-----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, Qoo7EvUTHTSFpUyx+RNZi0sDUSHLYySpxJwvMK71jgiJ8nkpVCDbHtR94Q22KAkc b6ZJlp7gR/byh04NgrNKPw== 0000944209-97-000357.txt : 19970326 0000944209-97-000357.hdr.sgml : 19970326 ACCESSION NUMBER: 0000944209-97-000357 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 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: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-23917 FILM NUMBER: 97562635 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 S-3 1 REGISTRATION STATEMENT ON FORM S-3 As filed with the Securities and Exchange Commission on March 25, 1997 Registration No. 333- ______ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 REGISTRATION STATEMENT ON FORM S-3 Under The Securities Act of 1933 ---------------- YES! ENTERTAINMENT CORPORATION (Exact name of Registrant as specified in its charter) ---------------- Delaware 94-3165290 - ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3875 Hopyard Road, Suite 375 Pleasanton, CA 94588 (510) 847-9444 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ---------------- BRUCE D. BOWER, ESQ. Executive Vice President, General Counsel and Secretary 3875 Hopyard Road, Suite 375 Pleasanton, CA 94588 (510) 847-9444 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- Copies to: RICHARD J. CHAR, ESQ. KENNETH L. HENDERSON, ESQ. DEBRA B. ROSLER, ESQ. ERIC L. COHEN, ESQ. Wilson Sonsini Goodrich & Rosati Robinson Silverman Pearce Aronsohn Professional Corporation Berman LLP 650 Page Mill Road 1290 Avenue of the Americas Palo Alto, California 94304 New York, New York 10104 (415) 493-9300 (212) 541-2000 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ---------------- If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [x] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _______ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _______ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
================================================================================================================ Proposed Proposed Maximum Maximum Amount of Amount to be Offering Price Aggregate Registration Title of Securities to be Registered Registered Per Share(1) Offering Price(1) Fee ================================================================================================================ Common Stock, par value $.001 per share 4,325,591 $4.969 $21,493,862 $6,513 - ----------------------------------------------------------------------------------------------------------------
(1) Estimated in accordance with Rule 457(c) solely for the purpose of calculating the registration fee based upon the average of the high and low sale prices of the Common Stock as reported on the Nasdaq National Market on March 20, 1997. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. PROSPECTUS YES! ENTERTAINMENT CORPORATION 4,325,591 SHARES OF COMMON STOCK (PAR VALUE $.001 PER SHARE) The 4,325,591 shares of Common Stock of YES! Entertainment Corporation, a Delaware corporation ("YES!" or the "Company") offered hereby (the "Common Stock") are being sold by the Selling Stockholders identified herein (the "Selling Stockholders"). The Company will not receive any of the proceeds from the sale of the securities offered hereby. Such offers and sales may be made on one or more exchanges, in the over- the-counter market, or otherwise, at prices and on terms then prevailing, or at prices related to the then-current market price, or in negotiated transactions, or by underwriters pursuant to underwriting agreements in customary form, or in a combination of any such methods of sale. The Selling Stockholders may also sell such shares in accordance with Rule 144 under the Securities Act. See "Plan of Distribution." The Selling Stockholders are identified and certain information with respect to them is provided under the caption "Selling Stockholders" herein. The expenses of the registration of the securities offered hereby, including fees of counsel for the Company, will be paid by the Company. The underwriting discounts and selling commissions, if any, and fees of legal counsel, if any, for the Selling Stockholders, will be borne by the Selling Stockholders. The filing by the Company of this Prospectus in accordance with the requirements of Form S-3 is not an admission that any person whose shares are included herein is an "affiliate" of the Company. The Selling Stockholders have advised the Company that they have not engaged any person as an underwriter or selling agent for any of such shares, but they may in the future elect to do so, and they will be responsible for paying such a person or persons customary compensation for so acting. The Selling Stockholders and any broker executing sell orders on behalf of any Selling Stockholder may be deemed to be "underwriters" within the meaning of the Securities Act, in which event commissions received by any such broker may be deemed to be underwriting commissions under the Securities Act. The Company's Common Stock is traded on the Nasdaq National Market under the symbol YESS. On March 20, 1997, the last reported sales price of the Common Stock as reported on the Nasdaq National Market was $4.969 per share. -------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS. -------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. MARCH 25, 1997 TABLE OF CONTENTS
Page ---- Incorporation of Certain Documents by Reference... 2 Prospectus Summary................................ 3 The Company....................................... 3 Risk Factors...................................... 4 Dividend Policy................................... 8 Selling Stockholders.............................. 8 Plan of Distribution.............................. 9 Legal Matters..................................... 9 Experts........................................... 10 Available Information............................. 10
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents or portions of documents heretofore filed by the Company with the Securities and Exchange Commission (the "Commission") (File No. 0-25916) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") are incorporated herein by reference: (1) Annual Report on Form 10-K for the year ended December 31, 1995; (2) Quarterly Report on Form 10-Q for the quarter ended March 31, 1996; (3) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996; (4) Quarterly Report on Form 10-Q for the quarter ended September 30, 1996; (5) Proxy Statement for Annual Meeting of Shareholders held on May 22, 1996; (6) Proxy Statement for Special Meeting of Shareholders held on September 24, 1996; (7) Current Report on Form 8-K filed on February 11, 1997; (8) Current Report on Form 8-K filed on March 25, 1997; and (9) the description of the Company's Common Stock contained in the Company's Registration Statement on Form 8-A filed with the Commission under the Exchange Act on April 20, 1995, declared effective on June 7, 1995 and amended by the Company's Registration Statement on Form 8-B filed on October 31, 1996. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing of such reports and documents. The Company will provide without charge to each person to whom this Prospectus is delivered, a copy of any and all of such documents which are incorporated herein by reference (exclusive of exhibits unless such exhibits are specifically incorporated by reference herein), upon written request to YES! Entertainment Corporation, 3875 Hopyard Road, Suite 375, Pleasanton, California 94588, to the attention of the Secretary (telephone number (510) 847-9444). Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for the purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document that also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. 2 PROSPECTUS SUMMARY YES! and YAK BAK are registered trademarks and YES! GEAR, MEGA, POWER PENZ, V-LINK, AIR VECTORS, YES! PRE-SCHOOL, YES! GIRL, DISGUSTING DESIGNS, RADICAL AIR WEAPONS (R.A.W.), YES! EXTREME and YES! GAMES are trademarks of YES! Entertainment Corporation. MRS. FIELDS is a registered trademark of the Mrs. Fields Development Corporation. BASKIN 31 ROBBINS is a registered trademark of Baskin-Robbins USA, Incorporated. THE COMPANY YES! Entertainment Corporation ("YES!" or the "Company") develops, manufactures and markets toys and other entertainment products, including a variety of interactive products. YES! applies innovative technology available in other industries to design products that are fun for children and build on their natural creativity. Most of YES!'s products target children between the ages of two and twelve, a market of over 45 million in North America alone. YES! has introduced several lines of products since being founded in December 1992. A substantial portion of the Company's current products are marketed under the YES! Gear brand. YES! Gear is comprised of the Company's Yak Bak and Mega lines of products. These products, which include both children's electronic and audio products, are designed to appeal to kids six to twelve years of age with their high impact design and unique play activities. The Company also markets Power Penz, a line of pens that incorporate toys and activities. In 1996, the Company also launched a line of food activity products with Mrs. Fields Baking Factory, a toy oven using mixes developed in conjunction with the Mrs. Fields Development Corporation, and V-Link, a new line of communications products designed to be a short-range, toll-free radiophone system that includes voice-messaging, conference call and private conversation features. In 1997, the Company expects to introduce a number of new products and product lines. These include the Baskin-Robbins Ice Cream Maker, a toy ice cream maker with which children can prepare ice cream for their family using delicious mixes developed in conjunction with Baskin-Robbins USA, Incorporated., Air Vectors, a line of small vehicles for boys that transform and launch flying objects, such as airplanes or missiles, YES! Pre-School, a line of pre-school products with incorporate popular features from YES!'s highly successful Yak Bak line, YES! Girl, a line of electronic toys and activities specially for girls, Disgusting Designs, a ghoulish new art activity center for boys, and Radical Air Weapons (R.A.W.), a line of toy guns that shoot foam balls that expand three times their original size in the air. YES! was incorporated in California in September 1992 and began operations in November 1992. The Company changed its state of incorporation to Delaware in October 1996. The Company generated net revenues of $69.7 million, $55.7 million, $36.4 million and $25.9 million in 1996, 1995, 1994 and 1993, respectively. The Company incurred operating losses from its inception through the quarter ended June 30, 1995, incurred a net loss of approximately $12.6 million in 1996, and had an accumulated deficit of approximately $52.7 million at December 31, 1996. The Company's executive offices are located at 3875 Hopyard Road, Suite 375, Pleasanton, California 94588 and its telephone number is (510) 847-9444. 3 RISK FACTORS The securities offered hereby involve a high degree of risk. Accordingly, in analyzing an investment in these securities, prospective investors should carefully consider the following risk factors, along with other information referred to herein. No investor should participate in this offering unless such investor can afford the loss of his or her entire investment. Because of the variety and uncertainty of the factors affecting the Company's operating results, past financial performance and historic trends may not be a reliable indicator of future performance. These factors, as well as other factors affecting the Company's operating performance, and the fact that the Company participates in a highly dynamic industry, may result in significant volatility in the Company's common stock price. This prospectus contains certain forward- looking statements based on current expectations which involve risks and uncertainties. Actual results and the timing of certain events may differ materially from those projected in such forward-looking statements due to a number of risk factors, including those set forth below. Limited Operating History; History of Losses; Accumulated Deficit. The Company has a short operating history, having commenced operation in November 1992 and shipped its first product in July 1993. Although the Company has achieved approximately $188 million in cumulative net sales through December 31, 1996, the Company incurred substantial operating losses in 1993 and 1994 and again in 1996, and at December 31, 1996 had an accumulated deficit of approximately $52.7 million. Future profitability is dependent upon the Company's ability to successfully and timely introduce, finance and manufacture its new products, successfully market its existing products and collect trade receivables in a timely manner. Dependence on 1997 Products. In 1997, the Company has introduced and expects to commence sales of a number of new product lines in new product categories, such as the Baskin-Robbins Ice Cream Maker, Air Vectors, YES! Extreme, YES! Games and YES! Pre-School. In addition, the Company also expects to expand its existing product lines in 1997, particularly its YES! Gear and Power Penz line of products. Manufacturing of certain of these items in commercial quantities has not commenced or is just commencing. The Company expects that completing the development and the manufacture of its 1997 product lines will place great demands on management and other Company resources. If the Company is not able to complete the development, tooling, manufacture and successful marketing of its 1997 product lines, the Company's operating results and financial condition would be materially adversely affected. Dependence on YES! Gear and Power Penz. The majority of the Company's current product lines are sold under the YES! Gear and Power Penz brands, which together accounted for 83% and 58% of the Company's sales in 1996 and 1995, respectively. The Company expects the YES! Gear, in particular the Yak Bak, and the Power Penz product lines to continue to account for a substantial percentage of the Company's business. In addition, the Company is aware that a number of toy manufacturers have attempted to duplicate the Company's success in this area of product by introducing similar lines of products in 1996 and for 1997. While the Company believes it will compete favorably with these new products on the basis of styling, quality, product depth and promotional support, there can be no assurance that the sale of these competitive products will not impact the sale of the YES! Gear or Power Penz product lines, particularly on the basis of price. Just in Time Inventory; Compressed Sales Cycles. Most of the Company's most significant customers have adopted inventory management systems to track sales of particular products and rely on reorders being filled rapidly by suppliers, rather than maintaining large on-hand inventories to meet consumer demand. While these systems reduce a retailer's investment in inventory, they increase pressure on suppliers like the Company to fill orders promptly and shift a significant portion of inventory risk to the supplier. The limited inventory carried by the 4 Company's customers may also reduce or delay consumer sell-through which in turn could impair the Company's ability to obtain reorders of its product in quantities necessary to permit the Company to achieve planned sales and income growth. In addition, the Company may be required to incur substantial additional expense to fill late reorders in order to ensure the product is available at retail prior to Christmas; these may include drop-shipment expense and higher advertising allowances which would otherwise be born by the Company's customers. In the event that anticipated reorders do not materialize, the Company may incur increased inventory carrying costs. Changes in 1997 Product Line. The Company constantly evaluates the toy markets and its development and manufacturing schedules. As the year progresses, the Company may elect to reduce the number of products it currently plans on shipping in 1997 for a variety of reasons, which include but are not limited to more accurate evaluation of demand, supply and manufacturing difficulties, or competitive considerations. Similarly, the Company may add products to its 1997 line either by accelerating development schedules or strategic acquisitions of current product lines. Reducing or adding products from and to the Company's line may have an impact on the Company's financial performance depending on, among other things, the price points, advertising and promotional support for and development, tooling and manufacturing costs of such products, relative to products they replace or are replaced by, as the case may be, if at all. Sales Concentration Risk. The Company's ten largest customers accounted for approximately 85%, 87% and 68% of net sales for the years ending December 31, 1996, 1995 and 1994, respectively. For the year ended December 31, 1996, the Company's two largest customers, Toys "R" Us and Wal-Mart, Inc., accounted for 21% and 20% of net sales, respectively. For the year ended December 31, 1995, the same two customers each accounted for approximately 27% of net sales and for the year ended December 31, 1994, Toys "R" Us and Wal-Mart, Inc. accounted for 21% and 14% of net sales, respectively. While the Company intends to expand distribution to new accounts, the Company expects to continue to depend on a relatively small number of customers for a significant percentage of its sales. Significant reductions in sales to any one or more of the Company's largest customers would have a material adverse effect on the Company's operating results. Because orders in the toy industry are generally cancelable at any time without penalty, there can be no assurance that present or future customers will not terminate their purchase arrangements with the Company or significantly change, reduce or delay the amount of products ordered from the Company. Any such termination of a significant customer relationship or change, reduction or delay in significant orders could have a material adverse effect on the Company's operating results. Price Protection; Stock Balancing; Reliance on Timely Payment. In connection with the introduction of new products, many companies in the toy industry discount prices of existing products, provide for certain advertising allowances and credits or give other sales incentives to their customers, particularly their most significant customers. In addition, in order to address working capital requirements, sales of inventory, changes in marketing trends and other issues, many companies in the toy industry allow retailers to return slow-moving products for credit, or if the manufacturer lowers the prices of its products, to provide price adjustments for inventories on hand at the time the price change occurs. The Company has made such accommodations in the past, and there can be no assurance that the Company will not make accommodations such as stock balancing, returns, other allowances or price protection adjustments to a significant degree in the future. Any such accommodations by the Company in the future could have a material adverse effect on the Company's operating results. In addition, in the past certain of the Company's retail customers have delayed payment beyond the date such payment is due. Delays in payments from retail customers in the future could materially impact the Company's anticipated cash flow to the detriment of the Company's business. Seasonality. The Company's revenues, as with many other toy companies, are highly seasonal, with a majority of retail sales occurring during the December holiday season. Accordingly, the Company expects that its operating results will vary significantly from quarter to quarter, particularly in the quarters ending September 30, and December 31, when the majority of products are shipped to the Company's customers. 5 Short Product Cycles. Consumer preferences in the toy industry are continuously changing and are difficult to predict. Few products achieve market acceptance, and even when they do achieve commercial success, products typically have short life cycles. There can be no assurance that (i) new products introduced by the Company will achieve any significant degree of market acceptance, (ii) acceptance, if achieved, will be sustained for any significant amount of time, or (iii) such products' life cycles will be sufficient to permit the Company to recover development, manufacturing, marketing and other costs associated therewith. In addition, sales of the Company's existing product lines are expected to decline over time, and may decline faster than expected unless existing products are enhanced or new product lines are introduced. Failure of new product lines to achieve or sustain market acceptance would have a material adverse effect on the Company's operating results and financial condition. International Business Risk. The Company will rely in 1997 principally on foreign distributors to market and sell the Company's products outside the United States. Although the Company's international sales personnel work closely with its foreign distributors, the Company cannot directly control such entities' sales and marketing activities and, accordingly, cannot directly manage the Company's product sales in foreign markets. In addition, the Company's international sales may be disrupted by currency fluctuations or other events beyond the Company's control, including political or regulatory changes. Dependence on Manufacturing Facilities Based in People's Republic of China. The Company contracts for the manufacture of substantially all of its products with entities based in Hong Kong whose manufacturing facilities are located in the People's Republic of China. In 1997, Hong Kong will become a sovereign territory of the People's Republic of China. While the People's Republic of China has provided assurances that Hong Kong will be allowed to maintain critical economic and tax policies, there can be no assurance that political or social tensions will not develop in Hong Kong that would disrupt this process. In addition, recent tensions between the People's Republic of China and the Republic of China (Taiwan), and the United States' involvement therein, could result either in a disruption in manufacturing in the China mainland or in the imposition of tariffs or duties on Chinese manufactured goods. Either event would have an adverse impact on the Company's ability to obtain its products or on the cost of these products, respectively, such that its operating results and financial condition would be materially adversely affected. Dependence on Restrictive Facility. The Company is dependent on an Accounts Receivable Management Agreement (the "ARM Agreement") with the BNY Financial Corporation to meet its financial needs during 1997, due in large part to the seasonality of the Company's business whereby the Company is required to finance the manufacture of a substantial portion of its products in the summer and autumn but does not collect on the sale of these products until the fourth quarter of that year and the first quarter of the following year. Under the terms of the ARM Agreement, BNY Financial Corporation has taken a first priority security interest in substantially all of the Company's assets, including its intellectual property. The ARM Agreement also contains a number of restrictive covenants, including covenants concerning the requirement that Donald Kingsborough and Sol Kershner, the Company's Chief Executive Officer and Chief Financial Officer, respectively, remain active in the management of the Company. The Company was not in compliance with the quick ratio and profitability covenants at December 31, 1996 and has obtained a waiver from BNY Financial Corporation with regard to these covenants. In the event the Company falls out of compliance with the ARM Agreement, and BNY Financial Corporation does not provide financing, the Company would not be able to finance its operations as contemplated, and its operating results and financial condition would be materially adversely affected. Volatility of Stock Price. The Company's Common Stock has experienced significant price volatility and such volatility may occur in the future, particularly as a result of quarter-to-quarter variations in the actual or anticipated financial results of the Company or of other toy companies or announcements by the Company or its competitors regarding new product introductions or other developments affecting the Company. In addition, the 6 market has experienced extreme price and volume fluctuations that have affected the market price of many technology companies' stock and that have been unrelated or disproportionate to the operating performance of these companies. Dependence on Key Personnel. The Company's future success will depend to a significant extent on the efforts of key management personnel, including Donald D. Kingsborough, the Company's Chairman and Chief Executive Officer, and Sol Kershner, the Company's Chief Financial Officer and Chief Operating Officer, and other key employees. The loss of one or more of these employees could have a material adverse effect on the Company's business. In addition, the Company believes that its future success will depend in large part on its ability to attract and retain highly qualified management, operations and sales personnel. There can be no assurance that the Company will be able to attract and retain the employees it needs to in order to ensure its success. No Dividends. The Company does not anticipate that any cash dividends will be declared or paid in the foreseeable future. In addition, the Company is restricted under its bank line of credit from paying any dividends. Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law. The Board of Directors has the authority to issue up to 1,915,000 shares of Preferred Stock (net of 85,000 shares previously issued by the Company) and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. Further, certain provisions of the Company's Bylaws and of Delaware law could delay or make difficult a merger, tender offer or proxy contest involving the Company. 7 DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Common Stock. The Company intends to reinvest earnings, if any, in the development and expansion of the Company's business. Any future declaration of cash dividends will be at the discretion of the Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors. In addition, the Loan and Security Agreement entered into with BNY Financial Corporation limits the Company's ability to pay dividends without the lender's consent. SELLING STOCKHOLDERS The shares of Common Stock offered hereby by the Selling Stockholders are issuable upon conversion of convertible subordinated debentures in the aggregate principal amount of $1,566,667 (the "Debentures") and 85,000 shares of the Company's Series A Convertible Preferred Stock (the "Preferred Stock") held by Infinity Investors Limited and Fairway Capital Limited (the "Purchasers") and upon the exercise of warrants to purchase an aggregate of 300,000 shares of Common Stock (the "Warrants"). Warrants to purchase 202,500, 22,500 and 75,000 shares of Common Stock are held respectively by Infinity Investors Limited, Fairway Capital Limited and Brown Simpson, LLC ("Brown Simpson" and together with the Purchasers, the "Selling Stockholders"). The Debentures, the Preferred Stock and the Warrants were issued to the Selling Stockholders in connection with a private placement in March 1997. The number of shares registered on the registration statement of which this Prospectus is a part and the number of shares offered hereby have been determined by agreement between the Company and the Purchasers. The number of shares of Common Stock that will ultimately be issued to the Purchasers upon conversion of the Debentures and the Preferred Stock is dependent upon a conversion formula which relies in part on the closing bid price of the Common Stock for the five (5) trading days immediately preceding the date of conversion and therefore cannot be determined at this time. The following table sets forth information with respect to the beneficial ownership of the Company's Common Stock by the Selling Stockholders as of March 20, 1997, and as adjusted to reflect the sale of the Common Stock offered hereby by the Selling Stockholders.
Shares Owned After Shares Beneficially Number of Offering(1)(2) Owned Prior to Shares Being --------------------------------- Selling Stockholder Offering(1) Offered Number Percent - --------------------------- ---------------------- ------------- ------------ ---------------- Infinity Investors Limited 3,825,532(1)(3) 3,825,532 0 * Fairway Capital Limited 425,059(1)(3) 425,059 0 * Brown Simpson, LLC 75,000 75,000 0 *
- ----------------------- * Less than 1%. (1) Based on 14,043,432 shares of Common Stock outstanding on March 20, 1997. (2) Assumes the sale of all shares offered hereby to unaffiliated third parties. (3) Based, in part, upon a hypothetical conversion of the full principal amount of the Debentures and the total outstanding number of shares of Preferred Stock on March 20, 1997. By agreement with the Company, no Purchaser may acquire beneficial ownership (as defined in Rule 13d-3 promulgated by the Commission under the Exchange Act) of more than 4.9% of the outstanding shares of Common Stock. 8 PLAN OF DISTRIBUTION The 4,325,591 shares of Common Stock of the Company offered hereby (the "Shares") may be sold by the Selling Stockholders, or by pledgees, donees, transferees or other successors in interest, either pursuant to a Registration Statement of which this Prospectus forms a part or, if available, under Section 4(1) of the Securities Act of 1933, as amended (the "Securities Act") or Rule 144 promulgated thereunder. This offering is not being underwritten. The Selling Stockholders, directly, through agents designated from time to time or through broker-dealers or underwriters also to be designated (who may purchase as principals and resell for their own account), may sell the Shares from time to time, in or through privately negotiated transactions, or in one or more transactions, including but not limited to a block trade in which the broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction, an exchange distribution in accordance with the rules of such exchange, and a combination of any such methods of sale, on the Nasdaq National Market or on any other market or stock exchange on which the Shares may be listed in the future pursuant to and in accordance with the applicable rules of such market or exchange or otherwise. The selling price of the Shares may be at market prices prevailing at the time of sale, at prices relating to such prevailing market prices or at negotiated prices. From time to time the Selling Stockholders may engage in short sales, including short sales against the box, puts and calls and other transactions in securities of the Company or derivatives thereof, and may sell and deliver the shares in connection therewith. In effecting sales, brokers or dealers engaged by the Selling Stockholder may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions or discounts from the Selling Stockholders or from the purchasers in amounts to be negotiated immediately prior to the sale. Further, except as set forth herein, the Selling Stockholders are not restricted as to the number of shares which may be sold at any one time, and it is possible that a significant number of shares could be sold at the same time, which may have a depressive effect on the market price of the Common Stock. The Selling Stockholders may also pledge shares as collateral for margin accounts, and such shares could be resold pursuant to the terms of such accounts. Resales or reoffers of the Shares by the Selling Stockholders must be accompanied by a copy of this Prospectus. The Selling Stockholders and any agents, broker-dealers or underwriters that participate in the distribution of the Shares may be deemed to be underwriters, and any profit on the sale of the Shares by them, and any discounts, commissions or concessions received by them, may be deemed to be underwriting commissions or discounts under the Securities Act. The Company has agreed to use its best efforts to maintain the effectiveness of the registration of the Shares for a period of three (3) years after the effective date of this Prospectus or such earlier date when all of the shares being offered hereunder have been sold or may be sold without volume or other restrictions pursuant to Rule 144 or Rule 144A under the Securities Act, as determined by counsel to the Company pursuant to a written opinion letter. LEGAL MATTERS Certain matters with respect to the legality of the issuance of the Securities offered hereby have been passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304. As of the date of this Prospectus, certain members, employees and affiliates of Wilson Sonsini Goodrich & Rosati beneficially owned an aggregate of 7,985 shares of Common Stock and warrants to purchase an aggregate of 1,140 shares of Common Stock. 9 EXPERTS The consolidated financial statements of YES! Entertainment Corporation appearing in the YES! Entertainment Corporation Annual Report (Form 10-K) for the year ended December 31, 1995, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-3 (the "Registration Statement") under the Securities Act of 1993, as amended (the "Securities Act"), with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock being offered, reference is hereby made to such Registration Statement and the exhibits and schedules thereto, which may be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. The Company is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at its principal office referred to above and at the Commission's regional offices at 13th Floor, Seven World Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois 60601-2511. The Commission maintains a World Wide Web site that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. The Company's Common Stock is quoted on the Nasdaq National Market under the symbol YESS. Reports and other information concerning the Company may be inspected at the National Association of Securities Dealers, Inc. located at 1735 K Street, N.W., Washington, D.C. 20006. The Company intends to furnish to its stockholders annual reports containing financial statements audited and reported on by its independent public accounting firm and such other periodic reports as the Company may determine to be appropriate or as may be required by law. 10 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the Nasdaq National Market listing fee.
Amount To Be Paid -------- SEC Registration Fee.................. $ 6,513 Nasdaq National Market listing fee.... 17,500 Edgar Filing Expenses................. 2,000 Legal Fees and Expenses............... 40,000 Accounting Fees....................... 0 Transfer Agent and Registrar's Fees... 4,000 Miscellaneous Expenses................ 0 ------- Total............................ $70,013 =======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Certificate of Incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability (i) for any breach of their duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation, or (iv) for any transaction from which the director derived an improper personal benefit. The Company's Bylaws provide that the Company shall indemnify its directors and officers and may indemnify its employees and other agents to the fullest extent permitted by law. The Company believes that indemnification under its Bylaws covers at least negligence and gross negligence on the part of indemnified parties. The Company's Bylaws also permit the Company to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the Company would have the power to indemnify him or her against such liability under the General Corporation Law of Delaware. The Company currently has secured such insurance on behalf of its officers and directors. The Company has entered into agreements to indemnify its directors and officers, in addition to indemnification provided for in the Company's Bylaws. Subject to certain conditions, these agreements, among other things, indemnify the Company's directors and officers for certain expenses (including attorney's fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person's services as a director or officer of the Company, any subsidiary II-1 of the Company or any other company or enterprise to which the person provides services at the request of the Company. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 15 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. In addition, the Amended and Restated Registration Rights Agreement, filed as Exhibit 4.4 hereto, contains provisions for indemnification by the Selling Stockholders of the Registrant and its officers, directors, and controlling persons against certain liabilities under the Securities Act.
ITEM 16. EXHIBITS Exhibit Number Description -------- ------------------------------------------------------- 4.1(1) Certificate of Designation of the Series A Convertible Preferred Stock. 4.2(2) Form of Registrant's Common Stock Certificate. 4.3 Amended and Restated Convertible Debenture and Convertible Preferred Stock Purchase Agreement dated as of March 18, 1997 among Infinity Investors Limited, Fairway Capital Limited and the Registrant. 4.4 Amended and Restated Registration Rights Agreement dated as of March 18, 1997 among Infinity Investors Limited, Fairway Capital Limited and the Registrant. 4.5(3) Form of Warrant dated March 18, 1997. 4.6(4) Form of Convertible Subordinated Debenture dated March 18, 1997. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C., regarding the legality of the securities being issued. 23.1 Consent of Ernst & Young LLP, independent auditors. 23.2 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-4).
- ------------------- (1) Incorporated by reference to Exhibit 4.1 filed with the Registrant's Current Report on Form 8-K, which was filed with the Commission on March 25, 1997. (2) Incorporated by reference to Exhibit 4.3 filed with the Registrant's Post- Effective Amendment No. 4 on Form S-3 to Registration Statement on Form S-1 (File No. 33-91408), which became effective on November 20, 1996. (3) Incorporated by reference to Exhibit 4.3 filed with the Registrant's Current Report on Form 8-K, which was filed with the Commission on March 25, 1997. (4) Incorporated by reference to Exhibit 4.2 filed with the Registrant's Current Report on Form 8-K, which was filed with the Commission on March 25, 1997. II-2 ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes, in accordance with the following sections of Item 512 of Regulation S-K: (a) (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (3) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (4) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; (b) That, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (c) To deliver or cause to be delivered with the Prospectus, to each person to whom the Prospectus is sent or given, the latest annual report, to securityholders that is incorporated by reference in the Prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 and Rule 14c-3 under the Exchange Act; and, where interim financial information required to be presented by Article 3 of Regulation S-X is not set forth in the Prospectus, to deliver, or cause to be delivered to each person to whom the Prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the Prospectus to provide such interim financial information. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pleasanton, State of California, on March 25, 1997. YES! ENTERTAINMENT CORPORATION By: /s/ BRUCE D. BOWER --------------------------------- Bruce D. Bower Executive Vice President. General Counsel and Secretary POWER OF ATTORNEY KNOWN ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Donald D. Kingsborough and Bruce D. Bower and each of them, jointly and severally, his attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement on Form S-, (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-3 has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Donald D. Kingsborough Chairman of the Board and Chief Executive March 25, 1997 - --------------------------- Officer (Principal Executive Officer) Donald D. Kingsborough /s/ Sol Kershner Chief Financial Officer March 25, 1997 - --------------------------- (Principal Financial and Accounting Officer) Sol Kershner /s/ David C. Costine Director March 25, 1997 - --------------------------- David C. Costine /s/ Esmond T. Goei Director March 25, 1997 - --------------------------- Esmond T. Goei Director - --------------------------- Michael J. Marocco /s/ Gary L. Nemetz Director March 25, 1997 - --------------------------- Gary L. Nemetz
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INDEX TO EXHIBITS Exhibit Number Description --------- ---------------------------------------------- 4.1(1) Certificate of Designation of the Series A Convertible Preferred Stock. 4.2(2) Form of Registrant's Common Stock Certificate. 4.3 Amended and Restated Convertible Debenture and Convertible Preferred Stock Purchase Agreement dated as of March 18, 1997 among Infinity Investors Limited, Fairway Capital Limited and the Registrant. 4.4 Amended and Restated Registration Rights Agreement dated as of March 18, 1997 among Infinity Investors Limited, Fairway Capital Limited and the Registrant. 4.5(3) Form of Warrant dated March 18, 1997. 4.6(4) Form of Convertible Subordinated Debenture dated March 18, 1997. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C., regarding legality of the securities being issued. 23.1 Consent of Ernst & Young LLP, independent auditors. 23.2 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-4). - ----------------
(1) Incorporated by reference to Exhibit 4.1 filed with the Registrant's Current Report on Form 8-K, which was filed with the Commission on March 25, 1997. (2) Incorporated by reference to Exhibit 4.3 filed with the Registrant's Post- Effective Amendment No. 4 on Form S-3 to Registration Statement on Form S-1 (File No. 33-91408), which became effective on November 20, 1996. (3) Incorporated by reference to Exhibit 4.3 filed with the Registrant's Current Report on Form 8-K, which was filed with the Commission on March 25, 1997. (4) Incorporated by reference to Exhibit 4.2 filed with the Registrant's Current Report on Form 8-K, which was filed with the Commission on March 25, 1997. EX-4.3 2 AMENDED & RESTATED PURCHASE AGREEMENT EXHIBIT 4.3 ================================================================================ AMENDED AND RESTATED CONVERTIBLE DEBENTURE AND CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT Between YES! ENTERTAINMENT CORPORATION, INFINITY INVESTORS LIMITED and FAIRWAY CAPITAL LIMITED ______________________________ Dated as of March 18, 1997 ______________________________ ================================================================================
TABLE OF CONTENTS ----------------- Page ---- ARTICLE I CERTAIN DEFINITIONS........................ 1 Section 1.1. Certain Definitions.................. 1 ARTICLE II PURCHASE OF SHARES......................... 5 Section 2.1. Purchase of Convertible Debentures; Closing.............................. 5 ARTICLE III REPRESENTATIONS AND WARRANTIES............. 6 Section 3.1. Representations and Warranties of the Company.............................. 6 Section 3.2. Representations and Warranties of the Purchasers........................... 11 ARTICLE IV OTHER AGREEMENTS OF THE PARTIES............ 14 Section 4.1. Transfer Restrictions................ 14 Section 4.2. Stop Transfer Instruction............ 15 Section 4.3. Furnishing of Information............ 15 Section 4.4. Copies and Use of Disclosure Materials............................ 16 Section 4.5. Blue Sky Laws........................ 16 Section 4.6. Integration.......................... 16 Section 4.7. Certain Agreements................... 16 Section 4.8. Purchaser Ownership of Common Stock.. 17 Section 4.9. Listing of Underlying Shares......... 17 Section 4.10. Purchaser's Rights if Trading in Common Stock is Suspended or Delisted 17 Section 4.11. No Violation of Applicable Law....... 18 Section 4.12. Repurchase Restrictions.............. 18 Section 4.13. Legal Opinion........................ 19 Section 4.14. Notice of Breaches................... 19 Section 4.15. The Warrants......................... 19 Section 4.16. Conversion Procedures................ 19 Section 4.17. Transfer Agent....................... 20 Section 4.18. Right of First Refusal............... 20 Section 4.19. Restriction on Debt.................. 21 ARTICLE V MISCELLANEOUS.............................. 21 Section 5.1. Fees and Expenses.................... 21 Section 5.2. Entire Agreement; Amendments......... 21 Section 5.3. Notices.............................. 21 Section 5.4. Amendments; Waivers.................. 23 Section 5.5. Headings............................. 23 Section 5.6. Successors and Assigns............... 23 Section 5.7. No Third-Party Beneficiaries......... 23 Section 5.8. Governing Law........................ 23 Section 5.9. Survival............................. 23
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Page ---- Section 5.10. Counterpart Signatures............... 24 Section 5.11. 24 Publicity......................... 24 Section 5.12. Severability......................... 24 Section 5.13. Remedies............................. 24 Exhibit A Form of 5% Convertible Debenture Exhibit B Form of Certificate of Designation Exhibit C Form of Registration Rights Agreement Exhibit D Form of Wilson Sonsini Goodrich & Rosati, P.C. Legal Opinion Exhibit E(1) Form of Fairway Warrant Exhibit E(2) Form of Infinity Warrant Exhibit F Conversion Procedures Schedule 2.1(b) Debentures and Warrants Schedule 3.1(c) Capitalization Schedule 3.1(f) Consents and Approvals Schedule 3.1(g) Litigation
-ii- AMENDED AND RESTATED CONVERTIBLE DEBENTURE AND CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, dated as of March 18, 1997 (this "Agreement"), by and --------- among YES! Entertainment Corporation, a Delaware corporation (the "Company"), ------- Infinity Investors Limited, a corporation organized and existing under the laws of Nevis, West Indies ("Infinity") and Fairway Capital Limited, a corporation organized and existing under the laws of Nevis, West Indies ("Fairway"). Infinity and Fairway are each a "Purchaser" and are collectively, the --------- "Purchasers". - ----------- WHEREAS, the Company and the Purchasers are parties to that certain Convertible Debenture Purchase Agreement, dated as of January 28, 1997 (the "January Purchase Agreement"), pursuant to which, among other things, (i) the - --------------------------- Company issued and sold to the Purchasers an aggregate of $10,000,000 principal amount of the Company's 5% Convertible Debentures, due January 28, 2000 (collectively, the "January Debentures") and (ii) the Company delivered an ------------------ aggregate of 300,000 Common Stock purchase Warrants (collectively, the "January ------- Warrants"); - -------- WHEREAS, the Company and the Purchasers desire to supersede in their entirety all of the January Debentures and January Warrants with $1,566,667 aggregate principal amount of 5% Convertible Debentures, shares of a to be created series of convertible preferred stock of the Company with an aggregate stated value of $8,500,000 and newly issued Common Stock purchase warrants; WHEREAS, the Company and the Purchasers have agreed to supersede the January Purchase Agreement in its entirety hereby to effectuate the understandings and agreements set forth above; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: ARTICLE I CERTAIN DEFINITIONS ------------------- Section 1.1. Certain Definitions. As used in this Agree ment, and ------------------- unless the context requires a different meaning, the following terms have the meanings indicated: "Affiliate" means, with respect to any Person, any Person that, --------- directly or indirectly, controls, is controlled by or is under common control with such Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and ------- ------------- "under common control with") shall mean the possession, directly or indirectly, ------------------------- of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Appraiser" means a nationally recognized or major regional investment --------- banking firm or firm of independent certified public accountants of national standing retained to determine the Warrant Repurchase Price in accordance with the terms hereof. "BNY" means BNY Financial Corporation, 1290 Avenue of the Americas, --- New York, New York 10104. "BNY Bank Obligations" means the borrowings and interest due thereon -------------------- (including, without limitation, any interest accruing after the commencement of any case, proceeding or other action relating to the liquidation, dissolution, assignment for the benefit of creditors, receivership, arrangement, bankruptcy, insolvency or reorganization of the Company regardless of whether such interest is allowable, payable or accruable to BNY in such case, proceeding or other action) under the Receivables Agreement, as the same may from time to time be amended, supplemented, otherwise modified, replaced or refinanced. "Business Day" means any day except Saturday, Sunday and any day which ------------ shall be a legal holiday or a day on which banking institutions in the state of New York or the State of California are authorized or required by law or other government actions to close. "Certificate of Designation" means the certificate of designation, -------------------------- substantially in the form of Exhibit B attached hereto, the final form of which --------- is subject to the approval by the Purchasers, which is to be filed by the Company with the Secretary of State of the State of Delaware on or prior to the Closing Date. "Commission" means the Securities and Exchange Commission. ---------- "Common Stock" means the Company's common stock, par value $.001 per ------------ share. "Convertible Debentures" means the Company's 5% Convertible ---------------------- Debentures, due January 28, 2000, in the form attached -2- hereto as Exhibit A, to be issued in accordance with and subject to the terms --------- and conditions hereof. "Disclosure Materials" means, collectively, the SEC Documents and the -------------------- Schedules to this Agreement furnished by or on behalf of the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "Lien" means, with respect to any asset, any mortgage, lien, pledge, ---- encumbrance, right of first refusal, charge or security interest of any kind in or on such asset or the revenues or income thereon or therefrom. "Material Adverse Effect" shall have the meaning set forth in Section ----------------------- ------- 3.1(a). - ------ "Person" means an individual or a corporation, partnership, trust, ------ incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Preferred Stock" means the shares of the Company's Series A --------------- Convertible Preferred Stock, par value $.001 per share, with the respective rights, preferences and privileges set forth in the Certificate of Designation. "Receivables Agreement" means the Accounts Receivable Management and --------------------- Security Agreement, dated as of July 31, 1995, among the Company and BNY. "Registration Rights Agreement" means the Registration Rights ----------------------------- Agreement, dated as of January 28, 1997, by and between the Company and the Purchasers, as amended by the Amended and Restated Registration Rights Agreement of even date herewith, in the form attached hereto as Exhibit C, as the same may --------- be amended, supplemented or otherwise modified in accordance with its terms. "SEC Documents" shall have the meaning set forth in Section 3.1(k). ------------- -------------- "Securities Act" means the Securities Act of 1933, as amended. -------------- "Shares" shall have the meaning set forth in Section 2.1(a). ------ -3- "Subsidiaries" shall have the meaning set forth in Section 3.1(a). ------------ -------------- "Trading Day" means (a) a day on which the Common Stock is traded on ----------- the Nasdaq National Market or Nasdaq SmallCap Market or principal national securities exchange or market on which the Common Stock has been listed or quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq National Market or Nasdaq SmallCap Market or any principal national securities exchange or market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the 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). "Transaction Documents" shall have the meaning set forth in Section --------------------- ------- 3.1(b). - ------ "Transfer Agent" shall have the meaning set forth in Section 4.17. -------------- ------------ "Transfer Agent Agreement" means the Book Entry Transfer Agent ------------------------ Agreement, dated as of the date hereof, between the Company, the Purchasers and the Transfer Agent. "Underlying Securities Registration Statement" means a registration -------------------------------------------- statement contemplated by the Registration Rights Agreement and relating to the Underlying Shares and Warrant Shares. "Underlying Shares" means the shares of Common Stock issuable upon the ----------------- conversion of the Convertible Debentures and the Shares in accordance with their terms and the Certificate of Designation. "Warrant Exercise Price" means the lesser of (a) $7.875 and (b) 125% ---------------------- of the average of the lowest Per Share Market Values for any five (5) consecutive Trading Days during the 60 Trading Days following the Closing Date. "Warrant Repurchase Price" with respect to any Warrant delivered ------------------------ hereunder shall equal (A) if the average Per Share Market Value for the five Trading Days immediately preceding the date of the notice triggering a repurchase hereunder or the date of payment in full of the repurchase price calculated under Section 4.10, whichever is greater, is greater than the Warrant ------------ Exercise Price, then the product of (1) the number of shares of Common Stock issuable upon exercise in full of such Warrant (less such number of -4- shares of Common Stock as shall have been previously issued upon conversion of such Warrant) and (2) the average Per Share Market Value for the five Trading Days immediately preceding (a) the date of the notice triggering such repurchase or (b) the date of payment in full of the repurchase price calculated under Section 4.10, whichever is greater, less the Warrant Exercise Price; or (B) if - ------------ the average Per Share Market Value for the five Trading Days immediately preceding the date of the notice triggering such repurchase or the date of payment in full of such repurchase price, whichever is greater, is less than or equal to the Warrant Exercise Price, then such amount as is determined in good faith by the Purchasers, provided that, if the Company notifies the Purchasers within 10 Business Days of its receipt of such Purchaser valuation that it disagrees with such valuation, within 10 Business Days of such Company notice, an Appraiser mutually acceptable to each of the Purchasers and the Company shall determine such amount; provided, however, if the Company and the Purchasers fail -------- ------- to appoint such mutually acceptable Appraiser within 10 Business Days of the expiration of such 10 day period, each of the Company and the Purchasers shall appoint an Appraiser, who (within 10 Business Days of such appointment) shall appoint a third Appraiser to determine conclusively the repurchase price for such Warrant, with the fees and disbursements of any such Appraiser being shared equally by the Company and the Purchasers. "Warrants" shall have the meaning set forth in Section 4.15. -------- ------------ "Warrant Shares" shall have the meaning set forth in Section 3(d). -------------- ------------ ARTICLE II PURCHASE OF SHARES ------------------ Section 2.1. Purchase of Convertible Debentures; Closing. ------------------------------------------- (a) Subject to the terms and conditions set forth in this Agreement, the Company shall issue and sell to the Purchasers, and the Purchasers shall purchase (i) an aggregate principal amount of $1,566,667 of Convertible Debentures and (ii) an aggregate of 85,000 shares of Preferred Stock (the "Shares"), having the respective rights, preferences and privileges set forth in ------ the Certificate of Designation, for an aggregate purchase price of $10,000,000 plus interest from the date of the January Purchase Agreement until the date hereof (the "Purchase Price"). -------------- -5- (b) The Closing. ----------- (i) The closing of the purchase and sale of the Convertible Debentures, Shares and Warrants (the "Closing") shall take place at the offices ------- of Robinson Silverman Pearce Aronsohn & Berman LLP, 1290 Avenue of the Americas, New York, New York 10104, immediately following the execution hereof, or at such other time and/or place as the Purchasers and the Company may agree. The date of the Closing is hereinafter referred to as the "Closing Date". ------------ (ii) At the Closing and in the manner described in the Transfer Agent Agreement, if applicable, (A) the Company shall deliver (i) the Debentures and Warrants and certificates representing the Shares to be issued and delivered to each Purchaser, as specified in Schedule 2.1(b) hereto, to the Persons (or as directed thereby), registered in the names and in the amounts set forth thereon, and (ii) to the Persons entitled thereto, all other documents, instruments and writings required to have been delivered at or prior to the Closing by the Company pursuant to this Agreement; (B) each Purchaser shall deliver to the Company (i) the January Debentures and January Warrants issued to such Purchaser (and shall deliver the January Warrants held by Brown Simpson, LLC) in connection with the closing of the transactions under the January Purchase Agreement and (ii) all documents, instruments and writings required to have been delivered at or prior to the Closing by such Purchaser pursuant to this Agreement. The Company acknowledges and agrees that the $10,000,000 paid it by the Purchasers at the closing of the transactions under the January Purchase Agreement shall constitute full payment of the Purchase Price for the Warrants, Shares and Convertible Debentures to be issued and sold to the Purchasers at the Closing pursuant to this Agreement, and no other consideration shall be due from the Purchasers at the Closing. For purposes of this Agreement, when used in connection with the Convertible Debentures, "Conversion Price," "Original Issue Date," "Conversion ---------------- ------------------- ---------- Date," "Conversion Ratio" and "Per Share Market Value" shall have the meanings - ---- ---------------- ---------------------- set forth in the Convertible Debentures and, when used in connection with the Preferred Stock such terms shall have the meanings set forth in the Certificate of Designation. -6- ARTICLE III REPRESENTATIONS AND WARRANTIES ------------------------------ Section 3.1. Representations and Warranties of the Company. The ------------------------------------- ------- Company hereby represents and warrants to the Purchasers as follows: (a) Organization and Qualification. The Company is a corporation, duly ------------------------------ incorporated, validly existing and in good standing under the laws of the State of Delaware, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. At the time the Company changed its state of incorporation from California to Delaware, the Company was in good standing under the laws of the State of California. The Company has no subsidiaries other than as set forth in the SEC Documents (collectively, the "Subsidiaries"). Each of the Subsidiaries is a ------------ corporation, duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, with the full corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not individually or in the aggregate have a material adverse effect on the results of operations, assets, prospects or financial condition of the Company and the Subsidiaries, taken as a whole (a "Material Adverse Effect"). ------------------------ (b) Authorization; Enforcement. The Company has the requisite -------------------------- corporate power and authority to enter into and to consummate the transactions contemplated hereby and by the Warrants, the Registration Rights Agreement, the Transfer Agent Agreement, the Convertible Debentures and the Certificate of Designation and otherwise to carry out its obligations hereunder and thereunder. This Agreement, the Registration Rights Agreement, the Transfer Agent Agreement, the Convertible Debentures, the Warrants and the Certificate of Designation are collectively referred to as the "Transaction Documents." The execution and --------------------- delivery of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company. Each Transaction Document has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company enforceable against the Company in -7- accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. (c) Capitalization. The authorized, issued and outstanding capital -------------- stock of the Company and each of the Subsidiaries is set forth in Schedule -------- 3.1(c). No shares of Common Stock are entitled to preemptive or similar rights. - ------ Except as specifically disclosed in Schedule 3.1(c), there are no outstanding --------------- options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or, except as a result of the purchase and sale of the Convertible Debentures, Shares and Warrants hereunder, securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate of incorporation, bylaws or other charter documents. (d) Issuance of Convertible Debentures, Shares and Warrants. The ------------------------------------------------------- Convertible Debentures have been duly and validly authorized for issuance, offer and sale pursuant to this Agreement and, when issued and delivered as provided hereunder against payment in accordance with the terms hereof, shall be valid and binding obligations of the Company enforceable in accordance with their terms free and clear of all Liens. The Shares are duly authorized and, when paid for in accordance with the terms hereof, shall be validly issued, fully paid and nonassessable. The Warrants are duly authorized, and when issued and paid for in accordance with the terms hereof, shall be validly issued, free and clear of all Liens. The Company has and at all times while the Convertible Debentures, Shares and Warrants are outstanding will maintain an adequate reserve of shares of Common Stock to enable it to perform its obligations under this Agreement, the Convertible Debentures, the Certificate of Designation and Warrants and in no circumstances shall such reserved and available shares of Common Stock be less than the sum of (i) two times the number of shares of Common Stock which would be issuable upon conversion in full of the aggregate principal amount of the Convertible Debentures and of the full number of Shares, assuming in each case such conversion occurred on the Original Issue Date (collectively the "Underlying Shares"), and (ii) the number of shares of Common Stock which would ----------------- be issuable upon exercise in full of the Warrants (the "Warrant ------- -8- Shares"). When issued in accordance with the terms hereof and the Convertible - ------- Debentures, the Certificate of Designation, the Underlying Shares will be duly authorized, validly issued, fully paid nonassessable, free and clear of all Liens; and when issued upon exercise of the Warrants in accordance with their respective terms, the Warrant Shares will be duly authorized, validly issued, fully paid, nonassessable and free and clear of all Liens. (e) No Conflicts. The execution, delivery and performance of the ------------ Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby do not and will not (i) conflict with or violate any provision of its certificate of incorporation or bylaws (each as amended through the date hereof) or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party or by which any property or asset of the Company is bound or affected, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including Federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected, except in the case of each of clauses (ii) or (iii), such conflicts, defaults, terminations, amendments, accel erations, cancellations and violations as could not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of any Transaction Document, (y) have a Material Adverse Effect or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under any Transaction Document. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the aggregate, do not have a Material Adverse Effect. (f) Consents and Approvals. Except as obtained prior to the execution ---------------------- hereof, neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) the filing with the Commission of an Underlying Securities Registration Statement contemplated by the Registration Rights Agreement and the making of the applicable blue-sky filings under state securities laws, each as contemplated by the Registration Rights Agreement, which shall be filed in the time periods set forth in the Registration Rights Agreement, (ii) the filing of the Certificate -9- of Designation with the Secretary of State of the State of Delaware, which shall occur prior to the Closing, and (iii) other than, in all other cases, where the failure to obtain such consent, waiver, authorization or order, or to give or make such notice or filing, could not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of any of the Transaction Documents, (y) have a Material Adverse Effect or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under any of the Transaction Documents. (g) Litigation; Proceedings. Except as specifically set forth in ----------------------- Schedule 3.1(g), there is no action, suit, notice of violation, proceeding or - --------------- investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective assets or properties before or by any court, governmental or administrative agency or regulatory authority (Federal, state, county, local or foreign) which (i) relates to or challenges the legality, validity or enforceability of the Transaction Documents, Underlying Shares or Warrant Shares (ii) could, individually or in the aggregate, if adversely determined, have a Material Adverse Effect or (iii) could, individually or in the aggregate, adversely impair the Company's ability to perform fully on a timely basis its obligations under the Transaction Documents. (h) No Default or Violation. Neither the Company nor any Subsidiary ----------------------- (i) is in default under or in violation of any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound, (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is in violation of any statute, rule or regulation of any governmental authority, except as could not, in any such case, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of any of the Transaction Documents, (y) have a Material Adverse Effect or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under the Transaction Documents. (i) Certain Fees. Except for $400,000 paid by the Company to ------------ Pennsylvania Merchant Group, no fees or commission will be payable by the Company to any broker, finder, investment banker or bank with respect to the consummation of the transactions contemplated hereby. (j) Private Offering. Assuming (without any independent investigation ---------------- or verification by or on behalf of the Company) the accuracy of the representations and warranties of the Purchasers set forth in Section 3.2, the ----------- offer and sale of the Convertible -10- Debentures, Shares, the Warrants, the Underlying Shares and the Warrant Shares are exempt from registration under Section 5 of the Securities Act of 1933, as amended (the "Securities Act"). Neither the Company nor any person acting on its -------------- behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of the Convertible Debentures or Shares under the Securities Act) which might subject the offering, issuance or sale of the Convertible Debentures, Shares, the Warrants, the Underlying Shares or the Warrant Shares to the registration requirements of Section 5 of the Securities Act. (k) SEC Documents. The Company has filed all forms, reports and ------------- documents required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (the foregoing reports being collectively referred to herein as the "SEC --- Documents") on a timely basis, or has received a valid extension of such time of - --------- filing. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder and none of the SEC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited and unaudited consolidated balance sheets of the Company and its Subsidiaries contained in the SEC Documents, and the related consolidated statements of income, changes in stockholders' equity and changes in cash flows for the periods then ended, including the footnotes thereto, except as indicated therein, have been prepared in accordance with generally accepted accounting principles consistently followed throughout the periods indicated, except that unaudited financial statements contained therein do not contain notes and may be subject to normal audit adjustments and normal annual adjustments and fairly present the financial condition of the Company and its consolidated Subsidiaries as of and for the dates thereof and, except as indicated therein, reflects all claims against and all material debts and liabilities of the Company and its consolidated Subsidiaries, fixed or contingent, as at and for the dates thereof; and the related statements of income, stockholders' equity and changes in cash flows fairly present the results of the operations of the Company and its consolidated Subsidiaries and the changes in financial position for the period indicated. Since the date of the financial statements included in the Company's last filed Quarterly Report on Form 10-Q, there has been no event, occurrence or development that has had a Material -11- Adverse Effect which is not specifically disclosed in any of the Disclosure Materials. (l) Form S-3 Eligibility. The Company is eligible to register for -------------------- resale securities with the Commission under Form S-3 promulgated under the Securities Act. (m) Investment Company. The Company is not, and following the Closing ------------------ and issuance of the Convertible Debentures and the Shares will not be, nor is it an Affiliate of an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (n) Solicitation Materials. The Company has not (i) distributed any ---------------------- offering materials in connection with the offering and sale of the Convertible Debentures, the Shares, the Warrants, the Underlying Shares or the Warrant Shares other than the Disclosure Materials or (ii) solicited any offer to buy or sell the Convertible Debentures, the Shares, the Warrants, the Underlying Shares or the Warrant Shares by means of any form of general solicitation or advertising. (o) Margin Requirements. The Company does not intend to, and will not, -------------------- use the proceeds of the offer and sale of the Convertible Debentures, Shares and Warrants hereunder, directly or indirectly, immediately, incidentally or ultimately, (i) to purchase or carry Margin Stock (as such term is defined under Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time) or to extend credit to others for the purpose of purchasing or carrying Margin Stock or to refund indebtedness originally incurred for such purpose, or (ii) for any purpose which entails a violation of, or which is inconsistent with, the provisions of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System. Section 3.2. Representations and Warranties of the Purchasers. Each ------------------------------------------------ of the Purchasers, severally and not jointly, hereby represents and warrants to the Company as follows: (a) Organization; Authority. Such Purchaser is a corporation duly ----------------------- incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation with the requisite corporate power and authority to enter into and to consummate the transactions contemplated hereby and by the Registration Rights Agreement, Transfer Agent Agreement and otherwise to carry out its obligations hereunder and thereunder. The acquisition of the Convertible Debentures and Shares to be purchased by such Purchaser hereunder has been duly authorized by all necessary action on the part of such Purchaser. Each of this -12- Agreement and the Registration Rights Agreement has been duly executed and delivered by such Purchaser and constitutes the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other general principles of equity. (b) Investment Intent. Such Purchaser is acquiring the Convertible ----------------- Debentures, Shares and the Warrant to be purchased by it hereunder, and the Underlying Shares and the Warrant Shares relating to such Convertible Debentures, Shares and Warrants, for its own account for investment purposes only and not with a view to or for distributing or reselling such Convertible Debentures, Shares, Underlying Shares, Warrant or Warrant Shares or any part thereof or interest therein, without prejudice, however, to such Purchaser's right, subject to the provisions of this Agreement and the Registration Rights Agreement, at all times to sell or otherwise dispose of all or any part of such Convertible Debentures, Shares, Underlying Shares, Warrant or Warrant Shares pursuant to under an effective registration statement under the Securities Act or pursuant to an available exemption from the registration requirements thereunder and in compliance with applicable state securities laws. (c) Purchaser Status. At the time such Purchaser was offered the ---------------- Convertible Debentures, Shares and Warrant to be acquired by it hereunder, it was and at the date hereof, it is, and at each date it exercises Warrants it will be, an "accredited investor" as defined in Rule 501(a) under the Securities Act. (d) Investment Company. The Purchaser is not, and following the ------------------ Closing and issuance of the Convertible Debentures and Shares will not be, nor is it an Affiliate of an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (e) Experience of Purchaser. Such Purchaser, either alone or together ----------------------- with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of an investment in the securities to be acquired by it hereunder, and has so evaluated the merits and risks of such investment. (f) Ability of Purchaser to Bear Risk of Investment. Such Purchaser is ----------------------------------------------- able to bear the economic risk of an investment in the securities to be acquired by it hereunder and, at the pre sent time, is able to afford a complete loss of such investment. -13- (g) Prohibited Transactions. The securities to be acquired by such ----------------------- Purchaser hereunder are not being acquired, directly or indirectly, with the assets of any "employee benefit plan", within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. (h) Access to Information. Such Purchaser acknowledges receipt of the --------------------- Disclosure Materials and further acknowledges that it has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the securities offered hereunder and the merits and risks of investing in such securities; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment in such securities; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment and to verify the accuracy and completeness of the information contained in the Disclosure Materials. (i) Reliance. Such Purchaser understands and acknowledges that (i) the -------- Convertible Debentures, the Shares and the Warrants being offered and sold to it hereunder are being offered and sold without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act under Regulation D promulgated thereunder and (ii) the availability of such exemption, depends in part on, and that the Company will rely upon the accuracy and truthfulness of, the foregoing representations and such Purchaser hereby consents to such reliance. The Company acknowledges and agrees that the Purchasers make no representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 3.2. ----------- ARTICLE IV OTHER AGREEMENTS OF THE PARTIES ------------------------------- Section 4.1. Transfer Restrictions. (a) If any Purchaser should --------------------- decide to dispose of any portion of the principal amount of the Convertible Debentures, any of the Shares or any portion of the Warrant to be purchased by it hereunder (and upon conversion or exercise thereof, any Underlying Shares or Warrant -14- Shares, as applicable), such Purchaser understands and agrees that it may do so only (i) pursuant to an effective registration statement under the Securities Act, (ii) to the Company or (iii) pursuant to an available exemption from registration under the Securities Act. No Purchaser may dispose of any portion of such securities pursuant to clause (iii) in the immediately prior sentence unless such Purchaser provides prior written notice thereof to the Company and complies with the provisions of the immediately following sentence. In connection with any transfer of any Convertible Debentures, Warrants, Underlying Shares or Warrant Shares other than pursuant to an effective registration statement or to the Company, the Company may require that the transferor provide to the Company an opinion of counsel experienced in the area of United States securities laws selected by the transferor, the form and substance of which opinion shall be reasonably satis factory to the Company, to the effect that such transfer of such Convertible Debentures, Shares, Warrants, Underlying Shares or Warrant Shares, as the case may be, is being made in compliance with the Securities Act. (b) The Purchasers agree to the imprinting, so long as required by the terms of this Section 4.1(b), of the following legend on certificates representing the Convertible Debentures, the Shares, the Underlying Shares, the Warrants and the Warrant Shares to be modified as applicable: NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE [OR EXERCISABLE] HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. [THIS 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.] The legend set forth above shall be removed upon the conversion of Convertible Debentures or Shares or exercise of Warrants represented by such certificate at any time after an Underlying Securities Registration Statement has been declared, and -15- so long as such Underlying Securities Registration Statement remains effective under the Securities Act or, if not converted during such time, at such other time as in the opinion of counsel to the Company experienced in the area of United States securities laws such legend is no longer required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The certificates representing the Convertible Debentures, Shares, Warrants, Underlying Shares and Warrant Shares shall also bear any other legends required by applicable Federal or state securities laws, which legends may be removed as set forth above in the immediately preceding sentence, or, with respect to legends required pursuant to state securities laws, when such legends are no longer required under the applicable requirements of such securities laws. The Company agrees that it will provide each Purchaser, upon request, with a substitute certificate or certificates, free from such legend at such time as such legend is no longer applicable. Each Purchaser agrees that, in connection with any transfer of Underlying Shares or Warrant Shares by it pursuant to an effective registration statement under the Securities Act, such Purchaser will comply with all applicable prospectus delivery requirements of the Securities Act. The Company makes no representation, warranty or agreement as to the availability of any exemption from registration under the Securities Act with respect to any resale of the Convertible Debentures, Shares, Underlying Shares, Warrants or Warrant Shares. Section 4.2. Stop Transfer Instruction. For so long as an ------------------------- Underlying Securities Registration Statement is effective, the Company may not issue any stop transfer instruction or make any notation on its records with respect thereto to any transfer agent (including the Transfer Agent) of the Company and shall issue shares of Common Stock upon a conversion of Convertible Debentures or Shares or exercise of Warrants in accordance with Section 4.1. Section 4.3. Furnishing of Information. (a) As long as any ------------------------- Purchaser owns Convertible Debentures, Shares, Underlying Shares, Warrants or Warrant Shares, the Company covenants to timely file (or obtain extensions in respect thereof) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act and to promptly furnish each Purchaser with true and complete copies of all such filings. If the Company is not at the time required to file reports pursuant to such sections, it will prepare and furnish to each Purchaser annual and quarterly financial statements, together with a discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act in the time period that such filings -16- would have been required to have been made under the Exchange Act. (b) The Company shall deliver copies to the Purchasers of any documents or financial statements it delivers to BNY pursuant to Section 11(a), 11(b) or 11(c/d) of the Receivables Agreement concurrently with such delivery to BNY, provided that the Company shall not be obligated to deliver the accountant's consent required under Section 11 of the Receivables Agreement and shall not deliver to the Purchasers the other materials it is required to deliver to BNY under such Section 11. Section 4.4. Copies and Use of Disclosure Materials. The Company -------------------------------------- consents to the use of the SEC Documents, and any amendments and supplements thereto, by the Purchasers in connection with resales of the Underlying Shares or the Warrant Shares to the extent such resales are not pursuant to an effective registration statement. Section 4.5. Blue Sky Laws. The Company shall qualify the Underlying ------------- Shares and the Warrant Shares under the securities or Blue Sky laws of such jurisdictions as each Purchaser may request and shall continue such qualification at all times through the third anniversary of the Closing Date; provided, however, that the Company shall not be required in connection - -------- ------- therewith to qualify as a foreign corporation where it is not now so qualified, or take any action that would subject the Company to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject. Section 4.6. Integration. The Company shall not and shall use its ----------- best efforts to ensure that no Affiliate shall sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Convertible Debentures, the Shares, the Warrants, the Underlying Shares or the Warrant Shares in a manner that would require the registration under the Securities Act of the sale of the Convertible Debentures, the Shares, the Warrants, the Underlying Shares or the Warrant Shares to the Purchasers. Section 4.7. Certain Agreements. From the date hereof through the ------------------ third anniversary hereafter, the Company shall not and shall cause the Subsidiaries not to, without the consent of the Purchasers, (i) amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Purchasers under the Transaction Documents; (ii) repay, repurchase or offer to repay, repurchase or otherwise acquire in -17- excess of 10,000 shares of its Common Stock, other than shares which may be repurchased from employees of the Company in connection with the termination of their employment with the Company; or (iii) enter into any agreement with respect to any of the foregoing. The Company may not force any conversion or call a redemption of any portion of the principal amount of the Convertible Debentures until such time as all of the Shares have been converted or redeemed in accordance with the terms hereof and the Certificate of Designation. Section 4.8. Purchaser Ownership of Common Stock. No Purchaser may ----------------------------------- use its ability to convert the Convertible Debentures or Shares issued to it hereunder or to use its ability to acquire shares of Common Stock upon exercise of the Warrant to be issued to it pursuant to the terms hereof to the extent that such conversion or exercise would result in that Purchaser beneficially owning (for purposes of Rule 13d-3 under the Exchange Act) more than 4.9% of the outstanding shares of the Common Stock; provided, however, that the provisions -------- ------- of this Section 4.8 shall not apply to any forced conversion by the Company pursuant to Section 4(b) of the Convertible Debentures or pursuant to Section 5(b) of the Certificate of Incorporation and, provided, further, that if 10 days -------- ------- have elapsed since a Purchaser shall have declared an "Event of Default" (as such term is defined in the Convertible Debentures), the provisions of this Section 4.8 shall be null and void ab initio. - ----------- ------ Section 4.9. Listing of Underlying Shares. The Company shall, within ---------------------------- seven (7) Business Days of the Closing Date, file with the Nasdaq Stock Market an additional shares listing application covering the listing of an aggregate of 4,325,591 Underlying Shares and Warrant Shares and shall take all steps necessary to cause such application to be approved as soon as possible thereafter. The Company shall also take all steps necessary to cause such shares to be listed on any other national securities exchange or market on which the Common Stock is then listed as soon as possible after the Closing Date. The Company shall provide to each Purchaser evidence of such filings and listings, and shall maintain such listings as long as any Purchaser holds Convertible Debentures, Shares, Warrants, Underlying Shares or Warrant Shares. In the event the aggregate number of Underlying Shares and Warrant Shares exceeds 4,325,591, the Company shall promptly file one or more appropriate listing applications to continually list for trading a number of such additional shares, as the Company and the Purchasers shall reasonably agree. -18- Section 4.10. Purchaser's Rights if Trading in Common Stock is Suspended ---------------------------------------------------------- or Delisted. In the event that at any time within the three-year period after - ----------- the date hereof, trading in the shares of the Common Stock is suspended on or delisted from the Nasdaq National Market (other than as a result of the suspension of trading in securities on such market generally or temporary suspensions pending the release of material information and other than a suspension of trading if the Common Stock is quoted on the Nasdaq SmallCap Market within one Business Day after such suspension), at each Purchaser's option exercisable by five Business Days prior written notice to the Company, the Company shall repurchase and redeem as applicable, all of the Convertible Debentures, Shares, Warrants, Underlying Shares and Warrant Shares owned by such Purchaser at an aggregate purchase price equal to the sum of (I)(A) the product of (1) the average Per Share Market Value for the five (5) Trading Days immediately preceding (a) the day of such notice or (b) the date of payment in full of the repurchase price calculated under this Section 4.10, whichever is greater, multiplied by (2) the Conversion Ratio on the date of the repurchase notice, (II) the Warrant Repurchase Price, (III) the number of Underlying Shares and Warrant Shares then held by such Purchaser multiplied by the average Per Share Market Value for the five (5) Trading Days immediately preceding (A) the date of the notice or (B) the date of payment in full by the Company of the repurchase price calculated under this Section 4.10, whichever is greater, and (IV) interest on such amounts set forth in I - III above accruing from the 7th day after such notice until the repurchase price under this Section 4.10 is paid in full at the rate 15% per annum. Section 4.11. No Violation of Applicable Law. Notwithstanding any ------------------------------ provision of this Agreement to the contrary, if any repurchase or redemption otherwise required under this Agreement or the Registration Rights Agreement would be prohibited by the relevant provisions of Delaware General Corporation Law, such repurchase shall not be effected unless and until it is permitted under such law; provided, however, that interest payable by the Company with -------- ------- respect to any such repurchase or redemption shall continue to accrue in accordance with Section 4.10. ------------ Section 4.12. Repurchase Restrictions. Notwithstanding any provision of ----------------------- this Agreement to the contrary, if any repurchase or redemption otherwise required under this Agreement or the Registration Rights Agreement would be prohibited in the absence of consent from any lender of the Company or any of the Subsidiaries, or by the holders of any class of securities of the Company, the Company shall use its best efforts to obtain such consent as promptly as practicable after the repurchase or redemption is required and such repurchase or redemption shall not be effected -19- unless and until such consent is obtained. Interest payable by the Company with respect to any such repurchase or redemption shall continue to accrue until such consent is obtained and the repurchase price therefor paid. Nothing contained in this Section 4.12 shall be construed as a waiver by the Purchaser of any rights ------------ it may have by virtue of any breach of any representation or warranty of the Company herein as to the absence of any requirement to obtain any such consent. Section 4.13. Legal Opinion. The Company shall cause the legal opinions ------------- of Wilson Sonsini Goodrich & Rosati, P.C. in the form of Exhibit D, to be delivered at the Closing. Section 4.14. Notice of Breaches. Each of the Company and each ------------------ Purchaser shall give prompt written notice to the other of any breach of any representation, warranty or other agreement contained in this Agreement or in the Registration Rights Agreement, as well as any events or occurrences arising after the date hereof and prior to, with respect to the Closing, which would reasonably be likely to cause any representation or warranty or other agreement of such party, as the case may be, contained herein to be incorrect or breached as of such Closing Date. However, no disclosure by either party pursuant to this Section 4.14 shall be deemed to cure any breach of any representation, ------------ warranty or other agreement contained herein or in the Registration Rights Agreement. Notwithstanding the generality of the foregoing, the Company shall promptly notify each Purchaser of any notice or claim (written or oral) that it receives from any lender of the Company to the effect that the consummation of the transactions contem plated hereby and by the Registration Rights Agreement violates or would violate any written agreement or understanding between such lender and the Company, and the Company shall promptly furnish by facsimile to the holders of the Convertible Debentures and Shares a copy of any written statement in support of or relating to such claim or notice. Section 4.15. The Warrants. At the Closing, the Company will issue ------------ warrants to purchase an aggregate of 300,000 shares of Common Stock as specified in Schedule 2.1(b) hereto and as follows: (i) to or as directed by Fairway, a Common Stock purchase warrant, in the form of Exhibit D(1) (the "Fairway ------------ ------- Warrant"), pursuant to which Fairway shall have the right at any time thereafter through the Expiration Date (as such term is defined in the Warrants) thereof, to acquire the amount, specified on Schedule 2.1(b) hereto, of shares of Common Stock at the Warrant Exercise Price and (ii) to or as directed by Infinity, a Common Stock purchase warrant, in the form of Exhibit D(2) (the "Infinity ------------ -------- Warrant"), pursuant to which Infinity shall have the right at any time - ------- -20- thereafter through the Expiration Date thereof, to acquire the amount, specified on Schedule 2.1(b) hereto, of shares of Common Stock at the Warrant Exercise Price per share. The Infinity Warrant, the Fairway Warrant and any other warrants specified on Schedule 2.1(b) hereto are each referred to herein as a "Warrant" and are collectively referred to herein as the "Warrants." Section 4.16. Conversion Procedures. Exhibit F sets forth the --------------------- --------- procedures that are to followed in addition to the tendering of a Conversion Notice hereunder with respect to the conversion of the Convertible Debentures or Shares including the form of legal opinion, if necessary, that shall be rendered to the Transfer Agent and such other information and instructions as may be reasonably necessary to enable the Purchasers to exercise its right of conversion smoothly and expeditiously. Section 4.17. Transfer Agent. The First National Bank of Boston and -------------- State Street Bank shall act as transfer agents (the "Transfer Agent") of the -------------- Company. The Company may not remove or replace either Transfer Agent as its transfer agent without written consent of the Purchasers. Section 4.18. Right of First Refusal. Except for sales of stock to key ---------------------- employees and Company matching contributions pursuant to the Company's 401(k) plan, for a period of one year commencing the date hereof, the Company may not enter into any transaction with a Person other than the Purchasers to sell or otherwise dispose of securities in any transaction intended not to be subject to the registration requirements of the Securities Act (a "Private Placement"), ----------------- unless the Company first provides a written notice (the "Private Placement ----------------- Notice") to each Purchaser describing the terms and conditions of such Private - ------ Placement (to which the Company shall attach any written term sheet or other similar writing with respect thereto). Each Purchaser shall have the right, exercisable within five (5) Business Days of its receipt of such notice, to provide the Company with a written notice of its intention to provide the financing described in the Private Placement Notice on terms no less favorable to the Company than as set forth in the Private Placement Notice. If the Purchasers indicate a desire to provide, in the aggregate, in excess of the financing requested in the Private Placement Notice, each Purchaser shall have the right to provide up to such portion of the Private Placement as corresponds to the portion, expressed as a percentage, that the principal amount of Convertible Debentures and stated values of Preferred Stock, then held by such Purchaser bears to the aggregate principal amount of Convertible Debentures in the aggregate, then outstanding. If any Purchaser shall fail to elect to provide its respective pro rata portion of the Private Placement financing, the other Purchasers shall be entitled to provide a pro -21- rata portion (determined in the manner referenced above) of such shortfall. If the Purchasers fail to elect to exercise the right of first refusal set forth in this Section, then the Company (subject to the terms of the engagement letter agreement between the Company and Brown Simpson, LLC) may consummate the Private Placement on the terms and to the Persons (or Affiliates of such Persons) set forth in the Private Placement Notice; provided, however, that if the Company -------- ------- shall fail to consummate such Private Placement within forty-five (45) days after the date of the Private Placement Notice relating thereto, the Company may not consummate such Private Placement without again complying with the terms of first refusal set forth in this Section. The provisions of this Section shall not apply to any issuance of Company securities pursuant to a bona fide employee stock option, stock purchase or non-employee director plan duly adopted by the Company. Section 4.19. Restriction on Debt. The Company covenants and agrees ------------------- that from and after the date hereof and so long as any of the Convertible Debentures remain outstanding, or the Company shall have any obligation to the Purchasers hereunder or pursuant hereto, the Company shall not, and shall not permit any Subsidiary to, without the prior written consent of the Purchasers in each instance incur, create, assume, guarantee or suffer to exist, or become or remain liable directly or indirectly, for or on account of any indebtedness, obligations or liabilities that rank pari passu with or senior to the ---- ----- indebtedness, obligations and liabilities represented by the Convertible Debentures, except under the BNY Bank Obligations. ARTICLE V MISCELLANEOUS ------------- Section 5.1. Fees and Expenses. Each party shall pay the fees and ----------------- expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement, except as set forth in the Registration Rights Agreement. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Convertible Debentures and Shares pursuant hereto. Each Purchaser shall be responsible for such Purchaser's own tax liability that may arise as a result of the investment hereunder or the transactions contemplated by this Agreement. Section 5.2. Entire Agreement; Amendments. This Agreement, together ---------------------------- with the Exhibits and Schedules hereto, the definitive Convertible Debentures, the Certificate of Designation, the Registration Rights Agreement and the Warrants contain the -22- entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. Section 5.3. Notices. Any and all notices or other communications ------- or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 4:30 p.m. (Eastern Standard Time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in the Purchase Agreement later than 4:30 p.m. (Eastern Standard Time) on any date and earlier than 11:59 p.m. (Eastern Standard time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: If to the Company: YES! Entertainment Corporation 3875 Hopyard Road Pleasanton, CA 94588 Attn: Donald Kingsborough Facsimile No.: (510) 734-0997 With copies to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, CA 94304 Attn: Richard Char Facsimile No.: (415) 493-6811 If to any Purchaser: 27 Wellington Road Cork, Ireland Attn: J. A. Loughran Facsimile No.: 011-44-171-355-4975 With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1209 Avenue of the Americas New York, NY 10019 Attn: Eric L. Cohen Facsimile No.: (212) 541-4630 and -23- Mr. Stuart Chasanoff c/o HW Finance 160 Elm Street, Suite 4000 Dallas, Texas 75201 Facsimile No.: (214) 720-1662 and Brown Simpson, LLC Carnegie Hall Tower 152 West 57th Street, 40th Floor New York, NY 10019 Attn: James R. Simpson Facsimile No.: (212) 247-1329 or such other address as may be designated in writing hereafter, in the same manner, by such person. Section 5.4. Amendments; Waivers. No provision of this Agreement may ------------------- be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and the Purchasers, or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. Section 5.5. Headings. The headings herein are for convenience -------- only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. Section 5.6. Successors and Assigns. This Agreement shall be ---------------------- binding upon and inure to the benefit of the parties and their successors and permitted assigns. Neither the Company nor the Purchasers may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other, except that each Purchaser may assign its rights hereunder and under the Registration Rights Agreement to an Affiliate thereof, provided, that such assignee demonstrates to the reasonable satisfaction of the Company its satisfaction of the representations and warranties set forth in Section 3.2 ----------- herein. The assignment by a party of this Agreement or any rights hereunder shall not affect the obligations of such party under this Agreement. -24- Section 5.7. No Third-Party Beneficiaries. This Agreement is ---------------------------- intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person, except that the representations, warranties and other agreements contained herein of the Company are intended for the benefit of and may be relied upon and enforced by Brown Simpson, LLC to the extent such representations, warranties and agreements relate to the Warrant to be delivered to Brown Simpson, LLC. Section 5.8. Governing Law. This Agreement shall be governed by and ------------- construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. Section 5.9. Survival. Each of (i) the representations and -------- warranties of the Company and the Purchaser contained in Article III and the ----------- agreements and covenants of the parties contained in Article IV and this Article ---------- ------- V shall survive until a date that is three years after the last Closing date. - - Section 5.10. Counterpart Signatures. This Agreement may be executed in ---------------------- two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. Section 5.11. Publicity. The Company and the Purchasers shall consult --------- with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed, except for such releases or public statements that are required by law. Section 5.12. Severability. In case any one or more of the ------------ provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable -25- substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. Section 5.13. Remedies. In addition to being entitled to exercise all -------- rights provided herein or granted by law, including recovery of damages, the Purchasers will be entitled to specific performance of the obligations of the Company under this Agreement and the Company will be entitled to specific performance of the obligations of the Purchasers hereunder with respect to the subsequent transfer of Convertible Debentures, Shares and the Underlying Shares. Each of the Company and the Purchasers agrees that monetary damages would not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] [SIGNATURE PAGE FOLLOWS] -26- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first indicated above. YES! ENTERTAINMENT CORPORATION /s/DONALD D. KINGSBOROUGH By: _______________________________________ Name: Donald D. Kingsborough Title: Chief Executive Officer [PURCHASERS' SIGNATURE PAGE FOLLOWS] INFINITY INVESTORS LIMITED /s/J. A. LOUGHRAN By: _________________________________________ Name: J. A. Loughran Title: Director FAIRWAY CAPITAL LIMITED /s/JAMES E. MARTIN By: _________________________________________ Name: James E. Martin Title: President Schedule 2.1(b) --------------- Entity to Receive Securities to be - ----------------- ---------------- Securities Purchased and Issued - ---------- -------------------- Infinity Investors Limited Convertible Debentures in a Principal Amount of $1,410,000 76,500 shares of Preferred Stock Warrants to Purchase 202,500 shares of Common Stock Fairway Capital Limited Convertible Debentures in a Principal Amount of $156,667 8,500 shares of Preferred Stock Warrants to Purchase 22,500 shares of Common Stock Brown Simpson, LLC Warrants to Purchase 75,000 shares of Common Stock EX-4.4 3 AMENDED & RESTATED REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.4 ----------- AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT This Amended and Restated Registration Rights Agreement (this "Agreement") is made and entered into as of March 18,1997 by and between - ---------- Infinity Investors Limited, a corporation organized and existing under the laws of Nevis, West Indies ("Infinity"), Fairway Capital Limited, a corporation -------- organized and existing under the laws of Nevis, West Indies ("Fairway") (each a ------- "Purchaser," and collectively, the "Purchasers") and YES! Entertainment --------- ---------- Corporation, a Delaware corporation (the "Company"). ------- WHEREAS, the Company and the Purchasers are parties to that certain Registration Rights Agreement, dated as of January 28, 1997 (the "January ------- Registration Rights Agreement"), which was executed pursuant to that certain - ----------------------------- Convertible Debenture Purchase Agreement, dated as of January 28, 1997, between the Purchasers and the Company (the "January Purchase Agreement"); -------------------------- WHEREAS, the Purchasers and the Company are entering into an Amended and Restated Convertible Debenture and Convertible Preferred Stock Purchase Agreement, which shall supersede in its entirety the January Purchase Agreement (the "Amended and Restated Purchase Agreement"); --------------------------------------- WHEREAS, it is a condition to the closing of the transactions contemplated by the Amended and Restated Purchase Agreement that the parties supersede in its entirety the January Registration Rights Agreement in order to govern the registration obligations of the Company with respect to the securities to be issued by the Company under the Amended and Restated Purchase Agreement; NOW, THEREFOR, the Company and the Purchasers hereby agree as follows: 1. Definitions ----------- Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Amended and Restated Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "Advice" shall have meaning set forth in Section 3(o). ------ ------------ "Affiliate" means, with respect to any Person, any other Person that --------- directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "control," when used with ------- respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "affiliated," "controlling" and "controlled" have meanings ---------- ----------- ---------- correlative to the foregoing. "Business Day" means any day except Saturday, Sunday and any day which ------------ shall be a legal holiday or a day on which banking institutions in the state of New York generally are authorized or required by law or other government actions to close. "Closing Date" shall have the meaning set forth in the Amended and ------------ Restated Purchase Agreement. "Commission" means the Securities and Exchange Commission. ---------- "Common Stock" means the Company's Common Stock, par value $.001 per ------------ share, stock of any other class into which such shares may hereafter be reclassified or changed and any other securities hereafter designated as Common Stock of the Company. "Debentures" means the 5% Convertible Debentures delivered to the ---------- Purchasers pursuant to the Amended and Restated Purchase Agreement. "Effectiveness Date" means May 5, 1997. ------------------ "Effectiveness Period" shall have the meaning set forth in Section -------------------- ------- 2(a). - ---- "Event" shall have the meaning set forth in Section 4. ----- --------- "Event Date" shall have the meaning set forth in Section 4. ---------- --------- "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "Filing Date" means March 24, 1997. ----------- -2- "Holder" or "Holders" means the holder or holders, as the case may be, ------ ------- from time to time of Registrable Securities. "Indemnified Party" shall have the meaning set forth in Section 6(c). ----------------- ------------ "Indemnifying Party" shall have the meaning set forth in Section 6(c). ------------------ ------------ "Losses" shall have the meaning set forth in Section 6(a). ------ ------------ "Person" means an individual or a corporation, partnership, trust, ------ incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Preferred Stock" means the shares of Series A Convertible Preferred --------------- Stock, par value $.001 per share, of the Company issued to the Purchasers pursuant to the Amended and Restated Purchase Agreement. "Proceeding" means an action, claim, suit, investigation or proceeding ---------- (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Prospectus" means the prospectus included in the Registration ---------- Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under to the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Registrable Securities" means the shares of Common Stock issuable ---------------------- upon conversion of the Debentures and the Preferred Stock and exercise of warrants delivered by the Company to each Purchaser and warrants held by Brown Simpson, LLC in connection with the transactions contemplated by the Amended and Restated Purchase Agreement; provided, however that in order to account for the -------- ------- fact that the number of shares of Common Stock that are issuable upon conversion of Debentures and shares of -3- Preferred Stock are determined in part upon the market price of the Common Stock at the time of conversion, Registrable Securities shall include a number of shares of Common Stock equal to no less than the sum of (1) two times the number of shares of Common Stock issuable upon conversion in full of the Debentures and the Preferred Stock, assuming such conversions occurred on the Closing Date and (2) the number of shares of Common Stock issuable upon exercise in full of the warrants described herein or such other number of shares of Common Stock as agreed to by the parties to the Amended and Restated Purchase Agreement. Notwithstanding anything herein contained to the contrary, if the actual number of shares of Common Stock issuable upon conversion in full of the Debentures and the Preferred Stock and exercise of all of the warrants contemplated under the Amended and Restated Purchase Agreement exceeds twice the number of shares of Common Stock issuable if such conversions and exercise occurred on the Closing Date, the term "Registrable Securities" shall be deemed to include such additional shares of Common Stock and the Company shall promptly file appropriate amendments to the Registration Statement to evidence such increase or the Company shall file one or more additional Registration Statements covering such additional shares of Common Stock, in either case, in the time contemplated herein for filing of appropriate amendments or additional Registration Statements in accordance with the terms hereof. "Registration Statement" means the registration statement, ---------------------- contemplated by Section 2(a), including the Prospectus, amendments and ------------ supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "Rule 144" means Rule 144 promulgated by the Commission pursuant to -------- the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 158" means Rule 158 promulgated by the Commission pursuant to -------- the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 415" means Rule 415 promulgated by the Commission pursuant to --------- the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted -4- by the Commission having substantially the same effect as such Rule. "Securities Act" means the Securities Act of 1933, as amended. -------------- "Special Counsel" means any special counsel to the Holders, for which --------------- the Holders will be reimbursed by the Company pursuant to Section 5. "Underwritten Registration or Underwritten Offering" means a -------------------------------------------------- registration in connection with which securities of the Company are sold to an underwriter for reoffering to the public pursuant to an effective registration statement. 2. Shelf Registration ------------------ On or prior to the Filing Date the Company shall prepare and file with the Commission a "Shelf" Registration Statement covering all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 or another appropriate form approved by the Holders of a majority of the Registrable Securities that permit registration of Registrable Securities for resale by the Holders in the manner or manners designated by them (including, without limitation, public or private sales and one or more Underwritten Offerings). The Company shall (i) not permit any securities other than the Registrable Securities to be included in the Registration Statement and (ii) use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as practicable after the filing thereof, but in any event prior to the Effectiveness Date, and to keep such Registration Statement continuously effective under the Securities Act until the date which is three years after the date that such Registration Statement is declared effective by the Commission or such earlier date when all Registrable Securities covered by such Registration Statement have been sold or may be sold pursuant to Rule 144 without volume restrictions as determined by the counsel to the Company pursuant to a written opinion letter, addressed to the Holders, to such effect (the "Effectiveness ------------- Period"); provided, however, that the Company shall not be deemed to have used - ------ -------- ------- its best efforts to keep the Registration Statement effective during the Effectiveness Period if it voluntarily takes any action that would result in the Holders not being able to sell the Registrable Securities covered by such Registration Statement during the Effectiveness Period, unless such action is required under applicable law or the -5- Company has filed a post-effective amendment to the Registration Statement and the Commission has not declared it effective. (b) If the Holders of a majority of the Registrable Securities so elect, an offering of Registrable Securities pur suant to the Registration Statement may be effected in the form of an Underwritten Offering. In such event, and if the managing underwriters advise the Company and such Holders in writing that in their opinion the amount of Registrable Securities proposed to be sold in such Underwritten Offering exceeds the amount of Registrable Securities which can be sold in such Underwritten Offering, there shall be included in such Underwritten Offering the amount of such Registrable Securities which in the opinion of such managing underwriters can be sold, and such amount shall be allocated pro rata among the Holders proposing to sell Registrable -------- Securities in such Underwritten Offering. In the event the Board of Directors determines in good faith that effecting an Underwritten Offering would have a Material Adverse Effect (as such term is defined in the Amended and Restated Purchase Agreement) on the Company, the Company may delay effecting the Underwritten Offering for up to 60 days. The Board of Directors shall provide written notice to the Holders electing the Underwritten Offering of its decision to delay the Underwritten Offering. (c) If any of the Registrable Securities are to be sold in an Underwritten Offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Holders of a majority of the Registrable Securities included in such offering and the Holders shall notify the Company of such selection. No Holder may participate in any Underwritten Offering hereunder unless such Person (i) agrees to sell its Registrable Securities on the basis provided in any underwriting agreements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such arrangements. 3. Registration Procedures ----------------------- In connection with the Company's registration obliga tions hereunder, the Company shall: (a) Prepare and file with the Commission on or prior to the Filing Date, a Registration Statement on Form S-3 in accordance with the method or methods of distribution thereof as specified by the Holders, and cause the Registration Statement to become effective and remain effective as provided herein; -6- provided, however, that not less than five (5) Business Days prior to the filing - -------- ------- of such Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall (i) furnish to the Holders, their Special Counsel and any managing underwriters, copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, their Special Counsel and such managing underwriters, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the opinion of respective counsel to such Holders and such underwriters, to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities, their Special Counsel, or any managing underwriters, shall reasonably object on a timely basis. (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement as may be necessary to keep such Registration Statement continuously effective as to all of the Registrable Securities for the three year period commencing on the date the Registration Statement is originally declared effective by the Commission and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; (iii) respond as promptly as practicable to any comments received from the Commission with respect to the Registration Statement or any amendment thereto; and (iv) comply with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. (c) Notify the Holders of Registrable Securities to be sold, their Special Counsel and any managing underwriters immediately (and, in the case of (i)(A) below, not less than five (5) days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one (1) -7- Business Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Regis tration Statement is proposed to be filed; and (B) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the Company contained in any agreement (including any underwriting agreement) contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event that makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of the Registration Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. (e) If requested by any managing underwriter or the Holders of a majority of the Registrable Securities to be sold in connection with an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as such managing underwriters and such Holders reasonably agree should be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment; provided, however, that the Company -------- ------- -8- shall not be required to take any action pursuant to this Section 3(e) that ------------ would, in the opinion of counsel for the Company, violate applicable law. (f) Furnish to each Holder, their Special Counsel and any managing underwriters, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission. (g) Promptly deliver to each Holder, their Special Counsel, and any underwriters, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request; and the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders and any underwriters in connection with the offering and sale of the Registrable Securi ties covered by such Prospectus and any amendment or supplement thereto. (h) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders, any underwriters and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder or underwriter requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; provided, however, that the Company shall not be required to qualify -------- -------- generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject. (i) Cooperate with the Holders and any managing underwriters to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall be free of all restrictive legends, and -9- to enable such Registrable Securities to be in such denominations and registered in such names as any such managing underwriters or Holders may request at least two Business Days prior to any sale of Registrable Securities. (j) Upon the occurrence of any event contemplated by Section 3(c)(vi), as ---------------- promptly as practicable, prepare a supple ment or amendment, including a post- effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (k) Use its best efforts to cause all Registrable Securities relating to such Registration Statement to be listed on the Nasdaq National Market and any other securities exchange, market or over-the-counter bulletin board, if any, on which similar securities issued by the Company are then listed. (l) Enter into such agreements (including, in case of an Underwritten Offering, an underwriting agreement in form, scope and substance as is customary in Underwritten Offerings) and take all such other actions in connection therewith (including those reasonably requested by any managing underwriters and the Holders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities, and whether or not an underwriting agreement is entered into, (i) make such representations and warranties to such Holders and such underwriters as are customarily made by issuers to underwriters in underwritten public offerings, and confirm the same if and when requested; (ii) obtain and deliver copies thereof to each Holder and the managing underwriters, if any, of opinions of counsel to the Company and updates thereof addressed to each selling Holder and each such underwriter, in form, scope and substance reasonably satisfactory to any such managing underwriters and Special Counsel to the selling Holders covering the matters customarily covered in opinions requested in Underwritten Offerings and such other matters as may be reasonably requested by such Special Counsel and underwriters; (iii) immediately prior to the effectiveness of the Registration Statement, and, in the case of an Underwritten Offering, at the time of delivery of any Registrable Securities sold pursuant thereto, obtain and deliver copies to the Holders and the managing underwriters, if any, of "cold comfort" letters and -10- updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data is, or is required to be, included in the Registration Statement), addressed to each selling Holder and each of the underwriters, if any, in form and substance as are customary in connection with Underwritten Offerings; (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable to the selling Holders and the underwriters, if any, than those set forth in Section 6 (or such other provisions and procedures acceptable to the managing - --------- underwriters, if any, and holders of a majority of Registrable Securities participating in such Under written Offering; and (v) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold, their Special Counsel and any managing underwriters to evidence the continued validity of the representations and warranties made pursuant to clause 3(l)(i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. (m) Make available for inspection by the selling Holders, any representative of such Holders, any underwriter participating in any disposition of Registrable Securities, and any attorney or accountant retained by such selling Holders or underwriters, at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and cause the officers, directors, agents and employees of the Company and its subsidiaries to supply all information in each case requested by any such Holder, representative, underwriter, attorney or accountant in connection with the Registration Statement; provided, however, that any information that is -------- ------- determined in good faith by the Company in writing to be of a confidential nature at the time of delivery of such information shall be disclosed only to the extent that each such Person executes a confidentiality agreement providing that such information will be kept confidential by such Persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities; (ii) disclosure of such information, in the opinion of counsel to such Person, is required by law; (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard by such Person; or (iv) such information becomes available to such Person from a source other than the Company and such source is not known -11- by such Person to be bound by a confidentiality agreement with the Company. (n) Comply with all applicable rules and regulations of the Commission and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 not later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts Underwritten Offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of the Registration Statement, which statement shall cover said 12-month period, or end shorter periods as is consistent with the requirements of Rule 158. (o) Provide a CUSIP number for all Registrable Securities, not later than the effective date of the Registration Statement. The Company may require each selling Holder to furnish to the Company such information regarding the distribution of such Registrable Securities as is required by law to be disclosed in the Registration Statement and the Company may exclude from such registration the Registrable Securities of any such Holder who unreasonably fails to furnish such information within a reasonable time after receiving such request. If the Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company, then such Holder shall have the right to require (i) the inclusion therein of language, in form and substance reasonably satisfactory to such Holder, to the effect that the ownership by such Holder of such securities is not to be construed as a rec ommendation by such Holder of the investment quality of the Company's securities covered thereby and that such ownership does not imply that such Holder will assist in meeting any future financial requirements of the Company, or (ii) if such reference to such Holder by name or otherwise is not required by the Securities Act or any similar Federal statute then in force, the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement filed or prepared subsequent to the time that such reference ceases to be required. Each Purchaser covenants and agrees that (i) it will not offer or sell any Registrable Securities under the Registration Statement until it has received copies of the -12- Prospectus as then amended or supplemented as contemplated in Section 3(g) and ------------ notice from the Company that such Registration Statement and any post-effective amendments thereto have become effective as contemplated by Section 3(c) and ------------ (ii) each Purchaser and its officers, directors or Affiliates, if any, will comply, and will advise their brokers and agents to comply, with the prospectus delivery requirements of the Securities Act as applicable to them in connection with sales of Registrable Securities pursuant to the Registration Statement. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or ---------------- --------- -------- ------- 3(c)(vi), such Holder will forthwith (and will advise any brokers or agents - -------- reselling Underlying Shares on their behalf pursuant to such Registration Statement to) discontinue disposition of such Registrable Securities and use of the Prospectus until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 3(j), ------------ or until it is advised in writing (the "Advice") by the Company that the use of ------ the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. 4. Liquidated Damages. The Company acknowledges and agrees that the ------------------ Holders will suffer damages, and that it would not be feasible to ascertain the extent of such damages with precision, if the Company fails to fulfill its obligations hereunder and (a) a Registration Statement is not declared effective by the Commission on or prior to the Effectiveness Date, (b) trading in the Common Stock shall be suspended for any reason for more than three trading days, (c) a Registration Statement is filed and declared effective by the Commission but thereafter ceases to be effective at any time during the Effectiveness Period without being succeeded within 10 Business Days by a subsequent Registration Statement filed with and declared effective by the Commission and (d) the Company fails to file with the Commission a request for acceleration in accordance with Rule 12d1-2 promulgated under the Exchange Act within five (5) days of the date that the Company is notified by the Commission that an Underlying Shares Registration Statement will not be reviewed (any such failure being hereinafter referred to as an "Event", and for purposes ----- of clause (a) the date on which such Event occurs, for purposes of clause (b) the date on which such 3-day limit is succeeded, for purposes of clause (c) the date on which such 10-day limit is exceeded or for purposes of -13- clause (d) the date on which such 5-day limit is exceeded, being hereinafter referred to as an "Event Date"), then the discount comprising the "Initial ---------- Conversion Price" (as such term is defined in the Debentures and in the Certificate of Designation relating to the Preferred Stock, as applicable), as adjusted, and the discount comprising the "Conversion Price" (as such term is defined in the Debentures and in the Certificate of Designation relating to the Preferred Stock, as applicable), if different from the Initial Conversion Price, shall be decreased by one percent (1%) (i.e., 81.5% as of the Event Date and 80.5% as of the one month anniversary of the Event Date) per month 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 79.5% as of the fourth month anniversary of the Event Date) and the Company shall pay on each monthly anniversary of the Event Date, in cash as liquidated damages and not a penalty, (i) to the Holders of outstanding Debentures, .5% of the aggregate principal amount of the Debentures then outstanding (each such Holder being entitled to receive such portion of such amount as equals its pro rata portion of the principal amount of Debentures then outstanding) and (ii) to each Holder of Preferred Stock then outstanding, .5% of the aggregate stated values for the outstanding shares of Preferred Stock then held by such Holder, 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 on each monthly anniversary of the Event Date until such time as the applicable Event is cured, in cash, as liquidated damages and not a penalty, (i) to the Holders of outstanding Debentures, 1% of the aggregate principal amount of the Debentures then outstanding (each such Holder being entitled to receive such portion of such amount as equals its pro rata portion of the principal amount of Debentures then outstanding) and (ii) to each Holder of Preferred Stock then outstanding, 1% of the aggregate stated values for the outstanding shares of Preferred Stock then held by such Holder. The provisions of this Section are not exclusive and shall in no way limit the Company's obligations under the Debentures, the Certificate of Designation relating to the Preferred Stock or the Amended and Restated Purchase Agreement. The Company shall notify each Holder within five (5) days of each Event and Event Date. The Company shall pay the liquidated damage due on the Registrable Securities to each -14- Holder of record as at the Event Date on the first Business Day of each month in which such liquidated damages shall accrue. 5. Registration Expenses --------------------- (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not the Registration Statement is filed or becomes effective and whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the National Associa tion of Securities Dealers, Inc. and (B) in compliance with state securities or Blue Sky laws (including, without limitation, fees and disbursements of counsel for the underwriters or Holders in connection with Blue Sky qualifications of the Registrable Securities and determination of the eligibility of the Regis trable Securities for investment under the laws of such jurisdictions as the managing underwriters, if any, or Holders of a majority of Registrable Securities may designate)), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is requested by the managing underwriters, if any, or by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and Special Counsel for the Holders as limited pursuant to Section 5(b), (v) fees and disbursements of all independent certified public accountants referred to in Section 3(l)(iii) (including, ----------------- without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance), (vi) Securities Act liability insurance, if the Company so desires such insurance, and (vii) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange on which similar securities issued by the Company are then listed. -15- (b) In connection with their initial review of the Registration Statement, the Company shall reimburse the Holders for up to $2000 for the fees and disbursements of one firm of attorneys chosen by the Holders of a majority of the Registrable Securities. 6. Indemnification --------------- (a) Indemnification by the Company. The Company shall, notwithstanding ------------------------------ termination of this Agreement and without limitation as to time, indemnify and hold harmless each Holder, the officers, directors, agents (including any underwriters retained by such Holder in connection with the offer or sale of Registrable Securities), brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and attorneys' fees) and expenses (collectively, "Losses"), ------ as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by or on behalf of such Holder expressly for use therein, which information was reasonably relied on by the Company for use therein or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. -16- (b) Indemnification by Holders. In connection with the Registration -------------------------- Statement, each Holder shall furnish to the Company in writing such information as the Company reasonably requests for use in connection with the Registration Statement or any Prospectus and agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review) arising solely out of or based solely upon any untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in the Registration Statement or such Prospectus and that such information was reasonably relied upon by the Company for use in the Registration Statement, such Prospectus or such form of prospectus or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) Conduct of Indemnification Proceedings. If any Proceeding shall be -------------------------------------- brought or asserted against any Person entitled to indemnity hereunder (an "Indemnified Party"), such Indemnified Party promptly shall notify the Person - ------------------ from whom indemnity is sought (the "Indemnifying Party") in writing, and the ------------------ Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that -------- the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or -17- further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (in cluding reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within 10 Business Days of written notice thereof to the Indemnifying Party (regard less of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require -------- such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). (d) Contribution. If a claim for indemnification under Section 6(a) or ------------ ------------ 6(b) is unavailable to an Indemnified Party or is insufficient to hold such - ---- Indemnified Party harmless for any Losses in respect of which this Section would apply by its -18- terms (other than by reason of exceptions provided in this Section), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 6(c), any attorneys' or other fees or expenses incurred by such party ------------ in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata ------------ --- ---- allocation or by any other method of allo cation that does not take into account the equitable considera tions referred to in the immediately preceding paragraph. Not withstanding the provisions of this Section 6(d), no Purchaser ------------ shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Purchaser from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. -19- 7. Rule 144 -------- The Company shall file the reports required to be filed by it under the Securities Act and the Exchange Act in a timely manner and, if at any time the Company is not required to file such reports, it will, upon the request of any Holder, make publicly available other information so long as necessary to permit sales of its securities pursuant to Rule 144. The Company further covenants that it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144. Upon the request of any Holder, the Company shall deliver to such Holder a written certification of a duly authorized officer as to whether it has complied with such requirements. To the extent Rule 144 is amended, the Company will take such action as any Holder may reasonably request, to enable such Holder to sell Registrable Securities pursuant to Rule 144 as then in effect. 8. Miscellaneous ------------- (a) Remedies. In the event of a breach by the Company or by a Holder, --------- of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (b) No Inconsistent Agreements. None of the Company nor any of its -------------------------- subsidiaries has, as of the date hereof, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. None of the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that are currently, or may in the future be, in effect. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority of the then outstanding Registrable Securities, the Company shall not grant to any Person the right to request the Company to register -20- any securities of the Company under the Securities Act unless the rights so granted are subject in all respects to the prior rights in full of the Holders set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement. In addition, in any case, the Company may not register for resale under the Securities Act any securities of the Company held by any person prior to the expiration of the 60th day following the date that the Registration Statement has been declared effective by the Commission, provided that if the effectiveness of such Registration Statement is suspended for any reason (or if the Underlying Shares are not listed for trading on the Nasdaq National Market or the Nasdaq SmallCap Market) such 60 day period shall be increased to include any such days. (c) No Piggyback on Registrations. None of the Company nor any of its ----------------------------- security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statement other than the Common Stock to be issued under the Amended and Restated Purchase Agreement, and the Company shall not enter into any agreement providing any such right to any of its security holders. (d) Piggy-Back Registrations. For so long as there is not an effective ------------------------- Registration Statement in effect relating to the Registrable Securities, if at any time the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, the Company shall send to each holder of Registrable Securities written notice of such determination and, if within twenty (20) days after receipt of such notice, any such holder shall so request in writing, the Company shall include in such registration statement all or any part of the Registrable Securities such holder requests to be registered, except that if, in connection with any Underwritten Offering for the account of the Company the managing underwriter(s) thereof shall impose a limitation on the number of shares of Common Stock which may be included in the registration statement because, in such underwriter(s)' judgment, such limitation is necessary to effect an orderly public distribution of securities covered thereby, then the Company shall be obligated to include in such registration statement only such limited portion of the Registrable Securities for to which such holder has requested inclusion hereunder. Any exclusion of Registrable Securities -21- shall be made pro rata among the holders seeking to include Registrable Securities, in proportion to the number of Registrable Securities sought to be included by such holders; provided, however, that the Company shall not exclude --------- ------- any Registrable Securities unless the Company has first excluded all outstanding securities the holders of which are not entitled by right to inclusion of securities in such registration statement; and provided, further, however, that, -------- -------- ------- after giving effect to the immediately preceding proviso, any exclusion of Registrable Securities shall be made pro rata with holders of other securities having the right to include such securities in such registration statement. No right to registration of Registrable Securities under this Section shall be construed to limit any registration otherwise required hereunder. (e) Amendments and Waivers. The provisions of this Agreement, ---------------------- including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of at least a majority of the then outstanding Registrable Securities; provided, however, that, for the purposes of this sentence, -------- ------- Registrable Securities that are owned, directly or indirectly, by the Company, or an Affiliate of the Company are not deemed outstanding. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this --------- ------- sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (f) Notices. Any and all notices or other communications or deliveries ------- required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 4:30 p.m. (Eastern Standard Time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in the Amended and Restated Purchase Agreement later than 4:30 p.m. (Eastern Standard Time) on any date and earlier than 11:59 p.m. (Eastern Standard time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) -22- upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: If to the Company: YES! Entertainment Corporation 3875 Hopyard Road Pleasanton, CA 94588 Attn: Donald Kingsborough Facsimile No.: (510) 734-0997 With copies to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, CA 94304 Attn: Richard Char Facsimile No.: (415) 493-6811 If to any Purchaser: 27 Wellington Road Cork, Ireland Attn: J. A. Loughran Facsimile No.: 011-44-171-355-4975 With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10019 Attn: Eric L. Cohen Facsimile No.: (212) 541-4630 and Mr. Stuart Chasanoff c/o HW Finance 160 Elm Street, Suite 4000 Dallas, Texas 75201 Facsimile No.: (214) 720-1662 If to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. (g) Successors and Assigns. This Agreement shall inure to the benefit ---------------------- of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the -23- benefit of each Holder. Except as otherwise permitted by the Amended and Restated Purchase Agreement, the parties hereto may not assign its rights or obligations hereunder without the prior written consent of each other. (h) Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (i) Governing Law; Arbitration. (A) This Agreement shall be governed -------------------------- by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of law thereof. (B) All disputes between the parties hereto arising under the terms of this Agreement shall be arbitrated in New York City under the rules of the American Arbitration Association then in effect in the City of New York. Judgment on any award made by the arbitrators hereunder may be rendered in any court having jurisdiction. The parties consent to the non-exclusive jurisdiction of the Federal and State courts sitting in New York County, New York, in connection with the enforcement of such award. The parties agree to keep confidential any materials, documents or other information that is disclosed in connection with any arbitration proceeding. (j) Cumulative Remedies. The remedies provided herein are cumulative ------------------- and not exclusive of any remedies provided by law. (k) Severability. If any term, provision, covenant or restriction of ------------ this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without -24- including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (l) Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. (m) Shares Held by The Company and its Affiliates. Whenever the --------------------------------------------- consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its Affiliates (other than the Purchasers or transferees or successors or assigns thereof if such Persons are deemed to be Affiliates solely by reason of their holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] [SIGNATURE PAGE FOLLOWS] -25- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. YES! ENTERTAINMENT CORPORATION /s/DONALD D. KINGSBOROUGH By:___________________________ Donald D. Kingsborough Chief Executive Officer [PURCHASERS' SIGNATURE PAGE FOLLOWS] INFINITY INVESTORS LIMITED /s/J. A. LOUGHRAN By:___________________________ Name: J. A. Loughran Title: Director FAIRWAY CAPITAL LIMITED /s/JAMES E. MARTIN By:___________________________ Name: James E. Martin Title: President EX-5.1 4 OPINION OF WILSON SONSINI GOODRICH & ROSATI EXHIBIT 5.1 Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 Phone: (415) 493-9300 Facsimile: (415) 493-6811 March 24, 1997 YES! Entertainment Corporation 3875 Hopyard Road, Suite 375 Pleasanton, CA 94588 RE: REGISTRATION STATEMENT ON FORM S-3 ---------------------------------- Ladies and Gentlemen: We have examined the Registration Statement on Form S-3 (the "Registration Statement") to be filed by you with the Securities and Exchange Commission (the "Commission") on March 24, 1997, in connection with the registration under the Securities Act of 1933, as amended, of 4,325,591 shares of Common Stock, par value $.001 per share (the "Securities"). We understand that the Shares are to be sold sold by the selling stockholders identified in the Registration Statement to the public as described in the Registration Statement. As your legal counsel, we have examined the proceedings taken, and are familiar with the proceedings proposed to be taken, by you in connection with the sale and issuance of the Common Stock. It is our opinion that, upon completion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Securities, including the proceedings being taken in order to permit such transaction to be carried out in accordance with applicable state securities laws, the Securities, when issued and sold in the manner described in the Registration Statement and in accordance with the resolutions adopted by the Board of Directors of the Company, will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and any amendments thereto. Very truly yours, WILSON SONSINI GOODRICH & ROSATI Professional Corporation /s/ WILSON SONSINI GOODRICH & ROSATI EX-23.1 5 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement on Form S-3 and related Prospectus of YES! Entertainment Corporation for the registration of 4,325,591 shares of its common stock issued in connection with the conversion of convertible subordinated debentures and Series A Convertible Preferred Stock and the exercise of certain Warrants, and to the incorporation by reference therein of our report dated February 28, 1996, with respect to the consolidated financial statements and schedule of YES! Entertainment Corporation included in its Annual Report (Form 10-K) for the year ended December 31, 1995, filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP San Jose, California March 24, 1997 -----END PRIVACY-ENHANCED MESSAGE-----