-----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, Gklf1kWfrUNBGeIcoLDLo7OvTvOssxvxHRtUkRnvKtG6Nhl3eOSZPdZ1UDvyVJiK J8bBgMpy0xHgZbBpb8pwHQ== 0001012870-97-001540.txt : 19970814 0001012870-97-001540.hdr.sgml : 19970814 ACCESSION NUMBER: 0001012870-97-001540 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 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: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25916 FILM NUMBER: 97659105 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 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 1997 OR [_] Transition Report pursuant to Section 13 of 15 (d) of the Securities Exchange Act of 1934. For the transition period from ____________ to ____________. Commission File Number 0-25916 YES! ENTERTAINMENT CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-3165290 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3875 Hopyard Road, Suite 375, Pleasanton, CA 94588 -------------------------------------------------- (Address of principal executive offices and zip code) (510) 847-9444 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] NO [_] As of July 31, 1997 there were 14,287,786 shares of the registrant's common stock outstanding. This quarterly report on Form 10-Q contains 21 pages of which this is page number 1. YES! ENTERTAINMENT CORPORATION FORM 10-Q JUNE 30, 1996 INDEX PAGE ---- Part I. Financial Information Item 1. Consolidated Financial Statements Consolidated Statements of Operations - Three months and six months ended June 30, 1997 and June 30, 1996 3 Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 4 Consolidated Statements of Cash Flows - Six months ended June 30, 1997 and June 30, 1996 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURE PAGE 21 2 PART I. FINANCIAL INFORMATION ----------------------------- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS YES! ENTERTAINMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1997 1996 1997 1996 -------- -------- -------- -------- Net sales $12,616 $11,551 $21,657 $20,486 Cost of sales 7,615 6,887 12,940 11,192 ------- ------- ------- ------- Gross profit 5,001 4,664 8,717 9,294 ------- ------- ------- ------- Operating expenses: Marketing, advertising and promotion 559 1,473 1,439 2,167 Selling, distribution and administrative 6,182 4,696 12,300 9,569 ------- ------- ------- ------- Total operating expenses 6,741 6,169 13,739 11,736 ------- ------- ------- ------- Operating loss (1,740) (1,505) (5,022) (2,442) Interest income 12 105 25 212 Interest expense (444) (107) (1,101) (310) Other expense, net (14) (11) (66) (92) ------- ------- ------- ------- Net loss before provision for income taxes (income tax benefit) (2,186) (1,518) (6,164) (2,632) Provision for income taxes (income tax benefit) 179 (304) (616) (527) ------- ------- ------- ------- Net loss (2,365) $(1,214) (5,548) $(2,105) ======= ======= Non-cash dividends and discount on preferred stock (1,049) (2,600) ------- ------- Net loss applicable to common stockholders $(3,414) $(8,148) ======= ======= Net loss per share applicable to common stockholders $(0.24) $(0.58) ======= ======= Net loss per share $ (0.09) $ (0.15) ======= ======= Shares used in computing net loss per share 14,237 13,995 14,140 13,761 ======= ======= ======= =======
See accompanying notes. 3 YES! ENTERTAINMENT CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1997 1996* -------- ------------ (Unaudited) ASSETS ------ Current assets: Cash and cash equivalents $ 1,302 $ 1,572 Accounts receivable, net 11,307 21,956 Inventories 25,621 26,194 Prepaid royalties 4,457 4,045 Prepaid expenses 1,750 1,868 Other current assets 3,222 1,671 -------- -------- Total current assets 47,659 57,306 Property and equipment, net 4,319 3,869 Intangibles and deposits, net 215 276 -------- -------- Total assets $ 52,193 $ 61,451 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Loans payable $ 8,164 $ 16,712 Accounts payable 7,061 12,565 Accrued royalties 1,529 1,018 Accrued liabilities 881 879 Capital lease obligations due within one year 17 16 Income taxes payable - 182 -------- -------- Total current liabilities 17,652 31,372 Capital lease obligations 6 14 Convertible debentures 1,778 - Other liabilities 17 - Redeemable convertible preferred stock 8,723 - Stockholders' equity: Undesignated preferred stock - - Common stock 14 14 Additional paid-in capital 84,807 82,707 Accumulated deficit (60,804) (52,656) -------- -------- Total stockholders' equity 24,017 30,065 -------- -------- Total liabilities and stockholders' equity $ 52,193 $ 61,451 ======== ========
* Derived from audited consolidated financial statements See accompanying notes. 4 YES! ENTERTAINMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED ----------------------------- JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- OPERATING ACTIVITIES Net loss $(5,548) $ (2,105) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,494 1,208 Advertising expenses funded by inventory 118 - Debt discount and amortization 475 - Accrued interest converted to convertible debt 67 - Employer contribution to 401(k) plan funded with 106 - common stock Changes in operating assets and liabilities: Accounts receivable 10,648 13,554 Inventories 573 (4,383) Prepaid expenses and other current assets (1,962) (3,626) Other assets - (307) Accounts payable (5,504) (1,128) Accrued royalties and liabilities 405 (1,672) Income taxes payable (182) - Other long-term liabilities 17 (39) ------- ------- Net cash provided by operating activities 707 1,502 INVESTING ACTIVITIES Acquisition of property and equipment (1,928) (1,709) Decrease in intangibles and deposits 45 - ------- ------- Net cash used in investing activities (1,883) (1,709) FINANCING ACTIVITIES Proceeds from issuance of convertible debentures 1,433 - Principal payments on loans payable (8,548) (10,125) Principal payments on capital lease obligations (8) (43) Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs 8,027 - Proceeds from issuance of common stock, net of issuance costs 2 13,770 ------- ------- Net cash provided by financing activities 906 3,602 ------- ------- Net increase (decrease) in cash and cash (270) 3,395 equivalents Cash and cash equivalents at beginning of period 1,572 2,987 Cash and cash equivalents at end of period $ 1,302 $ 6,382 ======= =======
See accompanying notes. 5 YES! ENTERTAINMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS Interim Financial Statements The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q but do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements and should, therefore, be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 1996 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 1997. In the opinion of management, all adjustments (which consist only of normal recurring accruals) have been made to present fairly the consolidated operating results for the unaudited periods. The interim operating results are not necessarily indicative of the results for fiscal 1997. Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. INVENTORY (IN THOUSANDS) June 30, December 31, 1997 1996 -------- ------------ Raw Materials $ 2,694 $ 2,940 Work-in-process 1,233 974 Finished goods 21,694 22,280 ------- ------- $25,621 $26,194 ======= ======= 6 3. RECENT DEVELOPMENTS Restructured Financing In July 1997, the Company entered into agreements with the institutional investors who purchased convertible debentures and Series A preferred stock in the first quarter of 1997 restructuring the terms of the prior agreements with respect to those securities. The transaction is deemed effective April 30, 1997. The new terms place significant restraints on the conversion into and sale of the common stock issuable upon conversion, including a prohibition on conversion until the earlier of November 1, 1997 or until the price of the Company's common stock exceeds $10 per share for twenty (20) consecutive trading days after August 1, 1997. The new terms also generally prohibit short sales. In addition, the conversion of the securities and sale of common stock is restricted to amounts that vary based upon the recent the price and trading volume of the Company's common stock. The conversion price of the securities is based on a discount to the weighted average value of the Company's common stock near the time of conversion. The discount increases monthly from 11.75% in November 1997 to 18.75% in April 1998. The securities are redeemable at the option of the Company. Any amount of the securities remaining after five years will convert at the then-prevailing conversion price. The total face value of the new instruments is $11,727,167. The new instruments have been issued in the place of instruments with a total value of $9,439,104, including accrued dividends and interest through April 30, 1997. The transaction will be accounted for by recognizing (1) approximately $647,000 in imputed interest and dividends in the second quarter of 1997, representing the difference between the face value of the new securities and the book value of the old instruments, including accrued dividends and interest, and (2) approximately $2.2 million in imputed interest expense and dividends ratably over the 12 month period beginning May 1, 1997, representing the value of the maximum discount of 18.75% on the face value of the new securities. Approximately $366,000 of this amount was recognized in the quarter ended June 30, 1997. Resignation of Director; Appointment of Executive Officer In June 1997, Gary L. Nemetz resigned as a director of the Company. In August 1997, the Board appointed Anthony J. Miadich to fill the vacancy created by Mr. Nemetz's resignation. In July 1997, the Company appointed Mike Bauer Executive Vice President, Sales. 4. SHAREHOLDER LAWSUITS On April 15, 1997, a class action lawsuit was filed in the Superior Court of the State of California, County of Alameda (the "California Action") against YES! Entertainment Corporation (the "Company") and certain of its executive officers. The California Action 7 is purportedly brought on behalf of purchasers of the Company's common stock between October 23, 1996 and December 12, 1996, inclusive. It alleges violations of (i) Sections 25400 and 25500 of the California Corporations Code, (ii) Sections 1709, 1710 and 1711 of the California Civil Code and (iii) Section 17200 et seq. of the California Business and Professions Code. On April 17, 1997, a second class action lawsuit was filed against the Company and certain of its executive officers in the United States District Court for the Northern District of California (the "Federal Action" and together with the California Action, the "Actions"). The Federal Action is purportedly brought on behalf of purchasers of the Company's common stock between March 29, 1996 and December 12, 1996, inclusive. The Federal Action alleges violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, 65 U.S.C. (S)(S) 78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. (S) 240.10b-5 promulgated thereunder by the Securities and Exchange Commission. The Actions seek compensatory and punitive damages, interest, attorneys' fees and other costs, as well as equitable relief to preserve defendants' assets. The Company believes that it has meritorious defenses to these Actions and intends to vigorously defend these Actions. Since the Actions were filed, three additional class action lawsuits were filed against the Company and certain of its executive officers, one in the Superior Court of the State of California, County of Alameda and two in the United States District Court for the Northern District of California. The causes of action alleged are substantially identical to those raised in the Actions, although the second state court action is purportedly brought on behalf of purchasers of the Company's common stock between March 29, 1996 and December 12, 1996, inclusive. In July 1997, the Superior Court of the State of California, County of Alameda, sustained a demurrer filed on behalf of the defendants in the California Action, with leave to amend the Complaint. 5. FASB STATEMENT NO. 128, EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. There was no impact of Statement 128 on the calculation of the primary or fully diluted loss per share for the quarters and six months ended June 30, 1997 and 1996. 8 YES! ENTERTAINMENT CORPORATION -- PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations includes certain forward looking statements about the Company that are based on current expectations. Actual results may differ materially as a result of any one or more of the risks identified in this section, as well as is the section captioned "Business Factors."
RESULTS OF OPERATION - -------------------- (In thousands) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1997 1996 1997 1996 ------------------- ------------------- Net sales $12,616 $11,551 $21,657 $20,486 Cost of sales 7,615 6,887 12,940 11,192 ------- ------- ------- ------- Gross profit 5,001 4,664 8,717 9,294 Gross profit % 40% 40% 40% 45% Operating expenses 6,741 6,169 13,739 11,736 Operating expenses % 53% 53% 63% 57% Operating loss (1,740) (1,505) (5,022) (2,442) Interest and other expense, net (446) (13) (1,143) (190) ------- ------- ------- ------- Net loss before provision for income taxes (2,186) (1,518) (6,164) (2,632) Provision for income taxes (income tax benefit) 179 (304) (616) (527) ------- ------- ------- ------- Net loss $(2,365) $(1,214) $(5,548) $(2,105) ======= ======= ======= ======= Non-cash dividends and discount on preferred stock (1,049) (2,600) ------- ------- Net loss applicable to common stockholders $(3,414) $(8,148) ======= =======
NET SALES: The Company's net sales for the second quarter of 1997 increased $1.0 million or approximately 9% to $12.6 million from $11.6 million in the second quarter of 1996. Net sales increased $1.2 million or approximately 6% to $21.7 million for the first six months of 1997 from $20.5 million for the first six months of 1996. International sales in the second quarter and the first six months of 1997 were higher than in the comparable periods of 1996, primarily as the result of the Company's efforts to increase international sales. International shipments represented 40% of shipments in the second quarter of 1997 and 26% of shipments in the second quarter of 1996. 9 The Company recognizes revenue upon shipment of product and computes net sales by concurrently deducting a provision for sales returns and allowances, including allowances for defective returns, price protection, mark downs and other returns. Sales allowances may vary as a percentage of gross sales due to changes in the Company's product mix, defective product allowances or other sales allowances. Sales of toys traditionally have been highly seasonal, with a majority of retail sales occurring during the December holiday season. The Company expects that its operating results will vary significantly from quarter to quarter, because the majority of the Company's products are shipped in the quarters ending September 30 and December 31. The Company is dependent on a relatively small number of customers, in particular Toys "R" Us, Inc. and Wal-Mart Stores, Inc., for a significant percentage of its sales. Significant reductions in sales to any one or more of the Company's largest customers would have a material adverse effect on the Company's operating results. Because orders in the toy industry are generally cancelable at any time without penalty, there can be no assurance that present or future customers will not terminate their purchase agreements with the Company or significantly change, reduce or delay the amount of products ordered from the Company. Any such termination of a customer relationship or change, reduction or delay in orders would have a material adverse effect on the Company's operating results. COST OF SALES: Cost of sales were approximately 60% of net sales in each of the second quarters of 1997 and 1996, and approximately 60% and 55% of net sales for the first six months of 1997 and 1996, respectively. The increases in cost of sales as a percentage of net sales in the first six months of 1997 from the comparable period in 1996 was primarily the result of the increase in lower margin international sales in the first quarter of 1997 compared to the first quarter of 1996 and the sale of certain slower moving items. In absolute dollars, cost of sales increased $728,000 or approximately 11% to $7.6 million in the second quarter of 1997 from $6.9 million in the second quarter of 1996 and increased $1.7 million or approximately 16% to $12.9 million for the first six months of 1997 from $11.2 million for the first six months of 1996. OPERATING EXPENSES: (In thousands)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1997 1996 1997 1996 -------- -------- -------- -------- Marketing, advertising and promotion $ 559 $1,473 $ 1,439 $ 2,167 Selling, distribution and administrative 6,182 4,696 12,300 9,569 ------ ------ ------- ------- Total operating expenses $6,741 $6,169 $13,739 $11,736 ====== ====== ======= =======
10 Operating expenses increased $572,000 or approximately 9% to $6.7 million in the second quarter of 1997 from $6.2 million in the second quarter of 1996, as the result of higher variable expense associated with higher revenue and higher fixed expenses required to support current and expected sales volumes. Operating expenses increased $2.0 million or approximately 17% to $13.7 million for the first six months of 1997 from $11.7 million for the first six months of 1996 for the same reasons. Marketing, Advertising and Promotion. Marketing, advertising and promotion expenses decreased $914,000 or approximately 62% to $559,000 in the second quarter of 1997 from $1.5 million in the second quarter of 1996. Marketing, advertising and promotion expenses decreased $728,000 or approximately 34% to $1.4 million for the first six months of 1997 from $2.2 million for the first six months of 1996. These decreases resulted from the increase in sales to international customers and the sale of slower-moving items, which do not require advertising support from the Company. The Company expects advertising expense in the last two quarters of the year to significantly exceed advertising expense in the first half of the year to support anticipated seasonal increases in sales. In the event higher sales volume is not achieved, the increase in fixed expenses could adversely affect the Company's operating results and financial condition. See Dependence on 1997 Products; Increase in Fixed Expenses. Selling, Distribution and Administrative. Selling, distribution and administrative expenses increased $1.5 million or approximately 32% to $6.2 million in the second quarter of 1997 from $4.7 million in the second quarter of 1996. Selling, distribution and administrative expenses increased $2.7 million or approximately 29% to $12.3 million for the first six months of 1997 from $9.6 million for the first six months of 1996. The increase in expenses resulted from higher variable expense associated with higher revenues and higher costs in operations and sales support, product development, and general and administrative expenses required to support expected sales volumes. INTEREST EXPENSE: The following table shows interest expense and interest income for the applicable periods:
(In thousands) THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1997 1996 1997 1996 ------------------------------------------ Interest income $ 12 $ 105 $ 25 $ 212 Interest expense $(444) $(107) $(1,101) $(310)
The increase in interest expense in the quarter and six months ended June 30, 1997 as compared to the comparable periods in 1996 is primarily the result of the non-cash interest expense recorded in connection with the convertible debenture and preferred stock financing, and the restructuring thereof, described under "Liquidity and Capital Resources." The non-cash interest expenses recorded in the quarter and six months ended June 30, 1997 were $218,000 and $558,000, respectively. The decrease in interest income and a portion of the increase in interest expense are the result of the lower cash balances maintained by the Company and higher bank 11 borrowings during the quarter and six months ended June 30, 1997 as compared to the comparable periods in 1996 PROVISION FOR INCOME TAXES (INCOME TAX BENEFIT): The following table shows the provision for income taxes (income tax benefit) for the applicable periods:
(In thousands) THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1997 1996 1997 1996 -------------------- ------------------- Provision for income taxes (income tax benefit) $ 179 $(304) $(616) $(527)
The income tax benefit for the six months ended June 30, 1997 is computed based on the projected annualized effective tax rate of 10% applied to the pre-tax book loss for the period. The projected effective tax rate for the current year is less than the federal statutory rate (34%) due to the projected benefit of the utilization of net operating loss carryovers. The projected annualized effective tax rate used in the quarter ended March 31, 1997 was 20% and was reduced due to the identification of additional loss carryforwards that may be utilized in fiscal 1997. The reduction in the projected annualized effective tax rate resulted in a provision for income taxes in the quarter ended June 30, 1997 of $179,000. At December 31, 1996, the Company had net operating loss carryforwards for federal and California tax purposes of approximately $36.5 million and $17.0 million, respectively. The federal losses will expire in the years 2007 though 2011, and the state losses will expire in the years 1999 through 2001, if not utilized. Utilization of the net operating loss carryovers may be subject to a substantial annual limitation if it should be determined that there has been a change in the ownership of more than 50 percent of the value of the Company's stock, pursuant to Section 382 of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating loss carryovers before utilization. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At June 30, 1997, the Company had cash and cash equivalents of approximately $1.3 million, a $270,000 decrease from approximately $1.6 million at December 31, 1996. The decrease in cash and cash equivalents was due to $1.9 million used in investing activities, partially offset by $707,000 provided by operating activities and $906,000 provided by financing activities. The cash generated by operating activities was due primarily to a decrease in accounts receivable of $10.6 million, a decrease in inventory of $573,000, and depreciation, amortization and other non-cash expenses of $2.3 million, partially offset by the net loss, a decrease in accounts payable of $5.5 million and an increase in prepaid expenses and other current assets of $2.0 million. 12 The $906,000 provided by financing activities was due to net proceeds from the issuance of the convertible preferred stock ($8.0 million) and convertible debentures ($1.4 million), partially offset by principal payments on bank debt of $8.5 million. Investing activities used cash of $1.9 million primarily due to the acquisition of tooling and other equipment. To meet seasonal working capital requirements during the balance of 1997, the Company anticipates borrowing substantial amounts under an Accounts Receivable Management and Security Agreement (the "ARM Agreement") entered into with BNY Financial Corporation ("BNY") in July 1995. The terms of the ARM Agreement, as amended, provide that BNY may advance YES! up to $30 million on the basis of the Company's accounts receivable, inventory and product being imported on a letter of credit basis. Loans to the Company are fully secured by all of the Company's assets, including intellectual property, and BNY acquired ownership of all of the Company's trade receivables. The Company is required to remain in compliance with certain financial and other covenants under the ARM Agreement with BNY. The Company was not in compliance with a financial covenant under the ARM Agreement at March 31 and June 30, 1997, but previously had obtained a waiver from BNY with regard to that covenant violation. The ARM Agreement also restricts the ability of the Company to obtain working capital in the form of indebtedness, other than indebtedness incurred in the ordinary course of the Company's business, to grant security interests in the assets of the Company or to pay dividends on the Company's securities. The Company's actual working capital needs will depend upon numerous factors, including the extent and timing of acceptance of the Company's products in the market, the Company's operating results, the cost of increasing the Company's sales and marketing activities and the status of competitive products, none of which can be predicted with certainty. The Company has experienced severe working capital shortfalls in the past, which have restricted the Company's ability to conduct its business as anticipated. The Company anticipates that it will experience periods of significant negative cash flow in 1997 as a result of seasonality in the toy industry, the timing of new product introductions and the Company's planned growth in new product inventory and accounts receivable. There can be no assurance that additional financing will be available to the Company on acceptable terms, if at all, when required by the Company. The inability to obtain such financing would have a material adverse effect on the Company's operating results. During March 1997, the Company issued $1,566,667 in convertible debentures and 85,000 shares of Series A convertible preferred stock at a par value of $.001 per share for $100 per share to two investors for a total of $8,500,000 (the "March Securities"). In April 1997, approximately $696,000 of the convertible preferred stock, including accrued dividends, were converted. Effective April 30, 1997, the remaining March Securities plus accrued dividends and interest were cancelled in favor of $1,956,021 in convertible debentures and 390,846 shares of Series B convertible preferred stock at a par value of $.001 per share for $25 per share to two investors and an investment bank retained by the Company in connection therewith for a total of $11,727,167 (the "Restructuring Transactions"). 13 Holders of the Series B convertible preferred stock are entitled to receive, when and as declared by the Board of Directors out of legally available funds, cumulative dividends at a rate of $1.28 per annum, payable in shares of Series B convertible preferred stock, semi-annually, but in no event later than the date of conversion. The Series B convertible preferred stock has no voting rights, has a liquidation preference of $25 per share plus all accrued but unpaid dividends, subject to adjustment, and is convertible at the option of the holder into shares of common stock at a discount to the weighted average value of the Company's common stock near the time of conversion. The discount increases monthly from 11.75% beginning in November 1997 increasing to 18.75% in April 1998. The Series B convertible preferred stock is redeemable at any time in cash, at the option of the Company. Any redemption payments must be approved by BNY, the financial institution with which the Company has its current accounts receivable management agreement. Any amount of the Series B convertible preferred stock remaining after five years will convert at the then-prevailing conversion price. The convertible debentures earn interest at 5% per annum, are due April 30, 2002, and are convertible any time after the earlier of November 1, 1997 or until the price of the Company's common stock exceeds a volume-weighted average price above $10 per share for twenty (20) consecutive trading days after August 1, 1997, at the option of the holder, at a conversion price similar to that of the Series B convertible preferred stock. The convertible debentures are subordinated to the bank financing agreements. In connection with the issuance of the March Securities, the Company issued warrants for the purchase of 300,000 shares of common stock at an exercise price per share equal to the lesser of (a) $7.875 or (b) 125% of the average of the lowest per share market value for any five consecutive trading days during the sixty trading days following March 18, 1997. The warrants expire March 18, 2002. The terms of the Warrants were not modified in connection with the Restructuring Transactions. Because the Company is not permitted by Nasdaq rules to issue in the aggregate more than 20% of its outstanding common stock as the result of the conversion of the Series B convertible preferred stock and convertible debentures and the exercise of the warrants without first obtaining stockholder approval, the Company would be required to redeem any portion of the securities issued in excess of 20% of its outstanding common stock in cash. RECENT DEVELOPMENTS - ------------------- Restructured Financing. See Note 3 to Notes to Financial Statements, Restructured Financing, and Liquidity and Capital Resources, above. Resignation of Director; Appointment of Executive Officer. In June 1997, Gary L. Nemetz resigned as a director of the Company. In August 1997, the Board appointed Anthony J. Miadich to fill the vacancy created by Mr. Nemetz's resignation. In July 1997, the Company appointed Mike Bauer Executive Vice President, Sales. Shareholder Lawsuits. See Note 4 to Notes to Financial Statements, Shareholder Lawsuits, above. 14 BUSINESS FACTORS - ---------------- 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. The Company's business is - -------------------------------------------------------------------------------- subject to a number of risks and the Company's forward looking statements should - -------------------------------------------------------------------------------- be considered in light of the business factors set forth below. - -------------------------------------------------------------- Limited Operating History; History of Losses; Accumulated Deficit; Risk to Profitability. The Company has a short operating history, having commenced operations in November 1992 and shipped its first product in July 1993. Although the Company has achieved approximately $219 million in cumulative net sales through June 30, 1997, the Company incurred substantial operating losses in 1993 and 1994, and again in 1996, and at June 30, 1997 had an accumulated deficit of approximately $60.8 million. Future profitability and the Company's ability to obtain future financing on favorable terms 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; Increase in Fixed Expenses. 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(R) Ice Cream Maker, Air Vectors(TM), YES! Extreme(TM), and YES! PreSchool(TM). In addition, the Company also expects to expand its existing product lines in 1997, particularly its YES! Gear, Power Penz(TM) and Mrs. Fields(TM) 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. In addition, the Company has increased its fixed expenses in anticipation of the introduction of the Company's 1997 product lines. In the event expected sales volumes are not achieved, this increase in fixed expenses could adversely affect the Company's operating results and financial condition. 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 YES! Gear, and in particular the Yak Bak(R), and the Power --------- Penz product lines to continue to account for a substantial percentage of the Company's business. However, there can be no assurance that the Company will be able to sustain Yak Bak and Power Penz sales at 1996 levels. See Short Product Cycles. 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 15 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 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, and may limit the Company's ability to accurately forecast reorders creating potential volatility in the Company's operating results. The limited inventory carried by the Company's customers may also reduce or delay consumer sell-through which in turn could impair the Company's ability to obtain reorders of its product in quantities necessary to permit the Company to achieve planned sales and income growth. In addition, the Company may be required to incur substantial additional expense to fill late reorders in order to ensure the product is available at retail locations prior to the peak holiday buying season; these may include drop-shipment expenses 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's operating results will be adversely affected and 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. The Company has made adjustments to its 1997 product line to date and expects to make further adjustments as the year progresses. Sales Concentration Risk. The Company's ten largest customers accounted for approximately 85%, 87% and 68% of 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, TRU and Wal-Mart, 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, TRU and Wal-Mart accounted for 14% and 21% 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 16 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 expects to make accommodations such as stock balancing, returns, other allowances or price protection adjustments in 1997. Any significant change in 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 and have claimed deductions to which, upon investigation, they may not be entitled or which may be overstated. Delays or unanticipated reductions 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. 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 or existing product lines to achieve or sustain market acceptance can create excess inventory, reduce average selling prices and/or require that the Company provide retailers with financial incentives, any one or all of which results would have a material adverse effect on the Company's operating results and financial condition. International Business Risk. The Company principally relies 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. Competition. The toy industry is highly competitive. Among the Company's competitors are toy companies, divisions of large diversified companies, and producers of consumer electronics products, many of which have greater assets and resources than those of the Company, as well as 17 smaller domestic and foreign toy and entertainment products manufacturers, importers and marketers. The Company's principal competitors include Mattel, Inc., Hasbro, Inc., and, particularly in the Yak Bak and Power Penz categories, Tiger Electronics, Inc. These competitors may impede the Company's ability to maintain market share and pricing goals in its existing categories, and may prevent the Company from successfully launching new products in categories served by these competitors. Dependence on Manufacturing Facilities Based in People's Republic of China. The Company contracts for the manufacture of substantially all of its products with entities based in Hong Kong whose manufacturing facilities are located in the People's Republic of China. In June 1997, Hong Kong became a sovereign territory of the People's Republic of China. While the People's Republic of China has provided assurances that Hong Kong will be allowed to maintain critical economic and tax policies, and while the transition to date has not adversely impacted the Company's business, 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 Peoples Republic of China and the Republic of China (Taiwan), and the United States' involvement therein, and recent debate regarding the extension of the Peoples Republic of China most favored nation trading status, could result either in a disruption in manufacturing in the China mainland or in the imposition of tariffs or duties on Chinese manufactured goods. Either event would have an adverse impact on the Company's ability to obtain its products or on the cost of these products, respectively, such that its operating results and financial condition would be materially adversely affected. Dependence on Restrictive Facility. The Company is dependent on the ARM Agreement with BNY Financial Corporation to meet its financial needs during 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 is required to remain in compliance with certain financial and other covenants under the ARM Agreement with BNY. The Company was not in compliance with a financial covenant under the ARM Agreement at March 31 and June 30, 1997 but previously had obtained a waiver from BNY with regard to that covenant violation. 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. Dilution from Convertible Securities; Obligation to Redeem in Cash. Under the terms of a preferred stock and convertible debenture financing completed in the first quarter of 1997 and restructured in the second quarter of 1997, certain investors have the right to convert the securities held by them in the face amount of approximately $11.7 million, plus dividends and 18 interest accrued, into Company common stock at a discount to the prevailing market price. The conversion price at which such securities may be converted into common stock is at a discount of 11.25% beginning in November 1997 increasing to 18.75% in April 1998 of a weighted average value of the Company's common stock, depending principally on the date on which such securities are converted. Because the Company is not permitted by Nasdaq rules to issue in the aggregate more than 20% of its outstanding common stock as the result of the conversion of the convertible preferred stock and convertible debentures and the exercise of the warrants without first obtaining stockholder approval, the Company would be required to redeem any portion of the securities issued in excess of 20% of its outstanding common stock in cash. 19 PART II. OTHER INFORMATION --------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 4.1 Form of Amended and Restated Registration Rights Agreement dated July 25, 1997 11.1 Statement Regarding Computation of Net Loss Per Share 27.1 Financial Data Schedules for the quarter ended June 30, 1997. b) Reports on Form 8-K A Current Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 was filed by the Company on August 4, 1997. Such report on Form 8-K disclosed the consummation of the restructured convertible debenture and preferred stock financing and included copies of the purchase agreement and securities as exhibits. 20 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. YES! Entertainment Corporation Registrant Date August 12, 1997 /s/ Donald D. Kingsborough -------------------------- Donald D. Kingsborough Chief Executive Officer (Principal Executive Officer) Date August 12, 1997 /s/ Sol Kershner -------------------------- Sol Kershner Chief Financial Officer (Principal Financial and Accounting Officer) 21 EX-4.1 2 AMENDED & RESTATED REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.1 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT This Amended and Restated Registration Rights Agreement (this "Agreement") is made and entered into July 25, 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 Cappello & Laffer Capital Corp., a California corporation ("Cappello") and YES! Entertainment Corporation, a Delaware corporation (the "Company"). WHEREAS, the Company and certain Purchasers are parties to that certain Registration Rights Agreement, dated as of March 18, 1997 (the "March Registration Rights Agreement"), which was executed pursuant to that certain Convertible Debenture Purchase Agreement, dated as of March 18, 1997, between the Purchasers and the Company (the "March Purchase Agreement"); WHEREAS, the Purchasers and the Company are entering into an Amended and Restated Securities Purchase Agreement, which shall supersede in its entirety the March Purchase Agreement (the "Purchase Agreement"); WHEREAS, it is a condition to the closing of the transactions contemplated by the Purchase Agreement that the parties supersede in its entirety the March 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 Purchase Agreement; WHEREAS, the Company and the Purchasers desire to supersede in its entirety the March Registration Rights Agreement with this Amended and Restated Registration Rights Agreement. WHEREAS, the Company and the Certain Purchasers that were parties to the March Registration Rights Agreement have agreed to supersede the March Registration Rights Agreement in its entirety hereby, and the Company and the Purchasers have agreed 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 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 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). 1. "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. "COMMISSION" means the Securities and Exchange Commission. "CLOSING DATE" shall have the meaning set forth in the Purchase Agreement. "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 Purchase Agreement. "EFFECTIVE DATE" shall be September 15, 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 the date the Registration Statement is filed with the SEC, which in no case shall be later than August 15, 1997. "HOLDER" OR "HOLDERS" means the holder or holders, as the case may be, from time to time of Registrable Securities. With respect only to Section 8(d) hereof and other Sections relating to the rights and obligations of Holders and the Company set forth in Section 8(d), the term Holder shall also include Cappello and Brown Simpson, LLC, provided, however, that Brown Simpson, LLC or its assignee or successor may only exercise rights hereunder after such party executes a counterpart of this Agreement. "INDEMNIFIED PARTY" shall have the meaning set forth in Section 6(c). "INDEMNIFYING PARTY" shall have the meaning set forth in Section 6(c). 2. "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 B Convertible Preferred Stock, par value $.001 per share, of the Company issued to the Purchasers pursuant to the 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 in connection with the transactions contemplated by the 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 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 Effective Date, and assuming the payment of dividends and interest in additional Shares and Debentures, 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 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 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. With respect to Section 8(d) hereof only, the term Registrable Securities shall also include (i) two 3. times the number of shares of Common Stock issuable upon conversion of the Debentures and the Preferred Stock delivered by the Company to Cappello in connection with the transactions contemplated by the Purchase Agreement and (ii) the number of shares of Common Stock issuable upon exercise in full of the warrants delivered by the Company to Brown Simpson, LLC on March 18, 1997. "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 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. (a) 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 permits 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 4. 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 Effective 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 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 pursuant 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 sixty (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 obligations hereunder, the Company shall: 5. (a) Prepare and file with the Commission on or prior to the Filing Date, a Registration Statement 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; 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 (3) 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) Business Day following the day (i) (A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration 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 6. 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 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 Securities 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 7. 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 the 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 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 supplement 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 8. 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 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 Underwritten 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 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 ninety (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. 9. (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 Prospectus as then amended or supplemented as contemplated in Section 3(q) 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(c)(i), 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 before the Effective Date, then the Company shall pay to 10. each Holder of the Registrable Securities, as liquidated damages and not as a penalty, on the earlier of November 1, 1997 or the date a Registration Statement is declared effective by the Commission, one and one half percent (1.5%) of the aggregate Liquidation Preference (as defined in the Certificate of Designation) for the outstanding shares of Preferred Stock and one and one half percent (1.5%) of the aggregate principal amount of the Debentures then held by such Holder for each thirty (30) days after September 15, 1997 that a Registration Statement shall not have been declared effective by the Commission; if a Registration Statement is not declared effective by the Commission on or before November 1, 1997, the Company shall pay on the first day of each month beginning December 1, 1997 until such time as a Registration Statement is declared effective by the Commission, to each Holder of the Registrable Securities, as liquidated damages and not as a penalty, three percent (3%) of the aggregate Liquidation Preference (as defined in the Certificate of Designation) for the outstanding shares of Preferred Stock and three percent (3%) of the aggregate principal amount of the Debentures then held by such Holder. The penalties set forth in the preceding sentence shall be pro-rated for periods less than thirty (30) days. Any penalty payable pursuant to this section during the first two months following the ninety (90) days after date hereof may be paid at the option of the Company in cash or in additional Preferred Stock or Debentures, as the case may be. Thereafter, any such penalty shall be paid in cash. 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 Purchase Agreement. The Company shall notify each Holder within five (5) days of the Event and Event Date. The Company shall pay the liquidated damage due on the Registrable Securities to each 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 Association 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 Registrable 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(1) (iii) (including, without 11. 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. (b) In connection with their initial review of the Registration Statement, the Company shall reimburse the Holders for up to two thousand dollars ($2,000) 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. 12. (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 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 13. 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 (including 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 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 allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding 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 14. 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. 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 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 15. securities of the Company held by any person prior to the expiration of the sixtieth (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 sixty (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 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 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, 16. 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) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: If to the Company: YES! Entertainment Corporation 3875 Hopyard Road Pleasanton, CA 94588 Attn: Donald Kingsborough Facsimile No.: (510) 734-0997 With copies to: Cooley Godward, LLP 5 Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306-2155 Attn: Patrick Pohlen Facsimile No.: (415) 857-0663 If to Infinity: Infinity Investors Limited c/o Trident Trust Company (Cayman) Limited 1 Capital Place P.O. Box 847 Grand Cayman, Cayman Island, B.V.I. Attn: G. McLaughlin Facsimile No.: (809) 949-0881 If to Fairway: Fairway Capital Limited 38 Hertferd Street London, England G1Y7T6 17. Attn: J.A. Loughran Facsimile No.: 011-44-171-355-4975 With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Attn: Eric L. Cohen Facsimile No.: (212) 541-4630 and Mr. Stuart Chasanoff c/o HW Finance 160 Elm Street, Suite 4000 Dallas, Texas 75201 Facsimile No.: (214) 720-1662 If to Cappello: Cappello & Laffer Capital Corp. 1299 Ocean Avenue, Suite 306 Santa Monica, CA 90401 Attn: Gerard Cappello Facsimile No.: (310) 393-4838 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 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 18. parties consent to the nonexclusive 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 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. 19. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. YES! ENTERTAINMENT CORPORATION By:_____________________________ Name:___________________________ Title:__________________________ INFINITY INVESTORS LIMITED By:_____________________________ Name:___________________________ Title:__________________________ FAIRWAY CAPITAL LIMITED By:_____________________________ Name:___________________________ Title:__________________________ CAPPELLO & LAFFER CAPITAL CORP. By:_____________________________ Name:___________________________ Title:__________________________ 20. EX-11.1 3 COMPUTATION OF NET LOSS EXHIBIT 11.1 YES! ENTERTAINMENT CORPORATION STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- -------------------------- 1997 1996 1997 1996 --------------------------- -------------------------- Net loss $ (2,365) $(1,214) $ (5,548) $(2,106) ======= ======= Non-cash dividends and discount on preferred stock (1,049) $ (2,600) -------- -------- Net loss applicable to common stockholders $ (3,414) $ (8,148) ======== ======== Computation of weighted average common and common equivalent shares outstanding: Weighted average common shares outstanding 14,237 13,995 14,140 13,761 -------- ------- ------- ------- Shares used in computing net loss per share 14,237 13,995 14,140 13,761 ======== ======== ======= ======= Net loss per share applicable to common stockholders $(0.24) $ (0.58) ======= ====== Net loss per share $ (0.09) $ (0.15) ======= ======
EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 3-MOS DEC-31-1997 DEC-31-1996 APR-01-1997 APR-01-1996 JUN-30-1997 JUN-30-1996 1,302 0 0 0 11,815 0 508 0 25,621 0 47,659 0 13,199 0 8,879 0 52,193 0 17,652 0 1,778 0 0 0 8,723 0 84,821 0 (60,804) 0 52,193 0 12,616 11,551 12,616 11,551 7,615 6,887 7,615 6,887 6,741 6,169 24 35 444 107 (2,186) (1,518) 179 (304) (2,365) (1,214) 0 0 0 0 0 0 (2,365) (1,214) (.24) (.09) (.24) (.09)
-----END PRIVACY-ENHANCED MESSAGE-----