-----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, HVtpP1b9u2k7WzqxfxAewXO6GUQPIrd4n9sZCl8SO8PEYljAIt63NcHR4VjpOARm +/PAd7VhUFhUN9VhmXUf0A== 0000944209-97-000354.txt : 19970326 0000944209-97-000354.hdr.sgml : 19970326 ACCESSION NUMBER: 0000944209-97-000354 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970325 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970325 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: 97562498 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 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) March 25, 1997 ----------------------------- YES! Entertainment Corporation - -------------------------------------------------------------------------------- (Exact Name of the Registrant as Specified in Its Charter) Delaware - -------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation) 0-25916 94-3165290 - ------------------------- --------------------------------- (Commission File Number) (I.R.S. Employer 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) - ------------------------------------------------------------------------------ (Former Name or Former Address, if Changed Since Last Report) Item 5. Other Events. ------------ In a press release disseminated on March 24, 1997, the Registrant publicly announced that it has entered into an agreement superseding a private placement to certain institutional buyers entered into on January 28, 1997 by which the Registrant raised $10 million through the sale of convertible subordinated debentures and warrants. The Registrant and such institutional buyers agreed to supersede the transaction by issuing convertible subordinated debentures, convertible preferred stock and warrants. The information which is set forth in the Registrant's Press Release dated March 24, 1997, filed as Exhibit 99.1 hereto, is incorporated herein by reference. Item 7. Financial Statements and Exhibits. --------------------------------- (c) Exhibits 4.1 Certificate of Designation of the Series A Convertible Preferred Stock. 4.2 Form of Convertible Subordinated Debenture dated March 18, 1997. 4.3 Form of Warrant dated March 18, 1997. 99.1 Press Release dated March 24, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: March 25, 1997 YES! ENTERTAINMENT CORPORATION By: /s/ Bruce D. Bower ---------------------------------- Bruce D. Bower Executive Vice President, General Counsel and Secretary INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ---------------------------------------------------------------- 4.1 Certificate of Designation of the Series A Convertible Preferred Stock. 4.2 Form of Convertible Subordinated Debenture dated March 18, 1997. 4.3 Form of Warrant dated March 18, 1997. 99.1 Press Release dated March 24, 1997. EX-4.1 2 CERTIFICATION OF DESIGNATION EXHIBIT 4.1 CERTIFICATE OF DESIGNATION OF SERIES A CONVERTIBLE PREFERRED STOCK OF YES! ENTERTAINMENT CORPORATION The undersigned, Donald D. Kingsborough and Bruce D. Bower, hereby certify that: I. They are the duly elected and acting Chief Executive Officer and Secretary, respectively, of YES! Entertainment Corporation, a Delaware corporation (the "Company"). ------- II. The Certificate of Incorporation of the Company authorizes 2,000,000 shares of preferred stock, par value $.001 per share, of which no shares are issued and outstanding. III. The following is a true and correct copy of the consent duly adopted by the Board of Directors of the Company (the "Board of Directors") ------------------ dated March 17, 1997, which constituted all requisite action on the part of the Company for adoption of such consent. RESOLUTIONS WHEREAS, the Board of Directors is authorized to provide for the issuance of shares of preferred stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designations, powers, preferences and rights and the qualifications, limitations or restrictions thereof; WHEREAS, the Board of Directors desires, pursuant to its authority as aforesaid, to designate a new series of preferred stock, set the number of shares constituting such series and fix the rights, preferences, privileges and restrictions of such series. NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby designates a new series of preferred stock and the number of shares constituting such series and fixes the designations, powers, preferences, rights, qualifications, limitations, restrictions and privileges relating to such series as follows: Section 1. Designation, Amount and Par Value. The series of preferred --------------------------------- stock shall be designated as the Series A Convertible Preferred Stock (the "Preferred Stock"), and the number of shares so designated shall be 85,000 - ---------------- (which shall not be subject to increase). Each share of Preferred Stock shall have a par value of $.001 per share and a stated value of $100 per share (the "Stated Value"). ------------ 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 (as a percentage of the Stated Value per share) equal to 6-1/2% per annum, payable, in cash or shares of Common Stock, semi-annually in arrears, but in no event later than the Conversion Date (as hereinafter defined). Notwithstanding the foregoing, the Company may not pay dividends in cash unless it has received the prior written consent of BNY (as defined in Section 7) to such payment, free from the subordination provisions of Section 8. Dividends on the Preferred Stock shall accrue daily commencing the Original Issue Date (as defined in Section 7), and shall be deemed to accrue on such date whether or not earned or declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends. The party that holds the Preferred Stock on an applicable record date for any dividend payment will be entitled to receive such dividend payment and any other accrued and unpaid dividends which accrued prior to such dividend payment date, without regard to any sale or disposition of such Preferred Stock subsequent to the applicable record date but prior to the applicable dividend payment date. Except as otherwise provided herein, if at any time the Company pays less than the total amount of dividends then accrued on account of the Preferred Stock, such payment shall be distributed ratably among the holders of the Preferred Stock based upon the number of shares held by each holder. Payment of dividends on the Preferred Stock is further subject to the provisions of Section 5(a)(ii). (b) Notwithstanding anything to the contrary contained herein, the Company may not issue shares of Common Stock in payment of dividends (and must deliver cash in respect thereof) on the Preferred Stock if: (i) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes, or held as treasury stock, is insufficient to issue such dividends to be paid in shares of Common Stock; (ii) the shares of Common Stock to be issued in respect of such dividends are not registered for resale pursuant to an effective registration statement that names the recipient of such dividend as a selling stockholder thereunder; (iii) the shares of Common Stock to be issued in respect of such dividends are not listed on the Nasdaq SmallCap Market or Nasdaq National Market and any other exchange or quotation system on which the Common Stock is then listed for trading; or (iv) if the recipient thereof is a "Purchaser" under the Purchase Agreement (or an affiliate thereof) and the issuance of such shares would result in such recipient beneficially -2- owning more than 4.9% of the issued and outstanding shares of Common Stock provided, however, if ten Business Days shall have elapsed from the date that - -------- ------- the Holder under the Convertible Debentures (as that term is defined in Section 7) shall have declared an Event of Default (as defined thereunder) as having occurred, then the provisions of this clause (iv) shall be null and void, ab -- initio. - ------ (c) So long as any Preferred Stock shall remain outstanding, neither the Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire directly or indirectly any Junior Securities (as defined in Section 7) (except that the Company may (i) repurchase or redeem up to 10,000 shares of Common Stock and (ii) repurchase or redeem shares of Common Stock of an employee upon such employee's termination of employment with the Company), nor shall the Company directly or indirectly pay or declare any dividend or make any distribution (other than a dividend or distribution described in Section 5) upon, nor shall any distribution be made in respect of, any Junior Securities, nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities unless all dividends on the Preferred Stock for all past dividend periods shall have been paid free of the subordination provisions of Section 8. Section 3. Voting Rights. Except as otherwise provided herein and as ------------- otherwise required by law, the Preferred Stock shall have no voting rights. However, so long as any shares of Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the shares of the Preferred Stock then outstanding, alter or change adversely the powers, preferences or rights given to the Preferred Stock or authorize or create any class of stock ranking as to dividends or distribution of assets upon a Liquidation (as defined in Section 4) senior to, prior to or pari passu with the Preferred Stock. Section 4. Liquidation. Upon any liquidation, dissolution or ----------- winding- up of the Company, whether voluntary or involuntary (a "Liquidation"), ----------- the holders of Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Preferred Stock an amount equal to the Stated Value plus all accrued but unpaid dividends per share, whether declared or not, before any distribution or payment shall be made to the holders of any Junior Securities, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed shall be distributed among the holders of Preferred Stock ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. Any of a sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than 331/3% of the voting power of the Company is disposed of, or a consolidation or merger of the Company with or into any other company or companies or a reclassification of the Common Stock shall not be treated as a Liquidation, but instead shall be subject to the provisions of Section 5. The Company shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each record holder of Preferred Stock. -3- Section 5. Conversion. ---------- (a)(i) Each share of Preferred Stock shall be convertible into shares of Common Stock (subject to reduction pursuant to Section 5(a)(ii) and (iii) and to adjustment under Section 5(c)) at the option of the holder in whole or in part at any time and from time to time after the date hereof at the Conversion Ratio (as defined in Section 7). The holder shall effect conversions by surrendering the certificate or certificates representing the shares of Preferred Stock to be converted to the Company, together with the form of conversion notice attached hereto as Exhibit A (the "Holder Conversion Notice"). --------- ------------------------ Each Holder Conversion Notice shall specify the number of shares of Preferred Stock to be converted and the date on which such conversion is to be effected, which date may not be prior to the date the holder delivers such Holder Conversion Notice by facsimile (the "Holder Conversion Date"). If no Holder ---------------------- Conversion Date is specified in a Holder Conversion Notice, the Holder Conversion Date shall be the date that the Holder Conversion Notice is deemed delivered pursuant to Section 5(i). Subject to Sections 5(a)(ii) and 5(c) and, as to the holders (or their designees) party to the Purchase Agreement (as defined in Section 7), subject to Section 4.10 of the Purchase Agreement each Holder Conversion Notice, once given, shall be irrevocable. If a holder is converting less than all shares of Preferred Stock represented by the certificate or certificates tendered by such holder with the Holder Conversion Notice, or if a conversion hereunder cannot be effected in full for any reason, the Company shall promptly deliver to such holder (in the manner within the time set forth in Section 5(c)) a certificate for such number of shares as have not been converted. (ii) Certain Regulatory Approval. If on the Conversion Date --------------------------- applicable to any conversion of shares of Preferred Stock (A) the Common Stock is then listed for trading on the Nasdaq National Market or, if the rules of the Nasdaq Stock Market are hereafter amended to extend Rule 4460(i) promulgated thereby (or by any successor or replacement provision thereof) to the Nasdaq SmallCap Market, on the Nasdaq SmallCap Market, (B) the Conversion Price then in effect is such that the aggregate number of shares of Common Stock that would then be issuable upon conversion of all outstanding shares of Preferred Stock and Debentures (as defined in Section 7), together with any shares of Common Stock previously issued upon conversion of Preferred Stock and Debentures, and together with any shares of Common Stock issued in payment of dividends hereunder and interest under the Debentures in shares of Common Stock, would equal or exceed 20% of the number of shares of Common Stock outstanding on the Original Issue Date (the "Issuable Maximum"), and (C) the Company has not ---------------- previously obtained Shareholder Approval (as defined below), then the Company shall issue to the converting holder of the Preferred Stock up to the Issuable Maximum and, with respect to any shares of Common Stock that would be issuable to such holder in respect of the Conversion Notice at issue in excess of the Issuable Maximum, the holder shall have the option to require the Company to either (1) as promptly as possible, but in no event later than 60 days after such Conversion Date, convene a meeting of the holders of the Common Stock and obtain the Shareholder Approval, or (2) redeem, from funds legally available therefor at the time of such redemption, the balance of the Preferred Stock then outstanding, including shares subject to the Conversion Notice at issue at a price per share equal to the product of (i) the average Per Share Market Value for the five (5) -4- Trading Days immediately preceding (1) the Conversion Date or (2) the date of payment in full by the Company of such redemption price, whichever is greater, and (ii) the Conversion Ratio calculated on the Conversion Date; provided, -------- however, that if the holder has requested that the Company obtain Shareholder - ------- Approval under paragraph (1) above and the Company fails for any reason to obtain such Shareholder Approval within the time period set forth in (1) above, the Company shall be obligated to redeem all of the shares of Preferred Stock then outstanding, including shares subject to the Conversion Notice at issue and not converted as a result of the provisions of this Section, in accordance with the provisions of paragraph (2) above, and in such case the interest contemplated by the immediately succeeding sentence shall be deemed to accrue from the Conversion Date. If the holder has requested that the Company redeem shares of Preferred Stock pursuant to this Section and the Company fails for any reason to pay the redemption price under (2) above within seven days after the Conversion Date or fails to deliver good funds to the Transfer agent for such purpose, the Company will pay interest on such redemption price at a rate of 15% per annum to the converting holder of Preferred Stock, accruing from the Conversion Date until the redemption price plus any accrued interest thereon is paid in full. The entire redemption price, including interest thereon, shall be paid in cash. "Shareholder Approval" means the approval by a majority of the -------------------- total votes cast on the proposal, in person or by proxy, at a meeting of the shareholders of the Company held in accordance with the Company's Certificate of Incorporation and by-laws, of the issuance by the Company of shares of Common Stock exceeding the Issuable Maximum as a consequence of the conversion of Preferred Stock into Common Stock at a price less than the greater of the book or market value on the Original Issue Date as and to the extent required pursuant to Rule 4460(i) of the Nasdaq Stock Market (or any successor or replacement provision thereof). (ii) If on any Conversion Date under Section 5 or the date of any redemption pursuant to Section 6 (a "Redemption Date") the average Per Share --------------- Market Value for the five (5) Trading Days immediately preceding such Conversion Date or Redemption Date, as the case may be, exceeds the Initial Conversion Price (defined in Section 5(d)(i) below) by more than 50%, the Conversion Price otherwise applicable to such conversion or redemption shall be increased by an amount equal to 50% of the difference between (A) the average Per Share Market Value for the five (5) Trading Days immediately preceding such Conversion Date or Redemption Date, as the case may be, less (B) 150% of the Initial Conversion Price. (b) At any time on or after the first anniversary of the Original Issue Date, each share of Preferred Stock shall be convertible in whole or in part and from time to time at the option of the Company into shares of Common Stock at the Conversion Ratio; provided, however, that the Company is not --------- -------- permitted to deliver or cause to be delivered a Company Conversion Notice (as defined below) (i) within 10 days of issuing any press release or other public statement relating to such conversion, (ii) prior to the 270th day after the date the Commission shall have declared effective a Registration Statement (as defined in the Amended and Restated Registration Rights Agreement, dated as of March 18, 1997, by and among the Company and the original holders of the Preferred Stock (the "Registration Rights Agreement")) ----------------------------- -5- (an "Underlying Securities Registration Statement"), (iii) at any time that an -------------------------------------------- Underlying Securities Registration Statement is not then effective, (iv) if the shares of Common Stock issuable upon such conversion are not then listed for trading on the Nasdaq National Market or Nasdaq SmallCap Market, (v) if the Company shall not have duly reserved for issuance to the holders of the Preferred Stock a sufficient number of shares of Common Stock to issue upon such conversion or (vi) such conversion shall not contravene Section 5(a)(ii). The Company shall effect such conversion by delivering or causing to be delivered to the holders of the Preferred Stock a written notice in the form attached hereto as Exhibit B (the "Company Conversion Notice"), which Company Conversion Notice, --------- ------------------------- once given, shall be irrevocable. Each Company Conversion Notice shall specify the number of shares of Preferred Stock required by the Company to be converted. The Company shall deliver or cause to be delivered such Company Conversion Notice at least two (2) Trading Days before the date of conversion indicated in the Company Conversion Notice (such date is hereinafter referred to as the "Company Conversion Date"). Any such conversion shall be effected on a pro rata ----------------------- basis among all holders of shares of Preferred Stock. Upon its receipt of a Company Conversion Notice, the holder shall surrender the shares of Preferred Stock held by it and subject to such Company Conversion Notice at the office of the Company or the Transfer Agent for the Preferred Stock or Common Stock. The Company shall, upon conversion of the Preferred Stock subject to such Company Conversion Notice deliver or cause to be delivered to the appropriate tendering holder, a replacement certificate representing shares of Preferred Stock tendered but not converted in response to the Company Conversion Notice. Each of a Holder Conversion Notice and a Company Conversion Notice is sometimes referred to herein as a "Conversion Notice," and each of a "Holder Conversion Date" and a ----------------- ---------------------- "Company Conversion Date" is sometimes referred to herein as a "Conversion ----------------------- ---------- Date." - ---- (c) Not later than three (3) Trading Days after the Conversion Date, the Company will cause the Transfer Agent to deliver to the holder (i) a certificate or certificates, representing the number of shares of Common Stock being acquired upon the conversion of Preferred Stock (subject to reduction pursuant to Section 5(a)(ii) and (iii)), (ii) a certificate representing the shares of Preferred Stock tendered in connection with a conversion hereunder but not converted; (iii) a bank check in the amount of all accrued and unpaid dividends in respect of the shares of Preferred Stock tendered for conversion (if the Company has elected (or is required pursuant to the terms hereof) to pay accrued interest in cash) and (iv) if the Company has elected (and is permitted pursuant to the terms hereof) to pay accrued dividends in shares of Common Stock, certificates representing such number of shares of Common Stock as equals such dividends divided by the average Per Share Market Value for the five (5) Trading Days immediately preceding the Conversion Date. Any certificates representing shares of Common Stock to be delivered upon a conversion hereunder shall be free of restrictive legends and trading restrictions, except those specified in Section 4.1(b) of the Purchase Agreement. The Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of any Preferred Stock and the counting of Trading Days for purposes of any consequences under this Section for a failure to deliver such certificates under this Section shall not begin until certificates representing the shares of Preferred Stock to be converted are either delivered for conversion to the Transfer Agent for the Common Stock, or until the holder notifies the Company that such -6- shares of Preferred Stock have been lost, stolen or destroyed and provides a bond reasonably satisfactory to the Company (or other adequate security reasonably acceptable to the Company) to indemnify the Company from any loss incurred by it in connection therewith, provided, however, that, if the -------- ------- Company or the Transfer Agent receives the original shares of Preferred Stock being converted on or prior to the time specified for the delivery of such shares of Common Stock or on or prior to the time at which liquidated damages begin to accrue, the date of the Holder Conversion Notice shall be deemed to be the date of delivery of such original shares of Preferred Stock. The Company shall, upon request of the holder, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If such certificate or certificates are not delivered by the date required under this Section, the holder shall be entitled by written notice to the Company and the Transfer Agent at any time on or before its receipt of such certificate or certificates, to rescind such conversion, in which event the Company shall immediately instruct the Transfer Agent to return the certificates representing shares of Preferred Stock subject to such conversion that were tendered for conversion. The Company shall pay to the converting holder as liquidated damages and not as penalty, $3,000 for each day that the Company fails to deliver such certificate or certificates pursuant to this Section commencing the fifth (5th) Trading Day after the applicable Conversion Date. In addition, if the Company fails to deliver to the holder such certificate or certificates pursuant to this Section prior to the 15th day after the Conversion Date, the Company shall, at the Holder's option, (i) redeem the shares of Preferred Stock then held by such holder, as requested by such holder, at the redemption price contemplated below, and (ii) pay all accrued but unpaid dividends on account of the Preferred Stock for which the Company shall have failed to issue Common Stock certificates hereunder, in cash. The redemption price shall be equal to the product of (A) the average Per Share Market Value for the five (5) Trading Days immediately preceding (1) the Conversion Date or (2) the date of payment in full by the Company of such redemption price, whichever is greater, and (B) the Conversion Ratio calculated on the Conversion Date. If the holder has requested that the Company redeem shares of Preferred Stock pursuant to this Section and the Company fails for any reason to pay the redemption price under (2) above within seven days after such notice, the Company will pay interest on such redemption price at a rate of 15% per annum, in cash to such Holder, accruing from such seventh day until such redemption price and any accrued but unpaid interest thereon is paid in full. (d) (i) The conversion price for each share of Preferred Stock (the "Conversion Price") in effect on any Conversion Date shall be the lowest of (a) - ----------------- the average Per Share Market Value for the five (5) Trading Days immediately preceding the Original Issue Date (the "Initial Conversion Price"), (b) the ------------------------ average of the lowest Per Share Market Values for any five (5) consecutive Trading Days during the sixty (60) Trading Days immediately following the Original Issue Date or (c) 82.5% of the average Per Share Market Value for the five (5) Trading Days immediately preceding the Conversion Date; provided that, if (1) an Underlying Securities Registration Statement is not filed with the Securities and Exchange Commission (the "Commission") on or prior to March 24, 1997, or (2) the Company fails to file with the Commission a request for acceleration in accordance with Rule 12d1-2 promulgated under the -7- Securities Exchange Act of 1934, as amended, within five (5) days of the date that the Company is notified by the Commission that an Underlying Securities Registration Statement will not be reviewed, or (3) if the Underlying Securities Registration Statement is not declared effective by the Commission on or prior to May 5, 1997, or (4) if such Underlying Securities Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective at any time prior to the expiration of the "Effectiveness Period" (as such term as defined in the Registration Rights Agreement), without being succeeded within 10 Business Days by a subsequent Underlying Securities Registration Statement filed with and declared effective by the Commission (any such failure being referred to as an "Event," and for purposes of clauses (1) ----- and (2) the date on which such Event occurs, or for purposes of clause (3) the date on which such five (5) day period is exceeded, or for purposes of clause (4) the date which such 10 Business Day-period is exceeded being referred to as "Event Date"), the Initial Conversion Price (as adjusted) and the discount comprising the Conversion Price (if the Conversion Price is not the Initial Conversion Price) shall be decreased by 1% each month (i.e., 81 1/2% as of the Event Date and 80 1/2% as of the one month anniversary of the Event Date) until such time as the applicable Event is cured. If such Event is not cured by the third month anniversary of the Event Date, commencing such third month anniversary the Initial Conversion Price (as adjusted) and the discount comprising the Conversion Price (if the Conversion Price is not the Initial Conversion Price) shall be decreased each month by .5% (i.e., 80% as of the third anniversary of the Event Date and 79 1/2% as of the fourth month anniversary of the Event Date) and the Company shall pay to each holder in cash, as liquidated damages and not a penalty, .5% of the aggregate stated value of the Preferred Stock then held by such holder on each monthly anniversary of the Event Date, until such time as the applicable Event is cured. If such Event is not cured by the fifth month anniversary of the Event Date, the Company shall pay to each holder in cash, as liquidated damages and not a penalty, 1% of the aggregate stated value of the Preferred Stock then held by such holder until such time as the applicable Event is cured. The adjustments contained in this Section are intended to be cumulative and any decrease in the Conversion Price, pursuant to the terms of this Section, shall be permanent. The provisions of this Section are not exclusive and shall in no way limit the Company's obligations under the Registration Rights Agreement. (ii) If the Company, at any time while any shares of Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Junior Securities payable in shares of Common Stock (whether payable in shares of its Common Stock or of capital stock of any class), (b) subdivide outstanding shares of Common Stock into a larger number of shares, or (c) combine outstanding shares of Common Stock into a smaller number of shares, the Initial Conversion Price (as adjusted, if applicable) shall be designated in Section 5(d)(i) multiplied by a fraction the numerator of which shall be the number of shares of Common Stock outstanding before such event and the denominator of which shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 5(c)(ii) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. -8- (iii) If the Company, at any time while any shares of Preferred Stock are outstanding, shall issue rights or warrants to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Per Share Market Value of Common Stock at the record date in the immediately following sentence, the Initial Conversion Price designated in Section 5(d)(i) (as adjusted if applicable) shall be multiplied by a fraction, the denominator of which shall be the number of shares of Common Stock (excluding treasury shares, if any, but including warrants or options that would be included for purposes of determining earnings per share in accordance with generally accepted accounting principles) outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and the numerator of which shall be the number of shares of Common Stock (excluding treasury shares, if any, but including warrants or options that would be included for purposes of determining earnings per share in accordance with generally accepted accounting principles) outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Per Share Market Value. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. However, upon the expiration of any right or warrant to purchase Common Stock the issuance of which resulted in an adjustment in the Initial Conversion Price pursuant to this Section 5(c)(iii), if any such right or warrant shall expire and shall not have been exercised, the Initial Conversion Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Initial Conversion Price made pursuant to the provisions of this Section 5 after the issuance of such rights or warrants) had the adjustment of the Initial Conversion Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights or warrants actually exercised. (iv) If the Company, at any time while shares of Preferred Stock are outstanding, shall distribute to all holders of Common Stock (and not to holders of Preferred Stock) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 5(c)(ii) and (iii) above), then in each such case the Initial Conversion Price at which each share of Preferred Stock -9- shall thereafter be convertible shall be determined by multiplying the Initial Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction the denominator of which shall be the Per Share Market Value of Common Stock determined as of such record date, and the numerator of which shall be such Per Share Market Value on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Board of Directors in good faith; provided, however, that in the event of a -------- ------- distribution exceeding ten percent (10%) of the net assets of the Company, such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "Appraiser") selected in --------- good faith by the holders of a majority in interest of the shares of Preferred Stock then outstanding; and provided, further, that the Company, after receipt -------- ------- of the determination by such Appraiser shall have the right to select an additional Appraiser, in good faith, in which case the fair market value shall be equal to the average of the determinations by each such Appraiser. In either case the adjustments shall be described in a statement provided to the holders of Preferred Stock of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (v) All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (vi) Whenever the Initial Conversion Price is adjusted pursuant to Section 5(c)(ii),(iii) or (iv), the Company shall instruct the Transfer Agent to promptly mail to each holder of Preferred Stock, a notice setting forth the Initial Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (vii) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person pursuant to which the Company will not be the surviving entity, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the holders of the Preferred Stock then outstanding shall have the right thereafter to, at their option, (A) convert such shares only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the holders of the Preferred Stock shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which such shares of Preferred Stock could have been converted immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange would have been entitled or (B) require the Company to redeem, from funds legally available therefor at the time of such redemption, its shares of Preferred Stock at a price per share equal to the product of (i) the -10- average Per Share Market Value for the five (5) Trading Days immediately preceding (1) the effective date or the date of the closing of such transaction, as the case may be, of the reclassification, consolidation, merger, sale, transfer or share exchange the triggering such redemption right or (2) the date of payment in full by the Company of the redemption price hereunder, whichever is greater, and (ii) the Conversion Ratio calculated on the date of the closing of the reclassification, consolidation, merger, sale, transfer or share exchange, as the case may be, triggering such redemption right. The entire redemption price shall be paid in cash, and the terms of payment of such redemption price shall be subject to the provisions set forth in Section 6(c). The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the holder of Preferred Stock the right to receive the securities, cash or property set forth in this Section 5(c)(vii) upon any conversion or redemption following such consolidation, merger, sale, transfer or share exchange. This provision shall similarly apply to successive reclassifications, consolidations, mergers, sales, transfers or share exchanges. Notwithstanding the foregoing, if upon the effectiveness of any business combination to which the Company is a party and from which the Company is not the surviving entity, if (i) the holders of the Common Stock immediately prior to the effectiveness of such business combination beneficially own (as determined under Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), in the aggregate, 66-2/3% or more of the voting power of such surviving entity and (ii) no Person or group (as described in Rule 13d-5(d) promulgated under the Exchange Act) who was not a holder of the Common Stock immediately prior to such business combination beneficially owns in excess of 16-2/3% of the voting power of such surviving entity, then the holders of the Preferred Stock shall only be entitled to elect the conversion set forth in (A) above. (viii) If: A. the Company shall declare a dividend (or any other distribution) on its Common Stock (other than a subdivision of the outstanding shares of Common Stock); or B. the Company shall declare a special nonrecurring cash dividend on or authorize a repurchase or redemption of more than 10,000 shares of its then outstanding Common Stock, other than a repurchase or redemption of the Common Stock of an employee upon termination of employment with the Company for any reason; or C. the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or -11- D. the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock (other than a subdivision or combination of then outstanding shares of Common Stock), any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or E. the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Preferred Stock, and shall cause to be mailed to the holders of Preferred Stock at their last addresses as shall appear upon the stock books of the Company, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up; provided, however, that the failure to mail such notice or any -------- ------- defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. (e) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Preferred Stock and payment of dividends on Preferred Stock, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the holders of Preferred Stock, such number of shares of Common Stock as shall be issuable upon the conversion of all outstanding shares of Preferred Stock and payment of dividends hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid and nonassessable. (f) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash -12- payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not to, or is unable to, make such a cash payment, the holder of a share of Preferred Stock shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (g) The issuance of certificates for shares of Common Stock on conversion of Preferred Stock shall be made without charge to the holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the holder of such shares of Preferred Stock so converted. (h) Shares of Preferred Stock converted into Common Stock shall be canceled and shall have the status of authorized but unissued shares of undesignated preferred stock. (i) Any and all notices or other communications or deliveries to be provided by a holder of Preferred Stock hereunder, including, without limitation, any Holder Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the attention of the Chief Financial Officer of the Company at the facsimile telephone number or address of the principal place of business of the Company, and if applicable to the Transfer Agent, at the address set forth on the Book Entry Transfer Agent Agreement. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the holder of Preferred Stock at the facsimile telephone number or address of such holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if delivered via facsimile at the facsimile telephone number specified in the Purchase Agreement prior to 4:30 p.m. (Eastern Standard Time) on a Trading Day, (ii) the Trading Day after the date of transmission, if delivered via facsimile at the facsimile telephone number specified in the Purchase Agreement later than 4:30 p.m. (Eastern Standard Time) on any date and earlier than 11:59 p.m. (Eastern Standard Time) on such date, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. -13- Section 6. Redemptions. ----------- (a)(i) The Company shall have the right, exercisable at any time upon 20 Trading Days notice to the holders of the Preferred Stock (the "Optional -------- Redemption Notice"), to redeem, from funds legally available therefor at the - ----------------- time of such redemption, all or any portion of the shares of Preferred Stock which have not been previously converted or redeemed at a price per share (the "Optional Redemption Price") equal to the product of (i) the average Per Share ------------------------- Market Value for the five Trading Days immediately preceding (1) the 20th Trading Day after the date of the Optional Redemption Notice or (2) the date of payment in full by the Company of the Optional Redemption Price, whichever is greater, and (ii) the Conversion Ratio calculated on the 20th Trading Day after the Optional Redemption Notice. The entire Optional Redemption Price shall be paid in cash. (ii) The holders of Preferred Stock shall have the right to continue to convert shares of Preferred Stock hereunder (and the Company shall honor such conversions) at any time from the date of the Optional Redemption Notice through the 15th Trading Day thereafter. (iii) On the 16th Trading Day after the date of the Optional Redemption Notice, each holder of Preferred Stock shall deliver to the Transfer Agent the shares of Preferred Stock owned by it and subject to the Optional Redemption Notice that have not been previously tendered for conversion and the Company shall deliver to the Transfer Agent in escrow for the benefit of each such holder a sum (the "Escrowed Amount") equal to the product of (i) the --------------- average Per Share Market Value for the five (5) Trading Days immediately preceding the 15th Trading Day after the date of the Optional Redemption Notice and (ii) the Conversion Ratio calculated on the 15th Trading Day after the Optional Redemption Notice, multiplied by the number of shares of Preferred Stock tendered by or on behalf of such holder for redemption in accordance with the provisions hereof. (iv) On the 20th Trading Day after the date of the Optional Redemption Notice the Transfer Agent shall pay to the each holder the Escrowed Amount applicable to the shares of Preferred Stock which were tendered by or on behalf such holder for redemption in accordance with the provisions hereof and the Company shall pay to such holder the Optional Redemption Price multiplied by the number of shares of Preferred Stock subject to the redemption provisions hereof, minus the Escrowed Amount. (b) On the third year anniversary of the Original Issue Date (the "Mandatory Redemption Date"), the Company shall redeem, from funds legally - -------------------------- available therefor at the time of such redemption, all shares of Preferred Stock which have not previously been converted or redeemed at a price per share (the "Mandatory Redemption Price") equal to the product of (i) the average Per Share - --------------------------- Market Value for the five (5) Trading Days immediately preceding (1) the Mandatory Redemption Date or (2) the date of payment in full by the Company of the Mandatory -14- Redemption Price, whichever is greater, and (ii) the Conversion Ratio calculated on the Mandatory Redemption Date. The entire Mandatory Redemption Price shall be paid in cash. (c) If the Optional Redemption Price shall not be paid in full within three Trading Days of the 20th Trading Day after the date of the Optional Redemption Notice, or the Mandatory Redemption Price shall not be paid in full within three Trading Days of the Mandatory Redemption Date, the Company shall pay as liquidated damages and not as a penalty the sum of $7,500 per day in cash until the Optional Redemption Price or Mandatory Redemption Price, as the case may be, together with all such liquidated damages, is paid in full. In addition, if the Company shall have failed to pay any portion of the Optional Redemption Price or Mandatory Redemption Price, as the case may be, within the applicable three Trading Day period set forth above, then any holder of Preferred Stock that was subject to such redemption may demand that the Company (i) convert all or any portion of the shares of its Preferred Stock for which the Optional Redemption Price or Mandatory Redemption Price, as the case may be, shall not have been paid (the "Unpaid Portion") at a Conversion Price calculated -------------- as at the date of the Optional Redemption Notice (in the case of optional redemptions) or the Mandatory Redemption Date (in the case of a mandatory redemption), as the case may be, or the date of such conversion, whichever is lower, or (ii) promptly issue to such holder new certificates representing shares of Preferred Stock in a number equal to the Unpaid Portion. (b) Notwithstanding anything to the contrary contained herein, the Company may not deliver an Optional Redemption Notice and may not pay the Mandatory Redemption Price unless it has received (and furnished to the each holder evidence thereof reasonably satisfactory to it of) prior written consent of BNY to pay the redemption amounts contemplated by this Section free from the subordination provisions of Section 8 hereof. Section 7. Definitions. For the purposes hereof, the following terms ----------- shall have the following meanings: "BNY" means BNY Financial Corporation, 1290 Avenue of the Americas, --- New York, New York 10104. "BNY Bank Obligations" means the borrowings and interest due thereon -------------------- (including, without limitation, any interest accruing after the commencement of any case, proceeding or other action relating to the liquidation, dissolution, assignment for the benefit of creditors, receivership, arrangement, bankruptcy, insolvency or reorganization of the Company regardless of whether such interest is allowable, payable or accruable to BNY in such case, proceeding or other action) under the Receivables Agreement, as the same may from time to time be amended, supplemented, otherwise modified, replaced or refinanced. "Business Day" means any day of the year on which commercial banks are ------------ not required or authorized to be closed in New York City. -15- "Common Stock" means shares now or hereafter authorized of the class ------------ of Common Stock, par value $.001 per share, of the Company, stock of any other class into which such shares may hereafter be reclassified or changed and any other equity securities of the Company hereafter designated as Common Stock. "Conversion Ratio" means, at any time, the quotient obtained by ---------------- dividing the Stated Value plus accrued but unpaid dividends, but only to the extent not paid in shares of Common Stock pursuant to the terms hereof, by the Conversion Price at such time. "Debentures" means the 5% Convertible Debentures delivered by the ---------- Company pursuant to the Purchase Agreement. "Junior Securities" means the Common Stock and all other equity ----------------- securities of the Company. "Original Issue Date" shall mean the date of the first issuance of any ------------------- shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock. "Per Share Market Value" means on any particular date (a) the closing ---------------------- bid price per share of the Common Stock on such date on the Nasdaq National Market or other stock exchange on which the Common Stock is then listed, as reported on Bloomberg, L.P. or if there is no such bid price on such date, then the last closing bid price on such exchange on the date nearest preceding such date, as reported on Bloomberg, L.P., or (b) if the Common Stock is not listed on the Nasdaq National Market or any stock exchange, the closing bid price for a share of Common Stock in the Nasdaq SmallCap Market, as reported on Bloomberg, L.P. (or similar organization or agency succeeding to its functions of reporting prices), or (c) if the Common Stock is no longer reported on Bloomberg, L.P. (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period as determined by the Holder, or (d) if the Common Stock is no longer publicly traded, the fair market value of a share of Common Stock as determined by an Appraiser selected in good faith by the holders of a majority of principal amount of outstanding Debentures; provided, however, that the Company, after -------- ------- receipt of the determination by such Appraiser, shall have the right to select an additional Appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such Appraiser. "Person" means an individual or a corporation, partnership, trust, ------ incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Purchase Agreement" means the Convertible Debenture Purchase ------------------ Agreement, dated as of January 28, 1997, between the Company and the original holders of the Preferred -16- Stock, as superseded by the Amended and Restated Convertible Debenture and Convertible Preferred Stock Purchase Agreement, dated as of March 18, 1997. "Receivables Agreement" means the Accounts Receivable Management and --------------------- Security Agreement, dated as of July 31, 1995, among the Company and BNY. "Trading Day" means (a) a day on which the Common Stock is traded on ----------- the Nasdaq National Market or Nasdaq SmallCap Market or principal national securities exchange or market on which the Common Stock has been listed or quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq National Market or Nasdaq SmallCap Market or any principal national securities exchange or market, a day on which the Common Stock is traded in the over-the- counter market, as reported by the Nasdaq Stock Market, or (c) if the Common Stock is not listed on the American Stock Exchange, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices). "Underlying Shares" means the number of shares of Common Stock into ----------------- which the Shares are convertible in accordance with the terms hereof and the Purchase Agreement. Section 8. Subordination. ------------- (a) The Preferred Stock is subordinated to full payment of all of the Company's obligations under the BNY Bank Obligations. Except to the extent otherwise specifically set forth in this Section, until such time as all BNY Bank Obligations are indefeasibly paid to BNY, the Company shall not, directly or indirectly, make any cash or other payment (except for the issuance and delivery of shares of Common Stock in respect of conversions or payments of dividends hereunder) that is due and owing on account of the Preferred Stock. Cash payments contemplated by Sections 5(a)(ii), 5(c) and 5(d) hereof, to the extent such payments do not exceed, in the aggregate, $500,000, may be made by the Company to (and retained by) the holders of Preferred Stock as long as (i) at the time any such payment is due under such Sections, the Bank has not given notice to the Company of acceleration of the Company's obligations under the Receivables Agreement or (ii) the making of such payment shall not cause (as determined at the time such payment shall become due to the holders) the Company to exceed the borrowing limitations set forth in Section 2 of the Receivables Agreement, or cause an "Event of Default" (as defined under the Receivables Agreement) under Section 18(a) of the Receivables Agreement. Cash payments contemplated by Sections 5(a)(ii), 5(c) or 5(d) hereof, to the extent that such payments, in the aggregate, exceed $500,000, may be made by the Company to (and retained by) the holders of the Preferred Stock as long as (i) at the time any such payment is due under such Sections, the Bank has not given notice to the Company of acceleration of the Company's obligations under the Receivables -17- Agreement, or (ii) at the time such payment becomes due the Company shall not be in default of Sections 12(n), 12(o), 12(p), 12(q), 18(a), 18(i) or 18(j) of the Receivables Agreement, or (iii) the making of such payment shall not cause (as determined at the time such payment shall become due to the holders) an Event of Default under such Receivables Agreement sections set forth in (ii) immediately above or cause the Company to exceed the borrowing limitations set forth in Section 2 of the Receivables Agreement. The subordination provided hereunder shall in no way limit the ability of the holders of the Preferred Stock to convert Debentures into shares of Common Stock and to receive payment of dividends hereunder in shares of Common Stock, including after such time as any Event of Default shall be declared under the Convertible Debentures. (b) Should any payment, other than payments contemplated in Section 8(a) above, be received by the a holder of the Preferred Stock, such payment shall be held in trust by such holder for the benefit of BNY and shall be delivered forthwith to BNY for application to BNY Bank Obligations, in the form received with any necessary endorsement or assignment. RESOLVED FURTHER, that the Chief Executive Officer and Secretary of the Company be, and they hereby are, authorized and directed to prepare, execute, verify, and file with the Secretary of State of Delaware, a Certificate of Designation in accordance with these resolutions and as required by law. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS] -18- IN WITNESS WHEREOF, YES! Entertainment Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by Donald D. Kingsborough, its Chief Executive Officer, and attested by Bruce Bower, its Secretary, this 18th day of March, 1997. YES! ENTERTAINMENT CORPORATION By: /s/ Donald D. Kingsborough ------------------------------------------ Name: Donald D. Kingsborough Title: Chief Executive Officer Attest: By: /s/ Bruce D. Bower ---------------------------------------------------- Name: Bruce D. Bower Title: Executive Vice President, General Counsel and Secretary -19- EXHIBIT A NOTICE OF CONVERSION AT THE ELECTION OF HOLDER (To be Executed by the Registration Holder in order to Convert shares of Preferred Stock) The undersigned hereby irrevocably elects to convert the number of shares of Series A Convertible Preferred Stock indicated below, into shares of Common Stock, par value $.001 per share (the "Common Stock"), of YES! Entertainment Corporation (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Conversion calculations: ______________________________________________________ Date to Effect Conversion ______________________________________________________ Number of shares of Preferred Stock to be Converted ______________________________________________________ Number of shares of Common Stock to be Issued ______________________________________________________ Applicable Conversion Price ______________________________________________________ Signature ______________________________________________________ Name: ______________________________________________________ Address: The Company undertakes to promptly upon its receipt of this conversion notice (and, in any case prior to the time it effects the conversion requested hereby), notify the converting holder by facsimile of the number of shares of Common Stock outstanding on such date and the number of shares of Common Stock which would be issuable to the holder if the conversion requested in this conversion notice were effected in full, whereupon, if the Company determines that such conversion would result in it owning in excess of 4.9% of the outstanding shares of Common Stock on such date, the Company shall convert up to an amount equal to 4.9% of the outstanding shares of Common Stock and issue to the holder one or more certificates representing shares of Preferred Stock which have not been converted as a result of this provision. EXHIBIT B YES! ENTERTAINMENT CORPORATION NOTICE OF CONVERSION AT THE ELECTION OF THE COMPANY The undersigned in the name and on behalf of YES! Entertainment Corporation (the "Company") hereby notifies the addressee hereof that the Company hereby elects to exercise its right to force the conversion of the shares of Series A Convertible Preferred Stock indicated below, into shares of Common Stock, par value $.001 per share (the "Common Stock"), of the Company according to the conditions hereof, as of the date written below. No fee will be charged to the holder for any conversion hereunder, except for such transfer taxes, if any, which may be incurred by the Company if shares are to be issued in the name of a person other than the person to whom this notice is addressed. Conversion calculations: ______________________________________________________ Date to Effect Conversion ______________________________________________________ Number of shares of Preferred Stock to be Converted ______________________________________________________ Number of shares of Common Stock to be Issued ______________________________________________________ Number of shares of outstanding at the close of trading on Conversion Date ______________________________________________________ Applicable Conversion Price ______________________________________________________ Signature ______________________________________________________ Name: ______________________________________________________ Address: EX-4.2 3 FORM OF CONVERTIBLE SUBORDINATE DEBENTURE EXHIBIT 4.2 NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS AND IN COMPLIANCE WITH THE TERMS AND CONDITIONS OF THE PURCHASE AGREEMENT. THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND CONVERSION SET FORTH IN AN AMENDED AND RESTATED CONVERTIBLE DEBENTURE AND CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, DATED AS OF MARCH 18, 1997, BETWEEN THE COMPANY AND THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF YES! ENTERTAINMENT CORPORATION. No. [ ] $[ ] YES! ENTERTAINMENT CORPORATION 5% CONVERTIBLE DEBENTURE DUE JANUARY 28, 2000 THIS DEBENTURE is one of a duly authorized issue of debentures of YES! Entertainment Corporation, a corporation organized and existing under the laws of Delaware and having a principal place of business at 3875 Hopyard Road, Suite 375, Pleasanton, California 94588 (the "Company"), designated as its 5% Convertible Debentures, due January 28, 2000 (the "Debentures"), in an aggregate principal amount of $1,566,667. This Debenture supersedes in its entirety the Debenture of like tenor, issued by the Company to the Holder on January 28, 1997. FOR VALUE RECEIVED, the Company promises to pay to [ ], or its registered assigns (the "Holder"), the principal sum of [ ] ($[ ]), on January 28, 2000 or such earlier date as Debentures are required to be repaid as provided hereunder (the "Maturity Date") and to pay interest to the Holder on the principal sum, at the rate of 5% per annum, payable upon conversion as provided hereunder, or on the Maturity Date if not earlier converted. Interest shall accrue daily commencing on the Original Issue Date (as defined in Section 6) until payment in full of the principal sum represented hereby, together with all accrued and unpaid interest and other amounts which may become due hereunder, has been made or duly provided for. Interest shall be calculated on the basis of a 360-day year and for the actual number of days elapsed. Interest hereunder will be paid to the person in whose name this Debenture (or one or more predecessor Debentures) is registered on the records of the Company regarding registration and transfers of the Debentures (the "Debenture Register") on the Conversion Date (as defined in Section 4(b)) or the Maturity Date, as the case may be; provided, however, that the Company's obligation to a transferee of this -------- ------- Debenture arises only if such transfer, sale or other disposition is made in accordance with the terms and conditions hereof and of the Convertible Debenture Purchase Agreement, dated as of January 28, 1997, as amended and restated by the Amended and Restated Purchase Agreement, dated as of March 18, 1997, and effective as of January 28, 1997, as amended from time to time (collectively, the "Purchase Agreement"), each executed by the original Holder. All overdue amounts hereunder shall bear interest at the rate of 15% per annum from the day of conversion hereunder or the Maturity Date or earlier date on which this Debenture is accelerated through and including the date of payment. The principal of, and interest on, this Debenture are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, at the address of the Holder last appearing on the Debenture Register, except that interest due hereunder may, at the Company's option, be paid in shares of Common Stock (as defined in Section 6) calculated based upon the average Per Share Market Value (as defined in Section 6) for the five (5) Trading Days immediately preceding the Conversion Date or Maturity Date, as the case may be; provided, however, that the Company -------- ------- may not pay interest hereon in cash without the prior written consent of BNY (as defined in Section 6) to such payment free from the subordination provisions of Section 8 hereof. All amounts due hereunder other than interest shall be paid in cash. Notwithstanding anything to the contrary contained herein, the Company may not issue shares of Common Stock in payment of interest on the Debentures (including, without limitation, pursuant to Section 4(b)) if: (i) the number of shares of Common Stock at the time authorized, unissued and reserved for all purposes, or held as treasury stock, is insufficient to pay such interest in shares of Common Stock; (ii) the shares of Common Stock to be issued in respect of such interest are not registered for resale pursuant to an effective registration statement that names the recipient of such interest as a selling stockholder thereunder; (iii) the shares of Common Stock to be issued in respect of such interest are not listed on the Nasdaq National Market or Nasdaq SmallCap Market and each other exchange or quotation system on which the Common Stock is then listed for trading; or (iv) if the recipient of such interest is the original Holder or an affiliate thereof, the issuance of such shares would result in such recipient beneficially owning more than 4.9% of the issued and outstanding shares of Common Stock; provided, however, if ten Business Days -------- ------- shall have elapsed from the date that the Holder shall have declared an Event of Default (as defined in Section 3) as having occurred, the provisions of this clause (iv) shall be null and void, ab initio. In addition, any payment of -- ------ interest hereunder in shares of Common Stock shall be subject to the provisions of Section 4(a)(ii). A transfer of the right to receive principal and interest under this Debenture shall be transferable only through an appropriate entry in the Debenture Register as provided herein. This Debenture is subject to the following additional provisions: Section 1. The Debentures are issuable in denominations of One Hundred ---------- Thousand Dollars ($100,000) and integral multiples of Fifty Thousand Dollars ($50,000) in excess -2- thereof. The Debentures are exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same but shall not be issuable in denominations of less than integral multiplies of Fifty Thousand Dollars ($50,000). No service charge will be made for such registration of transfer or exchange. Section 2. This Debenture has been issued subject to certain investment ---------- representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Securities Act of 1933, as amended (the "Act"), pursuant to an effective registration statement or pursuant to an available exemption from the registration requirements under the Act. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. Section 3. Events of Default. ---------- ----------------- "Event of Default," wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): (a) any default in the payment of the principal of or interest on this Debenture as and when the same shall become due and payable, either on the Conversion Date or the Maturity Date, by acceleration or otherwise; (b) the Company shall fail to timely observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach of, this Debenture, the Purchase Agreement, the Book Entry Transfer Agreement, dated as of March 18, 1997, effective as of January 28, 1997 (the "Transfer Agent Agreement"), between the Company, the original Holder and the transfer agent of the Company (the "Transfer Agent"), the Certificate of Designation of Series A Convertible Preferred Stock of the Company (the "Series A Certificate of Designation") or the Registration Rights Agreement, dated as of January 28, 1997, between the Company and the original Holder, as amended and restated by the Amended and Restated Registration Rights Agreement, dated as of March 18, 1997, effective as of January 28, 1997, between the Company and the original Holder (collectively, the "Registration Rights Agreement"), and such failure or breach shall not have been remedied within five (5) Business Days after the date on which notice of such failure or breach shall have been given or such other cure period as may specifically be provided herein or in such other agreements with respect to any particular covenant, agreement or warranty; (c) the Company or any of its subsidiaries shall commence a voluntary case under the United States Bankruptcy Code as now or hereafter in effect or any successor thereto (the -3- "Bankruptcy Code"); or an involuntary case is commenced against the Company under the Bankruptcy Code and the petition is not controverted within 30 days, or is not dismissed within 60 days, after commencement of such involuntary case; or a "custodian" (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or any substantial part of the property of the Company or the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or there is commenced against the Company any such proceeding which remains undismissed for a period of 60 days; or the Company is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Company makes a general assignment for the benefit of creditors; or the Company shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or the Company shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company for the purpose of effecting any of the foregoing; (d) the Company shall fail to pay any amount of principal or interest on any mortgage, credit agreement or other facility, indenture or other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness of the Company in an amount exceeding one hundred thousand dollars ($100,000) (collectively, "Indebtedness"), whether such Indebtedness now exists or shall hereafter be created, when and as the same shall become due and payable, or the Company shall fail to observe or perform any term, covenant or agreement contained in any agreement or instrument evidencing or governing any of such Indebtedness if the cure period for such term, covenant or agreement contained in such agreement or instrument has run and the holder or holders of such Indebtedness or a trustee on their behalf shall have the right to cause such Indebtedness to become due prior to its stated maturity; (e) the Company shall dispose of all or substantially all of its assets in one or more transactions or shall be a party to any business combination pursuant to which the Company shall not be the surviving entity, except if, upon the effectiveness of such a business combination, (i) the holders of the Common Stock immediately prior to such effectiveness beneficially own (as determined under Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), in the aggregate, 66 2/3% or more of the voting power of such surviving entity and (ii) no Person or group (as described in Rule 13d-5(b) promulgated under the Exchange Act) who was not a holder of the Common Stock immediately prior to such business combination beneficially owns in excess of 16 2/3% of the voting power of such surviving entity; (f) the Company shall redeem or repurchase more than 10,000 of its outstanding shares of Common Stock, other than a redemption or repurchase of an employee's Common -4- Stock upon termination of such employee's employment with the Company for any reason and other than a redemption of shares of Series A Convertible Preferred Stock issued under the Series A Certificate of Designation (the "Series A Preferred") in accordance with the Series A Certificate of Designation; or (g) the entry of any judgments against the Company aggregating more than $250,000 (except in connection with litigation specifically scheduled in paragraph 3 of Schedule 3.1(g) to the Purchase Agreement). If any Event of Default occurs and is continuing, and in every such case, then so long as such Event of Default shall then be continuing, Holders of a majority of the aggregate principal amount of Debentures then outstanding may, by notice to the Company, declare the full outstanding principal amount of this Debenture, together with all accrued but unpaid interest thereon and other amounts owing hereunder, plus the "Adjustment Amount" (as defined in Section 6), through the date of acceleration to be, whereupon the same shall become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are waived by the Company, notwithstanding anything herein contained to the contrary, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. Section 4. Conversion. ---------- ---------- (a) (i)This Debenture shall be convertible into shares of Common Stock at the Conversion Ratio (as defined in Section 6) (subject to reduction under Section 4(a)(ii) and Section 4(a)(iii) and to adjustment under Section 4(d)), at the option of the Holder in whole or in part at any time commencing on the date hereof and prior to 7:30 p.m. (Eastern Standard Time) on the Maturity Date. The Holder shall effect conversions by surrendering to the Transfer Agent the Debentures (or such portions thereof) to be converted and to the Company and the Transfer Agent deliver a conversion notice in the form attached hereto as Exhibit A (the "Holder Conversion Notice"). Each Holder Conversion Notice shall - --------- specify the principal amount of Debentures to be converted and the date on which such conversion is to be effected, which date may not be prior to the date the Holder delivers such Holder Conversion Notice by facsimile (the "Holder Conversion Date"). Subject to Sections 4(a)(ii) and 4(c), and, as to the original Holder, subject to Section 4.8 of the Purchase Agreement, each Holder Conversion Notice, once given, shall be irrevocable. If the Holder is converting less than all of the principal amount represented by the Debenture(s) tendered by the Holder with the Holder Conversion Notice, the Company shall promptly deliver or cause to be delivered to the Holder a new Debenture for such principal amount as has not been converted. (ii) Certain Regulatory Approval. If on the Conversion Date --------------------------- applicable to any conversion of any portion of the principal amount of this Debenture (A) the Common Stock is listed for trading on the Nasdaq National Market or, if the rules of the Nasdaq Stock Market are -5- hereafter amended to extend Rule 4460(i) promulgated thereby (or any successor or replacement provision thereof) to the Nasdaq SmallCap Market, the Nasdaq SmallCap Market, (B) the Conversion Price (as defined in Section 4(d)(i)) then in effect is such that the aggregate number of shares of Common Stock that would then be issuable upon conversion of the entire outstanding principal amount of Debentures and all outstanding shares of Series A Preferred, together with any shares of Common Stock previously issued upon conversion of Debentures and shares of Series A Preferred or in payment of interest or dividends, as the case may be, thereunder in accordance herewith and the Series A Certificate of Designation in shares of Common Stock, would equal or exceed 20% of the number of shares of Common Stock outstanding on the Original Issue Date (the "Issuable Maximum"), and (C) the Company has not previously obtained Shareholder Approval (as defined below), then the Company shall issue to the converting Holder the Issuable Maximum and, with respect to any shares of Common Stock that would be issuable to such Holder in respect of the Conversion Notice at issue in excess of the Issuable Maximum, the converting Holder shall have the option to require the Company to (I) repay the balance of the principal amount of Debentures then outstanding at a price equal to the product of (i) the average Per Share Market Value for the five (5) Trading Days immediately preceding (1) the Conversion Date or (2) the date of payment in full by the Company of such repayment price, whichever is greater, and (ii) the Conversion Ratio calculated on the Conversion Date or (II) as promptly as possible, but in no event later than 60 days after such Conversion Date, convene a meeting of the holders of the Common Stock and obtain the Shareholder Approval. If the Company fails for any reason to pay the repayment price pursuant to this subsection within seven days after the Conversion Date or fails to deliver good funds to the Transfer Agent for such purpose, the Company will pay to the converting Holder interest on such repayment price at a rate of 15% per annum accruing from the Conversion Date until the repayment price plus any accrued but unpaid interest thereon is paid in full. If the converting Holder shall have elected to require the Company to obtain Shareholder Approval and such approval is not obtained by the Company within 60 days, then the Company shall repay the principal amount of the Debentures in excess of the Issuable Maximum as set forth in clause (I) above and, in such case the interest contemplated by the immediately preceding sentence shall be deemed to accrue from the Conversion Date. The entire repayment price, including interest thereon, and any interest accrued because of failure by the Company to obtain Shareholder Approval, shall be paid in cash by wire transfer of same day funds. "Shareholder Approval" means the approval by a majority of the total votes cast on the proposal, in person or by proxy, at a meeting of the shareholders of the Company held in accordance with the Company's articles of incorporation and by-laws, of the issuance by the Company of shares of Common Stock exceeding the Issuable Maximum as a consequence of the conversion of Debentures into Common Stock at a price less than the greater of the book or market value on the Original Issue Date as and to the extent required pursuant to Rule 4460(i) of the Nasdaq Stock Market (or any successor or replacement provision thereof). (iii) If on any Conversion Date applicable to a conversion under Section 4(a) or 5(b) or a repurchase pursuant to Section 5 the average Per Share Market Value for the five (5) Trading Days immediately preceding such Conversion Date exceeds the Initial Conversion Price (defined in Section 4(d)(i) below) by more than 50%, the Conversion Price otherwise applicable to such conversion shall be increased by an amount equal to 50% of the difference between (A) the average -6- Per Share Market Value for the five (5) Trading Days immediately preceding such Conversion Date, less (B) 150% of the Initial Conversion Price. (b) At any time on or after the first anniversary of the Original Issue Date, this Debenture shall be convertible in whole or in part and from time to time at the option of the Company into shares of Common Stock at the Conversion Ratio; provided, however, that the Company is not permitted to deliver or cause to be delivered a Company Conversion Notice (as defined below) (i) within 10 days of issuing any press release or other public statement relating to such conversion, (ii) prior to the 270th day after the date the Commission shall have declared effective a Registration Statement (as defined in the Registration Rights Agreement) (an "Underlying Securities Registration Statement"), (iii) at any time that an Underlying Securities Registration Statement is not then effective, (iv) if the shares of Common Stock issuable upon such conversion are not then listed for trading on the Nasdaq National Market or Nasdaq SmallCap Market, (v) if the Company shall not have duly reserved for issuance to the Holder a sufficient number of shares of Common Stock to issue upon such conversion, (vi) such conversion does not contravene Section 5(a)(ii) or (vii) at any time when while there are shares of Series A Preferred outstanding. The Company shall effect such conversion by delivering or causing to be delivered to the Holder a written notice in the form attached hereto as Exhibit B (the "Company Conversion Notice"), which Company Conversion --------- Notice, once given, shall be irrevocable. Each Company Conversion Notice shall specify the principal amount (and the amount of accrued but unpaid interest thereon) of Debentures required by the Company to be converted. The Company shall deliver or cause to be delivered such Company Conversion Notice at least two (2) Trading Days before the date of conversion indicated in the Company Conversion Notice (such date is hereinafter referred to as the "Company Conversion Date"). Any such conversion shall be effected on a pro rata basis among all holders of Debentures. Upon its receipt of a Company Conversion Notice, the Holder shall surrender the Debentures representing the principal amount subject to such Company Conversion Notice at the office of the Company or the Transfer Agent for the Debentures or Common Stock. The Company shall, upon conversion of the principal amount of Debentures subject to such Company Conversion Notice deliver or cause to be delivered to the appropriate tendering Holder, a replacement Debenture for such principal amount of Debentures as have not been converted. Each of a Holder Conversion Notice and a Company Conversion Notice is sometimes referred to herein as a "Conversion Notice," and each of a "Holder Conversion Date" and a "Company Conversion Date" is sometimes referred to herein as a "Conversion Date." (c) Not later than three (3) Trading Days after the Conversion Date, the Company will cause the Transfer Agent to deliver to the Holder (i) a certificate or certificates, representing the number of shares of Common Stock being acquired upon the conversion of Debentures (subject to reduction pursuant to Section 4(a)(ii) and (iii)), (ii) Debentures in a principal amount equal to the principal amount of Debentures tendered in connection with a conversion hereunder but not converted; (iii) a bank check in the amount of all accrued and unpaid interest in respect of the Debentures tendered for conversion (if the Company has elected (or is required pursuant to the terms hereof) to pay accrued interest in cash) and (iv) if the Company has elected (and is permitted pursuant to the terms hereof) to pay accrued interest in shares of Common Stock, certificates representing -7- such number of shares of Common Stock as equals such interest divided by the average Per Share Market Value for the five (5) Trading Days immediately preceding the Conversion Date. Any certificates representing shares of Common Stock to be delivered upon a conversion hereunder shall be free of restrictive legends and trading restrictions, except those contemplated by Section 4.1(b) of the Purchase Agreement. The Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of any Debentures and the counting of Trading Days for purposes of any consequences under this Section for a failure to deliver such certificates under this Section shall not begin until Debentures representing the principal amount to be converted are either delivered for conversion to the Transfer Agent for the Common Stock, or until the Holder notifies the Company that such Debentures have been lost, stolen or destroyed and provides a bond reasonably satisfactory to the Company (or other adequate security reasonably acceptable to the Company) to indemnify the Company from any loss incurred by it in connection therewith, provided that, if the Company or the Transfer Agent receives the original Debentures being converted on or prior to the time specified for the delivery of such shares of Common Stock or on or prior to the time at which liquidated damages begin to accrue, the date of the Holder Conversion Notice shall be deemed to be the date of delivery of such original Debentures. The Company shall, upon request of the Holder, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section 4(c) electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If such certificate or certificates are not delivered by the date required under this Section 4(c), the Holder shall be entitled by written notice to the Company and the Transfer Agent at any time on or before its receipt of such certificate or certificates, to rescind such conversion, in which event the Company shall immediately instruct the Transfer Agent to return the Debentures representing the principal amount subject to such conversion that were tendered for conversion. The Company shall pay to the converting Holder as liquidated damages and not as penalty, $3,000 for each day that the Company fails to deliver such certificate or certificates pursuant to this Section commencing the fifth (5th) Trading Day after the applicable Conversion Date. In addition, if the Company fails to deliver to the holder such certificate or certificates pursuant to this Section prior to the 15th day after the Conversion Date, the Company shall, at the Holder's option, (i) repay the principal amount of Debentures then held by such Holder, as requested by such Holder, in an amount equal to the repayment price contemplated below, and (ii) pay all accrued but unpaid interest on account of the Debentures for which the Company shall have failed to issue Common Stock certificates hereunder, in cash. The repayment price shall be equal to the product of (A) the average Per Share Market Value for the five Trading Days immediately preceding (1) the Conversion Date or (2) the date of payment in full by the Company of such repayment price, whichever is greater, and (B) the Conversion Ratio calculated on the Conversion Date. If the Holder has requested that the Company redeem Debentures pursuant to this Section and the Company fails for any reason to pay the repayment price under (2) above within seven days after such notice, the Company will pay interest on such repayment price at a rate of 15% per annum, in cash to such Holder, accruing from such seventh day until such repayment price and any accrued but unpaid interest thereon is paid in full. (d) (i) The conversion price (the "Conversion Price") in effect on any Conversion Date shall be the lesser of (A) the average Per Share Market Value for the five (5) -8- Trading Days immediately preceding the Original Issue Date (the "Initial Conversion Price"), (B) the average of the lowest Per Share Market Values for any five consecutive (5) Trading Days during the sixty (60) days immediately following the Original Issue Date or (C) 82 1/2% of the average Per Share Market Value for the five (5) Trading Days immediately preceding the Conversion Date; provided that, if (a) an Underlying Securities Registration Statement is not filed with the Securities and Exchange Commission (the "Commission") on or prior to March 24, 1997, or (b) the Company fails to file with the Commission a request for acceleration in accordance with Rule 12d1-2 promulgated under the Securities Exchange Act of 1934, as amended, within five (5) days of the date that the Company is notified by the Commission that an Underlying Securities Registration Statement will not be reviewed, or (c) if the Underlying Securities Registration Statement is not declared effective by the Commission on or prior to May 5, 1997, or (d) if such Underlying Securities Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective at any time prior to the expiration of the "Effectiveness Period" (as such term as defined in the Registration Rights Agreement), without being succeeded within 10 Business Days by a subsequent Underlying Securities Registration Statement filed with and declared effective by the Commission (any such failure being referred to as an "Event," and for purposes of clauses (A) and (B) the date on which such Event occurs, or for purposes of clause (C) the date on which such five (5) day period is exceeded, or for purposes of clause (D) the date which such 10 Business Day-period is exceeded being referred to as "Event Date"), the Initial Conversion Price (as adjusted) and the discount comprising the Conversion Price (if different from the Initial Conversion Price) shall be decreased by 1% each month (i.e., 81 1/2% as of the Event Date and 80 1/2% as of the one month anniversary of the Event Date) until such time as the applicable Event is cured. If such Event is not cured by the third month anniversary of the Event Date, commencing such third month anniversary the Initial Conversion Price (as adjusted) and the discount comprising the Conversion Price (if different from the Initial Conversion Price) shall be decreased each month by .5% (i.e., 80% as of the third anniversary of the Event Date and 79 1/2% as of the fourth month anniversary of the Event Date) and the Company shall pay to the Holders in cash, as liquidated damages and not a penalty, .5% of the aggregate principal amount of the Debentures outstanding on each monthly anniversary of the Event Date (each Holder being entitled to receive such portion of such amount as equals its pro rata portion of the principal amount of Debentures then outstanding), until such time as the applicable Event is cured. If such Event is not cured by the fifth month anniversary of the Event Date, the Company shall pay to the Holders in cash, as liquidated damages and not a penalty, 1% of the aggregate principal amount of the Debentures outstanding (each Holder being entitled to receive such portion of such amount as equals its pro rata portion of the principal amount of Debentures then outstanding) until such time as the applicable Event is cured. The adjustments contained in this Section are intended to be cumulative and any decrease in the Conversion Price shall be permanent. The provisions of this Section are not exclusive and shall in no way limit the Company's obligations under the Registration Rights Agreement. (ii) If the Company, at any time while any Debentures are outstanding, (a) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Junior Securities (as defined in Section 6) payable in shares of its capital stock (whether payable in shares of its Common Stock or of capital stock of any class), (b) subdivide outstanding shares of Common -9- Stock into a larger number of shares, or (c) combine outstanding shares of Common Stock into a smaller number of shares, the Initial Conversion Price (as adjusted, if applicable) shall be multiplied by a fraction the numerator of which shall be the number of shares of Common Stock of the Company outstanding before such event and the denominator of which shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 4(d)(ii) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. (iii) If the Company, at any time while any Debentures are outstanding, shall issue rights or warrants to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the average Per Share Market Value at the record date in the immediately following sentence, the Initial Conversion Price designated in Section 4(d)(i) (as adjusted, if applicable) shall be multiplied by a fraction, the denominator of which shall be the number of shares of Common Stock (excluding treasury shares, if any, but including warrants or options that would be included for purposes of determining earnings per share in accordance with generally accepted accounting principals) outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and the numerator of which shall be the number of shares of Common Stock (excluding treasury shares, if any, but including warrants or options that would be included for purposes of determining earnings per share in accordance with generally accepted accounting principals) outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such average Per Share Market Value. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. However, upon the expiration of any right or warrant to purchase Common Stock the issuance of which resulted in an adjustment in the Initial Conversion Price pursuant to this Section 4(d)(iii), if any such right or warrant shall expire and shall not have been exercised, the Initial Conversion Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Initial Conversion Price made pursuant to the provisions of this Section 4 after the issuance of such rights or warrants) had the adjustment of the Initial Conversion Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights or warrants actually exercised. (iv) If the Company, at any time while Debentures are outstanding, shall distribute to all holders of Common Stock (and not to holders of Debentures) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Section 4(d)(iii) above), then in each such case the Initial Conversion Price at which each Debenture shall thereafter be convertible shall be determined by multiplying the Initial Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction the denominator of which shall be the -10- Per Share Market Value determined as of such record date, and the numerator of which shall be such average Per Share Market Value on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Board of Directors in good faith; provided, -------- however, that in the event of a distribution exceeding ten percent (10%) of the - ------- assets of the Company, such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "Appraiser") selected in good faith by the holders of a majority of the principal amount of the Debentures then outstanding; and provided, further, that -------- ------- the Company, after receipt of the determination by such Appraiser shall have the right to select an additional Appraiser, in which case the fair market value shall be equal to the average of the determinations by each such Appraiser. In either case the adjustments shall be described in a statement provided to the Holder and all other holders of Debentures of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (v) All calculations under this Section 4 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (vi) Whenever the Initial Conversion Price is adjusted pursuant to Section 4(d)(ii),(iii), (iv) or (v), the Company shall instruct the Transfer Agent to promptly mail to the Holder, a notice setting forth the Initial Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (vii) In case of any reclassification of the Common Stock or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, the Holder shall have the right thereafter to convert the principal amount of this Debenture into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or compulsory share exchange and the Holder shall be entitled upon such event to receive such amount of securities or property as the shares of the Common Stock into which such Debentures could have been converted immediately prior to such event. (viii) If: (A) the Company shall declare a dividend (or any other distribution) on its Common Stock (other than a subdivision of the outstanding shares of Common Stock); or (B) the Company shall declare a special nonrecurring cash dividend on or authorize a repurchase or redemption of more -11- than 10,000 shares of its then outstanding Common Stock other than a repurchase or redemption of the Common Stock of an employee upon termination of employment with the Company for any reason; or (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock (other than a subdivision or combination of the outstanding shares of Common Stock), any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is to be converted into other securities, cash or property; or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding-up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Debentures, and shall cause to be mailed to the Holder at its last address as it shall appear upon the Debenture Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding-up; provided, -------- however, that the failure to mail such notice or any defect therein or in the - ------- mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. (e) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Debentures and payment of interest on Debentures, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder, such number of shares of Common Stock as shall be issuable upon the conversion of the aggregate principal -12- amount of all outstanding Debentures and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, and nonassessable. (f) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not to, or is unable to, make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (g) The issuance of certificates for shares of Common Stock upon conversion of Debentures shall be made without charge to the Holder for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder. (h) Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the attention of the Chief Financial Officer of the Company at the facsimile telephone number or address of the principal place of business of the Company and if applicable to the Transfer Agent, at the address set forth on the Book Entry Transfer Agent Agreement. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the Holder at the facsimile telephone number or address of the Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if delivered via facsimile at the facsimile telephone number specified in the Purchase Agreement prior to 4:30 p.m. (Eastern Standard Time) on a Trading Day, (ii) the Trading Day after the date of transmission, if delivered via facsimile at the facsimile telephone number specified in the Purchase Agreement later than 4:30 p.m. (Eastern Standard Time) on any date and earlier than 11:59 p.m. (Eastern Standard Time) on such date, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. Section 5. Prepayment by the Company. ---------- ------------------------- (a)(i) The Company shall have the right, exercisable at any time after all shares of Series A Preferred have been converted or redeemed upon 20 Trading Days notice to the Holders (the "Optional Prepayment Notice"), to prepay all or any portion of the principal amount of the Debentures then outstanding at a price (the "Optional Prepayment Price") equal to the product of (i) -13- the average Per Share Market Value for the five Trading Days immediately preceding (1) the 20th Trading Day after the date of the Optional Prepayment Notice or (2) the date of payment in full by the Company of the Optional Prepayment Price, whichever is greater, and (ii) the Conversion Ratio calculated on the 20th Trading Day after the Optional Prepayment Notice. The entire Optional Prepayment Price shall be paid in cash. (ii) The Holder shall have the right to continue to convert Debentures hereunder (and the Company shall honor such conversions) at any time from the date of the Optional Prepayment Notice through the 15th Trading Day thereafter. (iii) On the 16th Trading Day after the date of the Optional Prepayment Notice, the Holder shall deliver to the Transfer Agent the Debentures subject to the Optional Prepayment Notice that have not been previously tendered for conversion and the Company shall deliver to the Transfer Agent in escrow for the benefit of the Holder a sum (the "Escrowed Amount") equal to the product of (i) the average Per Share Market Value for the five Trading Days immediately preceding the 15th Trading Day after the date of the Optional Prepayment Notice and (ii) the Conversion Ratio calculated on the 15th Trading Day after the Optional Prepayment Notice. (iv) On the 20th Trading Day after the date of the Optional Prepayment Notice the Transfer Agent shall pay to the Holder the Escrowed Amount and the Company shall pay to the Holder the Optional Prepayment Price minus the Escrowed Amount. (b) If the Optional Prepayment Price shall not be paid in full within three Trading Days of the 20th Trading Day after the date of the Optional Prepayment Notice, the Company shall pay as liquidated damages and not as a penalty the sum of $7,500 per day in cash until such Optional Prepayment Price, together with all such liquidated damages, is paid in full. In addition, if the Company shall have failed to pay any portion of the Optional Prepayment Price within such three Trading Day period, then the Holder may demand that the Company (i) convert all or any portion of the principal amount of the Debentures for which the Optional Prepayment Price shall not have been paid (the "Unpaid Principal Portion") at a Conversion Price calculated as at the date of the Optional Prepayment Notice or the date of such conversion, whichever is lower, or (ii) promptly issue to the Holders new Debentures for a principal amount equal to the Unpaid Principal Portion. (c) Notwithstanding anything to the contrary contained herein, the Company may not deliver an Optional Prepayment Notice unless (i) there are not outstanding any shares of Series A Preferred for which a redemption notice has not been delivered and (ii) it has received (and furnished to the Holder evidence thereof reasonably satisfactory to it of) prior written consent of BNY to make such prepayment free from the subordination provisions of Section 8 hereof. Section 6. Definitions. For the purposes hereof, the following terms ---------- ----------- shall have the following meanings: -14- "Adjustment Amount" is equal to (i) the product of (A) the average Per Share Market Value for the five Trading Days immediately preceding (1) the applicable Trigger Date or (2) the date of payment of all amounts due as a result of such Event of Default, whichever is greater, and (B) the Conversion Ratio with respect to the aggregate principal amount of Debentures then outstanding calculated on (1) the applicable Trigger Date or (2) the date of payment of all amounts due as a result of such Event of Default, whichever yields a lower Conversion Price denominator for the determination of the Conversion Ratio, minus (ii) the aggregate principal amount of Debentures then outstanding, plus all accrued and unpaid interest thereon, and all other amounts due, except for those referred to in (i) above pursuant to the terms hereof. "BNY" means BNY Financial Corporation, 1290 Avenue of the Americas, New York, New York 10104. "BNY Bank Obligations" means the borrowings and interest due thereon (including, without limitation, any interest accruing after the commencement of any case, proceeding or other action relating to the liquidation, dissolution, assignment for the benefit of creditors, receivership, arrangement, bankruptcy, insolvency or reorganization of the Company regardless of whether such interest is allowable, payable or accruable to BNY in such case, proceeding or other action) under the Receivables Agreement, as the same may from time to time be amended, supplemented, otherwise modified, replaced or refinanced. "Business Day" means any day of the year on which commercial banks are not required or authorized to be closed in New York City. "Common Stock" means shares now or hereafter authorized of the class of Common Stock, par value $.001 per share, of the Company, stock of any other class into which such shares may hereafter be reclassified or changed and any other equity securities of the Company hereafter designated as Common Stock. "Conversion Ratio" means, at any time, the quotient obtained by dividing the principal amount represented by any Debenture plus accrued but unpaid interest but only to the extent not paid in shares of Common Stock pursuant to the terms hereof, by the Conversion Price at such time. "Junior Securities" means the Common Stock, all other equity securities of the Company and all other debt that is subordinated to the Debentures by its terms. "Original Issue Date" shall mean the date of the first issuance of this Debenture regardless of the number of transfers hereof. "Per Share Market Value" means on any particular date (a) the closing bid price per share of the Common Stock on such date on the Nasdaq National Market or other stock exchange on which the Common Stock is then listed, as reported on Bloomberg, L.P. or if there is no such bid price on such date, then the last closing bid price on such exchange on the date nearest preceding -15- such date, as reported on Bloomberg, L.P., or (b) if the Common Stock is not listed on the Nasdaq National Market or any stock exchange, the closing bid price for a share of Common Stock in the Nasdaq SmallCap Market, as reported on Bloomberg, L.P. (or similar organization or agency succeeding to its functions of reporting prices), or (c) if the Common Stock is no longer reported on Bloomberg, L.P. (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period as determined by the Holder, or (d) if the Common Stock is no longer publicly traded, the fair market value of a share of Common Stock as determined by an Appraiser selected in good faith by the holders of a majority of principal amount of outstanding Debentures; provided, however, that -------- ------- the Company, after receipt of the determination by such Appraiser, shall have the right to select an additional Appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such Appraiser. "Person" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Receivables Agreement" means the Accounts Receivable Management and Security Agreement, dated as of July 31, 1995, among the Company and BNY. "Trading Day" means (a) a day on which the Common Stock is traded on the Nasdaq National Market or Nasdaq SmallCap Market or principal national securities exchange or market on which the Common Stock has been listed or quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq National Market or Nasdaq SmallCap Market or any principal national securities exchange or market, a day on which the Common Stock is traded in the over-the- counter market, as reported by the NASDAQ Stock Market, or (c) if the Common Stock is not listed on the American Stock Exchange, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices). "Trigger Date" shall mean, (i) with respect to an Event of Default caused by an event described in Section 3(a), the date the payment of principal or interest at issue was due, (ii) with respect to an Event of Default caused by an event described in Section 3(b), the date specified in any other provision of this Debenture, the Purchase Agreement or the Registration Rights Agreement that require repayment of the outstanding principal amount of this Debenture as a result of an event so contemplated, if not, the date such event becomes and Event of Default pursuant to Section 3(b), (iii) with respect to an Event of Default caused by an event described in Section 3(c) or (d), the date of such event becomes an Event of Default pursuant to such Sections and (v) with respect to an Event of Default caused by an event described in Section 3(e), the effective date of the merger or consolidation. Section 7. Except as expressly provided herein, no provision of this ---------- Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Debenture at the time, place, and rate, and in the coin or currency, -16- herein prescribed. This Debenture is a direct obligation of the Company. This Debenture ranks pari passu with all other indebtedness, obligations or ---------- liabilities of the Company now or hereafter issued under the terms set forth herein. The Company may not prepay the outstanding principal amount on the Debentures except in accordance with the specific terms hereof. Section 8. (a) This Debenture is subordinated to full payment of all ---------- of the Company's obligations under the BNY Bank Obligations. Except to the extent otherwise specifically set forth in this Section, until such time as all BNY Bank Obligations are indefeasibly paid to BNY, the Company shall not, directly or indirectly, make any cash or other payment (except for the issuance and delivery of shares of Common Stock in respect of conversions or payments of interest hereunder) that is due and owing under this Debenture. Cash payments contemplated by Sections 4(a)(ii), 4(c) or 4(d) hereof, to the extent such payments do not exceed, in the aggregate, $500,000, may be made by the Company to (and retained by) the Holders as long as (i) at the time any such payment is due under such Sections, the Bank has not given notice to the Company of acceleration of the Company's obligations under the Receivables Agreement or (ii) the making of such payment shall not cause (as determined at the time such payment shall become due to the Holders) the Company to exceed the borrowing limitations set forth in Section 2 of the Receivables Agreement, or cause an "Event of Default" (as defined under the Receivables Agreement) under Section 18(a) of the Receivables Agreement. Cash payments contemplated by Sections 4(a)(ii), 4(c) or 4(d) hereof, to the extent that such payments, in the aggregate, exceed $500,000, may be made by the Company to (and retained by) the Holders as long as (i) at the time any such payment is due under such Sections, the Bank has not given notice to the Company of acceleration of the Company's obligations under the Receivables Agreement, or (ii) at the time such payment becomes due the Company shall not be in default of Sections 12(n), 12(o), 12(p), 12(q), 18(a), 18(i) or 18(j) of the Receivables Agreement, or (iii) the making of such payment shall not cause (as determined at the time such payment shall become due to the Holders) an Event of Default under such Receivables Agreement sections set forth in (ii) immediately above or cause the Company to exceed the borrowing limitations set forth in Section 2 of the Receivables Agreement. The subordination provided hereunder shall in no way limit the Holders' ability to convert Debentures into shares of Common Stock and to receive payment of interest hereunder in shares of Common Stock, including after such time as any Event of Default shall be declared hereunder. (b) Should any payment, other than payments contemplated in Section 8(a) above, be received by the Holders, such payment shall be held in trust by the Holders for the benefit of BNY and shall be delivered forthwith to BNY for application to BNY Bank Obligations, in the form received with any necessary endorsement or assignment. Section 9. This Debenture shall not entitle the Holder to any of the ---------- rights of a stockholder of the Company, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof. -17- Section 10. If this Debenture shall be mutilated, lost, stolen or ----------- destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company. Section 11. This Debenture shall be governed by and construed in ----------- accordance with the laws of the State of New York, without giving effect to conflicts of laws thereof. Section 12. Any waiver by the Company or the Holder of a breach of ----------- any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing. Section 13. If any provision of this Debenture is invalid, illegal ----------- or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. Section 14. Whenever any payment or other obligation hereunder shall ----------- be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next calendar month, the preceding Business Day in the appropriate calendar month). [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] SIGNATURE PAGE FOLLOWS] -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 EXHIBIT A NOTICE OF CONVERSION AT THE ELECTION OF HOLDER (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby irrevocably elects to convert the above Debenture No. [ ] into shares of Common Stock, par value $.001 per share (the "Common Stock"), of YES! Entertainment Corporation (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the Holder for any conversion, except for such transfer taxes, if any. Conversion calculations: ______________________________________________________ Date to Effect Conversion ______________________________________________________ Principal Amount of Debentures to be Converted ______________________________________________________ Applicable Conversion Price ______________________________________________________ Amount of Interest due on the Principal Amount of Debentures to be Converted ______________________________________________________ Signature ______________________________________________________ Name: ______________________________________________________ Address: The Company undertakes to promptly upon its receipt of this conversion notice (and, in any case prior to the time it effects the conversion requested hereby), notify the converting holder by facsimile of the number of shares of Common Stock outstanding on such date and the number of shares of Common Stock which would be issuable to the holder if the conversion requested in this conversion notice were effected in full, whereupon, if the Company determines that such conversion would result in the holder owning in excess of 4.9% of the outstanding shares of Common Stock on such date, the Company shall convert up to an amount equal to 4.9% of the outstanding shares of Common Stock and shall issue to the holder one or more Debenture(s) which have not been converted as a result of this provision. EXHIBIT B YES! ENTERTAINMENT CORPORATION NOTICE OF CONVERSION AT THE ELECTION OF THE COMPANY The undersigned in the name and on behalf of YES! Entertainment Corporation (the "Company") hereby notifies the addressee hereof that the Company hereby elects to exercise its right to convert the above Debenture No. [ ] into shares of Common Stock, $.001 par value per share (the "Common Stock"), of the Company according to the conditions hereof, as of the date written below. No fee will be charged to the Holder for any conversion hereunder, except for such transfer taxes, if any, which may be incurred by the Company if shares are to be issued in the name of a person other than the person to whom this notice is addressed. Conversion calculations: ______________________________________________________ Date to Effect Conversion ______________________________________________________ Principal Amount of Debentures to be Converted ______________________________________________________ Applicable Conversion Price ______________________________________________________ Amount of Interest due on the Principal Amount of Debentures to be Converted ______________________________________________________ Number of Shares of Common Stock outstanding at close of trading on Conversion Date ______________________________________________________ Signature ______________________________________________________ Name: ______________________________________________________ Address: EX-4.3 4 FORM OF WARRANT EXHIBIT 4.3 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS WARRANT IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN AN AMENDED AND RESTATED CONVERTIBLE DEBENTURE AND CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, DATED AS OF MARCH 18, 1997, BETWEEN THE COMPANY AND THE ORIGINAL HOLDER HEREOF. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF YES! ENTERTAINMENT CORPORATION. YES! ENTERTAINMENT CORPORATION WARRANT ------- Dated March 18, 1997 YES! ENTERTAINMENT CORPORATION, a Delaware corporation (the "Company"), hereby certifies that, for value received, [ ], a corporation organized and existing under the laws of Nevis, West Indies or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company from time to time up to a total of [ ] shares of Common Stock, par value $.001 per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price per share equal to the lesser of (a) $7.875 or (b) 125% of the average of the lowest Per Share Market Values (as defined below) for any five (5) consecutive Trading Days (as defined below) during the sixty (60) Trading Days following the date hereof, (as adjusted from time to time as provided in Section 7, the "Exercise Price"), at any time after the date hereof and until and including March 18, 2002 (the "Expiration Date"), and subject to the terms and conditions set forth in this Warrant. For purposes of calculating the Exercise Price, the following definitions shall apply: "Per Share Market Value" means on any particular date (a) the closing bid price per share of the Common Stock on such date on the Nasdaq National Market or other stock exchange on which the Common Stock is then listed, as reported on Bloomberg, L.P. or if there is no such bid price on such date, then the last closing bid price on such exchange on the date nearest preceding such date, as reported on Bloomberg, L.P., or (b) if the Common Stock is not listed on the Nasdaq National Market or any stock exchange, the closing bid price for a share of Common Stock in the Nasdaq SmallCap Market, as reported on Bloomberg, L.P. (or similar organization or agency succeeding to its functions of reporting prices), or (c) if the Common Stock is no longer reported on Bloomberg, L.P. (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period as determined by the Holder, or (d) if the Common Stock is no longer publicly traded, the fair market value of a share of Common Stock as determined by an Appraiser selected in good faith by the Holder; provided, however, that the Company, after receipt of the determination by such - -------- -------- Appraiser, shall have the right to select an additional Appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such Appraiser. "Trading Day" means (a) a day on which the Common Stock is traded on the Nasdaq National Market or Nasdaq SmallCap Market or principal national securities exchange or market on which the Common Stock has been listed or quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq National Market or Nasdaq SmallCap Market or any principal national securities exchange or market, a day on which the Common Stock is traded in the over-the- counter market, as reported by the NASDAQ Stock Market, or (c) if the Common Stock is not listed on the American Stock Exchange, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices). 1. Registration of Warrant. The Company shall register this Warrant, ----------------------- upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. --------------------------------------- a. The Company shall register or instruct the Transfer Agent (as such term is defined in the Book Entry Transfer Agreement, dated as of January 28, 1997 (the "Transfer Agent Agreement") between the Company, the original Holder and the transfer agent of the Company) to register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Transfer Agent or to the Company at the office specified in or pursuant to Section 3(b). Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. b. This Warrant is exchangeable, upon the surrender hereof by the Holder to the Transfer Agent or at the office of the Company specified in or pursuant to Section 3(b) for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. -2- 3. Duration and Exercise of Warrants. --------------------------------- a. This Warrant shall be exercisable by the registered Holder on any business day before 5:00 P.M., New York time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., New York time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. b. Subject to Sections 2(b), 4 and 8, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Transfer Agent at The First National Bank of Boston, 435 Tasso Street, Suite 250, Palo Alto, California 94301, Attention: Dennis Roy ((415) 853-1409) or to Company at its office at 3875 Hopyard Road, Pleasanton, CA 94588, Attention: Chief Financial Officer, or at such other address as the Company may specify in writing to the then registered Holder, and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in lawful money of the United States of America, in cash or by certified or official bank check or checks, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 days thereafter) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends other than legends that may be required in the opinion of the Company's counsel in the event at such time there is not an effective Registration Statement (as defined in the Registration Rights Agreement, dated January 28, 1997, between the Company, Infinity Investors Limited, a corporation organized and existing under the laws of Nevis, West Indies and Fairway Capital Limited, a corporation organized and existing under the laws of Nevis, West Indies). Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Transfer Agent or the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. c. This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares so long as at least 10,000 Warrant Shares are purchased in any one exercise. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. 4. Payment of Taxes. The Company will pay all documentary stamp taxes ---------------- attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares in a name other than that of the Holder, and the Company shall not be required to issue or cause to be issued or deliver or cause to be delivered the certificates for Warrant Shares unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. -3- 5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or ---------------------- destroyed, the Company may in its discretion issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. 6. Reservation of Warrant Shares. The Company covenants that it will at ----------------------------- all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders (taking into account the adjustments and restrictions of Section 7). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and freely tradeable. 7. Certain Adjustments. The Exercise Price and number of Warrant Shares ------------------- issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 7. Upon each such adjustment of the Exercise Price pursuant to this Section 7, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. a. If the Company, at any time while this Warrant is outstanding, (a) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Junior Securities (as such term is defined in the Debenture) payable in shares of Common Stock, (b) subdivide outstanding shares of Common Stock into a larger number of shares, or (c) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. b. In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right -4- to receive the securities or property set forth in this Section 7(b) upon any exercise following such consolidation, merger, sale, transfer or share exchange. This provision shall similarly apply to successive reclassifications, consolidations, mergers, sales, transfers or share exchanges. c. If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 7(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "Appraiser") selected in good faith by the holders of a majority in interest of - ---------- the Warrants then outstanding. d. Except for rights and warrants issued by the Company to key employees or in connection with Company matching contributions pursuant to the Company's 401(k) plan or other employee stock purchase plan, if, at any time while this Warrant is outstanding, the Company shall issue or cause to be issued rights or warrants to acquire or otherwise sell or distribute shares of Common Stock to all holders of Common Stock for a consideration per share less than the Exercise Price then in effect, then, forthwith upon such issue or sale, the Exercise Price shall be reduced to the price (calculated to the nearest cent) determined by dividing (i) an amount equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issue or sale (excluding treasury shares, if any, but including warrants or options that would be included for purposes of determining earnings per share in accordance with generally accepted accounting principals) multiplied by the Exercise Price, and (B) the consideration, if any, received or receivable by the Company upon such issue or sale by (ii) the total number of shares of Common Stock outstanding immediately after such issue or sale (excluding treasury shares, if any, but including warrants or options that would be included for purposes of determining earnings per share in accordance with generally accepted accounting principals). e. For the purposes of this Section 7, the following clauses shall also be applicable: 1. Record Date. In case the Company shall take a record of the ----------- holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or (B) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. 2. Treasury Shares. The number of shares of Common Stock --------------- outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. f. All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. -5- g. Whenever the Exercise Price is adjusted pursuant to Section 7(c) above or Section 7(i) below, the Company, after receipt of the determination by the Appraiser shall have the right to select an additional Appraiser, in good faith, in which case the adjustment shall be equal to the average of the adjustments recommended by each Appraiser. The Company shall promptly mail or cause to be mailed to each Holder, a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such adjustment shall become effective immediately after the record date mentioned above; provided, however, that no such adjustment of the -------- ------- Exercise Price shall be made which in the opinion of the Appraiser(s) giving the aforesaid opinion or opinions would result in an increase of the Exercise Price to more than the Exercise Price then in effect. All determinations with respect to adjustments by the Company hereunder shall be made by the Board of Directors in good faith. h. If: 1. the Company shall declare a dividend (or any other distribution) on its Common Stock; or 2. the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or 3. the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or 4. the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or 5. the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; -6- provided, however, that the failure to mail such notice or any defect therein or - -------- ------- in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. i. If at any time conditions shall arise by reason of action taken by the Company which in the opinion of the Board of Directors are not adequately covered by the other provisions hereof and which might materially affect the rights of the Holders (different than or distinguished from the effect generally on rights of holders of any class of the Company's capital stock) or if any time such conditions are expected to arise by reason of any action contemplated by the Company, the Company shall mail a written notice briefly describing the action contemplated and the material adverse effects of such action on the rights of the Holders at least 30 calendar days prior to the effective date of such action, and an Appraiser selected by the Holders of majority in interest of this Warrant shall give its opinion as to the adjustment, if any (not inconsistent with the standards established in Section 7(e)), of the Exercise Price (including, if necessary, any adjustment as to the Warrant Shares to be purchased upon exercise of this Warrant) and any distribution which is or would be required to be preserved without diluting the rights of the Holders. 8. Fractional Shares. The Company shall not be required to issue or ----------------- cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 8, be issuable on the exercise of this Warrant, the Company shall, at its option, (a) pay an amount in cash equal to the Exercise Price multiplied by such fraction or (b) shall round the number of Warrant Shares issuable, up to the next whole number of such shares. 9. Notices. Any and all notices or other communications or deliveries ------- hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 4:30 p.m. (Eastern Standard Time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 4:30 p.m. (Eastern Standard Time) on any date and earlier than 11:59 p.m. (Eastern Standard Time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (1) if to the Company, to YES! ENTERTAINMENT CORPORATION, 3875 Hopyard Road, Pleasanton, CA 94558, Attention: Chief Financial Officer, or to facsimile no. (510) 734-0997, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 9. 10. Warrant Agent. ------------- a. The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company and the Holder may appoint a new warrant agent. b. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the register maintained by the warrant agent pursuant to this Warrant. -7- 11. Miscellaneous. ------------- a. This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder. b. Subject to Section 11(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company, the Holder and any registered holder of Warrant Shares any legal or equitable right, remedy or cause under this Warrant; this Warrant shall be for the sole and exclusive benefit of the Company, the Holder and any other registered holder of Warrant Shares. c. This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. d. The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. e. In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] [SIGNATURE PAGE FOLLOWS] -8- IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. YES! ENTERTAINMENT CORPORATION By:______________________________________ Name: Donald D. Kingsborough Title: Chief Executive Officer FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To YES! Entertainment Corporation: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase _____________ shares of Common Stock ("Common Stock"), par value $.001 per share, of YES! Entertainment Corporation and encloses herewith $________ in cash (or encloses herewith evidence of payment of such sum), which sum represents the Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER _______________________________________________________________ _______________________________________________________________________________ (Please print name and address) _______________________________________________________________________________ _______________________________________________________________________________ If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: _______________________________________________________________________________ (Please print name and address) _______________________________________________________________________________ _______________________________________________________________________________ Dated: ___________, _____ Name of Holder: (Print) ________________________________________________________________ (By:) __________________________________________________________________ (Title:) _______________________________________________________________ [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of YES! ENTERTAINMENT CORPORATION to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of YES! ENTERTAINMENT CORPORATION with full power of substitution in the premises. Dated: _______________, ____ ___________________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ___________________________________________________ Address In the presence of: __________________________ EX-99.1 5 PRESS RELEASE EXHIBIT 99.1 YES! ENTERTAINMENT CORPORATION ANNOUNCES SUPERSEDING PRIVATE PLACEMENT PLEASANTON, CALIFORNIA, MARCH 24, 1997 -- YES! ENTERTAINMENT CORPORATION (Nasdaq NM Symbol: YESS) today announced that it has entered into an agreement superseding the private placement to certain institutional buyers completed January 28, 1997 in which it raised $10 million through the sale of 5% convertible subordinated debentures and 300,000 warrants. The parties agreed to supersede the transaction with the issuance by the Company of convertible subordinated debentures in the principal amount of approximately $1,567,000, 85,000 shares of convertible preferred stock at a per share price of $100 and 300,000 warrants. The debentures are convertible into common stock at variable prices depending on market conditions, the convertible preferred stock is convertible into common stock and pays a cumulative dividend at a rate of 6-1/2% per annum, and the warrants are exercisable for common stock. The direct investment was made in January 1997 with funds advised by Brown Simpson LLC, a New York based fund advisory and capital management firm. Pennsylvania Merchant Group acted as placement agent for the company. The direct investment of the debentures and warrants has not been registered under the Securities of Act of 1933, as amended, or applicable state securities laws, and may not be offered or sold absent registration under the Securities Act and applicable state securities laws or available exemptions from registrations. However, the company is obligated to file a registration statement for the sale of the Common Stock underlying the debentures, the preferred stock and the warrants. YES! Entertainment Corporation develops, manufactures and markets toys and other entertainment products, including a variety of interactive products. YES! uses innovative technology to design products that are fun for children and build on their natural creativity. # # # -----END PRIVACY-ENHANCED MESSAGE-----