<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934.
For the quarterly period ended September 30, 1998
------------------
OR
[ ] Transition Report pursuant to Section 13 of 15 (d) of the
Securities Exchange Act of 1934.
For the transition period from __________ to __________.
Commission File Number 0-25916
YES! ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3165290
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3875 Hopyard Road, Suite 375, Pleasanton, CA 94588
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(Address of principal executive offices and zip code)
(925) 847-9444
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the proceeding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X__ NO ___
As of September 30, 1998, there were 16,813,998 shares of the registrant's
common stock outstanding.
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YES! ENTERTAINMENT CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for the three months and nine months ended
September 30, 1998 and September 30, 1997 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998
and September 30, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
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ITEM 1. FINANCIAL STATEMENTS
YES! ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 169 $ 624
Accounts receivable, net of allowance for doubtful accounts
of 263,101 on September 30, 1998 and $137,000 on
December 31, 1997 $ 5,834 $ 8,659
Inventories $ 8,986 $ 13,513
Prepaid royalties $ 801 $ 955
Prepaid expenses $ 1,187 $ 1,254
Other current assets $ 2,106 $ 1,989
----------- -----------
Total current assets $ 19,083 $ 26,994
Property and equipment, net $ 4,343 $ 5,345
Intangibles and deposits, net $ 165 $ 156
----------- -----------
Total assets $ 23,591 $ 32,495
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable $ 9,054 $ 10,709
Accounts payable $ 8,874 $ 11,716
Accrued royalties $ 1,630 $ 2,406
Accrued liabilities $ 663 $ 2,178
Deferred royalty income $ 300 $ ---
Dividends payable $ 114 $ 123
Capital lease obligations $ 1 $ 5
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Total current liabilities $ 20,636 $ 27,137
Convertible debentures $ 1,787 $ 1,741
Stockholders' equity :
Series B convertible preferred stock, $0.001 par value:
Authorized shares 540,000
Issued and outstanding shares of 10,241 on
September 30, 1998 and 387,770 on December 31, 1997
(aggregate liquidation preference of $256,025) $ 228 $ 8,500
Series C convertible preferred stock,
$0.001 par value:
Authorized shares 540,000
Issued and outstanding shares of 353,132 on
September 30, 1998
none issued at December 31, 1997
(aggregate liquidation preference of $8,828,300) $ 7,861 $ ---
Common stock,$.001 par value:
Authorized shares 48,000,000
Issued and outstanding shares - 16,813,998
on September 30, 1998 $ 17 $ 16
and 15,537,159 on December 31, 1997
Additional paid-in capital $ 92,278 $ 90,434
Deferred compensation $ (479) $ (606)
Accumulated deficit $ (98,737) $ (94,727)
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Total stockholders' equity $ 1,168 $ 3,617
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Total liabilities and stockholders' equity $ 23,591 $ 32,495
=========== ===========
</TABLE>
See accompanying notes.
3
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YES! ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 7,883 $ 17,759 $ 25,587 $ 39,417
Cost of sales $ 5,485 $ 12,238 $ 15,835 $ 25,178
----------- ----------- ----------- -----------
Gross profit $ 2,398 $ 5,521 $ 9,752 $ 14,239
----------- ----------- ----------- -----------
Operating expenses:
Marketing, advertising and promotion $ 791 $ 657 $ 2,761 $ 2,096
Selling, distribution and administrative $ 4,448 $ 7,595 $ 15,019 $ 19,896
----------- ----------- ----------- -----------
Total operating expenses $ 5,239 $ 8,252 $ 17,780 $ 21,992
----------- ----------- ----------- -----------
Operating (loss) $ (2,841) $ (2,731) $ (8,028) $ (7,753)
Interest income $ 1 $ 42 $ 4 $ 67
Interest expense $ (270) $ (487) $ (918) $ (1,589)
Other income (expense), net $ 120 $ (47) $ 62 $ (113)
Gain on sale of assets $ 16 --- $ 6,019 ---
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes $ (2,974) $ (3,223) $ (2,861) $ (9,388)
Provision for income taxes (income tax benefit) --- $ 616 --- ---
----------- ----------- ----------- -----------
Net income (loss) $ (2,974) $ (3,839) $ (2,861) $ (9,388)
Non-cash dividends and discount on preferred stock $ (178) $ (623) $ (1,148) $ (3,223)
----------- ----------- ----------- -----------
Net income (loss) applicable to common stockholders $ (3,152) $ (4,462) $ (4,009) $ (12,611)
=========== =========== =========== ===========
Basic earnings (loss) per share applicable to common
stockholders $ (0.19) $ (0.31) $ (0.24) $ (0.88)
=========== =========== =========== ===========
Shares used in computing basic earnings (loss) per share 16,726 14,589 16,412 14,290
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
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YES! ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (2,861) $ (9,388)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Gain on sale of Product Lines $ (6,019) --
Depreciation and amortization $ 2,277 $ 2,259
Advertising expenses funded by inventory $ 67 $ 118
Debt discount and warrant amortization $ 201 $ 585
Accrued interest converted to convertible debt $ 72 $ 108
Employer contribution to 401(k) plan funded with common stock $ 67 $ 124
Reduction in vendor indebtedness funded with common stock -- $ 1,554
Deferred compensation $ 127 --
Changes in operating assets and liabilities:
Accounts receivable $ 2,825 $ 3,584
Inventories $ 1,791 $ 1,955
Prepaid royalties, expenses and other current assets $ (224) $ (317)
Accounts payable $ (3,381) $ (5,625)
Accrued royalties and liabilities $ (2,461) $ 881
Income taxes payable -- $ (182)
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Net cash (used in) provided by operating activities $ (7,519) $ (4,344)
INVESTING ACTIVITIES
Proceeds from Sale of product lines $ 10,223 --
Acquisition of property and equipment $ (1,490) $ (3,416)
(Increase) decrease in intangibles and deposits and equipment $ (8) $ 41
---------- ----------
Net cash (used in) provided by investing activities $ 8,725 $ (3,375)
FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures -- $ 1,385
Principal payments on loans payable $ (1,656) $ (1,254)
Principal payments on capital lease obligations $ (5) $ (12)
Proceeds from issuance of redeemable convertible preferred
stock, net of issuance costs -- $ 7,875
Proceeds from issuance of common stock, net of issuance costs -- $ 28
---------- ----------
Net cash (used in) provided by financing activities $ (1,661) $ 8,022
---------- ----------
Net increase (decrease) in cash and cash equivalents $ (455) $ 303
Cash and cash equivalents at beginning of period $ 624 $ 1,572
---------- ----------
Cash and cash equivalents at end of period $ 169 $ 1,875
========== ==========
</TABLE>
See accompanying notes.
5
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YES! ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
Interim Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q but do not
include all of the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements and
should, therefore, be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the fiscal year
ended December 31, 1997 included in the Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on April 15, 1998, and as
amended on April 30, 1998. In the opinion of management, all adjustments
(which consist only of normal recurring accruals) have been made to present
fairly the consolidated operating results for the unaudited periods. The
interim operating results are not necessarily indicative of the results for
fiscal 1998.
Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. INVENTORY (IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
Raw Materials $ 962 $ 496
Work-in-process $ 72 $ 600
Finished goods $ 7,952 $ 12,417
-------------- -------------
$ 8,986 $ 13,513
============== =============
</TABLE>
6
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3. SHAREHOLDER LAWSUITS
As of September 18, 1998, the Company was a defendant in several class
action lawsuits, as follows:
THE STATE SECURITIES CLASS ACTIONS
----------------------------------
Two class actions were filed against the Company, Donald D. Kingsborough,
Sol Kershner and Bruce D. Bower in the California Superior Court of the
County of Alameda: Wang v. YES! Entertainment Corporation et al., filed on
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April 15, 1997; and Miller v. YES! Entertainment Corporation et al., filed
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on July 3, 1997. In Miller, Gary L. Nemetz, a director of the Company was
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also named as a defendant.
The Wang lawsuit was purportedly brought on behalf of purchasers of the
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Company's common stock between October 23, 1996 and December 12, 1996,
inclusive. It challenged certain statements made by defendants regarding
the Company's V-Link Product, as well as its impact on the Company's sales
and profitability. The Wang lawsuit alleged that these statements violated
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Corporations Code sections 25400 and 25500, which provide a remedy to
California residents against persons who make false or misleading
statements while engaged in "market activity", constituted "unfair
competition" in violation of California Business and Professions Code
section 17200; and constituted common law fraud pursuant to California
Civil Code sections 1709-1711.
The Miller lawsuit was based on the same facts as the Wang lawsuit, but
------- ----
alleged a longer class period of March 29, 1996 to December 12, 1996, and
challenged certain additional statements made by defendants. The Miller
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first amended complaint state only one count for violation of Sections
25400 and 25500 of the California Corporations Code.
THE FEDERAL SECURITIES CLASS ACTIONS
------------------------------------
Three class actions were filed against the Company and Messrs. Kingsborough
and Kershner in the United States District Court for the Northern District
of California: Harow v. YES! Entertainment Corporation et al., filed on
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April 17, 1997; Takats v. YES! Entertainment Corporation et al., filed on
----------------------------------------------
June 11, 1997 and Siegel v. YES! Entertainment Corporation et al., filed on
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June 27, 1997. On August 6, 1997, these federal actions were consolidated
for pretrial proceedings and captioned In re YES! Entertainment Corp.
------------------------------
Securities Litigation, Civil Action No. C-97-1388 MHP. On December 4, 1997
---------------------
the action was referred to the Honorable
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Charles Breyer of the Northern District of California. The Federal class
actions were based upon claims under the federal securities laws which
impose liability on persons who make false or misleading statements in
connection with the purchase or sale of securities.
The Company maintained that the allegations contained in each of the class
actions lawsuits are without merit. Nonetheless, the Company concluded
that further conduct of the class action lawsuits would be protracted and
expensive, and that it would be desirable and beneficial to the Company to
settle the lawsuits. Accordingly, on July 8, 1998, the company entered
into an agreement that settled all the class action securities lawsuits.
The settlement called for payment to the plaintiff class of $2.5 million,
which was funded under the Company's insurance policies. On September 18,
1998, the Court entered a Final Judgment and Order of Dismissal which
approved the settlement of all the class action securities lawsuits and
dismissed with prejudiced the Federal class actions.
The Miller lawsuit was dismissed with prejudiced on October 14, 1998. The
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Wang lawsuit has not yet been dismissed.
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THE MACHINA LITIGATION
----------------------
On December 19, 1997 the Company filed a demand for arbitration seeking
declaratory judgment concerning the interpretation of several license
agreements with respondent Machina, Inc. ("Machina"), as well as rescission
of certain other contracts. On January 8, 1998, Machina filed an answer
generally denying the Company's claims and counterclaiming for payment of
royalties. On January 17, 1998, the Company filed a response generally
denying the allegations set forth in Machina's counterclaim and raising
certain affirmative defenses in response thereto. The arbitration is
calendared for November 9-11, 1998.
On January 27, 1998, plaintiff Machina, Inc. ("Machina") filed a verified
complaint seeking a temporary restraining order, preliminary injunction,
and permanent injunction specifically prohibiting the Company from showing
certain products at the New York Toy Fair and generally barring the Company
from continuing to market, manufacture and sell certain products pursuant
to license agreements purportedly terminated by Machina. The Company
successfully opposed Machina's ex parte application for temporary
restraining order (denied January 27, 1998) and subsequent application for
preliminary injunction (denied February 5, 1998). On March 26, 1998, the
parties entered into a stipulation staying the
8
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matter pending the arbitration. The matter remains on stay, with a status
conference calendared for January 15, 1999.
The Company is involved from time to time in other litigation matters
incidental to its business.
4. SALE OF PRODUCT LINES
In March 1998, the Company entered into a definitive agreement with Wham-O,
Inc. to purchase the assets of YES!'s Food and Girls Activity product
lines. The total purchase price included approximately $10.2 million in
cash for the purchase of the lines and related inventories, a $2.5 million
contingency payment to be earned based upon certain performance criteria
for the Food line in the first year, and royalties of up to $5.5 million
over a seven year period.
Sales from these product lines were $15.7 million, $5.1 million and $0 for
1997, 1996 and 1995. Gross margin from these product lines were $9.5
million, $2.8 million and $0 for 1997, 1996 and 1995.
5. FASB STATEMENT NO. 130, REPORTING COMPREHENSIVE INCOME
As of January 1, 1998 the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of the Statement had no impact on the Company's net income or
shareholders' equity.
During the third quarter of 1998 and 1997, total comprehensive income
(loss) amounted to $ (2,974) and $ (3,839)
6. CHANGES TO THE MEMBERSHIP OF THE BOARD OF DIRECTORS
In August of 1998, David Costine resigned from the Board of Directors. Mark
Shepherd was appointed to the Board of Directors, and to the position of
Chief Executive Officer replacing Donald Kingsborough. Donald Kingsborough
resigned as Chairman of the Board but remains a director and non-officer
employee of the Company. Gary Nemetz was appointed Chairman of the Board.
In September of 1998, Stuart J. Chasanoff and Barrett N. Wissman of HW
Partners, L.P. were appointed to the Board as representatives of the
Preferred Shareholders.
9
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YES! ENTERTAINMENT CORPORATION -- PART I, ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forward looking statements about the Company that
are based on current expectations. Actual results may differ materially as a
result of any one or more of the risks identified in this section, as well as in
the section captioned "Business Risk Factors."
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
- ---------------------
Three months ended Nine months ended
September 30 September 30
------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Net Sales 7,883 17,759 25,587 39,417
Cost of sales 5,485 12,238 15,835 25,178
Gross profit 2,398 5,521 9,752 14,239
Gross profit % 30% 31% 38% 36%
Operating Expenses 5,239 8,252 17,780 21,992
Operating Expense % 66% 46% 69% 56%
Operating (loss) (2,841) (2,731) (8,028) (7,753)
Gain on Sale of Assets 16 ___ 6,019 ___
Interest and other expense, net (149) (492) (852) (1,635)
Income (loss) before provision (2,974) (3,223) (2,861) (9,388)
for income taxes
Provision for income taxes ___ 616 ___ ___
Net income (loss) (2,974) (3,839) (2,861) (9,388)
Non-cash dividends and discount (178) (623) (1,148) (3,223)
on preferred stock
Net income (loss) applicable to (3,152) (4,462) (4,009) (12,611)
common stockholders
</TABLE>
10
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NET SALES
The Company's net sales for the third quarter of 1998 decreased $9.9 million, a
decline of approximately 55.6%, to $7.9 million from $17.8 million in third
quarter 1997. International sales in the third quarter of 1998 represented
approximately 31.8% or $2.5 million of net sales as compared to 21.2% or $3.8
million in the third quarter of 1997. For the first nine months of 1998 net
sales declined by $13.8 million or 35.0% to $25.6 million as compared to $39.4
million in the first nine months of 1997. International sales represented 34.4%
or $8.8 million for the for the nine month period ending September 30, 1998 as
compared to 29.5% or $11.6 million for the comparable period in 1997.
The decrease in both domestic and international sales was due primarily to
reduced volume in YES! Gear and Power Penz product lines. Domestic volume was
further reduced by the sale of the food line in March 1998 (see Note 4 to the
financial statements) which accounted for $3.8 million in sales for third
quarter 1997 and $8.4 million in sales for the nine month period ending
September 30, 1997. As a result of the sale of the Food lines, to the extent
the loss of net sales of these lines are not replaced by increased net sales of
current or future products, the Company's net sales and operating results will
continue to be materially and adversely affected.
The Company recognizes revenue upon shipment of product and computes net sales
by concurrently deducting a provision for sales returns and allowances,
including allowances for defective returns, price protection, mark downs and
other returns. Sales allowances may vary as a percentage of gross sales due to
changes in the Company's product mix, defective product allowances or other
sales allowances.
Sales of toys traditionally have been highly seasonal, with a majority of retail
sales occurring during the December holiday season. The Company expects that
its operating results will vary significantly from quarter to quarter because
the majority of the Company's products are shipped in the quarters ending
September 30 and December 31.
The Company is dependent on a relatively small number of customers, in
particular Toys "R" Us, Inc. and Wal-Mart Stores, Inc., for a significant
percentage of its sales. Significant reductions in sales to any one or more of
the Company's largest customers would have a material adverse effect on the
Company's operating results. Because orders in the toy industry are generally
cancelable at any time without penalty, there can be no assurance that present
or future customers will not terminate their purchase agreements with the
Company or significantly change, reduce or delay the amount of products ordered
from the Company. Any such termination of a customer relationship or change,
reduction or delay in orders would have a material adverse effect on the
Company's operating results. Furthermore, the industry has been impacted by
declining overall sales to Toys "R" Us due to changes in Toys "R" Us' inventory
policy
11
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and store closings which could have a continuing adverse effect on the
Company's revenue.
COST OF SALES
Cost of sales were approximately 70% and 69% of net sales in the third quarters
of 1998 and 1997, respectively. The increase in cost of sales as a percentage
of net sales in the third quarter of 1998 as compared to the third quarter of
1997 was primarily the result of an increase in close-out sales and greater mix
of international sales which tend to have lower margins. For the nine month
period ending September 30, 1998 cost of sales as a percentage of total sales
was approximately 62% as compared to approximately 64% in the comparable period
of 1997. In absolute dollars, cost of sales decreased by approximately $6.8
million for the third quarter of 1998 to $5.5 million, compared to $12.2 million
in the third quarter of 1997. For the nine month period ended September 30, 1998
cost of sales decreased by approximately $9.3 million to $15.8 million as
compared to approximately $25.2 million in the comparable period in 1997. Cost
of sales in the 1998 periods in absolute dollars decreased as a result of
reduced net sales.
<TABLE>
<CAPTION>
OPERATING EXPENSES
(in thousands) Three months ended Nine months ended
September 30 September 30
----------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Marketing, advertising & promotion $ 791 $ 657 $ 2,761 $ 2,096
Selling, distribution & administrative $ 4,448 $ 7,595 $ 15,019 $ 19,896
----------------------- -------------------------
Total operating expenses $ 5,239 $ 8,252 $ 17,780 $ 21,992
</TABLE>
Marketing, Advertising and Promotion. Marketing, advertising and promotion
expenses increased by approximately $134,000 for the third quarter of 1998 from
the third quarter of 1997. As a percentage of net sales, marketing, advertising
and promotion expenses were 10% in the third quarter of 1998 as compared to 3.7%
in the third quarter of 1997. For the nine month period ending September 30,
1998 marketing, advertising, and promotion expenses increased by $665,000 and
were 10.8% of net sales as compared to 5.3% of net sales for the comparable
period in 1997. The increase for third quarter expenditures was due to the
write-off of television production costs and the year to date increases are
related to this write-off and the promotion of W3 Speedloader and Air Vectors.
The Company expects advertising expense in the last quarter of 1998 to
significantly exceed advertising expense in the first three quarters of the year
to support anticipated seasonal increases in sales. However, depending on
Company liquidity and sales in to retail distribution channels, the Company may
choose not to run significant levels of media advertising, which may have an
adverse effect on revenue.
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Selling, Distribution and Administrative. Selling, distribution and
administrative expenses decreased by $3.2 million, to $4.5 million in the third
quarter of 1998 as compared to $7.6 million in the third quarter of 1997. For
the nine month period ended September 30, 1998 selling, distribution, and
administrative expenses were reduced by $4.9 million to $15.0 million as
compared to $19.9 million in the prior year period. Net reductions in this
expense category were the result of cost control measures implemented by the
Company. In October, the Company underwent further headcount reductions.
INTEREST EXPENSE
The following table shows interest expense and interest income for the
applicable periods:
<TABLE>
<CAPTION>
(in thousands) Three months ended Nine months ended
September 30 September 30
-------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income $ 1 $ 42 $ 4 $ 67
Interest expense $ (270) $ (487) $ (918) $ (1,589)
</TABLE>
The decrease in interest expense in the quarter ended September 30, 1998 as
compared to the comparable period in 1997 is the result of lower bank borrowings
and non-cash interest expense recorded in connection with the convertible
debentures and preferred stock financing and the restructuring thereof described
in detail in the Company's annual report on form 10-K for year ended December
31, 1997. The non-cash interest expense recorded in the quarter ended September
30, 1998 was $56,000. Non-cash interest expense for the nine months ended
September 30,1998 was $302,000. The decrease in interest income is the result of
lower cash balances maintained by the Company during the quarter and nine months
ended September 30, 1998 as compared to 1997.
PROVISION FOR INCOME TAXES (INCOME TAX BENEFIT)
No income tax provision has been computed for the three and nine months ended
September 30, 1998 as the Company did not have net income during such periods.
The Company does not expect to earn a profit during 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents of
approximately $169,000, a $455,000 decrease from approximately $624,000 at
December 31, 1997. The decrease in cash and cash equivalents was due to the $1.7
million used in financing activities and $7.5 million used in operating
activities offset primarily by $8.7 million provided by investing activities.
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The cash used by operating activities was due primarily to the Company's net
income which includes a $6.0 million gain from the sale of two product lines, a
decrease in accounts receivable of $2.8 million, a decrease in inventories of
$1.8 million offset by a decrease in accounts payable of approximately $3.4
million. The $8.7 million provided by investing activities related primarily to
proceeds from the sale of two product lines.
Since its inception, the Company's internally generated cash flow has not been
sufficient to finance trade receivables, inventory, capital equipment
requirements and new product development, or to support operations. The Company
has met its capital requirements to date primarily through the initial public
offering of the Company's common stock, which generated net proceeds to the
Company of approximately $10.9 million, the exercise of IPO Warrants which
generated approximately $19.7 million, the private sales of approximately $50.0
million of equity securities, borrowings of $2.0 million of long-term
convertible subordinated notes (now repaid), borrowings under short term loans
from certain stockholders, borrowings under bank loans guaranteed by certain
shareholders, borrowings under a factoring agreement with a group of banks,
borrowings under a Loan and Security Agreement with Congress Financial
Corporation Western (now repaid), and borrowings under an Accounts Receivable
Management and Security Agreement entered into with BNY Financial Corporation in
July 1995, as amended (the "ARM Agreement"). In addition, in the first quarter
of 1997, the Company raised net proceeds of approximately $9.3 million from the
sale of convertible debentures, preferred stock and warrants and, in the third
quarter of 1997, satisfied trade debt of $3.1 million by issuing common stock to
several of its vendors.
Pursuant to a Credit Agreement, dated as of September 2, 1998, Infinity
Investors Limited extended a $3,050,000 loan to the Company, due June 30, 1999,
at an interest rate of 12% per annum.
To meet seasonal working capital requirements during 1998, the Company has
borrowed substantial amounts under the ARM Agreement. The terms of the ARM
Agreement, as amended, provide that BNY Financial Corporation may advance YES!
up to $30 million on the basis of the Company's accounts receivable, inventory
and product being imported on a letter of credit basis. Loans to the Company are
fully secured by all of the Company's assets, including intellectual property,
and BNY acquired ownership of all of the Company's trade receivables. The
Company is required to remain in compliance with certain financial and other
covenants under the ARM Agreement. As of December 31,
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1997, the Company was required to maintain a monthly quick ratio of 1:1 under
the ARM Agreement. The ratio at December 31, 1997 was 0.5:1 and the Company
obtained a waiver for the month of December 1997 with regard to the quick ratio
requirement. Since the month ended December 31, 1997, BNY Financial Corporation
and the Company have amended the ARM Agreement to require that a monthly quick
ratio of 0.5:1 be maintained for the quarter ending March 31, 1998, which ratio
decreased to 0.4:1 as of June 30, 1998 and shall increase to 0.5:1 thereafter.
The Company was not in compliance with this covenant requirement at September
30, 1998, however a waiver is anticipated. As of December 31, 1997, the ARM
Agreement required that a ratio of earnings calculated before interest, taxes,
depreciation and amortization to total interest expense of 5:1 on a
retrospective rolling four quarter basis be maintained. The Company recorded a
loss before interest, taxes, depreciation and amortization for the four quarters
ended December 31, 1997. The Company obtained a waiver from BNY with regard to
this covenant for the fourth quarter of 1997. Since the month ended December 31,
1997, BNY Financial Corporation and the Company have amended the ARM Agreement
to require that a ratio of earnings calculated before interest, taxes,
depreciation and amortization to total interest expense of 5:1 on a prospective
rolling four quarter basis be maintained for the year beginning January 1, 1998
and reverts back to a retrospective rolling four quarter basis effective January
1, 1999. The Company was not in compliance with this covenant requirement at
September 30, 1998, however a waiver is anticipated. A tangible net worth of $32
million at December 31, 1997 was required under the ARM Agreement. As of
December 31, 1997 the Company had a tangible net worth of $3.5 million. The
Company obtained a waiver with respect to this requirement from BNY Financial
Corporation for the fourth quarter of 1997. Since the month ended December 31,
1997, BNY Financial Corporation and the Company have amended the ARM Agreement
to require a tangible net worth of $6.9 million at March 31, 1998, $3.8 million
at June 30, 1998, $4.3 million at September 30, 1998 and $3.0 million at
December 31, 1998. The Company was not in compliance with this covenant
requirement at September 30, 1998, however a waiver is anticipated. The ARM
Agreement also restricts the ability of the Company to obtain working capital in
the form of indebtedness, other than indebtedness incurred in the ordinary
course of the Company's business or to grant security interests in the assets of
the Company. As of September 30, 1998, the Company had borrowings of $6.1
million under the ARM Agreement. The $30 million under the ARM Agreement is
subject to a borrowing base which limits the ability to utilize the full amount
of the line.
The Company's working capital needs will depend upon numerous factors, including
the extent and timing of acceptance of the Company's products in the market, the
Company's operating results, the cost of increasing the Company's sales and
marketing activities and the status of competitive products, none of which can
be predicted with certainty. The Company has experienced severe
15
<PAGE>
working capital shortfalls in the past, which have restricted the Company's
ability to conduct its business as anticipated. As a result of seasonality in
the toy industry, the timing of new product introductions, the Company's planned
growth and the current financial condition of the Company, there can be no
assurance that the Company will not require additional funding. There can be no
assurance that any additional financing will be available to the Company, under
the ARM Agreement or otherwise, on acceptable terms, if at all, when required by
the Company. The inability to obtain such financing would have a material
adverse effect on the Company's business and operating results.
BUSINESS RISK FACTORS
History of Losses; Accumulated Deficit. The Company incurred operating losses of
$38.2 and $12.6 million for the years ended December 31, 1997 and 1996,
respectively. In 1997, the Company had a net cash outflow of $1.4 million. In
the third quarter of 1998, the Company incurred an operating loss of $2.8
million and an operating loss through the nine months ended September 30, 1998
of $8.0 million with a resulting accumulated deficit of $98.7 million. As a
result of these losses, the Company has incurred indebtedness to finance its
operations. See "Dependence on Restricted Facility." In the event the Company
continues to incur operating losses and is unable to obtain additional financing
on favorable terms, or at all, in the future, its operating results and
financial condition would be materially adversely affected.
Dependence on 1998 Products. In 1998, the Company has introduced and expects to
commence sales of a number of new product lines in new product categories, such
as the W-3 Wild Water Weapons, Air Vectors SFX, Yak Live, Fistful of Aliens and
Teddy Ruxpin. In addition, the Company also expects to expand its existing
product lines in 1998, particularly in its YES! Gear line of products.
Manufacturing of certain of these items in commercial quantities has not
commenced or is just commencing. The Company expects that completing the
development and the manufacture of its 1998 product lines will place great
demands on management and other Company resources. If the Company is not able to
complete the development, tooling, manufacture and successful marketing of its
1998 product lines, the Company 's operating results and financial condition
would be materially adversely affected.
Dependence on Yak Bak and Power Penz. The majority of the Company's current
product lines are sold under the YES! Gear brand and consist of Yak Bak and
Power Penz products. The Company had a significant decline in the sales of its
Yak Bak products in 1997 as compared to 1996 and, while Power Penz revenues were
stable, gross margins on its Power Penz sales declined due to a shift from
domestic to international sales. These product lines accounted for 51% and 72%
16
<PAGE>
of net sales in 1997 and 1996, respectively. The Power Penz brand accounted for
26% and 22% of net sales in 1997 and 1996, respectively. The Company expects
these brands to continue to account for a substantial percentage of the
Company's business, but there can be no assurance that they will be able to
sustain sales at the 1997 level, or at a level necessary to maintain its overall
sales and revenues. In addition, a number of toy manufacturers have attempted to
duplicate the Company's success in these areas and there can be no assurance
that the sale of these competitive products will not impact the sale of the Yak
Bak or Power Penz product lines.
Just in Time Inventory; Compressed Sales Cycles. Most of the Company's most
significant customers have adopted inventory management systems to track sales
of particular products and rely on reorders being filled rapidly by suppliers,
rather than maintaining large on-hand inventories to meet consumer demand. While
these systems reduce a retailer's investment in inventory, they increase
pressure on suppliers like the Company to fill orders promptly and shift a
significant portion of inventory risk to the supplier. The limited inventory
carried by the Company's customers may also reduce or delay consumer sell-
through which in turn could impair the Company's ability to obtain reorders of
its product in quantities necessary to permit the Company to achieve planned
sales and income growth. In addition, the Company may be required to incur
substantial additional expense to fill late reorders in order to ensure the
product is available at retail prior to Christmas; these may include drop-
shipment expense and higher advertising allowances which would otherwise be
borne by the Company's customers. In the event that anticipated reorders do not
materialize, the Company may incur increased inventory carrying costs.
Changes in 1998 Product Line. The Company constantly evaluates the toy markets
and its development and manufacturing schedules. In March 1998, the Company sold
its Food line, which accounted for a significant portion of its gross margin in
Fiscal 1997. See Note 4 of Notes to Consolidated Financial Statements. As the
year progresses, the Company may elect to reduce the number of products it
currently plans on shipping in 1998 for a variety of reasons, which include but
are not limited to more accurate evaluation of demand, supply and manufacturing
difficulties, or competitive considerations. Similarly, the Company may add
products to its 1998 line either by accelerating development schedules or
strategic acquisitions of current product lines. Reducing or adding products
from and to the Company's line may have an impact on the Company's financial
performance depending on, among other things, the price points, advertising and
promotional support for and development, tooling and manufacturing costs of such
products, relative to products they replace or are replaced by, as the case may
be, if applicable.
17
<PAGE>
Sales Concentration Risk. The Company's ten largest customers accounted for 73%,
85% and 87% of sales for the years ending December 31, 1997, 1996 and 1995,
respectively. For the year ended December 31, 1997, the Company's two largest
customers, TRU and Wal-Mart, accounted for 21% and 13% of net sales,
respectively. For the year ended December 31, 1996, the same two customers
accounted for approximately 21% and 20% of net sales, respectively, and for the
year ended December 31, 1995, TRU and Wal-Mart each accounted for 27% of net
sales. While the Company intends to expand distribution to new accounts, the
Company expects to continue to depend on a relatively small number of customers
for a significant percentage of its sales. Significant reductions in sales to
any one or more of the Company's largest customers would have a material adverse
effect on the Company's operating results. Because of Toys "R" Us' recent
inventory control policy changes and store closings, a continuing adverse effect
on the Company's revenue could occur. Orders in the toy industry are generally
cancelable at any time without penalty, therefore, there can be no assurance
that present or future customers will not terminate their purchase arrangements
with the Company or significantly change, reduce or delay the amount of products
ordered from the Company. Any such termination of a significant customer
relationship or change, reduction or delay in significant orders could have a
material adverse effect on the Company's operating results.
Price Protection; Stock Balancing; Reliance of Timely Payment. In connection
with the introduction of new products, many companies in the toy industry
discount prices of existing products, provide for certain advertising allowances
and credits or give other sales incentives to their customers, particularly
their most significant customers. In addition, in order to address working
capital requirements, sales of inventory, changes in marketing trends and other
issues, many companies in the toy industry allow retailers to return slow-moving
products for credit, or if the manufacturer lowers the prices of its products,
to provide price adjustments for inventories on hand at the time the price
change occurs. The Company has made such accommodations in the past, and expects
to make accommodations such as stock balancing, returns, other allowances or
price protection adjustments in the future. Any such accommodations by the
Company in the future could have a material adverse effect on the Company's
operating results. In addition, in the past certain of the Company's retail
customers have delayed payment beyond the date such payment is due. Delays in
payments from retail customers in the future could materially impact the
Company's anticipated cash flow to the detriment of the Company's business.
Delays or reductions in payment have, in the past, increased the Company's
reliance on other sources of capital, including bank lines of credit, which has
increased the Company's interest expense and, in the case of payment reductions,
reduced profitability, or increased loss, by an amount equivalent to such
reductions. Delays or reductions in payment in the future would have the same or
similar effect.
18
<PAGE>
Seasonality. Sales of toys traditionally have been highly seasonal, with a
majority of retail sales occurring during the December holiday season.
Accordingly, the Company expects that its operating results will vary
significantly from quarter to quarter, particularly in the third and fourth
quarters, when the majority of products are shipped, and the first quarter, when
a disproportionate amount of receivables are collected and trade credits are
negotiated. In addition, although indications of interest are provided by
retailers early in the year for product shipments for the December holiday
season, committed orders are not placed until later in the year and, even when
placed, such orders generally are cancelable at any time without penalty.
Accordingly, the Company generally must enter into tooling, manufacturing media
and advertising commitments prior to having firm orders. As a result, there can
be no assurance that the Company can maintain sufficient flexibility with
respect to its working capital needs or its ability to manufacture products and
obtain supplies of raw materials, tools and components to be able to minimize
the adverse effects of an unanticipated shortfall or increase in demand. Failure
to accurately predict and respond to consumer demand may cause the Company to
produce excess inventory which could materially adversely affect the Company's
operating results and financial condition. Conversely, if a product achieves
greater success than anticipated, the Company may not have sufficient inventory
to meet retail demand, which could adversely impact the Company's relations with
its customers.
Short Product Cycles. Consumer preferences in the toy industry are continuously
changing and are difficult to predict. Few products achieve market acceptance,
and even when they do achieve commercial success, products typically have short
life cycles. There can be no assurance that (i) new products introduced by the
Company will achieve any significant degree of market acceptance, (ii)
acceptance, if achieved, will be sustained for any significant amount of time,
or (iii) such products' life cycles will be sufficient to permit the Company to
recover development, manufacturing, marketing and other costs associated
therewith. In addition, sales of the Company's existing product lines are
expected to decline over time, and may decline faster than expected unless
existing products are enhanced or new product lines are introduced. Failure of
new product lines to achieve or sustain market acceptance would have a material
adverse effect on the Company's operating results and financial condition. Any
or all products within the YES! Gear and Power Penz categories, which categories
account for a majority of the Company's overall product sales, will experience
relatively short life cycles.
International Business Risk. The Company relies principally on foreign
distributors to market and sell the Company's products outside the United
States. Although the Company's international sales personnel work closely with
its foreign
19
<PAGE>
distributors, the Company cannot directly control such entities' sales and
marketing activities and, accordingly, cannot directly manage the Company's
product sales in foreign markets. The percentage of total sales constituting
foreign sales for 1995, 1996 and 1997 are 7%, 21% and 32%, respectively. In
addition, the Company's international sales may be disrupted by currency
fluctuations or other events beyond the Company's control, including political
or regulatory changes. To date, substantially all of the Company's international
sales have been denominated in US dollars and therefore the Company has not to
date experienced any adverse impact from currency fluctuations. To the extent
future sales are not denominated in US dollars, currency exchange fluctuations
in the countries where the Company does business could materially adversely
affect the Company's business, financial condition and results of operations.
Dependence on Manufacturing Facilities Based in People's Republic of China. The
Company contracts for the manufacture of substantially all of its products with
entities based in Hong Kong whose manufacturing facilities are located in the
People's Republic of China. In June 1997, Hong Kong became a sovereign territory
of the People's Republic of China. While the People's Republic of China has
provided assurances that Hong Kong will be allowed to maintain critical economic
and tax policies, there can be no assurance that political or social tensions
will not develop in Hong Kong that would disrupt this process. In addition,
tensions between the Peoples Republic of China and the Republic of China
(Taiwan), and the United States' involvement therein, could result either in a
disruption in manufacturing in the China mainland or in the imposition of
tariffs or duties on Chinese manufactured goods. Either event would have an
adverse impact on the Company's ability to obtain its products or on the cost of
these products, respectively, such that its operating results and financial
condition would be materially adversely affected.
Dependence on Restrictive Facility. The Company is dependent on the ARM
Agreement with BNY Financial Corporation to meet its financial needs during
1998, due in large part to the seasonality of the Company's business whereby the
Company is required to finance the manufacture of a substantial portion of its
products in the summer and autumn but does not collect on the sale of these
products until the fourth quarter of that year and the first quarter of the
following year. Under the terms of the ARM Agreement, BNY Financial Corporation
has taken a first priority security interest in substantially all of the
Company's assets, including its intellectual property. The ARM Agreement also
contains a number of restrictive covenants and events of default, including a
provision specifying that it shall be an event of default if Donald
Kingsborough, the Company's Vice President of Development, is not active in the
management of the Company and is not replaced within ninety (90) days with a
suitable individual of comparable experience and capability. In the event the
Company falls out of compliance with the ARM Agreement, or BNY Financial
Corporation
20
<PAGE>
does not provide additional financing, and the Company is unable to obtain
financing from other sources, the Company would not be able to finance its
operations as contemplated, and its operating results and financial condition
would be materially adversely affected.
Dependence on Key Personnel. The Company's future success will depend to a
significant extent on the efforts of the key management personnel, including
Mark Shepherd, the Company's Chief Executive Officer and Chief Financial Officer
and other key employees. The loss of one or more of these employees could have a
material adverse effect on the Company's business. In addition, the Company
believes that its future success will depend in large part on its ability to
attract and retain highly qualified management, operations and sales personnel.
There can be no assurance that the Company will be able to attract and retain
the employees it needs to in order to ensure its success.
Delisting on the Nasdaq Stock Exchange The Company has received notification
from The Nasdaq Stock Market of its intent to delist the Company's common stock
from the Nasdaq National Market. Nasdaq cited the Company's failure to meet the
minimum bid price maintenance and the minimum market value public float
requirements for a continued listing of YES!'s common stock on the Nasdaq
National Market. YES! has requested and been granted an oral hearing on November
13, 1998 to appeal Nasdaq's determination, and the Company's shares will
continue to be listed on the Nasdaq National Market while the appeal is being
heard. The Company, while appealing the delisting, does not expect to prevail.
In addition, as of September 30, 1998, the Company no longer met the Nasdaq net
tangible assets maintenance requirement.
Impact of Year 2000. The Company is in the process of evaluating and updating
its internal management information systems so that they will have the
capability to manage and manipulate data involving the transition of dates from
1999 to 2000 without functional or data abnormality and without inaccurate
results relating to such dates. The Company has contracted with a vendor to
perform all Year 2000 system upgrades necessary. Several other vendors are
prepared to perform Year 2000 systems upgrades should the initial vendor be
unable to fulfill all requirements. The Company expects to complete the updating
of its current systems before 2000. Estimated cost to address Year 2000 issues
is approximately $95,000. Any new systems implemented by the Company would be
Year 2000 compliant. Other participants in the Company's industry may also
experience functional or data abnormality. Any failures on the part of the
Company or the Company's manufacturers, lending institutions and key customers
to ensure their respective software complies with Year 2000 requirements, could
have a material adverse effect on the financial condition and results of
operation of the Company. The Company has completed its initial evaluation and
believes no material adverse effect on the financial condition of the Company
will result.
21
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
See Note 3 to the Consolidated Financial Statements on pages 7-9
hereof.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 2, 1998, pursuant to a Securities Exchange Agreement
(the "Exchange Agreement") entered into among the Company and
Infinity Investors Limited, Glacier Capital Limited and Infinity
Emerging Opportunities Limited (collectively, the "Investors"), the
Company exchanged with the Investors an aggregate of (i) 348,670
shares of the Company's Series B Convertible Preferred Stock
("Series B Stock") for the like number of shares of the Company's
Series C Convertible Preferred Stock ("Series C Convertible Stock"),
and (ii) $1,835,921 principal amount of 5% Convertible Debentures
("Old Debentures") for the like principal amount of 5% Convertible
Debentures ("New Debentures"). These securities were exchanged and
sold without registration in reliance on Section 4(2) under the
Securities Act of 1933, as amended, as the Investors are "accredited
investors" within the meaning of the Securities Act.
The Exchange Agreement provides that the Investors will not convert
the Series C Convertible Preferred Stock or New Debentures, or sell
any shares of Series C Convertible Preferred Stock, Common Stock or
New Debentures (subject to certain limited exceptions), in each case
until the earlier of February 21, 1999 or the occurrence of an Event
of Default (as defined in the Exchange Agreement). The Series C
Convertible Preferred Stock and New Debentures are substantially
similar to the Series B Stock and Old Debentures, except that
certain conversion and sale restrictions applicable to the Series B
Stock and Old Debentures do not apply to the Series C Convertible
Preferred Stock and the New Debentures, and the holders of the
Series C Convertible Preferred Stock are entitled to elect two
directors to the Company Board of Directors. The Exchange Agreement
also requires the Registrant to call a meeting of the stockholders
of the Registrant to (i) approve the issuance of all of the shares
of Common Stock upon conversion of the Series C Convertible
Preferred Stock and New Debentures (conversion is currently limited
due to certain Nasdaq
22
<PAGE>
requirements which will no longer apply if such stockholder approval
is obtained or the Company's Common Stock is delisted from the
Nasdaq National Market), and (ii) to increase the number of shares
of Common Stock authorized for issuance. Failure of the Company to
obtain such stockholder approval will constitute an Event of
Default. The Company is not seeking the stockholder approval
described in (i) above and is seeking a waiver of such stockholder
approval as the Company anticipates that the Company's Common Stock
will be delisted from the Nasdaq National Market. The Company is
seeking stockholder approval of the increase in the authorized
number of shares of Common Stock described in (ii) above. If the
Company's Common Stock is delisted from the Nasdaq National Market,
the Investors are entitled to require that the Company redeem the
Series C Convertible Preferred Stock and New Debentures.
At the option of the holder, (i) the Series C Convertible Preferred
Stock is convertible into Common Stock at a conversion rate per
share equal to $25.00 divided by 81.25% of the lowest trading price
of the Common Stock over the last 30 trading days prior to
conversion (subject to certain antidilution adjustments), and (ii)
the New Debentures are convertible into Common Stock at a conversion
rate of the dollar amount being converted divided by 81.25% of the
of the lowest trading price of the Common Stock over the last 30
trading days prior to conversion (subject to certain antidilution
adjustments), in each case subject to the limitations set forth
above.
The issuance of the Series C Convertible Preferred Stock and New
Debentures was reported on a Current Report on Form 8-K filed with
the SEC on September 16, 1998, and the Exchange Agreement,
Certificate of Designation of the Series C Convertible Preferred
Stock and form of New Debenture were filed as exhibits to such
report. Reference is made to such report and exhibits for a
description of the full terms of the Series C Convertible Preferred
Stock and New Debentures.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is not in compliance with certain covenants under the
ARM Agreement with the Bank of New York. See "Part I - Item 2. -
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
23
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In September 1998, Stuart J. Chasanoff and Barrett N. Wissman of HW
Partners, L.P. were appointed to the Board of Directors
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
4.1* Form of 5% Convertible Debenture due April 30, 2002.
4.2* Amended Certificate of Designation of Series C Preferred
Shares.
10.1* Securities Exchange Agreement dated September 2, 1998.
10.2 Credit Agreement, dated as of September 2, 1998, between the
Company and Infinity Investors Limited.
10.3 Security Agreement, dated as of September 2, 1998, between
the Company and Infinity Investors Limited.
27.1 Financial Data Schedule for the quarter ended September 30,
1998
(*) Previously filed on Current Report on Form 8-K filed
September 16, 1998.
b) REPORTS ON FORM 8-K
A Current Report on form 8-K was filed on September 16, 1998.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
YES! Entertainment Corporation
------------------------------
Registrant
Date November 13, 1998 /s/ Mark Shepherd
----------------- -----------------
Mark Shepherd
Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer and
Principal Financial and Chief Accounting
Officer)
25
<PAGE>
EXHIBIT 10.2
CREDIT AGREEMENT
CREDIT AGREEMENT, dated as of September 2, 1998, between YES!
ENTERTAINMENT CORPORATION, a Delaware corporation as borrower (the "Borrower")
--------
and INFINITY INVESTORS LIMITED, a Nevis, West Indies corporation, as lender (the
"Lender" or "Infinity").
------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, subject to and upon the conditions herein set forth, the
Lender is willing to make available to the Borrower the credit facility provided
for herein;
NOW, THEREFORE, IT IS AGREED:
Section 1. Definitions and Principles of Construction.
------------------------------------------
1.1 Defined Terms. As used in this Agreement, the following
-------------
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"Affiliate" shall mean, with respect to any Person, any other Person
---------
(other than an individual) directly or indirectly controlling, controlled by, or
under direct or indirect common control with, such Person; provided, however,
-------- -------
that an Affiliate of an individual shall include any Person in which such
individual, directly or indirectly, owns more than 5% of the equity or voting
interests of such Person or serves as an officer or director of such Person. A
Person shall be deemed to control another Person if such Person possesses,
directly or indirectly, the power to direct or cause the direction of the
management and policies of such other Person, whether through the ownership of
voting securities, by contract or otherwise.
"Agreement" shall mean this Credit Agreement, as modified,
---------
supplemented or amended from time to time.
"Bankruptcy Code" shall have the meaning provided in Section 8.5.
---------------
"Borrower" shall have the meaning provided in the first paragraph of
--------
this Agreement.
"Borrowing" shall mean the making of any Loan pursuant hereto.
---------
"Borrowing Date" shall mean September 2, 1998 or such other date as
--------------
the Lender and the Borrower agree to in writing.
"Business Day" shall mean for all purposes any day except Saturday,
------------
Sunday and any day which shall be in New York or California a legal holiday or a
day on which banking institutions are authorized or required by law or other
government action to close.
"Collateral" shall mean all Security Agreement Collateral.
----------
<PAGE>
"Commitment" shall mean U.S.$3,050,000.
----------
"Credit Documents" shall mean this Agreement, the Note, and the
----------------
Security Documents.
"Default" shall mean any event, act or condition which with notice or
-------
lapse of time, or both, would constitute an Event of Default.
"Default Rate" shall have the meaning provided in Section 2.4(b).
------------
"Dollars" and the sign "$" shall each mean freely transferable lawful
------- -
money of the United States.
"Effective Date" shall mean the date on which this Agreement is
--------------
executed by the Lender and the Borrower.
"Event of Default" shall have the meaning provided in Section 8.
----------------
"Exchange Agreement" shall mean the agreement, dated as of September
------------------
2, 1998, among the Holders and the Borrower, pursuant to which the Borrower
exchanged the July Debentures for the Replacement Debentures and exchanged the
Series B Preferred for the Series C Preferred.
"Holders" shall mean Infinity Investors Limited, Glacier Capital
-------
Limited and Infinity Emerging Opportunities Limited.
"Indebtedness" shall mean, as to any Person, without duplication, (i)
------------
all indebtedness (including principal, interest, fees and charges) of such
Person for borrowed money or for the deferred purchase price of property or
services, (ii) the face amount of all letters of credit issued for the account
of such Person and all drafts drawn thereunder, (iii) all liabilities secured by
any Lien on any property owned by such Person, whether or not such liabilities
have been assumed by such Person, (iv) the aggregate amount required to be
capitalized under leases under which such Person is the lessee, (v) all
obligations and liabilities of such Person arising under or pursuant to any
interest rate "swap", "cap", "collar" or other interest rate protection
arrangement, and (vi) all obligations of such Person guaranteeing or intended to
guarantee any Indebtedness, leases, dividends or other obligations of any other
Person in any manner, whether directly or indirectly.
"July Debentures" shall mean 5% convertible debentures, due April 30,
---------------
2002 issued by the Borrower pursuant to the Purchase Agreement.
"Lender" shall have the meaning provided in the first paragraph of
------
this Agreement.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment,
----
deposit arrangement, encumbrance, lien (statutory or other), preference,
priority or other security agreement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any financing or similar statement or notice filed under any
recording or notice statute, and any lease having substantially the same effect
as any of the foregoing).
-2-
<PAGE>
"Loan" shall have the meaning provided in Section 2.1.
----
"Material Adverse Effect" shall mean, with respect to any Person (i)
-----------------------
any material adverse effect on the condition (financial or otherwise), business,
operations, assets, revenues, properties or prospects of such Person and/or (ii)
any material adverse effect on the ability of such Person to perform any of its
obligations under the Credit Document to which it is a party.
"Maturity Date" shall mean June 30, 1999.
-------------
"Note" shall have the meaning provided in Section 2.3.
----
"Obligations" shall mean all amounts owing to the Lender pursuant to
-----------
the terms of this Agreement or any other Credit Document (including, without
limitation, principal and interest under the Note).
"Permitted Liens" shall have the meaning provided in Section 7.3.
---------------
"Person" shall mean any individual, partnership, joint venture, firm,
------
corporation, association, trust or other enterprise or any government or
political subdivision or any agency, department or instrumentality thereof.
"Process Agent" shall have the meaning provided in Section 9.7.
-------------
"Purchase Agreement" shall mean that certain Amended and Restated
------------------
Securities Purchase Agreement, dated July 25, 1998, between Yes! Entertainment
Corporation, Infinity Investors Limited, Fairway Capital Limited, and Cappello &
Laffer Capital Corp.
"Replacement Debentures" shall mean 5% convertible debentures, due
----------------------
April 30, 2002, issued by the Borrower pursuant to the Exchange Agreement.
"SEC" shall mean the Securities and Exchange Commission or any
---
governmental agencies substituted therefor.
"Security Agreement" shall have the meaning provided in Section
------------------
4.5(ii).
"Security Agreement Collateral" shall mean all "Collateral" as defined
----------------------------- ----------
in Section 1.01(a) of the Security Agreement.
"Security Assignment" shall have the meaning provided in Section
-------------------
4.5(i).
"Security Documents" shall mean the Security Agreement and the
------------------
Security Assignment.
"Series B Preferred Stock" shall mean the Series B preferred stock
------------------------
issued by the Borrower pursuant to the Purchase Agreement.
"Series C Preferred Stock" shall mean the Series C preferred stock
------------------------
issued by the Borrower pursuant to the Purchase Agreement.
"Subsidiary" shall mean, as to any Person, (i) any corporation more
----------
than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a
-3-
<PAGE>
majority of the directors of such corporation (irrespective of whether or not at
the time stock of any class or classes of such corporation shall have or might
have voting power by reason of the happening of any contingency) is at the time
owned by such Person and/or one or more Subsidiaries of such Person and (ii) any
partnership, association, joint venture or other entity in which such Person
and/or one or more Subsidiaries of such Person has more than a 50% equity
interest at the time.
"Taxes" shall have the meaning provided in Section 3.5.
-----
"United States" and "U.S." shall each mean the United States of
------------- ----
America.
"Wham-O Contract" shall mean that certain Asset Purchase Agreement,
---------------
dated February 27, 1998, between the Borrower and Wham-O, Inc.
Section 1.2 Principles of Construction. All references to sections,
--------------------------
schedules and exhibits are to sections, schedules and exhibits in or to this
Agreement unless otherwise specified. The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement.
Section 2. Amount and Terms of Credit.
--------------------------
2.1 The Loan. (a) Subject to and upon the terms and conditions
--------
set forth herein, the Lender agrees, on the Borrowing Date, to make a loan (the
"Loan") to the Borrower, which Loan shall (i) be made as a single Borrowing and
(ii) be in an amount equal to U.S.$3,000,000.00. The Loan is available only on
the terms and conditions specified hereunder, and though repaid, in full or in
part, at maturity or by prepayment, may not be reborrowed in full or in part.
2.2 Disbursement of Funds. Subject to the terms and conditions
---------------------
hereof, no later than 12:00 Noon (New York time) on the Borrowing Date, the
Lender will make available, through its lending office, the amount of the Loan,
net of fees and costs payable to the Lender, to or to the order of the Borrower
pursuant to wire instructions provided to the Lender not later than two Business
Days prior to the Borrowing Date.
2.3 Notes; Evidence of Obligations. The Borrower's obligation to
------------------------------
pay the principal of, and interest on, the Loan shall be evidenced by a
promissory note duly executed and delivered by the Borrower on or before the
Borrowing Date substantially in the form of Exhibit A, with blanks appropriately
completed in conformity herewith (the "Note"). The Note shall (i) be executed
by the Borrower, (ii) be payable to the order of the Lender and be dated as of
the Borrowing Date, (iii) be in a stated principal amount equal to the
Commitment, (iv) provide for repayment of principal as provided in Section 3.3,
and (v) bear interest as provided in Section 2.4. The Lender will note on its
internal records the amount of the indebtedness of the Borrower to the Lender as
a result of the Loan, including the amounts of principal, interest and other
amounts payable and paid to the Lender from time to time under this Agreement
and the Note. Such internal records shall constitute prima facie evidence of
the existence and amounts of the Loan and other Obligations therein noted;
provided, however, that the failure of the Lender to make such notations, or any
error therein, shall not in any manner affect the obligations of the Borrower to
repay or pay the Loan in accordance with the terms of this Agreement.
-4-
<PAGE>
2.4 Interest. (a) The Borrower agrees to pay interest in respect of
--------
the unpaid principal amount of each Loan outstanding from time to time, from the
Borrowing Date thereof until the maturity thereof (whether by acceleration or
otherwise), at a fixed rate per annum of 12.0%.
(b) Overdue principal and, to the extent permitted by law,
overdue interest in respect of the Loan and any other overdue amount payable by
the Borrower hereunder shall bear interest at a rate per annum equal to the
lesser of (i) 15% or (ii) the maximum rate permitted by applicable law (the
"Default Rate").
------------
(c) Accrued (and theretofore unpaid) interest in respect of each
Loan shall be payable at maturity (whether by acceleration or otherwise) and,
after such maturity, on demand.
2.5 Increased Costs, Illegality, etc. (a) In the event that the
---------------------------------
Lender shall have determined (which determination shall, absent manifest error,
be final and conclusive and binding upon all parties hereto) at any time (i)
that the Lender shall incur increased costs or reductions in the amounts
received or receivable hereunder with respect to the Loan because of any change
since the date hereof in any applicable law or in the interpretation or
administration thereof, including the introduction of any new law, or (ii) that
the making or continuance of the Loan has been made unlawful by any law or
impossible by compliance by the Lender in good faith with any law, then, and in
any such event, the Lender shall promptly give telephonic notice (confirmed in
writing) to the Borrower. Thereafter (x) in the case of clause (i) above, if the
Borrower does not elect to prepay such Loan within 30 days after receipt of
notice thereof, the Borrower shall pay to the Lender, upon written demand
therefor (and against a certificate specifying in reasonable detail the nature
of the increased cost or reduction, the date from which it has been applied and
the method of calculating such increased cost), such additional amounts (in the
form of an increased rate of, or a different method of calculating, interest) as
shall be required to compensate the Lender for such increased costs or
reductions in amounts received or receivable hereunder, and (y) in the case of
clause (ii) above, the Borrower shall repay the Loan as promptly as possible
and, in any event, within the time period required by law.
(b) If the Lender determines at any time that the introduction
or implementation of, or any change in, any law after the date hereof concerning
capital adequacy, or any change in interpretation or administration thereof by
any governmental authority, central bank or comparable agency, will have the
effect of increasing the amount of capital required or expected to be maintained
by the Lender based on the existence of the Lender's obligations hereunder, then
the Borrower shall pay to the Lender, within 15 Business Days of its written
demand therefor, such additional amounts as shall be required to compensate the
Lender for the increased cost to the Lender as a result of such increase of
capital. In determining such additional amounts, the Lender will act in good
faith and will use averaging and attribution methods which are reasonable. The
Borrower shall have no obligation to reimburse the Lender for any costs incurred
more than 90 days prior to demand therefor by the Lender.
Section 3. Prepayments; Payments.
---------------------
3.1 Voluntary Prepayments. The Borrower shall have the right to
---------------------
prepay the Loan, without premium or penalty, in whole or in part at any time and
from time to time on the following terms and conditions: (i) the Borrower shall
give the Lender at least five Business
-5-
<PAGE>
Days' prior written notice of its intent to prepay the Loan and the amount of
such prepayment; (ii) each prepayment in respect of any Loan shall be in an
aggregate principal amount of at least U.S.$100,000; and (iii) the Borrower
shall compensate the Lender, upon its written request, for all reasonable and
actual losses, expenses and any liabilities (including, without limitation, any
loss, expense or liability incurred by reason of the liquidation or redeployment
of deposits or other funds required by the Lender to fund the Loan or any
expense or liability incurred by the Lender in settlement of any swap or other
interest rate protection agreement entered into by the Lender in connection with
the Loan) if for any reason the repayment of the Loan occurs other than as
specified in Section 3.3.
3.2 Mandatory Prepayments. If at any time after the Borrowing
---------------------
Date the Borrower is entitled to receive any payments under the Wham-O Contract,
whether such right accrued prior to or following the Borrowing Date (but
excluding monies payable to the Borrower under the Transition Services Agreement
entered into as of March 20, 1998, by the Borrower and Wham-O, Inc.), such
payments shall be made directly to the Lender and applied first to any
outstanding interest and then to principal.
3.3 Scheduled Repayment. The outstanding principal of the Loan
-------------------
shall be paid in full on the Maturity Date.
3.4 Method and Place of Payment. Except as otherwise specifically
---------------------------
provided herein, all payments under this Agreement or any Note shall be made to
the Lender not later than 12:00 Noon (New York time) on the date when due and
shall be made in Dollars in immediately available funds at Citibank, New York
City, ABA# 021 000 089, Credit to Bear Stearns Acct # 0925-3186, f/c/o Infinity
Investors Limited, Account Number 102-05092 or to such other location as the
Lender may from time to time specify in writing. Whenever any payment to be made
hereunder or under any Note shall be stated to be due on a day which is not a
Business Day, the due date thereof shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest, if any, shall
be payable at the applicable rate during such extension.
3.5 Net Payments. All payments made by the Borrower hereunder or
------------
under any Note will be made without setoff, counterclaim or other defense. All
such payments will be made free and clear of, and without deduction or
withholding for, any present or future taxes, value-added taxes, levies,
imposts, duties, fees, assessments or other charges of whatever nature now or
hereafter imposed by any jurisdiction or by any political subdivision or taxing
authority thereof or therein (but excluding, except as provided below, any tax
imposed on or measured by the net income of the Lender pursuant to the laws of
the jurisdiction (or any political subdivision or taxing authority thereof or
therein) in which the principal office or lending office of the Lender is
located) and all interest, penalties or similar liabilities with respect thereto
(collectively, "Taxes"). If any amounts are payable in respect of Taxes
pursuant to the preceding sentence, then the Borrower shall also reimburse the
Lender, upon the written request of the Lender, for all value-added and other
taxes imposed on or measured by the net income of the Lender pursuant to the
laws of the jurisdiction (or any political subdivision or taxing authority
thereof or therein) in which the principal office or lending office of the
Lender is located as the Lender shall determine are payable by the Lender in
respect of amounts paid to or on behalf of the Lender pursuant to the preceding
sentence. If any Taxes are so levied or imposed, the Borrower agrees to pay the
full amount of such Taxes and such additional amounts as may be necessary so
that every payment of all amounts due hereunder or under the Note, after
-6-
<PAGE>
withholding or deduction for or on account of any Taxes, will not be less than
the amount provided for herein or in the Note. The Borrower will furnish to the
Lender within 45 days after the date the payment of any Taxes is due pursuant to
applicable law certified copies of tax receipts evidencing such payment by the
Borrower. The Borrower will indemnify and hold harmless the Lender, and
reimburse the Lender upon its written request, for the amount of any Taxes or
other taxes described above which are levied or imposed on and paid by such
Lender.
Section 4. Conditions Precedent.
--------------------
The obligation of the Lender to make the Loan is subject to the
satisfaction of the following conditions as of the Borrowing Date:
4.1 Execution of Agreement; Note. There shall have been
----------------------------
delivered to the Lender this Agreement and the Note, each duly executed by the
Borrower.
4.2 No Default; Representations and Warranties. At the time of
------------------------------------------
the Borrowing (and after giving effect thereto) (i) there shall exist no Default
or Event of Default and (ii) all representations and warranties contained herein
and in the other Credit Documents shall be true and correct in all material
respects with the same effect as though such representations and warranties had
been made on and as of the date of the Borrowing.
4.3 Opinion of Borrower's Counsel. The Lender shall have received
-----------------------------
from counsel to the Borrower an opinion addressed to the Lender and dated the
Borrowing Date in substantially the form attached hereto as Exhibit B and
covering such additional matters incident to the transactions contemplated
herein as the Lender may reasonably request.
4.4 Officers Certificates; Proceedings.
----------------------------------
(i) The Lender shall have received a certificate, dated
the Borrowing Date, substantially in the form of Exhibit C, signed by the
President or a Vice President of the Borrower, and attested to by the Secretary
or an Assistant Secretary of the Borrower, of corporate resolution authorizing
the execution and delivery of the Credit Documents to which the Borrower is a
party, and the performance of its obligations thereunder, and such other matters
as the Lender may reasonably request, together with copies of the certificate of
incorporation and by-laws of the Borrower and the resolutions of the Borrower
referred to in such certificate.
(ii) All corporate and legal proceedings and all
instruments and agreements in connection with the transactions contemplated in
this Agreement and the other Credit Documents shall be satisfactory in form and
substance to the Lender, and the Lender shall have received all information and
copies of all documents and papers, including records of corporate or
partnership proceedings, as the case may be, and governmental approvals, if any,
which the Lender reasonably may have requested in connection therewith, such
documents and papers where appropriate to be certified by proper corporate or
governmental authorities, as the case may be.
4.5 Security Documents.
------------------
(i) The Borrower shall have duly authorized, executed and
delivered a security assignment substantially in the form of Exhibit D (as
modified,
-7-
<PAGE>
supplemented or amended from time to time, the "Security Assignment"), pursuant
-------------------
to which the Borrower shall have granted to the Lender a first priority Lien on
all of the Borrower's rights under the Wham-O Contract, and all acknowledgments
and consents required thereunder, including those of Wham-O, Inc., have been
obtained and shall be in full force and effect. Additionally, the Borrower shall
have delivered:
(a) acknowledgment copies of proper financing statements (Form
UCC-1) duly filed under the UCC of each jurisdiction as may be
necessary or, in the opinion of the Lender, desirable to perfect the
security interests purported to be created by the Security Assignment;
(b) certified copies of requests for information or copies (Form
UCC-11), or equivalent reports, listing the financing statements
referred to in clause (a) above and all other effective financing
statements that name the Borrower as debtor and that are filed in the
jurisdictions referred to in said clause (a), together with copies of
such other financing statements (none of which shall cover the
Borrower's rights under the Wham-O Contract except to the extent
evidencing Permitted Liens);
(c) evidence of the completion of all other recordings and
filings of, or with respect to, the Security Assignment as may be
necessary or, in the opinion of the Lender, desirable to perfect the
security interests purported to be created by the Security Agreement;
and
(d) evidence that all other actions necessary or, in the opinion
of the Lender, desirable to perfect and protect the security interests
purported to be created by the Security Assignment have been taken.
(i) The Borrower shall have duly authorized, executed and
delivered a security agreement substantially in the form of Exhibit E (as
modified, supplemented or amended from time to time, the "Security Agreement"),
------------------
covering all the Borrower's present and future Security Agreement Collateral,
together with:
(a) acknowledgment copies of proper financing statements (Form
UCC-1) duly filed under the UCC of each jurisdiction as may be
necessary or, in the opinion of the Lender, desirable to perfect the
security interests purported to be created by the Security Agreement;
(b) certified copies of requests for information or copies (Form
UCC-11), or equivalent reports, listing the financing statements
referred to in clause (a) above and all other effective financing
statements that name the Borrower as debtor and that are filed in the
jurisdictions referred to in said clause (a), together with copies of
such other financing statements (none of which shall cover the
Security Agreement Collateral except to the extent evidencing
Permitted Liens);
(c) evidence of the completion of all other recordings and
filings of, or with respect to, the Security Agreement as may be
necessary or, in the opinion of the Lender, desirable to perfect the
security interests purported to be created by the Security Agreement;
and
-8-
<PAGE>
(d) evidence that all other actions necessary or, in the opinion
of the Lender, desirable to perfect and protect the security interests
purported to be created by the Security Agreement have been taken.
4.6 Consent Letter. The Lender shall have received a letter from
--------------
the Borrower, substantially in the form attached hereto as Exhibit F, indicating
its appointment of the Process Agent as its agent to accept service of process
in connection with the transactions contemplated by the Credit Documents,
together with the countersignature of the process agent indicating its consent
to serve in such capacity.
4.7 Governmental Approvals. The Borrower shall have delivered
----------------------
evidence satisfactory to the Lender in all respects that all governmental
approvals required in connection with (i) the execution, delivery and
performance of the Credit Documents and (ii) the legality, validity, binding
effect and enforceability of any and all such Credit Documents, have been
received by the Borrower.
4.8 Litigation. No litigation, action, suit, investigation, claim
----------
or proceeding shall be pending or threatened with respect to this Agreement or
any other Credit Document, the transactions contemplated hereby or which could
reasonably be expected to have a Material Adverse Effect on the Borrower.
4.9 Payments. All fees and other amounts required to be paid or
--------
deposited on or prior to the Borrowing Date under this Agreement and the other
Credit Documents shall have been paid or deposited.
4.10 No Material Adverse Change. Nothing shall have occurred
--------------------------
since June 30, 1998 (and the Lender shall have become aware of no facts or
conditions not previously known), which the Lender shall determine has, or could
reasonably be expected to have, a Material Adverse Effect on the Borrower.
4.11 Consent to First Priority Lien. The Borrower shall have
------------------------------
received the written consent of the Bank of New York permitting the Borrower to
grant a first priority lien in the Wham-O Contract to the Lender and
subordinating all existing liens of The Bank of New York in the Wham-O Contract
to the first priority lien in the Wham-O Contract.
4.12 Entering into the Exchange Agreement. The Lender and the
------------------------------------
Borrower shall have entered into the Exchange Agreement.
4.13 Replacement of Debentures. The Borrower shall have issued
-------------------------
Replacement Debentures which shall be issued pursuant to the Exchange Agreement.
4.14 Exchange of Series B Preferred. The Borrower shall have
------------------------------
filed a new certificate of designation with respect to the Borrower's Series C
Preferred Stock, and the Holders shall have received their shares of Series C
Preferred in exchange for their shares of Series B Preferred, as contemplated by
the Exchange Agreement.
4.15 Mutual Releases. The Lender and the Borrower shall have
---------------
executed mutual releases of all claims and causes of action arising with respect
to actions taken prior to the effective date of the Exchange Agreement.
-9-
<PAGE>
Section 5. Representations, Warranties and Agreements.
------------------------------------------
In order to induce the Lender to enter into this Agreement and to make
the Loan, the Borrower makes the following representations, warranties and
agreements as of the Effective Date, which shall survive the execution and
delivery of this Agreement and the Note and the making of the Loan.
5.1 Organization. The Borrower (i) is a duly organized and
------------
validly existing corporation in good standing under the laws of Delaware, (ii)
has the power and authority to own its property and assets and to transact the
business in which it is engaged and (iii) is duly qualified as a foreign
corporation and in good standing in each jurisdiction where the ownership,
leasing or operation of property or the conduct of its business requires such
qualification.
5.2 Power and Authority. The Borrower has the power and authority to
-------------------
execute, deliver and perform the terms and provisions of each of the Credit
Documents to which it is a party and has taken all necessary action to authorize
the execution, delivery and performance by the Borrower of each of such Credit
Documents. The Borrower has duly executed and delivered each of the Credit
Documents to which the Borrower is a party, and each of such Credit Documents
constitutes the legal, valid and binding obligation of the Borrower enforceable
in accordance with its terms.
5.3 No Violation. Neither the execution, delivery or performance by
------------
the Borrower of the Credit Documents nor compliance by the Borrower with the
terms and provisions hereof and thereof, (i) shall contravene any provision of
any law, statute, rule or regulation or any order, writ, injunction or decree of
any court or governmental instrumentality, or (ii) shall conflict or be
inconsistent with or result in any breach of any of the terms, covenants,
conditions or provisions of, or constitute a default under, or result in the
creation or imposition of (or the obligation to create or impose) any Lien upon
any of the property or assets of the Borrower pursuant to the terms of any
indenture, mortgage, deed of trust, credit agreement, loan agreement or any
other agreement, contract or instrument to which the Borrower is a party or by
which the Borrower or any of the Borrower's property or assets is bound or to
which it may be subject.
5.4 Consent, Approvals, Etc. No order, consent, approval, license,
------------------------
authorization or validation of, or filing, recording or registration with
(except as have been obtained or made prior to the date hereof), or exemption
by, the Borrower is required to authorize, or is required in connection with,
(i) the execution, delivery and performance of any Credit Document by the
Borrower, or (ii) the legality, validity, binding effect or enforceability of
any such Credit Document.
5.5 Financial Statements; Financial Conditions: Undisclosed
-------------------------------------------------------
Liabilities; etc.
- -----------------
(a) The statements of financial condition of the Borrower at
June 30, 1998, and the related statements of income and retained earnings and
changes in financial position of the Borrower for the 6-month period ended on
such date, heretofore furnished to the Lender, present fairly the financial
condition of the Borrower at the date of such statements. All such statements
have been prepared in accordance with generally accepted accounting principles
and practices consistently applied, subject to normal year end audit
adjustments. Since June 30,
-10-
<PAGE>
1998, there has been no material adverse change in the business, operations,
property, assets, condition (financial or otherwise) or prospects of the
Borrower.
(b) Except as fully reflected in the financial statements
delivered pursuant to subsection (a) above, there were as of the date hereof no
liabilities or obligations with respect to the Borrower of any nature whatsoever
(whether absolute, accrued, contingent or otherwise and whether or not due)
which, either individually or in the aggregate, would be material to the
Borrower. As of the date hereof, the Borrower does not know of any basis for the
assertion against the Borrower of any liability or obligation of any nature
whatsoever that is not fully reflected in the financial statements delivered
pursuant to subsection (a) above which, either individually or in the aggregate,
could be material to the Borrower.
5.6 Litigation. There are no actions, suits or proceedings pending
----------
or, to the best knowledge of the Borrower, threatened (i) with respect to any
Credit Document or (ii) that are reasonably likely to have a Material Adverse
Effect on the Borrower, other than as disclosed in the Borrower's most recent
reports in Forms 10-K and 10-Q filed with the SEC.
5.7 True and Complete Disclosure. All factual information (taken
----------------------------
as a whole) heretofore or contemporaneously furnished by or on behalf of the
Borrower to the Lender for purposes of or in connection with this Agreement or
any transaction contemplated herein is, and all other such factual information
(taken as a whole) hereafter furnished by or on behalf of the Borrower in
writing to the Lender or made in public filings with the SEC shall be, true and
accurate in all material respects on the date as of which such information is
dated or certified and not incomplete by omitting to state any fact necessary to
make such information (taken as a whole) not misleading at such time in light of
the circumstances under which such information was provided.
5.8 Use of Proceeds, Margin Regulations. All of the proceeds of the
-----------------------------------
Loan will be used by the Borrower for general working capital purposes. No part
of the proceeds of the Loan shall be used by the Borrower to purchase or carry
any margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock. Neither the making of the Loan nor the use of the
proceeds thereof shall violate or be inconsistent with the provisions of
Regulations T, U or X of the Board of Governors of the Federal Reserve System.
5.9 Tax Returns and Payments. The Borrower has filed all tax returns
------------------------
required to be filed by the Borrower and has paid all income taxes payable by
the Borrower which have become due pursuant to such tax returns and all other
taxes and assessments payable by the Borrower which have become due, other than
those not yet delinquent and except for those contested in good faith and by
appropriate proceedings diligently pursued and for which adequate reserves have
been established. The Borrower has paid all federal and local income taxes
applicable to the Borrower for all prior years and for the current year to the
date hereof.
5.10 Compliance with Laws. The Borrower is in compliance with all
--------------------
applicable statutes, regulations and orders of, and all applicable restrictions
imposed by, all governmental agencies, authorities and instrumentalities,
domestic or foreign, in respect of the conduct of its business and the ownership
of its property (including applicable statutes, regulations, orders and
restrictions relating to environmental standards and controls), except such
noncompliance as would not, in the aggregate, have a Material Adverse Effect on
the Borrower.
-11-
<PAGE>
5.11 Title to Properties. The Borrower has good and marketable title
-------------------
to all material properties owned by it, including all properties reflected in
the financial statements referred to in Section 5.5(a) (except as sold or
otherwise disposed of since the date of such financial statements in the
ordinary course of business or as otherwise disclosed to the Lender).
5.12 Fees and Enforcement. No fees or taxes, including, without
--------------------
limitation, stamp, transaction, registration or similar taxes, are required to
be paid for the legality, validity, or enforceability of this Agreement or any
of the other Credit Documents.
Section 6. Affirmative Covenants.
---------------------
On and after the Effective Date and until the Loan and the Note,
together with interest and all other Obligations incurred hereunder and
thereunder, are paid in full, the Borrower consents and agrees that, unless
otherwise consented to in writing by the Lender:
6.1 Information Covenants. The Borrower will furnish, or cause to be
---------------------
furnished, to the Lender:
(a) As soon as available, but in any event within 45 days after
the close of each quarterly accounting period in each fiscal year of the
Borrower, the statement of financial condition of the Borrower as at the end of
such quarterly period and the related statements of income retained earnings and
statement of cash flow for such quarterly annual period and for the elapsed
portion of the fiscal year ended with the last day of such quarterly annual
period, in each case setting forth comparative figures for the related periods
in the prior fiscal year, all of which shall be certified by the chief financial
officer of the Borrower, subject to normal year-end audit adjustments.
(b) As soon as available, but in any event within 90 days after
the close of each fiscal year of the Borrower, the statement of financial
condition of the Borrower as at the end of such fiscal year and the related
statements of income retained earnings and statement of cash flow for such
fiscal year, in each case setting forth comparative figures for the prior fiscal
year, all of which shall be reviewed by independent certified accountants
reasonably acceptable to the Lender.
(c) At the time of the delivery of the financial statements
provided for in Section 7.1(a) or (b), a certificate from the Borrower to the
effect that, to the best of the Borrower's knowledge, no Default or Event of
Default has occurred and is continuing or, if any Default or Event of Default
has occurred and is continuing, specifying the nature and extent thereof.
(d) Promptly, and in any event within three Business Days after
the Borrower obtains knowledge thereof, notice of (i) the occurrence of any
event which constitutes a Default or Event of Default, (ii) any litigation or
governmental proceeding pending (x) against the Borrower which is reasonably
likely to have a Material Adverse Effect on the Borrower or (y) with respect to
any Credit Document and (iii) any other event which is reasonably likely to have
a Material Adverse Effect on the Borrower.
(e) From time to time, such other information or documents
(financial or otherwise) as the Lender may reasonably request.
-12-
<PAGE>
6.2 Books and Records. The Borrower will keep proper books of record
-----------------
and account in which full, true and correct entries, in conformity with
applicable law and in conformity with generally accepted accounting principles,
will be made of all business dealings and transactions in relation to the
Borrower's financial activities. The Borrower will, and will cause its agents
and representatives to permit officers and designated representatives or agents
of the Lender to visit and inspect at all reasonable times and to such
reasonable extent as the Lender may request, any of the Borrower's assets and
properties, and to examine the books of record and account of the Borrower and
to discuss the affairs, finances and accounts of the Borrower with, and be
advised as to the same by, the officers, representatives and agents of the
Borrower; such visits, inspections and examinations to occur not more than four
times annually so long as no Event of Default exists.
6.3 Maintenance of Properties and Insurance. The Borrower will keep
---------------------------------------
all of its properties and assets in good and working order and condition and
maintain with financially sound and reputable insurance companies insurance on
such properties and assets in such amounts and against such risks as Persons
similarly situated generally maintain in effect (including, without limitation,
insurance with respect to environmental hazards) and furnish to the Lender, upon
written request, full information as to the insurance carried.
6.4 Franchises. The Borrower will do, or cause to be done, all
----------
things necessary to preserve and keep in full force and effect its existence and
its material rights, franchises and licenses.
6.5 Compliance with Law. The Borrower will comply with all
-------------------
provisions of law applicable to the Borrower and its properties, assets or
business, except where such non-compliance would not have a Material Adverse
Effect.
6.6 Taxes. The Borrower will pay when due all of its taxes, except
-----
as contested in good faith and by appropriate proceedings diligently pursued and
for which adequate reserves have been established.
6.7 Use of Proceeds. The Borrower will use the proceeds as
---------------
contemplated in Section 5.8 hereof.
6.8 Further Assurances.
------------------
(a) The Borrower will, at its own expense, (i) make, execute,
endorse, acknowledge, file and/or deliver to the Lender from time to time such
vouchers, invoices, schedules, confirmatory assignments, conveyances, financing
statements, transfer endorsements, powers of attorney, certificates, reports and
other assurances or instruments and (ii) take or cause to be taken such further
actions and steps relating to the filing and prosecution of applications with
governmental agencies for registration or recording (including, if necessary or
requested, the modification, refiling and prosecution of such applications) and
the other agreements, covenants and transactions provided for or contemplated
herein, in any such case as the Lender may reasonably require.
(b) The Borrower will (i) make, execute, endorse, acknowledge,
file with and/or deliver, or cause to be made, executed, endorsed, acknowledged,
filed and/or delivered, to the Lender from time to time such documents,
instruments and opinions, and (ii) take such further steps relating to the
syndication and/or transfer of all or any portion of the Loan
-13-
<PAGE>
as the Lender may reasonably require. Without limiting the generality of the
foregoing, the Borrower will promptly execute and deliver such additional
substitute Notes as the Lender may reasonably require.
Section 7. Negative Covenants.
------------------
On and after the date hereof and until the Loan and the Note, together
with interest and all other Obligations incurred hereunder and thereunder, are
paid in full, the Borrower covenants and agrees that, without the prior written
agreement of the Lender:
7.1 Consolidation, Merger Sale of Assets, Etc. The Borrower will
-----------------------------------------
not wind up, liquidate or dissolve its affairs or enter into any transaction of
merger or consolidation, or convey, sell, lease or otherwise dispose of, (or
agree to do any of the foregoing at any future time) all or any material part of
its property or assets, other than sales of inventory made in the ordinary
course of business.
7.2 Indebtedness. The Borrower will not contract, create, incur,
------------
assume or suffer to exist any Indebtedness, except: (i) accrued expenses and
current trade accounts payable incurred in the ordinary course of business; (ii)
Indebtedness under this Agreement; (iii) Indebtedness existing on the date
hereof and described in the financial statements delivered pursuant to Section
5.5; (iv) other Indebtedness not in excess of $100,000 in the aggregate; and (v)
Indebtedness under the Replacement Debentures.
7.3 Liens. The Borrower will not create, incur, assume or suffer
-----
to exist any Lien upon or with respect to any property or assets (real or
personal, tangible or intangible) of the Borrower, whether now owned or
hereafter acquired, provided that the provisions of this subsection shall not
prevent the creation, incurrence, assumption or existence of the following Liens
(the "Permitted Liens"): (i) Liens for taxes not yet due, or Liens for taxes
---------------
being contested in good faith and by appropriate proceedings for which adequate
reserves have been established; (ii) Liens in respect of property or assets of
the Borrower imposed by law, which were incurred in the ordinary course of
business, such as carriers, warehousemen's and mechanic's liens and other
similar Liens arising in the ordinary course of business and (x) which do not in
the aggregate materially detract from the value of such property or assets or
materially impair the use thereof or (y) which are being contested in good faith
by appropriate proceedings, which proceedings have the effect of preventing the
forfeiture or sale of the property or assets subject to any such Lien; and
(iii) Liens in existence on the date hereof and described in the financial
statements delivered pursuant to Section 5.5 or in Annex A to the Security
Agreement.
7.4 Advances, Investments and Loans. The Borrower will not lend
-------------------------------
money or credit or make advances to any Person, or purchase or acquire any
stock, obligations or securities of, or any other interest in, or make any
capital contribution to, any other Person, except that the Borrower may own bank
accounts and hold receivables owing to the Borrower if created or acquired in
the ordinary course of business and payable or dischargeable in accordance with
customary trade terms.
7.5 Affiliate Transactions. The Borrower will not enter into any
----------------------
transaction or series of related transactions, whether or not in the ordinary
course of business, with any Affiliate of the Borrower other than on terms and
conditions as favorable to the Borrower as
-14-
<PAGE>
would be obtainable by the Borrower at the time in a comparable arm's-length
transaction with a Person other than an Affiliate.
7.6 Business. The Borrower will not engage (directly or indirectly)
--------
in any business which is substantially different than the business in which it
is engaged on the date hereof.
7.7 Dividends. The Borrower will not declare or pay any dividends,
---------
or return any capital to, its shareholders or authorize or make any other
distribution, payment or delivery of property or cash to its shareholders as
such, or redeem, retire, purchase or otherwise acquire, directly or indirectly,
for a consideration, any shares of any class of its capital stock now or
hereafter outstanding (or any options or warrants issued by the Borrower with
respect to its capital stock), or set aside any funds for any of the foregoing
purposes, in each case without the written consent of the Lender, which will not
be unreasonably withheld; or except in accordance with the terms of the Series B
Preferred Stock and Series C Preferred Stock.
7.8 Limitation on Voluntary Payments and Modifications of
-----------------------------------------------------
Indebtedness. Other than as permitted hereunder and under the other Credit
- ------------
Documents, the Borrower will not (i) make any voluntary or optional payment or
prepayment on or redemption or acquisition for value of (including, without
limitation, by way of depositing with the trustee with respect thereto money or
securities before due for the purpose of paying when due) any Indebtedness or
(ii) amend or modify, or permit the amendment or modification of, any provision
of any Indebtedness or of any agreement (including, without limitation, any
purchase agreement, indenture, loan agreement or security agreement) relating to
any of the foregoing; provided, however, that the Borrower may amend or modify,
or permit the amendment or modification of any of the agreements described in
this clause (ii) if such amendment or modification (x) does not (a) change the
maturity or accelerate any payment of principal or interest (through any
modification of any existing or the inclusion o any additional mandatory
prepayments or otherwise), (b) increase the principal owed, (c) increase the
rate of interest or (d) provide for any additional fees or indemnities relating
to any Indebtedness and (y) does not adversely affect the rights and remedies of
the Lender hereunder or the ability of the Borrower to perform its obligations
hereunder.
Section 8. Events of Default.
-----------------
Upon the occurrence of any of the following specified events (each an
"Event of Default"):
----------------
8.1 Payments. The Borrower shall (i) default in the payment when
--------
due of any principal of any Loan or the Note, or (ii) default, and such default
shall continue unremedied for ten (10) or more Business Days, in the payment
when due of interest on any Loan or the Note or any other amounts owing
hereunder or under the Note; or
8.2 Representations, etc. Any representation, warranty or
--------------------
statement made by the Borrower in any Credit Document or in any certificate
delivered pursuant to any Credit Document shall prove to be untrue in any
material respect on the date as of which made or deemed made; or
-15-
<PAGE>
8.3 Borrower's Covenants. The Borrower shall (i) default in the
--------------------
due performance or observance by them of any term, covenant or agreement
contained in Section 6.1(d), 6.7, 6.8 or 7 or (ii) default in the due
performance or observance of any term, covenant or agreement (other than those
referred to in Sections 8.1 and 8.2 and clause (i) of this Section 8.3)
contained in this Agreement and such default shall continue unremedied for a
period of twenty (20) days; or
8.4 Default Under Other Agreements. The Borrower shall (i)
------------------------------
default in any payment of any Indebtedness (other than the Note) beyond the
period of grace, if any, provided in the instrument or agreement under which any
such Indebtedness was created or (ii) default in the observance or performance
of any agreement or condition relating to any Indebtedness (other than the
Note), or contained in any instrument or agreement evidencing, securing or
relating thereto to any Indebtedness, or any other event shall occur or
condition exist, the effect of which default or other event or condition is to
cause, or to permit the holder or holders of such Indebtedness (or a trustee or
agent on behalf of such holder or holders) to cause (determined without regard
to whether any notice is required), any such Indebtedness to become due prior to
its stated maturity; or any Indebtedness of the Borrower shall be declared to be
due and payable, or required to be prepaid other than by a regularly scheduled
required prepayment, prior to the stated maturity thereof; or
8.5 Bankruptcy, etc. The Borrower shall commence a voluntary
---------------
case concerning such Person under Title 11 of the United States Code entitled
"Bankruptcy," as now or hereafter in effect, or any successor thereto (the
"Bankruptcy Code"); or an involuntary case is commenced against the Borrower,
---------------
and the petition is not controverted within 10 days, or is not dismissed within
60 days, after commencement of the case; or a custodian (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or substantially all
of the property of the Borrower, or the Borrower 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 Borrower, or there is
commenced against the Borrower, any such proceeding which remains undismissed
for a period of 60 days, or the Borrower is adjudicated insolvent or bankrupt;
or any order of relief or other order approving any such case or proceeding is
entered; or the Borrower suffers any appointment of any custodian or the like
for the Borrower or any substantial part of its property to continue
undischarged or unstayed for a period of 60 days; or the Borrower makes a
general assignment for the benefit of creditors; or any personal, corporate or
partnership action, as the case may be, is taken by the Borrower for the purpose
of effecting any of the foregoing; or
8.6 Judgments. One or more judgments or decrees shall be entered
---------
against the Borrower involving in the aggregate a liability (not paid or fully
covered by insurance) of $200,000 or more, and all such judgments or decrees
shall not have been vacated, discharged or stayed or bonded pending appeal
within 60 days after the entry thereof; or
8.7 Cancellation of Payment Obligation. Any dominant authority
----------------------------------
asserting or exercising de jure or de facto governmental or police powers in New
York shall, by moratorium laws or otherwise, cancel, suspend or defer the
obligation of the Borrower to pay any amount required to be paid hereunder or
under the Notes, or the obligations of the Borrower under any other Credit
Document; or
-16-
<PAGE>
8.8 Security Assignment. The Security Assignment or any provision
-------------------
thereof shall cease to be in full force and effect, or shall cease to give the
Lender the Liens, rights, powers and privileges purported to be created thereby,
or the Borrower shall default in the due performance or observance of any term,
covenant or agreement on its part to be performed or observed pursuant to the
Security Assignment; or
8.9 Security Agreement. The Security Agreement or any provision
------------------
thereof shall cease to be in full force and effect, or shall cease to give the
Lender the Liens, rights, powers and privileges purported to be created thereby,
or the Borrower shall default in the due performance or observance of any term,
covenant or agreement on its part to be performed or observed pursuant to the
Security Agreement; or
8.10 Governmental Action. Any government agency shall have
-------------------
condemned, nationalized, seized, or otherwise expropriated all or any
substantial part of the property or other assets of the Borrower; or shall have
assumed custody or control of such property or such other assets of the business
or operations of the Borrower; or shall have taken any action for the
dissolution or disestablishment of the Borrower or any action that would prevent
the Borrower from carrying on its business or a substantial part thereof; or
8.11 Material Adverse Changes. The Lender shall determine, in
------------------------
its reasonable discretion, that any material adverse change shall have occurred
in the operations, business, property, assets, condition (financial or
otherwise), earnings or prospects of the Borrower;
then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Lender may by written notice to the Borrower, take
any or all of the following actions, without prejudice to the rights of the
Lender or the holder of the Note to enforce its claims against the Borrower
(provided, that, if an Event of Default specified in Section 9.5 shall occur,
the result which would occur upon the giving of written notice by the Lender to
the Borrower as specified in clause (ii) below shall occur automatically without
the giving of any such notice): (i) declare the principal of and any accrued
interest in respect of the Loan and the Note and all obligations owing hereunder
and thereunder to be, whereupon the same shall become, forthwith due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Borrower; and (ii) exercise any other rights available
under the Credit Documents or other documents or instruments entered into in
connection therewith; or
8.12 Stockholders Vote. Provided that Infinity continues as a
-----------------
Lender hereunder, within 120 days of the effective date of the Exchange
Agreement, the Borrower's stockholders shall fail to approve of the Borrower's
issuance of its common stock to Infinity, Glacier Capital Limited and Infinity
Emerging Opportunities Limited, in an amount exceeding 20% of the issued and
outstanding common stock of the Borrower as of the Effective Date.
Section 9. Miscellaneous.
-------------
9.1 Payment of Expenses, etc. The Borrower hereby agrees to (i)
------------------------
whether or not the transactions herein contemplated are consummated, pay all
reasonable out-of-pocket costs and expenses (x) of the Lender (including,
without limitation, the reasonable fees and disbursements of counsel to the
Lender) in connection with the preparation, execution and delivery of this
Agreement and the other Credit Documents and the documents and instruments
-17-
<PAGE>
referred to herein and therein and any amendment, waiver or consent relating
hereto or thereto in an amount equivalent to U.S.$50,000, which amount shall be
paid from the Loan proceeds on the Effective Date, and (y) of the Lender in
connection with the enforcement of this Agreement and the other Credit Documents
and the documents and instruments referred to herein and therein (including,
without limitation, the reasonable fees and disbursements of counsel for the
Lender); (ii) pay and hold the Lender harmless from and against any and all
present and future stamp and other similar taxes with respect to the foregoing
matters and save the Lender harmless from and against any and all liabilities
with respect to or resulting from any delay or omission (other than to the
extent attributable to such Lender) to pay such taxes; and (iii) indemnify the
Lender, its officers, directors, employees, representatives and agents from and
hold each of them harmless against any and all liabilities, obligations, losses,
damages, penalties, claims, actions, judgments, suits, costs, expenses and
disbursements incurred by any of them as a result of, or arising out of, or in
any way related to, or by reason of, any investigation, litigation or other
proceeding (whether or not the Lender is a party thereto) related to the
entering into and/or performance of this Agreement or any other Credit Document
or the use of the proceeds of any Loan hereunder or the consummation of any
transactions contemplated herein or in any other Credit Document, including,
without limitation, the reasonable fees and disbursements of counsel incurred in
connection with any such investigation, litigation or other proceeding (but
excluding any such liabilities, obligations, losses, etc., to the extent
incurred by reason of the gross negligence or willful misconduct of the Person
to be indemnified).
9.2 Right of Setoff. In addition to any rights now or hereafter
---------------
granted under applicable law or otherwise, and not by way of limitation of any
such rights, upon the occurrence of an Event of Default, the Lender is hereby
authorized at any time or from time to time, without presentment, demand,
protest or other notice of any kind to Borrower or to any other Person, any such
notice being hereby expressly waived, to set off and to appropriate and apply
any and all deposits (general or special) and any other Indebtedness at any time
held or owing by the Lender (including without limitation by branches and
agencies of the Lender wherever located) to or for the credit or the account of
the Borrower or any other Credit Party against and on account of the Obligations
and all other claims of any nature or description arising out of or connected
with this Agreement or any other Credit Document, irrespective of whether or not
the Lender shall have made any demand hereunder and although said Obligations,
liabilities or claims, or any of them, shall be contingent or unmatured.
9.3 Notices. Except as otherwise expressly provided herein, all
-------
notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, telecopier or cable communication) and mailed,
telegraphed, telexed, telecopied, cabled or delivered:
If to Borrower, to:
YES! Entertainment Corporation
3875 Hopyard Road, Suite 375
Pleasanton, California 94588
Attention: Mark C. Shepherd
-18-
<PAGE>
With a copy to:
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: Martin L. Lagod
If to the Lender:
Infinity Investors Limited
Hunkins Waterfront Plaza
Main Street, PO Box 556
Charleston, Nevis West Indies
Attention:
-------------------------
With copies to:
HW Finance LLC
1601 Elm Street, Suite 4000
Dallas, Texas 75201
Attention: Stuart J. Chasanoff ; and
White & Case LLP
200 South Biscayne Boulevard, Suite 5000
Miami, Florida 33131
Attention: Thomas E Lauria;
or, as to any party, at such other address as shall be designated by such party
in a written notice to the other parties hereto. All such notices and
communications shall, when mailed, telegraphed, telexed, telecopied, or cabled
or sent by overnight courier, be effective when deposited in the mails,
delivered to the telegraph company, cable company or overnight courier, as the
case may be, or sent by telex or telecopier, except that notices and
communications to the Lender shall not be effective until received by the
Lender.
9.4 Benefit of Agreement. This Agreement shall be binding upon
--------------------
and inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided that the Borrower may not assign or
transfer any of its rights or obligations hereunder without the prior written
consent of the Lender. The Lender may at any time (i) grant participations in
or (ii) transfer or assign any of its rights hereunder or under the Note. If
the Lender transfers or assigns all or a part of its rights hereunder or under
the Note to any other Person, any reference to the Lender in this Agreement or
the Note shall thereafter refer to the Lender and to such other Person to the
extent of its interests.
9.5 No Waiver; Remedies Cumulative. No failure or delay on the
------------------------------
part of the Lender or the holder of the Note in exercising any right, power or
privilege hereunder or under any other Credit Document and no course of dealing
between the Borrower and the Lender or the holder of the Note shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder or under any other Credit Document preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder or
-19-
<PAGE>
thereunder. The rights, powers and remedies herein or in any other Credit
Document expressly provided are cumulative and not exclusive of any rights,
powers or remedies which the Lender or the holder of the Note would otherwise
have. No notice to or demand on the Borrower in any case shall entitle the
Borrower to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Lender or the holder
of the Note to any other or further action in any circumstances without notice
or demand.
9.6 Calculations; Computations.
--------------------------
(a) The financial statements to be furnished to the Lender
pursuant hereto shall be made and prepared in accordance with generally accepted
accounting principles in effect from time to time in the United States
consistently applied throughout periods involved.
(b) All computations of interest hereunder shall be made on
the basis of a year of 360 days for the actual number of days (including the
first day but excluding the last day) occurring in the period for which such
interest is payable.
9.7 Governing Law; Submission to Jurisdiction; Venue.
------------------------------------------------
(a) This Agreement and the other Credit Documents and the
rights and obligations of the parties hereunder and thereunder shall be
construed in accordance with and be governed by the law of the State of New
York. Any legal action or proceeding against the Borrower with respect to this
Agreement or any other Credit Document may be brought in the courts of the State
of New York or of the United States District Court for the Southern District of
New York, and, by execution and delivery of this Agreement, the Borrower hereby
irrevocably accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of the aforesaid courts. The Borrower hereby
irrevocably designates CT Corporation System as its designee, appointee and
agent to receive, accept and acknowledge for and on its behalf, and in respect
of its property, service of any and all legal process, summons, notices and
documents which may be served in any such action or proceeding. The Borrower
further irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by registered or certified mail, postage prepaid, to the Borrower at
such Person's address set forth opposite such Person's signature below, such
service to become effective 30 days after such mailing. Nothing herein shall
affect the right of the Lender or the holder of the Note to serve process in any
other manner permitted by law or to commence legal proceedings or otherwise
proceed against the Borrower in any other jurisdiction.
(b) The Borrower hereby irrevocably waives any objection which
it may now or hereafter have to the laying of venue of any of the aforesaid
actions or proceedings arising out of or in connection with this Agreement or
any other Credit Document brought in the courts referred to in clause (a) above
and hereby further irrevocably waives and agrees not to plead or claim in any
such court that any such action or proceeding brought in any such court has been
brought in an inconvenient forum.
9.8 Counterparts. This Agreement may be executed in any number
------------
of counterparts and by the different parties hereto on separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument.
-20-
<PAGE>
9.9 Headings Descriptive. The headings of the several sections
--------------------
and subsections of this Agreement are inserted for convenience only and shall
not in any way affect the meaning or construction of any provision of this
Agreement.
9.10 Amendment or Waiver. Neither this Agreement nor any other
-------------------
Credit Document nor any terms hereof or thereof may be changed, waived,
discharged or terminated unless such change, waiver, discharge or termination is
in writing signed by the Lender and the Borrower.
9.11 Survival. All indemnities set forth herein shall survive
--------
the execution and delivery of this Agreement and the Note and the making and
repayment of the Obligations.
9.12 Waiver of Trial by Jury. THE BORROWER AND THE LENDER HEREBY
-----------------------
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY OBLIGATION UNDER THIS AGREEMENT
OR ANY OTHER CREDIT DOCUMENT.
-21-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement on the date first above written.
BORROWER:
YES! ENTERTAINMENT CORPORATION
By:
---------------------------------------
Title:
------------------------------------
LENDER:
INFINITY INVESTORS LIMITED
By:
---------------------------------------
Title:
------------------------------------
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<PAGE>
EXHIBIT 10.3
SECURITY AGREEMENT
SECURITY AGREEMENT, dated as of September 2, 1998, between YES!
ENTERTAINMENT CORPORATION (the "Assignor") and INFINITY INVESTORS LIMITED (the
"Assignee"). Unless otherwise defined herein, terms used herein and defined in
the Credit Agreement shall be used herein as so defined.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Assignor desires to incur Loans under the Credit
Agreement;
WHEREAS, it is a condition precedent to the incurrence of Loans under
the Credit Agreement that the Assignor shall have executed and delivered to the
Assignee this Agreement; and
WHEREAS, the Assignor desires to execute this Agreement to satisfy the
condition described in the preceding paragraph;
NOW, THEREFORE, in consideration of the benefits to the Assignor, the
receipt and sufficiency of which are hereby acknowledged, the Assignor hereby
makes the following representations and warranties to the Assignee and hereby
covenants and agrees with the Assignee as follows:
SECTION 1. SECURITY INTERESTS
------------------
1.1. Grant of Security Interests. (a) As security for the prompt
---------------------------
and complete payment and performance when due of all of its Obligations (all
capitalized terms used herein and defined in Section 9.1 shall be used herein as
so defined), the Assignor does hereby sell, assign and transfer unto the
Assignee, and does hereby grant to the Assignee a continuing security interest
of first priority in, all of the right, title and interest of the Assignor in,
to and under all of the following, whether now existing or hereafter from time
to time acquired: (i) each and every Receivable; (ii) all Contracts, together
with all Contract Rights arising thereunder; (iii) all Inventory; (iv) all
Equipment; (v) all Marks, together with the registrations and right to all
renewals thereof, and the goodwill of the business of the Assignor symbolized by
the Marks; (vi) all Patents and Copyrights; (vii) all computer programs of the
Assignor and all intellectual property rights therein and all other proprietary
information of the Assignor, including, but not limited to, trade secrets;
(viii) all cash of the Assignor wherever held and in whatever form; (ix) all
other Goods, General Intangibles, Chattel Paper, Documents and Instruments
(other than Pledged Stock); and (x) all Proceeds and products of any and all of
the foregoing (all of the above, collectively, the "Collateral").
(b) The security interest of the Assignee under this Agreement extends
to all Collateral of the kind described in preceding clause (a) which the
Assignor may acquire at any time during the continuation of this Agreement.
<PAGE>
1.2. Power of Attorney. The Assignor hereby constitutes and appoints
-----------------
the Assignee its true and lawful attorney, irrevocably, with full power after
the occurrence of an Event of Default (in the name of the Assignor or otherwise)
to act, require, demand, receive, compound and give acquittance for any and all
monies and claims for monies due or to become due to the Assignor under or
arising out of the Collateral, to endorse any checks or other instruments or
orders in connection therewith and to file any claims or take any action or
institute any proceedings which the Assignee may deem to be necessary or
advisable in the premises, which appointment as attorney is coupled with an
interest.
SECTION 2. GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS
-------------------------------------------------
The Assignor represents, warrants and covenants, which
representations, warranties and covenants shall survive execution and delivery
of this Agreement, as follows:
2.1. Necessary Filings. All filings, registrations and recordings
-----------------
necessary or appropriate to create, preserve, protect and perfect the security
interest granted by the Assignor to the Assignee hereby in respect of the
Collateral have been accomplished and the security interest granted to the
Assignee pursuant to this Agreement in and to the Collateral constitutes a valid
and enforceable perfected security interest therein superior and prior to the
rights of all other Persons therein and subject to no other Liens (except that
the Collateral may be subject to Liens permitted under Section 7.3 of the Credit
Agreement) and is entitled to all the rights, priorities and benefits afforded
by the Uniform Commercial Code or other relevant law as enacted in any relevant
jurisdiction to perfected security interests.
2.2. No Liens. The Assignor is, and as to Collateral acquired by it
--------
from time to time after the date hereof the Assignor will be, the owner of all
Collateral free from any Lien or other right, title or interest of any Person
(other than Liens created hereby or permitted under Section 7.3 of the Credit
Agreement), and the Assignor shall defend the Collateral against all claims and
demands of all Persons at any time claiming the same or any interest therein
adverse to the Assignee, except that the Collateral is subject to the lien of
BNY under the Existing Facility to the extent and in the manner described
therein.
2.3. Other Financing Statements. There is no financing statement (or
--------------------------
similar statement or instrument of registration under the law of any
jurisdiction) covering or purporting to cover any interest of any kind in the
Collateral except as disclosed in Annex A and so long as the Total Commitment
has not been terminated or any of the Obligations remain unpaid, the Assignor
will not execute or authorize to be filed in any public office any financing
statement (or similar statement or instrument of registration under the law of
any jurisdiction) or statements relating to the Collateral, except financing
statements filed or to be filed in respect of and covering the security
interests granted hereby by the Assignor.
2.4. Chief Executive Office; Records. The chief executive office of
-------------------------------
the Assignor is located at 3875 Hopyard Road, Suite 375, Pleasanton, California
94588. The Assignor will not move its chief executive office except to such new
location as the Assignor may establish in accordance with the last sentence of
this Section 2.4. The originals of all documents evidencing all Receivables and
Contract Rights of the Assignor and the only original books of account and
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records of the Assignor relating thereto are, and will continue to be, kept at
such chief executive office or at the locations disclosed in Annex B, or at such
new locations as the Assignor may establish in accordance with the last sentence
of this Section 2.4. All Receivables and Contract Rights of the Assignor are,
and will continue to be, maintained at, and controlled and directed (including,
without limitation, for general accounting purposes) from, such office locations
shown above, or such new locations as the Assignor may establish in accordance
with the last sentence of this Section 2.4. The Assignor shall not establish a
new location for such offices until (i) it shall have given to the Assignee not
less than 45 days' prior written notice of its intention so to do, clearly
describing such new location and providing such other information in connection
therewith as the Assignee may reasonably request and (ii) with respect to such
new location, it shall have taken all action, satisfactory to the Assignee, to
maintain the security interest of the Assignee in the Collateral intended to be
granted hereby at all times fully perfected and in full force and effect.
2.5. Location of Inventory and Equipment. (a) All Inventory and
-----------------------------------
Equipment held on the date hereof by the Assignor is located at one of the
locations shown on Annex C. The Assignor agrees that (i) all Inventory and
Equipment now held or subsequently acquired by it shall be kept at (or shall be
in transport to) any one of the locations shown on Annex C, or such new location
as the Assignor may establish in accordance with the last sentence of this
Section 2.5. The Assignor may establish a new location for Inventory and
Equipment only if (i) it shall have given to the Assignee prior written notice
of its intention so to do, clearly describing such new location and providing
such other information in connection therewith as the Assignee may reasonably
request and (ii) with respect to such new location, it shall have taken all
action reasonably satisfactory to the Assignee to maintain the security interest
of the Assignee in the Collateral intended to be granted hereby at all times
fully perfected and in full force and effect.
2.6. Recourse. This Agreement is made with full recourse to the
--------
Assignor and pursuant to and upon all the warranties, representations, covenants
and agreements on the part of the Assignor contained herein, in the Credit
Agreement and otherwise in writing in connection herewith or therewith.
SECTION 3. SPECIAL PROVISIONS CONCERNING RECEIVABLES; CONTRACT
---------------------------------------------------
RIGHTS; INSTRUMENTS
- -------------------
3.1. Additional Representations and Warranties. As of the time when
-----------------------------------------
each of its Receivable arises, the Assignor shall be deemed to have represented
and warranted that such Receivable, and all records, papers and documents
relating thereto (if any) are genuine and in all respects what they purport to
be, and that all papers and documents (if any) relating thereto (i) will
represent the genuine, legal, valid and binding obligation of the account debtor
evidencing indebtedness unpaid and owed by the respective account debtor arising
out of the performance of labor or services or the sale or lease and delivery of
the merchandise listed therein, or both, (ii) will be the only original writings
evidencing and embodying such obligation of the account debtor named therein
(other than copies created for general accounting purposes), (iii) will evidence
true and valid obligations, enforceable in accordance with their respective
terms and (iv) will be in compliance and will conform with all applicable
federal, state and local laws and applicable laws of any relevant foreign
jurisdiction.
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3.2. Maintenance of Records. The Assignor will keep and maintain at
----------------------
its own cost and expense satisfactory and complete records of its Receivables
and Contracts, including, but not limited to, the originals of all documentation
(including each Contract) with respect thereto, records of all payments
received, all credits granted thereon, all merchandise returned and all other
dealings therewith, and the Assignor will make the same available to the
Assignee for inspection, at the Assignor's own cost and expense, at any and all
reasonable times upon demand. The Assignor shall, at its own cost and expense,
deliver all tangible evidence of its Receivables and Contract Rights (including,
without limitation, all documents evidencing the Receivables and all Contracts)
and such books and records to the Assignee or to its representatives (copies of
which evidence and books and records may be retained by the Assignor) at any
time upon its reasonable demand. If the Assignee so directs, the Assignor shall
legend, in form and manner reasonably satisfactory to the Assignee, the
Receivables and Contracts, as well as books, records and documents of the
Assignor evidencing or pertaining to the Receivables or Contracts with an
appropriate reference to the fact that the Receivables and Contracts have been
assigned to the Assignee and that the Assignee has a security interest therein.
3.3. Direction to Account Debtors; Contracting Parties; etc. Upon
-------------------------------------------------------
the occurrence and during the continuation of an Event of Default and if the
Assignee so directs, the Assignor agrees (i) to cause all payments on account of
the Receivables and Contracts to be made directly to the Cash Collateral Account
and (ii) that the Assignee may, at its option, directly notify the obligors with
respect to any Receivables and/or under any Contracts to make payments with
respect thereto as provided in preceding clause (i). Without notice to or
assent by the Assignor, the Assignee may apply any or all amounts then in, or
thereafter deposited in, the Cash Collateral Account in the manner provided in
Section 7.4 of this Agreement. The costs and expenses (including attorneys'
fees) of collection, whether incurred by the Assignor or the Assignee, shall be
borne by the Assignor.
3.4. Modification of Terms; etc. The Assignor shall not rescind or
---------------------------
cancel any indebtedness evidenced by any Receivable or under any Contract, or
modify any term thereof or make any adjustment with respect thereto, or extend
or renew the same, or compromise or settle any dispute, claim, suit or legal
proceeding relating thereto, or sell any Receivable or Contract, or interest
therein, without the prior written consent of the Assignee, except as permitted
by Section 3.5. The Assignor will duly fulfill all obligations on its part to
be fulfilled under or in connection with the Receivables and Contracts and will
do nothing to impair the rights of the Assignee in the Receivables or Contracts.
3.5. Collection. The Assignor shall endeavor to cause to be
----------
collected from the account debtor named in each of its Receivables or obligor
under any Contract, as and when due (including, without limitation, amounts
which are delinquent, such amounts to be collected in accordance with generally
accepted lawful collection procedures) any and all amounts owing under or on
account of such Receivable or Contract, and apply forthwith upon receipt thereof
all such amounts as are so collected to the outstanding balance of such
Receivable or under such Contract, except that, prior to the occurrence of an
Event of Default, the Assignor may allow in the ordinary course of business as
adjustments to amounts owing under its Receivables and Contracts (i) an
extension or renewal of the time or times of payment, or settlement for less
than
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the total unpaid balance, which the Assignor finds appropriate in accordance
with sound business judgment and (ii) a refund or credit due as a result of
returned or damaged merchandise or improperly performed services. The costs and
expenses (including, without limitation, attorneys' fees) of collection, whether
incurred by the Assignor or the Assignee, shall be borne by the Assignor.
3.6. Instruments. If the Assignor owns or acquires any Instrument,
-----------
the Assignor will within 10 days notify the Assignee thereof, and upon request
by the Assignee promptly deliver such Instrument to the Assignee appropriately
endorsed to the order of the Assignee as further security hereunder.
3.7. Further Actions. The Assignor will, at its own expense, make,
---------------
execute, endorse, acknowledge, file and/or deliver to the Assignee from time to
time such vouchers, invoices, schedules, confirmatory assignments, conveyances,
financing statements, transfer endorsements, powers of attorney, certificates,
reports and other assurances or instruments and take such further steps relating
to its Receivables, Contracts, Instruments and other property or rights covered
by the security interest hereby granted, as the Assignee may reasonably require.
SECTION 4. SPECIAL PROVISIONS CONCERNING TRADEMARKS
----------------------------------------
4.1. Additional Representations and Warranties. The Assignor
-----------------------------------------
represents and warrants that it is the true and lawful exclusive owner of the
Marks listed in Annex D and that such listed Marks constitute all the marks
registered in the United States Patent and Trademark Office that the Assignor
now owns or uses in connection with its business. The Assignor represents and
warrants that it owns or is licensed to use all Marks that it uses. The
Assignor further warrants that it is aware of no third party claim that any
aspect of the Assignor's present or contemplated business operations infringes
or will infringe any Mark.
4.2. Licenses and Assignments. The Assignor hereby agrees not to
------------------------
divest itself of any right under a Mark material to its business absent prior
written approval of the Assignee.
4.3. Infringements. The Assignor agrees, promptly upon learning
-------------
thereof, to notify the Assignee in writing of the name and address of, and to
furnish such pertinent information that may be available with respect to, any
party who may be infringing or otherwise violating any of the Assignor's rights
in and to any significant Mark, or with respect to any party claiming that the
Assignor's use of any significant Mark violates any property right of that
party. The Assignor further agrees, unless otherwise directed by the Assignee,
diligently to prosecute any Person infringing any significant Mark.
4.4. Preservation of Marks. The Assignor agrees to use its
---------------------
significant Marks in interstate commerce during the time in which this Agreement
is in effect, sufficiently to preserve such Marks as trademarks or service marks
registered under the laws of the United States.
4.5. Maintenance of Registration. The Assignor shall, at its own
---------------------------
expense, diligently process all documents required by the Trademark Act of 1946,
15 U.S.C. (S)(S) 1051 et seq. to maintain trademark registration, including, but
-- ---
not limited to, affidavits of use and applications for renewals of registration
in the United States Patent and Trademark Office for all
5
<PAGE>
of its Marks pursuant to 15 U.S.C. (S)(S) 1058(a), 1059 and 1065, and shall pay
all fees and disbursements in connection therewith, and shall not abandon any
such filing of affidavit of use or any such application of renewal prior to the
exhaustion of all administrative and judicial remedies without prior written
consent of the Assignee. The Assignor agrees to notify the Assignee six months
prior to the dates on which the affidavits of use or the applications for
renewal registration are due that the affidavit of use or the renewal is being
processed.
4.6. Future Registered Marks. If any mark registration issues
-----------------------
hereafter to the Assignor as a result of any application now or hereafter
pending before the United States Patent and Trademark Office, within 30 days of
receipt of such certificate the Assignor shall deliver a copy of such
certificate, and a grant of security in such mark, to the Assignee, confirming
the grant thereof hereunder, the form of such confirmatory grant to be
substantially the same as the form hereof.
4.7. Remedies. If an Event of Default shall occur and be continuing,
--------
the Assignee may, by written notice to the Assignor, take any or all of the
following actions: (i) declare the entire right, title and interest of the
Assignor in and to each of the Marks, together with all trademark rights and
rights of protection to the same, vested, in which event such rights, title and
interest shall immediately vest, in the Assignee, in which case the Assignor
agrees to execute an assignment in form and substance satisfactory to the
Assignee of all its rights, title and interest in and to the Marks to the
Assignee; (ii) take and use or sell the Marks and the goodwill of the Assignor's
business symbolized by the Marks and the right to carry on the business and use
the assets of the Assignor in connection with which the Marks have been used;
and (iii) direct the Assignor to refrain, in which event the Assignor shall
refrain, from using the Marks in any manner whatsoever, directly or indirectly,
and, if requested by the Assignee, change the Assignor's corporate name to
eliminate therefrom any use of any Mark and execute such other and further
documents that the Assignee may request to further confirm this and to transfer
ownership of the Marks and registrations and any pending trademark application
in the United States Patent and Trademark Office to the Assignee.
SECTION 5. SPECIAL PROVISIONS CONCERNING PATENTS AND COPYRIGHTS
----------------------------------------------------
5.1. Additional Representations and Warranties. The Assignor
-----------------------------------------
represents and warrants that it is the true and lawful exclusive owner of all
rights in the Patents listed in Annex E and in the Copyrights listed in Annex F,
that said Patents constitute all the U.S. patents and applications for U.S.
patents that the Assignor now owns and that said Copyrights constitute all the
U.S. copyrights that the Assignor now owns. The Assignor represents and
warrants that it owns or is licensed to practice under all Patents and
Copyrights that it now owns, uses or practices under. The Assignor further
warrants that it is aware of no third party claim that any aspect of the
Assignor's present or contemplated business operations infringes or will
infringe any Patent or any Copyright.
5.2. Licenses and Assignments. The Assignor hereby agrees not to
------------------------
divest itself of any right under a Patent or Copyright absent prior written
approval of the Assignee.
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<PAGE>
5.3. Infringements. The Assignor agrees, promptly upon learning
-------------
thereof, to furnish the Assignee in writing with all pertinent information
available to the Assignor with respect to any infringement or other violation of
the Assignor's rights in any significant Patent or Copyright, or with respect to
any claim that practice of any significant Patent or Copyright violates any
property right of that party. The Assignor further agrees, absent direction of
the Assignee to the contrary, diligently to prosecute any Person infringing any
significant Patent or Copyright.
5.4. Maintenance of Patents. At its own expense, the Assignor shall
----------------------
make timely payment of all post-issuance fees required pursuant to 35 U.S.C. (S)
41 to maintain in force rights under each Patent.
5.5. Prosecution of Patent Application. At its own expense, the
---------------------------------
Assignor shall diligently prosecute all applications for U.S. patents listed on
Annex E, and shall not abandon any such application prior to exhaustion of all
administrative and judicial remedies, absent written consent of the Assignee.
5.6. Other Patents and Copyrights. Within 30 days of acquisition of
----------------------------
a U.S. Patent or Copyright, or of filing of an application for a U.S. Patent or
Copyright, the Assignor shall deliver to the Assignee a copy of such Patent or
Copyright, as the case may be, with a grant of security as to such Patent or
Copyright, as the case may be, confirming the grant thereof hereunder, the form
of such confirmatory grant to be substantially the same as the form hereof.
5.7. Remedies. If an Event of Default shall occur and be continuing,
--------
the Assignee may, by written notice to the Assignor, take any or all of the
following actions: (i) declare the entire right, title and interest of the
Assignor in each of the Patents and Copyrights vested, in which event such
right, title and interest shall immediately vest in the Assignee, in which case
the Assignor agrees to execute an assignment in form and substance satisfactory
to the Assignee of all its right, title and interest to such Patents and
Copyrights to the Assignee; (ii) take and practice or sell the Patents and
Copyrights; (iii) direct the Assignor to refrain, in which event the Assignor
shall refrain, from practicing the Patents and Copyrights directly or
indirectly, and the Assignor shall execute such other and further documents as
the Assignee may request further to confirm this and to transfer ownership of
the Patents and Copyrights to the Assignee.
SECTION 6. PROVISIONS CONCERNING ALL COLLATERAL
------------------------------------
6.1. Protection of Assignee's Security. The Assignor will do nothing
---------------------------------
to impair the rights of the Assignee in the Collateral. The Assignor will at
all times keep its Inventory and Equipment insured in favor of the Assignee, at
its own expense, to the Assignee's reasonable satisfaction against fire, theft
and all other risks to which such Collateral may be subject; all policies or
certificates with respect to such insurance shall be endorsed to the Assignee's
satisfaction for the benefit of the Assignee (including, without limitation, by
naming the Assignee as loss payee) and deposited with the Assignee. If the
Assignor shall fail to insure such Inventory and Equipment to the Assignee's
reasonable satisfaction, or if the Assignor shall fail to so endorse and deposit
all policies or certificates with respect thereto, the Assignee shall have the
right (but shall be under no obligation) to procure such insurance and the
Assignor
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<PAGE>
agrees to reimburse the Assignee for all costs and expenses of procuring such
insurance. The Assignee may apply any proceeds of such insurance when received
by it toward the payment of any of the Obligations to the extent the same shall
then be due. The Assignor assumes all liability and responsibility in connection
with the Collateral acquired by it and the liability of the Assignor to pay its
Obligations shall in no way be affected or diminished by reason of the fact that
such Collateral may be lost, destroyed, stolen, damaged or for any reason
whatsoever unavailable to the Assignor.
6.2. Warehouse Receipts Non-negotiable. The Assignor agrees that if
---------------------------------
any warehouse receipt or receipt in the nature of a warehouse receipt is issued
with respect to any of its Inventory, such warehouse receipt or receipt in the
nature thereof shall not be "negotiable" (as such term is used in Section 7-104
of the Uniform Commercial Code as in effect in any relevant jurisdiction or
under other relevant law).
6.3. Further Actions. The Assignor will, at its own expense, make,
---------------
execute, endorse, acknowledge, file and/or deliver to the Assignee from time to
time such lists, descriptions and designations of its Collateral, warehouse
receipts, receipts in the nature of warehouse receipts, bills of lading,
documents of title, vouchers, invoices, schedules, confirmatory assignments,
conveyances, financing statements, transfer endorsements, powers of attorney,
certificates, reports and other assurances or instruments and take such further
steps relating to the Collateral and other property or rights covered by the
security interest hereby granted, which the Assignee deems reasonably
appropriate or advisable to perfect, preserve or protect its security interest
in the Collateral.
6.4. Financing Statements. The Assignor agrees to assign and deliver
--------------------
to the Assignee such financing statements, in form acceptable to the Assignee,
as the Assignee may from time to time reasonably request or as are necessary or
desirable in the reasonable opinion of the Assignee to establish and maintain a
valid, enforceable, first priority security interest in the Collateral as
provided herein and the other rights and security contemplated herein, all in
accordance with the Uniform Commercial Code as enacted in any and all relevant
jurisdictions or any other relevant law. The Assignor will pay any applicable
filing fees and related expenses. The Assignor authorizes the Assignee to file
any such financing statements without the signature of the Assignor.
SECTION 7. REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT
--------------------------------------------
7.1. Remedies; Obtaining the Collateral Upon Default. The Assignor
-----------------------------------------------
agrees that, if any Event of Default shall have occurred and be continuing, then
and in every such case, subject to any mandatory requirements of applicable law
then in effect, the Assignee, in addition to any rights now or hereafter
existing under applicable law, shall have all rights as a secured creditor under
the Uniform Commercial Code in all relevant jurisdictions and may:
(a) personally, or by agents or attorneys, immediately retake
possession of the Collateral or any part thereof, from the Assignor or any
other Person who then has possession of any part thereof with or without
notice or process of law, and for that purpose may enter upon the
Assignor's premises where any of the Collateral is located
8
<PAGE>
and remove the same and use in connection with such removal any and all
services, supplies, aids and other facilities of the Assignor; and
(b) instruct the obligor or obligors on any agreement, instrument or
other obligation (including, without limitation, the Receivables)
constituting the Collateral to make any payment required by the terms of
such instrument or agreement directly to the Assignee; and
(c) withdraw all monies, securities and instruments in the Cash
Collateral Account for application to the Obligations; and
(d) sell, assign or otherwise liquidate, or direct the Assignor to
sell, assign or otherwise liquidate, any or all of the Collateral or any
part thereof, and take possession of the proceeds of any such sale or
liquidation; and
(e) take possession of the Collateral or any part thereof, by
directing the Assignor in writing to deliver the same to the Assignee at
any place or places designated by the Assignee, in which event the Assignor
shall at its own expense:
(i) forthwith cause the same to be moved to the place or
places so designated by the Assignee and there delivered to the
Assignee,
(ii) store and keep any Collateral so delivered to the Assignee
at such place or places pending further action by the Assignee as
provided in Section 7.2, and
(iii) while the Collateral shall be so stored and kept, provide
such guards and maintenance services as shall be necessary to protect
the same and to preserve and maintain them in good condition;
it being understood that the Assignor's obligation so to deliver the Collateral
is of the essence of this Agreement and that, accordingly, upon application to a
court of equity having jurisdiction, the Assignee shall be entitled to a decree
requiring specific performance by the Assignor of such obligation.
7.2. Remedies; Disposition of the Collateral. Any Collateral
---------------------------------------
repossessed by the Assignee under or pursuant to Section 7.1, and any other
Collateral whether or not so repossessed by the Assignee, may be sold, assigned,
leased or otherwise disposed of under one or more contracts or as an entirety,
and without the necessity of gathering at the place of sale the property to be
sold, and in general in such manner, at such time or times, at such place or
places and on such terms as the Assignee may, in compliance with any mandatory
requirements of applicable law, determine to be commercially reasonable. Any of
the Collateral may be sold, leased or otherwise disposed of, in the condition in
which the same existed when taken by the Assignee or after any overhaul or
repair which the Assignee shall determine to be commercially reasonable. Any
such disposition which shall be a private sale or other private proceeding
permitted by such requirements shall be made upon not less than 10 days' written
notice to the Assignor specifying the time at which such disposition is to be
made and the intended sale price
9
<PAGE>
or other consideration therefor, and shall be subject, for the 10 days after the
giving of such notice, to the right of the Assignor or any nominee of the
Assignor to acquire the Collateral involved at a price or for such other
consideration at least equal to the intended sale price or other consideration
so specified. Any such disposition which shall be a public sale permitted by
such requirements shall be made upon not less than 10 days' written notice to
the Assignor specifying the time and place of such sale and, in the absence of
applicable requirements of law, shall be by public auction (which may, at the
Assignee's option, be subject to reserve), after publication of notice of such
auction not less than 10 days prior thereto in two newspapers in general
circulation in the city of Pleasanton. To the extent permitted by any such
requirement of law, the Assignee may bid for and become the purchaser of the
Collateral or any item thereof, offered for sale in accordance with this Section
7.2 without accountability to the Assignor (except to the extent of surplus
money received as provided in Section 7.4). If, under mandatory requirements of
applicable law, the Assignee shall be required to make disposition of the
Collateral within a period of time which does not permit the giving of notice to
the Assignor as hereinabove specified, the Assignee need give the Assignor only
such notice of disposition as shall be reasonably practicable in view of such
mandatory requirements of applicable law.
7.3. Waiver of Claims. Except as otherwise provided in this
----------------
Agreement, THE ASSIGNOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE
LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE ASSIGNEE'S TAKING
POSSESSION OR THE ASSIGNEE'S DISPOSITION OF ANY OF THE COLLATERAL, INCLUDING,
WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT
REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH ASSIGNOR WOULD OTHERWISE HAVE UNDER
THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, and the
Assignor hereby further waives, to the extent permitted by law:
(i) all damages occasioned by such taking of possession except any
damages which are the direct result of the Assignee's gross negligence or
willful misconduct;
(ii) all other requirements as to the time, place and terms of sale or
other requirements with respect to the enforcement of the Assignee's rights
hereunder; and
(iii) all rights of redemption, appraisement, valuation, stay,
extension or moratorium now or hereafter in force under any applicable law
in order to prevent or delay the enforcement of this Agreement or the
absolute sale of the Collateral or any portion thereof, and the Assignor,
for itself and all who may claim under it, insofar as it or they now or
hereafter lawfully may, hereby waives the benefit of all such laws.
Any sale of, or the grant of options to purchase, or any other realization upon,
any Collateral shall operate to divest all right, title, interest, claim and
demand, either at law or in equity, of the Assignor therein and thereto, and
shall be a perpetual bar both at law and in equity against the Assignor and
against any and all Persons claiming or attempting to claim the Collateral so
sold, optioned or realized upon, or any part thereof, from, through and under
the Assignor.
7.4. Application of Proceeds. The proceeds of any Collateral
-----------------------
obtained pursuant to Section 7.1 or disposed of pursuant to Section 7.2 shall be
applied as follows:
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<PAGE>
(i) to the payment of any and all expenses and fees (including
reasonable attorneys' fees) incurred by the Assignee in obtaining, taking
possession of, removing, insuring, repairing, storing and disposing of
Collateral and any and all amounts incurred by the Assignee in connection
therewith;
(ii) next, any surplus then remaining to the payment of the
Obligations in the following order of priority:
(w) all interest accrued and unpaid;
(x) the principal amount owing on the Loans;
(y) the fees then owing to the Agent; and
(z) all other Obligations then owing;
(iii) if the Total Commitment is then terminated and no other
Obligation is outstanding, any surplus then remaining shall be paid to the
Assignor, subject, however, to the rights of the holder of any then
existing Lien of which the Assignee has actual notice (without
investigation);
it being understood that the Assignor shall remain liable to the extent of any
deficiency between the amount of the proceeds of the Collateral and the
aggregate amount of the sums referred to in clauses (i) and (ii) of this Section
7.4 with respect to the Assignor.
7.5. Remedies Cumulative. No failure or delay on the part of the
-------------------
Assignee in exercising any right, power or privilege hereunder or under any
other Credit Document and no course of dealing between the Assignor and the
Assignee shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or under any other Credit
Document preclude any other or further exercise thereof or the exercise of any
other right, power or privilege hereunder or thereunder. The rights, powers and
remedies herein or in any other Credit Document expressly provided are
cumulative and not exclusive of any rights, powers or remedies which the
Assignee would otherwise have. No notice to or demand on the Assignor in any
case shall entitle the Assignor to any other or further notice or demand in
similar or other circumstances or constitute a waiver of the rights of the
Assignee to any other or further action in any circumstances without notice or
demand.
7.6. Discontinuance of Proceedings. In case the Assignee shall have
-----------------------------
instituted any proceeding to enforce any right, power or remedy under this
Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall
have been discontinued or abandoned for any reason or shall have been determined
adversely to the Assignee, then and in every such case the Assignor and the
Assignee shall be restored to their former positions and rights hereunder with
respect to the Collateral subject to the security interest created under this
Agreement, and all rights, remedies and powers of the Assignee shall continue as
if no such proceeding had been instituted.
SECTION 8. INDEMNITY
---------
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8.1. Indemnity. (a) The Assignor agrees to indemnify, reimburse and
---------
hold the Assignee and its officers, directors, employees, representatives and
agents (hereinafter in this Section 8.1 referred to individually as "Indemnitee"
and collectively as "Indemnitees") harmless from any and all liabilities,
obligations, losses, damages, penalties, claims, actions, judgments, suits,
costs, expenses or disbursements (including reasonable attorneys' fees and
expenses) (for the purposes of this Section 8.1 the foregoing are collectively
called "expenses") of whatsoever kind or nature which may be imposed on,
asserted against or incurred by any of the Indemnitees in any way relating to or
arising out of this Agreement, any other Credit Document or the documents
executed in connection herewith and therewith or in any other way connected with
the administration of the transactions contemplated hereby and thereby or the
enforcement of any of the terms of or the preservation of any rights under any
thereof, or in any way relating to or arising out of the manufacture, ownership,
ordering, purchase, delivery, control, acceptance, lease, financing, possession,
operation, condition, sale, return or other disposition or use of the Collateral
(including, without limitation, latent or other defects, whether or not
discoverable), the violation of the laws of any country, state or other
governmental body or unit, any tort (including, without limitation, claims
arising or imposed under the doctrine of strict liability, or for or on account
of injury to or the death of any Person (including any Indemnitee), or for
property damage) or any contract claim; provided that no Indemnitee shall be
indemnified pursuant to this Section 8.1(a) for expenses to the extent caused by
the gross negligence or willful misconduct of such Indemnitee. The Assignor
agrees that upon written notice by any Indemnitee of any assertion that could
give rise to an expense, the Assignor shall assume full responsibility for the
defense thereof. Each Indemnitee agrees to use its best efforts to promptly
notify the Assignor of any such assertion of which such Indemnitee has
knowledge.
(b) Without limiting the application of Section 8.1(a), the Assignor
agrees to pay, or reimburse the Assignee for (if the Assignee shall have
incurred fees, costs or expenses because the Assignor shall have failed to
comply with its obligations under this Agreement or any other Credit Document),
any and all fees, costs and expenses of whatever kind or nature incurred in
connection with the creation, preservation or protection of the Assignee's Liens
on, and security interest in, the Collateral, including, without limitation, all
fees and taxes in connection with the recording or filing of instruments and
documents in public offices, payment or discharge of any taxes or Liens upon or
in respect of the Collateral, premiums for insurance with respect to the
Collateral and all other fees, costs and expenses in connection with protecting,
maintaining or preserving the Collateral and the Assignee's interest therein,
whether through judicial proceedings or otherwise, or in defending or
prosecuting any actions, suits or proceedings arising out of or relating to the
Collateral.
(c) Without limiting the application of Section 8.1(a) or (b), the
Assignor agrees to pay, indemnify and hold each Indemnitee harmless from and
against any expenses which such Indemnitee may suffer, expend or incur in
consequence of or growing out of any misrepresentation by the Assignor in this
Agreement or any of the other Credit Documents or in any statement or writing
contemplated by or made or delivered pursuant to or in connection with this
Agreement or any of the other Credit Documents.
12
<PAGE>
(d) If and to the extent that the obligations of the Assignor under
this Section 8.1 are unenforceable for any reason, Assignor hereby agrees to
make the maximum contribution to the payment and satisfaction of such
obligations which is permissible under applicable law.
8.2. Indemnity Obligations Secured by Collateral; Survival. Any
-----------------------------------------------------
amounts paid by any Indemnitee as to which such Indemnitee has the right to
reimbursement shall constitute Obligations secured by the Collateral. The
indemnity obligations of the Assignor contained in this Article VIII shall
continue in full force and effect notwithstanding the full payment of all the
Notes issued under the Credit Agreement and all of the other Obligations and
notwithstanding the discharge thereof.
SECTION 9. DEFINITIONS
-----------
9.1. The following terms shall have the meanings herein specified
unless the context otherwise requires. Such definitions shall be equally
applicable to the singular and plural forms of the terms defined.
"Agreement" shall mean this Security Agreement, as modified,
supplemented or amended from time to time.
"Asset Purchase Agreement" shall mean that certain Asset Purchase
Agreement dated February 27, 1998, between the Assignor and Wham-O, Inc., as
amended.
"Assignee" shall have the meaning provided in the first paragraph of
this Agreement.
"Assignor" shall have the meaning provided in the first paragraph of
this Agreement.
"BNY" shall mean BNY Financial Corporation.
"Chattel Paper" shall have the meaning assigned that term under the
Uniform Commercial Code as in effect on the date hereof in the State of New
York.
"Collateral" shall have the meaning provided in Section 1.1(a).
"Contracts" shall mean all contracts between the Assignor and one or
more additional parties, excluding the Asset Purchase Agreement.
"Contract Rights" shall mean all rights of the Assignor (including,
without limitation, all rights to payment) under each Contract.
"Copyrights" shall mean any U.S. copyright to which the Assignor now
or hereafter has title, as well as any application for a U.S. copyright
hereafter made by the Assignor.
"Credit Agreement" shall have that certain Credit Agreement of even
date herewith between the Assignor, as borrower, and the Assignee, as lender.
13
<PAGE>
"Documents" shall have the meaning assigned that term under the
Uniform Commercial Code as in effect on the date hereof in the State of New
York.
"Equipment" shall mean any "equipment," as such term is defined in the
Uniform Commercial Code as in effect on the date hereof in the State of New
York, now or hereafter owned by Assignor and, in any event, shall include, but
shall not be limited to, all machinery, equipment, furnishings, fixtures and
vehicles now or hereafter owned by the Assignor and any and all additions,
substitutions and replacements of any of the foregoing, wherever located,
together with all attachments, components, parts, equipment and accessories
installed thereon or affixed thereto.
"Existing Facility" shall mean that certain senior secured credit
facility between the Assignor and BNY as evidenced by (i) that certain Accounts
Receivable Management and Security Agreement, dated as of July 31, 1995 between
the Assignor, as borrower, and BNY, as lender, as amended from time to time, and
(ii) such other documents and instruments executed and delivered in connection
with any of the foregoing.
"General Intangibles" shall have the meaning assigned that term under
the Uniform Commercial Code as in effect on the date hereof in the State of New
York.
"Goods" shall have the meaning assigned that term under the Uniform
Commercial Code as in effect on the date hereof in the State of New York.
"Indemnitee" shall have the meaning specified in Section 8.1.
"Instrument" shall have the meaning assigned that term under the
Uniform Commercial Code as in effect on the date hereof in the State of New
York.
"Inventory" shall mean all raw materials, work-in-process, and
finished inventory of the Assignor of every type or description and all
documents of title covering such inventory, and shall specifically include all
"inventory" as such term is defined in the Uniform Commercial Code as in effect
on the date hereof in the State of New York, now or hereafter owned by the
Assignor.
"Marks" shall mean any trademarks and service marks now held or
hereafter acquired by the Assignor, which are registered in the United States
Patent and Trademark Office, as well as any unregistered marks used by the
Assignor in the United States and trade dress, including logos and/or designs,
in connection with which any of these registered or unregistered marks are used.
"Obligations" shall mean: (a) all indebtedness, obligations and
liabilities (including, without limitation, guarantees and other contingent
liabilities) of the Assignor to the Assignee arising under or in connection with
any Credit Document; (b) any and all sums advanced by the Assignee in order to
preserve the Collateral or preserve its security interest in the Collateral; and
(c) in the event of any proceeding for the collection or enforcement of any
indebtedness, obligations or liabilities of the Assignor referred to in clause
(a), after an Event of Default shall have occurred and be continuing, the
reasonable expenses of re-taking, holding,
14
<PAGE>
preparing for sale or lease, selling or otherwise disposing or realizing on the
Collateral, or of any exercise by the Assignee of its rights hereunder, together
with reasonable attorneys' fees and court costs.
"Patents" shall mean any U.S. patent to which the Assignor now or
hereafter has title, as well as any application for a U.S. patent now or
hereafter made by Assignor.
"Proceeds" shall have the meaning assigned that term under the Uniform
Commercial Code as in effect in the State of New York on the date hereof or
under other relevant law and, in any event, shall include, but not be limited
to, (i) any and all proceeds of any insurance, indemnity, warranty or guaranty
payable to the Assignee or the Assignor from time to time with respect to any of
the Collateral, (ii) any and all payments (in any form whatsoever) made or due
and payable to the Assignor from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any governmental authority (or any Person acting under
color of governmental authority) and (iii) any and all other amounts from time
to time paid or payable under or in connection with any of the Collateral.
"Receivables" shall mean any "account" as such term is defined in the
Uniform Commercial Code as in effect on the date hereof in the State of New
York, now or hereafter owned by Assignor and, in any event, shall include, but
shall not be limited to, all of the Assignor's rights to payment for goods sold
or leased or services performed by the Assignor, whether now in existence or
arising from time to time hereafter, including, without limitation, rights
evidenced by an account, note, contract, security agreement, chattel paper or
other evidence of indebtedness or security, together with (i) all security
pledged, assigned, hypothecated or granted to or held by the Assignor to secure
the foregoing, (ii) all of the Assignor's right, title and interest in and to
any goods, the sale of which gave rise thereto, (iii) all guarantees,
endorsements and indemnifications on, or of, any of the foregoing, (iv) all
powers of attorney for the execution of any evidence of indebtedness or security
or other writing in connection therewith, (v) all books, records, ledger cards,
and invoices relating thereto, (vi) all evidences of the filing of financing
statements and other statements and the registration of other instruments in
connection therewith and amendments thereto, notices to other creditors or
secured parties, and certificates from filing or other registration officers,
(vii) all credit information, reports and memoranda relating thereto and (viii)
all other writings related in any way to the foregoing.
SECTION 10. MISCELLANEOUS
-------------
10.1. Notices. All notices and other communications hereunder shall
-------
be made at the addresses, in the manner and with the effect provided in Section
9.3 of the Credit Agreement.
10.2. Waiver; Amendment. This Agreement may be charged, waived,
-----------------
discharged, or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
10.3. Obligations Absolute. The obligations of the Assignor under
--------------------
this Agreement shall be absolute and unconditional and shall remain in full
force and effect without
15
<PAGE>
regard to, and shall not be released, suspended, discharged, terminated or
otherwise affected by, any circumstance or occurrence whatsoever, including,
without limitation: (i) any renewal, extension, amendment or modification of, or
addition or supplement to or deletion from, any of the Credit Documents or any
other instrument or agreement referred to therein, or any assignment or transfer
of any thereof; (ii) any waiver, consent, extension, indulgence or other action
or inaction under or in respect of any such instrument or agreement or this
Agreement or any exercise or non-exercise of any right, remedy, power or
privilege under or in respect of this Agreement or any other Credit Document;
(iii) any furnishing of any additional security to the Assignee or any
acceptance thereof or any sale, exchange, release, surrender or realization of
or upon any security by the Assignee; or (iv) any invalidity, irregularity or
unenforceability of all or part of the Obligations or of any security therefor.
16
<PAGE>
10.4. Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of and be enforceable by the respective successors and
assigns of the partners hereto; provided, however, that the Assignor may not
assign or transfer any of its rights or obligations hereunder without the prior
written consent of the Assignee. All agreements, statements, representations
and warranties made by the Assignor herein or in any certificate or other
instrument delivered by the Assignor or on its behalf under this Agreement shall
survive the execution and delivery of this Agreement and the other Credit
Documents.
10.5. Headings Descriptive. The headings of the several sections and
--------------------
subsections of this Agreement are inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Agreement.
10.6. Governing Law. This Agreement and the rights and obligations
-------------
of the parties hereunder shall be construed in accordance with and be governed
by the law of the State of New York.
10.7. Waiver of Jury Trial. Assignor and Assignee each acknowledges
--------------------
and agrees that any controversy that may arise under this Agreement is likely to
involve complicated and difficult issues, and therefore each party hereby
irrevocably and unconditionally waives any right it may have to a trial by jury
in respect to any litigation directly or indirectly arising out of or relating
to this Agreement, or the breach, termination or validity of this Agreement, or
the transactions contemplated by this Agreement. Each party to this Agreement
certifies and acknowledges that (A) no representative, agent or attorney of any
other party has represented, expressly or otherwise, that such party would not,
in the event of litigation, seek to enforce the foregoing waiver, (B) it
understands and has considered the implication of this waiver, (C) it makes this
waiver voluntarily and (D) it has been induced to enter into this Agreement by,
among other things, the mutual waivers and certifications in this Section 10.7.
10.8. Assignor's Duties. It is expressly agreed, anything herein
-----------------
contained to the contrary notwithstanding, that the Assignor shall remain liable
to perform all of the obligations, if any, assumed by it with respect to the
Collateral and the Assignee shall not have any obligations or liabilities with
respect to any Collateral by reason of or arising out of or in connection with
this Agreement, nor shall the Assignee be required or obligated in any manner to
perform or fulfill any of the obligations of the Assignor under or with respect
to any Collateral.
10.9. Termination; Release. After all Obligations have been paid in
--------------------
full, this Agreement shall terminate, and the Assignee, at the request and
expense of the Assignor, will execute and deliver to the Assignor the proper
instruments (including Uniform Commercial Code termination statements on form
UCC-3) acknowledging the termination of this Agreement, and will duly assign,
transfer and deliver to the Assignor (without recourse and without any
representation or warranty) such of the Collateral as may be in possession of
the Assignee and has not theretofore been sold or otherwise applied or released
pursuant to this Agreement.
10.10. Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered by their duly authorized officers as of the date first
above written.
YES! ENTERTAINMENT CORPORATION,
as Assignor
By ____________________________________
Title:
INFINITY INVESTORS LIMITED,
as Assignee
By ___________________________________
Title:
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 169 169
<SECURITIES> 0 0
<RECEIVABLES> 16,156 16,156
<ALLOWANCES> 10,322 10,322
<INVENTORY> 8,986 8,986
<CURRENT-ASSETS> 19,083 19,083
<PP&E> 17,114 17,114
<DEPRECIATION> 12,771 12,771
<TOTAL-ASSETS> 23,591 23,591
<CURRENT-LIABILITIES> 20,636 20,636
<BONDS> 0 0
0 0
8,089 8,089
<COMMON> 92,295 92,295
<OTHER-SE> (99,216) (99,216)
<TOTAL-LIABILITY-AND-EQUITY> 23,591 23,591
<SALES> 7,883 25,587
<TOTAL-REVENUES> 7,883 25,587
<CGS> 5,485 15,835
<TOTAL-COSTS> 5,485 15,835
<OTHER-EXPENSES> 5,239 17,780
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 270 918
<INCOME-PRETAX> (2,974) (2,861)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,974) (2,861)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,974) (2,861)
<EPS-PRIMARY> (0.19) (0.24)
<EPS-DILUTED> 0 0
</TABLE>
