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SECURITIES EXCHANGE AND COMMISSION
Washington, D. C. 20549
____________
FORM 8-K
CURRENT REPORT
____________
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported): September 2, 1998
YES! Entertainment Corporation
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(Exact name of registrant as specified in its charter)
Delaware 0-25916 94-3165290
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(State of (Commission File Number) (IRS Employer
Incorporation) Identification No.)
3875 Hopyard Road, Suite 375, Pleasanton, California 94588
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(Address of principal executive offices) (Zip Code)
(925) 847-9444
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(Registrant's telephone number, including area code)
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Item 5. Other Events.
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On September 2, 1998, the Registrant entered into a Securities Exchange
Agreement (the "Exchange Agreement") with certain of the Registrant's
institutional investors (the "Investors") superseding an agreement entered
into on July 25, 1997 (the "July Agreement") pursuant to which the Registrant
had issued convertible subordinated debentures (the "July Debentures") and
convertible preferred stock (the "July Shares"). The Registrant and
the Investors agreed to supersede the July Agreement by entering into the
Exchange Agreement and issuing new convertible subordinated debentures (the
"Debentures") and convertible preferred stock ("Preferred Stock") in exchange
for the Investors' remaining July Debentures and July Shares.
The Exchange Agreement provides that the Investors will not convert the
Debentures or Preferred Stock, or sell any shares of Preferred Stock, Common
Stock or 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 Agreement). In addition, certain conversion and sale
restrictions applicable to the July Shares and July Debentures do not apply to
the Preferred Stock and the Debentures. 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 Preferred Stock and Debentures (conversion is currently limited due to
certain Nasdaq requirements which will no longer apply if such stockholder
approval is obtained), 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 holders of the
Preferred Stock are also entitled to elect two members to the Registrant's
board of directors.
These and other terms of the transactions referred to above are set forth
in the Debentures, the Certificate of Designation relating to the Preferred
Stock, and the Exchange Agreement, which are attached hereto as Exhibits 4.1,
4.2, and 4.3, respectively, and are incorporated by reference herein. The
information set forth in the Registrant's Press Release dated September 3,
1998 relating to the above transactions is filed as Exhibit 99.1 hereto and is
also incorporated by reference herein.
Item 7. Exhibits
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4.1 Form of 5% Convertible Debenture due April 30, 2002.
4.2 Amended Certificate of Designation of Series C Preferred Shares.
4.3 Securities Exchange Agreement dated September 2, 1998.
99.1 Press release dated September 3, 1998.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
YES! ENTERTAINMENT CORPORATION
Dated: September 15, 1998 By: /s/ Mark Shepherd
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Mark Shepherd
President and Chief Executive Officer
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INDEX TO EXHIBITS
-----------------
Page number in
sequentially
numbered version
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4.1 Form of 5% Convertible Debenture due April 30, 2002. 5
4.2 Amended Certificate of Designation of Series C 23
Preferred Shares.
4.3 Securities Exchange Agreement dated September 2, 1998. 41
99.1 Press Release dated, September 3, 1998 63
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EXHIBIT 4.1
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS.
THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND CONVERSION SET
FORTH IN A SECURITIES EXCHANGE AGREEMENT, DATED AUGUST 28, 1998, BETWEEN YES!
ENTERTAINMENT CORPORATION ("THE COMPANY") AND THE ORIGINAL HOLDER HEREOF. A
COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
No. [_] $[ ]
YES! ENTERTAINMENT CORPORATION
5% CONVERTIBLE DEBENTURE DUE APRIL 30, 2002
THIS DEBENTURE is one of a duly authorized issue of debentures of YES!
Entertainment Corporation, a corporation organized and existing under the laws
of Delaware and having a principal place of business at 3875 Hopyard Road, Suite
375, Pleasanton, California 94588 (the "Company"), designated as its 5%
Convertible Debentures, due April 30, 2002 (the "Debentures"), in an aggregate
principal amount of $[ ]. This Debenture supersedes in its
entirety the Debentures of like tenor, issued by the Company to the Holder on or
after July 25, 1997.
FOR VALUE RECEIVED, the Company promises to pay to [ ],
or its registered assigns (the "Holder"), the principal sum of [ ]
($[ ]) (together with all additional sums of deferred interest added to
the principal balance of this Debenture as provided below) on April 30, 2002 or
such earlier date as the Debentures are required to be repaid as provided
hereunder (the "Maturity Date") with interest (calculated on the basis of a 360-
day year and for the actual number of days elapsed) accruing on the unpaid
balance thereof from the date hereof at the rate of 5% per annum, payable (i) on
the last day of March, June, September and December of each year, commencing
September 30, 1998; (ii) upon conversion; or (iii) upon the Maturity Date if not
earlier converted. Accrued interest on this Debenture shall, at the Company's
option, be (i) paid in cash or (ii) added to the outstanding principal balance
of this Debenture with effect as of the day such interest is payable. Interest
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hereunder will be paid to the person in whose name this Debenture (or one or
more predecessor Debentures) is registered on the records of the Company
regarding registration and transfers of the Debentures (the "Debenture
Register"); provided, however, that the Company's obligation to a transferee of
this Debenture arises only if such transfer, sale or other disposition is made
in accordance with the terms and conditions hereof and of the Purchase Agreement
(as hereafter defined). All overdue amounts hereunder shall bear interest at the
rate of 15% per annum from the date such payment is due. Subject to the
foregoing, the principal of, and interest on, this Debenture are payable in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts, at the address of the
Holder last appearing on the Debenture Register. A transfer of the right to
receive principal and interest under this Debenture shall be transferable only
through an appropriate entry in the Debenture Register as provided herein.
This Debenture is subject to the following additional provisions:
SECTION 1. The Debentures are exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same but shall not be issuable in
denominations of less than integral multiplies of Fifty Thousand Dollars
($50,000). No service charge will be made for such registration of transfer or
exchange.
SECTION 2. This Debenture has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Securities Act,
pursuant to an effective registration statement or pursuant to an available
exemption from the registration requirements under the Securities Act. Prior to
due presentment to the Company for transfer of this Debenture, the Company and
any agent of the Company may treat the person in whose name this Debenture is
duly registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
SECTION 3. EVENTS OF DEFAULT.
"Event of Default," wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):
(a) any default in the payment of the principal of or interest on this
Debenture as and when the same shall become due and payable, either on the
Conversion Date (as hereafter defined) or the Maturity Date, by acceleration or
otherwise.
(b) the Company shall fail to timely observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any breach of,
this Debenture, the Purchase Agreement, the Certificate of Designation of the
Series C Preferred Stock of the Company (the "Certificate of Designation") or
the Amended and Restated Registration Rights
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Agreement, dated July 25, 1997 (the "Registration Rights Agreement"), and such
failure or breach shall not have been remedied within five (5) Business Days
thereafter or such other cure period as may specifically be provided herein or
in such other agreements with respect to any particular covenant, agreement or
warranty;
(c) the Company or any of its subsidiaries shall commence a voluntary
case under the United States Bankruptcy Code as now or hereafter in effect or
any successor thereto (the "Bankruptcy Code"); or an involuntary case is
commenced against the Company under the Bankruptcy Code and the petition is not
controverted within thirty (30) days, or is not dismissed within sixty (60)
days, after commencement of such involuntary case; or a "custodian" (as defined
in the Bankruptcy Code) is appointed for, or takes charge of, all or any
substantial part of the property of the Company or the Company commences any
other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or there
is commenced against the Company any such proceeding which remains undismissed
for a period of sixty (60) days; or the Company is adjudicated insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or the Company suffers any appointment of any custodian
or the like for it or any substantial part of its property which continues
undischarged or unstayed for a period of sixty (60) days; or the Company makes a
general assignment for the benefit of creditors; or the Company shall call a
meeting of its creditors with a view to arranging a composition or adjustment of
its debts; or the Company shall by any act or failure to act indicate its
consent to, approval of or acquiescence in any of the foregoing; or any
corporate or other action is taken by the Company for the purpose of effecting
any of the foregoing;
(d) the Company shall fail to pay any amount of principal or interest
on any mortgage, credit agreement or other facility, indenture or other
instrument under which there may be issued, or by which there may be secured or
evidenced, any indebtedness of the Company in an amount exceeding one hundred
thousand dollars ($100,000) (collectively, "Indebtedness"), whether such
Indebtedness now exists or shall hereafter be created, when and as the same
shall become due and payable, or the Company shall fail to observe or perform
any term, covenant or agreement contained in any agreement or instrument
evidencing or governing any of such Indebtedness if the cure period for such
term, covenant or agreement contained in such agreement or instrument has run
and the holder or holders of such Indebtedness or a trustee on their behalf
shall have the right to cause such Indebtedness to become due prior to its
stated maturity;
(e) the Company shall dispose of all or substantially all of its assets
in one or more transactions or shall be a party to any business combination
pursuant to which the Company shall not be the surviving entity, except if, upon
the effectiveness of such a business combination, (i) the holders of the Common
Stock immediately prior to such effectiveness beneficially own (as determined
under Rule 13d-3 promulgated under the Exchange Act in the aggregate, 66 2/3% or
more of the voting power of such surviving entity and (ii) no Person or group
(as described in Rule 13d-5(b) promulgated under the Exchange Act) who was not a
holder
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of the Common Stock immediately prior to such business combination beneficially
owns in excess of 16 2/3% of the voting power of such surviving entity;
(f) the Company shall redeem or repurchase more than ten thousand
(10,000) of its outstanding shares of Common Stock, other than a redemption or
repurchase of an employee's Common Stock upon termination of such employee's
employment with the Company for any reason and other than a redemption of shares
of Series B Convertible Preferred Stock (the "Series B Preferred") issued
pursuant to the Certificate of Designation; or
(g) the entry of any judgments against the Company aggregating more
than two hundred fifty thousand dollars ($250,000) (except in connection with
litigation specifically scheduled in paragraph 3 of Schedule 3.1 (g) to the
Purchase Agreement).
If any Event of Default occurs and is continuing, and in every such case,
then so long as such Event of Default shall then be continuing, Holders of a
majority of the aggregate principal amount of Debentures then outstanding may,
by notice to the Company, declare the full outstanding principal amount of this
Debenture, together with all accrued but unpaid interest thereon and other
amounts owing hereunder, through the date of acceleration to be, whereupon the
same shall become, immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are waived by the Company,
notwithstanding anything herein contained to the contrary, and the Holder may
immediately and without expiration of any grace period enforce any and all of
its rights and remedies hereunder and all other remedies available to it under
applicable law. Such declaration may be rescinded and annulled by Holder at any
time prior to payment hereunder. No such rescission or annulment shall affect
any subsequent Event of Default or impair any right consequent thereon.
SECTION 4. CONVERSION.
(a) CONVERSION AT HOLDER'S OPTION. This Debenture shall be convertible
in whole or in part into shares of Common Stock (as hereafter defined) (subject
to reduction pursuant to Section 4(b)) at the option of the Holder in whole or
in part at any time and from time to time and prior to 7:30 p.m. (Eastern
Standard Time) on the Maturity Date at the Conversion Ratio (as hereafter
defined), as adjusted to give effect to any and all Adjustment Events (as
hereafter defined) occurring prior to conversion. The Holder shall effect
conversions by surrendering to the Transfer Agent (as hereafter defined) the
Debentures (or such portions thereof) to be converted and to the Company and the
Transfer Agent deliver a conversion notice in the form attached hereto as
Exhibit A (the "Conversion Notice"). Each Conversion Notice shall specify the
principal amount (and the amount of accrued but unpaid interest thereon) of
Debentures to be converted and the date on which conversion is to be effected
(the "Conversion Date"), which date may not be prior to the date the Holder
delivers such Conversion Notice by facsimile. If no Conversion Date is specified
in a Conversion Notice, the Conversion Date shall be the date that the
Conversion Notice is deemed deliverable pursuant to Section 4(i). Subject to
Section 4(b), each Conversion Notice, once given, shall be irrevocable unless
the Company fails to deliver a certificate or certificates representing the
underlying Common Stock pursuant to Section 4(d) within 3 Trading Days of the
Conversion Date, at which time or any time thereafter
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the holder of the Debentures may, at its option either (a) cancel the Conversion
Notice or (b) elect to have the Common Stock issuable upon conversion of this
Debenture deemed to be issued and outstanding and held as of record as of the
Conversion Date by the holder of this Debenture which sent the Conversion
Notice. If a Holder is converting less than all of the principal amount
represented by the Debentures tendered by such Holder with the Conversion
Notice, or if a conversion hereunder cannot be effected in full for any reason,
the Company shall promptly deliver to such Holder (in the manner within the time
set forth in Section 4(d)) a new Debenture for such principal amount as has not
been converted.
(b) CERTAIN REGULATORY APPROVAL. (i) The Company shall have until
December 21, 1998 to obtain Stockholder Approval (as defined below) of the
issuance of Common Stock upon conversion/exercise of the Series C Preferred, the
Debentures and the Warrants (each as defined in the Purchase Agreement). In the
event the Company has not obtained such Stockholder Approval by December 21,
1998, then, unless the holder of this Debenture on such date shall have
delivered written notice to the Company that this Debenture shall not be
redeemed pursuant to this subsection (b)(i), the Company shall within five
business days thereafter repay all of the principal amount (and the amount of
accrued but unpaid interest thereon) of Debentures then outstanding at a price
equal to the Prepayment Price. If Company fails for any reason to pay the
Prepayment Price on or prior to December 23, 1998, if required, the Company will
pay interest on such Prepayment Price at a rate of 20% per annum to the Holder,
accruing from December 21, 1998 until the Prepayment Price plus any accrued
interest thereon is paid in full. The entire Prepayment Price, including
interest thereon, shall be paid in cash. "Stockholder Approval" means the
approval by a majority of the total votes cast on the proposal, in person or by
proxy, at a meeting of the stockholders of the Company held in accordance with
the Company's certificate of incorporation and by-laws, of (A) the issuance by
the Company of shares of Common Stock pursuant to the conversion/exercise of
Series C Preferred, the Debentures and the Warrants (each as defined in the
Purchase Agreement) into Common Stock as and to the extent required pursuant to
Rule 4460(i) of the Nasdaq Stock Market (or any successor or replacement
provision thereof) and (B) an increase in the authorized number of shares of
Common Stock sufficient to cause the number of authorized and unissued and
unreserved shares of Common Stock on such date to exceed by at least 10 million
shares the number of shares of Common Stock issuable upon the conversion and
exercise of all of the outstanding shares of Series B Preferred and Series C
Preferred, the July Debentures, the Debentures and the Warrants.
(ii) If on a Conversion Date (A) the Common Stock is then listed
for trading on the Nasdaq National Market or, if the rules of the Nasdaq Stock
Market are hereafter amended to extend Rule 4460(i) promulgated thereby (or by a
successor or replacement provision thereof) to the Nasdaq SmallCap Market, on
the Nasdaq SmallCap Market, (B) the Conversion Ratio, as adjusted to give effect
to any and all Adjustment Events occurring prior to conversion, is such that the
aggregate number of shares of Common Stock that would then be issuable upon
conversion of all outstanding shares of Series C Preferred and Debentures, would
equal or exceed 20% of the number of shares of Common Stock outstanding on the
Conversion Date (the "Issuable Maximum"), and (C) the Company has not previously
obtained Stockholder
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Approval, then the Company shall issue to the converting holder of this
Debenture up to the Issuable Maximum (and no more).
(c) AUTOMATIC CONVERSION. If the Company shall have obtained
Stockholder Approval of the issuance of the Common Stock upon conversion of the
Debentures on or prior to December 21, 1998, then the principal amount of (and
accrued but unpaid interest thereon) any and all Debentures outstanding on April
30, 2002 (the "Automatic Conversion Date") shall be automatically converted into
fully paid and nonassessable shares of Common Stock, at the Conversion Ratio, as
adjusted to give effect to any and all prior Adjustment Events prior to
conversion, in the manner provided herein.
(d) DELIVERY OF CERTIFICATES. Not later than three (3) Trading Days
after a Conversion Date or the Automatic Conversion Date, the Company shall
cause the Transfer Agent (as hereafter defined) to deliver to the Holder (i) a
certificate or certificates, representing the number of shares of Common Stock
being acquired upon the conversion of Debentures (subject to reduction pursuant
to Section 5(b)(ii)) and (ii) Debentures in a principal amount equal to the
principal amount of Debentures tendered in connection with a conversion
hereunder but not converted. Any certificates representing shares of Common
Stock to be delivered upon a conversion hereunder shall be free of restrictive
legends and trading restrictions, except those specified in Section 4.1(b) of
the Purchase Agreement. The Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of any Debentures
to be converted are either delivered to the Transfer Agent for conversion, or
until the Holder notifies the Company that such Debentures have been lost,
stolen or destroyed and provides a bond reasonably satisfactory to the Company
(or other adequate security reasonably acceptable to the Company) to indemnify
the Company from any loss incurred by it in connection therewith. The Company
shall, upon request of the Holder, use its best efforts to deliver any
Debentures required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions. If such certificate or
certificates are not delivered within ten (10) Trading Days after a Conversion
Date, the holder shall be entitled to rescind such Conversion Notice upon
written notice to the Company, in which event the Company shall immediately
instruct the Transfer Agent to return the Debentures subject to such Conversion
Notice that were tendered for conversion. The Company shall pay to the
converting Holder, as liquidated damages and not as penalty, $3,000 for each day
that the Company fails to deliver such certificate or certificates pursuant to
this Section commencing after the fifth (5th) Trading Day after the applicable
Conversion Date or Automatic Conversion Date. In addition, if the Company fails
to deliver to the Holder such Debentures pursuant to this Section prior to a
fifteenth (15th) day after the Conversion Date or Automatic Conversion Date, the
Company shall, at the Holder's option, repay the principal amount of (and
accrued but unpaid interest on) the Debentures then held by such Holder, as
requested by such Holder, in an amount equal to the Prepayment Price calculated
as of the Conversion Date or Automatic Conversion Date (which date may be
referred to herein as a "Prepayment Date"). If the Holder has requested that the
Company repay the Debentures pursuant to this Section and the Company fails for
any reason to pay the Prepayment Price hereunder within five (5) Business Days
after such notice, the Company will pay interest on such Prepayment Price at a
rate of 17% per annum, in cash to such
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Holder, accruing from such fifth (5th) Business Day until such Prepayment Price
and any accrued but unpaid interest thereon is paid in full.
(e) ADJUSTMENTS.
(i) The following events shall be deemed to be "Adjustment
Events:"
A. If the Company, at any time while any Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Junior Securities payable in shares of either
Common Stock or of capital stock of any class (whether payable in shares of its
Common Stock or of capital stock of any class), (b) subdivide outstanding shares
of Common Stock into a larger number of shares, or (c) combine outstanding
shares of Common Stock into a smaller number of shares.
B. If the Company, at any time while any Debentures are
outstanding, shall issue rights or warrants to all Holders of Common Stock
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the Per Share Market Price of Common Stock as calculated on
the record date.
C. If the Company, at any time while any Debentures are
outstanding, shall distribute to all Holders of Common Stock (and not to the
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
4(e)(i)(A) and (i)(B) above).
(ii) ADJUSTMENT FOR STOCK SPLITS, COMBINATIONS. If an Adjustment
Event described in 4(e)(i)(A) occurs, then the Conversion Ratio, as adjusted to
give effect to all prior Adjustment Events, shall be multiplied by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
before such event and the denominator of which shall be the number of shares of
Common Stock outstanding after such event. Any adjustment computed pursuant to
this Section 4(e)(ii) shall become effective immediately after the record date
for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision or combination.
(iii) ADJUSTMENT FOR ISSUANCES TO COMMON STOCKHOLDERS. If an
Adjustment Event described in 4(e)(i)(B) occurs, then Conversion Ratio, as
adjusted to give effect to all prior Adjustment Events, shall be multiplied by a
fraction, the numerator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any, but including warrants or options that would
be included for purposes of determining earnings per share in accordance with
generally accepted accounting principles) outstanding on the date of issuance of
such rights or warrants plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at such Per Share
Market Price, and the denominator of which shall be the number of shares of
Common Stock (excluding treasury shares, if any, but including warrants or
options that would be included for purposes of determining earnings per share in
accordance with generally accepted accounting principles) outstanding on the
date of issuance of such rights or warrants plus the number of additional shares
of Common Stock
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offered for subscription or purchase. Such adjustment shall be calculated
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such rights or warrants. However, upon the expiration of any right or
warrant to purchase Common Stock the issuance of which resulted in an adjustment
pursuant to this Section 4(e)(iii), if any such right or warrant shall expire
and shall not have been exercised, such adjustment shall immediately upon such
expiration be recomputed as if the adjustment calculated upon the issuance of
such rights or warrants been calculated on the basis of offering for
subscription or purchase only that number of shares of Common Stock actually
purchased upon the exercise of such rights or warrants actually exercised.
(iv) ADJUSTMENT FOR DISTRIBUTION OF EVIDENCES OF INDEBTEDNESS OR
ASSETS TO COMMON STOCKHOLDERS. If an Adjustment Event described in 4(e)(i)(C)
occurs, then the Conversion Ratio, as adjusted to give effect to all prior
Adjustment Events, shall be multiplied by a fraction the numerator of which
shall be such Per Share Market Price on such record date less the then fair
market value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of Common Stock
as determined by the Board of Directors in good faith, and the denominator of
which shall be the Per Share Market Price determined as of such record date;
provided, however, that in the event of a distribution exceeding ten percent
(10%) of the net assets of the Company, such fair market value shall be
determined by a nationally recognized or major regional investment banking firm
or firm of independent certified public accountants of recognized standing
(which may be the firm that regularly examines the financial statements of the
Company) (an "Appraiser") selected in good faith by the Holders; and provided,
further, that the Company, after receipt of the determination by such Appraiser
shall have the right to select an additional Appraiser, in good faith, in which
case the fair market value shall be equal to the average of the determinations
by each such Appraiser. Such adjustment shall be calculated whenever any such
distribution is made and shall become applicable immediately after the record
date mentioned above.
(v) Upon the occurrence of an Adjustment Event, the Company
shall promptly to mail to each Holder a notice setting forth (a) the adjustment
to the Conversion Ratio required by the Adjustment Event at issue, (b) the
cumulative adjustment to which the Conversion Ratio shall be subject after the
Adjustment Event, giving effect to any and all prior Adjustment Events, and (c)
a brief statement of the facts requiring the adjustment at issue.
(vi) ROUNDING. All calculations under this Section 4 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) RECLASSIFICATIONS OR SHARE EXCHANGE. In case of any
reclassification of the Common Stock or any compulsory share exchange pursuant
to which the Common Stock is converted into other securities, cash or property,
the Holder shall have the right thereafter to, at their option, (A) convert the
principal amount of (and accrued but unpaid interest on) this Debenture into the
shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of Common Stock following such reclassification or
compulsory share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property as the shares of the Common Stock
of the
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Company into which the principal amount (and accrued and unpaid interest
thereon) of the Debentures could have been converted immediately prior to such
event or (B) require the Company to repay the principal amount (and all accrued
and unpaid interest thereon) of the Debentures.
(viii) CERTAIN EVENTS. The Company shall not effect any of the
following actions prior to obtaining Stockholder Approval of the issuance of the
Common Stock upon conversion of the Debentures:
A. declare a dividend (or any other distribution) on its
Common Stock (other than a subdivision of the outstanding shares of Common
Stock); or
B. declare a special nonrecurring cash dividend on or
authorize a repurchase or redemption of more than ten thousand (10,000) shares
of its then outstanding Common Stock, other than a repurchase or redemption of
the Common Stock of an employee upon termination of employment with the Company
for any reason; or
C. authorize the granting to all Holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights; or
D. any reclassification of the Common Stock (other than a
subdivision or combination of then outstanding shares of Common Stock), any
consolidation or merger to which the Company is a party, any sale or transfer of
all or substantially all of the assets of the Company, or any compulsory share
exchange whereby the Common Stock is converted into other securities, cash or
property; or
E. authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company.
After obtaining such Stockholder Approval, in the event any of the
foregoing actions occur, then the Company shall cause to be filed at each office
or agency maintained for the purpose of conversion of Debentures and shall cause
to be mailed to the Holders at its last addresses as shall appear on the
Debenture Register, at least thirty (30) calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the Holders of Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger, sale, transfer,
share exchange, dissolution, liquidation or winding-up is expected to become
effective, and the date as of which it is expected that Holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities, cash, or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding-up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
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(f) RESERVATION OF COMMON STOCK. The Company covenants, from and after
obtaining Stockholder Approval, that it shall at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Debentures, as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holder, such number of shares of Common Stock as shall be
issuable upon the conversion of the aggregate principal amount of all
outstanding Debentures. The Company covenants that all shares of Common Stock
that shall be so issuable shall, upon issue, be duly and validly authorized,
issued and fully paid and nonassessable.
(g) FRACTIONAL SHARES. Upon a conversion hereunder the Company shall
not be required to issue stock certificates representing fractions of shares of
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Price at such time.
If the Company elects not to, or is unable to, make such a cash payment, the
Holder shall be entitled to receive, in lieu of the final fraction of a share,
one whole share of Common Stock.
(h) CERTIFICATES. The issuance of certificates for shares of Common
Stock on conversion of Debentures shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder.
(i) NOTICE. Any and all notices or other communications or deliveries
to be provided by the Holder hereunder, including, without limitation, any
Holder Conversion Notice, shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service or sent by
certified or registered mail, postage prepaid, addressed to the attention of the
Chief Financial Officer of the Company at the facsimile telephone number or
address of the principal place of business of the Company, and if applicable, to
the Transfer Agent. Any and all notices or other communications or deliveries to
be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
the Holder at the facsimile telephone number or address of such Holder appearing
on the books of the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on the
earliest of (i) the date of transmission, if delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement prior to 4:30
p.m. (Eastern Standard Time) on a Trading Day, (ii) the Trading Day after the
transmission, if delivered via facsimile at the facsimile telephone number
specified in the Purchase Agreement later than 4:30 p.m. (Eastern Standard Time)
on any date and earlier than 11:59 p.m. (Eastern Standard Time) on such date,
(iii) the Trading Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (iv) upon actual receipt by the party
to whom such notice is required to be given.
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SECTION 5. PREPAYMENT BY THE COMPANY.
(a) OPTIONAL PREPAYMENT BY COMPANY.
(i) The Company shall have the right, exercisable at any time
after or concurrent with such time as all shares of Series B Preferred have been
converted or redeemed upon fifteen (15) Trading Days notice to the Holders (the
"Optional Prepayment Notice"), to prepay all of the principal amount of the
Debentures then outstanding at the Prepayment Price calculated on the date of
the Optional Prepayment Notice (which date may be referred to herein as a
"Prepayment Date"); provided, however, that the Company shall not redeem the
Debentures from a holder without simultaneously repaying any and all
indebtedness owed to such holder of Debentures. The entire Prepayment Price
shall be paid in cash.
(ii) The holders of the Debentures shall have until the
Redemption Date to convert any and all Debentures into shares of Common Stock by
delivering a Conversion Notice on or prior to the date that is the business day
before the Redemption Date. On or after the Prepayment Date, no Holder shall
have the right to continue to convert Debentures which have been noticed for
redemption.
(iii) On or before the fifth Trading Day after the Optional
Prepayment Date, the Holder shall deliver to the Company the Debentures subject
to the Optional Prepayment Notice that have not been previously tendered for
conversion and the Company shall deliver a sum equal to the Prepayment Price as
calculated on the Prepayment Date.
(iv) Notwithstanding the other provisions of this Section 5, in
the event the Company effects a merger, redemption, consolidation,
recapitalization, sale of all or substantially all of its assets or other
business combination within 90 days of the Redemption Date and the Redemption
Price is less than the consideration that the Holders of the Debentures would
have received upon conversion of the Debentures into Common Stock pursuant to
such subsequent Event (the "Subsequent Consideration") then, prior to or
concurrently with such transaction the Company shall pay to the former holders
of the Debentures that were redeemed on the Redemption Date the difference
between the Subsequent Consideration and the Redemption Price.
(b) LIQUIDATED DAMAGES. If the Optional Prepayment Price shall not be
paid in full on or before the fifteenth Trading Day after the Prepayment Date,
the Company shall pay to the holders of Debentures subject to Redemption as
liquidated damages and not as a penalty the sum of seven thousand five hundred
dollars ($7,500) per day in cash until such Optional Prepayment Price, together
with all such liquidated damages, is paid in full. In addition, if the Company
shall have failed to pay any portion of the Optional Prepayment Price on or
before the eighteenth Trading Day after the Prepayment Date, then the Holder may
demand that the Company (i) convert all or any portion of the principal amount
of the Debentures for which the Optional Prepayment Price shall not have been
paid (the "Unpaid Principal Portion") at a Conversion Price calculated as at the
date of the Optional Prepayment Notice or the date of such conversion, whichever
is lower, or (ii) promptly issue to the Holders new Debentures for a principal
amount equal to the Unpaid Principal Portion.
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(c) BNY CONSENTS. Notwithstanding anything to the contrary contained
herein, so long as the BNY Bank Obligations are outstanding, the Company shall
not deliver an Optional Prepayment Notice unless (i) there are no outstanding
Debentures or all outstanding Debentures are subject to a delivered redemption
notice and (ii) it has received (and furnished to the Holder evidence thereof
reasonably satisfactory to it or) prior written consent of BNY to make such
prepayment free from the subordination provisions of Section 8 hereof.
SECTION 6. DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:
"AUTOMATIC CONVERSION DATE" is as defined in Section 4(c).
"BNY" means BNY Financial Corporation, 1290 Avenue of the Americas, New
York, New York 10104.
"BNY BANK OBLIGATIONS" means the borrowings and interest due thereon
(including, without limitation, any interest accruing after the commencement of
any case, proceeding or other action relating to the liquidation, dissolution,
assignment for the benefit of creditors, receivership, arrangement, bankruptcy,
insolvency or reorganization of the Company regardless of whether such interest
is allowable, payable or accruable to BNY in such case, proceeding or other
action) under the Receivables Agreement, as the same may from time to time be
amended, supplemented, otherwise modified, replaced or refinanced.
"BUSINESS DAY" means any day of the year on which commercial banks are not
required or authorized to be closed in New York City.
"CLOSING DATE" is as defined in the Purchase Agreement.
"COMMON STOCK" means shares now or hereafter authorized of the class of
Common Stock, par value $.001 per share, of the Company, stock of any other
class into which such shares may hereafter be reclassified or changed and any
other equity securities of the Company hereafter designated as Common Stock.
"CONVERSION DATE" is as defined in Section 4(d).
"CONVERSION NOTICE" is as defined in Section 4(d).
"CONVERSION PRICE" shall mean, as of any date of determination, the product
of (a) the Relevant Percentage as of the date of conversion and (b) the lowest
Per Share Market Price during the Measurement Period immediately preceding the
date of conversion; provided, however, that the Conversion Price shall not
exceed the product of (x) 81.25% and (y) the average Per Share Market Price for
the period from April 1, 1998 to and including April 30, 1998 (the "Maximum
Conversion Price").
"CONVERSION RATIO" means a fraction of the numerator which is one (1) the
denominator of which is the Conversion Price.
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"DEBENTURE REGISTER" is as defined in paragraph two (2) of this Debenture.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"ISSUABLE MAXIMUM" is as defined in Section 4(d).
"JULY DEBENTURES" is as defined in the Purchase Agreement.
"JUNIOR SECURITIES" means the Common Stock, all other equity securities of
the Company and all other debt that is subordinated to the Debentures by its
terms.
"MAXIMUM CONVERSION PRICE" is as defined in the definition of "Conversion
Price."
"MEASUREMENT PERIOD" shall mean 30 Trading Days.
"OPTIONAL PREPAYMENT NOTICE" is as defined in Section 5(a)(i).
"MATURITY DATE" is as defined in paragraph two (2) of this Debenture.
"PER SHARE MARKET PRICE" means on any date of determination (a) the lowest
reported sales price per share of the Common Stock on such date on the Nasdaq
National Market or other stock exchange on which the Common Stock is then
listed, as reported on Bloomberg, L.P., or (b) if the Common Stock is not listed
on the Nasdaq National Market or such other stock exchange, the lowest reported
sales price for a share of Common Stock in the Nasdaq SmallCap Market, as
reported on Bloomberg, L.P. (or similar organization or agency succeeding to its
functions of reporting prices), or (c) if the Common Stock is no longer reported
on Bloomberg, L.P. (or similar organization or agency succeeding to its
functions of reporting prices), then the average of the "Pink Sheet" quotes for
the relevant conversion period as determined by the Holder, or (d) if the Common
Stock is no longer publicly traded, the fair market value of a share of Common
Stock as determined by an Appraiser selected in good faith by the holders of a
majority of principal amount of outstanding Debentures; provided, however, that
the Company, after receipt of the determination by such Appraiser, shall have
the right to select an additional Appraiser, in which case, the fair market
value shall be equal to the average of the determinations by each such
Appraiser.
"PERSON" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"PREPAYMENT DATE" is as defined in Section 4(e) if in connection with a
Conversion Notice and as defined in Section 5(a)(i) if in connection with an
Optional Prepayment Notice.
"PREPAYMENT PRICE" shall mean, as of any Prepayment Date a quotient equal
to (i) the principal amount of (and accrued but unpaid interest thereon) the
Debentures to be repaid, and (ii) the Relevant Percentage as of the Prepayment
Date.
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"PURCHASE AGREEMENT" means the Securities Exchange Agreement, dated August
28, 1998, as amended from time to time.
"RECEIVABLES AGREEMENT" means the Accounts Receivable Management and
Security Agreement, dated as of July 31, 1995, among the Company and BNY.
"REGISTRATION RIGHTS AGREEMENT" is as defined in Section 3(b).
"RELEVANT PERCENTAGE" shall mean 81.25%.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERIES C PREFERRED" means the Series C Preferred Stock designated in the
Series C Certificate of Designation.
"STOCKHOLDER APPROVAL" is as defined in Section 4(b).
"TRADING DAY" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the over-the-
counter market, as reported by the National Quotation Bureau Incorporated (or
any similar organization or agency succeeding its functions of reporting
prices).
"TRANSFER AGENT" means Boston EquiServe.
"UNDERLYING SECURITIES REGISTRATION STATEMENT" means the Registration
Statement (as defined in the Registration Rights Agreement) to be amended within
thirty (30) days of Closing (as defined in the Purchase Agreement).
"UNPAID PRINCIPAL PORTION" is as defined in Section 5(b).
"WARRANTS" is as defined in the Purchase Agreement.
SECTION 7. Except as expressly provided herein, no provision of this
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, and interest on, this Debenture at
the time, place, and rate, and in the coin or currency, herein prescribed. This
Debenture is a direct obligation of the Company. This Debenture ranks pari passu
with all other indebtedness, obligations or liabilities of the Company now or
hereafter issued under the terms set forth herein. The Company may not prepay
the outstanding principal amount on the Debentures except in accordance with the
specific terms hereof.
SECTION 8. (a) This Debenture is subordinated to full payment of all of
the Company's obligations under the BNY Bank Obligations. Except to the extent
otherwise specifically set forth in this Section, until such time as all BNY
Bank Obligations are
14
<PAGE>
indefeasibly paid to BNY, the Company shall not, directly or indirectly, make
any cash or other payment (except for the issuance and delivery of shares of
Common Stock in respect of conversions or payments of interest hereunder) that
is due and owing under this Debenture. Cash payments contemplated by Sections
4(b) or 4(d) hereof, to the extent such payments do not exceed, in the
aggregate, five hundred thousand $500,000, may be made by the Company to (and
retained by) the Holders as long as (i) at the time any such payment is due
under such Sections, the Bank has not given notice to the Company of
acceleration of the Company's obligations under the Receivables Agreement or
(ii) the making of such payment shall not cause (as determined at the time such
payment shall become due to the Holders) the Company to exceed the borrowing
limitations set forth in Section 2 of the Receivables Agreement, or cause an
"Event of Default" (as defined under the Receivables Agreement) under Section
18(a) of the Receivables Agreement. Cash payments contemplated by Sections 4(b)
or 4(d) hereof, to the extent that such payments, in the aggregate, exceed five
hundred thousand ($500,000), may be made by the Company to (and retained by) the
Holders as long as (i) at the time any such payment is due under such Sections,
the Bank has not given notice to the Company of acceleration of the Company's
obligations under the Receivables Agreement, or (ii) at the time such payment
becomes due the Company shall not be in default of Sections 12(n), 12(o), 12(p),
12(q), 18(a), 18(i) or 18(j) of the Receivables Agreement, or (iii) the making
of such payment shall not cause (as determined at the time such payment shall
become due to the Holders) an Event of Default under such Receivables Agreement
sections set forth in (ii) immediately above or cause the Company to exceed the
borrowing limitations set forth in Section 2 of the Receivables Agreement. The
subordination provided hereunder shall in no way limit the Holders' ability to
convert Debentures into shares of Common Stock and to receive payment of
interest hereunder in shares of Common Stock, including after such time as any
Event of Default shall be declared hereunder.
(b) Should any payment, other than payments contemplated in Section
8(a) above, be received by the Holders, such payment shall be held in trust by
the Holders for the benefit of BNY and shall be delivered forthwith to BNY for
application to BNY Bank Obligations, in the form received with any necessary
endorsement or assignment.
SECTION 9. This Debenture shall not entitle the Holder to any of the
rights of a stockholder of the Company, including without limitation, the right
to vote, to receive dividends and other distributions, or to receive any notice
of, or to attend, meetings of stockholders or any other proceedings of the
Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
SECTION 10. If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
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SECTION 11. This Debenture shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof.
SECTION 12. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Debenture. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any waiver
must be in writing.
SECTION 13. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
SECTION 14. Whenever any payment or other obligation hereunder shall be
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day (or, if such next succeeding Business Day falls in the
next calendar month, the preceding Business Day in the appropriate calendar
month).
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IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized as of September 2, 1998.
YES! ENTERTAINMENT CORPORATION
Attest: By:
------------------------- -----------------------------
Mark Shepherd Mark Shepherd
Secretary Chief Executive Officer
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EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert the above Debenture
No. [ ] into shares of Common Stock, par value $.001 per share (the "Common
Stock"), of YES! Entertainment Corporation (the "Company") according to the
conditions hereof, as of the date written below. As of the date set forth
below, the undersigned is in compliance with Section 4.18 of the Securities
Exchange Agreement between the Company, Infinity Investors Limited, Infinity
Emerging Opportunities Limited and Glacier Capital Limited dated August 28,
1998. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
Holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
----------------------------------------------------
Date to Effect Conversion
----------------------------------------------------
Principal Amount of Debentures to be Converted
----------------------------------------------------
Applicable Conversion Ratio (as adjusted to give
effect to all prior Adjustment Events)
----------------------------------------------------
Amount of Interest due on the Principal Amount of
Debentures to be Converted
----------------------------------------------------
Signature
----------------------------------------------------
Name:
----------------------------------------------------
Address:
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EXHIBIT 4.2
AMENDED CERTIFICATE OF DESIGNATION OF
SERIES C CONVERTIBLE PREFERRED STOCK OF
YES! ENTERTAINMENT CORPORATION
The undersigned, Mark Shepherd, hereby certifies that:
I. He is the duly elected and acting Chief Executive Officer and
Secretary, respectively, of YES! Entertainment Corporation, a Delaware
corporation (the "Company").
II. The Certificate of Incorporation of the Company authorizes 2,000,000
shares of preferred stock, par value $.001 per share, of which 358,822 shares
are issued and outstanding.
III. No shares of Series C Convertible Preferred Stock are issued and
outstanding.
IV. The following is a true and correct copy of the consent dated
September 1, 1998 (which amends and restates in their entirety the resolutions
of the Board of Directors of the Company (the "Board of Directors") dated August
27, 1998 designating the rights, preferences, privileges and restrictions of the
Series C Convertible Preferred Stock) duly adopted by the Board of Directors,
which constituted all requisite action on the part of the Company for adoption
of such consent.
RESOLUTIONS
WHEREAS, the Board of Directors is authorized to provide for the issuance
of shares of preferred stock in series, and by filing a certificate pursuant to
the applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in such series, and to fix the designations,
powers, preferences and rights and the qualifications, limitations or
restrictions thereof;
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges and
restrictions of such series;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares constituting
such series and fixes the designations, powers, preferences, rights,
qualifications, limitations, restrictions and privileges relating to such series
as follows:
SECTION 1. DESIGNATION, AMOUNT AND PAR VALUE. There are hereby provided
one series of Preferred Stock designated and to be known as "Series C
Convertible Preferred Stock" (the "Series C Preferred"). The number of shares
constituting authorized Series C Preferred shall be five hundred forty thousand
(540,000) (which shall not be subject to increase), with a par value of $.001.
SECTION 2. DIVIDENDS.
1.
<PAGE>
(a) Holders of Preferred Stock shall be entitled to receive, when and
as declared by the Board of Directors out of funds legally available therefor,
and the Company shall pay, cumulative dividends at the rate per share equal to
$1.28 (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares) per annum, payable
in shares of Series C Preferred Stock, on the last day of March, June, September
and December commencing on September 30, 1998 or on the Conversion Date (each a
"Dividend Payment Date"). Dividends on the Series C Preferred shall accrue daily
commencing on September 2, 1998, and shall be deemed to accrue on the Dividend
Payment Date whether or not earned or declared and whether or not there are
profits, surplus or other funds of the Company legally available for the payment
of dividends. The amount of dividends accrued on each share of Series C
Preferred shall be calculated for each Dividend Payment Date on the basis of an
annual dividend rate of $1.28 and a 360-day year of twelve 30-day months, and
shall include any unpaid accrued dividends for prior periods or portions
thereof. Within 15 Business Days of each Dividend Payment Date, dividends shall
be paid by issuing and delivering to a holder of Series C Preferred that number
of additional shares of Series C Preferred equal to the quotient of (a) the
aggregate dollar amount of accrued and unpaid dividends for all shares of Series
C Preferred held by such holder on the Dividend Payment Date divided by (b)
Liquidation Preference (as hereafter defined). Should any dividend that is paid
through the issuance and delivery of additional shares of Series C Preferred
require the issuance and delivery of a fractional share or shares of Series C
Preferred, no such fractional shares shall be so issued, but instead the Company
shall pay the equivalent value of such fractional share in cash. The party that
holds the Series C Preferred on an applicable record date for any dividend
payment will be entitled to receive such dividend payment and any other accrued
and unpaid dividends that accrued prior to such Dividend Payment Date, without
regard to any sale or disposition of such Series C Preferred subsequent to the
applicable record date but prior to the applicable Dividend Payment Date. Except
as otherwise provided herein, if at any time the Company pays less than the
total amount of dividends then accrued on account of the Series C Preferred,
such payment shall be distributed ratably among the holders of the Series C
Preferred based upon the number of shares held by each holder.
SECTION 3A. NEW DIRECTORS. Within 10 days after the Closing Date, the
Company shall cause a majority of its Board of Directors to elect each of Clark
Hunt and Barrett Whissman to the Board.
SECTION 3B. VOTING RIGHTS. The holders of the Series C Preferred shall
have the right to elect two members of the Company's Board of Directors (the
"Series C Directors") at each annual and special meeting of the Company's
stockholders held for such purpose until such time as the number of shares of
Series C Preferred outstanding is less 25% of the number of such shares
outstanding on the date hereof (excluding the effects of reverse stock splits,
recapitalizations and other such events). So long as the holders of the Series
C Preferred shall have the right to elect two directors, the holders of a
majority of the Series C Preferred shall have the right to nominate such two
directors; provided that the holders of a majority of the Series C Preferred
shall have provided the Company written notice at least fifteen (15) days prior
to the date the Company files its proxy statement with respect to the election
of directors with the Securities and Exchange Commission setting forth the
nominees of the Series C Preferred in such notice; provided further, that this
advance notice shall not apply to the first meeting of the stockholders of the
Company, in which the nominees of the Series C Preferred shall be Clark
2.
<PAGE>
Hunt and Barrett Whissman. The Company shall give the holders of the Series C
Preferred thirty (30) days advance written notice of its intention to file a
proxy statement with the Securities and Exchange Commission relating to the
election of directors. The two members shall be elected by the holders of a
majority of the shares of Series C Preferred outstanding on the record date for
the general election of directors. In addition, so long as any shares of Series
C Preferred are outstanding, the Company shall not, without the affirmative vote
of the holders of a majority of the shares of the Series C Preferred then
outstanding, (a) alter or change adversely the powers, preferences or rights
given to the Series C Preferred, (b) authorize or create any class of stock
ranking as to dividends or distribution of assets upon a Liquidation (as defined
in Section 4) senior to, prior to or pari passu with the Series C Preferred or
(c) enter into any merger, recapitalization, consolidation or similar
transaction that would result in the change in any of the terms of the Series C
Preferred.
SECTION 3C. CONSENT OF SERIES C DIRECTORS. Without the consent and
approval of the Series C Directors, the Company shall not (i) incur more than
$100,000 in additional indebtedness (excluding trade debt incurred in the
ordinary course of business); (ii) permit to exist liens on its assets securing
payment of claims or obligations in an aggregate amount of $500,000 other than
existing liens or liens securing payment of (A) the BNY Bank Obligations, (B)
the Bridge Loan, or (C) the New Facility; (iii) use any of the proceeds of the
Bridge Loan or the New Facility for any purpose other than working capital in
connection with the operation of the Company's present business operations; (iv)
enter into any agreement to merge with or otherwise combine its assets or
operations with any other entity or sell any material assets outside the
ordinary course of business; (v) commence an action for relief under any
provision of the United States Bankruptcy Code or any similar statutory scheme;
(vi) pay any material additional or special compensation to any of its officers
that is not currently required under any existing agreements with its officers;
(vii) enter into any material transaction with any insider or affiliate; or
(viii) issue any shares of stock in the Company other than in satisfaction of
existing options, warrants, conversion rights, or existing obligations under the
Company's employee benefit plans. Any of the foregoing actions taken by the
Company without the consent and approval of the Series C Directors shall be null
and void and shall have no legal effect.
SECTION 4. LIQUIDATION. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a "Liquidation"), the holders
of Series C Preferred shall be entitled to receive out of the assets of the
Company, whether such assets are capital or surplus, for each share of Series C
Preferred, including any shares to be issued pursuant to Section 2 hereof
whether declared or not, an amount equal to $25.00 (as adjusted for any stock
dividends, combinations, splits, recapitalization and the like with respect to
such shares) (the "Liquidation Preference"), before any distribution or payment
shall be made to the holders of any Junior Securities (as hereafter defined),
and if the assets of the Company shall be insufficient to pay in full such
amounts, then the entire assets to be distributed shall be distributed among the
holders of Series C Preferred ratably in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon were paid in
full. The Company shall mail written notice of any such Liquidation, not less
than forty-five (45) days prior to the payment date stated therein, to each
record holder of Series C Preferred.
3.
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SECTION 5. CONVERSION.
(a) CONVERSION AT HOLDER'S OPTION. Each share of Series C Preferred
shall be convertible into shares of Common Stock (as hereafter defined) (subject
to reduction pursuant to Section 5(b)) at the option of the holder in whole or
in part at any time and from time to time at the Conversion Ratio (as hereafter
defined), as adjusted to give effect to any and all Adjustment Events (as
hereafter defined) occurring prior to conversion. The holder shall effect
conversions by surrendering the certificate or certificates representing the
shares of Series C Preferred to be converted to the Company, together with the
form of conversion notice attached hereto as Exhibit A (the "Conversion
Notice"). Each Conversion Notice shall specify the number of shares of Series C
Preferred to be converted and the date on which conversion is to be effected
(the "Conversion Date"), which date may not be prior to the date the holder
delivers such Conversion Notice by facsimile. If no Conversion Date is specified
in a Conversion Notice, the Conversion Date shall be the date that the
Conversion Notice is deemed deliverable pursuant to Section 5(d). Subject to
Section 5(b), each Conversion Notice, once given, shall be irrevocable unless
the Company fails to deliver a certificate or certificates representing the
underlying Common Stock pursuant to Section 5(d) within 3 Trading Days of the
Conversion Date, at which time or any time thereafter the holder of the Series C
Preferred may, at its option, either (a) cancel the Conversion Notice or (b)
elect to have the Common Stock issuable upon conversion of Series C Preferred
deemed to be issued and outstanding and held of record as of the Conversion Date
by the holder of Series C Preferred which sent the Conversion Notice. If a
holder is converting less than all shares of Preferred Stock represented by the
certificate or certificates tendered by such holder with the Conversion Notice,
or if a conversion hereunder cannot be effected in full for any reason, the
Company shall promptly deliver to such holder (in the manner within the time set
forth in Section 5(d)) a certificate of such number of shares as have not been
converted.
(b) CERTAIN REGULATORY APPROVAL. (i) The Company shall have until
December 21, 1998 to obtain Stockholder Approval (as defined below) of the
issuance of Common Stock upon conversion/exercise of the Series C Preferred, the
Debentures and the Warrants (each as defined in the Purchase Agreement). In the
event the Company has not obtained such Stockholder Approval by December 21,
1998, then, unless the holders of a majority in interest of the outstanding
Series C Preferred on such date shall have delivered written notice to the
Company that the Series C Preferred shall not be redeemed pursuant to this
subsection (b)(i), the Company shall within five business days thereafter
redeem, from funds legally available therefor at the time of such redemption,
all of the Series C Preferred then outstanding, including shares subject to a
Conversion Notice, at a price per share equal to the Redemption Price (as
hereafter defined). If the Company fails for any reason to pay the Redemption
Price on or prior to December 23, 1998 if required, then the Company will pay
interest on such Redemption Price at a rate of 17% per annum to the converting
holder of Series C Preferred, accruing from December 21, 1998 until the
Redemption Price plus any accrued interest thereon is paid in full. The entire
Redemption Price, including interest thereon, shall be paid in cash.
"Stockholder Approval" means the approval by a majority of the total votes cast
on the proposal, in person or by proxy, at a meeting of the stockholders of the
Company held in accordance with the Company's certificate of incorporation and
by-laws, of (A) the issuance by the Company of shares of Common Stock pursuant
to the conversion/exercise of Series B Preferred, Series C Preferred, the July
Debentures, the Debentures and the Warrants (all as
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defined in the Purchase Agreement) into Common Stock as and to the extent
required pursuant to Rule 4460(i) of the Nasdaq Stock Market (or any successor
or replacement provision thereof) and (B) an increase in the authorized number
of shares of Common Stock sufficient to cause the number of authorized and
unissued and unreserved shares of Common Stock on such date to exceed by at
least 10 million shares the number of shares of Common Stock issuable upon the
conversion and exercise of all of the outstanding shares of Series B Preferred
and Series C Preferred, the July Debentures, the Debentures and the Warrants.
(ii) If on a Conversion Date (A) the Common Stock is then listed
for trading on the Nasdaq National Market or, if the rules of the Nasdaq
Stock Market are hereafter amended to extend Rule 4460(i) promulgated
thereby (or by a successor or replacement provision thereof) to the
Nasdaq SmallCap Market, on the Nasdaq SmallCap Market, (B) the
Conversion Ratio, as adjusted to give effect to any and all Adjustment
Events occurring prior to conversion, is such that the aggregate number
of shares of Common Stock that would then be issuable upon conversion of
all outstanding shares of Series C Preferred and Debentures, would equal
or exceed 20% of the number of shares of Common Stock outstanding on the
Conversion Date (the "Issuable Maximum"), and (C) the Company has not
previously obtained Stockholder Approval, then the Company shall issue
to the converting holder of the Series C Preferred up to the Issuable
Maximum (and no more).
(c) AUTOMATIC CONVERSION. If the Company shall have obtained
Stockholder Approval of the issuance of the Common Stock upon conversion of the
Series C Preferred on or prior to December 21, 1998, then any and all shares of
Series C Preferred outstanding on April 30, 2002 (the "Automatic Conversion
Date") shall be automatically converted into fully paid and nonassessable shares
of Common Stock, at the Conversion Ratio, as adjusted to give effect to any and
all Adjustment Events occurring prior to conversion, in the manner provided
herein.
(d) DELIVERY OF CERTIFICATES. Not later than three (3) Trading Days
after a Conversion Date or the Automatic Conversion Date, the Company shall
cause the Transfer Agent to deliver to the holder (i) a certificate or
certificates, representing the number of shares of Common Stock being acquired
upon the conversion of Series C Preferred (subject to reduction pursuant to
Section 5(b)(ii)) and (ii) a certificate representing the shares of Series C
Preferred tendered in connection with a conversion hereunder but not converted.
Any certificates representing shares of Common Stock to be delivered upon a
conversion hereunder shall be free of restrictive legends and trading
restrictions, except those specified in Section 4.1(b) of the Purchase
Agreement. The Company shall not be obligated to issue certificates evidencing
the shares of Common Stock issuable upon conversion of any Series C Preferred
until certificates representing the shares of Series C Preferred to be converted
are either delivered to the Transfer Agent for conversion or the holder notifies
the Company that such shares of Series C Preferred have been lost, stolen or
destroyed and provides a bond reasonably satisfactory to the Company (or other
adequate security reasonably acceptable to the Company) to indemnify the Company
from any loss incurred by it in connection therewith. The Company shall, upon
request of the holder, use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions. If such
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certificate or certificates are not delivered within ten (10) Trading Days after
a Conversion Date, the holder shall be entitled to rescind such Conversion
Notice upon written notice to the Company and the Transfer Agent, in which event
the Company shall immediately instruct the Transfer Agent to return the
certificates representing shares of Series C Preferred subject to such
Conversion Notice that were tendered for conversion. The Company shall pay to
the converting holder, as liquidated damages and not as penalty, $3,000 for each
day that the Company fails to deliver such certificate or certificates pursuant
to this Section commencing after the fifth (5th) Trading Day after the
applicable Conversion Date or Automatic Conversion Date. In addition, if the
Company fails to deliver to the holder such certificate or certificates pursuant
to this Section prior to the fifteenth (15th) day after a Conversion Date or
Automatic Conversion Date, the Company shall, at the Holder's option, (i) redeem
the shares of Series C Preferred then held by such holder, as requested by such
holder, at the Redemption Price calculated as of the Conversion Date or
Automatic Conversion Date (which date may be referred to herein as a "Redemption
Date") and (ii) pay all accrued but unpaid dividends on account of the Series C
Preferred for which the Company shall have failed to issue Series C Preferred
certificates hereunder, in cash. If the holder has requested that the Company
redeem shares of Series C Preferred pursuant to this Section and the Company
fails for any reason to pay the Redemption Price hereunder within five (5)
Business Days after such notice, the Company will pay interest on such
Redemption Price at a rate of 17% per annum, in cash to such Holder, accruing
from such fifth (5th) Business Day until such Redemption Price and any accrued
but unpaid interest thereon is paid in full.
(e) ADJUSTMENTS.
(i) The following events shall be deemed to be "Adjustment
Events":
A. If the Company, at any time while any shares of Series C
Preferred are outstanding, (a) shall pay a stock dividend or otherwise
make a distribution or distributions on shares of its Junior Securities
payable in shares of either Common Stock or of capital stock of any
class, (b) subdivide outstanding shares of Common Stock into a larger
number of shares, or (c) combine outstanding shares of Common Stock into
a smaller number of shares.
B. If the Company, at any time while any shares of Series C
Preferred are outstanding, shall issue rights or warrants to all holders
of Common Stock entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the Per Share Market Price
of Common Stock as calculated on the record date.
C. If the Company, at any time while shares of Series C
Preferred are outstanding, shall distribute to all holders of Common
Stock (and not to holders of Series C Preferred) evidences of its
indebtedness or assets or rights or warrants to subscribe for or
purchase any security (excluding those referred to in Sections
5(e)(i)(A) and (B) above).
(ii) ADJUSTMENT FOR STOCK SPLITS, COMBINATIONS. If an Adjustment
Event described in 5(e)(i)(A) occurs, then the Conversion Ratio, as adjusted
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to give effect to all prior Adjustment Events, shall be multiplied by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding before such event and the denominator of which shall be the number
of shares of Common Stock outstanding after such event. Any adjustment
completed pursuant to this Section 5(e)(ii) shall become effective immediately
after the record date for the determination of stockholders entitled to
receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision or combination.
(iii) ADJUSTMENT FOR ISSUANCES TO COMMON STOCKHOLDERS. If an
Adjustment Event described in 5(e)(i)(B) occurs, then the Conversion Ratio, as
adjusted to give effect to all prior Adjustment Events, shall be multiplied by
a fraction, the numerator of which shall be the number of shares of Common
Stock (excluding treasury shares, if any, but including warrants or options
that would be included for purposes of determining earnings per share in
accordance with generally accepted accounting principles) outstanding on the
date of issuance of such rights or warrants plus the number of shares which
the aggregate offering price of the total number of shares so offered would
purchase at such Per Share Market Price, and the denominator of which shall be
the number of shares of Common Stock (excluding treasury shares, if any, but
including warrants or options that would be included for purposes of
determining earnings per share in accordance with generally accepted
accounting principles) outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of Common Stock offered for
subscription or purchase. Such adjustment shall be calculated whenever such
rights or warrants are issued and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants. However, upon the expiration of any right or warrant to
purchase Common Stock the issuance of which resulted in an adjustment pursuant
to this Section 5(e)(iii), if any such right or warrant shall expire and shall
not have been exercised, such adjustment shall immediately upon such
expiration be recomputed as if the adjustment computed upon the issuance of
such rights or warrants been computed on the basis of offering for
subscription or purchase only that number of shares of Common Stock actually
purchased upon the exercise of such rights or warrants actually exercised.
Such readjustment shall be effective immediately upon such expiration.
(iv) ADJUSTMENT FOR DISTRIBUTION OF EVIDENCES OF INDEBTEDNESS OR
ASSETS TO COMMON STOCKHOLDERS. If an Adjustment Event described in
5(e)(i)(C) occurs, then the Conversion Ratio, as adjusted to give effect to
all prior Adjustment Events, shall be multiplied by a fraction the numerator
of which shall be such Per Share Market Price on such record date less the
then fair market value at such record date of the portion of such assets or
evidence of indebtedness so distributed applicable to one outstanding share of
Common Stock as determined by the Board of Directors in good faith, and the
denominator of which shall be the Per Share Market Price determined as of such
record date; provided, however, that in the event of a distribution exceeding
ten percent (10%) of the net assets of the Company, such fair market value
shall be determined by a nationally recognized or major regional investment
banking firm or firm of independent certified public accountants of recognized
standing (which may be the firm that regularly examines the financial
statements of the Company)
7.
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(an "Appraiser") selected in good faith by the holders of a majority in
interest of the shares of Preferred Stock then outstanding; and provided,
further, that the Company, after receipt of the determination by such
Appraiser shall have the right to select an additional Appraiser, in good
faith, in which case the fair market value shall be equal to the average of
the determinations by each such Appraiser. Such adjustment shall be calculated
whenever any such distribution is made and shall become applicable immediately
after the record date mentioned above.
(v) Upon the occurrence of an Adjustment Event, the Company
shall promptly mail or instruct the Transfer Agent to promptly mail to each
holder of Series C Preferred a notice setting forth (a) the adjustment to the
Conversion Ratio required by the Adjustment Event at issue, (b) the cumulative
adjustment to which the Conversion Ratio shall be subject after the Adjustment
Event, giving effect to any and all prior Adjustment Events, and (c) a brief
statement of the facts requiring the adjustment at issue.
(vi) ROUNDING. All calculations under this Section 5 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may
be.
(vii) RECLASSIFICATIONS, MERGERS, CONSOLIDATIONS OR SALES OF
ASSETS. In case of any reclassification of the Common Stock, any consolidation
or merger of the Company with or into another person pursuant to which the
Company will not be the surviving entity, the sale or transfer of all or
substantially all of the assets of the Company or any compulsory share
exchange pursuant to which the Common Stock is converted into other
securities, cash or property, the holders of the Series C Preferred then
outstanding shall have the right thereafter to, at their option, (A) convert
such shares only into the shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of Common Stock
following such reclassification, consolidation, merger, sale, transfer or
share exchange, and the holders of the Series C Preferred shall be entitled
upon such event to receive such amount of securities, cash or property as the
shares of the Common Stock of the Company into which such shares of Series C
Preferred could have been converted immediately prior to such
reclassification, consolidation, merger, sale, transfer or share exchange
would have been entitled or (B) require the Company to redeem, from funds
legally available therefor at the time of such redemption, its shares of
Series C Preferred at a price per share equal to the Redemption Price
calculated on the date of the closing of the reclassification, consolidation,
merger, sale, transfer or share exchange, as the case may be, triggering such
redemption right. The entire Redemption Price shall be paid in cash, and the
terms of payment of such Redemption Price shall be subject to the provisions
set forth in Section 6(b). The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to give
to the holder of Series C Preferred the right to receive the securities, cash
or property in this Section 5(e)(vii) upon any conversion or redemption
following such consolidation, merger, sale, transfer, or share exchange. This
provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
8.
<PAGE>
(viii) CERTAIN EVENTS. The Company shall not effect any of the
following actions prior to obtaining Stockholder Approval of the issuance of
the Common Stock upon conversion of the Series C Preferred:
A. declare a dividend (or any other distribution) on its
Common Stock (other than a subdivision of the outstanding shares of
Common Stock); or
B. declare a special nonrecurring cash dividend on or
authorize a repurchase or redemption of more than ten thousand (10,000)
shares of its then outstanding Common Stock, other than a repurchase or
redemption of the Common Stock of an employee upon termination of
employment with the Company for any reason; or
C. authorize the granting to all holders of the Common
Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; or
D. any reclassification of the Common Stock (other than a
subdivision or combination of then outstanding shares of Common Stock),
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, or
any compulsory share exchange whereby the Common Stock is converted into
other securities, cash or property; or
E. authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company;
After obtaining such Stockholder Approval, in the event any of the foregoing
actions occur, then the Company shall cause to be mailed to the holders of
Series C Preferred at their last addresses as shall appear on the stock books of
the Company, at least thirty (30) calendar days prior to the applicable record
or effective date hereinafter specified, a notice stating (x) the date on which
a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger, sale, transfer,
share exchange, dissolution, liquidation or winding-up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities, cash, or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding-up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
(f) RESERVATION OF COMMON STOCK. The Company covenants, from and after
obtaining Stockholder Approval, that it shall at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion
9.
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of Series C Preferred, as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the holders of
Series C Preferred, such number of shares of Common Stock as shall be issuable
upon the conversion of all outstanding shares of Series C Preferred. The Company
covenants that all shares of Series C Preferred that shall be so issuable shall,
upon issue, be duly and validly authorized, issued and fully paid and
nonassessable.
(g) RESERVATION OF SERIES C PREFERRED. The Company covenants that it
will at all times reserve and keep available out of its authorized and unissued
Series C Preferred solely for the purpose of payment of dividends on Series C
Preferred, as herein provided, free from preemptive rights or any other actual
contingent purchase rights of persons other than the holders of the Series C
Preferred, such number of shares of Series C Preferred as shall be issuable upon
payment of dividends hereunder. The Company covenants that all shares of Series
C Preferred Stock that shall be so issuable shall, upon issue, be duly and
validly authorized, issued and fully paid and nonassessable.
(h) FRACTIONAL SHARES. Upon a conversion hereunder the Company shall
not be required to issue stock certificates representing fractions of shares of
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Price at such time.
If the Company elects not to, or is unable to, make such a cash payment, the
holder of a share of Series C Preferred shall be entitled to receive, in lieu of
the final fraction of a share, one whole share of Common Stock.
(i) CERTIFICATES. The issuance of certificates for shares of Common
Stock on conversion of Series C Preferred shall be made without charge to the
holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the holder of such shares of Series C
Preferred so converted.
(j) CANCELLED SHARES. Shares of Series C Preferred converted into
Common Stock shall be canceled and shall have the status of authorized but
unissued shares of undesignated preferred stock.
(k) NOTICE. Any and all notices or other communications or deliveries
to be provided by a holder of Series C Preferred hereunder, including, without
limitation, any Holder Conversion Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
the attention of the Chief Financial Officer of the Company at the facsimile
telephone number or address of the principal place of business of the Company,
and, if applicable, to the Transfer Agent. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to the holder of Series C Preferred at the facsimile
telephone number or address of such holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the
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holder. Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of transmission, if
delivered via facsimile at the facsimile telephone number specified in the
Purchase Agreement prior to 4:30 p.m. (Eastern Standard Time) on a Trading Day,
(ii) the Trading Day after the transmission, if delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 4:30
p.m. (Eastern Standard Time) on any date and earlier than 11:59 p.m. (Eastern
Standard Time) on such date, (iii) the Trading Day following the date of
mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be given.
SECTION 6. REDEMPTION.
(a) OPTIONAL REDEMPTION BY COMPANY.
(i) The Company shall have the right, exercisable at any time
upon fifteen (15) Trading Days notice to the holders of the Series C
Preferred (the "Optional Redemption Notice"), to redeem, from funds legally
available therefor at the time of such redemption, all of the shares of
Series C Preferred from a holder which have not been previously converted
or redeemed at a price per share equal to the Redemption Price calculated
on the date of the Optional Redemption Notice (which date may be referred
to herein as a "Redemption Date"); provided, however, that the Company
shall not redeem the Series C Preferred from a holder without
simultaneously repaying any and all indebtedness owed to such holder of
Series C Preferred. The entire Optional Redemption Price shall be paid in
cash.
(ii) The holders of the Series C Preferred shall have until the
Redemption Date to convert any and all shares of Series C Preferred into
shares of Common Stock by delivering a Conversion Notice on or prior to the
date that is the business day prior to the Redemption Date. On or after the
Redemption Date, no holder of Series C Preferred shall have the right to
continue to convert shares of Series C Preferred which have been noticed
for redemption.
(iii) On or before the fifth Trading Day after the Redemption
Date, each holder of Series C Preferred shall deliver to the Company the
shares of Series C Preferred owned by it and subject to the Optional
Redemption Notice that have not been previously tendered for conversion and
the Company shall deliver a sum equal to the product of (i) the Redemption
Price as calculated on the Redemption Date and (ii) the number of shares of
Series C Preferred tendered by or on behalf of such holder for redemption
in accordance with the provisions hereof.
(iv) Notwithstanding the other provisions of this Section 6, in
the event the Company effects a merger, redemption, consolidation,
recapitalization, sale of all or substantially all of its assets or other
business combination within 90 days of the Redemption Date and the
Redemption Price is less than the consideration that the holders of the
Series C Preferred would have received upon conversion of the Series C
Preferred into Common Stock pursuant to such subsequent event (the
"Subsequent Consideration") then, prior to or concurrently with such
transaction the Company shall pay to the former
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holders of the Series C Preferred that were redeemed on the Redemption Date
the difference between the Subsequent Consideration and the Redemption
Price.
(b) LIQUIDATED DAMAGES. If the Redemption Price shall not be paid in
full on or before the fifteenth Trading Day after the Redemption Date, the
Company shall pay to the holders of the Series C Preferred subject to Redemption
as liquidated damages and not as a penalty the sum of seven thousand five
hundred dollars ($7,500) per day in cash until the Redemption Price, together
with all such liquidated damages, is paid in full. In addition, if the Company
shall have failed to pay any portion of the Redemption Price on or before the
eighteenth Trading Day after the Redemption Date, then any holder of Series C
Preferred that was subject to such redemption may demand that the Company (i)
convert all or any portion of the shares of its Series C Preferred for which the
Redemption Price, shall not have been paid (the "Unpaid Portion") at the
Conversion Ratio, as adjusted to give effect to any and all Adjustment Events
occurring prior to conversion, calculated as at the date of the Optional
Redemption Notice, or the date of such conversion (a "Conversion Date"),
whichever is higher, or (ii) promptly issue to such holder new certificates
representing shares of Series C Preferred in a number equal to the Unpaid
Portion.
(c) BNY CONSENTS. Notwithstanding anything to the contrary contained
herein, so long as the BNY Bank Obligations are outstanding, the Company may not
deliver an Optional Redemption Notice unless it has received (and furnished to
the each holder evidence thereof reasonably satisfactory to it of) prior written
consent of BNY (as hereafter defined) to pay the redemption amounts contemplated
by this Section free from the subordination provisions of Section 8 hereof.
SECTION 7. DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:
"Automatic Conversion Date" is as defined in Section 5(c).
"BNY" means BNY Financial Corporation, 1290 Avenue of the Americas, New
York, New York 10104.
"BNY Bank Obligations" means the borrowings and interest due thereon
(including, without limitation, any interest accruing after the commencement of
any case, proceedings or other action relating to the liquidation, dissolution,
assignment for the benefit of creditors, receivership, arrangement, bankruptcy,
insolvency or reorganization of the Company regardless of whether such interest
is allowable, payable or accruable to BNY in such case, proceeding or other
action) under the Receivables Agreement, as the same may from time to time be
amended, supplemented, otherwise modified, replaced or refinanced.
"Bridge Loan" shall mean that certain $3 million loan from Infinity
Investors Limited in favor of the Company and executed on the date hereof.
"Business Day" means any day of the year on which commercial banks are not
required or authorized to be closed in New York City.
"Closing Date" is as defined in the Purchase Agreement.
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"Common Stock" means shares now or hereafter authorized of the class of
Common Stock, par value $.001 per share, of the Company, stock of any other
class into which such shares may hereafter be reclassified or changed and any
other equity securities of the Company hereafter designated as Common Stock.
"Conversion Date" is as defined in Section 5(a).
"Conversion Notice" is as defined in Section 5(a).
"Conversion Price" shall mean, as of any date of determination, the product
of (a) 0.8125 and (b) the lowest Per Share Market Price during the 30 Trading
Days immediately preceding the Conversion Date; provided, however, that the
Conversion Price shall not exceed the product of (x) 81.25% and (y) the average
Per Share Market Price for the period from April 1, 1998 to and including April
30, 1998 (the "Maximum Conversion Price").
"Conversion Ratio" shall mean, as of any date of determination, a fraction
the numerator of which is the Liquidation Preference and the denominator of
which is the Conversion Price.
"Debentures" means the 5% Convertible Debentures delivered by the Company
pursuant to the Purchase Agreement.
"Dividend Payment Date" is as defined in Section 2(a).
"Issuable Maximum" is as defined in Section 5(b).
"July Debentures" is as defined in the Purchase Agreement.
"Junior Securities" means the Common Stock and all other equity securities
of the Company other than the Series B Preferred and Series C Preferred.
"Liquidation Preference" is as defined in Section 4.
"Maximum Conversion Price" is as defined in the definition of "Conversion
Price."
"New Facility" shall mean the proposed $10 million loan facility which may
be entered into between the Company and Infinity Investors Limited.
"Optional Redemption Notice" is as defined in Section 6(a)(i).
"Per Share Market Price" means on any date of determination (a) the lowest
reported sales price per share of the Common Stock on such date on the Nasdaq
National Market or other stock exchange on which the Common Stock is then
listed, as reported on Bloomberg, L.P. or (b) if the Common Stock is not listed
on the Nasdaq National Market or such other stock exchange, the lowest reported
sales price for a share of Common Stock in the Nasdaq SmallCap Market, as
reported on Bloomberg, L.P. (or similar organization or agency succeeding to its
functions of reporting prices), or (c) if the Common Stock is no longer reported
on Bloomberg, L.P. (or similar organization or agency succeeding to its
functions of reporting prices), then the average of the "Pink Sheet" quotes for
the relevant conversion period as determined by the holder, or (d)
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<PAGE>
if the Common Stock is no longer publicly traded, the fair market value of a
share of Common Stock as determined by an Appraiser selected in good faith by
the holders of a majority of shares of Series C Preferred; provided, however,
that the Company, after receipt of the determination by such Appraiser, shall
have the right to select an additional Appraiser, in which case, the fair market
value shall be equal to the average of the determinations by each such
Appraiser.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Purchase Agreement" means the Securities Exchange Agreement, dated
September 2, 1998.
"Receivables Agreement" means the Accounts Receivable Management and
Security Agreement, dated as of July 31, 1995, as amended, among the Company and
BNY.
"Redemption Date" is as defined in Section 5(d) if in connection with a
Conversion Notice and as defined in Section 6(a)(i) if in connection with an
Optional Redemption Notice.
"Redemption Price" shall mean, as of any Redemption Date, a fraction, the
numerator of which is the Liquidation Preference and the denominator of which is
the Relevant Percentage as of the Redemption Date.
"Stockholder Approval" is as defined in Section 5(b).
"Trading Day" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the over-the-
counter market as reported by the National Quotation Bureau Incorporated (or any
similar organization or agency succeeding its functions of reporting prices).
"Transfer Agent" means Boston EquiServe.
"Underlying Securities Registration Statement" means the Registration
Statement (as defined in the Registration Rights Agreement, to be amended within
thirty (30) days of Closing (as defined in the Purchase Agreement).
"Underlying Shares" means the number of shares of Common Stock into which
the Series C Preferred are convertible in accordance with the terms hereof and
the Purchase Agreement.
"Unpaid Portion" is as defined in Section 6(a).
"Warrants" is as defined in the Purchase Agreement.
14.
<PAGE>
SECTION 8. SUBORDINATION.
(a) The Series C Preferred is subordinated to full payment of all of
the Company's obligations under the BNY Bank Obligations. Except to the extent
otherwise specifically set forth in this Section, until such time as all BNY
Bank Obligations are indefeasibly paid to BNY, the Company shall not, directly
or indirectly, make any cash or other payment (except for the issuance and
delivery of shares of Common Stock in respect of conversions or payments of
dividends hereunder) that is due and owing on account of the Series C Preferred.
Cash payments contemplated by Sections 5(b) and 5(d) hereof, to the extent such
payments do not exceed, in the aggregate, five hundred thousand dollars
($500,000), may be made by the Company to (and retained by) the holders of
Series C Preferred as long as (i) at the time any such payment is due under such
Sections, the Bank has not given notice to the Company of acceleration of the
Company's obligations under the Receivables Agreement of (ii) the making of such
payment shall not cause (as determined at the time such payment shall become due
to the holders) the Company to exceed the borrowing limitations set forth in
Section 2 of the Receivables Agreement, or cause an "Event of Default" (as
defined under the Receivables Agreement) under Section 18(a) of the Receivables
Agreement. Cash payments contemplated by Sections 5(b) and 5(d) hereof, to the
extent that such payments, in the aggregate, exceed five hundred thousand
dollars ($500,000), may be made by the Company to (and retained by) the holders
of the Series C Preferred as long as (1) at the time any such payment is due
under such Sections, the Bank has not given notice to the Company of
acceleration of the Company's obligations under the Receivables Agreement, or
(ii) at the time such payment becomes due the Company shall not be in default of
Sections 12(n), 12(o), 12(p), 12(q), 18(a), 18(i) or 18(j) of the Receivables
Agreement, or (iii) the making of such payment shall not cause (as determined at
the time such payment shall become due to the holders) an Event of Default under
such Receivables Agreement sections set forth in (ii) immediately above or cause
the Company to exceed the borrowing limitations set forth in Section 2 of the
Receivables Agreement. The subordination provided hereunder shall in no way
limit the ability of the holders of the Series C Preferred to convert Debentures
into shares of Common Stock and to receive payment of dividends hereunder in
shares of Common Stock, including after such time as any Event of Default shall
be declared under the Convertible Debentures.
(b) Should any payment, other than payments contemplated in Section
8(a) above, held in trust by such holder for the benefit of BNY and shall be
delivered forthwith to BNY for application to BNY Bank Obligations, in the form
received with any necessary endorsements or assignment.
SECTION 9. REDEMPTION OR PURCHASE OF JUNIOR SECURITY
So long as any Preferred Stock shall remain outstanding, neither the
Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire
directly or indirectly any Junior Securities (as defined in Section 7) except
that the Company may (i) repurchase or redeem up to 10,000 shares of Common
Stock and (ii) repurchase or redeem shares of Common Stock of any employee upon
such employee's termination of employment with the Company), nor shall the
Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any Junior Securities,
nor shall any monies be set aside for or applied to the purchase
15.
<PAGE>
or redemption (through a sinking fund or otherwise) of any Junior Securities
unless all dividends on the Preferred Stock for all post dividend period shall
have been paid free of the subordination provisions of Section 8.
RESOLVED FURTHER, that the Chief Executive Officer and Secretary of the
Company be, and they hereby are, authorized and directed to prepare, execute,
verify, and file with the Secretary of State of Delaware, a Certificate of
Designation in accordance with these resolutions and as required by law.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
16.
<PAGE>
IN WITNESS WHEREOF, Yes! Entertainment Corporation has caused its corporate
seal to be hereunto affixed and this certificate to be signed by Mark Shepherd,
its Chief Executive Officer and Secretary this 2nd day of September, 1998.
YES! ENTERTAINMENT CORPORATION
/s/ Mark Shepherd
------------------------------------
Name: Mark Shepherd
Title: Chief Executive Officer
Attest:
/s/ Mark Shepherd
- ------------------------------------
Name: Mark Shepherd
Title: Secretary
17.
<PAGE>
EXHIBIT A
---------
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registration Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby irrevocably elects to convert the number of shares
of Series C Convertible Preferred Stock indicated below, into shares of Common
Stock, par value $.001 per share (the "Common Stock"), of YES! Entertainment
Corporation (the "Company") according to the conditions hereof, as of the date
written below. As of the date set forth below, the undersigned is in compliance
with Section 4.18 of the Securities Exchange Agreement between the Company,
Infinity Investors Limited, Infinity Emerging Opportunities Limited and Glacier
Capital Limited dated September 2, 1998. If shares are to be issued in the name
of a person other than undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance therewith. No fee
will be charged to the holder for any conversion, except for such transfer
taxes, if any.
Conversion calculations:
-------------------------------------------------------
Date to Effect Conversion
-------------------------------------------------------
Number of shares of Preferred Stock to be Converted
-------------------------------------------------------
Number of shares of Common Stock to be Issued
-------------------------------------------------------
Applicable Conversion Ratio (as adjusted to give
effect to prior Adjustment Events)
-------------------------------------------------------
Signature
-------------------------------------------------------
Name:
-------------------------------------------------------
Address:
18.
<PAGE>
EXHIBIT 4.3
SECURITIES EXCHANGE AGREEMENT
AMONG
YES! ENTERTAINMENT CORPORATION,
INFINITY INVESTORS LIMITED,
INFINITY EMERGING OPPORTUNITIES LIMITED
AND
GLACIER CAPITAL LIMITED
-------------------------------------
Dated as of September 2, 1998
-------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION 1. CERTAIN DEFINITIONS........................................ 2
1.1 CERTAIN DEFINITIONS........................................ 2
SECTION 2. EXCHANGE OF SECURITIES..................................... 5
2.1 EXCHANGE OF SECURITIES; ISSUANCE OF SECURITIES............. 5
2.2 CLOSING.................................................... 5
SECTION 3. REPRESENTATIONS AND WARRANTIES............................. 6
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............. 6
3.2 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS............ 10
SECTION 4. OTHER AGREEMENTS OF THE PARTIES............................ 11
4.1 TRANSFER RESTRICTIONS...................................... 11
4.2 STOP TRANSFER INSTRUCTION.................................. 12
4.3 FURNISHING OF INFORMATION.................................. 13
4.4 COPIES AND USE OF DISCLOSURE MATERIALS..................... 13
4.5 BLUE SKY LAWS.............................................. 13
4.6 INTEGRATION................................................ 13
4.7 CERTAIN AGREEMENTS......................................... 14
4.8 LISTING OF UNDERLYING SHARES............................... 14
4.9 INVESTOR'S RIGHTS IF TRADING IN COMMON STOCK IS SUSPENDED
OR DELISTED................................................ 14
4.10 NO VIOLATION OF APPLICABLE LAW............................. 15
4.11 REPURCHASE RESTRICTIONS.................................... 15
4.12 LEGAL OPINION.............................................. 15
4.13 NOTICE OF BREACHES......................................... 15
4.14 CONVERSION PROCEDURES...................................... 15
4.15 TRANSFER AGENT............................................. 16
4.16 NEW DIRECTORS.............................................. 16
4.17 RESTRICTION ON DEBT........................................ 16
4.18 RESTRICTION ON SHORT SALES................................. 16
4.19 RESTRICTIONS ON CONVERSION AND SALE........................ 16
4.20 STOCKHOLDERS MEETING....................................... 17
i.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
SECTION 5. MISCELLANEOUS.............................................. 18
5.1 FEES AND EXPENSES.......................................... 18
5.2 ENTIRE AGREEMENT; AMENDMENTS............................... 18
5.3 NOTICES.................................................... 18
5.4 AMENDMENTS; WAIVERS........................................ 19
5.5 HEADINGS................................................... 20
5.6 SUCCESSORS AND ASSIGNS..................................... 20
5.7 NO THIRD-PARTY BENEFICIARIES............................... 20
5.8 GOVERNING LAW.............................................. 20
5.9 SURVIVAL................................................... 20
5.10 COUNTERPART SIGNATURES..................................... 20
5.11 PUBLICITY.................................................. 20
5.12 SEVERABILITY............................................... 21
5.13 REMEDIES................................................... 21
5.14 AMENDMENT TO REGISTRATION RIGHTS AGREEMENT................. 21
Exhibit A Form of Certificate of Designation
Exhibit B Form of 5% Convertible Debenture
Exhibit C [Intentionally Omitted]
Exhibit D Form of Cooley Godward LLP Legal Opinion
Exhibit F Conversion Procedures
Schedule 2.2(b) Debentures, Preferred Stock, Warrants
Schedule 3.1(a) Company Subsidiaries
Schedule 3.1(c) Capitalization
Schedule 3.1(f) Consents and Approvals
Schedule 3.1(g) Litigation
Schedule 4.20(b) Ownership Percentages
ii.
<PAGE>
SECURITIES EXCHANGE AGREEMENT
THIS SECURITIES EXCHANGE AGREEMENT, dated September 2, 1998 (this
"Agreement"), by and among YES! ENTERTAINMENT CORPORATION, a Delaware
corporation (the "Company"), INFINITY INVESTORS LIMITED, a corporation organized
and existing under the laws of Nevis, West Indies ("Infinity"), GLACIER CAPITAL
LIMITED, a corporation organized and existing under the laws of Nevis, West
Indies ("Glacier") and INFINITY EMERGING OPPORTUNITIES LIMITED, a corporation
organized and existing under the laws of Nevis, West Indies ("Emerging") (each
of Infinity, Glacier and Emerging an "Investor," and collectively, the
"Investors").
WHEREAS, the Company, Infinity and Fairway Capital Limited ("Fairway" and
collectively with Infinity, the "Original Purchasers") are parties to that
certain Amended and Restated Convertible Debenture and Convertible Preferred
Stock Purchase Agreement, dated as of March 18, 1997 (the "March Purchase
Agreement"), pursuant to which, among other things, (i) the Company issued and
sold to the Original Purchasers an aggregate of $1,566,667 principal amount of
the Company's 5% convertible debentures, due January 28, 2000 (collectively, the
"March Debentures"), (ii) the Company issued 85,000 shares of its Series A
Convertible Preferred Stock (the "Series A Preferred") to the Original
Purchasers, and (iii) the Company delivered Common Stock Purchase Warrants
exercisable into 300,000 shares of Common Stock (collectively, the "Warrants");
WHEREAS, the Company, the Original Purchasers and Cappello & Laffer Capital
Corp. ("Cappello") are parties to that certain Amended and Restated Securities
Purchase Agreement, dated July 25, 1997 (the "July Purchase Agreement"), which
amended and restated the March Purchase Agreement on July 25, 1997 pursuant to
which, among other things, (a) the Company issued and delivered to the Original
Purchasers and Cappello in exchange for the March Debentures and the Series A
Preferred they then held (i) an aggregate amount of 390,846 shares of the
Company's Series B Preferred Stock (the "Series B Preferred") and (ii) an
aggregate amount of $1,956,021.49 of the Company's 5% Convertible Debentures Due
April 30, 2000 (the "July Debentures");
WHEREAS, (a) on December 31, 1997, Fairway transferred all of its Series B
Preferred and July Debentures to Glacier, and (b) on May 15, 1998, Infinity sold
$100,000 of its July Debentures to Emerging, in each case in a private
transaction under Section 4(2) of the Securities Act of 1933, as amended;
WHEREAS, subject to the terms of this Agreement the Company and the
Investors desire to exchange the Investors' Series B Preferred for 348,670
shares of the Company's Series C Preferred Stock (the "Series C Preferred") and
to exchange the Investors July Debentures for the Company's new 5% Convertible
Debentures, due April 30, 2002 (the "Debentures);
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
1.
<PAGE>
SECTION 1. CERTAIN DEFINITIONS
1.1 CERTAIN DEFINITIONS. As used in this Agreement, and unless the context
requires a different meaning, the following terms have the meanings indicated:
"Affiliate" means, with respect to any Person, any Person that, directly or
indirectly, controls, is controlled by or is under common control with such
Person. For the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlled by" and "under common control with")
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person, whether
through the ownership of voting securities or by contract or otherwise.
"Agreement Effective Date" shall mean September 2, 1998.
"BNY" means BNY Financial Corporation, 1290 Avenue of the Americas, New
York, New York 10104.
"BNY Bank Obligations" means the borrowings and interest due thereon
(including, without limitation, any interest accruing after the commencement of
any case, proceeding or other action relating to the liquidation, dissolution,
assignment for the benefit of creditors, receivership, arrangement, bankruptcy,
insolvency or reorganization of the Company regardless of whether such interest
is allowable, payable or accruable to BNY in such case, proceeding or other
action) under the Receivables Agreement, as the same may from time to time be
amended, supplemented, otherwise modified, replaced or refinanced.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of
New York or the State of California are authorized or required by law or other
government actions to close.
"Certificate of Designation" means the Amended and Restated Certificate of
Designation in the form of Exhibit A attached hereto, which is to be filed by
the Company with the Secretary of State of the State of Delaware on or prior to
the Closing Date.
"Closing" and "Closing Date" are as defined in Section 2.2(a).
"Commission" means the Securities and Exchange Commission.
"Common Stock" means shares now or hereafter authorized of the class of
Common Stock, par value $.001 per share, of the Company, stock of any other
class into which such shares may hereafter be reclassified or changed and any
other equity securities of the Company hereafter designated as Common Stock.
"Conversion Date" when used in connection with the Debentures shall have
the meaning set forth therein, and when used in connection with the Preferred
Stock shall have the meaning set forth in the Certificate of Designation.
2.
<PAGE>
"Conversion Price" when used in connection with the Debentures shall have
the meaning set forth therein, and when used in connection with the Preferred
Stock shall have the meaning set forth in the Certificate of Designation.
"Conversion Ratio" when used in connection with the Debentures shall have
the meaning set forth therein, and when used in connection with the Preferred
Stock shall have the meaning set forth in the Certificate of Designation.
"Debentures" means the Company's 5% Convertible Debentures, due April 30,
2002, in the form attached hereto as Exhibit B, to be issued in accordance with
and subject to the terms and conditions hereof and "Debenture" means any of
them.
"Disclosure Materials" means, collectively, the SEC Documents and the
Schedules to this Agreement furnished by or on behalf of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
encumbrance, right of first refusal, charge or security interest of any kind in
or on such asset or the revenues or income thereon or therefrom.
"Liquidation Preference" is as set forth in the Certificate of Designation.
"Material Adverse Effect" shall have the meaning set forth in Section
3.1(a).
"Per Share Market Price," when used in connection with the Debentures shall
have the meaning set forth therein, and when used in connection with the
Preferred Stock or the Underlying Shares shall have the meaning set forth in the
Certificate of Designation.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Preferred Stock" means the shares of the Company's Series C Convertible
Preferred Stock, par value $.001 per share, with the respective rights,
preferences and privileges set forth in the Certificate of Designation.
"Prepayment Date" is as defined in the Debenture.
"Prepayment Price" is as defined in the Debenture.
"Receivables Agreement" means the Accounts Receivable Management and
Security Agreement, dated as of July 31, 1995, among the Company and BNY, as
amended.
"Redemption Date" shall have the meaning set forth in the Certificate of
Designation.
"Redemption Price" shall have the meaning set forth in the Certificate of
Designation.
3.
<PAGE>
"Registration Rights Agreement" means the Amended and Restated Registration
Rights Agreement dated July 25, 1998 among the Original Purchasers and Cappello,
as the same may be amended, supplemented or otherwise modified in accordance
with its terms, including pursuant to Section 5.14 hereof.
"SEC Documents" shall have the meaning set forth in Section 3.1(k).
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" shall have the meaning set forth in Section 2.1(d).
"Short Sales" shall mean any sale of a security which the seller does not
own (as defined below) or any sale which is consummated by the delivery of a
security borrowed by, or for the account of, the seller. A person shall be
deemed to "own" a security if:
(1) he or his agent is title to it; or
(2) he has purchased, or has entered into an unconditional contract,
binding on both parties thereto, to purchase it but has not yet received it; or
(3) he owns a security convertible into or exchangeable for it and has
tendered such security for conversion or exchange; or
(4) he has an option to purchase or acquire it and has exercised such
option; or
(5) he has rights or warrants to subscribe to it and has exercised such
rights or warrants, provided, however, that a person shall be deemed to own
securities only to the extent that he has a net long position in such
securities.
"Subsidiaries" shall have the meaning set forth in Section 3.1(a).
"Trading Day" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the over-the-
counter market, as reported by the National Quotation Bureau Incorporated (or
any similar organization or agency succeeding its functions of reporting
prices).
"Transaction Documents" shall have the meaning set forth in Section 3.1(b).
"Transfer Agent" shall have the meaning set forth in Section 4.15.
"Underlying Securities Registration Statement" means the registration
statement contemplated by the Registration Rights Agreement and relating to the
Underlying Shares and Warrant Shares.
4.
<PAGE>
"Underlying Shares" means the shares of Common Stock issuable upon the
conversion of the Debentures and the Shares in accordance with their terms and
the Certificate of Designation.
"Warrants" shall be as defined in the preamble to this Agreement.
"Warrant Shares" shall have the meaning set forth in Section 3.1(d).
SECTION 2. EXCHANGE OF SECURITIES
2.1 EXCHANGE OF SECURITIES; ISSUANCE OF SECURITIES.
(a) INFINITY. Subject to the terms and conditions set forth in this
Agreement, Infinity shall receive and the Company shall issue and deliver upon
surrender by Infinity of the July Debentures and Series B Preferred currently
held by it: (i) Debentures in an aggregate principal amount of $1,545,787.50
(the "Infinity Debenture") and (ii) 313,454 shares of Series C Preferred Stock
(the "Infinity Preferred Shares").
(b) EMERGING. Subject to the terms and conditions set forth in this
Agreement, Emerging shall receive and the Company shall issue and deliver upon
surrender by Emerging of the July Debentures currently held by it Debentures in
an aggregate principal amount of $100,638.89 (the "Emerging Debenture").
(c) GLACIER. Subject to the terms and conditions set forth in this
Agreement, Glacier shall receive and the Company shall issue and deliver upon
surrender by Glacier of the July Debentures and Series B Preferred currently
held by it: (i) Debentures in an aggregate principal amount of $189,494.20 (the
"Glacier Debenture") and (ii) 35,216 shares of Series C Preferred Stock (the
"Glacier Preferred Shares").
(d) DEFINITIONS. The Infinity Debenture, the Emerging Debenture and
the Glacier Debenture are sometimes collectively referred to herein as the
"Debentures." The Infinity Preferred Shares and the Glacier Preferred Shares are
sometimes referred to collectively herein as the "Shares." The Shares,
Debentures and Underlying Shares are sometimes collectively referred to as the
"Securities."
2.2 CLOSING.
(a) The closing of the exchange of the Debentures and the Shares (the
"Closing") shall take place at the offices of Cooley Godward LLP, Five Palo Alto
Square, 3000 El Camino Real, Palo Alto, California 94306, immediately following
the execution hereof, or at such other time and/or place as the Investors and
the Company may agree. The date of the Closing is hereinafter referred to as the
"Closing Date."
(b) At the Closing (A) the Company shall deliver (i) the Debentures
and certificates representing the Shares to be issued and delivered to each
Investor, as specified in Section 2.1 hereto, and (ii) to the Persons entitled
thereto, all other documents, instruments and writings required to have been
delivered at or prior to the Closing by the Company pursuant to this Agreement;
(B) each Investor shall deliver to the Company (i) the July Debentures and
Series B Preferred, as specified in Section 2.1 and (ii) all documents,
instruments and writings
5.
<PAGE>
required to have been delivered at or prior to the Closing by such Investor
pursuant to this Agreement.
SECTION 3. REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Investors as follows:
(a) ORGANIZATION AND QUALIFICATION. The Company is a corporation, duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, with the requisite corporate power and authority to own and use its
properties and assets and to carry on its business as currently conducted. The
Company has no subsidiaries other than as set forth in the SEC Documents
(collectively, the "Subsidiaries"). Each of the Subsidiaries is a corporation,
duly incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with the full corporate power and authority
to own and use its properties and assets and to carry on its business as
currently conducted. Each of the Company and the Subsidiaries is duly qualified
to do business and is in good standing as a foreign corporation in each
jurisdiction in which the nature of the business conducted or property owned by
it makes such qualification necessary, except where the failure to be so
qualified or in good standing, as the case may be, could not individually or in
the aggregate have a material adverse effect on the results of operations,
assets, prospects or financial condition of the Company and the Subsidiaries,
taken as a whole (a "Material Adverse Effect").
(b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated hereby and by the Debentures and the Certificate of Designation and
otherwise to carry out its obligations hereunder and thereunder. This Agreement,
the Debentures, and the Certificate of Designation are collectively referred to
as the "Transaction Documents." The execution and delivery of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company. Each Transaction Document has been duly executed and
delivered by the Company and constitutes the valid and binding obligation of the
Company enforceable against the Company in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
(c) CAPITALIZATION. The authorized, issued and outstanding capital
stock of the Company and each of the Subsidiaries is set forth in the latest
Form 10-Q filed by the Company with the Commission on August 14, 1998. No shares
of Common Stock are entitled to preemptive or similar rights. Except as
specifically disclosed in the Form 10-K filed by the Company for the year ended
December 31, 1997 and options granted under the Company's stock option plans
subsequent to December 31, 1997, there are no outstanding options, warrants,
script rights to subscribe to, calls or commitments of any character whatsoever
relating to, or, securities, rights or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or acquire any
shares of Common Stock, or contracts, commitments, understandings, or
arrangements by which the Company or any Subsidiary is or may become
6.
<PAGE>
bound to issue additional shares of Common Stock, or securities or rights
convertible or exchangeable into shares of Common Stock except upon conversion
of the July Debentures, the Debentures, Series B Preferred, the Shares and the
Warrants. Neither the Company nor any Subsidiary is in violation of any of the
provisions of its respective certificate of incorporation, bylaws or other
charter documents.
(d) ISSUANCE OF DEBENTURES AND SHARES. The Debentures have been duly
and validly authorized for issuance, offer and sale pursuant to this Agreement
and, when issued and delivered as provided hereunder against payment in
accordance with the terms hereof, shall be valid and binding obligations of the
Company enforceable in accordance with their terms free and clear of all Liens.
The Shares are duly authorized and, when issued and paid for in accordance with
the terms hereof, will be validly issued, fully paid and nonassessable. The
Company has and at all times while the Debentures, Shares and Warrants are
outstanding will maintain an adequate reserve of shares of Common Stock to
enable it to perform its obligations under this Agreement, the Debentures, the
Certificate of Designation and Warrants and in no circumstances shall such
reserved and available shares of Common Stock be less than the sum of (i) 5
million shares prior to obtaining Stockholder Approval, and following the
obtaining of Stockholder Approval, the number of Underlying Shares plus 10
million, assuming in each case such conversion occurred on the Agreement
Effective Date, and assuming the payment of dividends and interest in additional
Shares and Debentures, and (ii) the number of shares of Common Stock which would
be issuable upon exercise in full of the Warrants (the "Warrant Shares"). When
issued in accordance with the terms hereof, the Debentures and the Certificate
of Designation, the Underlying Shares will be duly authorized, validly issued,
fully paid nonassessable, free and clear of all Liens.
(e) NO CONFLICTS. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby do not and will not (i) conflict
with or violate any provision of its certificate of incorporation or bylaws
(each as amended through the date hereof) or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company is a party or by which any property or asset of the Company is bound
or affected, or (iii) result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company is subject (including Federal and state
securities laws and regulations), or by which any property or asset of the
Company is bound or affected, except in the case of each of clauses (ii) or
(iii), such conflicts, defaults, terminations, amendments, accelerations,
cancellations and violations as could not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of any Transaction
Document, (y) have a Material Adverse Effect or (z) adversely impair the
Company's ability to perform fully on a timely basis its obligations under any
Transaction Document. The business of the Company is not being conducted in
violation of any law, ordinance or regulation of any governmental authority,
except for violations which, individually or in the aggregate, do not have a
Material Adverse Effect.
(f) CONSENTS AND APPROVALS. Except as obtained prior to the execution
hereof, neither the Company nor any Subsidiary is required to obtain any
consent,
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waiver, authorization or order of, or make any filing or registration with, any
court or other federal, state, local or other governmental authority or other
Person in connection with the execution, delivery and performance by the Company
of the Transaction Documents, other than (i) the filing of an amendment with the
Commission of the Underlying Securities Registration Statement and the making of
the applicable blue-sky filings under state securities laws, each as
contemplated by the Registration Rights Agreement, which shall be filed in the
time periods set forth in the Registration Rights Agreement, (ii) the filing of
the Certificate of Designation with the Secretary of State of the State of
Delaware, which shall occur prior to the Closing, and (iii) other than, in all
other cases, where the failure to obtain such consent, waiver, authorization or
order, or to give or make such notice or filing, could not, individually or in
the aggregate, (x) adversely affect the legality, validity or enforceability of
any of the Transaction Documents, (y) have a Material Adverse Effect or (z)
adversely impair the Company's ability to perform fully on a timely basis its
obligations under any of the Transaction Documents.
(g) LITIGATION; PROCEEDINGS. There is no action, suit, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company or any of its Subsidiaries
or any of their respective assets or properties before or by any court,
governmental or administrative agency or regulatory authority (federal, state,
county, local or foreign) which (i) relates to or challenges the legality,
validity or enforceability of the Transaction Documents, Underlying Shares or
Warrant Shares or (ii) could, individually or in the aggregate, adversely impair
the Company's ability to perform fully on a timely basis its obligations under
the Transaction Documents.
(h) NO DEFAULT OR VIOLATION. Neither the Company nor any Subsidiary
(i) is in default under or in violation of any indenture, loan or credit
agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound, (ii) is in violation of any order of
any court, arbitrator or governmental body, or (iii) is in violation of any
statute, rule or regulation of any governmental authority, except as could not,
in any such case, individually or in the aggregate, (y) adversely affect the
legality, validity or enforceability of any of the Transaction Documents, or (z)
adversely impair the Company's ability to perform fully on a timely basis its
obligations under the Transaction Documents.
(i) CERTAIN FEES. No fees or commission will be payable by the Company
to any broker, finder, investment banker or bank with respect to the
consummation of the transactions contemplated hereby.
(j) PRIVATE OFFERING. Assuming (without any independent investigation
or verification by or on behalf of the Company) the accuracy of the
representations and warranties of the Investors set forth in Section 3.2, the
offer and sale of the Debentures, Shares, and the Underlying Shares are exempt
from registration under Section 5 of the Securities Act. Neither the Company nor
any person acting on its behalf has taken or will take any action (including,
without limitation, any offering of any securities of the Company under
circumstances which would require the integration of such offering with the
offering of the Convertible Debentures or Shares under the Securities Act) which
might subject the offering, issuance or sale of the Debentures, Shares, the
Underlying Shares or the Warrant Shares to the registration requirements of
Section 5 of the Securities Act.
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(k) SEC DOCUMENTS. The Company has filed all forms, reports and
documents required to be filed by it under the Exchange Act, including pursuant
to Section 13(a) or 15(d) thereof, since March 18, 1995 (the foregoing reports
being collectively referred to herein as the "SEC Documents") on a timely basis,
or has received a valid extension of such time of filing. As of their respective
dates, the SEC Documents complied in all material respects with the requirements
of the Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder and none of the SEC Documents, when filed,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited and unaudited consolidated balance sheets of the Company
and its Subsidiaries contained in the SEC Documents, and the related
consolidated statements of income, changes in stockholders' equity and changes
in cash flows for the periods then ended, including the footnotes thereto,
except as indicated therein, have been prepared in accordance with generally
accepted accounting principles consistently followed throughout the periods
indicated, except that unaudited financial statements contained therein do not
contain notes and may be subject to normal audit adjustments and normal annual
adjustments and fairly present the financial condition of the Company and its
consolidated Subsidiaries as of and for the dates thereof and, except as
indicated therein, reflects all claims against and all material debts and
liabilities of the Company and its consolidated Subsidiaries, fixed or
contingent, as at and for the dates thereof; and the related statements of
income, stockholders' equity and changes in cash flows fairly present the
results of the operations of the Company and its consolidated Subsidiaries and
the changes in financial position for the period indicated. Since the date of
the financial statements included in the Company's last filed Quarterly Report
on Form 10-Q, there has been no event, occurrence or development that has had a
Material Adverse Effect which is not specifically disclosed in any of the
Disclosure Materials.
(l) FORM S-3 ELIGIBILITY. The Company meets the registrant
requirements set forth in connection with offerings by persons other than the
issuer set forth in the General Instructions of Form S-3 promulgated under the
Securities Act.
(m) INVESTMENT COMPANY. The Company is not, and following the Closing
will not be, an Affiliate of an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(n) SOLICITATION MATERIALS. The Company did not solicit any offer to
buy or sell the Debentures, the Shares, or the Underlying Shares by means of any
form of general solicitation or advertising.
(o) MARGIN REQUIREMENTS. The Company will not use the proceeds of the
offer and sale of the Debentures and Shares hereunder, directly or indirectly,
immediately, incidentally or ultimately, (i) to purchase or carry Margin Stock
(as such term is defined under Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time) or to extend credit to
others for the purpose of purchasing or carrying Margin Stock or to refund
indebtedness originally incurred for such purpose, or (ii) for any purpose which
entails a violation of, or which is inconsistent with, the provisions of
Regulations T, U or X of the Board of Governors of the Federal Reserve System.
9.
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3.2 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each of the
Investors, severally and not jointly, hereby represents and warrants to the
Company as follows:
(a) ORGANIZATION; AUTHORITY. Such Investor is a corporation duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation with the requisite corporate power and
authority to enter into and to consummate the transactions contemplated hereby
and otherwise to carry out its obligations hereunder and thereunder. The
acquisition of the Debentures and Shares purchased by such Investor hereunder
has been duly authorized by all necessary action on the part of such Investor.
This Agreement has been duly executed and delivered by such Investor and
constitutes the valid and legally binding obligation of such Investor,
enforceable against it in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to, or affecting generally
the enforcement of, creditors' rights and remedies or by other general
principles of equity.
(b) INVESTMENT INTENT. Such Investor is acquiring the Debentures and
Shares to be purchased by it hereunder, and the Underlying Shares relating to
such Debentures and Shares, for its own account for investment purposes only and
not with a view to or for distributing or reselling such Debentures, Shares or
Underlying Shares or any part thereof or interest therein, without prejudice,
however, to such Investor's right, subject to the provisions of this Agreement
and the Registration Rights Agreement, at all times to sell or otherwise dispose
of all or any part of such Debentures, Shares or Underlying Shares, pursuant to
under an effective registration statement under the Securities Act or pursuant
to an available exemption from the registration requirements thereunder and in
compliance with applicable state securities laws.
(c) INVESTOR STATUS. At the time such Investor was offered the
Debentures and Shares to be acquired by it hereunder, it was and at the date
hereof, it is, an "accredited investor" as defined in Rule 501(a) under the
Securities Act.
(d) INVESTMENT COMPANY. The Investor is not, and following the Closing
and issuance of the Debentures and Shares will not be, nor is it an Affiliate of
an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
(e) EXPERIENCE OF INVESTOR. Such Investor, either alone or together
with its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of an investment in the securities to be acquired by it hereunder, and has
so evaluated the merits and risks of such investment.
(f) ABILITY OF INVESTOR TO BEAR RISK OF INVESTMENT. Such Investor is
able to bear the economic risk of an investment in the securities to be acquired
by it hereunder and, at the present time, is able to afford a complete loss of
such investment.
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(g) PROHIBITED TRANSACTIONS. The securities to be acquired by such
Investor hereunder are not being acquired, directly or indirectly, with the
assets of any "employee benefit plan," within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended.
(h) ACCESS TO INFORMATION. Such Investor acknowledges receipt of the
Disclosure Materials and further acknowledges that it has been afforded (i) the
opportunity to ask such questions as it has deemed necessary of, and to receive
answers from, representatives of the Company concerning the terms and conditions
of the securities offered hereunder and the merits and risks of investing in
such securities; (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment in such securities;
and (iii) the opportunity to obtain such additional information which the
Company possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the investment
and to verify the accuracy and completeness of the information contained in the
Disclosure Materials.
(i) RELIANCE. Such Investor understands and acknowledges that (i) the
Debentures and the Shares being offered and sold to it hereunder are being
offered and sold without registration under the Securities Act in a private
placement that is exempt from the registration provisions of the Securities Act
under Regulation D promulgated thereunder and (ii) the availability of such
exemption, depends in part on, and that the Company will rely upon the accuracy
and truthfulness of, the foregoing representations and such Investor hereby
consents to such reliance.
The Company acknowledges and agrees that the Investors make no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.
SECTION 4. OTHER AGREEMENTS OF THE PARTIES
4.1 TRANSFER RESTRICTIONS.
(a) If any Investor should decide to dispose of any portion of the
principal amount of the Debentures, or any of the Shares to be purchased by it
hereunder (and upon conversion thereof, any Underlying Shares), such Investor
understands and agrees that it may do so only (i) pursuant to an effective
registration statement under the Securities Act, (ii) to the Company or (iii)
pursuant to an available exemption from registration under the Securities Act.
As a condition to any transfer of any Debentures, Shares or Underlying Shares
other than pursuant to an effective registration statement or to the Company,
the Company may require that the transferor provide to the Company an opinion of
counsel experienced in the area of United States securities laws selected by the
transferor, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer of such
Debentures, Shares, or Underlying Shares, as the case may be, is being made
pursuant to an exemption under the Securities Act. Any transfer of the
Underlying Shares shall be subject to the transfer and sales restrictions set
forth in Section 4.19(b) of this Agreement.
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(b) The Investors agree to the imprinting, so long as required by the
terms of this Section 4.1(b), of the following legend on certificates
representing the Debentures, the Shares, and the Underlying Shares, to be
modified as applicable:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES
LAWS.
THIS [ ] IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND CONVERSION
SET FORTH IN A SECURITIES EXCHANGE AGREEMENT, DATED AS OF SEPTEMBER 2,
1998, BETWEEN YES! ENTERTAINMENT CORPORATION ("THE COMPANY") AND THE
ORIGINAL HOLDER HEREOF. A COPY OF SUCH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY.
The legend set forth above shall be removed upon the conversion of
Debentures or Shares represented by such certificate at any time after an
Underlying Securities Registration Statement has been declared, and so long as
such Underlying Securities Registration Statement remains effective under the
Securities Act or, if not converted during such time, at such other time as in
the opinion of counsel to the Company experienced in the area of United States
securities laws such legend is no longer required under applicable requirements
of the Securities Act (including judicial interpretations and pronouncements
issued by the staff of the Commission). The certificates representing the
Debentures, Shares, and Underlying Shares shall also bear any other legends
required by applicable Federal or state securities laws, which legends may be
removed as set forth above in the immediately preceding sentence, or, with
respect to legends required pursuant to state securities laws, when such legends
are no longer required under the applicable requirements of such securities
laws. The Company agrees that it will provide each Investor, upon request, with
a substitute certificate or certificates, free from such legend at such time as
such legend is no longer applicable at no charge. Each Investor agrees that, in
connection with any transfer of Underlying Shares by it pursuant to an effective
registration statement under the Securities Act, such Investor will comply with
all applicable prospectus delivery requirements of the Securities Act. The
Company makes no representation, warranty or agreement as to the availability of
any exemption from registration under the Securities Act with respect to any
resale of the Debentures, Shares, or Underlying Shares.
4.2 STOP TRANSFER INSTRUCTION. For so long as an Underlying Securities
Registration Statement is effective or the Investor complies with Section 4.1,
the Company shall
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not issue any stop transfer instruction or make any notation on its records with
respect thereto to any transfer agent (including the Transfer Agent) of the
Company and shall issue shares of Common Stock upon a conversion of Debentures
or Shares or exercise of Warrants in accordance with Section 4.1.
4.3 FURNISHING OF INFORMATION.
(a) As long as any Investor owns Debentures, Shares or Underlying
Shares, the Company covenants to timely file (or obtain extensions in respect
thereof) all reports required to be filed by the Company after the date hereof
pursuant to Section 13(a) or 15(d) of the Exchange Act and to furnish to each
Investor within ten days of each such filing true and complete copies of all
such filings. If the Company is not at the time required to file reports
pursuant to such sections, it will prepare and furnish to each Investor annual
and quarterly financial statements, together with a management discussion and
analysis of such financial statements in form and substance substantially
similar to those that would otherwise be required to be included in reports
required by Section 13(a) or 15(d) of the Exchange Act in the time period that
such filings would have been required to have been made under the Exchange Act.
(b) The Company shall deliver copies to the Investors of any documents
or financial statements it delivers to BNY pursuant to Sections 11(a), 11(b),
11(c) or 11(d) of the Receivables Agreement concurrently with such delivery to
BNY, provided that the Company shall not be obligated to deliver the
accountant's consent required under Section 11 of the Receivables Agreement and
shall not deliver to the Investors the other materials it is required to deliver
to BNY under such Section 11.
4.4 COPIES AND USE OF DISCLOSURE MATERIALS. The Company consents to the use
of the SEC Documents, and any amendments and supplements thereto, by the
Investors in connection with resales of the Underlying Shares to the extent such
resales are not pursuant to an effective registration statement.
4.5 BLUE SKY LAWS. The Company shall qualify the Underlying Shares under
the securities or Blue Sky laws of such jurisdictions as each Investor may
request and shall continue such qualification at all times through the third
anniversary of the Closing Date; provided, however, that the Company shall not
be required in connection therewith to qualify as a foreign corporation where it
is not now so qualified, or take any action that would subject the Company to
general service of process in any such jurisdiction where it is not then so
subject or subject the Company to any material tax in any such jurisdiction
where it is not then so subject.
4.6 INTEGRATION. The Company shall not and shall use its best efforts to
ensure that no Affiliate shall sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in Section 2 of the
Securities Act) that would be integrated with the offer or sale of the
Debentures, the Shares or the Underlying Shares in a manner that would require
the registration under the Securities Act of the sale of the Debentures, the
Shares or the Underlying Shares to the Investors.
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4.7 CERTAIN AGREEMENTS.
(a) The Company shall not and shall cause the Subsidiaries not to,
without the consent of the Investors, (i) amend its certificate of
incorporation, bylaws or other charter documents so as to adversely affect any
rights of the Investors under the Transaction Documents; (ii) repay, repurchase
or offer to repay, repurchase or otherwise acquire in excess of 10,000 shares of
its Common Stock (counting since March 17, 1997), other than shares which may be
repurchased from employees of the Company in connection with the termination of
their employment with the Company; or (iii) enter into any agreement with
respect to any of the foregoing.
(b) The Company may not force any conversion or call a redemption of
any portion of the principal amount of the Debentures until such time as all of
the Shares have been converted or redeemed in accordance with the terms hereof
and the Certificate of Designation.
4.8 LISTING OF UNDERLYING SHARES. The Company shall, within seven (7)
Business Days of the Closing Date, file with the Nasdaq National Market an
additional shares listing application covering such Underlying Shares and
Warrant Shares that shall not have been previously covered by a Nasdaq
additional shares listing and shall take all steps necessary to cause such
application to be approved as soon as possible thereafter. The Company shall
also take all steps necessary to cause such shares to be listed on any other
national securities exchange or market on which the Common Stock is then listed
as soon as possible after the Closing Date. The Company shall provide to each
Investor evidence of such filings and listings, and shall maintain such listings
as long as any Investor holds Debentures, Shares, Warrants, Underlying Shares or
Warrant Shares. In the event the aggregate number of Underlying Shares and
Warrant Shares exceeds the number covered by the additional shares listing
application filed with the Nasdaq National Market, the Company shall promptly
file one or more appropriate listing applications to continually list for
trading a number of such additional shares, as the Company and the Investors
shall reasonably agree.
4.9 INVESTOR'S RIGHTS IF TRADING IN COMMON STOCK IS SUSPENDED OR DELISTED.
In the event that at any time within the three-year period after the date
hereof, trading in the shares of the Common Stock is suspended on or delisted
from the Nasdaq National Market (other than as a result of the suspension of
trading in securities on such market generally or temporary suspensions pending
the release of material information and other than a suspension of trading if
the Common Stock is quoted on the Nasdaq SmallCap Market within one Business Day
after such suspension), at each Investor's option exercisable by five Business
Days prior written notice to the Company, the Company shall repay, redeem, or
repurchase as applicable, all of the Debentures owned by each Investor at the
Prepayment Price as calculated on the date of such notice, all of the Shares
owned by each Investor at the Redemption Price as calculated on the date of such
notice, all of the Warrants at the Warrant Repurchase Price as calculated on the
date of such notice as provided in the July Purchase Agreement, and all of the
Underlying Shares at the Per Share Market Price as calculated on the date of
such notice and interest on such amounts at the rate of 15% per annum accruing
from the fifth (5th) Business Day after such notice until the repurchase price
under this Section 4.9 is paid in full.
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4.10 NO VIOLATION OF APPLICABLE LAW. Notwithstanding any provision of this
Agreement to the contrary, if any repurchase or redemption otherwise required
under this Agreement or the Registration Rights Agreement would be prohibited by
the relevant provisions of Delaware General Corporation Law, such repurchase
shall not be effected unless and until it is permitted under such law; provided,
however, that interest payable by the Company with respect to any such
repurchase or redemption shall continue to accrue in accordance with Section
4.9.
4.11 REPURCHASE RESTRICTIONS. Notwithstanding any provision of this
Agreement to the contrary, if any repurchase or redemption otherwise required
under this Agreement or the Registration Rights Agreement would be prohibited in
the absence of consent from any institutional lender of the Company or any of
the Subsidiaries which has an outstanding loan balance in excess of $1 million,
the Company shall use its best efforts to obtain such consent as promptly as
practicable after the repurchase or redemption is required and such repurchase
or redemption shall not be effected unless and until such consent is obtained.
Interest payable by the Company with respect to any such repurchase or
redemption shall continue to accrue until such consent is obtained and the
repurchase price therefor paid. Nothing contained in this Section 4.11 shall be
construed as a waiver by the Investor of any rights it may have by virtue of any
breach of any representation or warranty of the Company herein as to the absence
of any requirement to obtain any such consent.
4.12 LEGAL OPINION. The Company shall cause the legal opinion of Cooley
Godward LLP in the form of Exhibit D, to be delivered at the Closing.
4.13 NOTICE OF BREACHES. Each party shall give prompt written notice to
the other party of any breach by it of any representation, warranty or other
agreement contained in this Agreement or in the Registration Rights Agreement,
as well as any events or occurrences arising after the date hereof and prior to
the Closing, which would reasonably be likely to cause any representation or
warranty or other agreement of such party, as the case may be, contained herein
to be incorrect or breached as of such Closing Date. However, no disclosure by
either party pursuant to this Section 4.13 shall be deemed to cure any breach of
any representation, warranty or other agreement contained herein or in the
Registration Rights Agreement.
Notwithstanding the generality of the foregoing, the Company shall promptly
notify each Investor of any notice or claim (written or oral) that it receives
from any lender of the Company to the effect that the consummation of the
transactions contemplated hereby and by the Registration Rights Agreement
violates or would violate any written agreement or understanding between such
lender and the Company, and the Company shall promptly furnish by facsimile to
the holders of the Debentures and Shares a copy of any written statement in
support of or relating to such claim or notice.
4.14 CONVERSION PROCEDURES. Exhibit F sets forth the procedures that are
to followed in addition to the tendering of a Conversion Notice hereunder with
respect to the conversion of the Debentures or Shares including the form of
legal opinion, if necessary, that shall be rendered to the Transfer Agent and
such other information and instructions as may be reasonably necessary to enable
the Investors to exercise its right of conversion smoothly and expeditiously.
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4.15 TRANSFER AGENT. Boston EquiServe shall act as transfer agent (the
"Transfer Agent") of the Company. The Company may not remove or replace the
Transfer Agent as its transfer agent without the written consent of the
Investors.
4.16 NEW DIRECTORS. Within 10 days after the Closing Date, the Company
shall cause a majority of its Board of Directors to elect each of Stuart
Chasanoff and Barrett Whissman to the Board.
4.17 RESTRICTION ON DEBT. The Company covenants and agrees that from and
after the date hereof and so long as any of the Debentures remain outstanding,
or the Company shall have any obligation to the Investors hereunder or pursuant
hereto, the Company shall not, and shall not permit any Subsidiary to, without
the prior written consent of the Investors in each instance incur, create,
assume, guarantee or suffer to exist, or become or remain liable directly or
indirectly, for or on account of any indebtedness, obligations or liabilities
that rank pari passu with or senior to the indebtedness, obligations and
liabilities represented by the Debentures, except under the BNY Bank Obligations
or any obligations to any of the Investors or their respective successors and
permitted assigns.
4.18 RESTRICTION ON SHORT SALES. Each Investor covenants and agrees not to
engage in any Short Sales of Common Stock so long as the Investors or any of
their affiliates, as defined in the Exchange Act, hold any Shares or Debentures;
provided, however, that each Investor may engage in sales of Common Stock
issuable to an Investor upon conversion or upon exercise of a Warrant, made
within 72 hours prior to the time notice of conversion is given, or such Warrant
is exercised, as applicable.
4.19 RESTRICTIONS ON CONVERSION AND SALE. (a) The Investors agree not to
convert the Series C Preferred and Debentures into or exercise the Warrants for
Common Stock until the earlier of (i) February 21, 1999 or (ii) the date an
Event of Default (as defined below) occurs. For purposes of this Agreement, the
following shall constitute an Event of Default: (i) the Company incurs more than
$100,000 in additional indebtedness (excluding trade debt incurred in the
ordinary course of business); (ii) the Company permits to exist liens on its
assets securing payment of claims or obligations in an aggregate amount of
$500,000 other than existing liens or liens securing payment of (A) the BNY Bank
Obligations, (B) the Bridge Loan (as defined below), or (C) the New Facility (as
defined below); (iii) the Company uses any of the proceeds of the Bridge Loan or
the New Facility for any purpose other than working capital in connection with
the operation of the Company's present business operations; (iv) the Company
enters into any agreement to merge with or otherwise combine its assets or
operations with any other entity or sells any material assets outside the
ordinary course of business; (v) the Company commences an action for relief
under any provision of the United States Bankruptcy Code or any similar
statutory scheme (or is made the subject of such an action and such action is
not dismissed within 30 days of commencement); (vi) the Company pays any
material additional or special compensation to any of its officers that is not
currently required under any existing agreements with its officers; (vii) the
Company enters into any material transaction with any insider or affiliate;
(viii) the Company issues any shares of stock in the Company other than in
satisfaction of existing options, warrants, conversion rights, or existing
obligations under the Company's employee benefit plans; or (ix) the Company's
stockholders fail to approve (A) the Company's issuance of more than 20% of the
Company's Common Stock upon conversion of
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the Debentures and Series C Preferred to the Investors pursuant to Rule 4460 of
the Nasdaq National market rules or (B) an increase in the authorized number of
shares of Common Stock sufficient to cause the number of authorized and unissued
and unreserved shares of Common Stock on such date to exceed (by not less than
10 million shares) the number of shares of Common Stock issuable upon the
conversion and exercise of all of the outstanding shares of Series B Preferred
and Series C Preferred, the July Debentures, the Debentures and the Warrants, in
each case, on or prior to December 21, 1998. The Bridge Loan shall mean that
certain $3 million loan from Infinity Investors Limited in favor of the Company
and executed on the date hereof. The New Facility shall mean the proposed $10
million loan facility which may be entered into between the Company and Infinity
Investors Limited.
(b) The Investors agree not to sell, assign or otherwise transfer
their shares of the Series C Preferred and Debentures or the Underlying Shares
or Warrants until the earlier of (i) February 21, 1999 or (ii) the date an Event
of Default occurs, except (X) in a private placement to a bona fide, independent
third-party which is not an affiliate of any of the Investors in a transaction
not entered into for the purpose of avoiding the provisions of this Section
4.19, which private placement is exempt from the registration requirements of
Section 5 of the Securities Act, (Y) pursuant to an underwritten public offering
of such securities, and (Z) the Investors may collectively sell, in any calendar
quarter, Securities that convert into Underlying Shares or Underlying Shares in
amounts up to 5% of the outstanding Common Stock on a fully diluted basis. On or
after the first to occur of (i) February 21, 1999 or (ii) the date an Event of
Default occurs, the Investors may (1) sell, assign or otherwise transfer their
shares of the Series C Preferred and Debentures or the Underlying Shares or
Warrants (A) in a private placement to a bona fide, independent third party
which is not an affiliate of any of the Investors in a transaction not entered
into for the purpose of avoiding the provisions of this Section 4.19, which
private placement is exempt from the registration requirements of Section 5 of
the Securities Act, (B) pursuant to an underwritten public offering of such
securities or (2) collectively sell, in any calendar quarter, Securities that
convert into Underlying Shares or Underlying Shares in amounts up to (but not
exceeding) 10% of the outstanding Common Stock on a fully diluted basis.
4.20 STOCKHOLDERS MEETING. As soon as practicable, the Company shall file
proxy materials with the Commission relating to a special or annual meeting of
the stockholders of the Company called for the purpose of approving (A) the
issuance (the "Issuance") of such Common Stock upon conversion of the
Debentures, Warrants and Series C Preferred pursuant to Rule 4460 of Nasdaq
National Market and (B) an increase in the authorized number of shares of Common
Stock sufficient to cause the number of authorized and unissued and unreserved
shares of Common Stock on such date to exceed (by not less than 10 million
shares) the number of shares of Common Stock issuable upon the conversion and
exercise of all of the outstanding shares of Series B Preferred and Series C
Preferred, the July Debentures, the Debentures and the Warrants (the "Special
Meeting"). The Company shall use its best efforts to clear the proxy statement
relating to the Special Meeting with the Commission as soon as practicable and
to mail the same to its stockholders as soon as practicable. The Company
covenants to hold the Special Meeting on the earliest practicable date in
compliance with Delaware law and the Company's certificate of incorporation and
bylaws as in effect on the date hereof. The Board of Directors of the Company
shall recommend to its stockholders that they vote in favor of a proposal to
approve the Issuance and against any proposal that would prevent or discourage
the Issuance. Simultaneous with the execution of this Agreement, Messrs. Donald
Kingsborough and Gary
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Nemetz have provided irrevocable proxies to the Investors allowing the Investors
to vote all of their shares of Common Stock at the Special Meeting in favor of
the Issuance.
SECTION 5. MISCELLANEOUS
5.1 FEES AND EXPENSES. The Company shall pay the fees and expenses of its
advisers, counsel, accountants and other experts, if any, and all other expenses
incurred incident to the negotiation, preparation, execution, delivery and
performance of this Agreement and the Registration Rights Agreement. The Company
shall also pay the legal fees and expenses of the Investors incurred by them in
connection with the negotiation, preparation, execution and delivery of this
Agreement and the other documents delivered at the Closing. The Company shall
pay all stamp and other taxes and duties levied in connection with the issuance
of the Debentures and Shares pursuant hereto. Each Investor shall be responsible
for such Investor's own tax liability that may arise as a result of the
investment hereunder or the transactions contemplated by this Agreement.
5.2 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with the
Exhibits and Schedules hereto, the Debentures, the Certificate of Designation,
the Registration Rights Agreement, the July Purchase Agreement solely as it
relates to the Warrants (except that Sections 4.8 and 4.20 with respect to the
Warrants are hereby deleted and of no further force and effect), and the
Warrants contain the entire understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
oral or written, with respect to such matters.
5.3 NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 4:30 p.m. (Eastern Standard
Time) on a Business Day, (ii) the Business Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
telephone number specified in the Purchase Agreement later than 4:30 p.m.
(Eastern Standard Time) on any date and earlier than 11:59 p.m. (Eastern
Standard time) on such date, (iii) the Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be given.
The addresses for such communications shall be:
If to the Company: YES! Entertainment Corporation
3875 Hopyard Road
Pleasanton, CA 94588
Attn: Donald Kingsborough
Facsimile No.: (510) 734-0997
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With copies to: Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Attn: Patrick Pohlen
Facsimile No.: (415) 857-0663
If to Infinity: Infinity Investors Limited
Hunkins Waterfront Plaza
Main Street
P.O. Box 556
Charlestown, Nevis, West Indies
Attn: _________
Facsimile No.: (__) __________
If to Glacier: Glacier Capital Limited
Main Street
P.O. Box 556
Charlestown, Nevis, West Indies
Attn: _________
Facsimile No.: (__) __________
If to Emerging: Infinity Emerging Opportunities Limited
Main Street
P.O. Box 556
Charlestown, Nevis, West Indies
Attn: _________
Facsimile No.: (__) __________
With copies to: White & Case LLP
4900 First Union Financial Center
200 South Biscayne Boulevard
Miami, Florida 33131
Attn: Thomas E Lauria
Facsimile No.: (305) 358-5744
and Mr. Stuart Chasanoff
c/o HW Finance
160 Elm Street, Suite 4000
Dallas, Texas 75201
Facsimile No.: (214) 720-1662
or such other address as may be designated in writing hereafter, in the same
manner, by such person.
5.4 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived or
amended except in a written instrument signed, in the case of an amendment, by
both the
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Company and the Investors, or, in the case of a waiver, by the party against
whom enforcement of any such waiver is sought. No waiver of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
5.5 HEADINGS. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
5.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns.
Neither the Company nor the Investors may assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other, except
that each Investor may assign its rights hereunder and under the Registration
Rights Agreement to an Affiliate thereof, provided, that such assignee
demonstrates to the reasonable satisfaction of the Company its satisfaction of
the representations and warranties set forth in Section 3.2 herein. The
assignment by a party of this Agreement or any rights hereunder shall not affect
the obligations of such party under this Agreement.
5.7 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
5.8 GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of New York without
regard to the principles of conflicts of law thereof.
5.9 SURVIVAL. Each of the representations and warranties of the Company
and the Investor contained in Article III and the agreements and covenants of
the parties contained in Article IV and this Article V shall survive until a
date that is three years after the last Closing date.
5.10 COUNTERPART SIGNATURES. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
5.11 PUBLICITY. Prior to, or concurrently with, the filing of an amended
registration statement contemplated by this transaction the Company and the
Investors shall consult with each other in issuing any press releases or
otherwise making public statements with respect to the transactions contemplated
hereby and neither party shall issue any such press release or otherwise make
any such public statement without the prior written consent of the
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other, which consent shall not be unreasonably withheld or delayed, except for
such releases, filings or public statements that are required by law. Any press
release or public statement made subsequent to the filing of the amended
registration statement contemplated by this transaction shall not contain any
statement regarding the trading on investment of the Investors in connection
with this Agreement, the March Agreement or the predecessor thereto, without
first obtaining the consent of such Investors, which consent shall not be
unreasonably withheld.
5.12 SEVERABILITY. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affected or impaired thereby and the parties will attempt to agree
upon a valid and enforceable provision which shall be a reasonable substitute
therefor, and upon so agreeing, shall incorporate such substitute provision in
this Agreement.
5.13 REMEDIES. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Investors
will be entitled to specific performance of the obligations of the Company under
this Agreement and the Company will be entitled to specific performance of the
obligations of the Investors hereunder with respect to the subsequent transfer
of Debentures, Shares and the Underlying Shares. Each of the Company and the
Investors agrees that monetary damages would not be adequate compensation for
any loss incurred by reason of any breach of its obligations described in the
foregoing sentence and hereby agrees to waive in any action for specific
performance of any such obligation the defense that a remedy at law would be
adequate.
5.14 AMENDMENT TO REGISTRATION RIGHTS AGREEMENT. The Investors, being the
holders of at least a majority of the Registrable Securities (as defined in the
Registration Agreement), and the Company hereby agree to amend the Registration
Rights Agreement to provide the holders of the Series C Preferred and Debentures
the same rights as the holders of the Series B Preferred and the July Debentures
and such holders are hereby deemed to be parties to, and have the rights and
benefits of, the Registration Rights Agreement as though they were original
signatories thereto. The Company represents to the Investors that the
Registration Rights Agreement is in full force and effect, is an enforceable
obligation of the Company in accordance with its terms and the Company has no
claims or defenses with respect thereto, except that the enforceability of the
Registration Rights Agreement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application. The Company covenants that
within thirty (30) days of the date hereof the Company shall file an amendment
to the Underlying Securities Registration Statement to include the Series C
Preferred and Debentures or file a new registration statement as would have been
required under the Registration Rights Agreement had the Series C Preferred and
Debentures been issued with the Series B Preferred and July Debentures.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first indicated above.
YES! ENTERTAINMENT CORPORATION
By: /s/ Mark Shepherd
------------------------------------
Name: Mark Shepherd
----------------------------------
Title: CEO and President
---------------------------------
INFINITY INVESTORS LIMITED
By: /s/ James E. Martin
------------------------------------
Name: James E. Martin
----------------------------------
Title: Director
---------------------------------
GLACIER CAPITAL LIMITED
By: /s/ James E. Martin
------------------------------------
Name: James E. Martin
----------------------------------
Title: Director
---------------------------------
INFINITY EMERGING OPPORTUNITIES LIMITED
By: /s/ James E. Martin
------------------------------------
Name: James E. Martin
----------------------------------
Title: Director
---------------------------------
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EXHIBIT 99.1
YES! ENTERTAINMENT APPOINTS MARK SHEPHERD CEO
PLEASANTON, Calif.--(BUSINESS WIRE)--Sept. 3, 1998--YES! Entertainment (NASDAQ:
YESS - news) today announced that the Board of Directors has appointed Mark C.
Shepherd as Chief Executive Officer of the Company.
In addition, Mr. Shepherd will serve as a Director of the Company. Concurrent
with this announcement, Donald D. Kingsborough has resigned as Chief Executive
Officer and Chairman of the Board. He is replaced as Chairman by current Board
member Gary L. Nemetz, who is a General Partner with DCC Growth Fund, L.P.
With his new position, Mr. Shepherd will continue to perform the duties of Chief
Operating Officer and will appoint a Chief Financial Officer at a later date.
Mr. Kingsborough will remain on the Board of Directors and will continue to
provide the Company with the benefit of his industry experience.
Mark Shepherd commented, "We recently completed a capital infusion of $3 million
and an agreement that ends all outstanding disputes with the holders of the
Company's Preferred Stock and 5% Convertible Debentures. This resolution allows
us to focus on the core business and to continue exploring options to increase
shareholder value. We also expect to complete, on or before September 15, 1998,
a working capital line with the majority holder of the Company's Preferred
Stock."
All terms of the transaction will be detailed in an 8K filing with the
Securities and Exchange Commission.
Shepherd continued, "Since I have been with YES!, we have made great progress in
lowering our break-even to match our expected revenue level. This new working
capital line will give us the flexibility to focus on the business and leverage
our strong core brand names such as Yak Bak(R), Power Penz(R), and Air
Vectors(TM). During the year, we introduced W-3 Wild Water Weapons(TM) and
Fistful of Aliens(TM), a collectible action figures/game combination. We see an
opportunity to balance the cyclicality of our business as Water Weapons are
counter seasonal. We are encouraged about the positive reception of Fistful of
Aliens, specifically on the international front."
"Late in the third quarter we will begin shipping The New World of Teddy Ruxpin.
We believe this product gives us a tremendous opportunity to break into the
Interactive Feature Plush category, which is one of the fastest growing segments
in the Feature Plush category," Shepherd added.
The Company also announced the appointment of Stuart J. Chasanoff and Barrett N.
Wissman, of HW Partners, L.P., to the Board of Directors as representatives of
the Preferred shareholders.
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In addition, David C. Costine has resigned from the Company's Board. The
addition of Messrs. Shepherd, Chasanoff and Wissman, brings YES!'s Board
membership to six.
"We welcome Stuart and Barrett to the Board. Their expertise will provide the
Company with valuable insight and direction," Shepherd concluded.
Mr. Shepherd joined YES! in October of 1997 as Chief Operating Officer and was
named Chief Financial Officer in April 1998. Prior to joining YES!, Mr.
Shepherd was Senior Vice President - Finance for Einstein/Noah Bagel Corp.
(Nasdaq:ENBX - news) where he was responsible for operations finance,
procurement, distribution and manufacturing operations for this multi-unit bagel
retailer. Prior to that, he was Vice President/Chief Financial Officer for
Noah's Pacific L.L.C./Noah's Bay Area L.L.C. From 1992 to 1995, Mr. Shepherd
was Senior Vice President and Chief Financial Officer for Lewis Galoob Toys,
Inc. (NYSE:GAL - news).
YES! Entertainment Corporation develops, manufactures and markets toys and other
children's products, including a variety of interactive products. YES! uses
innovative technology to design products that are fun for children and build on
their natural creativity.
This press release includes certain forward looking statements about the Company
that are based on management's current expectations. Actual results may differ
materially as a result of any one or more of the risks including that the
Company will not successfully complete negotiations of the working capital
facility and those risks identified in the Company's filings under the
Securities and Exchange Act of 1934, in particular in the section captioned
"Business Factors" of the Company's Form 10- K as amended filed with the
Securities Exchange Commission for the year ended December 31, 1997 and
subsequent filings.
2.
