exceeds a volume-weighted
average price above $10 per share for twenty (20) consecutive trading days
after August 1, 1997, at the option of the holder, at a conversion price
similar to that of the Series B convertible preferred stock. The convertible
debentures are subordinated to the bank financing agreements.
In connection with the issuance of the March Securities, the Company issued
warrants for the purchase of 300,000 shares of common stock at an exercise
price per share equal to the lesser of (a) $7.875 or (b) 125% of the average
of the lowest per share market value for any five consecutive trading days
during the sixty trading days following March 18, 1997. The warrants expire
March 18, 2002. The terms of the Warrants were not modified in connection with
the Restructuring Transactions.
Because the Company is not permitted by Nasdaq rules to issue in the aggregate
more than 20% of its outstanding common stock as the result of the conversion of
the Series B convertible preferred stock and convertible debentures and the
exercise of the warrants without first obtaining stockholder approval, the
Company would be required to redeem any portion of the securities issued in
excess of 20% of its outstanding common stock in cash.
RECENT DEVELOPMENTS
- -------------------
Restructured Financing. See Note 3 to Notes to Financial Statements,
Restructured Financing, and Liquidity and Capital Resources, above.
Resignation of Director; Appointment of Executive Officer. In June 1997, Gary
L. Nemetz resigned as a director of the Company. In August 1997, the Board
appointed Anthony J. Miadich to fill the vacancy created by Mr. Nemetz's
resignation. In July 1997, the Company appointed Mike Bauer Executive Vice
President, Sales.
Shareholder Lawsuits. See Note 4 to Notes to Financial Statements, Shareholder
Lawsuits, above.
14
<PAGE>
BUSINESS FACTORS
- ----------------
Because of the variety and uncertainty of the factors affecting the Company's
- --------------------------------------------------------------------------------
operating results, past financial performance and historic trends may not be a
- --------------------------------------------------------------------------------
reliable indicator of future performance. These factors, as well as other
- --------------------------------------------------------------------------------
factors affecting the Company's operating performance, and the fact that the
- --------------------------------------------------------------------------------
Company participates in a highly dynamic industry, may result in significant
- --------------------------------------------------------------------------------
volatility in the Company's common stock price. The Company's business is
- --------------------------------------------------------------------------------
subject to a number of risks and the Company's forward looking statements should
- --------------------------------------------------------------------------------
be considered in light of the business factors set forth below.
- --------------------------------------------------------------
Limited Operating History; History of Losses; Accumulated Deficit; Risk to
Profitability. The Company has a short operating history, having commenced
operations in November 1992 and shipped its first product in July 1993. Although
the Company has achieved approximately $219 million in cumulative net sales
through June 30, 1997, the Company incurred substantial operating losses in 1993
and 1994, and again in 1996, and at June 30, 1997 had an accumulated deficit of
approximately $60.8 million. Future profitability and the Company's ability to
obtain future financing on favorable terms is dependent upon the Company's
ability to successfully and timely introduce, finance and manufacture its new
products, successfully market its existing products and collect trade
receivables in a timely manner.
Dependence on 1997 Products; Increase in Fixed Expenses. In 1997, the Company
has introduced and expects to commence sales of a number of new product lines in
new product categories, such as the Baskin-Robbins(R) Ice Cream Maker, Air
Vectors(TM), YES! Extreme(TM), and YES! PreSchool(TM). In addition, the Company
also expects to expand its existing product lines in 1997, particularly its YES!
Gear, Power Penz(TM) and Mrs. Fields(TM) line of products. Manufacturing of
certain of these items in commercial quantities has not commenced or is just
commencing. The Company expects that completing the development and the
manufacture of its 1997 product lines will place great demands on management and
other Company resources. If the Company is not able to complete the development,
tooling, manufacture and successful marketing of its 1997 product lines, the
Company's operating results and financial condition would be materially
adversely affected. In addition, the Company has increased its fixed expenses in
anticipation of the introduction of the Company's 1997 product
lines. In the event expected sales volumes are not achieved, this increase in
fixed expenses could adversely affect the Company's operating results and
financial condition.
Dependence on YES! Gear and Power Penz. The majority of the Company's current
product lines are sold under the YES! Gear and Power Penz brands, which together
accounted for 83% and 58% of the Company's sales in 1996 and 1995, respectively.
The Company expects YES! Gear, and in particular the Yak Bak(R), and the Power
---------
Penz product lines to continue to account for a substantial percentage of the
Company's business. However, there can be no assurance that the Company will be
able to sustain Yak Bak and Power Penz sales at 1996 levels. See Short Product
Cycles. In addition, the Company is aware that a number of toy manufacturers
have attempted to duplicate the Company's success in this area of product by
introducing similar lines of products in 1996 and for 1997. While the Company
believes it will compete favorably with these new products on the basis of
styling, quality, product depth and promotional support, there
15
<PAGE>
can be no assurance that the sale of these competitive products will not impact
the sale of the YES! Gear or Power Penz product lines, particularly on the basis
of price.
Just in Time Inventory; Compressed Sales Cycles. Most of the Company's
significant customers have adopted inventory management systems to track sales
of particular products and rely on reorders being filled rapidly by suppliers,
rather than maintaining large on-hand inventories to meet consumer demand. While
these systems reduce a retailer's investment in inventory, they increase
pressure on suppliers like the Company to fill orders promptly and shift a
significant portion of inventory risk to the supplier, and may limit the
Company's ability to accurately forecast reorders creating potential volatility
in the Company's operating results. The limited inventory carried by the
Company's customers may also reduce or delay consumer sell-through which in turn
could impair the Company's ability to obtain reorders of its product in
quantities necessary to permit the Company to achieve planned sales and income
growth. In addition, the Company may be required to incur substantial additional
expense to fill late reorders in order to ensure the product is available at
retail locations prior to the peak holiday buying season; these may include
drop-shipment expenses and higher advertising allowances which would otherwise
be born by the Company's customers. In the event that anticipated reorders do
not materialize, the Company's operating results will be adversely affected and
the Company may incur increased inventory carrying costs.
Changes in 1997 Product Line. The Company constantly evaluates the toy markets
and its development and manufacturing schedules. As the year progresses, the
Company may elect to reduce the number of products it currently plans on
shipping in 1997 for a variety of reasons, which include but are not limited to
more accurate evaluation of demand, supply and manufacturing difficulties, or
competitive considerations. Similarly, the Company may add products to its 1997
line either by accelerating development schedules or strategic acquisitions of
current product lines. Reducing or adding products from and to the Company's
line may have an impact on the Company's financial performance depending on,
among other things, the price points, advertising and promotional support for
and development, tooling and manufacturing costs of such products, relative to
products they replace or are replaced by, as the case may be, if at all. The
Company has made adjustments to its 1997 product line to date and expects to
make further adjustments as the year progresses.
Sales Concentration Risk. The Company's ten largest customers accounted for
approximately 85%, 87% and 68% of sales for the years ending December 31, 1996,
1995 and 1994, respectively. For the year ended December 31, 1996, the Company's
two largest customers, TRU and Wal-Mart, accounted for 21% and 20% of net sales,
respectively. For the year ended December 31, 1995, the same two customers each
accounted for approximately 27% of net sales and for the year ended December 31,
1994, TRU and Wal-Mart accounted for 14% and 21% of net sales, respectively.
While the Company intends to expand distribution to new accounts, the Company
expects to continue to depend on a relatively small number of customers for a
significant percentage of its sales. Significant reductions in sales to any one
or more of the Company's largest customers would have a material adverse effect
on the Company's operating results. Because orders in the toy industry are
generally cancelable at any time without penalty, there can be no assurance that
present or future customers will not terminate their purchase arrangements with
the Company or significantly change, reduce or delay the amount of products
16
<PAGE>
ordered from the Company. Any such termination of a significant customer
relationship or change, reduction or delay in significant orders could have a
material adverse effect on the Company's operating results.
Price Protection; Stock Balancing; Reliance on Timely Payment. In connection
with the introduction of new products, many companies in the toy industry
discount prices of existing products, provide for certain advertising allowances
and credits or give other sales incentives to their customers, particularly
their most significant customers. In addition, in order to address working
capital requirements, sales of inventory, changes in marketing trends and other
issues, many companies in the toy industry allow retailers to return slow-moving
products for credit, or if the manufacturer lowers the prices of its products,
to provide price adjustments for inventories on hand at the time the price
change occurs. The Company has made such accommodations in the past, and expects
to make accommodations such as stock balancing, returns, other allowances or
price protection adjustments in 1997. Any significant change in such
accommodations by the Company in the future could have a material adverse effect
on the Company's operating results. In addition, in the past certain of the
Company's retail customers have delayed payment beyond the date such payment is
due and have claimed deductions to which, upon investigation, they may not be
entitled or which may be overstated. Delays or unanticipated reductions in
payments from retail customers in the future could materially impact the
Company's anticipated cash flow to the detriment of the Company's business.
Short Product Cycles. Consumer preferences in the toy industry are continuously
changing and are difficult to predict. Few products achieve market acceptance,
and even when they do achieve commercial success, products typically have short
life cycles. There can be no assurance that (i) new products introduced by the
Company will achieve any significant degree of market acceptance, (ii)
acceptance, if achieved, will be sustained for any significant amount of time,
or (iii) such products' life cycles will be sufficient to permit the Company to
recover development, manufacturing, marketing and other costs associated
therewith. In addition, sales of the Company's existing product lines are
expected to decline over time, and may decline faster than expected unless
existing products are enhanced or new product lines are introduced. Failure of
new or existing product lines to achieve or sustain market acceptance can create
excess inventory, reduce average selling prices and/or require that the Company
provide retailers with financial incentives, any one or all of which results
would have a material adverse effect on the Company's operating results and
financial condition.
International Business Risk. The Company principally relies on foreign
distributors to market and sell the Company's products outside the United
States. Although the Company's international sales personnel work closely with
its foreign distributors, the Company cannot directly control such entities'
sales and marketing activities and, accordingly, cannot directly manage the
Company's product sales in foreign markets. In addition, the Company's
international sales may be disrupted by currency fluctuations or other events
beyond the Company's control, including political or regulatory changes.
Competition. The toy industry is highly competitive. Among the Company's
competitors are toy companies, divisions of large diversified companies, and
producers of consumer electronics products, many of which have greater assets
and resources than those of the Company, as well as
17
<PAGE>
smaller domestic and foreign toy and entertainment products manufacturers,
importers and marketers. The Company's principal competitors include Mattel,
Inc., Hasbro, Inc., and, particularly in the Yak Bak and Power Penz categories,
Tiger Electronics, Inc. These competitors may impede the Company's ability to
maintain market share and pricing goals in its existing categories, and may
prevent the Company from successfully launching new products in categories
served by these competitors.
Dependence on Manufacturing Facilities Based in People's Republic of China. The
Company contracts for the manufacture of substantially all of its products with
entities based in Hong Kong whose manufacturing facilities are located in the
People's Republic of China. In June 1997, Hong Kong became a sovereign territory
of the People's Republic of China. While the People's Republic of China has
provided assurances that Hong Kong will be allowed to maintain critical economic
and tax policies, and while the transition to date has not adversely impacted
the Company's business, there can be no assurance that political or social
tensions will not develop in Hong Kong that would disrupt this process. In
addition, recent tensions between the Peoples Republic of China and the Republic
of China (Taiwan), and the United States' involvement therein, and recent debate
regarding the extension of the Peoples Republic of China most favored nation
trading status, could result either in a disruption in manufacturing in the
China mainland or in the imposition of tariffs or duties on Chinese manufactured
goods. Either event would have an adverse impact on the Company's ability to
obtain its products or on the cost of these products, respectively, such that
its operating results and financial condition would be materially adversely
affected.
Dependence on Restrictive Facility. The Company is dependent on the ARM
Agreement with BNY Financial Corporation to meet its financial needs during
1997, due in large part to the seasonality of the Company's business whereby the
Company is required to finance the manufacture of a substantial portion of its
products in the summer and autumn but does not collect on the sale of these
products until the fourth quarter of that year and the first quarter of the
following year. Under the terms of the ARM Agreement, BNY Financial Corporation
has taken a first priority security interest in substantially all of the
Company's assets, including its intellectual property. The ARM Agreement also
contains a number of restrictive covenants, including covenants concerning the
requirement that Donald Kingsborough and Sol Kershner, the Company's Chief
Executive Officer and Chief Financial Officer, respectively, remain active in
the management of the Company. The Company is required to remain in compliance
with certain financial and other covenants under the ARM Agreement with BNY.
The Company was not in compliance with a financial covenant under the ARM
Agreement at March 31 and June 30, 1997 but previously had obtained a waiver
from BNY with regard to that covenant violation. In the event the Company
falls out of compliance with the ARM Agreement, and BNY Financial Corporation
does not provide financing, the Company would not be able to finance its
operations as contemplated, and its operating results and financial condition
would be materially adversely affected.
Dilution from Convertible Securities; Obligation to Redeem in Cash. Under the
terms of a preferred stock and convertible debenture financing completed in the
first quarter of 1997 and restructured in the second quarter of 1997, certain
investors have the right to convert the securities held by them in the face
amount of approximately $11.7 million, plus dividends and
18
<PAGE>
interest accrued, into Company common stock at a discount to the prevailing
market price. The conversion price at which such securities may be converted
into common stock is at a discount of 11.25% beginning in November 1997
increasing to 18.75% in April 1998 of a weighted average value of the
Company's common stock, depending principally on the date on which such
securities are converted. Because the Company is not permitted by Nasdaq rules
to issue in the aggregate more than 20% of its outstanding common stock as the
result of the conversion of the convertible preferred stock and
convertible debentures and the exercise of the warrants without first
obtaining stockholder approval, the Company would be required to redeem any
portion of the securities issued in excess of 20% of its outstanding common
stock in cash.
19
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
4.1 Form of Amended and Restated Registration Rights Agreement dated July 25,
1997
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Data Schedules for the quarter ended June 30, 1997.
b) Reports on Form 8-K
A Current Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 was filed by the Company on August 4, 1997. Such
report on Form 8-K disclosed the consummation of the restructured
convertible debenture and preferred stock financing and included
copies of the purchase agreement and securities as exhibits.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
YES! Entertainment Corporation
Registrant
Date August 12, 1997 /s/ Donald D. Kingsborough
--------------------------
Donald D. Kingsborough
Chief Executive Officer
(Principal Executive Officer)
Date August 12, 1997 /s/ Sol Kershner
--------------------------
Sol Kershner
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
<PAGE>
EXHIBIT 4.1
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This Amended and Restated Registration Rights Agreement (this
"Agreement") is made and entered into July 25, 1997 by and between Infinity
Investors Limited, a corporation organized and existing under the laws of Nevis,
West Indies ("Infinity"), Fairway Capital Limited, a corporation organized and
existing under the laws of Nevis, West Indies ("Fairway") (each a "Purchaser,"
and collectively, the "Purchasers") and Cappello & Laffer Capital Corp., a
California corporation ("Cappello") and YES! Entertainment Corporation, a
Delaware corporation (the "Company").
WHEREAS, the Company and certain Purchasers are parties to that
certain Registration Rights Agreement, dated as of March 18, 1997 (the "March
Registration Rights Agreement"), which was executed pursuant to that certain
Convertible Debenture Purchase Agreement, dated as of March 18, 1997, between
the Purchasers and the Company (the "March Purchase Agreement");
WHEREAS, the Purchasers and the Company are entering into an Amended
and Restated Securities Purchase Agreement, which shall supersede in its
entirety the March Purchase Agreement (the "Purchase Agreement");
WHEREAS, it is a condition to the closing of the transactions
contemplated by the Purchase Agreement that the parties supersede in its
entirety the March Registration Rights Agreement in order to govern the
registration obligations of the Company with respect to the securities to be
issued by the Company under the Purchase Agreement;
WHEREAS, the Company and the Purchasers desire to supersede in its
entirety the March Registration Rights Agreement with this Amended and Restated
Registration Rights Agreement.
WHEREAS, the Company and the Certain Purchasers that were parties to
the March Registration Rights Agreement have agreed to supersede the March
Registration Rights Agreement in its entirety hereby, and the Company and the
Purchasers have agreed to effectuate the understandings and agreements set forth
above;
NOW THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and for good and valuable consideration; the receipt of which
is hereby acknowledged, the Company and the Purchasers hereby agree as follows:
1. DEFINITIONS.
Capitalized terms used and not otherwise defined herein shall have the
meanings given such terms in the Purchase Agreement. As used in this Agreement,
the following terms shall have the following meanings:
"ADVICE" shall have meaning set forth in Section 3(o).
1.
<PAGE>
"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "CONTROL," when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "AFFILIATED," "CONTROLLING" and "CONTROLLED" have meanings
correlative to the foregoing.
"BUSINESS DAY" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the state of
New York generally are authorized or required by law or other government actions
to close.
"COMMISSION" means the Securities and Exchange Commission.
"CLOSING DATE" shall have the meaning set forth in the Purchase
Agreement.
"COMMON STOCK" means the Company's Common Stock, par value $.001 per
share, stock of any other class into which such shares may hereafter be
reclassified or changed and any other securities hereafter designated as Common
Stock of the Company.
"DEBENTURES" means the 5% Convertible Debentures delivered to the
Purchasers pursuant to the Purchase Agreement.
"EFFECTIVE DATE" shall be September 15, 1997.
"EFFECTIVENESS PERIOD" shall have the meaning set forth in Section
2(a).
"EVENT" shall have the meaning set forth in Section 4.
"EVENT DATE" shall have the meaning set forth in Section 4.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FILING DATE" means the date the Registration Statement is filed with
the SEC, which in no case shall be later than August 15, 1997.
"HOLDER" OR "HOLDERS" means the holder or holders, as the case may be,
from time to time of Registrable Securities. With respect only to Section 8(d)
hereof and other Sections relating to the rights and obligations of Holders and
the Company set forth in Section 8(d), the term Holder shall also include
Cappello and Brown Simpson, LLC, provided, however, that Brown Simpson, LLC or
its assignee or successor may only exercise rights hereunder after such party
executes a counterpart of this Agreement.
"INDEMNIFIED PARTY" shall have the meaning set forth in Section 6(c).
"INDEMNIFYING PARTY" shall have the meaning set forth in Section 6(c).
2.
<PAGE>
"LOSSES" shall have the meaning set forth in Section 6(a).
"PERSON" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"PREFERRED STOCK" means the shares of Series B Convertible Preferred
Stock, par value $.001 per share, of the Company issued to the Purchasers
pursuant to the Purchase Agreement.
"PROCEEDING" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"PROSPECTUS" means the prospectus included in the Registration
Statement (including, without limitation, 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 to 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
Securities covered by the 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 SECURITIES" means the shares of Common Stock issuable
upon conversion of the Debentures and the Preferred Stock and exercise of
warrants delivered by the Company to each Purchaser in connection with the
transactions contemplated by the Purchase Agreement; provided, however that in
order to account for the fact that the number of shares of Common Stock that are
issuable upon conversion of Debentures and shares of Preferred Stock are
determined in part upon the market price of the Common Stock at the time of
conversion, Registrable Securities shall include a number of shares of Common
Stock equal to no less than the sum of (1) two times the number of shares of
Common Stock issuable upon conversion in full of the Debentures and the
Preferred Stock, assuming such conversions occurred on the Effective Date, and
assuming the payment of dividends and interest in additional Shares and
Debentures, and (2) the number of shares of Common Stock issuable upon exercise
in full of the warrants described herein or such other number of shares of
Common Stock as agreed to by the parties to the Purchase Agreement.
Notwithstanding anything herein contained to the contrary, if the actual number
of shares of Common Stock issuable upon conversion in full of the Debentures and
the Preferred Stock and exercise of all of the warrants contemplated under the
Purchase Agreement exceeds twice the number of shares of Common Stock issuable
if such conversions and exercise occurred on the Closing Date, the term
"Registrable Securities" shall be deemed to include such additional shares of
Common Stock and the Company shall promptly file appropriate amendments to the
Registration Statement to evidence such increase or the Company shall file one
or more additional Registration Statements covering such additional shares of
Common Stock, in either case, in the time contemplated herein for filing of
appropriate amendments or additional Registration Statements in accordance with
the terms hereof. With respect to Section 8(d) hereof only, the term
Registrable Securities shall also include (i) two
3.
<PAGE>
times the number of shares of Common Stock issuable upon conversion of the
Debentures and the Preferred Stock delivered by the Company to Cappello in
connection with the transactions contemplated by the Purchase Agreement and (ii)
the number of shares of Common Stock issuable upon exercise in full of the
warrants delivered by the Company to Brown Simpson, LLC on March 18, 1997.
"REGISTRATION STATEMENT" means the registration statement,
contemplated by Section 2(a), including the Prospectus, amendments and
supplements to such registration statement or Prospectus, including pre- and
post-effective amendments, all exhibits thereto, and all material incorporated
by reference or deemed to be incorporated by reference in such registration
statement.
"RULE 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 158" means Rule 158 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"RULE 415" means Rule 415 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SPECIAL COUNSEL" means any special counsel to the Holders, for which
the Holders will be reimbursed by the Company pursuant to Section 5.
"UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
2. SHELF REGISTRATION.
(a) On or prior to the Filing Date, the Company shall prepare and file
with the Commission a "Shelf" Registration Statement covering all Registrable
Securities for an offering to be made on a continuous basis pursuant to Rule
415. The Registration Statement shall be on Form S-3 or another appropriate
form approved by the Holders of a majority of the Registrable Securities that
permits registration of Registrable Securities for resale by the Holders in the
manner or manners designated by them (including, without limitation, public or
private sales and one or more Underwritten Offerings). The Company shall (i)
not permit any securities other than the Registrable Securities to be included
in the Registration Statement and (ii) use its
4.
<PAGE>
best efforts to cause the Registration Statement to be declared effective under
the Securities Act as promptly as practicable after the filing thereof but in
any event prior to the Effective Date, and to keep such Registration Statement
continuously effective under the Securities Act until the date which is three
years after the date that such Registration Statement is declared effective by
the Commission or such earlier date when all Registrable Securities covered by
such Registration Statement have been sold or may be sold pursuant to Rule 144
without volume restrictions as determined by the counsel to the Company pursuant
to a written opinion letter, addressed to the Holders, to such effect (the
"Effectiveness Period"); provided, however, that the Company shall not be deemed
to have used its best efforts to keep the Registration Statement effective
during the Effectiveness Period if it voluntarily takes any action that would
result in the Holders not being able to sell the Registrable Securities covered
by such Registration Statement during the Effectiveness Period, unless such
action is required under applicable law or the Company has filed a post-
effective amendment to the Registration Statement and the Commission has not
declared it effective.
(b) If the Holders of a majority of the Registrable Securities so
elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable Securities proposed to
be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall be
included in such Underwritten Offering the amount of such Registrable Securities
which in the opinion of such managing underwriters can be sold, and such amount
shall be allocated PRO RATA among the Holders proposing to sell Registrable
Securities in such Underwritten Offering. In the event the Board of Directors
determines in good faith that effecting an Underwritten Offering would have a
Material Adverse Effect (as such term is defined in the Amended and Restated
Purchase Agreement) on the Company, the Company may delay effecting the
Underwritten Offering for up to sixty (60) days. The Board of Directors shall
provide written notice to the Holders electing the Underwritten Offering of its
decision to delay the Underwritten Offering.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Holders of
a majority of the Registrable Securities included in such offering and the
Holders shall notify the Company of such selection. No Holder may participate in
any Underwritten Offering hereunder unless such Person (i) agrees to sell its
Registrable Securities on the basis provided in any underwriting agreements
approved by the Persons entitled hereunder to approve such arrangements and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
arrangements.
3. REGISTRATION PROCEDURES.
In connection with the Company's registration obligations hereunder,
the Company shall:
5.
<PAGE>
(a) Prepare and file with the Commission on or prior to the Filing
Date, a Registration Statement in accordance with the method or methods of
distribution thereof as specified by the Holders, and cause the Registration
Statement to become effective and remain effective as provided herein; provided,
however, that not less than five (5) Business Days prior to the filing of such
Registration Statement or any related Prospectus or any amendment or supplement
thereto (including any document that would be incorporated or deemed to be
incorporated therein by reference), the Company shall (i) furnish to the
Holders, their Special Counsel and any managing underwriters, copies of all such
documents proposed to be filed, which documents (other than those incorporated
or deemed to be incorporated by reference) will be subject to the review of such
Holders, their Special Counsel and such managing underwriters, and (ii) cause
its officers and directors, counsel and independent certified public accountants
to respond to such inquiries as shall be necessary, in the opinion of respective
counsel to such Holders and such underwriters, to conduct a reasonable
investigation within the meaning of the Securities Act. The Company shall not
file the Registration Statement or any such Prospectus or any amendments or
supplements thereto to which the Holders of a majority of the Registrable
Securities, their Special Counsel, or any managing underwriters, shall
reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep such Registration Statement continuously effective as to all
of the Registrable Securities for the three (3) year period commencing on the
date the Registration Statement is originally declared effective by the
Commission and prepare and file with the Commission such additional Registration
Statements in order to register for resale under the Securities Act all of the
Registrable Securities; (ii) cause the related Prospectus to be amended or
supplemented by any required Prospectus supplement, and as so supplemented or
amended to be filed pursuant to Rule 424 (or any similar provisions then in
force) promulgated under the Securities Act; (iii) respond as promptly as
practicable to any comments received from the Commission with respect to the
Registration Statement or any amendment thereto; and (iv) comply with the
provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by the Registration Statement
during the applicable period in accordance with the intended methods of
disposition by the Holders thereof set forth in the Registration Statement as so
amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold, their
Special Counsel and any managing underwriters immediately (and, in the case of
(i) (A) below, not less than five (5) days prior to such filing) and (if
requested by any such Person) confirm such notice in writing no later than one
(1) Business Day following the day (i) (A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is proposed
to be filed; and (B) with respect to the Registration Statement or any post-
effective amendment, when the same has become effective; (ii) of any request by
the Commission or any other Federal or state governmental authority for
amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) if at any time any of the representations and warranties of the
Company contained in any agreement (including
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any underwriting agreement) contemplated hereby ceases to be true and correct in
all material respects; (v) of the receipt by the Company of any notification
with respect to the suspension of the qualification or exemption from
qualification of any of the Registrable Securities for sale in any jurisdiction,
or the initiation or threatening of any Proceeding for such purpose; and (vi) of
the occurrence of any event that makes any statement made in the Registration
Statement or Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, 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.
(d) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or exemption
from qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of a
majority of the Registrable Securities to be sold in connection with an
Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as such
managing underwriters and such Holders reasonably agree should be included
therein and (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; provided, however, that the Company shall not be
required to take any action pursuant to this Section 3(e) that would, in the
opinion of counsel for the Company, violate applicable law.
(f) Furnish to each Holder, their Special Counsel and any managing
underwriters, without charge, at least one conformed copy of each Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference, and all exhibits to the extent requested by such Person (including
those previously furnished or incorporated by reference) promptly after the
filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel, and any
underwriters, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request; and the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders, any
underwriters and their respective counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky
7.
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laws of such jurisdictions within the United States as any Holder or underwriter
requests in writing, to keep each such registration or qualification (or
exemption therefrom) effective during the Effectiveness Period and to do any and
all other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by the Registration
Statement; provided, however, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified
or to take any action that would subject it to general service of process in any
such jurisdiction where it is not then so subject or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
(i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold, which certificates shall be free of all
restrictive legends, and to enable such Registrable Securities to be in such
denominations and registered in such names as any such managing underwriters or
Holders may request at least two Business Days prior to any sale of Registrable
Securities.
(j) Upon the occurrence of any event contemplated by Section 3(c)
(vi), as promptly as practicable, prepare a supplement or amendment, including a
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, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will 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.
(k) Use its best efforts to cause all Registrable Securities relating
to such Registration Statement to be listed on the Nasdaq National Market and
any other securities exchange, market or over-the-counter bulletin board, if
any, on which similar securities issued by the Company are then listed.
(l) Enter into such agreements (including, in case of an Underwritten
Offering, an underwriting agreement in form, scope and substance as is customary
in Underwritten Offerings) and take all such other actions in connection
therewith (including those reasonably requested by any managing underwriters and
the Holders of a majority of the Registrable Securities being sold) in order to
expedite or facilitate the disposition of such Registrable Securities, and
whether or not an underwriting agreement is entered into, (i) make such
representations and warranties to such Holders and such underwriters as are
customarily made by issuers to underwriters in underwritten public offerings,
and confirm the same if and when requested; (ii) obtain and deliver copies
thereof to each Holder and the managing underwriters, if any, of opinions of
counsel to the Company and updates thereof addressed to each selling Holder and
each such underwriter, in form, scope and substance reasonably satisfactory to
any such managing underwriters and Special Counsel to the selling Holders
covering the matters customarily covered in opinions requested in Underwritten
Offerings and such other matters as may be reasonably requested by such Special
Counsel and underwriters; (iii) immediately prior to the effectiveness of the
Registration Statement, and, in the case of an
8.
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Underwritten Offering, at the time of delivery of any Registrable Securities
sold pursuant thereto, obtain and deliver copies to the Holders and the managing
underwriters, if any, of "cold comfort" letters and updates thereof 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 is, or is required to be, included in the Registration
Statement), addressed to each selling Holder and each of the underwriters, if
any, in form and substance as are customary in connection with Underwritten
Offerings; (iv) if an underwriting agreement is entered into, the same shall
contain indemnification provisions and procedures no less favorable to the
selling Holders and the underwriters, if any, than those set forth in Section 6
(or such other provisions and procedures acceptable to the managing
underwriters, if any, and holders of a majority of Registrable Securities
participating in such Underwritten Offering; and (v) deliver such documents and
certificates as may be reasonably requested by the Holders of a majority of the
Registrable Securities being sold, their Special Counsel and any managing
underwriters to evidence the continued validity of the representations and
warranties made pursuant to clause 3(l)(i) above and to evidence compliance with
any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
(m) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be disclosed only to
the extent that each such Person executes a confidentiality agreement providing
that such information will be kept confidential by such Persons, unless (i)
disclosure of such information is required by court or administrative order or
is necessary to respond to inquiries of regulatory authorities; (ii) disclosure
of such information, in the opinion of counsel to such Person, is required by
law; (iii) such information becomes generally available to the public other than
as a result of a disclosure or failure to safeguard by such Person; or (iv) such
information becomes available to such Person from a source other than the
Company and such source is not known by such Person to be bound by a
confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the Commission
and make generally available to its security holders earning statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule 158
not later than 45 days after the end of any 12-month period (or ninety (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 Securities 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
the Registration Statement, which statement shall cover said 12-month period, or
end shorter periods as is consistent with the requirements of Rule 158.
9.
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(o) Provide a CUSIP number for all Registrable Securities, not later
than the effective date of the Registration Statement.
The Company may require each selling Holder to furnish to the Company
such information regarding the distribution of such Registrable Securities as is
required by law to be disclosed in the Registration Statement and the Company
may exclude from such registration the Registrable Securities of any such Holder
who unreasonably fails to furnish such information within a reasonable time
after receiving such request.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (i) the inclusion therein of language, in form and
substance reasonably satisfactory to such Holder, to the effect that the
ownership by such Holder of such securities is not to be construed as a rec
ommendation by such Holder of the investment quality of the Company's securities
covered thereby and that such ownership does not imply that such Holder will
assist in meeting any future financial requirements of the Company, or (ii) if
such reference to such Holder by name or otherwise is not required by the
Securities Act or any similar Federal statute then in force, the deletion of the
reference to such Holder in any amendment or supplement to the Registration
Statement filed or prepared subsequent to the time that such reference ceases to
be required.
Each Purchaser covenants and agrees that (i) it will not offer or sell
any Registrable Securities under the Registration Statement until it has
received copies of the Prospectus as then amended or supplemented as
contemplated in Section 3(q) and notice from the Company that such Registration
Statement and any post-effective amendments thereto have become effective as
contemplated by Section 3(c) and (ii) each Purchaser and its officers, directors
or Affiliates, if any, will comply, and will advise their brokers and agents to
comply, with the prospectus delivery requirements of the Securities Act as
applicable to them in connection with sales of Registrable Securities pursuant
to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable Securities
that, upon receipt of a notice from the Company of the occurrence of any event
of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or
3(c)(vi), such Holder will forthwith (and will advise any brokers or agents
reselling Underlying Shares on their behalf pursuant to such Registration
Statement to) discontinue disposition of such Registrable Securities and use of
the Prospectus until such Holder's receipt of the copies of the supplemented
Prospectus and/or amended Registration Statement contemplated by Section
3(c)(i), or until it is advised in writing (the "Advice") by the Company that
the use of the applicable Prospectus may be resumed, and, in either case, has
received copies of any additional or supplemental filings that are incorporated
or deemed to be incorporated by reference in such Prospectus or Registration
Statement.
4. LIQUIDATED DAMAGES.
The Company acknowledges and agrees that the Holders will suffer
damages, and that it would not be feasible to ascertain the extent of such
damages with precision, if the Company fails to fulfill its obligations
hereunder and (a) a Registration Statement is not declared effective by the
Commission on or before the Effective Date, then the Company shall pay to
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<PAGE>
each Holder of the Registrable Securities, as liquidated damages and not as a
penalty, on the earlier of November 1, 1997 or the date a Registration Statement
is declared effective by the Commission, one and one half percent (1.5%) of the
aggregate Liquidation Preference (as defined in the Certificate of Designation)
for the outstanding shares of Preferred Stock and one and one half percent
(1.5%) of the aggregate principal amount of the Debentures then held by such
Holder for each thirty (30) days after September 15, 1997 that a Registration
Statement shall not have been declared effective by the Commission; if a
Registration Statement is not declared effective by the Commission on or before
November 1, 1997, the Company shall pay on the first day of each month beginning
December 1, 1997 until such time as a Registration Statement is declared
effective by the Commission, to each Holder of the Registrable Securities, as
liquidated damages and not as a penalty, three percent (3%) of the aggregate
Liquidation Preference (as defined in the Certificate of Designation) for the
outstanding shares of Preferred Stock and three percent (3%) of the aggregate
principal amount of the Debentures then held by such Holder. The penalties set
forth in the preceding sentence shall be pro-rated for periods less than thirty
(30) days. Any penalty payable pursuant to this section during the first two
months following the ninety (90) days after date hereof may be paid at the
option of the Company in cash or in additional Preferred Stock or Debentures, as
the case may be. Thereafter, any such penalty shall be paid in cash. The
provisions of this Section are not exclusive and shall in no way limit the
Company's obligations under the Debentures, the Certificate of Designation
relating to the Preferred Stock or the Purchase Agreement.
The Company shall notify each Holder within five (5) days of the Event
and Event Date. The Company shall pay the liquidated damage due on the
Registrable Securities to each Holder of record as at the Event Date on the
first Business Day of each month in which such liquidated damages shall accrue.
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
the Registration Statement is filed or becomes effective and whether or not any
Registrable Securities are sold pursuant to the Registration Statement. The fees
and expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses (A) with respect to filings required to be made with the
National Association of Securities Dealers, Inc. and (B) in compliance with
state securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the underwriters or Holders in connection with Blue
Sky qualifications of the Registrable Securities and determination of the
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as the managing underwriters, if any, or Holders of a majority of
Registrable Securities may designate)), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable Securities
and of printing prospectuses if the printing of prospectuses is requested by the
managing underwriters, if any, or by the holders of a majority of the
Registrable Securities included in the Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company and Special Counsel for the Holders as limited pursuant to Section 5(b),
(v) fees and disbursements of all independent certified public accountants
referred to in Section 3(1) (iii) (including, without
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limitation, the expenses of any special audit and "cold comfort" letters
required by or incident to such performance), (vi) Securities Act liability
insurance, if the Company so desires such insurance, and (vii) fees and expenses
of all other Persons retained by the Company in connection with the consummation
of the transactions contemplated by this Agreement. In addition, the Company
shall be responsible for all of its internal expenses incurred in connection
with the consummation of the transactions contemplated by this Agreement
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, the fees and expenses incurred in connection with the listing of the
Registrable Securities on any securities exchange on which similar securities
issued by the Company are then listed.
(b) In connection with their initial review of the Registration
Statement, the Company shall reimburse the Holders for up to two thousand
dollars ($2,000) for the fees and disbursements of one firm of attorneys chosen
by the Holders of a majority of the Registrable Securities.
6. INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. The Company shall, notwithstanding
termination of this Agreement and without limitation as to time, indemnify and
hold harmless each Holder, the officers, directors, agents (including any
underwriters retained by such Holder in connection with the offer or sale of
Registrable Securities), brokers (including brokers who offer and sell
Registrable Securities as principal as a result of a pledge or any failure to
perform under a margin call of Common Stock), investment advisors and employees
of each of them, each Person who controls any such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) and the
officers, directors, agents and employees of each such controlling Person, to
the fullest extent permitted by applicable law, from and against any and all
losses, claims, damages, liabilities, costs (including, without limitation,
costs of preparation and attorneys' fees) and expenses (collectively, "Losses"),
as incurred, arising out of or relating to any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
Prospectus or any form of prospectus or in any amendment or supplement thereto
or in any preliminary prospectus, or arising out of or relating to any omission
or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, in light of the circumstances under which
they were made) not misleading, except to the extent, but only to the extent,
that such untrue statements or omissions are based solely upon information
regarding such Holder furnished in writing to the Company by or on behalf of
such Holder expressly for use therein, which information was reasonably relied
on by the Company for use therein or to the extent that such information relates
to such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus or in any amendment or supplement thereto. The Company shall notify
the Holders promptly of the institution, threat or assertion of any Proceeding
of which the Company is aware in connection with the transactions contemplated
by this Agreement.
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(b) INDEMNIFICATION BY HOLDERS. In connection with the Registration
Statement, each Holder shall furnish to the Company in writing such information
as the Company reasonably requests for use in connection with the Registration
Statement or any Prospectus and agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, officers, agents and employees,
each Person who controls the Company (within the meaning of Section 15 of the
Securities Act and Section 20 of the Exchange Act), and the directors, officers,
agents or employees of such controlling Persons, to the fullest extent permitted
by applicable law, from and against all Losses (as determined by a court of
competent jurisdiction in a final judgment not subject to appeal or review)
arising solely out of or based solely upon any untrue statement of a material
fact contained in the Registration Statement, any Prospectus or any form of
prospectus, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus and that such information was reasonably relied
upon by the Company for use in the Registration Statement, such Prospectus or
such form of prospectus or to the extent that such information relates to such
Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus. In no event shall the liability of any selling Holder hereunder be
greater in amount than the dollar amount of the net proceeds received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party promptly shall notify the Person
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally determined by a court
of competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed to pay such fees and
expenses; or (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to such
Indemnified Party in any such Proceeding; or (3) the named parties to any such
Proceeding (including any impleaded parties) include both such Indemnified Party
and the Indemnifying Party, and such Indemnified Party shall have been advised
by counsel that a conflict of interest is likely to exist if the same counsel
were to represent such Indemnified Party and the Indemnifying Party (in which
case, if such Indemnified Party notifies the Indemnifying Party in writing that
it elects to employ separate counsel at the expense of the Indemnifying
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Party, the Indemnifying. Party shall not have the right to assume the defense
thereof and such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
effected without its written consent, which consent shall not be unreasonably
withheld. No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending Proceeding in respect of
which any Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within 10 Business
Days of written notice thereof to the Indemnifying Party (regard less of whether
it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(d) CONTRIBUTION. If a claim for indemnification under Section 6(a) or
6(b) is unavailable to an Indemnified Party or is insufficient to hold such
Indemnified Party harmless for any Losses in respect of which this Section would
apply by its terms (other than by reason of exceptions provided in this
Section), then each Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such Indemnified Party
as a result of such Losses, in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party and Indemnified Party in connection
with the actions, statements or omissions that resulted in such Losses as well
as any other relevant equitable considerations. The relative fault of such
Indemnifying Party and Indemnified Party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission of a
material fact, has been taken or made by, or relates to information supplied by,
such Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in Section 6(c), any attorneys' or other fees or expenses incurred by such party
in connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 6(d), no Purchaser shall be
required to contribute, in the aggregate, any amount in excess of the amount by
which the proceeds actually received by such Purchaser from the sale of the
Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Purchaser has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No Person
guilty of fraudulent misrepresentation (within the meaning of
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Section 11(f) of the Securities Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
7. RULE 144
The Company shall file the reports required to be filed by it under
the Securities Act and the Exchange Act 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, make publicly available other information so long as necessary to
permit sales of its securities pursuant to Rule 144. The Company further
covenants that it will take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable such Holder to
sell Registrable Securities without registration under the Securities Act within
the limitation of the exemptions provided by Rule 144. Upon the request of any
Holder, the Company shall deliver to such Holder a written certification of a
duly authorized officer as to whether it has complied with such requirements. To
the extent Rule 144 is amended, the Company will take such action as any Holder
may reasonably request, to enable such Holder to sell Registrable Securities
pursuant to Rule 144 as then in effect.
8. MISCELLANEOUS
(a) REMEDIES. In the event of a breach by the Company or by a Holder,
of any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses 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. None of the Company nor any of its
subsidiaries has, as of the date hereof, nor shall the Company or any of its
subsidiaries, on or after the date of this Agreement, enter into any agreement
with respect to its securities that is inconsistent with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions hereof.
None of the Company nor any of its subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its securities
to any Person that are currently, or may in the future be, in effect. Without
limiting the generality of the foregoing, without the written consent of the
Holders of a majority of the then outstanding Registrable Securities, the
Company shall not grant to any Person the right to request the Company to
register any securities of the Company under the Securities Act unless the
rights so granted are subject in all respects to the prior rights in full of the
Holders set forth herein, and are not otherwise in conflict or inconsistent with
the provisions of this Agreement. In addition, in any case, the Company may not
register for resale under the Securities Act any
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securities of the Company held by any person prior to the expiration of the
sixtieth (60th) day following the date that the Registration Statement has been
declared effective by the Commission, provided that if the effectiveness of such
Registration Statement is suspended for any reason (or if the Underlying Shares
are not listed for trading on the Nasdaq National Market or the Nasdaq SmallCap
Market) such sixty (60) day period shall be increased to include any such days.
(c) NO PIGGYBACK ON REGISTRATIONS. None of the Company nor any of its
security holders (other than the Holders in such capacity pursuant hereto) may
include securities of the Company in the Registration Statement other than the
Common Stock to be issued under the Amended and Restated Purchase Agreement, and
the Company shall not enter into any agreement providing any such right to any
of its security holders.
(d) PIGGY-BACK REGISTRATIONS. For so long as there is not an effective
Registration Statement in effect relating to the Registrable Securities, if at
any time the Company shall determine to prepare and file with the Commission a
registration statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities,
other than on Form S-4 or Form S-8 (each as promulgated under the Securities
Act) or their then equivalents relating to equity securities to be issued solely
in connection with any acquisition of any entity or business or equity
securities issuable in connection with stock option or other employee benefit
plans, the Company shall send to each holder of Registrable Securities written
notice of such determination and, if within twenty (20) days after receipt of
such notice, any such holder shall so request in writing, the Company shall
include in such registration statement all or any part of the Registrable
Securities such holder requests to be registered, except that if, in connection
with any Underwritten Offering for the account of the Company the managing
underwriter thereof shall impose a limitation on the number of shares of Common
Stock which may be included in the registration statement because, in such
underwriter's judgment, such limitation is necessary to effect an orderly public
distribution of securities covered thereby, then the Company shall be obligated
to include in such registration statement only such limited portion of the
Registrable Securities for to which such holder has requested inclusion
hereunder. Any exclusion of Registrable Securities shall be made pro rata among
the holders seeking to include Registrable Securities, in proportion to the
number of Registrable Securities sought to be included by such holders;
provided, however, that the Company shall not exclude any Registrable Securities
unless the Company has first excluded all outstanding securities the holders of
which are not entitled by right to inclusion of securities in such registration
statement; and provided, further, however, that, after giving effect to the
immediately preceding proviso, any exclusion of Registrable Securities shall be
made pro rata with holders of other securities having the right to include such
securities in such registration statement. No right to registration of
Registrable Securities under this Section shall be construed to limit any
registration otherwise required hereunder.
(e) 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 same shall be in writing and signed by the Company
and the Holders of at least a majority of the then outstanding Registrable
Securities; provided, however, that, for the purposes of this sentence,
16.
<PAGE>
Registrable Securities that are owned, directly or indirectly, by the Company,
or an Affiliate of the Company are not deemed outstanding. 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 and that does not
directly or indirectly affect the rights of other Holders may be given by
Holders of at least a majority of the Registrable Securities to which such
waiver or consent relates; provided, however, that the provisions of this
sentence may not be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence.
(f) NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 4:30 p.m. (Eastern Standard
Time) on a Business Day, (ii) the Business Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
telephone number specified in the Amended and Restated Purchase Agreement later
than 4:30 p.m. (Eastern Standard Time) on any date and earlier than 11:59 p.m.
(Eastern Standard time) on such date, (iii) the Business Day following the date
of mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be given.
The addresses for such communications shall be:
If to the Company: YES! Entertainment Corporation
3875 Hopyard Road
Pleasanton, CA 94588
Attn: Donald Kingsborough
Facsimile No.: (510) 734-0997
With
copies to: Cooley Godward, LLP
5 Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attn: Patrick Pohlen
Facsimile No.: (415) 857-0663
If to Infinity: Infinity Investors Limited
c/o Trident Trust Company (Cayman) Limited
1 Capital Place
P.O. Box 847
Grand Cayman, Cayman Island, B.V.I.
Attn: G. McLaughlin
Facsimile No.: (809) 949-0881
If to Fairway: Fairway Capital Limited
38 Hertferd Street
London, England G1Y7T6
17.
<PAGE>
Attn: J.A. Loughran
Facsimile No.: 011-44-171-355-4975
With
copies to: Robinson Silverman Pearce Aronsohn
& Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Attn: Eric L. Cohen
Facsimile No.: (212) 541-4630
and
Mr. Stuart Chasanoff
c/o HW Finance
160 Elm Street, Suite 4000
Dallas, Texas 75201
Facsimile No.: (214) 720-1662
If to Cappello: Cappello & Laffer Capital Corp.
1299 Ocean Avenue, Suite 306
Santa Monica, CA 90401
Attn: Gerard Cappello
Facsimile No.: (310) 393-4838
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in the stock transfer books of the
Company or such other address as may be designated in writing hereafter, in the
same manner, by such Person.
(g) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder. Except as otherwise
permitted by the Amended and Restated Purchase Agreement, the parties hereto may
not assign its rights or obligations hereunder without the prior written consent
of each other.
(h) COUNTERPARTS. This Agreement may be executed in any number of
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. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(i) GOVERNING LAW; ARBITRATION. (A) This Agreement shall be governed
by and construed in accordance with the laws of the State of New York, without
regard to principles of conflicts of law thereof. (B) All disputes between the
parties hereto arising under the terms of this Agreement shall be arbitrated in
New York City under the rules of the American Arbitration Association then in
effect in the City of New York. Judgment on any award made by the arbitrators
hereunder may be rendered in any court having jurisdiction. The
18.
<PAGE>
parties consent to the nonexclusive jurisdiction of the Federal and State courts
sitting in New York County, New York, in connection with the enforcement of such
award. The parties agree to keep confidential any materials, documents or other
information that is disclosed in connection with any arbitration proceeding.
(j) CUMULATIVE REMEDIES. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
(k) 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 reasonable 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.
(l) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(m) SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than the Purchasers or transferees or successors or
assigns thereof if such Persons are deemed to be Affiliates solely by reason of
their holdings of such Registrable Securities) shall not be counted in
determining whether such consent or approval was given by the Holders of such
required percentage.
19.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
YES! ENTERTAINMENT CORPORATION
By:_____________________________
Name:___________________________
Title:__________________________
INFINITY INVESTORS LIMITED
By:_____________________________
Name:___________________________
Title:__________________________
FAIRWAY CAPITAL LIMITED
By:_____________________________
Name:___________________________
Title:__________________________
CAPPELLO & LAFFER CAPITAL CORP.
By:_____________________________
Name:___________________________
Title:__________________________
20.
<PAGE>
EXHIBIT 11.1
YES! ENTERTAINMENT CORPORATION
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1997 1996 1997 1996
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Net loss $ (2,365) $(1,214) $ (5,548) $(2,106)
======= =======
Non-cash dividends and discount on preferred stock (1,049) $ (2,600)
-------- --------
Net loss applicable to common stockholders $ (3,414) $ (8,148)
======== ========
Computation of weighted average common
and common equivalent shares outstanding:
Weighted average common shares outstanding 14,237 13,995 14,140 13,761
-------- ------- ------- -------
Shares used in computing net loss per share 14,237 13,995 14,140 13,761
======== ======== ======= =======
Net loss per share applicable to common
stockholders $(0.24) $ (0.58)
======= ======
Net loss per share $ (0.09) $ (0.15)
======= ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> APR-01-1997 APR-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 1,302 0
<SECURITIES> 0 0
<RECEIVABLES> 11,815 0
<ALLOWANCES> 508 0
<INVENTORY> 25,621 0
<CURRENT-ASSETS> 47,659 0
<PP&E> 13,199 0
<DEPRECIATION> 8,879 0
<TOTAL-ASSETS> 52,193 0
<CURRENT-LIABILITIES> 17,652 0
<BONDS> 1,778 0
0 0
8,723 0
<COMMON> 84,821 0
<OTHER-SE> (60,804) 0
<TOTAL-LIABILITY-AND-EQUITY> 52,193 0
<SALES> 12,616 11,551
<TOTAL-REVENUES> 12,616 11,551
<CGS> 7,615 6,887
<TOTAL-COSTS> 7,615 6,887
<OTHER-EXPENSES> 6,741 6,169
<LOSS-PROVISION> 24 35
<INTEREST-EXPENSE> 444 107
<INCOME-PRETAX> (2,186) (1,518)
<INCOME-TAX> 179 (304)
<INCOME-CONTINUING> (2,365) (1,214)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,365) (1,214)
<EPS-PRIMARY> (.24) (.09)
<EPS-DILUTED> (.24) (.09)
</TABLE>
