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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) March 25, 1997
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YES! Entertainment Corporation
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(Exact Name of the Registrant as Specified in Its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
0-25916 94-3165290
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(Commission File Number) (I.R.S. Employer Identification No.)
3875 Hopyard Road, Suite 375 Pleasanton, California 94588
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(Address of Principal Executive Offices) (Zip Code)
(510) 847-9444
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(Registrant's Telephone Number, Including Area Code)
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(Former Name or Former Address, if Changed Since Last Report)
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Item 5. Other Events.
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In a press release disseminated on March 24, 1997, the Registrant
publicly announced that it has entered into an agreement superseding a private
placement to certain institutional buyers entered into on January 28, 1997 by
which the Registrant raised $10 million through the sale of convertible
subordinated debentures and warrants. The Registrant and such institutional
buyers agreed to supersede the transaction by issuing convertible subordinated
debentures, convertible preferred stock and warrants. The information which is
set forth in the Registrant's Press Release dated March 24, 1997, filed as
Exhibit 99.1 hereto, is incorporated herein by reference.
Item 7. Financial Statements and Exhibits.
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(c) Exhibits
4.1 Certificate of Designation of the Series A Convertible
Preferred Stock.
4.2 Form of Convertible Subordinated Debenture
dated March 18, 1997.
4.3 Form of Warrant dated March 18, 1997.
99.1 Press Release dated March 24, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: March 25, 1997
YES! ENTERTAINMENT CORPORATION
By: /s/ Bruce D. Bower
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Bruce D. Bower
Executive Vice President, General
Counsel and Secretary
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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4.1 Certificate of Designation of the Series A Convertible Preferred
Stock.
4.2 Form of Convertible Subordinated Debenture dated March 18, 1997.
4.3 Form of Warrant dated March 18, 1997.
99.1 Press Release dated March 24, 1997.
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EXHIBIT 4.1
CERTIFICATE OF DESIGNATION OF
SERIES A CONVERTIBLE PREFERRED STOCK OF
YES! ENTERTAINMENT CORPORATION
The undersigned, Donald D. Kingsborough and Bruce D. Bower, hereby
certify that:
I. They are the duly elected and acting Chief Executive Officer and
Secretary, respectively, of YES! Entertainment Corporation, a Delaware
corporation (the "Company").
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II. The Certificate of Incorporation of the Company authorizes
2,000,000 shares of preferred stock, par value $.001 per share, of which no
shares are issued and outstanding.
III. The following is a true and correct copy of the consent duly
adopted by the Board of Directors of the Company (the "Board of Directors")
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dated March 17, 1997, which constituted all requisite action on the part of the
Company for adoption of such consent.
RESOLUTIONS
WHEREAS, the Board of Directors is authorized to provide for the
issuance of shares of preferred stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designations, powers, preferences and rights and the qualifications, limitations
or restrictions thereof;
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges and
restrictions of such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares constituting
such series and fixes the designations, powers, preferences, rights,
qualifications, limitations, restrictions and privileges relating to such series
as follows:
Section 1. Designation, Amount and Par Value. The series of preferred
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stock shall be designated as the Series A Convertible Preferred Stock (the
"Preferred Stock"), and the number of shares so designated shall be 85,000
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(which shall not be subject to increase). Each
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share of Preferred Stock shall have a par value of $.001 per share and a stated
value of $100 per share (the "Stated Value").
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Section 2. Dividends.
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(a) Holders of Preferred Stock shall be entitled to receive, when and
as declared by the Board of Directors out of funds legally available therefor,
and the Company shall pay, cumulative dividends at the rate per share (as a
percentage of the Stated Value per share) equal to 6-1/2% per annum, payable, in
cash or shares of Common Stock, semi-annually in arrears, but in no event later
than the Conversion Date (as hereinafter defined). Notwithstanding the
foregoing, the Company may not pay dividends in cash unless it has received the
prior written consent of BNY (as defined in Section 7) to such payment, free
from the subordination provisions of Section 8. Dividends on the Preferred Stock
shall accrue daily commencing the Original Issue Date (as defined in Section 7),
and shall be deemed to accrue on such date whether or not earned or declared and
whether or not there are profits, surplus or other funds of the Company legally
available for the payment of dividends. The party that holds the Preferred Stock
on an applicable record date for any dividend payment will be entitled to
receive such dividend payment and any other accrued and unpaid dividends which
accrued prior to such dividend payment date, without regard to any sale or
disposition of such Preferred Stock subsequent to the applicable record date but
prior to the applicable dividend payment date. Except as otherwise provided
herein, if at any time the Company pays less than the total amount of dividends
then accrued on account of the Preferred Stock, such payment shall be
distributed ratably among the holders of the Preferred Stock based upon the
number of shares held by each holder. Payment of dividends on the Preferred
Stock is further subject to the provisions of Section 5(a)(ii).
(b) Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends (and must
deliver cash in respect thereof) on the Preferred Stock if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes, or held as treasury stock, is
insufficient to issue such dividends to be paid in shares of Common Stock;
(ii) the shares of Common Stock to be issued in respect of such
dividends are not registered for resale pursuant to an effective registration
statement that names the recipient of such dividend as a selling stockholder
thereunder;
(iii) the shares of Common Stock to be issued in respect of such
dividends are not listed on the Nasdaq SmallCap Market or Nasdaq National Market
and any other exchange or quotation system on which the Common Stock is then
listed for trading; or
(iv) if the recipient thereof is a "Purchaser" under the Purchase
Agreement (or an affiliate thereof) and the issuance of such shares would result
in such recipient beneficially
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owning more than 4.9% of the issued and outstanding shares of Common Stock
provided, however, if ten Business Days shall have elapsed from the date that
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the Holder under the Convertible Debentures (as that term is defined in Section
7) shall have declared an Event of Default (as defined thereunder) as having
occurred, then the provisions of this clause (iv) shall be null and void, ab
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initio.
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(c) So long as any Preferred Stock shall remain outstanding, neither
the Company nor any subsidiary thereof shall redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities (as defined in Section 7)
(except that the Company may (i) repurchase or redeem up to 10,000 shares of
Common Stock and (ii) repurchase or redeem shares of Common Stock of an employee
upon such employee's termination of employment with the Company), nor shall the
Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any Junior Securities,
nor shall any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any Junior Securities unless all
dividends on the Preferred Stock for all past dividend periods shall have been
paid free of the subordination provisions of Section 8.
Section 3. Voting Rights. Except as otherwise provided herein and as
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otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not, without the affirmative vote of the holders of a majority of the
shares of the Preferred Stock then outstanding, alter or change adversely the
powers, preferences or rights given to the Preferred Stock or authorize or
create any class of stock ranking as to dividends or distribution of assets upon
a Liquidation (as defined in Section 4) senior to, prior to or pari passu with
the Preferred Stock.
Section 4. Liquidation. Upon any liquidation, dissolution or
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winding- up of the Company, whether voluntary or involuntary (a "Liquidation"),
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the holders of Preferred Stock shall be entitled to receive out of the assets of
the Company, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to the Stated Value plus all accrued but unpaid
dividends per share, whether declared or not, before any distribution or payment
shall be made to the holders of any Junior Securities, and if the assets of the
Company shall be insufficient to pay in full such amounts, then the entire
assets to be distributed shall be distributed among the holders of Preferred
Stock ratably in accordance with the respective amounts that would be payable on
such shares if all amounts payable thereon were paid in full. Any of a sale,
conveyance or disposition of all or substantially all of the assets of the
Company or the effectuation by the Company of a transaction or series of related
transactions in which more than 331/3% of the voting power of the Company is
disposed of, or a consolidation or merger of the Company with or into any other
company or companies or a reclassification of the Common Stock shall not be
treated as a Liquidation, but instead shall be subject to the provisions of
Section 5. The Company shall mail written notice of any such Liquidation, not
less than 45 days prior to the payment date stated therein, to each record
holder of Preferred Stock.
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Section 5. Conversion.
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(a)(i) Each share of Preferred Stock shall be convertible into shares
of Common Stock (subject to reduction pursuant to Section 5(a)(ii) and (iii) and
to adjustment under Section 5(c)) at the option of the holder in whole or in
part at any time and from time to time after the date hereof at the Conversion
Ratio (as defined in Section 7). The holder shall effect conversions by
surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Company, together with the form of
conversion notice attached hereto as Exhibit A (the "Holder Conversion Notice").
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Each Holder Conversion Notice shall specify the number of shares of Preferred
Stock to be converted and the date on which such conversion is to be effected,
which date may not be prior to the date the holder delivers such Holder
Conversion Notice by facsimile (the "Holder Conversion Date"). If no Holder
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Conversion Date is specified in a Holder Conversion Notice, the Holder
Conversion Date shall be the date that the Holder Conversion Notice is deemed
delivered pursuant to Section 5(i). Subject to Sections 5(a)(ii) and 5(c) and,
as to the holders (or their designees) party to the Purchase Agreement (as
defined in Section 7), subject to Section 4.10 of the Purchase Agreement each
Holder Conversion Notice, once given, shall be irrevocable. If a holder is
converting less than all shares of Preferred Stock represented by the
certificate or certificates tendered by such holder with the Holder Conversion
Notice, or if a conversion hereunder cannot be effected in full for any reason,
the Company shall promptly deliver to such holder (in the manner within the time
set forth in Section 5(c)) a certificate for such number of shares as have not
been converted.
(ii) Certain Regulatory Approval. If on the Conversion Date
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applicable to any conversion of shares of Preferred Stock (A) the Common Stock
is then listed for trading on the Nasdaq National Market or, if the rules of the
Nasdaq Stock Market are hereafter amended to extend Rule 4460(i) promulgated
thereby (or by any successor or replacement provision thereof) to the Nasdaq
SmallCap Market, on the Nasdaq SmallCap Market, (B) the Conversion Price then in
effect is such that the aggregate number of shares of Common Stock that would
then be issuable upon conversion of all outstanding shares of Preferred Stock
and Debentures (as defined in Section 7), together with any shares of Common
Stock previously issued upon conversion of Preferred Stock and Debentures, and
together with any shares of Common Stock issued in payment of dividends
hereunder and interest under the Debentures in shares of Common Stock, would
equal or exceed 20% of the number of shares of Common Stock outstanding on the
Original Issue Date (the "Issuable Maximum"), and (C) the Company has not
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previously obtained Shareholder Approval (as defined below), then the Company
shall issue to the converting holder of the Preferred Stock up to the Issuable
Maximum and, with respect to any shares of Common Stock that would be issuable
to such holder in respect of the Conversion Notice at issue in excess of the
Issuable Maximum, the holder shall have the option to require the Company to
either (1) as promptly as possible, but in no event later than 60 days after
such Conversion Date, convene a meeting of the holders of the Common Stock and
obtain the Shareholder Approval, or (2) redeem, from funds legally available
therefor at the time of such redemption, the balance of the Preferred Stock then
outstanding, including shares subject to the Conversion Notice at issue at a
price per share equal to the product of (i) the average Per Share Market Value
for the five (5)
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Trading Days immediately preceding (1) the Conversion Date or (2) the date of
payment in full by the Company of such redemption price, whichever is greater,
and (ii) the Conversion Ratio calculated on the Conversion Date; provided,
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however, that if the holder has requested that the Company obtain Shareholder
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Approval under paragraph (1) above and the Company fails for any reason to
obtain such Shareholder Approval within the time period set forth in (1) above,
the Company shall be obligated to redeem all of the shares of Preferred Stock
then outstanding, including shares subject to the Conversion Notice at issue and
not converted as a result of the provisions of this Section, in accordance with
the provisions of paragraph (2) above, and in such case the interest
contemplated by the immediately succeeding sentence shall be deemed to accrue
from the Conversion Date. If the holder has requested that the Company redeem
shares of Preferred Stock pursuant to this Section and the Company fails for any
reason to pay the redemption price under (2) above within seven days after the
Conversion Date or fails to deliver good funds to the Transfer agent for such
purpose, the Company will pay interest on such redemption price at a rate of 15%
per annum to the converting holder of Preferred Stock, accruing from the
Conversion Date until the redemption price plus any accrued interest thereon is
paid in full. The entire redemption price, including interest thereon, shall be
paid in cash. "Shareholder Approval" means the approval by a majority of the
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total votes cast on the proposal, in person or by proxy, at a meeting of the
shareholders of the Company held in accordance with the Company's Certificate of
Incorporation and by-laws, of the issuance by the Company of shares of Common
Stock exceeding the Issuable Maximum as a consequence of the conversion of
Preferred Stock into Common Stock at a price less than the greater of the book
or market value on the Original Issue Date as and to the extent required
pursuant to Rule 4460(i) of the Nasdaq Stock Market (or any successor or
replacement provision thereof).
(ii) If on any Conversion Date under Section 5 or the date of any
redemption pursuant to Section 6 (a "Redemption Date") the average Per Share
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Market Value for the five (5) Trading Days immediately preceding such Conversion
Date or Redemption Date, as the case may be, exceeds the Initial Conversion
Price (defined in Section 5(d)(i) below) by more than 50%, the Conversion Price
otherwise applicable to such conversion or redemption shall be increased by an
amount equal to 50% of the difference between (A) the average Per Share Market
Value for the five (5) Trading Days immediately preceding such Conversion Date
or Redemption Date, as the case may be, less (B) 150% of the Initial Conversion
Price.
(b) At any time on or after the first anniversary of the Original
Issue Date, each share of Preferred Stock shall be convertible in whole or in
part and from time to time at the option of the Company into shares of Common
Stock at the Conversion Ratio; provided, however, that the Company is not
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permitted to deliver or cause to be delivered a Company Conversion Notice (as
defined below) (i) within 10 days of issuing any press release or other public
statement relating to such conversion, (ii) prior to the 270th day after the
date the Commission shall have declared effective a Registration Statement (as
defined in the Amended and Restated Registration Rights Agreement, dated as of
March 18, 1997, by and among the Company and the original holders of the
Preferred Stock (the "Registration Rights Agreement"))
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(an "Underlying Securities Registration Statement"), (iii) at any time that an
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Underlying Securities Registration Statement is not then effective, (iv) if the
shares of Common Stock issuable upon such conversion are not then listed for
trading on the Nasdaq National Market or Nasdaq SmallCap Market, (v) if the
Company shall not have duly reserved for issuance to the holders of the
Preferred Stock a sufficient number of shares of Common Stock to issue upon such
conversion or (vi) such conversion shall not contravene Section 5(a)(ii). The
Company shall effect such conversion by delivering or causing to be delivered to
the holders of the Preferred Stock a written notice in the form attached hereto
as Exhibit B (the "Company Conversion Notice"), which Company Conversion Notice,
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once given, shall be irrevocable. Each Company Conversion Notice shall specify
the number of shares of Preferred Stock required by the Company to be converted.
The Company shall deliver or cause to be delivered such Company Conversion
Notice at least two (2) Trading Days before the date of conversion indicated in
the Company Conversion Notice (such date is hereinafter referred to as the
"Company Conversion Date"). Any such conversion shall be effected on a pro rata
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basis among all holders of shares of Preferred Stock. Upon its receipt of a
Company Conversion Notice, the holder shall surrender the shares of Preferred
Stock held by it and subject to such Company Conversion Notice at the office of
the Company or the Transfer Agent for the Preferred Stock or Common Stock. The
Company shall, upon conversion of the Preferred Stock subject to such Company
Conversion Notice deliver or cause to be delivered to the appropriate tendering
holder, a replacement certificate representing shares of Preferred Stock
tendered but not converted in response to the Company Conversion Notice. Each of
a Holder Conversion Notice and a Company Conversion Notice is sometimes referred
to herein as a "Conversion Notice," and each of a "Holder Conversion Date" and a
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"Company Conversion Date" is sometimes referred to herein as a "Conversion
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Date."
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(c) Not later than three (3) Trading Days after the Conversion Date,
the Company will cause the Transfer Agent to deliver to the holder (i) a
certificate or certificates, representing the number of shares of Common Stock
being acquired upon the conversion of Preferred Stock (subject to reduction
pursuant to Section 5(a)(ii) and (iii)), (ii) a certificate representing the
shares of Preferred Stock tendered in connection with a conversion hereunder but
not converted; (iii) a bank check in the amount of all accrued and unpaid
dividends in respect of the shares of Preferred Stock tendered for conversion
(if the Company has elected (or is required pursuant to the terms hereof) to pay
accrued interest in cash) and (iv) if the Company has elected (and is permitted
pursuant to the terms hereof) to pay accrued dividends in shares of Common
Stock, certificates representing such number of shares of Common Stock as equals
such dividends divided by the average Per Share Market Value for the five (5)
Trading Days immediately preceding the Conversion Date. Any certificates
representing shares of Common Stock to be delivered upon a conversion hereunder
shall be free of restrictive legends and trading restrictions, except those
specified in Section 4.1(b) of the Purchase Agreement. The Company shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon conversion of any Preferred Stock and the counting of Trading Days for
purposes of any consequences under this Section for a failure to deliver such
certificates under this Section shall not begin until certificates representing
the shares of Preferred Stock to be converted are either delivered for
conversion to the Transfer Agent for the Common Stock, or until the holder
notifies the Company that such
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shares of Preferred Stock have been lost, stolen or destroyed and
provides a bond reasonably satisfactory to the Company (or other adequate
security reasonably acceptable to the Company) to indemnify the Company from any
loss incurred by it in connection therewith, provided, however, that, if the
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Company or the Transfer Agent receives the original shares of Preferred Stock
being converted on or prior to the time specified for the delivery of such
shares of Common Stock or on or prior to the time at which liquidated damages
begin to accrue, the date of the Holder Conversion Notice shall be deemed to be
the date of delivery of such original shares of Preferred Stock. The Company
shall, upon request of the holder, use its best efforts to deliver any
certificate or certificates required to be delivered by the Company under this
Section electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. If such
certificate or certificates are not delivered by the date required under this
Section, the holder shall be entitled by written notice to the Company and the
Transfer Agent at any time on or before its receipt of such certificate or
certificates, to rescind such conversion, in which event the Company shall
immediately instruct the Transfer Agent to return the certificates representing
shares of Preferred Stock subject to such conversion that were tendered for
conversion. The Company shall pay to the converting holder as liquidated
damages and not as penalty, $3,000 for each day that the Company fails to
deliver such certificate or certificates pursuant to this Section commencing the
fifth (5th) Trading Day after the applicable Conversion Date. In addition, if
the Company fails to deliver to the holder such certificate or certificates
pursuant to this Section prior to the 15th day after the Conversion Date, the
Company shall, at the Holder's option, (i) redeem the shares of Preferred Stock
then held by such holder, as requested by such holder, at the redemption price
contemplated below, and (ii) pay all accrued but unpaid dividends on account of
the Preferred Stock for which the Company shall have failed to issue Common
Stock certificates hereunder, in cash. The redemption price shall be equal to
the product of (A) the average Per Share Market Value for the five (5) Trading
Days immediately preceding (1) the Conversion Date or (2) the date of payment in
full by the Company of such redemption price, whichever is greater, and (B) the
Conversion Ratio calculated on the Conversion Date. If the holder has requested
that the Company redeem shares of Preferred Stock pursuant to this Section and
the Company fails for any reason to pay the redemption price under (2) above
within seven days after such notice, the Company will pay interest on such
redemption price at a rate of 15% per annum, in cash to such Holder, accruing
from such seventh day until such redemption price and any accrued but unpaid
interest thereon is paid in full.
(d) (i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be the lowest of (a)
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the average Per Share Market Value for the five (5) Trading Days immediately
preceding the Original Issue Date (the "Initial Conversion Price"), (b) the
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average of the lowest Per Share Market Values for any five (5) consecutive
Trading Days during the sixty (60) Trading Days immediately following the
Original Issue Date or (c) 82.5% of the average Per Share Market Value for the
five (5) Trading Days immediately preceding the Conversion Date; provided that,
if (1) an Underlying Securities Registration Statement is not filed with the
Securities and Exchange Commission (the "Commission") on or prior to March 24,
1997, or (2) the Company fails to file with the Commission a request for
acceleration in accordance with Rule 12d1-2 promulgated under the
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Securities Exchange Act of 1934, as amended, within five (5) days of the date
that the Company is notified by the Commission that an Underlying Securities
Registration Statement will not be reviewed, or (3) if the Underlying Securities
Registration Statement is not declared effective by the Commission on or prior
to May 5, 1997, or (4) if such Underlying Securities Registration Statement is
filed with and declared effective by the Commission but thereafter ceases to be
effective at any time prior to the expiration of the "Effectiveness Period" (as
such term as defined in the Registration Rights Agreement), without being
succeeded within 10 Business Days by a subsequent Underlying Securities
Registration Statement filed with and declared effective by the Commission (any
such failure being referred to as an "Event," and for purposes of clauses (1)
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and (2) the date on which such Event occurs, or for purposes of clause (3)
the date on which such five (5) day period is exceeded, or for purposes of
clause (4) the date which such 10 Business Day-period is exceeded being referred
to as "Event Date"), the Initial Conversion Price (as adjusted) and the discount
comprising the Conversion Price (if the Conversion Price is not the Initial
Conversion Price) shall be decreased by 1% each month (i.e., 81 1/2% as of the
Event Date and 80 1/2% as of the one month anniversary of the Event Date) until
such time as the applicable Event is cured. If such Event is not cured by the
third month anniversary of the Event Date, commencing such third month
anniversary the Initial Conversion Price (as adjusted) and the discount
comprising the Conversion Price (if the Conversion Price is not the Initial
Conversion Price) shall be decreased each month by .5% (i.e., 80% as of the
third anniversary of the Event Date and 79 1/2% as of the fourth month
anniversary of the Event Date) and the Company shall pay to each holder in cash,
as liquidated damages and not a penalty, .5% of the aggregate stated value of
the Preferred Stock then held by such holder on each monthly anniversary of the
Event Date, until such time as the applicable Event is cured. If such Event is
not cured by the fifth month anniversary of the Event Date, the Company shall
pay to each holder in cash, as liquidated damages and not a penalty, 1% of the
aggregate stated value of the Preferred Stock then held by such holder until
such time as the applicable Event is cured. The adjustments contained in this
Section are intended to be cumulative and any decrease in the Conversion Price,
pursuant to the terms of this Section, shall be permanent. The provisions of
this Section are not exclusive and shall in no way limit the Company's
obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any shares of Preferred
Stock are outstanding, (a) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities payable in
shares of Common Stock (whether payable in shares of its Common Stock or of
capital stock of any class), (b) subdivide outstanding shares of Common Stock
into a larger number of shares, or (c) combine outstanding shares of Common
Stock into a smaller number of shares, the Initial Conversion Price (as
adjusted, if applicable) shall be designated in Section 5(d)(i) multiplied by a
fraction the numerator of which shall be the number of shares of Common Stock
outstanding before such event and the denominator of which shall be the number
of shares of Common Stock outstanding after such event. Any adjustment made
pursuant to this Section 5(c)(ii) shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision or combination.
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(iii) If the Company, at any time while any shares of Preferred
Stock are outstanding, shall issue rights or warrants to all holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the Per Share Market Value of Common Stock at the
record date in the immediately following sentence, the Initial Conversion Price
designated in Section 5(d)(i) (as adjusted if applicable) shall be multiplied by
a fraction, the denominator of which shall be the number of shares of Common
Stock (excluding treasury shares, if any, but including warrants or options that
would be included for purposes of determining earnings per share in accordance
with generally accepted accounting principles) outstanding on the date of
issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for subscription or purchase, and the numerator of which
shall be the number of shares of Common Stock (excluding treasury shares, if
any, but including warrants or options that would be included for purposes of
determining earnings per share in accordance with generally accepted accounting
principles) outstanding on the date of issuance of such rights or warrants plus
the number of shares which the aggregate offering price of the total number of
shares so offered would purchase at such Per Share Market Value. Such adjustment
shall be made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights or warrants. However, upon the
expiration of any right or warrant to purchase Common Stock the issuance of
which resulted in an adjustment in the Initial Conversion Price pursuant to this
Section 5(c)(iii), if any such right or warrant shall expire and shall not have
been exercised, the Initial Conversion Price shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Initial Conversion Price made pursuant to the provisions of
this Section 5 after the issuance of such rights or warrants) had the adjustment
of the Initial Conversion Price made upon the issuance of such rights or
warrants been made on the basis of offering for subscription or purchase only
that number of shares of Common Stock actually purchased upon the exercise of
such rights or warrants actually exercised.
(iv) If the Company, at any time while shares of Preferred
Stock are outstanding, shall distribute to all holders of Common Stock (and not
to holders of Preferred Stock) evidences of its indebtedness or assets or rights
or warrants to subscribe for or purchase any security (excluding those referred
to in Sections 5(c)(ii) and (iii) above), then in each such case the Initial
Conversion Price at which each share of Preferred Stock
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shall thereafter be convertible shall be determined by multiplying the Initial
Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction the denominator of which shall be the Per Share Market Value of Common
Stock determined as of such record date, and the numerator of which shall be
such Per Share Market Value on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Board of Directors in good faith; provided, however, that in the event of a
-------- -------
distribution exceeding ten percent (10%) of the net assets of the Company, such
fair market value shall be determined by a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
---------
good faith by the holders of a majority in interest of the shares of Preferred
Stock then outstanding; and provided, further, that the Company, after receipt
-------- -------
of the determination by such Appraiser shall have the right to select an
additional Appraiser, in good faith, in which case the fair market value shall
be equal to the average of the determinations by each such Appraiser. In either
case the adjustments shall be described in a statement provided to the holders
of Preferred Stock of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
(v) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Initial Conversion Price is adjusted pursuant
to Section 5(c)(ii),(iii) or (iv), the Company shall instruct the Transfer Agent
to promptly mail to each holder of Preferred Stock, a notice setting forth the
Initial Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
(vii) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person pursuant to
which the Company will not be the surviving entity, the sale or transfer of all
or substantially all of the assets of the Company or any compulsory share
exchange pursuant to which the Common Stock is converted into other securities,
cash or property, the holders of the Preferred Stock then outstanding shall have
the right thereafter to, at their option, (A) convert such shares only into the
shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the holders of the
Preferred Stock shall be entitled upon such event to receive such amount of
securities, cash or property as the shares of the Common Stock of the Company
into which such shares of Preferred Stock could have been converted immediately
prior to such reclassification, consolidation, merger, sale, transfer or share
exchange would have been entitled or (B) require the Company to redeem, from
funds legally available therefor at the time of such redemption, its shares of
Preferred Stock at a price per share equal to the product of (i) the
-10-
<PAGE>
average Per Share Market Value for the five (5) Trading Days immediately
preceding (1) the effective date or the date of the closing of such transaction,
as the case may be, of the reclassification, consolidation, merger, sale,
transfer or share exchange the triggering such redemption right or (2) the date
of payment in full by the Company of the redemption price hereunder, whichever
is greater, and (ii) the Conversion Ratio calculated on the date of the closing
of the reclassification, consolidation, merger, sale, transfer or share
exchange, as the case may be, triggering such redemption right. The entire
redemption price shall be paid in cash, and the terms of payment of such
redemption price shall be subject to the provisions set forth in Section 6(c).
The terms of any such consolidation, merger, sale, transfer or share exchange
shall include such terms so as to continue to give to the holder of Preferred
Stock the right to receive the securities, cash or property set forth in this
Section 5(c)(vii) upon any conversion or redemption following such
consolidation, merger, sale, transfer or share exchange. This provision shall
similarly apply to successive reclassifications, consolidations, mergers, sales,
transfers or share exchanges. Notwithstanding the foregoing, if upon the
effectiveness of any business combination to which the Company is a party and
from which the Company is not the surviving entity, if (i) the holders of the
Common Stock immediately prior to the effectiveness of such business combination
beneficially own (as determined under Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), in the
aggregate, 66-2/3% or more of the voting power of such surviving entity and (ii)
no Person or group (as described in Rule 13d-5(d) promulgated under the Exchange
Act) who was not a holder of the Common Stock immediately prior to such business
combination beneficially owns in excess of 16-2/3% of the voting power of such
surviving entity, then the holders of the Preferred Stock shall only be entitled
to elect the conversion set forth in (A) above.
(viii) If:
A. the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than a
subdivision of the outstanding shares of Common
Stock); or
B. the Company shall declare a special nonrecurring
cash dividend on or authorize a repurchase or
redemption of more than 10,000 shares of its then
outstanding Common Stock, other than a repurchase
or redemption of the Common Stock of an employee
upon termination of employment with the Company
for any reason; or
C. the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to
subscribe for or purchase any shares of capital
stock of any class or of any rights; or
-11-
<PAGE>
D. the approval of any stockholders of the Company
shall be required in connection with any
reclassification of the Common Stock (other than a
subdivision or combination of then outstanding
shares of Common Stock), any consolidation or
merger to which the Company is a party, any sale
or transfer of all or substantially all of the
assets of the Company, or any compulsory share
exchange whereby the Common Stock is converted
into other securities, cash or property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up
of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Preferred Stock, and shall cause to be mailed to
the holders of Preferred Stock at their last addresses as shall appear upon the
stock books of the Company, at least 30 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger, sale, transfer,
share exchange, dissolution, liquidation or winding-up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding-up; provided, however, that the failure to mail such notice or any
-------- -------
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
(e) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Preferred Stock and payment of dividends on
Preferred Stock, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the holders of
Preferred Stock, such number of shares of Common Stock as shall be issuable upon
the conversion of all outstanding shares of Preferred Stock and payment of
dividends hereunder. The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly and validly authorized, issued
and fully paid and nonassessable.
(f) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash
-12-
<PAGE>
payment in respect of any final fraction of a share based on the Per Share
Market Value at such time. If the Company elects not to, or is unable to, make
such a cash payment, the holder of a share of Preferred Stock shall be entitled
to receive, in lieu of the final fraction of a share, one whole share of Common
Stock.
(g) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the holder of such shares of Preferred
Stock so converted.
(h) Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
undesignated preferred stock.
(i) Any and all notices or other communications or deliveries to be
provided by a holder of Preferred Stock hereunder, including, without
limitation, any Holder Conversion Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
the attention of the Chief Financial Officer of the Company at the facsimile
telephone number or address of the principal place of business of the Company,
and if applicable to the Transfer Agent, at the address set forth on the Book
Entry Transfer Agent Agreement. Any and all notices or other communications or
deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized overnight
courier service or sent by certified or registered mail, postage prepaid,
addressed to the holder of Preferred Stock at the facsimile telephone number or
address of such holder appearing on the books of the Company, or if no such
facsimile telephone number or address appears, at the principal place of
business of the holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if delivered via facsimile at the facsimile telephone number
specified in the Purchase Agreement prior to 4:30 p.m. (Eastern Standard Time)
on a Trading Day, (ii) the Trading Day after the date of transmission, if
delivered via facsimile at the facsimile telephone number specified in the
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 Trading
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.
-13-
<PAGE>
Section 6. Redemptions.
-----------
(a)(i) The Company shall have the right, exercisable at any time upon
20 Trading Days notice to the holders of the Preferred Stock (the "Optional
--------
Redemption Notice"), to redeem, from funds legally available therefor at the
- -----------------
time of such redemption, all or any portion of the shares of Preferred Stock
which have not been previously converted or redeemed at a price per share (the
"Optional Redemption Price") equal to the product of (i) the average Per Share
-------------------------
Market Value for the five Trading Days immediately preceding (1) the 20th
Trading Day after the date of the Optional Redemption Notice or (2) the date of
payment in full by the Company of the Optional Redemption Price, whichever is
greater, and (ii) the Conversion Ratio calculated on the 20th Trading Day after
the Optional Redemption Notice. The entire Optional Redemption Price shall be
paid in cash.
(ii) The holders of Preferred Stock shall have the right to
continue to convert shares of Preferred Stock hereunder (and the Company shall
honor such conversions) at any time from the date of the Optional Redemption
Notice through the 15th Trading Day thereafter.
(iii) On the 16th Trading Day after the date of the Optional
Redemption Notice, each holder of Preferred Stock shall deliver to the Transfer
Agent the shares of Preferred Stock owned by it and subject to the Optional
Redemption Notice that have not been previously tendered for conversion and the
Company shall deliver to the Transfer Agent in escrow for the benefit of each
such holder a sum (the "Escrowed Amount") equal to the product of (i) the
---------------
average Per Share Market Value for the five (5) Trading Days immediately
preceding the 15th Trading Day after the date of the Optional Redemption Notice
and (ii) the Conversion Ratio calculated on the 15th Trading Day after the
Optional Redemption Notice, multiplied by the number of shares of Preferred
Stock tendered by or on behalf of such holder for redemption in accordance with
the provisions hereof.
(iv) On the 20th Trading Day after the date of the Optional
Redemption Notice the Transfer Agent shall pay to the each holder the Escrowed
Amount applicable to the shares of Preferred Stock which were tendered by or on
behalf such holder for redemption in accordance with the provisions hereof and
the Company shall pay to such holder the Optional Redemption Price multiplied by
the number of shares of Preferred Stock subject to the redemption provisions
hereof, minus the Escrowed Amount.
(b) On the third year anniversary of the Original Issue Date (the
"Mandatory Redemption Date"), the Company shall redeem, from funds legally
- --------------------------
available therefor at the time of such redemption, all shares of Preferred Stock
which have not previously been converted or redeemed at a price per share (the
"Mandatory Redemption Price") equal to the product of (i) the average Per Share
- ---------------------------
Market Value for the five (5) Trading Days immediately preceding (1) the
Mandatory Redemption Date or (2) the date of payment in full by the Company of
the Mandatory
-14-
<PAGE>
Redemption Price, whichever is greater, and (ii) the Conversion Ratio calculated
on the Mandatory Redemption Date. The entire Mandatory Redemption Price shall
be paid in cash.
(c) If the Optional Redemption Price shall not be paid in full within
three Trading Days of the 20th Trading Day after the date of the Optional
Redemption Notice, or the Mandatory Redemption Price shall not be paid in full
within three Trading Days of the Mandatory Redemption Date, the Company shall
pay as liquidated damages and not as a penalty the sum of $7,500 per day in cash
until the Optional Redemption Price or Mandatory Redemption Price, as the case
may be, together with all such liquidated damages, is paid in full. In
addition, if the Company shall have failed to pay any portion of the Optional
Redemption Price or Mandatory Redemption Price, as the case may be, within the
applicable three Trading Day period set forth above, then any holder of
Preferred Stock that was subject to such redemption may demand that the Company
(i) convert all or any portion of the shares of its Preferred Stock for which
the Optional Redemption Price or Mandatory Redemption Price, as the case may be,
shall not have been paid (the "Unpaid Portion") at a Conversion Price calculated
--------------
as at the date of the Optional Redemption Notice (in the case of optional
redemptions) or the Mandatory Redemption Date (in the case of a mandatory
redemption), as the case may be, or the date of such conversion, whichever is
lower, or (ii) promptly issue to such holder new certificates representing
shares of Preferred Stock in a number equal to the Unpaid Portion.
(b) Notwithstanding anything to the contrary contained herein, the
Company may not deliver an Optional Redemption Notice and may not pay the
Mandatory Redemption Price unless it has received (and furnished to the each
holder evidence thereof reasonably satisfactory to it of) prior written consent
of BNY to pay the redemption amounts contemplated by this Section free from the
subordination provisions of Section 8 hereof.
Section 7. Definitions. For the purposes hereof, the following terms
-----------
shall have the following meanings:
"BNY" means BNY Financial Corporation, 1290 Avenue of the Americas,
---
New York, New York 10104.
"BNY Bank Obligations" means the borrowings and interest due thereon
--------------------
(including, without limitation, any interest accruing after the commencement of
any case, proceeding or other action relating to the liquidation, dissolution,
assignment for the benefit of creditors, receivership, arrangement, bankruptcy,
insolvency or reorganization of the Company regardless of whether such interest
is allowable, payable or accruable to BNY in such case, proceeding or other
action) under the Receivables Agreement, as the same may from time to time be
amended, supplemented, otherwise modified, replaced or refinanced.
"Business Day" means any day of the year on which commercial banks are
------------
not required or authorized to be closed in New York City.
-15-
<PAGE>
"Common Stock" means shares now or hereafter authorized of the class
------------
of Common Stock, par value $.001 per share, of the Company, stock of any other
class into which such shares may hereafter be reclassified or changed and any
other equity securities of the Company hereafter designated as Common Stock.
"Conversion Ratio" means, at any time, the quotient obtained by
----------------
dividing the Stated Value plus accrued but unpaid dividends, but only to the
extent not paid in shares of Common Stock pursuant to the terms hereof, by the
Conversion Price at such time.
"Debentures" means the 5% Convertible Debentures delivered by the
----------
Company pursuant to the Purchase Agreement.
"Junior Securities" means the Common Stock and all other equity
-----------------
securities of the Company.
"Original Issue Date" shall mean the date of the first issuance of any
-------------------
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing
----------------------
bid price per share of the Common Stock on such date on the Nasdaq National
Market or other stock exchange on which the Common Stock is then listed, as
reported on Bloomberg, L.P. or if there is no such bid price on such date, then
the last closing bid price on such exchange on the date nearest preceding such
date, as reported on Bloomberg, L.P., or (b) if the Common Stock is not listed
on the Nasdaq National Market or any stock exchange, the closing bid price for a
share of Common Stock in the Nasdaq SmallCap Market, as reported on Bloomberg,
L.P. (or similar organization or agency succeeding to its functions of reporting
prices), or (c) if the Common Stock is no longer reported on Bloomberg, L.P. (or
similar organization or agency succeeding to its functions of reporting prices),
then the average of the "Pink Sheet" quotes for the relevant conversion period
as determined by the Holder, or (d) if the Common Stock is no longer publicly
traded, the fair market value of a share of Common Stock as determined by an
Appraiser selected in good faith by the holders of a majority of principal
amount of outstanding Debentures; provided, however, that the Company, after
-------- -------
receipt of the determination by such Appraiser, shall have the right to select
an additional Appraiser, in which case, the fair market value shall be equal to
the average of the determinations by each such Appraiser.
"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.
"Purchase Agreement" means the Convertible Debenture Purchase
------------------
Agreement, dated as of January 28, 1997, between the Company and the original
holders of the Preferred
-16-
<PAGE>
Stock, as superseded by the Amended and Restated Convertible Debenture and
Convertible Preferred Stock Purchase Agreement, dated as of March 18, 1997.
"Receivables Agreement" means the Accounts Receivable Management and
---------------------
Security Agreement, dated as of July 31, 1995, among the Company and BNY.
"Trading Day" means (a) a day on which the Common Stock is traded on
-----------
the Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the over-the-
counter market, as reported by the Nasdaq Stock Market, or (c) if the Common
Stock is not listed on the American Stock Exchange, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices).
"Underlying Shares" means the number of shares of Common Stock into
-----------------
which the Shares are convertible in accordance with the terms hereof and the
Purchase Agreement.
Section 8. Subordination.
-------------
(a) The Preferred Stock is subordinated to full payment of all of the
Company's obligations under the BNY Bank Obligations. Except to the extent
otherwise specifically set forth in this Section, until such time as all BNY
Bank Obligations are indefeasibly paid to BNY, the Company shall not, directly
or indirectly, make any cash or other payment (except for the issuance and
delivery of shares of Common Stock in respect of conversions or payments of
dividends hereunder) that is due and owing on account of the Preferred Stock.
Cash payments contemplated by Sections 5(a)(ii), 5(c) and 5(d) hereof, to the
extent such payments do not exceed, in the aggregate, $500,000, may be made by
the Company to (and retained by) the holders of Preferred Stock as long as (i)
at the time any such payment is due under such Sections, the Bank has not given
notice to the Company of acceleration of the Company's obligations under the
Receivables Agreement or (ii) the making of such payment shall not cause (as
determined at the time such payment shall become due to the holders) the Company
to exceed the borrowing limitations set forth in Section 2 of the Receivables
Agreement, or cause an "Event of Default" (as defined under the Receivables
Agreement) under Section 18(a) of the Receivables Agreement. Cash payments
contemplated by Sections 5(a)(ii), 5(c) or 5(d) hereof, to the extent that such
payments, in the aggregate, exceed $500,000, may be made by the Company to (and
retained by) the holders of the Preferred Stock as long as (i) at the time any
such payment is due under such Sections, the Bank has not given notice to the
Company of acceleration of the Company's obligations under the Receivables
-17-
<PAGE>
Agreement, or (ii) at the time such payment becomes due the Company shall not be
in default of Sections 12(n), 12(o), 12(p), 12(q), 18(a), 18(i) or 18(j) of the
Receivables Agreement, or (iii) the making of such payment shall not cause (as
determined at the time such payment shall become due to the holders) an
Event of Default under such Receivables Agreement sections set forth in (ii)
immediately above or cause the Company to exceed the borrowing limitations set
forth in Section 2 of the Receivables Agreement. The subordination provided
hereunder shall in no way limit the ability of the holders of the Preferred
Stock to convert Debentures into shares of Common Stock and to receive payment
of dividends hereunder in shares of Common Stock, including after such time as
any Event of Default shall be declared under the Convertible Debentures.
(b) Should any payment, other than payments contemplated in Section
8(a) above, be received by the a holder of the Preferred Stock, such payment
shall be held in trust by such holder for the benefit of BNY and shall be
delivered forthwith to BNY for application to BNY Bank Obligations, in the form
received with any necessary endorsement or assignment.
RESOLVED FURTHER, that the Chief Executive Officer and Secretary of
the Company be, and they hereby are, authorized and directed to prepare,
execute, verify, and file with the Secretary of State of Delaware, a Certificate
of Designation in accordance with these resolutions and as required by law.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
-18-
<PAGE>
IN WITNESS WHEREOF, YES! Entertainment Corporation has caused its
corporate seal to be hereunto affixed and this certificate to be signed by
Donald D. Kingsborough, its Chief Executive Officer, and attested by Bruce
Bower, its Secretary, this 18th day of March, 1997.
YES! ENTERTAINMENT CORPORATION
By: /s/ Donald D. Kingsborough
------------------------------------------
Name: Donald D. Kingsborough
Title: Chief Executive Officer
Attest:
By: /s/ Bruce D. Bower
----------------------------------------------------
Name: Bruce D. Bower
Title: Executive Vice President,
General Counsel and Secretary
-19-
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registration Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series A Convertible Preferred Stock indicated below, into shares of Common
Stock, par value $.001 per share (the "Common Stock"), of YES! Entertainment
Corporation (the "Company") according to the conditions hereof, as of the date
written below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
______________________________________________________
Date to Effect Conversion
______________________________________________________
Number of shares of Preferred Stock to be Converted
______________________________________________________
Number of shares of Common Stock to be Issued
______________________________________________________
Applicable Conversion Price
______________________________________________________
Signature
______________________________________________________
Name:
______________________________________________________
Address:
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested hereby),
notify the converting holder by facsimile of the number of shares of Common
Stock outstanding on such date and the number of shares of Common Stock which
would be issuable to the holder if the conversion requested in this conversion
notice were effected in full, whereupon, if the Company determines that such
conversion would result in it owning in excess of 4.9% of the outstanding shares
of Common Stock on such date, the Company shall convert up to an amount equal to
4.9% of the outstanding shares of Common Stock and issue to the holder one or
more certificates representing shares of Preferred Stock which have not been
converted as a result of this provision.
<PAGE>
EXHIBIT B
YES! ENTERTAINMENT CORPORATION
NOTICE OF CONVERSION
AT THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of YES! Entertainment Corporation (the
"Company") hereby notifies the addressee hereof that the Company hereby elects
to exercise its right to force the conversion of the shares of Series A
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.001 per share (the "Common Stock"), of the Company according to the
conditions hereof, as of the date written below. No fee will be charged to the
holder for any conversion hereunder, except for such transfer taxes, if any,
which may be incurred by the Company if shares are to be issued in the name of a
person other than the person to whom this notice is addressed.
Conversion calculations:
______________________________________________________
Date to Effect Conversion
______________________________________________________
Number of shares of Preferred Stock to be Converted
______________________________________________________
Number of shares of Common Stock to be Issued
______________________________________________________
Number of shares of outstanding at the close of trading
on Conversion Date
______________________________________________________
Applicable Conversion Price
______________________________________________________
Signature
______________________________________________________
Name:
______________________________________________________
Address:
<PAGE>
EXHIBIT 4.2
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS AND IN
COMPLIANCE WITH THE TERMS AND CONDITIONS OF THE PURCHASE AGREEMENT.
THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND
CONVERSION SET FORTH IN AN AMENDED AND RESTATED CONVERTIBLE DEBENTURE AND
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, DATED AS OF MARCH 18, 1997,
BETWEEN THE COMPANY AND THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS
ON FILE AT THE PRINCIPAL OFFICE OF YES! ENTERTAINMENT CORPORATION.
No. [ ] $[ ]
YES! ENTERTAINMENT CORPORATION
5% CONVERTIBLE DEBENTURE DUE JANUARY 28, 2000
THIS DEBENTURE is one of a duly authorized issue of debentures of YES!
Entertainment Corporation, a corporation organized and existing under the laws
of Delaware and having a principal place of business at 3875 Hopyard Road, Suite
375, Pleasanton, California 94588 (the "Company"), designated as its 5%
Convertible Debentures, due January 28, 2000 (the "Debentures"), in an aggregate
principal amount of $1,566,667. This Debenture supersedes in its entirety the
Debenture of like tenor, issued by the Company to the Holder on January 28,
1997.
FOR VALUE RECEIVED, the Company promises to pay to [ ], or its
registered assigns (the "Holder"), the principal sum of [ ] ($[ ]), on
January 28, 2000 or such earlier date as Debentures are required to be repaid as
provided hereunder (the "Maturity Date") and to pay interest to the Holder on
the principal sum, at the rate of 5% per annum, payable upon conversion as
provided hereunder, or on the Maturity Date if not earlier converted. Interest
shall accrue daily commencing on the Original Issue Date (as defined in Section
6) until payment in full of the principal sum represented hereby, together with
all accrued and unpaid interest and other amounts which may become due
hereunder, has been made or duly provided for. Interest shall be calculated
on the basis
<PAGE>
of a 360-day year and for the actual number of days elapsed. Interest hereunder
will be paid to the person in whose name this Debenture (or one or more
predecessor Debentures) is registered on the records of the Company regarding
registration and transfers of the Debentures (the "Debenture Register") on the
Conversion Date (as defined in Section 4(b)) or the Maturity Date, as the case
may be; provided, however, that the Company's obligation to a transferee of this
-------- -------
Debenture arises only if such transfer, sale or other disposition is made in
accordance with the terms and conditions hereof and of the Convertible Debenture
Purchase Agreement, dated as of January 28, 1997, as amended and restated by the
Amended and Restated Purchase Agreement, dated as of March 18, 1997, and
effective as of January 28, 1997, as amended from time to time (collectively,
the "Purchase Agreement"), each executed by the original Holder. All overdue
amounts hereunder shall bear interest at the rate of 15% per annum from the day
of conversion hereunder or the Maturity Date or earlier date on which this
Debenture is accelerated through and including the date of payment. The
principal of, and interest on, this Debenture are payable in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, at the address of the Holder
last appearing on the Debenture Register, except that interest due hereunder
may, at the Company's option, be paid in shares of Common Stock (as defined in
Section 6) calculated based upon the average Per Share Market Value (as defined
in Section 6) for the five (5) Trading Days immediately preceding the Conversion
Date or Maturity Date, as the case may be; provided, however, that the Company
-------- -------
may not pay interest hereon in cash without the prior written consent of BNY (as
defined in Section 6) to such payment free from the subordination provisions of
Section 8 hereof. All amounts due hereunder other than interest shall be paid in
cash. Notwithstanding anything to the contrary contained herein, the Company may
not issue shares of Common Stock in payment of interest on the Debentures
(including, without limitation, pursuant to Section 4(b)) if: (i) the number of
shares of Common Stock at the time authorized, unissued and reserved for all
purposes, or held as treasury stock, is insufficient to pay such interest in
shares of Common Stock; (ii) the shares of Common Stock to be issued in respect
of such interest are not registered for resale pursuant to an effective
registration statement that names the recipient of such interest as a selling
stockholder thereunder; (iii) the shares of Common Stock to be issued in respect
of such interest are not listed on the Nasdaq National Market or Nasdaq SmallCap
Market and each other exchange or quotation system on which the Common Stock is
then listed for trading; or (iv) if the recipient of such interest is the
original Holder or an affiliate thereof, the issuance of such shares would
result in such recipient beneficially owning more than 4.9% of the issued and
outstanding shares of Common Stock; provided, however, if ten Business Days
-------- -------
shall have elapsed from the date that the Holder shall have declared an Event of
Default (as defined in Section 3) as having occurred, the provisions of this
clause (iv) shall be null and void, ab initio. In addition, any payment of
-- ------
interest hereunder in shares of Common Stock shall be subject to the provisions
of Section 4(a)(ii). A transfer of the right to receive principal and interest
under this Debenture shall be transferable only through an appropriate entry in
the Debenture Register as provided herein.
This Debenture is subject to the following additional provisions:
Section 1. The Debentures are issuable in denominations of One Hundred
----------
Thousand Dollars ($100,000) and integral multiples of Fifty Thousand Dollars
($50,000) in excess
-2-
<PAGE>
thereof. The Debentures are exchangeable for an equal aggregate principal
amount of Debentures of different authorized denominations, as requested by the
Holder surrendering the same but shall not be issuable in denominations of less
than integral multiplies of Fifty Thousand Dollars ($50,000). No service charge
will be made for such registration of transfer or exchange.
Section 2. This Debenture has been issued subject to certain investment
----------
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Securities Act of
1933, as amended (the "Act"), pursuant to an effective registration statement or
pursuant to an available exemption from the registration requirements under the
Act. Prior to due presentment to the Company for transfer of this Debenture,
the Company and any agent of the Company may treat the person in whose name this
Debenture is duly registered on the Debenture Register as the owner hereof for
the purpose of receiving payment as herein provided and for all other purposes,
whether or not this Debenture is overdue, and neither the Company nor any such
agent shall be affected by notice to the contrary.
Section 3. Events of Default.
---------- -----------------
"Event of Default," wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):
(a) any default in the payment of the principal of or interest on
this Debenture as and when the same shall become due and payable, either on
the Conversion Date or the Maturity Date, by acceleration or otherwise;
(b) the Company shall fail to timely observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any
breach of, this Debenture, the Purchase Agreement, the Book Entry Transfer
Agreement, dated as of March 18, 1997, effective as of January 28, 1997
(the "Transfer Agent Agreement"), between the Company, the original Holder
and the transfer agent of the Company (the "Transfer Agent"), the
Certificate of Designation of Series A Convertible Preferred Stock of the
Company (the "Series A Certificate of Designation") or the Registration
Rights Agreement, dated as of January 28, 1997, between the Company and the
original Holder, as amended and restated by the Amended and Restated
Registration Rights Agreement, dated as of March 18, 1997, effective as of
January 28, 1997, between the Company and the original Holder
(collectively, the "Registration Rights Agreement"), and such failure or
breach shall not have been remedied within five (5) Business Days after the
date on which notice of such failure or breach shall have been given or
such other cure period as may specifically be provided herein or in such
other agreements with respect to any particular covenant, agreement or
warranty;
(c) the Company or any of its subsidiaries shall commence a voluntary
case under the United States Bankruptcy Code as now or hereafter in effect
or any successor thereto (the
-3-
<PAGE>
"Bankruptcy Code"); or an involuntary case is commenced against the Company
under the Bankruptcy Code and the petition is not controverted within 30
days, or is not dismissed within 60 days, after commencement of such
involuntary case; or a "custodian" (as defined in the Bankruptcy Code) is
appointed for, or takes charge of, all or any substantial part of the
property of the Company or the Company commences any other proceeding under
any reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect relating to the Company or there is
commenced against the Company any such proceeding which remains undismissed
for a period of 60 days; or the Company is adjudicated insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or the Company suffers any appointment of any
custodian or the like for it or any substantial part of its property which
continues undischarged or unstayed for a period of 60 days; or the Company
makes a general assignment for the benefit of creditors; or the Company
shall call a meeting of its creditors with a view to arranging a
composition or adjustment of its debts; or the Company shall by any act or
failure to act indicate its consent to, approval of or acquiescence in any
of the foregoing; or any corporate or other action is taken by the Company
for the purpose of effecting any of the foregoing;
(d) the Company shall fail to pay any amount of principal or interest
on any mortgage, credit agreement or other facility, indenture or other
instrument under which there may be issued, or by which there may be
secured or evidenced, any indebtedness of the Company in an amount
exceeding one hundred thousand dollars ($100,000) (collectively,
"Indebtedness"), whether such Indebtedness now exists or shall hereafter be
created, when and as the same shall become due and payable, or the Company
shall fail to observe or perform any term, covenant or agreement contained
in any agreement or instrument evidencing or governing any of such
Indebtedness if the cure period for such term, covenant or agreement
contained in such agreement or instrument has run and the holder or holders
of such Indebtedness or a trustee on their behalf shall have the right to
cause such Indebtedness to become due prior to its stated maturity;
(e) the Company shall dispose of all or substantially all of its
assets in one or more transactions or shall be a party to any business
combination pursuant to which the Company shall not be the surviving
entity, except if, upon the effectiveness of such a business combination,
(i) the holders of the Common Stock immediately prior to such effectiveness
beneficially own (as determined under Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), in the
aggregate, 66 2/3% or more of the voting power of such surviving entity and
(ii) no Person or group (as described in Rule 13d-5(b) promulgated under
the Exchange Act) who was not a holder of the Common Stock immediately
prior to such business combination beneficially owns in excess of 16 2/3%
of the voting power of such surviving entity;
(f) the Company shall redeem or repurchase more than 10,000 of its
outstanding shares of Common Stock, other than a redemption or repurchase
of an employee's Common
-4-
<PAGE>
Stock upon termination of such employee's employment with the Company for
any reason and other than a redemption of shares of Series A Convertible
Preferred Stock issued under the Series A Certificate of Designation (the
"Series A Preferred") in accordance with the Series A Certificate of
Designation; or
(g) the entry of any judgments against the Company aggregating more
than $250,000 (except in connection with litigation specifically scheduled
in paragraph 3 of Schedule 3.1(g) to the Purchase Agreement).
If any Event of Default occurs and is continuing, and in every such case, then
so long as such Event of Default shall then be continuing, Holders of a majority
of the aggregate principal amount of Debentures then outstanding may, by notice
to the Company, declare the full outstanding principal amount of this Debenture,
together with all accrued but unpaid interest thereon and other amounts owing
hereunder, plus the "Adjustment Amount" (as defined in Section 6), through the
date of acceleration to be, whereupon the same shall become, immediately due and
payable without presentment, demand, protest or other notice of any kind, all of
which are waived by the Company, notwithstanding anything herein contained to
the contrary, and the Holder may immediately and without expiration of any grace
period enforce any and all of its rights and remedies hereunder and all other
remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder. No
such rescission or annulment shall affect any subsequent Event of Default or
impair any right consequent thereon.
Section 4. Conversion.
---------- ----------
(a) (i)This Debenture shall be convertible into shares of Common
Stock at the Conversion Ratio (as defined in Section 6) (subject to reduction
under Section 4(a)(ii) and Section 4(a)(iii) and to adjustment under Section
4(d)), at the option of the Holder in whole or in part at any time commencing on
the date hereof and prior to 7:30 p.m. (Eastern Standard Time) on the Maturity
Date. The Holder shall effect conversions by surrendering to the Transfer Agent
the Debentures (or such portions thereof) to be converted and to the Company and
the Transfer Agent deliver a conversion notice in the form attached hereto as
Exhibit A (the "Holder Conversion Notice"). Each Holder Conversion Notice shall
- ---------
specify the principal amount of Debentures to be converted and the date on which
such conversion is to be effected, which date may not be prior to the date the
Holder delivers such Holder Conversion Notice by facsimile (the "Holder
Conversion Date"). Subject to Sections 4(a)(ii) and 4(c), and, as to the
original Holder, subject to Section 4.8 of the Purchase Agreement, each Holder
Conversion Notice, once given, shall be irrevocable. If the Holder is
converting less than all of the principal amount represented by the Debenture(s)
tendered by the Holder with the Holder Conversion Notice, the Company shall
promptly deliver or cause to be delivered to the Holder a new Debenture for such
principal amount as has not been converted.
(ii) Certain Regulatory Approval. If on the Conversion Date
---------------------------
applicable to any conversion of any portion of the principal amount of this
Debenture (A) the Common Stock is listed for trading on the Nasdaq National
Market or, if the rules of the Nasdaq Stock Market are
-5-
<PAGE>
hereafter amended to extend Rule 4460(i) promulgated thereby (or any successor
or replacement provision thereof) to the Nasdaq SmallCap Market, the Nasdaq
SmallCap Market, (B) the Conversion Price (as defined in Section 4(d)(i)) then
in effect is such that the aggregate number of shares of Common Stock that would
then be issuable upon conversion of the entire outstanding principal amount of
Debentures and all outstanding shares of Series A Preferred, together with any
shares of Common Stock previously issued upon conversion of Debentures and
shares of Series A Preferred or in payment of interest or dividends, as the case
may be, thereunder in accordance herewith and the Series A Certificate of
Designation in shares of Common Stock, would equal or exceed 20% of the number
of shares of Common Stock outstanding on the Original Issue Date (the "Issuable
Maximum"), and (C) the Company has not previously obtained Shareholder Approval
(as defined below), then the Company shall issue to the converting Holder the
Issuable Maximum and, with respect to any shares of Common Stock that would be
issuable to such Holder in respect of the Conversion Notice at issue in excess
of the Issuable Maximum, the converting Holder shall have the option to require
the Company to (I) repay the balance of the principal amount of Debentures then
outstanding at a price equal to the product of (i) the average Per Share Market
Value for the five (5) Trading Days immediately preceding (1) the Conversion
Date or (2) the date of payment in full by the Company of such repayment price,
whichever is greater, and (ii) the Conversion Ratio calculated on the Conversion
Date or (II) as promptly as possible, but in no event later than 60 days after
such Conversion Date, convene a meeting of the holders of the Common Stock and
obtain the Shareholder Approval. If the Company fails for any reason to pay the
repayment price pursuant to this subsection within seven days after the
Conversion Date or fails to deliver good funds to the Transfer Agent for such
purpose, the Company will pay to the converting Holder interest on such
repayment price at a rate of 15% per annum accruing from the Conversion Date
until the repayment price plus any accrued but unpaid interest thereon is paid
in full. If the converting Holder shall have elected to require the Company to
obtain Shareholder Approval and such approval is not obtained by the Company
within 60 days, then the Company shall repay the principal amount of the
Debentures in excess of the Issuable Maximum as set forth in clause (I) above
and, in such case the interest contemplated by the immediately preceding
sentence shall be deemed to accrue from the Conversion Date. The entire
repayment price, including interest thereon, and any interest accrued because of
failure by the Company to obtain Shareholder Approval, shall be paid in cash by
wire transfer of same day funds. "Shareholder Approval" means the approval by a
majority of the total votes cast on the proposal, in person or by proxy, at a
meeting of the shareholders of the Company held in accordance with the Company's
articles of incorporation and by-laws, of the issuance by the Company of shares
of Common Stock exceeding the Issuable Maximum as a consequence of the
conversion of Debentures into Common Stock at a price less than the greater of
the book or market value on the Original Issue Date as and to the extent
required pursuant to Rule 4460(i) of the Nasdaq Stock Market (or any successor
or replacement provision thereof).
(iii) If on any Conversion Date applicable to a conversion under
Section 4(a) or 5(b) or a repurchase pursuant to Section 5 the average Per Share
Market Value for the five (5) Trading Days immediately preceding such Conversion
Date exceeds the Initial Conversion Price (defined in Section 4(d)(i) below) by
more than 50%, the Conversion Price otherwise applicable to such conversion
shall be increased by an amount equal to 50% of the difference between (A) the
average
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<PAGE>
Per Share Market Value for the five (5) Trading Days immediately preceding such
Conversion Date, less (B) 150% of the Initial Conversion Price.
(b) At any time on or after the first anniversary of the Original
Issue Date, this Debenture shall be convertible in whole or in part and from
time to time at the option of the Company into shares of Common Stock at the
Conversion Ratio; provided, however, that the Company is not permitted to
deliver or cause to be delivered a Company Conversion Notice (as defined below)
(i) within 10 days of issuing any press release or other public statement
relating to such conversion, (ii) prior to the 270th day after the date the
Commission shall have declared effective a Registration Statement (as defined in
the Registration Rights Agreement) (an "Underlying Securities Registration
Statement"), (iii) at any time that an Underlying Securities Registration
Statement is not then effective, (iv) if the shares of Common Stock issuable
upon such conversion are not then listed for trading on the Nasdaq National
Market or Nasdaq SmallCap Market, (v) if the Company shall not have duly
reserved for issuance to the Holder a sufficient number of shares of Common
Stock to issue upon such conversion, (vi) such conversion does not contravene
Section 5(a)(ii) or (vii) at any time when while there are shares of Series A
Preferred outstanding. The Company shall effect such conversion by delivering or
causing to be delivered to the Holder a written notice in the form attached
hereto as Exhibit B (the "Company Conversion Notice"), which Company Conversion
---------
Notice, once given, shall be irrevocable. Each Company Conversion Notice shall
specify the principal amount (and the amount of accrued but unpaid interest
thereon) of Debentures required by the Company to be converted. The Company
shall deliver or cause to be delivered such Company Conversion Notice at least
two (2) Trading Days before the date of conversion indicated in the Company
Conversion Notice (such date is hereinafter referred to as the "Company
Conversion Date"). Any such conversion shall be effected on a pro rata basis
among all holders of Debentures. Upon its receipt of a Company Conversion
Notice, the Holder shall surrender the Debentures representing the principal
amount subject to such Company Conversion Notice at the office of the Company or
the Transfer Agent for the Debentures or Common Stock. The Company shall, upon
conversion of the principal amount of Debentures subject to such Company
Conversion Notice deliver or cause to be delivered to the appropriate tendering
Holder, a replacement Debenture for such principal amount of Debentures as have
not been converted. Each of a Holder Conversion Notice and a Company Conversion
Notice is sometimes referred to herein as a "Conversion Notice," and each of a
"Holder Conversion Date" and a "Company Conversion Date" is sometimes referred
to herein as a "Conversion Date."
(c) Not later than three (3) Trading Days after the Conversion Date,
the Company will cause the Transfer Agent to deliver to the Holder (i) a
certificate or certificates, representing the number of shares of Common Stock
being acquired upon the conversion of Debentures (subject to reduction pursuant
to Section 4(a)(ii) and (iii)), (ii) Debentures in a principal amount equal to
the principal amount of Debentures tendered in connection with a conversion
hereunder but not converted; (iii) a bank check in the amount of all accrued and
unpaid interest in respect of the Debentures tendered for conversion (if the
Company has elected (or is required pursuant to the terms hereof) to pay accrued
interest in cash) and (iv) if the Company has elected (and is permitted pursuant
to the terms hereof) to pay accrued interest in shares of Common Stock,
certificates representing
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<PAGE>
such number of shares of Common Stock as equals such interest divided by the
average Per Share Market Value for the five (5) Trading Days immediately
preceding the Conversion Date. Any certificates representing shares of Common
Stock to be delivered upon a conversion hereunder shall be free of restrictive
legends and trading restrictions, except those contemplated by Section 4.1(b) of
the Purchase Agreement. The Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of any Debentures
and the counting of Trading Days for purposes of any consequences under this
Section for a failure to deliver such certificates under this Section shall not
begin until Debentures representing the principal amount to be converted are
either delivered for conversion to the Transfer Agent for the Common Stock, or
until the Holder notifies the Company that such Debentures have been lost,
stolen or destroyed and provides a bond reasonably satisfactory to the Company
(or other adequate security reasonably acceptable to the Company) to indemnify
the Company from any loss incurred by it in connection therewith, provided that,
if the Company or the Transfer Agent receives the original Debentures being
converted on or prior to the time specified for the delivery of such shares of
Common Stock or on or prior to the time at which liquidated damages begin to
accrue, the date of the Holder Conversion Notice shall be deemed to be the date
of delivery of such original Debentures. The Company shall, upon request of the
Holder, use its best efforts to deliver any certificate or certificates required
to be delivered by the Company under this Section 4(c) electronically through
the Depository Trust Corporation or another established clearing corporation
performing similar functions. If such certificate or certificates are not
delivered by the date required under this Section 4(c), the Holder shall be
entitled by written notice to the Company and the Transfer Agent at any time on
or before its receipt of such certificate or certificates, to rescind such
conversion, in which event the Company shall immediately instruct the Transfer
Agent to return the Debentures representing the principal amount subject to such
conversion that were tendered for conversion. The Company shall pay to the
converting Holder as liquidated damages and not as penalty, $3,000 for each day
that the Company fails to deliver such certificate or certificates pursuant to
this Section commencing the fifth (5th) Trading Day after the applicable
Conversion Date. In addition, if the Company fails to deliver to the holder such
certificate or certificates pursuant to this Section prior to the 15th day after
the Conversion Date, the Company shall, at the Holder's option, (i) repay the
principal amount of Debentures then held by such Holder, as requested by such
Holder, in an amount equal to the repayment price contemplated below, and (ii)
pay all accrued but unpaid interest on account of the Debentures for which the
Company shall have failed to issue Common Stock certificates hereunder, in cash.
The repayment price shall be equal to the product of (A) the average Per Share
Market Value for the five Trading Days immediately preceding (1) the Conversion
Date or (2) the date of payment in full by the Company of such repayment price,
whichever is greater, and (B) the Conversion Ratio calculated on the Conversion
Date. If the Holder has requested that the Company redeem Debentures pursuant to
this Section and the Company fails for any reason to pay the repayment price
under (2) above within seven days after such notice, the Company will pay
interest on such repayment price at a rate of 15% per annum, in cash to such
Holder, accruing from such seventh day until such repayment price and any
accrued but unpaid interest thereon is paid in full.
(d) (i) The conversion price (the "Conversion Price") in effect on any
Conversion Date shall be the lesser of (A) the average Per Share Market Value
for the five (5)
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<PAGE>
Trading Days immediately preceding the Original Issue Date (the "Initial
Conversion Price"), (B) the average of the lowest Per Share Market Values for
any five consecutive (5) Trading Days during the sixty (60) days immediately
following the Original Issue Date or (C) 82 1/2% of the average Per Share Market
Value for the five (5) Trading Days immediately preceding the Conversion Date;
provided that, if (a) an Underlying Securities Registration Statement is not
filed with the Securities and Exchange Commission (the "Commission") on or prior
to March 24, 1997, or (b) the Company fails to file with the Commission a
request for acceleration in accordance with Rule 12d1-2 promulgated under the
Securities Exchange Act of 1934, as amended, within five (5) days of the date
that the Company is notified by the Commission that an Underlying Securities
Registration Statement will not be reviewed, or (c) if the Underlying Securities
Registration Statement is not declared effective by the Commission on or prior
to May 5, 1997, or (d) if such Underlying Securities Registration Statement is
filed with and declared effective by the Commission but thereafter ceases to be
effective at any time prior to the expiration of the "Effectiveness Period" (as
such term as defined in the Registration Rights Agreement), without being
succeeded within 10 Business Days by a subsequent Underlying Securities
Registration Statement filed with and declared effective by the Commission (any
such failure being referred to as an "Event," and for purposes of clauses (A)
and (B) the date on which such Event occurs, or for purposes of clause (C) the
date on which such five (5) day period is exceeded, or for purposes of clause
(D) the date which such 10 Business Day-period is exceeded being referred to as
"Event Date"), the Initial Conversion Price (as adjusted) and the discount
comprising the Conversion Price (if different from the Initial Conversion Price)
shall be decreased by 1% each month (i.e., 81 1/2% as of the Event Date and 80
1/2% as of the one month anniversary of the Event Date) until such time as the
applicable Event is cured. If such Event is not cured by the third month
anniversary of the Event Date, commencing such third month anniversary the
Initial Conversion Price (as adjusted) and the discount comprising the
Conversion Price (if different from the Initial Conversion Price) shall be
decreased each month by .5% (i.e., 80% as of the third anniversary of the Event
Date and 79 1/2% as of the fourth month anniversary of the Event Date) and the
Company shall pay to the Holders in cash, as liquidated damages and not a
penalty, .5% of the aggregate principal amount of the Debentures outstanding on
each monthly anniversary of the Event Date (each Holder being entitled to
receive such portion of such amount as equals its pro rata portion of the
principal amount of Debentures then outstanding), until such time as the
applicable Event is cured. If such Event is not cured by the fifth month
anniversary of the Event Date, the Company shall pay to the Holders in cash, as
liquidated damages and not a penalty, 1% of the aggregate principal amount of
the Debentures outstanding (each Holder being entitled to receive such portion
of such amount as equals its pro rata portion of the principal amount of
Debentures then outstanding) until such time as the applicable Event is cured.
The adjustments contained in this Section are intended to be cumulative and any
decrease in the Conversion Price shall be permanent. The provisions of this
Section are not exclusive and shall in no way limit the Company's obligations
under the Registration Rights Agreement.
(ii) If the Company, at any time while any Debentures are outstanding,
(a) shall pay a stock dividend or otherwise make a distribution or distributions
on shares of its Junior Securities (as defined in Section 6) payable in shares
of its capital stock (whether payable in shares of its Common Stock or of
capital stock of any class), (b) subdivide outstanding shares of Common
-9-
<PAGE>
Stock into a larger number of shares, or (c) combine outstanding shares of
Common Stock into a smaller number of shares, the Initial Conversion Price (as
adjusted, if applicable) shall be multiplied by a fraction the numerator of
which shall be the number of shares of Common Stock of the Company outstanding
before such event and the denominator of which shall be the number of shares of
Common Stock outstanding after such event. Any adjustment made pursuant to this
Section 4(d)(ii) shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision or combination.
(iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights or warrants to all holders of Common Stock
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the average Per Share Market Value at the record date in the
immediately following sentence, the Initial Conversion Price designated in
Section 4(d)(i) (as adjusted, if applicable) shall be multiplied by a fraction,
the denominator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any, but including warrants or options that would
be included for purposes of determining earnings per share in accordance with
generally accepted accounting principals) outstanding on the date of issuance of
such rights or warrants plus the number of additional shares of Common Stock
offered for subscription or purchase, and the numerator of which shall be the
number of shares of Common Stock (excluding treasury shares, if any, but
including warrants or options that would be included for purposes of determining
earnings per share in accordance with generally accepted accounting principals)
outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares so
offered would purchase at such average Per Share Market Value. Such adjustment
shall be made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights or warrants. However, upon the
expiration of any right or warrant to purchase Common Stock the issuance of
which resulted in an adjustment in the Initial Conversion Price pursuant to this
Section 4(d)(iii), if any such right or warrant shall expire and shall not have
been exercised, the Initial Conversion Price shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Initial Conversion Price made pursuant to the provisions of
this Section 4 after the issuance of such rights or warrants) had the adjustment
of the Initial Conversion Price made upon the issuance of such rights or
warrants been made on the basis of offering for subscription or purchase only
that number of shares of Common Stock actually purchased upon the exercise of
such rights or warrants actually exercised.
(iv) If the Company, at any time while Debentures are outstanding,
shall distribute to all holders of Common Stock (and not to holders of
Debentures) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Section
4(d)(iii) above), then in each such case the Initial Conversion Price at which
each Debenture shall thereafter be convertible shall be determined by
multiplying the Initial Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction the denominator of which shall be the
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<PAGE>
Per Share Market Value determined as of such record date, and the numerator of
which shall be such average Per Share Market Value on such record date less the
then fair market value at such record date of the portion of such assets or
evidence of indebtedness so distributed applicable to one outstanding share of
Common Stock as determined by the Board of Directors in good faith; provided,
--------
however, that in the event of a distribution exceeding ten percent (10%) of the
- -------
assets of the Company, such fair market value shall be determined by a
nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the holders of a majority of the
principal amount of the Debentures then outstanding; and provided, further, that
-------- -------
the Company, after receipt of the determination by such Appraiser shall have the
right to select an additional Appraiser, in which case the fair market value
shall be equal to the average of the determinations by each such Appraiser. In
either case the adjustments shall be described in a statement provided to the
Holder and all other holders of Debentures of the portion of assets or evidences
of indebtedness so distributed or such subscription rights applicable to one
share of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above.
(v) All calculations under this Section 4 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Initial Conversion Price is adjusted pursuant to
Section 4(d)(ii),(iii), (iv) or (v), the Company shall instruct the Transfer
Agent to promptly mail to the Holder, a notice setting forth the Initial
Conversion Price after such adjustment and setting forth a brief statement of
the facts requiring such adjustment.
(vii) In case of any reclassification of the Common Stock or any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property, the Holder shall have the right thereafter to
convert the principal amount of this Debenture into the shares of stock and
other securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification or compulsory share exchange and
the Holder shall be entitled upon such event to receive such amount of
securities or property as the shares of the Common Stock into which such
Debentures could have been converted immediately prior to such event.
(viii) If:
(A) the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than a
subdivision of the outstanding shares of Common Stock); or
(B) the Company shall declare a special nonrecurring cash
dividend on or authorize a repurchase or redemption of
more
-11-
<PAGE>
than 10,000 shares of its then outstanding Common
Stock other than a repurchase or redemption of the Common
Stock of an employee upon termination of employment with
the Company for any reason; or
(C) the Company shall authorize the granting to all holders of
the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any
rights; or
(D) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the
Common Stock (other than a subdivision or combination of
the outstanding shares of Common Stock), any consolidation
or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the
Company, or any compulsory share exchange whereby the
Common Stock is to be converted into other securities, cash
or property; or
(E) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding-up of the affairs of
the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Debentures, and shall cause to be mailed to the
Holder at its last address as it shall appear upon the Debenture Register, at
least 30 calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as of which the holders of
Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined, or (y) the date on which
such reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding-up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding-up; provided,
--------
however, that the failure to mail such notice or any defect therein or in the
- -------
mailing thereof shall not affect the validity of the corporate action required
to be specified in such notice.
(e) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Debentures and payment of interest on Debentures,
each as herein provided, free from preemptive rights or any other actual
contingent purchase rights of persons other than the Holder, such number of
shares of Common Stock as shall be issuable upon the conversion of the aggregate
principal
-12-
<PAGE>
amount of all outstanding Debentures and payment of interest hereunder. The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid, and
nonassessable.
(f) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final fraction
of a share based on the Per Share Market Value at such time. If the Company
elects not to, or is unable to, make such a cash payment, the Holder shall be
entitled to receive, in lieu of the final fraction of a share, one whole share
of Common Stock.
(g) The issuance of certificates for shares of Common Stock upon
conversion of Debentures shall be made without charge to the Holder for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
than that of the Holder.
(h) Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Conversion
Notice, shall be in writing and delivered personally, by facsimile, sent by a
nationally recognized overnight courier service or sent by certified or
registered mail, postage prepaid, addressed to the attention of the Chief
Financial Officer of the Company at the facsimile telephone number or address of
the principal place of business of the Company and if applicable to the Transfer
Agent, at the address set forth on the Book Entry Transfer Agent Agreement. Any
and all notices or other communications or deliveries to be provided by the
Company hereunder shall be in writing and delivered personally, by facsimile,
sent by a nationally recognized overnight courier service or sent by certified
or registered mail, postage prepaid, addressed to the Holder at the facsimile
telephone number or address of the Holder appearing on the books of the Company,
or if no such facsimile telephone number or address appears, at the principal
place of business of the holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if delivered via facsimile at the facsimile telephone
number specified in the Purchase Agreement prior to 4:30 p.m. (Eastern Standard
Time) on a Trading Day, (ii) the Trading Day after the date of transmission, if
delivered via facsimile at the facsimile telephone number specified in the
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 Trading
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.
Section 5. Prepayment by the Company.
---------- -------------------------
(a)(i) The Company shall have the right, exercisable at any time after
all shares of Series A Preferred have been converted or redeemed upon 20 Trading
Days notice to the Holders (the "Optional Prepayment Notice"), to prepay all or
any portion of the principal amount of the Debentures then outstanding at a
price (the "Optional Prepayment Price") equal to the product of (i)
-13-
<PAGE>
the average Per Share Market Value for the five Trading Days immediately
preceding (1) the 20th Trading Day after the date of the Optional Prepayment
Notice or (2) the date of payment in full by the Company of the Optional
Prepayment Price, whichever is greater, and (ii) the Conversion Ratio calculated
on the 20th Trading Day after the Optional Prepayment Notice. The entire
Optional Prepayment Price shall be paid in cash.
(ii) The Holder shall have the right to continue to convert
Debentures hereunder (and the Company shall honor such conversions) at any time
from the date of the Optional Prepayment Notice through the 15th Trading Day
thereafter.
(iii) On the 16th Trading Day after the date of the Optional
Prepayment Notice, the Holder shall deliver to the Transfer Agent the Debentures
subject to the Optional Prepayment Notice that have not been previously tendered
for conversion and the Company shall deliver to the Transfer Agent in escrow for
the benefit of the Holder a sum (the "Escrowed Amount") equal to the product of
(i) the average Per Share Market Value for the five Trading Days immediately
preceding the 15th Trading Day after the date of the Optional Prepayment Notice
and (ii) the Conversion Ratio calculated on the 15th Trading Day after the
Optional Prepayment Notice.
(iv) On the 20th Trading Day after the date of the Optional
Prepayment Notice the Transfer Agent shall pay to the Holder the Escrowed Amount
and the Company shall pay to the Holder the Optional Prepayment Price minus the
Escrowed Amount.
(b) If the Optional Prepayment Price shall not be paid in full within
three Trading Days of the 20th Trading Day after the date of the Optional
Prepayment Notice, the Company shall pay as liquidated damages and not as a
penalty the sum of $7,500 per day in cash until such Optional Prepayment Price,
together with all such liquidated damages, is paid in full. In addition, if the
Company shall have failed to pay any portion of the Optional Prepayment Price
within such three Trading Day period, then the Holder may demand that the
Company (i) convert all or any portion of the principal amount of the Debentures
for which the Optional Prepayment Price shall not have been paid (the "Unpaid
Principal Portion") at a Conversion Price calculated as at the date of the
Optional Prepayment Notice or the date of such conversion, whichever is lower,
or (ii) promptly issue to the Holders new Debentures for a principal amount
equal to the Unpaid Principal Portion.
(c) Notwithstanding anything to the contrary contained herein, the Company
may not deliver an Optional Prepayment Notice unless (i) there are not
outstanding any shares of Series A Preferred for which a redemption notice has
not been delivered and (ii) it has received (and furnished to the Holder
evidence thereof reasonably satisfactory to it of) prior written consent of BNY
to make such prepayment free from the subordination provisions of Section 8
hereof.
Section 6. Definitions. For the purposes hereof, the following terms
---------- -----------
shall have the following meanings:
-14-
<PAGE>
"Adjustment Amount" is equal to (i) the product of (A) the average Per
Share Market Value for the five Trading Days immediately preceding (1) the
applicable Trigger Date or (2) the date of payment of all amounts due as a
result of such Event of Default, whichever is greater, and (B) the Conversion
Ratio with respect to the aggregate principal amount of Debentures then
outstanding calculated on (1) the applicable Trigger Date or (2) the date of
payment of all amounts due as a result of such Event of Default, whichever
yields a lower Conversion Price denominator for the determination of the
Conversion Ratio, minus (ii) the aggregate principal amount of Debentures then
outstanding, plus all accrued and unpaid interest thereon, and all other amounts
due, except for those referred to in (i) above pursuant to the terms hereof.
"BNY" means BNY Financial Corporation, 1290 Avenue of the Americas,
New York, New York 10104.
"BNY Bank Obligations" means the borrowings and interest due thereon
(including, without limitation, any interest accruing after the commencement of
any case, proceeding or other action relating to the liquidation, dissolution,
assignment for the benefit of creditors, receivership, arrangement, bankruptcy,
insolvency or reorganization of the Company regardless of whether such interest
is allowable, payable or accruable to BNY in such case, proceeding or other
action) under the Receivables Agreement, as the same may from time to time be
amended, supplemented, otherwise modified, replaced or refinanced.
"Business Day" means any day of the year on which commercial banks are
not required or authorized to be closed in New York City.
"Common Stock" means shares now or hereafter authorized of the class
of Common Stock, par value $.001 per share, of the Company, stock of any other
class into which such shares may hereafter be reclassified or changed and any
other equity securities of the Company hereafter designated as Common Stock.
"Conversion Ratio" means, at any time, the quotient obtained by
dividing the principal amount represented by any Debenture plus accrued but
unpaid interest but only to the extent not paid in shares of Common Stock
pursuant to the terms hereof, by the Conversion Price at such time.
"Junior Securities" means the Common Stock, all other equity
securities of the Company and all other debt that is subordinated to the
Debentures by its terms.
"Original Issue Date" shall mean the date of the first issuance of
this Debenture regardless of the number of transfers hereof.
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the Nasdaq National
Market or other stock exchange on which the Common Stock is then listed, as
reported on Bloomberg, L.P. or if there is no such bid price on such date, then
the last closing bid price on such exchange on the date nearest preceding
-15-
<PAGE>
such date, as reported on Bloomberg, L.P., or (b) if the Common Stock is not
listed on the Nasdaq National Market or any stock exchange, the closing bid
price for a share of Common Stock in the Nasdaq SmallCap Market, as reported on
Bloomberg, L.P. (or similar organization or agency succeeding to its functions
of reporting prices), or (c) if the Common Stock is no longer reported on
Bloomberg, L.P. (or similar organization or agency succeeding to its functions
of reporting prices), then the average of the "Pink Sheet" quotes for the
relevant conversion period as determined by the Holder, or (d) if the Common
Stock is no longer publicly traded, the fair market value of a share of Common
Stock as determined by an Appraiser selected in good faith by the holders of a
majority of principal amount of outstanding Debentures; provided, however, that
-------- -------
the Company, after receipt of the determination by such Appraiser, shall have
the right to select an additional Appraiser, in which case, the fair market
value shall be equal to the average of the determinations by each such
Appraiser.
"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.
"Receivables Agreement" means the Accounts Receivable Management and
Security Agreement, dated as of July 31, 1995, among the Company and BNY.
"Trading Day" means (a) a day on which the Common Stock is traded on
the Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the over-the-
counter market, as reported by the NASDAQ Stock Market, or (c) if the Common
Stock is not listed on the American Stock Exchange, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices).
"Trigger Date" shall mean, (i) with respect to an Event of Default
caused by an event described in Section 3(a), the date the payment of principal
or interest at issue was due, (ii) with respect to an Event of Default caused by
an event described in Section 3(b), the date specified in any other provision of
this Debenture, the Purchase Agreement or the Registration Rights Agreement that
require repayment of the outstanding principal amount of this Debenture as a
result of an event so contemplated, if not, the date such event becomes and
Event of Default pursuant to Section 3(b), (iii) with respect to an Event of
Default caused by an event described in Section 3(c) or (d), the date of such
event becomes an Event of Default pursuant to such Sections and (v) with respect
to an Event of Default caused by an event described in Section 3(e), the
effective date of the merger or consolidation.
Section 7. Except as expressly provided herein, no provision of this
----------
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, and interest on, this Debenture at
the time, place, and rate, and in the coin or currency,
-16-
<PAGE>
herein prescribed. This Debenture is a direct obligation of the Company. This
Debenture ranks pari passu with all other indebtedness, obligations or
----------
liabilities of the Company now or hereafter issued under the terms set forth
herein. The Company may not prepay the outstanding principal amount on the
Debentures except in accordance with the specific terms hereof.
Section 8. (a) This Debenture is subordinated to full payment of all
----------
of the Company's obligations under the BNY Bank Obligations. Except to the
extent otherwise specifically set forth in this Section, until such time as all
BNY Bank Obligations are indefeasibly paid to BNY, the Company shall not,
directly or indirectly, make any cash or other payment (except for the issuance
and delivery of shares of Common Stock in respect of conversions or payments of
interest hereunder) that is due and owing under this Debenture. Cash payments
contemplated by Sections 4(a)(ii), 4(c) or 4(d) hereof, to the extent such
payments do not exceed, in the aggregate, $500,000, may be made by the Company
to (and retained by) the Holders as long as (i) at the time any such payment is
due under such Sections, the Bank has not given notice to the Company of
acceleration of the Company's obligations under the Receivables Agreement or
(ii) the making of such payment shall not cause (as determined at the time such
payment shall become due to the Holders) the Company to exceed the borrowing
limitations set forth in Section 2 of the Receivables Agreement, or cause an
"Event of Default" (as defined under the Receivables Agreement) under Section
18(a) of the Receivables Agreement. Cash payments contemplated by Sections
4(a)(ii), 4(c) or 4(d) hereof, to the extent that such payments, in the
aggregate, exceed $500,000, may be made by the Company to (and retained by) the
Holders as long as (i) at the time any such payment is due under such Sections,
the Bank has not given notice to the Company of acceleration of the Company's
obligations under the Receivables Agreement, or (ii) at the time such payment
becomes due the Company shall not be in default of Sections 12(n), 12(o), 12(p),
12(q), 18(a), 18(i) or 18(j) of the Receivables Agreement, or (iii) the making
of such payment shall not cause (as determined at the time such payment shall
become due to the Holders) an Event of Default under such Receivables Agreement
sections set forth in (ii) immediately above or cause the Company to exceed the
borrowing limitations set forth in Section 2 of the Receivables Agreement. The
subordination provided hereunder shall in no way limit the Holders' ability to
convert Debentures into shares of Common Stock and to receive payment of
interest hereunder in shares of Common Stock, including after such time as any
Event of Default shall be declared hereunder.
(b) Should any payment, other than payments contemplated
in Section 8(a) above, be received by the Holders, such payment shall be held in
trust by the Holders for the benefit of BNY and shall be delivered forthwith to
BNY for application to BNY Bank Obligations, in the form received with any
necessary endorsement or assignment.
Section 9. This Debenture shall not entitle the Holder to any of the
----------
rights of a stockholder of the Company, including without limitation, the right
to vote, to receive dividends and other distributions, or to receive any notice
of, or to attend, meetings of stockholders or any other proceedings of the
Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
-17-
<PAGE>
Section 10. If this Debenture shall be mutilated, lost, stolen or
-----------
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
Section 11. This Debenture shall be governed by and construed in
-----------
accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof.
Section 12. Any waiver by the Company or the Holder of a breach of
-----------
any provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture. The failure of the Company or the Holder to insist
upon strict adherence to any term of this Debenture on one or more occasions
shall not be considered a waiver or deprive that party of the right thereafter
to insist upon strict adherence to that term or any other term of this
Debenture. Any waiver must be in writing.
Section 13. If any provision of this Debenture is invalid, illegal
-----------
or unenforceable, the balance of this Debenture shall remain in effect, and if
any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
Section 14. Whenever any payment or other obligation hereunder shall
-----------
be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day (or, if such next succeeding Business Day falls in
the next calendar month, the preceding Business Day in the appropriate calendar
month).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized as of the date first above
indicated.
YES! ENTERTAINMENT
CORPORATION
Attest: ________________________ By:________________________________
Name: Donald D. Kingsborough
Title: Chief Executive Officer
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert the above Debenture No. [ ]
into shares of Common Stock, par value $.001 per share (the "Common Stock"), of
YES! Entertainment Corporation (the "Company") according to the conditions
hereof, as of the date written below. If shares are to be issued in the name of
a person other than undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance therewith. No fee
will be charged to the Holder for any conversion, except for such transfer
taxes, if any.
Conversion calculations:
______________________________________________________
Date to Effect Conversion
______________________________________________________
Principal Amount of Debentures to be Converted
______________________________________________________
Applicable Conversion Price
______________________________________________________
Amount of Interest due on the Principal Amount of
Debentures to be Converted
______________________________________________________
Signature
______________________________________________________
Name:
______________________________________________________
Address:
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested hereby),
notify the converting holder by facsimile of the number of shares of Common
Stock outstanding on such date and the number of shares of Common Stock which
would be issuable to the holder if the conversion requested in this conversion
notice were effected in full, whereupon, if the Company determines that such
conversion would result in the holder owning in excess of 4.9% of the
outstanding shares of Common Stock on such date, the Company shall convert up to
an amount equal to 4.9% of the outstanding shares of Common Stock and shall
issue to the holder one or more Debenture(s) which have not been converted as a
result of this provision.
<PAGE>
EXHIBIT B
YES! ENTERTAINMENT CORPORATION
NOTICE OF CONVERSION
AT THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of YES! Entertainment Corporation (the
"Company") hereby notifies the addressee hereof that the Company hereby elects
to exercise its right to convert the above Debenture No. [ ] into shares of
Common Stock, $.001 par value per share (the "Common Stock"), of the Company
according to the conditions hereof, as of the date written below. No fee will
be charged to the Holder for any conversion hereunder, except for such transfer
taxes, if any, which may be incurred by the Company if shares are to be issued
in the name of a person other than the person to whom this notice is addressed.
Conversion calculations:
______________________________________________________
Date to Effect Conversion
______________________________________________________
Principal Amount of Debentures to be Converted
______________________________________________________
Applicable Conversion Price
______________________________________________________
Amount of Interest due on the Principal Amount of
Debentures to be Converted
______________________________________________________
Number of Shares of Common Stock outstanding at close
of trading on Conversion Date
______________________________________________________
Signature
______________________________________________________
Name:
______________________________________________________
Address:
<PAGE>
EXHIBIT 4.3
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS.
THIS WARRANT IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN AN
AMENDED AND RESTATED CONVERTIBLE DEBENTURE AND CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT, DATED AS OF MARCH 18, 1997, BETWEEN THE COMPANY AND THE
ORIGINAL HOLDER HEREOF. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICE OF YES! ENTERTAINMENT CORPORATION.
YES! ENTERTAINMENT CORPORATION
WARRANT
-------
Dated March 18, 1997
YES! ENTERTAINMENT CORPORATION, a Delaware corporation (the "Company"),
hereby certifies that, for value received, [ ], a corporation
organized and existing under the laws of Nevis, West Indies or its registered
assigns ("Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company from time to time up to a total of [ ] shares of
Common Stock, par value $.001 per share (the "Common Stock"), of the Company
(each such share, a "Warrant Share" and all such shares, the "Warrant Shares")
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 Values (as defined below) for any
five (5) consecutive Trading Days (as defined below) during the sixty (60)
Trading Days following the date hereof, (as adjusted from time to time as
provided in Section 7, the "Exercise Price"), at any time after the date hereof
and until and including March 18, 2002 (the "Expiration Date"), and subject to
the terms and conditions set forth in this Warrant.
For purposes of calculating the Exercise Price, the following
definitions shall apply:
"Per Share Market Value" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the Nasdaq National
Market or other stock exchange on which the Common Stock is then listed, as
reported on Bloomberg, L.P. or if there is no such bid price on such date, then
the last closing bid price on such exchange on the date nearest preceding such
date, as reported on Bloomberg, L.P., or (b) if the Common Stock is not listed
on the Nasdaq National Market or any stock exchange, the closing bid price for a
share of Common Stock in the Nasdaq SmallCap Market, as reported on Bloomberg,
L.P. (or similar organization or agency succeeding to its functions of reporting
prices), or (c) if the Common Stock is no longer
<PAGE>
reported on Bloomberg, L.P. (or similar organization or agency succeeding to its
functions of reporting prices), then the average of the "Pink Sheet" quotes for
the relevant conversion period as determined by the Holder, or (d) if the Common
Stock is no longer publicly traded, the fair market value of a share of Common
Stock as determined by an Appraiser selected in good faith by the Holder;
provided, however, that the Company, after receipt of the determination by such
- -------- --------
Appraiser, shall have the right to select an additional Appraiser, in which
case, the fair market value shall be equal to the average of the determinations
by each such Appraiser.
"Trading Day" means (a) a day on which the Common Stock is traded on
the Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the over-the-
counter market, as reported by the NASDAQ Stock Market, or (c) if the Common
Stock is not listed on the American Stock Exchange, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices).
1. Registration of Warrant. The Company shall register this Warrant,
-----------------------
upon records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary.
2. Registration of Transfers and Exchanges.
---------------------------------------
a. The Company shall register or instruct the Transfer Agent (as such
term is defined in the Book Entry Transfer Agreement, dated as of January 28,
1997 (the "Transfer Agent Agreement") between the Company, the original Holder
and the transfer agent of the Company) to register the transfer of any portion
of this Warrant in the Warrant Register, upon surrender of this Warrant, with
the Form of Assignment attached hereto duly completed and signed, to the
Transfer Agent or to the Company at the office specified in or pursuant to
Section 3(b). Upon any such registration or transfer, a new warrant to purchase
Common Stock, in substantially the form of this Warrant (any such new warrant, a
"New Warrant"), evidencing the portion of this Warrant so transferred shall be
issued to the transferee and a New Warrant evidencing the remaining portion of
this Warrant not so transferred, if any, shall be issued to the transferring
Holder.
b. This Warrant is exchangeable, upon the surrender hereof by the
Holder to the Transfer Agent or at the office of the Company specified in or
pursuant to Section 3(b) for one or more New Warrants, evidencing in the
aggregate the right to purchase the number of Warrant Shares which may then be
purchased hereunder. Any such New Warrant will be dated the date of such
exchange.
-2-
<PAGE>
3. Duration and Exercise of Warrants.
---------------------------------
a. This Warrant shall be exercisable by the registered Holder on any
business day before 5:00 P.M., New York time, at any time and from time to time
on or after the date hereof to and including the Expiration Date. At 5:00 P.M.,
New York time on the Expiration Date, the portion of this Warrant not exercised
prior thereto shall be and become void and of no value.
b. Subject to Sections 2(b), 4 and 8, upon surrender of this Warrant,
with the Form of Election to Purchase attached hereto duly completed and signed,
to the Transfer Agent at The First National Bank of Boston, 435 Tasso Street,
Suite 250, Palo Alto, California 94301, Attention: Dennis Roy ((415) 853-1409)
or to Company at its office at 3875 Hopyard Road, Pleasanton, CA 94588,
Attention: Chief Financial Officer, or at such other address as the Company may
specify in writing to the then registered Holder, and upon payment of the
Exercise Price multiplied by the number of Warrant Shares that the Holder
intends to purchase hereunder, in lawful money of the United States of America,
in cash or by certified or official bank check or checks, all as specified by
the Holder in the Form of Election to Purchase, the Company shall promptly (but
in no event later than 3 days thereafter) issue or cause to be issued and cause
to be delivered to or upon the written order of the Holder and in such name or
names as the Holder may designate, a certificate for the Warrant Shares issuable
upon such exercise, free of restrictive legends other than legends that may be
required in the opinion of the Company's counsel in the event at such time there
is not an effective Registration Statement (as defined in the Registration
Rights Agreement, dated January 28, 1997, between the Company, Infinity
Investors Limited, a corporation organized and existing under the laws of Nevis,
West Indies and Fairway Capital Limited, a corporation organized and existing
under the laws of Nevis, West Indies). Any person so designated by the Holder
to receive Warrant Shares shall be deemed to have become holder of record of
such Warrant Shares as of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Transfer Agent or the
Company shall have received (i) this Warrant (or any New Warrant, as
applicable), with the Form of Election to Purchase attached hereto (or attached
to such New Warrant) appropriately completed and duly signed, and (ii) payment
of the Exercise Price for the number of Warrant Shares so indicated by the
holder hereof to be purchased.
c. This Warrant shall be exercisable, either in its entirety or, from
time to time, for a portion of the number of Warrant Shares so long as at least
10,000 Warrant Shares are purchased in any one exercise. If less than all of
the Warrant Shares which may be purchased under this Warrant are exercised at
any time, the Company shall issue or cause to be issued, at its expense, a New
Warrant evidencing the right to purchase the remaining number of Warrant Shares
for which no exercise has been evidenced by this Warrant.
4. Payment of Taxes. The Company will pay all documentary stamp taxes
----------------
attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares in a name other than that of the Holder,
and the Company shall not be required to issue or cause to be issued or deliver
or cause to be delivered the certificates for Warrant Shares unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid. The Holder shall be responsible for all
other tax liability that may arise as a result of holding or transferring this
Warrant or receiving Warrant Shares upon exercise hereof.
-3-
<PAGE>
5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or
----------------------
destroyed, the Company may in its discretion issue or cause to be issued in
exchange and substitution for and upon cancellation hereof, or in lieu of and
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
indemnity, if requested, satisfactory to it. Applicants for a New Warrant under
such circumstances shall also comply with such other reasonable regulations and
pay such other reasonable charges as the Company may prescribe.
6. Reservation of Warrant Shares. The Company covenants that it will at
-----------------------------
all times reserve and keep available out of the aggregate of its authorized but
unissued Common Stock, solely for the purpose of enabling it to issue Warrant
Shares upon exercise of this Warrant as herein provided, the number of Warrant
Shares which are then issuable and deliverable upon the exercise of this entire
Warrant, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holders (taking into account the adjustments
and restrictions of Section 7). The Company covenants that all Warrant Shares
that shall be so issuable and deliverable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and freely tradeable.
7. Certain Adjustments. The Exercise Price and number of Warrant Shares
-------------------
issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section 7. Upon each such adjustment of the Exercise
Price pursuant to this Section 7, the Holder shall thereafter prior to the
Expiration Date be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
a. If the Company, at any time while this Warrant is outstanding, (a)
shall pay a stock dividend or otherwise make a distribution or distributions on
shares of its Junior Securities (as such term is defined in the Debenture)
payable in shares of Common Stock, (b) subdivide outstanding shares of Common
Stock into a larger number of shares, or (c) combine outstanding shares of
Common Stock into a smaller number of shares, the Exercise Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock (excluding treasury shares, if any outstanding before such event
and of which the denominator shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to this Section
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision or combination, and shall apply to successive subdivisions and
combinations.
b. In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property, then the Holder shall have the right
thereafter to exercise this Warrant only into the shares of stock and other
securities and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property equal to the amount of Warrant
Shares such Holder would have been entitled to had such Holder exercised this
Warrant immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to give to
the Holder the right
-4-
<PAGE>
to receive the securities or property set forth in this Section 7(b) upon any
exercise following such consolidation, merger, sale, transfer or share exchange.
This provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
c. If the Company, at any time while this Warrant is outstanding,
shall distribute to all holders of Common Stock (and not to holders of this
Warrant) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
7(a), (b) and (d)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
a nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the holders of a majority in interest of
- ----------
the Warrants then outstanding.
d. Except for rights and warrants issued by the Company to key
employees or in connection with Company matching contributions pursuant to the
Company's 401(k) plan or other employee stock purchase plan, if, at any time
while this Warrant is outstanding, the Company shall issue or cause to be issued
rights or warrants to acquire or otherwise sell or distribute shares of Common
Stock to all holders of Common Stock for a consideration per share less than the
Exercise Price then in effect, then, forthwith upon such issue or sale, the
Exercise Price shall be reduced to the price (calculated to the nearest cent)
determined by dividing (i) an amount equal to the sum of (A) the number of
shares of Common Stock outstanding immediately prior to such issue or sale
(excluding treasury shares, if any, but including warrants or options that would
be included for purposes of determining earnings per share in accordance with
generally accepted accounting principals) multiplied by the Exercise Price, and
(B) the consideration, if any, received or receivable by the Company upon such
issue or sale by (ii) the total number of shares of Common Stock outstanding
immediately after such issue or sale (excluding treasury shares, if any, but
including warrants or options that would be included for purposes of determining
earnings per share in accordance with generally accepted accounting principals).
e. For the purposes of this Section 7, the following clauses shall
also be applicable:
1. Record Date. In case the Company shall take a record of the
-----------
holders of its Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock or in Convertible
Securities, or (B) to subscribe for or purchase Common Stock or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
2. Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
f. All calculations under this Section 7 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
-5-
<PAGE>
g. Whenever the Exercise Price is adjusted pursuant to Section 7(c)
above or Section 7(i) below, the Company, after receipt of the determination by
the Appraiser shall have the right to select an additional Appraiser, in good
faith, in which case the adjustment shall be equal to the average of the
adjustments recommended by each Appraiser. The Company shall promptly mail or
cause to be mailed to each Holder, a notice setting forth the Exercise Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment. Such adjustment shall become effective immediately after the
record date mentioned above; provided, however, that no such adjustment of the
-------- -------
Exercise Price shall be made which in the opinion of the Appraiser(s) giving the
aforesaid opinion or opinions would result in an increase of the Exercise Price
to more than the Exercise Price then in effect. All determinations with respect
to adjustments by the Company hereunder shall be made by the Board of Directors
in good faith.
h. If:
1. the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
2. the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
3. the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe for
or purchase any shares of capital stock of any class or
of any rights; or
4. the approval of any stockholders of the Company shall
be required in connection with any reclassification of
the Common Stock of the Company, any consolidation or
merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of
the Company, or any compulsory share exchange whereby
the Common Stock is converted into other securities,
cash or property; or
5. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of
the affairs of the Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up;
-6-
<PAGE>
provided, however, that the failure to mail such notice or any defect therein or
- -------- -------
in the mailing thereof shall not affect the validity of the corporate action
required to be specified in such notice.
i. If at any time conditions shall arise by reason of action taken
by the Company which in the opinion of the Board of Directors are not adequately
covered by the other provisions hereof and which might materially affect the
rights of the Holders (different than or distinguished from the effect generally
on rights of holders of any class of the Company's capital stock) or if any time
such conditions are expected to arise by reason of any action contemplated by
the Company, the Company shall mail a written notice briefly describing the
action contemplated and the material adverse effects of such action on the
rights of the Holders at least 30 calendar days prior to the effective date of
such action, and an Appraiser selected by the Holders of majority in interest of
this Warrant shall give its opinion as to the adjustment, if any (not
inconsistent with the standards established in Section 7(e)), of the Exercise
Price (including, if necessary, any adjustment as to the Warrant Shares to be
purchased upon exercise of this Warrant) and any distribution which is or would
be required to be preserved without diluting the rights of the Holders.
8. Fractional Shares. The Company shall not be required to issue or
-----------------
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 8, be issuable
on the exercise of this Warrant, the Company shall, at its option, (a) pay an
amount in cash equal to the Exercise Price multiplied by such fraction or (b)
shall round the number of Warrant Shares issuable, up to the next whole number
of such shares.
9. Notices. Any and all notices or other communications or deliveries
-------
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 this
Section 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: (1) if
to the Company, to YES! ENTERTAINMENT CORPORATION, 3875 Hopyard Road,
Pleasanton, CA 94558, Attention: Chief Financial Officer, or to facsimile no.
(510) 734-0997, or (ii) if to the Holder, to the Holder at the address or
facsimile number appearing on the Warrant Register or such other address or
facsimile number as the Holder may provide to the Company in accordance with
this Section 9.
10. Warrant Agent.
-------------
a. The Company shall serve as warrant agent under this Warrant. Upon
thirty (30) days' notice to the Holder, the Company and the Holder may appoint a
new warrant agent.
b. Any corporation into which the Company or any new warrant agent may
be merged or any corporation resulting from any consolidation to which the
Company or any new warrant agent shall be a party or any corporation to which
the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the register maintained by the warrant agent pursuant to
this Warrant.
-7-
<PAGE>
11. Miscellaneous.
-------------
a. This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. This
Warrant may be amended only in writing signed by the Company and the Holder.
b. Subject to Section 11(a), above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company, the
Holder and any registered holder of Warrant Shares any legal or equitable right,
remedy or cause under this Warrant; this Warrant shall be for the sole and
exclusive benefit of the Company, the Holder and any other registered holder of
Warrant Shares.
c. This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York without regard to the
principles of conflicts of law thereof.
d. The headings herein are for convenience only, do not constitute a
part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
e. In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
by its authorized officer as of the date first indicated above.
YES! ENTERTAINMENT CORPORATION
By:______________________________________
Name: Donald D. Kingsborough
Title: Chief Executive Officer
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To YES! Entertainment Corporation:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Common Stock ("Common Stock"), par value $.001 per share, of YES!
Entertainment Corporation and encloses herewith $________ in cash (or encloses
herewith evidence of payment of such sum), which sum represents the Exercise
Price (as defined in the Warrant) for the number of shares of Common Stock to
which this Form of Election to Purchase relates, together with any applicable
taxes payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common Stock
issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
_______________________________________________________________
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
_______________________________________________________________________________
If the number of shares of Common Stock issuable upon this exercise shall
not be all of the shares of Common Stock which the undersigned is entitled to
purchase in accordance with the enclosed Warrant, the undersigned requests that
a New Warrant (as defined in the Warrant) evidencing the right to purchase the
shares of Common Stock not issuable pursuant to the exercise evidenced hereby be
issued in the name of and delivered to:
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
_______________________________________________________________________________
Dated: ___________, _____
Name of Holder:
(Print) ________________________________________________________________
(By:) __________________________________________________________________
(Title:) _______________________________________________________________
<PAGE>
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of YES! ENTERTAINMENT
CORPORATION to which the within Warrant relates and appoints ________________
attorney to transfer said right on the books of YES! ENTERTAINMENT CORPORATION
with full power of substitution in the premises.
Dated:
_______________, ____
___________________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
___________________________________________________
Address
In the presence of:
__________________________
<PAGE>
EXHIBIT 99.1
YES! ENTERTAINMENT CORPORATION ANNOUNCES SUPERSEDING
PRIVATE PLACEMENT
PLEASANTON, CALIFORNIA, MARCH 24, 1997 -- YES! ENTERTAINMENT CORPORATION
(Nasdaq NM Symbol: YESS) today announced that it has entered into an agreement
superseding the private placement to certain institutional buyers completed
January 28, 1997 in which it raised $10 million through the sale of 5%
convertible subordinated debentures and 300,000 warrants. The parties agreed to
supersede the transaction with the issuance by the Company of convertible
subordinated debentures in the principal amount of approximately $1,567,000,
85,000 shares of convertible preferred stock at a per share price of $100 and
300,000 warrants. The debentures are convertible into common stock at variable
prices depending on market conditions, the convertible preferred stock is
convertible into common stock and pays a cumulative dividend at a rate of 6-1/2%
per annum, and the warrants are exercisable for common stock.
The direct investment was made in January 1997 with funds advised by Brown
Simpson LLC, a New York based fund advisory and capital management firm.
Pennsylvania Merchant Group acted as placement agent for the company.
The direct investment of the debentures and warrants has not been
registered under the Securities of Act of 1933, as amended, or applicable state
securities laws, and may not be offered or sold absent registration under the
Securities Act and applicable state securities laws or available exemptions from
registrations. However, the company is obligated to file a registration
statement for the sale of the Common Stock underlying the debentures, the
preferred stock and the warrants.
YES! Entertainment Corporation develops, manufactures and markets toys and
other entertainment products, including a variety of interactive products. YES!
uses innovative technology to design products that are fun for children and
build on their natural creativity.
# # #
