-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ns78bpeiOevJlCz0bE9Ea01XkmXhiHjt73jiDKe4PAPpFy494Taz2BLuQu5fkqM/ KY0DC/UN8Fwrni9ckiGE2w== 0000891618-97-003149.txt : 19970805 0000891618-97-003149.hdr.sgml : 19970805 ACCESSION NUMBER: 0000891618-97-003149 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970804 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970804 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: YES ENTERTAINMENT CORP CENTRAL INDEX KEY: 0000943747 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 943165290 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25916 FILM NUMBER: 97651098 BUSINESS ADDRESS: STREET 1: 3875 HOPYARD RD STE 375 CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5108479444 MAIL ADDRESS: STREET 1: 3875 HOPYARD ROAD STREET 2: SUITE 375 CITY: PLEASANTON STATE: CA ZIP: 94588 8-K 1 FORM 8-K 1 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): August 4, 1997 YES! Entertainment Corporation -------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 0-25916 94-3165290 - -------------- ------------------------ ------------------- (State of (Commission File Number) (IRS Employer Incorporation) Identification No.) 3875 Hopyard Road, Suite 375, Pleasanton, California 94588 ------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (510) 847-9444 (Registrant's telephone number, including area code) 2 Item 5. Other Events. In a press release disseminated on August 4, 1997, the Registrant publicly announced that it has entered into an agreement superseding an agreement with certain institutional buyers entered into on March 18, 1997 (the "March Agreement"), pursuant to which the Registrant issued convertible subordinated debentures (the "March Debentures"), convertible preferred stock (the "March Shares") and warrants, and which superseded a private placement to such institutional buyers entered into on January 28, 1997 by which the Registrant raised $10 million through the sale of convertible subordinated debentures and warrants. The Registrant and such institutional buyers agreed to supersede the March Agreement by issuing convertible subordinated debentures and convertible preferred stock upon surrender of the March Debentures and March Shares. The information that is set forth in the Registrant's Press Release dated August 4, 1997, filed as Exhibit 99.1 hereto, is incorporated by reference. Item 7. Exhibits 4.1 Form of 5% Convertible Debenture due April 30, 2002. 4.2 Certificate of Designation of Series B Preferred Shares. 4.3 Amended and Restated Securities Purchase Agreement dated July 25, 1997. 99.1 Press release dated August 4, 1997. 1. 3 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: August 4, 1997 By: /s/ Donald Kingsborough ------------------------------------- Donald Kingsborough President and Chief Executive Officer 2. 4 INDEX TO EXHIBITS
Page number in sequentially numbered version ---------------- 4.1 Form of 5% Convertible Debenture due April 30, 2002. 4.2 Certificate of Designation of Series B Preferred Shares. 4.3 Amended and Restated Securities Purchase Agreement dated July 25, 1997. 99.1 Press Release dated, August 4, 1997
3. EX-4.1 2 FORM OF 5% CONVERTIBLE DEBENTURE 1 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 AN AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT, DATED JULY 25, 1997, AND EFFECTIVE AS OF APRIL 30,1997, 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 $1,956,021.39. This Debenture supersedes in its entirety the Debenture of like tenor, issued by the Company to the Holder on March 28, 1997. FOR VALUE RECEIVED, the Company promises to pay to [ ], or its registered assigns (the "Holder"), the principal sum of [ ] ($[ ]) (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 April 30, 1997 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, 1997; (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 1. 2 as of the day such interest is payable. Interest hereunder will be paid to the person in whose name this Debenture (or one or more predecessor Debentures) is registered on the records of the Company regarding registration and transfers of the Debentures (the "Debenture Register"); 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), each executed by the original Holder. 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 transferrable only through an appropriate entry in the Debenture Register as provided herein. This Debenture is subject to the following additional provisions: SECTION 1. The Debentures are issuable in denominations of One Hundred Thousand Dollars ($100,000) and integral multiples of Fifty Thousand Dollars ($50,000) in excess thereof. The Debentures are exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same but shall not be issuable in denominations of less than integral multiplies of Fifty Thousand Dollars ($50,000). No service charge will be made for such registration of transfer or exchange. SECTION 2. This Debenture has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Securities Act, 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. 2. 3 (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 B Preferred Stock of the Company (the "Certificate of Designation") or the Amended and Restated Registration Rights Agreement, dated July 25, 1997 (the "Registration Rights Agreement"), and such failure or breach shall not have been remedied within five (5) Business Days after the date on which notice of such failure or breach shall have been given or such other cure period as may specifically be provided herein or in such other agreements with respect to any particular covenant, agreement or warranty; (c) the Company or any of its subsidiaries shall commence a voluntary case under the United States Bankruptcy Code as now or hereafter in effect or any successor thereto (the "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 3. 4 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 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 October 31, 1997 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; provided, however, such shares shall be convertible at the option of the Holder any time on or after August 1, 1997 if the "volume-weighted average" price (as defined and reported by Bloomberg, L.P.) of Common Stock exceeds ten dollars ($10.00) per share for a period of twenty (20) consecutive Trading Days (as hereafter defined), commencing on August 1, 1997. 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 4. 5 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(j). Subject to Sections 4(b) and 4(e) and, as to the Holders (or their designee) party to the Purchase Agreement, subject to Section 4.8 of the Purchase Agreement; each Conversion Notice, once given, shall be irrevocable. 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(e)) a new Debenture for such principal amount as has not been converted. (b) CERTAIN REGULATORY APPROVAL - OPTIONAL CONVERSIONS. 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 an 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 B Preferred (hereafter defined) and Debentures, together with any shares of Common Stock previously issued upon conversion of Series B Preferred and Debentures, would equal or exceed 20% of the number of shares of Common Stock outstanding on the Closing Date as hereafter defined (the "Issuable Maximum"), and (C) the Company has not previously obtained Shareholder Approval (as defined below), then the Company shall issue to the converting Holder the Issuable Maximum and, with respect to any shares of Common Stock that would be issuable to such Holder in respect of the Conversion Notice at issue in excess of the Issuable Maximum, the Holder shall have the option to require the Company to either (1) as promptly as possible, but in no event later than sixty (60) days after such Conversion Date, convene a meeting of the Holder of the Common Stock and obtain the Shareholder Approval, or (2) repay, from funds legally available therefor at the time of such repayment, the balance 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 calculated as of the Conversion Date; provided, however, that if the Holder has requested that the Company obtain Shareholder Approval and the Company fails for any reason to obtain such Shareholder Approval within sixty (60) days after the Conversion Date, the Company shall be obligated to repay in accordance with this provision, at the Prepayment Price calculated as of the Conversion Date, the principal amount (and the amount of accrued but unpaid interest thereon) of Debentures then outstanding, including principal and interest subject to the Conversion Notice at issue and not converted as a result of the provisions of this subsection, and in such case the interest contemplated by the immediately succeeding sentence shall be deemed to accrue on the Prepayment Price from the Conversion Date. If Company fails for any reason to pay the Prepayment Price within five (5) Business Days after the Conversion Date, the Company will pay interest on such Prepayment Price at a rate of 15% per annum to the converting Holder, accruing from the Conversion Date until the Prepayment Price plus any accrued interest thereon 5. 6 is paid in full. The entire Prepayment Price, including interest thereon, shall be paid in cash. "Shareholder Approval" means the approval by a majority of the total votes cast on the proposal, in person or by proxy, at a meeting of the shareholders of the Company held in accordance with the Company's certificate of incorporation and by-laws, of the issuance of the Company of shares of Common Stock exceeding the Issuable Maximum as a consequence of the conversion of Debentures into Common Stock at a price less than the greater of the book or market value on the Closing Date as and to the extent required pursuant to Rule 4460(i) of the Nasdaq Stock Market (or any successor or replacement provision thereof). (c) AUTOMATIC CONVERSION. On the April 30, 2002 (the "Automatic Conversion Date"), the principal amount of (and accrued but unpaid interest thereon) any and all outstanding Debentures 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) CERTAIN REGULATORY APPROVAL - AUTOMATIC CONVERSION. If on the Automatic Conversion Date applicable to any conversion of any portion of the principal amount of this Debenture (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 an 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 B Preferred and Debentures, would equal or exceed the Issuable Maximum, and (C) the Company has not previously obtained Shareholder Approval (as defined below), then the Company shall issue to the converting Holder the Issuable Maximum and, with respect to any shares of Common Stock that would be issuable to such Holder in respect of the Conversion Notice at issue in excess of the Issuable Maximum, the Holder shall have the option to require the Company to either (1) as promptly as possible, but in no event later than sixty (60) days after such Conversion Date, convene a meeting of the Holders of the Common Stock and obtain the Shareholder Approval, or (2) repay, from funds legally available therefor at the time of such repayment, the balance of the principal amount of (and accrued but unpaid interest on) the Debentures then outstanding, at a price equal to the Prepayment Price calculated as of the Conversion Date. (e) DELIVERY OF CERTIFICATES. Not later than three (3) Trading Days after a Conversion Date or the Automatic Conversion Date, the Company will 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 4(b) and 4(d)) 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 6. 7 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 counting of days for the purpose of computing liquidation damages pursuant to Section 4(b) shall not begin until such original Debentures (or other security acceptable to Company) have been delivered to the Transfer Agent. 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 twenty (20) 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 15% per annum, in cash to such Holder, accruing from such fifth (5th) Business Day until such Prepayment Price and any accrued but unpaid interest thereon is paid in full. (f) 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. 7. 8 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(f)(i)(A) and (i)(B) above). (ii) ADJUSTMENT FOR STOCK SPLITS, COMBINATIONS. If an Adjustment Event described in 4(f)(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(f)(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(f)(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 offered for subscription or purchase. Such adjustment shall be calculated whenever such rights or warrants are issued, and shall become applicable 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(f)(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. The adjustment provided for in this Section 4(f)(iii) shall not be applicable to issuances of rights or warrants pursuant to a Stockholders Rights Plan properly adopted by the Company pursuant to Delaware General Corporate law. (iv) ADJUSTMENT FOR DISTRIBUTION OF EVIDENCES OF INDEBTEDNESS OR ASSETS TO COMMON STOCKHOLDERS. If an Adjustment Event described in 4(f)(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 8. 9 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. The adjustment provided for in this Section 4(f)(iv) shall not be applicable to distributions of evidences of indebtedness or assets pursuant to a Stockholders Rights Plan properly adopted by the Company pursuant to Delaware General Corporate law. (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 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 Company into which the principal amount (and accrued and unpaid interest thereon) of the Debentures could have been converted immediately prior to such event. (viii) NOTICE OF CERTAIN EVENTS. If: A. the Company shall declare a dividend (or any other distribution) on its Common Stock (other than a subdivision of the outstanding shares of Common Stock); or B. the Company shall declare a special nonrecurring cash dividend on or authorize a repurchase or redemption of more than ten thousand (10,000) shares 9. 10 of its then outstanding Common Stock, other than a repurchase or redemption of the Common Stock of an employee upon termination of employment with the Company for any reason; or C. the Company shall authorize the granting to all Holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or D. the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock (other than a subdivision or combination of then outstanding shares of Common Stock), any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or E. the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of 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. (g) RESERVATION OF COMMON STOCK. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Debentures, 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. (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 10. 11 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. (i) 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. (j) 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. SECTION 5. PREPAYMENT BY THE COMPANY. (a) OPTIONAL REDEMPTION 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 five (5) Trading Days notice to the Holders (the "Optional Prepayment Notice"), to prepay all or any portion of the principal amount of the Debentures then outstanding at the Prepayment Price calculated on the date of the Optional Prepayment Notice (which date may be referred to herein as a "Prepayment Date"). The entire Prepayment Price shall be paid in cash. (ii) On or after the date of the Optional Prepayment Notice, no Holder shall have the right to continue to convert Debentures, which have been noticed for redemption. 11. 12 (iii) On the fifth (5th) Trading Day after the date of the Optional Prepayment Notice, 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. (b) LIQUIDATED DAMAGES. If the Optional Prepayment Price shall not be paid in full within three (3) Trading Days of the fifth (5th) Trading Day after the date of the Optional Prepayment Notice, the Company shall pay as liquidated damages and not as a penalty the sum of 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 within such three Trading Day period, then the Holder may demand that the Company (i) convert all or any portion of the principal amount of the Debentures for which the Optional Prepayment Price shall not have been paid (the "Unpaid Principal Portion") at a Conversion Price calculated as at the date of the Optional Prepayment Notice or the date of such conversion, whichever is lower, or (ii) promptly issue to the Holders new Debentures for a principal amount equal to the Unpaid Principal Portion. (c) BNY COVENANTS. Notwithstanding anything to the contrary contained herein, the Company shall not deliver an Optional Prepayment Notice unless (i) there are no outstanding shares of Series B Preferred or all outstanding shares of Series B Preferred 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. 12. 13 "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 as of any date of determination on or after May 1, 1998 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. "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). "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 (i) with respect to any Conversion Date occurring during the period from November 1, 1997 to and including November 30, 1997, 14 Trading Days, (ii) with respect to any Conversion Date occurring during the period from December 1, 1997 to and including December 31, 1997, 16 Trading Days, (iii) with respect to any Conversion Date occurring during the period from January 1 to and including January 31, 1998, 18 Trading Days, (iv) with respect to any Conversion Date occurring during the period from February 1 to and including February 28, 1998, 20 Trading Days, (v) with respect to any Conversion Date occurring during the period from March 1 to and including March 31, 1998, 22 Trading Days, (vi) with respect to any Conversion Date occurring during the period from April 1, 1998 to and including April 30, 1998, 24 Trading Days, (vii) with respect to any Conversion Date occurring during the period from May 1, 1998 to and including May 31, 1998, 26 Trading Days, (viii) with respect to any Conversion Date occurring during the period from 13. 14 June 1 to and including June 30, 1998, 28 Trading Days and (ix) with respect to any Conversion Date occurring on or after July 1, 1998, 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. "PURCHASE AGREEMENT" means the Amended and Restated Securities Purchase Agreement, dated July 25, 1997, 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 (i) with respect to any Prepayment Date occurring during the period from the Closing Date to and including October 31, 1997, 100% (ii) 14. 15 with respect to any Conversion Date or Prepayment Date occurring during the period from November 1, 1997 to and including November 30, 1997, 88.25%, (iii) with respect to any Conversion Date or Prepayment Date occurring during the period from December 1 to and including December 31, 1997, 86.75%, (iv) with respect to any Conversion Date or Prepayment Date occurring during the period from January 1, 1998 to and including January 31, 1998, 85.25%, (v) with respect to any Conversion Date or Prepayment Date occurring during the period from February 1, 1998 to and including February 28, 1998, 84.00%, (vi) with respect to any Conversion Date or Prepayment Date occurring during the period from March 1 to and including March 31, 1998, 82.50%, (vii) with respect to any Conversion Date or Prepayment Date occurring on or after April 1, 81.25%. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SERIES B PREFERRED" means the Series B Preferred Stock designated in the Series B Certificate of Designation. "SHAREHOLDER 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 filed within thirty (30) days of Closing (as defined in the Purchase Agreement). "UNPAID PRINCIPAL PORTION" is as defined in Section 5(b). 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 15. 16 specifically set forth in this Section, until such time as all BNY Bank Obligations are indefeasibly paid to BNY, the Company shall not, directly or indirectly, make any cash or other payment (except for the issuance and delivery of shares of Common Stock in respect of conversions or payments of interest hereunder) that is due and owing under this Debenture. Cash payments contemplated by Sections 4(a)(ii) 4(d) or 4(e) 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(a)(ii) 4(d) or 4(e) 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. 16. 17 SECTION 11. This Debenture shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to conflicts of laws thereof. SECTION 12. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing. SECTION 13. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. SECTION 14. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next calendar month, the preceding Business Day in the appropriate calendar month). [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] [SIGNATURE PAGE FOLLOWS] 17. 18 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized as of the date first above indicated. YES! ENTERTAINMENT CORPORATION Attest: ________________________ By: _____________________________________ Name: Donald D. Kingsborough Title: Chief Executive Officer 18. 19 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 orth below, the undersigned is in compliance with Section 4.19 of the Amended and Restated Securities Purchase Agreement between the Company, Infinity Investors Limited, Fairway Capital Limited and Cappello & Laffer Capital Corp. dated July 25, 1997. 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: The Company undertakes to promptly upon its receipt of this conversion notice (and, in any case prior to the time it effects the conversion requested hereby), notify the converting holder by facsimile of the number of shares of Common Stock outstanding on such date and the number of shares of Common Stock which would be issuable to the holder if the conversion requested in this conversion notice were effected in full, whereupon, if the Company determines that such conversion would result in the holder owning in excess of 4.9% of the outstanding shares of Common Stock on such 20 date, the Company shall convert up to an amount equal to 4.9% of the outstanding shares of Common Stock and shall issue to the holder one or more Debenture(s) which have not been converted as a result of this provision. EX-4.2 3 CERTIFICATE OF DESIGNATION 1 EXHIBIT 4.2 CERTIFICATE OF DESIGNATION OF SERIES B CONVERTIBLE PREFERRED STOCK OF YES! ENTERTAINMENT CORPORATION The undersigned, Donald D. Kingsborough and Sol Kershner, hereby certify that: I. They are the duly elected and acting Chief Executive Officer and Secretary, respectively, of YES! Entertainment Corporation, a Delaware corporation (the "Company"). II. The Certificate of Incorporation of the Company authorizes 2,000,000 shares of preferred stock, par value $.001 per share, of which 85,000 shares are issued and outstanding. III. The following is a true and correct copy of the consent duly adopted by the Board of Directors of the Company (the "Board of Directors") dated July 22, 1997, which constituted all requisite action on the part of the Company for adoption of such consent. RESOLUTIONS WHEREAS, the Board of Directors is authorized to provide for the issuance of shares of preferred stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in 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 B Convertible Preferred Stock" (the "Series B Preferred"). The number of shares constituting Series B 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. (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 1. 2 annum, payable in shares of Series B Preferred Stock, on the last day of March, June, September and December commencing on September 30, 1997 or on the Conversion Date (each a "Dividend Payment Date"). Dividends on the Series B Preferred shall accrue daily commencing on May 1, 1997, 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 B 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 B Preferred that number of additional shares of Series B Preferred equal to the quotient of (a) the aggregate dollar amount of accrued and unpaid dividends for all shares of Series B 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 B Preferred require the issuance and delivery of a fractional share or shares of Series B 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 B 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 B 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 B Preferred, such payment shall be distributed ratably among the holders of the Series B Preferred based upon the number of shares held by each holder. SECTION 3. VOTING RIGHTS. Except as otherwise provided herein and as otherwise required by law, the Series B Preferred shall have no voting rights. However, so long as any shares of Series B Preferred are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the shares of the Series B Preferred then outstanding, (a) alter or change adversely the powers, preferences or rights given to the Series B Preferred or (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 B Preferred. SECTION 4. LIQUIDATION. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a "Liquidation"), the holders of Series B 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 B 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 B 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 2. 3 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 B Preferred. SECTION 5. CONVERSION. (a) CONVERSION AT HOLDER'S OPTION. Each share of Series B 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 after October 31, 1997 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; provided, however, such shares shall be convertible at the option of the holder any time on or after August 1, 1997, if the"volume-weighted average" price (as defined and reported by Bloomberg, L.P.) of Common Stock exceeds ten dollars ($10.00) per share for a period of twenty (20) consecutive Trading Days (as hereafter defined), commencing on August 1, 1997. The holder shall effect conversions by surrendering the certificate or certificates representing the shares of Series B 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 B 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(e). Subject to Sections 5(b) and 5(e) and, as to the holders (or their designee) party to the Purchase Agreement (as hereafter defined), subject to Section 4.8 of the Purchase Agreement; each Conversion Notice, once given, shall be irrevocable. If a holder is converting less than all shares of Preferred Stock represented by the certificate or certificates tendered by such holder with the 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(e)) a certificate of such number of shares as have not been converted. (b) CERTAIN REGULATORY APPROVAL - OPTIONAL CONVERSIONS. 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 an 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 B Preferred and Debentures (hereafter defined), 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 Shareholder Approval (as defined below), then the Company shall issue to the converting holder of the Series B Preferred up to the Issuable Maximum and, with respect to any shares of Common Stock that would be issuable to such holder in respect of the Conversion Notice at issue in excess of the Issuable Maximum, the holder shall have the option to require the Company to either (1) as promptly as possible, but in no event later than sixty (60) days after such Conversion Date, 3. 4 convene a meeting of the holders of the Common Stock and obtain the Shareholder Approval, or (2) redeem, from funds legally available therefor at the time of such redemption, the balance of the Series B Preferred then outstanding, including shares subject to the Conversion Notice at issue at a price per share equal to the Redemption Price (as hereafter defined) calculated as of the Conversion Date; provided, however, that if the holder has requested that the Company obtain Shareholder Approval and the Company fails for any reason to obtain such Shareholder Approval within sixty (60) days after the Conversion Date, the Company shall be obligated to redeem, in accordance with this provision, all of the shares of Series B Preferred then outstanding, including shares subject to the Conversion Notice at issue and not converted as a result of the provisions of this subsection, and in such case the interest contemplated by the immediately succeeding sentence shall be deemed to accrue from the Conversion Date. If the holder has requested that the Company redeem shares of Series B Preferred, pursuant to this Section and the Company fails for any reason to pay the Redemption Price within five (5) Business Days after the Conversion Date, the Company will pay interest on such Redemption Price at a rate of 15% per annum to the converting holder of Series B Preferred, accruing from the Conversion Date until the Redemption Price plus any accrued interest thereon is paid in full. The entire Redemption Price, including interest thereon, shall be paid in cash. "Shareholder Approval" means the approval by a majority of the total votes cast on the proposal, in person or by proxy, at a meeting of the shareholders of the Company held in accordance with the Company's certificate of incorporation and by-laws, of the issuance of the Company of shares of Common Stock exceeding the Issuable Maximum as a consequence of the conversion of Series B Preferred into Common Stock at a price less than the greater of the book or market value on the Closing Date as and to the extent required pursuant to Rule 4460(i) of the Nasdaq Stock Market (or any successor or replacement provision thereof). (c) AUTOMATIC CONVERSION. On April 30, 2002 (the "Automatic Conversion Date") any and all outstanding shares of Series B Preferred 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) CERTAIN REGULATORY APPROVAL - AUTOMATIC CONVERSION. If on the Automatic Conversion Date applicable to any conversion of shares of Series B Preferred (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 an 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 B Preferred and Debentures (hereafter defined), would equal or exceed the Issuable Maximum, and (C) the Company has not previously obtained Shareholder Approval (as defined below), then the Company shall issue to the converting holder of the Series B Preferred up to the Issuable Maximum and, with respect to any shares of Common Stock that would be issuable to such holder in respect of the Conversion Notice at issue in excess of the Issuable Maximum, the holder shall have the option to require the Company to either (1) as promptly as possible, but 4. 5 in no event later than sixty (60) days after such Conversion Date, convene a meeting of the holders of the Common Stock and obtain the Shareholder Approval, or (2) redeem, from funds legally available therefor at the time of such redemption, the balance of the Series B Preferred then outstanding, including shares subject to the Conversion Notice at issue at a price per share equal to the Redemption Price calculated as of the Conversion Date. (e) DELIVERY OF CERTIFICATES. Not later than three (3) Trading Days after a Conversion Date or the Automatic Conversion Date, the Company will cause the Transfer Agent to deliver to the holder (i) a certificate or certificates, representing the number of shares of Common Stock being acquired upon the conversion of Series B Preferred (subject to reduction pursuant to Section 5(b) and 5(d)) and (ii) a certificate representing the shares of Series B 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 B Preferred until certificates representing the shares of Series B Preferred to be converted are either delivered to the Transfer Agent for conversion or the holder notifies the Company that such shares of Series B 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 counting of days for the purpose of computing liquidation damages pursuant to Section 5(b) shall not begin until such original certificates (or bond or security therefore, in a form acceptable to Company) has been delivered to the Transfer Agent. The Company shall, upon request of the holder, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If such certificate or certificates are not delivered within twenty (20) 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 Preferred Stock 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 B 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 B Preferred for which the Company shall have failed to issue Series B Preferred certificates hereunder, in cash. If the holder has requested that the Company redeem shares of Series B 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 5. 6 on such Redemption Price at a rate of 15% 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. (f) ADJUSTMENTS. (i) The following events shall be deemed to be "Adjustment Events:" A. If the Company, at any time while any shares of Series B 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 B 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 B Preferred are outstanding, shall distribute to all holders of Common Stock (and not to holders of Series B 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(f)(ii) and (iii) above). (ii) ADJUSTMENT FOR STOCK SPLITS, COMBINATIONS. If an Adjustment Event described in 5(f)(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 completed pursuant to this Section 5(f)(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(f)(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 6. 7 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 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(f)(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. The adjustment provided for in this Section 5(f)(iii) shall not be applicable to issuances of rights or warrants pursuant to a Stockholders Rights Plan properly adopted by the Company pursuant to Delaware General Corporate Law. (iv) ADJUSTMENT FOR DISTRIBUTION OF EVIDENCES OF INDEBTEDNESS OR ASSETS TO COMMON STOCKHOLDERS. If an Adjustment Event described in 5(f)(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 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. The adjustment provided for in this Section 5(f)(iv) shall not be applicable to distributions of evidences of indebtedness or assets pursuant to a Stockholders Rights Plan properly adopted by the Company pursuant to Delaware General Corporate Law. (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 B 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. 7. 8 (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 B 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 B 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 B 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 B 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 B Preferred the right to receive the securities, cash or property in this Section 5(f)(vii) upon any conversion or redemption following such consolidation, merger, sale, transfer, or share exchange. This provision shall similarly apply to successive reclassifications, consolidations, mergers, sales, transfers or share exchanges. Notwithstanding the foregoing, if upon the effectiveness of any business combination to which the Company is a party and from which the Company is not the surviving entity, if (i) the holders of the Common Stock immediately prior to the effectiveness of such business combination beneficially own (as determined under Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), in the aggregate, 66-2/3% or more of the voting power of such surviving entity and (ii) no Person or group (as described in Rule 13d-5(d) promulgated under the Exchange Act) who was not a holder of the Common Stock immediately prior to such business combination beneficially owns in excess of 16-2/3% of the voting power of such surviving entity, then the holders of the Series B Preferred shall only be entitled to elect the conversion set forth in (A) above. (viii) NOTICE OF CERTAIN EVENTS. If: A. the Company shall declare a dividend (or any other distribution) on its Common Stock (other than a subdivision of the outstanding shares of Common Stock); or 8. 9 B. the Company shall 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. the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or D. the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock (other than a subdivision or combination of then outstanding shares of Common Stock), any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or E. the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be mailed to the holders of Series B 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. (g) RESERVATION OF COMMON STOCK. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Series B Preferred, as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the holders of Series B Preferred, such number of shares of Common Stock as shall be issuable upon the conversion of all outstanding shares of Series B Preferred. The Company covenants that all shares of Series B Preferred that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid and nonassessable. (h) RESERVATION OF SERIES B PREFERRED. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Series B Preferred 9. 10 solely for the purpose of payment of dividends on Series B Preferred, as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the holders of the Series B Preferred, such number of shares of Series B Preferred as shall be issuable upon payment of dividends hereunder. The Company covenants that all shares of Series B Preferred Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid and nonassessable. (i) 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 B Preferred shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (j) CERTIFICATES. The issuance of certificates for shares of Common Stock on conversion of Series B 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 B Preferred so converted. (k) CANCELLED SHARES. Shares of Series B Preferred converted into Common Stock shall be canceled and shall have the status of authorized but unissued shares of undesignated preferred stock. (l) NOTICE. Any and all notices or other communications or deliveries to be provided by a holder of Series B 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 B 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 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 10. 11 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 five (5) Trading Days notice to the holders of the Series B Preferred (the "Optional Redemption Notice"), to redeem, from funds legally available therefor at the time of such redemption, all or any portion of the shares of Series B Preferred 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"). The entire Optional Redemption Price shall be paid in cash. (ii) On or after the date of the Optional Redemption Notice, no holder of Series B Preferred shall have the right to continue to convert shares of Series B Preferred which have been noticed for redemption. (iii) On the fifth (5th) Trading Day after the date of the Optional Redemption Notice, each holder of Series B Preferred shall deliver to the Company the shares of Series B 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 B Preferred tendered by or on behalf of such holder for redemption in accordance with the provisions hereof. (b) LIQUIDATED DAMAGES. If the Redemption Price shall not be paid in full within three (3) Trading Days of the fifth (5th) Trading Day after the date of the Optional Redemption Notice, the Company shall pay 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, within the applicable three Trading Day period set forth above, then any holder of Series B Preferred that was subject to such redemption may demand that the Company (i) convert all or any portion of the shares of its Series B 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 B Preferred in a number equal to the Unpaid Portion. (c) BNY CONSENTS. Notwithstanding anything to the contrary contained herein, 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 11. 12 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. "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 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) the Relevant Percentage as of the Conversion Date and (b) the lowest Per Share Market Price during the Measurement Period immediately preceding the Conversion Date; provided, however, that the Conversion Price as of any date of determination on or after May 1, 1998 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. 12. 13 "DIVIDEND PAYMENT DATE" is as defined in Section 2(a). "ISSUABLE MAXIMUM" is as defined in Section 5(b). "JUNIOR SECURITIES" means the Common Stock and all other equity securities of the Company other than the Series B Preferred. "LIQUIDATION PREFERENCE" is as defined in Section 4. "MAXIMUM CONVERSION PRICE" is as defined in the definition of "Conversion Price". "MEASUREMENT PERIOD" shall mean (i) with respect to any Conversion Date occurring during the period from November 1, 1997 to and including November 30, 1997, 14 Trading Days, (ii) with respect to any Conversion Date occurring during the period from December 1, 1997 to and including December 31, 1997, 16 Trading Days, (iii) with respect to any Conversion Date occurring during the period from January 1 to and including January 31, 1998, 18 Trading Days, (iv) with respect to any Conversion Date occurring during the period from February 1 to and including February 28, 1998, 20 Trading Days, (v) with respect to any Conversion Date occurring during the period from March 1 to and including March 31, 1998, 22 Trading Days, (vi) with respect to any Conversion Date occurring during the period from April 1, 1998 to and including April 30, 1998, 24 Trading Days, (vii) with respect to any Conversion Date occurring during the period from May 1, 1998 to and including May 31, 1998, 26 Trading Days, (viii) with respect to any Conversion Date occurring during the period from June 1 to and including June 30, 1998, 28 Trading Days and (ix) with respect to any Conversion Date occurring on or after July 1, 1998, 30 Trading Days. "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) 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 B 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. 13. 14 "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 Amended and Restated Securities Purchase Agreement, dated July 25, 1997. "RECEIVABLES AGREEMENT" means the Accounts Receivable Management and Security Agreement, dated as of July 31, 1995, among the Company and BNY. "REDEMPTION DATE" is as defined in Section 5(e) 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. "RELEVANT PERCENTAGE" shall mean (i) with respect to any Redemption Date occurring during the period from the Closing Date to and including October 31, 1997, 100%, (ii) with respect to any Conversion Date or Redemption Date occurring during the period from November 1, 1997 to and including November 30, 1997, 88.25%, (iii) with respect to any Conversion Date or Redemption Date occurring during the period from December 1 to and including December 31, 1997, 86.75%, (iv) with respect to any Conversion Date or Redemption Date occurring during the period from January 1, 1998 to and including January 31, 1998, 85.25%, (v) with respect to any Conversion Date or Redemption Date occurring during the period from February 1, 1998 to and including February 28, 1998, 84.00%, (vi) with respect to any Conversion Date or Redemption Date occurring during the period from March 1 to and including March 31, 1998, 82.50%, (vii) with respect to any Conversion Date or Redemption Date occurring on or after April 1, 1998, 81.25%. "SHAREHOLDER 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 filed within thirty (30) Trading Days of Closing (as defined in the Purchase Agreement). 14. 15 "UNDERLYING SHARES" means the number of shares of Common Stock into which the Series B Preferred are convertible in accordance with the terms hereof and the Purchase Agreement. "UNPAID PORTION" is as defined in Section 6(a). SECTION 8. SUBORDINATION. (a) The Series B 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 B Preferred. Cash payments contemplated by Sections 5(c), 5(e), and 5(g) 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 B 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(c), 5(e), and 5(g) 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 B 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 B 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, be received by the holder of the Series B Preferred, such payment shall be held in trust by such holder for the benefit of BNY and shall be delivered forthwith to BNY for application to BNY Bank Obligations, in the form received with any necessary endorsements or assignment. SECTION 9. REDEMPTION OR PURCHASE OF JUNIOR SECURITY 15. 16 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 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. The foregoing provision shall not restrict the Company from adopting and implementing a Stockholder Rights Plan pursuant to Delaware General Corporate Law. 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. 17 IN WITNESS WHEREOF, Yes! Entertainment Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by Donald D. Kingsborough, its Chief Executive Officer, and attested by Sol Kershner, its Secretary this 21st day of July, 1997. YES! ENTERTAINMENT CORPORATION /s/ Donald D. Kingsborough _________________________________________ Name: Donald D. Kingsborough Title: Chief Executive Officer Attest: /s/ Sol Kershner _________________________________ Name: Sol Kershner Title: Secretary 17. 18 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 B 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 4.19 of the Amended and Restated Securities Purchase Agreement between the Company, Infinity Investors Limited, Fairway Capital Limited and Cappello & Laffer Capital Corp. dated July 25, 1997. 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: The Company undertakes to promptly upon its receipt of this conversion notice (and, in any case prior to the time it effects the conversion requested hereby), notify the converting holder by facsimile of the number of shares of Common Stock outstanding on such date and the number of shares of Common Stock which would be issuable to the holder if the conversion requested in this conversion would result in it owning in excess of 4.9% of the outstanding shares of Common Stock on such date, the Company shall convert up to an amount equal to 4.9% of the outstanding shares of Common Stock and issue to the holder one or more certificates representing shares of Preferred Stock which have not been converted as a result of this provision. 18. EX-4.3 4 AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT 1 EXHIBIT 4.3 - -------------------------------------------------------------------------------- AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT Between YES! ENTERTAINMENT CORPORATION, INFINITY INVESTORS LIMITED, FAIRWAY CAPITAL LIMITED, and CAPPELLO & LAFFER CAPITAL CORP. --------------------------- Dated July 25, 1997 --------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- SECTION 1. CERTAIN DEFINITIONS........................................................................... 1 1.1 Certain Definitions........................................................................... 1 SECTION 2. PURCHASE OF SECURITIES........................................................................ 6 2.1 Exchange of Securities; Issuance of Securities................................................ 6 2.2 Closing....................................................................................... 6 SECTION 3. REPRESENTATIONS AND WARRANTIES................................................................ 7 3.1 Representations and Warranties of the Company................................................. 7 3.2 Representations and Warranties of the Purchasers.............................................. 11 SECTION 4. OTHER AGREEMENTS OF THE PARTIES............................................................... 13 4.1 Transfer Restrictions......................................................................... 13 4.2 Stop Transfer Instruction..................................................................... 14 4.3 Furnishing of Information..................................................................... 14 4.4 Copies and Use of Disclosure Materials........................................................ 15 4.5 Blue Sky Laws................................................................................. 15 4.6 Integration................................................................................... 15 4.7 Certain Agreements............................................................................ 15 4.8 Purchaser Ownership of Common Stock........................................................... 16 4.9 Listing of Underlying Shares.................................................................. 16 4.10 Purchaser's Rights if Trading in Common Stock is Suspended or Delisted...................................................................................... 16 4.11 No Violation of Applicable Law................................................................ 17 4.12 Repurchase Restrictions....................................................................... 17 4.13 Legal Opinion................................................................................. 17 4.14 Notice of Breaches............................................................................ 17 4.15 Conversion Procedures......................................................................... 18 4.16 Transfer Agent................................................................................ 18 4.17 Right of First Refusal........................................................................ 18 4.18 Restriction on Debt........................................................................... 19 4.19 Restriction on Short Sales.................................................................... 19 4.20 Restrictions on Conversion and Sale........................................................... 19 SECTION 5. MISCELLANEOUS................................................................................. 21 5.1 Fees and Expenses............................................................................. 21 5.2 Entire Agreement; Amendments.................................................................. 21 5.3 Notices....................................................................................... 21 5.4 Amendments; Waivers........................................................................... 22 5.5 Headings...................................................................................... 22 5.6 Successors and Assigns........................................................................ 23
i 3 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 5.7 No Third-Party Beneficiaries.................................................................. 23 5.8 Governing Law................................................................................. 23 5.9 Survival...................................................................................... 23 5.10 Counterpart Signatures........................................................................ 23 5.11 Publicity..................................................................................... 23 5.12 Severability.................................................................................. 23 5.13 Remedies...................................................................................... 24 Exhibit A Form of Certificate of Designation Exhibit B Form of 5% Convertible Debenture Exhibit C Form of Registration Rights Agreement 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 4 AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT THIS AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT, dated July 25, 1997 (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"), FAIRWAY CAPITAL LIMITED, a corporation organized and existing under the laws of Nevis, West Indies ("Fairway" and, together with Infinity, the "Original Purchasers"), and CAPPELLO & LAFFER CAPITAL CORP., a California corporation ("Cappello") (each a "Purchaser," and collectively, the "Purchasers"). WHEREAS, the Company and 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, subject to the terms of this Agreement the Company and the Original Purchasers desire to amend and restate the March Purchase Agreement, to modify certain terms with respect to the March Debentures and to exchange the Series A Preferred; WHEREAS, the Company and the Original Purchasers pursuant to Section 5.4 of the March Purchase Agreement agree to amend the March Purchase Agreement and restate the March Purchase Agreement in its entirety; 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: 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 1 5 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 April 30, 1997. "APPLICABLE CUMULATIVE CONVERSION PERCENTAGE" is as set forth in Section 4.20(b)(ii)(A). "APPLICABLE CONVERSION PRICE" is as defined in Section 4.20(g). "APPLICABLE SALES PERCENTAGE" is as set forth in Section 4.20(b)(ii)(B). "APPRAISER" means a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of national standing retained to determine the Warrant Repurchase Price in accordance with the terms hereof. "BNY" means BNY Financial Corporation, 1290 Avenue of the Americas, New York, New York 10104. "BNY BANK OBLIGATIONS" means the borrowings and interest due thereon (including, without limitation, any interest accruing after the commencement of any case, proceeding or other action relating to the liquidation, dissolution, assignment for the benefit of creditors, receivership, arrangement, bankruptcy, insolvency or reorganization of the Company regardless of whether such interest is allowable, payable or accruable to BNY in such case, proceeding or other action) under the Receivables Agreement, as the same may from time to time be amended, supplemented, otherwise modified, replaced or refinanced. "BUSINESS DAY" means any day 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 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. 2 6 "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. "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. "MAJOR PURCHASER" is as defined in Section 4.17. "MATERIAL ADVERSE EFFECT" shall have the meaning set forth in Section 3.1(a). "OWNERSHIP PERCENTAGE" is as set forth in schedule 4.20(b). "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 B Convertible Preferred Stock, par value $.001 per share, with the respective rights, preferences and privileges set forth in the Certificate of Designation. 3 7 "PREPAYMENT DATE" is as defined in the Debenture. "PREPAYMENT PRICE" is as defined in the Debenture. "PRIVATE PLACEMENT" is as defined in Section 4.17. "PRIVATE PLACEMENT NOTICE" is as defined in Section 4.17. "RECEIVABLES AGREEMENT" means the Accounts Receivable Management and Security Agreement, dated as of July 31, 1995, among the Company and BNY. "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. "REGISTRATION RIGHTS AGREEMENT" means the Amended and Restated Registration Rights Agreement of even date herewith, in the form attached hereto as Exhibit C, as the same may be amended, supplemented or otherwise modified in accordance with its terms. "SALES RESTRICTION" is as set forth in Section 4.20(b)(ii)(B). "SEC DOCUMENTS" shall have the meaning set forth in Section 3.1(j). "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 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 4 8 (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 4.16. "UNDERLYING SECURITIES REGISTRATION STATEMENT" means the registration statement contemplated by the Registration Rights Agreement and relating to the Underlying Shares and Warrant Shares. "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. "WARRANT EXERCISE PRICE" means the "Exercise Price" as defined in the Warrants. "WARRANT REPURCHASE PRICE" with respect to any Warrant delivered hereunder shall mean (A) if the average Per Share Market Price for the five Trading Days immediately preceding the date of the notice triggering a repurchase hereunder is greater than the Warrant Exercise Price, the product of (1) the number of shares of Common Stock issuable upon exercise in full of such Warrant (less such number of shares of Common Stock as shall have been previously issued upon conversion of such Warrant) and (2) the average Per Share Market Price for the five Trading Days immediately preceding the date of the notice triggering a repurchase hereunder, less the Warrant Exercise Price; or (B) if the average Per Share Market Price for the five Trading Days immediately preceding the date of the notice triggering a repurchase hereunder is less than or equal to the Warrant Exercise Price, such amount as is determined in good faith by the Purchasers; provided, however, that, if the Company notifies the Purchasers within 10 Business Days of its receipt of such a valuation by the Purchaser pursuant to clause (B) above that it disagrees with such valuation, within 10 Business Days of such notice, an Appraiser mutually acceptable to each of the Purchasers and the Company shall determine such amount; provided, further, if the Company and the Purchasers fail to appoint such mutually acceptable Appraiser within 10 Business Days of the expiration of such 10 day period, each of 5 9 the Company and the Purchasers shall appoint an Appraiser, who (within 10 Business Days of such appointment) shall appoint a third Appraiser to determine conclusively the repurchase price for such Warrant, with the fees and disbursements of any such Appraiser being shared equally by the Company and the Purchasers. "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. PURCHASE 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 March Debentures and Series A Preferred currently held by it: (i) Debentures in an aggregate principal amount of $1,717,481.83 (the "Infinity Debenture") and (ii) 343,252 shares of Preferred Stock (the "Infinity Preferred Shares"). (b) FAIRWAY. Subject to the terms and conditions set forth in this Agreement, Fairway shall receive and the Company shall issue and deliver upon surrender by Fairway of the March Debentures and Series A Preferred currently held by it: (i) Debentures in an aggregate principal amount of $190,831.72 (the "Fairway Debenture") and (ii) 38,061 shares of Preferred Stock (the "Fairway Preferred Shares"). (c) CAPPELLO. Subject to the terms and conditions set forth in this Agreement, Cappello shall receive and the Company shall issue and deliver upon surrender by Cappello of the March Debentures and Series A Preferred currently held by it: (i) Debentures in an aggregate principal amount of $47,707.84 (the "Cappello Debenture") and (ii) 9,533 shares of Preferred Stock (the "Cappello Preferred Shares"). (d) DEFINITIONS. The Infinity Debenture, Fairway Debenture and Cappello Debenture are sometimes collectively referred to herein as the "Debentures." The Infinity Preferred Shares, Fairway Preferred Shares and Cappello Preferred Shares are sometimes referred to collectively herein as the "Shares." The Shares, Debentures, Warrants, Underlying Shares and Warrant Shares are sometimes collectively referred to as the "Securities." 2.2 CLOSING. (a) The closing of the exchange of the March Debentures and Debentures and of the Series A Preferred and 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 Purchasers 6 10 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 Purchaser, as specified in Schedule 2.2(b) hereto, to the Persons (or as directed thereby), registered in the names and in the amounts set forth thereon, 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 Purchaser shall deliver to the Company (i) the March Debentures and Series A Preferred issued to such Purchaser in connection with the closing of the transactions under the March Purchase Agreement and (ii) all documents, instruments and writings required to have been delivered at or prior to the Closing by such Purchaser 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 Purchasers 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 Warrants, the Registration Rights Agreement, the Convertible Debentures and the Certificate of Designation and otherwise to carry out its obligations hereunder and thereunder. This Agreement, the Registration Rights Agreement, the Convertible Debentures, the Warrants 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 7 11 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 Schedule 3.1(c). No shares of Common Stock are entitled to preemptive or similar rights. Except as specifically disclosed in Schedule 3.1(c), there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or, except as a result of the purchase and sale of the Convertible Debentures, Shares and Warrants hereunder, 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 bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. 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, SHARES AND WARRANTS. 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 paid for in accordance with the terms hereof, shall be validly issued, fully paid and nonassessable. The Warrants are duly authorized, and when issued and paid for in accordance with the terms hereof, shall be validly issued, free and clear of all Liens. 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) two times the number of Underlying Shares, assuming in each case such conversion occurred on the 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 and the Convertible Debentures, the Certificate of Designation, the Underlying Shares will be duly authorized, validly issued, fully paid nonassessable, free and clear of all Liens; and when issued upon exercise of the Warrants in accordance with their respective terms, the Warrant Shares will be duly authorized, validly issued, fully paid, nonassessable and 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 8 12 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, 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 with the Commission of an 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. Except as specifically set forth in Schedule 3.1(g), 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 (ii) could, individually or in the aggregate, if adversely determined, have a Material Adverse Effect or (iii) 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, 9 13 in any such case, 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 the Transaction Documents. (i) CERTAIN FEES Except for $200,000, the Cappello Debenture and the Cappello Preferred Shares paid by the Company to Cappello, 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 Purchasers set forth in Section 3.2, the offer and sale of the Debentures, Shares, the Warrants, the Underlying Shares and the Warrant Shares are exempt from registration under Section 5 of the Securities Act of 1933, as amended (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 Warrants, the Underlying Shares or the Warrant Shares to the registration requirements of Section 5 of the Securities Act. (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, for the two years preceding the date hereof (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 10 14 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 and 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 and issuance of the Debentures and the 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. (n) SOLICITATION MATERIALS. The Company has not (i) distributed any offering materials in connection with the offering and sale of the Debentures, the Shares, the Warrants, the Underlying Shares or the Warrant Shares other than the Disclosure Materials or (ii) solicited any offer to buy or sell the Debentures, the Shares, the Warrants, the Underlying Shares or the Warrant Shares by means of any form of general solicitation or advertising. (o) MARGIN REQUIREMENTS. The Company does not intend to, and will not, use the proceeds of the offer and sale of the Debentures, Shares and Warrants 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 G, T, U or X of the Board of Governors of the Federal Reserve System. 3.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each of the Purchasers, severally and not jointly, hereby represents and warrants to the Company as follows: (a) ORGANIZATION; AUTHORITY. Such Purchaser 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 by the Registration Rights Agreement and otherwise to carry out its obligations hereunder and thereunder. The acquisition of the Debentures, Shares and Warrants to be purchased by such Purchaser hereunder has been duly authorized by all necessary action on the part of such Purchaser. Each of this Agreement and the Registration Rights Agreement has been duly executed and delivered by such Purchaser and constitutes the valid and legally binding obligation of such Purchaser, 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. 11 15 (b) INVESTMENT INTENT. Such Purchaser is acquiring the Debentures, Shares and the Warrants to be purchased by it hereunder, and the Underlying Shares and the Warrant Shares relating to such Debentures, Shares and Warrants, for its own account for investment purposes only and not with a view to or for distributing or reselling such Debentures, Shares, Underlying Shares, Warrants or Warrant Shares or any part thereof or interest therein, without prejudice, however, to such Purchaser'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, Underlying Shares, Warrants or Warrant 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) PURCHASER STATUS. At the time such Purchaser was offered the Debentures, Shares and Warrants to be acquired by it hereunder, it was and at the date hereof, it is, and at each date it exercises Warrants it will be, an "accredited investor" as defined in Rule 501(a) under the Securities Act. (d) INVESTMENT COMPANY. The Purchaser 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 PURCHASER. Such Purchaser, 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 PURCHASER TO BEAR RISK OF INVESTMENT. Such Purchaser 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. (g) PROHIBITED TRANSACTIONS. The securities to be acquired by such Purchaser 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 Purchaser 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 12 16 decision with respect to the investment and to verify the accuracy and completeness of the information contained in the Disclosure Materials. (i) RELIANCE. Such Purchaser understands and acknowledges that (i) the Debentures, the Shares and the Warrants 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 Purchaser hereby consents to such reliance. The Company acknowledges and agrees that the Purchasers 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 Purchaser should decide to dispose of any portion of the principal amount of the Debentures, any of the Shares or any portion of the Warrant to be purchased by it hereunder (and upon conversion or exercise thereof, any Underlying Shares or Warrant Shares, as applicable), such Purchaser 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. No Purchaser may dispose of any portion of such securities pursuant to clause 4.1(a)(iii) unless such Purchaser provides prior written notice thereof to the Company and complies with the provisions of the immediately following sentence. In connection with any transfer of any Debentures, Warrants, Underlying Shares or Warrant 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, Warrants, Underlying Shares or Warrant Shares, as the case may be, is being made in compliance with the Securities Act. Any transfer of the Underlying Shares shall be subject to the transfer and sales restrictions set forth in Sections 4.20 of this Agreement. (b) The Purchasers 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, the Underlying Shares, the Warrants and the Warrant Shares to be modified as applicable: NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE [OR EXERCISABLE] HAVE BEEN REGISTERED 13 17 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 AN AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT, DATED AS OF JULY 25, 1997, AND EFFECTIVE AS OF APRIL 30, 1997 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 or exercise of Warrants 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, Warrants, Underlying Shares and Warrant 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 Purchaser, upon request, with a substitute certificate or certificates, free from such legend at such time as such legend is no longer applicable. Each Purchaser agrees that, in connection with any transfer of Underlying Shares or Warrant Shares by it pursuant to an effective registration statement under the Securities Act, such Purchaser 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, Underlying Shares, Warrants or Warrant Shares. 4.2 STOP TRANSFER INSTRUCTION. For so long as an Underlying Securities Registration Statement is effective, the Company may 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. 14 18 (a) As long as any Purchaser owns Debentures, Shares, Underlying Shares, Warrants or Warrant 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 promptly furnish each Purchaser with 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 Purchaser annual and quarterly financial statements, together with a 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 Purchasers of any documents or financial statements it delivers to BNY pursuant to Section 11(a), 11(b) or 11(c/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 Purchasers 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 Purchasers in connection with resales of the Underlying Shares or the Warrant 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 and the Warrant Shares under the securities or Blue Sky laws of such jurisdictions as each Purchaser 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, the Warrants, the Underlying Shares or the Warrant Shares in a manner that would require the registration under the Securities Act of the sale of the Debentures, the Shares, the Warrants, the Underlying Shares or the Warrant Shares to the Purchasers. 4.7 CERTAIN AGREEMENTS. (a) From the date hereof through the third anniversary hereafter, the Company shall not and shall cause the Subsidiaries not to, without the consent of the Purchasers, (i) amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any 15 19 rights of the Purchasers 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, 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 PURCHASER OWNERSHIP OF COMMON STOCK. No Purchaser may use its ability to convert the Debentures or Shares issued to it hereunder or to use its ability to acquire shares of Common Stock upon exercise of the Warrant to be issued to it pursuant to the terms hereof to the extent that such conversion or exercise would result in that Purchaser beneficially owning (for purposes of Rule 13d-3 under the Exchange Act) more than 4.9% of the outstanding shares of the Common Stock; provided, however, that the provisions of this Section 4.8 shall not apply to any forced conversion by the Company pursuant to Section 4(b) of the Debentures or pursuant to Section 5(b) of the Certificate of Designation and, provided, further, that if 10 days have elapsed since a Purchaser shall have declared an "Event of Default" (as such term is defined in the Debentures), the provisions of this Section 4.8 shall be null and void ab initio. 4.9 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 Purchaser evidence of such filings and listings, and shall maintain such listings as long as any Purchaser 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 Purchasers shall reasonably agree. 4.10 PURCHASER'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 Purchaser'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 Purchaser at the Prepayment Price as calculated on the date 16 20 of such notice, all of the Shares owned by each Purchaser 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, 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 4.10 is paid in full. 4.11 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 4.10. 4.12 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 lender of the Company or any of the Subsidiaries, or by the holders of any class of securities of the Company, 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 4.12 shall be construed as a waiver by the Purchaser 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. 4.13 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. 4.14 NOTICE OF BREACHES. Each of the Company and each Purchaser shall give prompt written notice to the other of any breach 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, with respect 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 4.14 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 Purchaser 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 17 21 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. 4.15 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 Purchasers to exercise its right of conversion smoothly and expeditiously. 4.16 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 written consent of the Purchasers. 4.17 RIGHT OF FIRST REFUSAL. Except for sales of stock to key employees and Company matching contributions pursuant to the Company's 401(k) plan, the Company may not enter into any transaction prior to one hundred eighty days from the Closing Date with a Person other than the Major Purchasers (as hereafter defined) to sell or otherwise dispose of securities in any transaction intended not to be subject to the registration requirements of the Securities Act (a "Private Placement"), unless the Company first provides a written notice (the "Private Placement Notice") to each Major Purchaser describing the terms and conditions of such Private Placement (to which the Company shall attach any written term sheet or other similar writing with respect thereto). Infinity and Fairway (each a "Major Purchaser") shall have the right, exercisable within five (5) Business Days of its receipt of such notice, to provide the Company with a written notice of its intention to provide the financing described in the Private Placement Notice on terms no less favorable to the Company than as set forth in the Private Placement Notice. If a Major Purchaser indicates a desire to provide, in the aggregate, in excess of the financing requested in the Private Placement Notice, such Major Purchaser shall have the right to provide up to such portion of the Private Placement as corresponds to the portion, expressed as a percentage, that the principal amount of Debentures and stated values of Preferred Stock, then held by such Major Purchaser bears to the aggregate principal amount of Debentures in the aggregate, then outstanding. If any Major Purchaser shall fail to elect to provide its respective pro rata portion of the Private Placement financing, the other Major Purchaser shall be entitled to provide a pro rata portion (determined in the manner referenced above) of such shortfall. If a Major Purchaser fails to elect to exercise the right of first refusal set forth in this Section, then the Company may consummate the Private Placement on the terms and to the Persons (or Affiliates of such Persons) set forth in the Private Placement Notice; provided, however, that if the Company shall fail to consummate such Private Placement within forty-five (45) days after the date of the Private Placement Notice relating thereto, the Company may not consummate such Private Placement without again complying with the terms of first refusal set forth in this Section. The provisions of this Section shall not apply to (i) any issuance of Company securities pursuant to a bona fide employee stock option, stock purchase or non-employee director plan duly adopted by the Company or (ii) any Private Placement Notice if all, or substantially all, of the proceeds of such Private Placement shall be proposed to be used and shall actually be used to repay, redeem or retrieve the Securities. 18 22 4.18 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 Purchasers hereunder or pursuant hereto, the Company shall not, and shall not permit any Subsidiary to, without the prior written consent of the Purchasers 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. 4.19 RESTRICTION ON SHORT SALES. Each Purchaser covenants and agrees not to engage in any Short Sales of Common Stock so long as the Purchasers or any of their affiliates, as defined in the Exchange Act, hold any Shares or Debentures; provided, however, that each Major Purchaser may engage in sales of Common Stock issuable to a Major Purchaser 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. 4.20 RESTRICTIONS ON CONVERSION AND SALE. (a) DEFINITIONS. "Applicable Conversion Price" shall mean the "volume-weighted average" price of shares of Common Stock as defined and reported by Bloomberg, L.P. for the twenty (20) consecutive Trading Day period immediately preceding the first day of the month in which the conversion occurs starting on the fourth month after the Agreement Effective Date. (b) RESTRICTIONS. (i) Each Purchaser agrees that they shall not sell nor offer to sell any of the Underlying Shares until October 31, 1997, except in accordance with the terms of the Securities. (ii) Subject to, and in addition to, the provisions of the Securities and Section 4.20(b) above, beginning on November 1, 1997, each Purchaser is subject to the following restrictions with respect to the conversion and sale of the Securities. (a) In any calendar month, each Purchaser may convert when aggregated with all previous conversions by such Purchaser up to the "Applicable Cumulative Conversion Percentage" (as set forth below) of the aggregate Liquidation Preference of the Shares held by such Purchaser as of the date of such conversion during the relevant month and may convert, when aggregated with all previous conversions by such Purchaser, up to the Applicable Conversion Percentage of aggregate principal amount of (and unpaid interest on) the Debentures held by such Purchaser as of the date of such conversion during the relevant month. For the purposes of this Section 4.20, the Applicable Cumulative Conversion Percentage shall vary with the Applicable Conversion Price as set forth in the table below: 19 23
Applicable Cumulative Applicable Conversion Price Conversion Percentage --------------------------- --------------------- Less than $4.00 15% Equal to or greater than $4.00 but less than $5.00 17.5% Equal to or greater than $5.00 but less than $6.00 20% Equal to or greater than $6.00 but less than $7.00 22.5% Equal to or greater than $7.00 but less than $10.00 25% Equal to or greater than $10.00 but less than $12.00 30% Equal to or greater than $12.00 100%
(b) In any calendar week, any Purchaser may not sell more shares of Common Stock, acquired upon conversion of Shares or Debentures, than the "Sales Restriction" which shall be the number equal to the product of (a) such Purchaser's Ownership Percentage as set forth in Schedule 4.20(b); (b) the Applicable Sales Percentage (as set forth below); and (c) the greater of the average weekly trading volume of Common Stock, as reported by Bloomberg, L.P., for the following periods: (i) the calendar week preceding the week in which such sale occurs; (ii) for the four calendar weeks preceding the week in which such sale occurs; or (iii) for the thirteen calendar weeks preceding the week in which sale occurs; provided, however, that beginning on the first day of the thirteenth month after the Agreement Effective Date, each Purchaser may sell up to the greater of (x) Sales Restriction or (y) the number of shares of Common Stock, acquired upon conversion of Shares or Convertible Debentures, equal to the product of (i) such Purchaser's Ownership Percentage and (ii) 100,000. For the purposes of this Section 4.20, the "Applicable Sales Percentage" shall vary with the Per Share Market Price and with the month after the Agreement Effective Date in which such sale occurs, as set forth in the table below:
Applicable Sales Percentage ----------------------------- Months Four After Through Month Per Share Market Price Twelve Twelve ---------------------- ----------- ------ Less than $4.00 10% 20% Equal to or greater than $4.00 but less than $5.00 12.5% 25% Equal to or greater than $5.00 but less than $6.00 15% 30% Equal to or greater than $6.00 but less than $7.00 17.5% 35% Equal to or greater than $7.00 but less than $10.00 20% 40% Equal to or greater than $10.00 but less than $12.00 22.5% 45% Equal to or greater than $12.00 100% 100%
(c) On each Conversion Date, a Purchaser shall make a representation that such Purchaser has not violated Section 4.19 of this Agreement. 20 24 SECTION 5. MISCELLANEOUS 5.1 FEES AND EXPENSES. Each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement, except as set forth in the Registration Rights Agreement; provided, however, the Company shall pay the legal fees and expenses of the Major Purchasers 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 Purchaser shall be responsible for such Purchaser'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 definitive Debentures, the Certificate of Designation, the Registration Rights Agreement 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 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 21 25 c/o Trident Trust Company (Cayman) Limited 1 Capital Place P.O. Box 847 Grand Cayman, Cayman Island, B.V.I. Attn: G. McLaughlin Facsimile No.: (809) 949-0881 If to Fairway: Fairway Capital Limited 38 Hertferd Street London, England G1Y7T6 Attn: J.A. Loughran Facsimile No.: 011-44-171-355-4975 With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Attn: Eric L. Cohen Facsimile No.: (212) 541-4630 and Mr. Stuart Chasanoff c/o HW Finance 160 Elm Street, Suite 4000 Dallas, Texas 75201 Facsimile No.: (214) 720-1662 If to Cappello: Cappello & Laffer Capital Corp. 1299 Ocean Avenue Suite 306 Santa Monica, CA 90401 Attn: Gerard Cappello Facsimile No.: (310) 393-4838 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 Company and the Purchasers, 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. 22 26 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 Purchasers may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other, except that each Purchaser 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, except that the representations, warranties and other agreements contained herein of the Company are intended for the benefit of and may be relied upon and enforced by Brown Simpson, LLC to the extent such representations, warranties and agreements relate to the March Warrant delivered to Brown Simpson, LLC. 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 Purchaser 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 a registration statement contemplated by this transaction the Company and the Purchasers 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 other, which consent shall not be unreasonably withheld or delayed, except for such releases or public statements that are required by law. Any press release or public statement made subsequent to 23 27 the filing of the registration statement contemplated by this transaction shall not contain any statement regarding the trading on investment of the Major Purchasers in connection with this Agreement, the March Agreement or the predecessor thereto, without first obtaining the consent of such Major Purchasers, 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 Purchasers 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 Purchasers hereunder with respect to the subsequent transfer of Debentures, Shares and the Underlying Shares. Each of the Company and the Purchasers 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. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] [SIGNATURE PAGE FOLLOWS] 24 28 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:______________________________________ Name:____________________________________ Title:___________________________________ INFINITY INVESTORS LIMITED By:______________________________________ Name:____________________________________ Title:___________________________________ FAIRWAY CAPITAL LIMITED By:______________________________________ Name:____________________________________ Title:___________________________________ CAPPELLO & LAFFER CAPITAL CORP. By:______________________________________ Name:____________________________________ Title:___________________________________ 25 EX-99.1 5 PRESS RELEASE 1 FOR IMMEDIATE RELEASE CONTACT: Jeffrey Volk/John W. Heilshorn Lippert/Heilshorn & Associates Inc. (212) 838-3777 Jeff@lhai.com YES! ENTERTAINMENT CORPORATION ANNOUNCES STRUCTURE OF CONVERTIBLE SECURITIES PLEASANTON, CALIFORNIA, AUGUST 4, 1997 - YES! ENTERTAINMENT CORPORATION (Nasdaq NM Symbol: YESS) today announced that it has entered into agreements with the institutional investors who purchased convertible securities in the first quarter of 1997 restructuring the terms of the prior agreements with respect to those securities. The transaction was agreed to in principle in the second quarter of 1997 and has an effective date of April 30, 1997. The new terms provide for a lockup until November 1, 1997, prohibit short sales, and place significant restraints on the conversion into and sale of the common stock issuable upon conversion. All prior formulas for determining the conversion price of the securities have been eliminated in favor of a discount to the value of the Company's common stock at the time of conversion. The securities are redeemable at the option of the Company at any time. Any amount of the securities remaining after five years will convert at the then-prevailing conversion price. Commenting on the restructure, Don Kingsborough, chairman and chief executive officer of YES! Entertainment Corporation, stated, "We are pleased to have completed the restructure of this investment and appreciate the cooperation of the investor group. We believe that the new terms of these securities more closely align the interests of the convertible securities investors with those of the Company's common stockholders." Cappello & Laffer Capital Corp. was the Company's exclusive financial advisor in connection with this transaction. The Company intends to file a Current Report on Form 8-K with the Securities and Exchange Commission regarding the transactions described herein. The form of documents executed by the Company that contain the specific terms of the transaction will be included therewith as exhibits. The Company's business is subject to a number of business risks and the Company's financial results may vary materially as a result of the realization of such risks, including any one or more of the known risks identified in the Company's filings under the Securities Exchange Act of 1934, in particular under the section captioned Business Factors" of the Company's Form 10-Q for the quarter ended March 31, 1997 filed and for the quarter ended June 30, 1997 to be filed with the Securities and Exchange Commission. YES! Entertainment Corporation develops manufactures, and markets toys and other entertainment products, including a variety of interactive products. YES! uses innovative technology to design products that are fun for children and build on their natural creativity. -----END PRIVACY-ENHANCED MESSAGE-----