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EXHIBIT 4.2
CERTIFICATE OF DESIGNATION OF
SERIES B CONVERTIBLE PREFERRED STOCK OF
YES! ENTERTAINMENT CORPORATION
The undersigned, Donald D. Kingsborough and Sol Kershner, hereby
certify that:
I. They are the duly elected and acting Chief Executive Officer and
Secretary, respectively, of YES! Entertainment Corporation, a Delaware
corporation (the "Company").
II. The Certificate of Incorporation of the Company authorizes
2,000,000 shares of preferred stock, par value $.001 per share, of which 85,000
shares are issued and outstanding.
III. The following is a true and correct copy of the consent duly
adopted by the Board of Directors of the Company (the "Board of Directors")
dated July 22, 1997, which constituted all requisite action on the part of the
Company for adoption of such consent.
RESOLUTIONS
WHEREAS, the Board of Directors is authorized to provide for the
issuance of shares of preferred stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in such series, and to fix the
designations, powers, preferences and rights and the qualifications, limitations
or restrictions thereof;
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges and
restrictions of such series;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares constituting
such series and fixes the designations, powers, preferences, rights,
qualifications, limitations, restrictions and privileges relating to such series
as follows:
SECTION 1. DESIGNATION, AMOUNT AND PAR VALUE. There are hereby provided one
series of Preferred Stock designated and to be known as "Series B Convertible
Preferred Stock" (the "Series B Preferred"). The number of shares constituting
Series B Preferred shall be five hundred forty thousand (540,000) (which shall
not be subject to increase), with a par value of $.001.
SECTION 2. DIVIDENDS.
(a) Holders of Preferred Stock shall be entitled to receive, when and
as declared by the Board of Directors out of funds legally available therefor,
and the Company shall pay, cumulative dividends at the rate per share equal to
$1.28 (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares) per
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annum, payable in shares of Series B Preferred Stock, on the last day of March,
June, September and December commencing on September 30, 1997 or on the
Conversion Date (each a "Dividend Payment Date"). Dividends on the Series B
Preferred shall accrue daily commencing on May 1, 1997, and shall be deemed to
accrue on the Dividend Payment Date whether or not earned or declared and
whether or not there are profits, surplus or other funds of the Company legally
available for the payment of dividends. The amount of dividends accrued on each
share of Series B Preferred shall be calculated for each Dividend Payment Date
on the basis of an annual dividend rate of $1.28 and a 360-day year of twelve
30-day months, and shall include any unpaid accrued dividends for prior periods
or portions thereof. Within 15 Business Days of each Dividend Payment Date,
dividends shall be paid by issuing and delivering to a holder of Series B
Preferred that number of additional shares of Series B Preferred equal to the
quotient of (a) the aggregate dollar amount of accrued and unpaid dividends for
all shares of Series B Preferred held by such holder on the Dividend Payment
Date divided by (b) Liquidation Preference (as hereafter defined). Should any
dividend that is paid through the issuance and delivery of additional shares of
Series B Preferred require the issuance and delivery of a fractional share or
shares of Series B Preferred, no such fractional shares shall be so issued, but
instead the Company shall pay the equivalent value of such fractional share in
cash. The party that holds the Series B Preferred on an applicable record date
for any dividend payment will be entitled to receive such dividend payment and
any other accrued and unpaid dividends that accrued prior to such Dividend
Payment Date, without regard to any sale or disposition of such Series B
Preferred subsequent to the applicable record date but prior to the applicable
Dividend Payment Date. Except as otherwise provided herein, if at any time the
Company pays less than the total amount of dividends then accrued on account of
the Series B Preferred, such payment shall be distributed ratably among the
holders of the Series B Preferred based upon the number of shares held by each
holder.
SECTION 3. VOTING RIGHTS. Except as otherwise provided herein and as otherwise
required by law, the Series B Preferred shall have no voting rights. However, so
long as any shares of Series B Preferred are outstanding, the Company shall not,
without the affirmative vote of the holders of a majority of the shares of the
Series B Preferred then outstanding, (a) alter or change adversely the powers,
preferences or rights given to the Series B Preferred or (b) authorize or create
any class of stock ranking as to dividends or distribution of assets upon a
Liquidation (as defined in Section 4) senior to, prior to or pari passu with the
Series B Preferred.
SECTION 4. LIQUIDATION. Upon any liquidation, dissolution or winding-up of the
Company, whether voluntary or involuntary (a "Liquidation"), the holders of
Series B Preferred shall be entitled to receive out of the assets of the
Company, whether such assets are capital or surplus, for each share of Series B
Preferred, including any shares to be issued pursuant to Section 2 hereof
whether declared or not, an amount equal to $25.00 (as adjusted for any stock
dividends, combinations, splits, recapitalization and the like with respect to
such shares) (the "Liquidation Preference"), before any distribution or payment
shall be made to the holders of any Junior Securities (as hereafter defined),
and if the assets of the Company shall be insufficient to pay in full such
amounts, then the entire assets to be distributed shall be distributed among the
holders of Series B Preferred ratably in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon were paid in
full. The Company shall
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mail written notice of any such Liquidation, not less than forty-five (45) days
prior to the payment date stated therein, to each record holder of Series B
Preferred.
SECTION 5. CONVERSION.
(a) CONVERSION AT HOLDER'S OPTION. Each share of Series B Preferred
shall be convertible into shares of Common Stock (as hereafter defined) (subject
to reduction pursuant to Section 5(b)) at the option of the holder in whole or
in part at any time and from time to time after October 31, 1997 at the
Conversion Ratio (as hereafter defined), as adjusted to give effect to any and
all Adjustment Events (as hereafter defined) occurring prior to conversion;
provided, however, such shares shall be convertible at the option of the holder
any time on or after August 1, 1997, if the"volume-weighted average" price (as
defined and reported by Bloomberg, L.P.) of Common Stock exceeds ten dollars
($10.00) per share for a period of twenty (20) consecutive Trading Days (as
hereafter defined), commencing on August 1, 1997. The holder shall effect
conversions by surrendering the certificate or certificates representing the
shares of Series B Preferred to be converted to the Company, together with the
form of conversion notice attached hereto as Exhibit A (the "Conversion
Notice"). Each Conversion Notice shall specify the number of shares of Series B
Preferred to be converted and the date on which conversion is to be effected
(the "Conversion Date"), which date may not be prior to the date the holder
delivers such Conversion Notice by facsimile. If no Conversion Date is specified
in a Conversion Notice, the Conversion Date shall be the date that the
Conversion Notice is deemed deliverable pursuant to Section 5(e). Subject to
Sections 5(b) and 5(e) and, as to the holders (or their designee) party to the
Purchase Agreement (as hereafter defined), subject to Section 4.8 of the
Purchase Agreement; each Conversion Notice, once given, shall be irrevocable. If
a holder is converting less than all shares of Preferred Stock represented by
the certificate or certificates tendered by such holder with the Conversion
Notice, or if a conversion hereunder cannot be effected in full for any reason,
the Company shall promptly deliver to such holder (in the manner within the time
set forth in Section 5(e)) a certificate of such number of shares as have not
been converted.
(b) CERTAIN REGULATORY APPROVAL - OPTIONAL CONVERSIONS. If on a
Conversion Date (A) the Common Stock is then listed for trading on the Nasdaq
National Market or, if the rules of the Nasdaq Stock Market are hereafter
amended to extend Rule 4460(i) promulgated thereby (or by an successor or
replacement provision thereof) to the Nasdaq SmallCap Market, on the Nasdaq
SmallCap Market, (B) the Conversion Ratio, as adjusted to give effect to any and
all Adjustment Events occurring prior to conversion, is such that the aggregate
number of shares of Common Stock that would then be issuable upon conversion of
all outstanding shares of Series B Preferred and Debentures (hereafter defined),
would equal or exceed 20% of the number of shares of Common Stock outstanding on
the Conversion Date (the "Issuable Maximum"), and (C) the Company has not
previously obtained Shareholder Approval (as defined below), then the Company
shall issue to the converting holder of the Series B Preferred up to the
Issuable Maximum and, with respect to any shares of Common Stock that would be
issuable to such holder in respect of the Conversion Notice at issue in excess
of the Issuable Maximum, the holder shall have the option to require the Company
to either (1) as promptly as possible, but in no event later than sixty (60)
days after such Conversion Date,
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convene a meeting of the holders of the Common Stock and obtain the Shareholder
Approval, or (2) redeem, from funds legally available therefor at the time of
such redemption, the balance of the Series B Preferred then outstanding,
including shares subject to the Conversion Notice at issue at a price per share
equal to the Redemption Price (as hereafter defined) calculated as of the
Conversion Date; provided, however, that if the holder has requested that the
Company obtain Shareholder Approval and the Company fails for any reason to
obtain such Shareholder Approval within sixty (60) days after the Conversion
Date, the Company shall be obligated to redeem, in accordance with this
provision, all of the shares of Series B Preferred then outstanding, including
shares subject to the Conversion Notice at issue and not converted as a result
of the provisions of this subsection, and in such case the interest contemplated
by the immediately succeeding sentence shall be deemed to accrue from the
Conversion Date. If the holder has requested that the Company redeem shares of
Series B Preferred, pursuant to this Section and the Company fails for any
reason to pay the Redemption Price within five (5) Business Days after the
Conversion Date, the Company will pay interest on such Redemption Price at a
rate of 15% per annum to the converting holder of Series B Preferred, accruing
from the Conversion Date until the Redemption Price plus any accrued interest
thereon is paid in full. The entire Redemption Price, including interest
thereon, shall be paid in cash. "Shareholder Approval" means the approval by a
majority of the total votes cast on the proposal, in person or by proxy, at a
meeting of the shareholders of the Company held in accordance with the Company's
certificate of incorporation and by-laws, of the issuance of the Company of
shares of Common Stock exceeding the Issuable Maximum as a consequence of the
conversion of Series B Preferred into Common Stock at a price less than the
greater of the book or market value on the Closing Date as and to the extent
required pursuant to Rule 4460(i) of the Nasdaq Stock Market (or any successor
or replacement provision thereof).
(c) AUTOMATIC CONVERSION. On April 30, 2002 (the "Automatic
Conversion Date") any and all outstanding shares of Series B Preferred shall be
automatically converted into fully paid and nonassessable shares of Common
Stock, at the Conversion Ratio, as adjusted to give effect to any and all
Adjustment Events occurring prior to conversion, in the manner provided herein.
(d) CERTAIN REGULATORY APPROVAL - AUTOMATIC CONVERSION. If on the
Automatic Conversion Date applicable to any conversion of shares of Series B
Preferred (A) the Common Stock is then listed for trading on the Nasdaq National
Market or, if the rules of the Nasdaq Stock Market are hereafter amended to
extend Rule 4460(i) promulgated thereby (or by an successor or replacement
provision thereof) to the Nasdaq SmallCap Market, on the Nasdaq SmallCap Market,
(B) the Conversion Ratio, as adjusted to give effect to any and all Adjustment
Events occurring prior to conversion, is such that the aggregate number of
shares of Common Stock that would then be issuable upon conversion of all
outstanding shares of Series B Preferred and Debentures (hereafter defined),
would equal or exceed the Issuable Maximum, and (C) the Company has not
previously obtained Shareholder Approval (as defined below), then the Company
shall issue to the converting holder of the Series B Preferred up to the
Issuable Maximum and, with respect to any shares of Common Stock that would be
issuable to such holder in respect of the Conversion Notice at issue in excess
of the Issuable Maximum, the holder shall have the option to require the Company
to either (1) as promptly as possible, but
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in no event later than sixty (60) days after such Conversion Date, convene a
meeting of the holders of the Common Stock and obtain the Shareholder Approval,
or (2) redeem, from funds legally available therefor at the time of such
redemption, the balance of the Series B Preferred then outstanding, including
shares subject to the Conversion Notice at issue at a price per share equal to
the Redemption Price calculated as of the Conversion Date.
(e) DELIVERY OF CERTIFICATES. Not later than three (3) Trading Days
after a Conversion Date or the Automatic Conversion Date, the Company will cause
the Transfer Agent to deliver to the holder (i) a certificate or certificates,
representing the number of shares of Common Stock being acquired upon the
conversion of Series B Preferred (subject to reduction pursuant to Section 5(b)
and 5(d)) and (ii) a certificate representing the shares of Series B Preferred
tendered in connection with a conversion hereunder but not converted. Any
certificates representing shares of Common Stock to be delivered upon a
conversion hereunder shall be free of restrictive legends and trading
restrictions, except those specified in Section 4.1(b) of the Purchase
Agreement. The Company shall not be obligated to issue certificates evidencing
the shares of Common Stock issuable upon conversion of any Series B Preferred
until certificates representing the shares of Series B Preferred to be converted
are either delivered to the Transfer Agent for conversion or the holder notifies
the Company that such shares of Series B Preferred have been lost, stolen or
destroyed and provides a bond reasonably satisfactory to the Company (or other
adequate security reasonably acceptable to the Company) to indemnify the Company
from any loss incurred by it in connection therewith. The counting of days for
the purpose of computing liquidation damages pursuant to Section 5(b) shall not
begin until such original certificates (or bond or security therefore, in a form
acceptable to Company) has been delivered to the Transfer Agent. The Company
shall, upon request of the holder, use its best efforts to deliver any
certificate or certificates required to be delivered by the Company under this
Section electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. If such
certificate or certificates are not delivered within twenty (20) Trading Days
after a Conversion Date, the holder shall be entitled to rescind such Conversion
Notice upon written notice to the Company and the Transfer Agent, in which event
the Company shall immediately instruct the Transfer Agent to return the
certificates representing shares of Preferred Stock subject to such Conversion
Notice that were tendered for conversion. The Company shall pay to the
converting holder, as liquidated damages and not as penalty, $3,000 for each day
that the Company fails to deliver such certificate or certificates pursuant to
this Section commencing after the fifth (5th) Trading Day after the applicable
Conversion Date or Automatic Conversion Date. In addition, if the Company fails
to deliver to the holder such certificate or certificates pursuant to this
Section prior to the fifteenth (15th) day after a Conversion Date or Automatic
Conversion Date, the Company shall, at the Holder's option, (i) redeem the
shares of Series B Preferred then held by such holder, as requested by such
holder, at the Redemption Price calculated as of the Conversion Date or
Automatic Conversion Date (which date may be referred to herein as a "Redemption
Date") and (ii) pay all accrued but unpaid dividends on account of the Series B
Preferred for which the Company shall have failed to issue Series B Preferred
certificates hereunder, in cash. If the holder has requested that the Company
redeem shares of Series B Preferred pursuant to this Section and the Company
fails for any reason to pay the Redemption Price hereunder within five (5)
Business Days after such notice, the Company will pay interest
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on such Redemption Price at a rate of 15% per annum, in cash to such Holder,
accruing from such fifth (5th) Business Day until such Redemption Price and any
accrued but unpaid interest thereon is paid in full.
(f) ADJUSTMENTS.
(i) The following events shall be deemed to be "Adjustment
Events:"
A. If the Company, at any time while any shares of Series B
Preferred are outstanding, (a) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities payable in
shares of either Common Stock or of capital stock of any class, (b) subdivide
outstanding shares of Common Stock into a larger number of shares, or (c)
combine outstanding shares of Common Stock into a smaller number of shares.
B. If the Company, at any time while any shares of Series B
Preferred are outstanding, shall issue rights or warrants to all holders of
Common Stock entitling them to subscribe for or purchase shares of Common Stock
at a price per share less than the Per Share Market Price of Common Stock as
calculated on the record date.
C. If the Company, at any time while shares of Series B
Preferred are outstanding, shall distribute to all holders of Common Stock (and
not to holders of Series B Preferred) evidences of its indebtedness or assets or
rights or warrants to subscribe for or purchase any security (excluding those
referred to in Sections 5(f)(ii) and (iii) above).
(ii) ADJUSTMENT FOR STOCK SPLITS, COMBINATIONS. If an Adjustment
Event described in 5(f)(i)(A) occurs, then the Conversion Ratio, as adjusted to
give effect to all prior Adjustment Events, shall be multiplied by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
before such event and the denominator of which shall be the number of shares of
Common Stock outstanding after such event. Any adjustment completed pursuant to
this Section 5(f)(ii) shall become effective immediately after the record date
for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision or combination.
(iii) ADJUSTMENT FOR ISSUANCES TO COMMON STOCKHOLDERS. If an
Adjustment Event described in 5(f)(i)(B) occurs, then the Conversion Ratio, as
adjusted to give effect to all prior Adjustment Events, shall be multiplied by a
fraction, the numerator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any, but including warrants or options that would
be included for purposes of determining earnings per share in accordance with
generally accepted accounting principles) outstanding on the date of issuance of
such rights or warrants plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at such Per Share
Market Price, and the denominator of which shall be the number of shares of
Common Stock (excluding treasury shares, if any, but including warrants or
options that would be included for purposes of
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determining earnings per share in accordance with generally accepted accounting
principles) outstanding on the date of issuance of such rights or warrants plus
the number of additional shares of Common Stock offered for subscription or
purchase. Such adjustment shall be calculated whenever such rights or warrants
are issued and shall become immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
However, upon the expiration of any right or warrant to purchase Common Stock
the issuance of which resulted in an adjustment pursuant to this Section
5(f)(iii), if any such right or warrant shall expire and shall not have been
exercised, such adjustment shall immediately upon such expiration be recomputed
as if the adjustment computed upon the issuance of such rights or warrants been
computed on the basis of offering for subscription or purchase only that number
of shares of Common Stock actually purchased upon the exercise of such rights or
warrants actually exercised. Such readjustment shall be effective immediately
upon such expiration. The adjustment provided for in this Section 5(f)(iii)
shall not be applicable to issuances of rights or warrants pursuant to a
Stockholders Rights Plan properly adopted by the Company pursuant to Delaware
General Corporate Law.
(iv) ADJUSTMENT FOR DISTRIBUTION OF EVIDENCES OF INDEBTEDNESS OR
ASSETS TO COMMON STOCKHOLDERS. If an Adjustment Event described in 5(f)(i)(C)
occurs, then the Conversion Ratio, as adjusted to give effect to all prior
Adjustment Events, shall be multiplied by a fraction the numerator of which
shall be such Per Share Market Price on such record date less the then fair
market value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of Common Stock
as determined by the Board of Directors in good faith, and the denominator of
which shall be the Per Share Market Price determined as of such record date;
provided, however, that in the event of a distribution exceeding ten percent
(10%) of the net assets of the Company, such fair market value shall be
determined by a nationally recognized or major regional investment banking firm
or firm of independent certified public accountants of recognized standing
(which may be the firm that regularly examines the financial statements of the
Company) (an "Appraiser") selected in good faith by the holders of a majority in
interest of the shares of Preferred Stock then outstanding; and provided,
further, that the Company, after receipt of the determination by such Appraiser
shall have the right to select an additional Appraiser, in good faith, in which
case the fair market value shall be equal to the average of the determinations
by each such Appraiser. Such adjustment shall be calculated whenever any such
distribution is made and shall become applicable immediately after the record
date mentioned above. The adjustment provided for in this Section 5(f)(iv) shall
not be applicable to distributions of evidences of indebtedness or assets
pursuant to a Stockholders Rights Plan properly adopted by the Company pursuant
to Delaware General Corporate Law.
(v) Upon the occurrence of an Adjustment Event, the Company shall
promptly mail or instruct the Transfer Agent to promptly mail to each holder of
Series B Preferred a notice setting forth (a) the adjustment to the Conversion
Ratio required by the Adjustment Event at issue, (b) the cumulative adjustment
to which the Conversion Ratio shall be subject after the Adjustment Event,
giving effect to any and all prior Adjustment Events, and (c) a brief statement
of the facts requiring the adjustment at issue.
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(vi) ROUNDING. All calculations under this Section 5 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) RECLASSIFICATIONS, MERGERS, CONSOLIDATIONS OR SALES OF
ASSETS. In case of any reclassification of the Common Stock, any consolidation
or merger of the Company with or into another person pursuant to which the
Company will not be the surviving entity, the sale or transfer of all or
substantially all of the assets of the Company or any compulsory share exchange
pursuant to which the Common Stock is converted into other securities, cash or
property, the holders of the Series B Preferred then outstanding shall have the
right thereafter to, at their option, (A) convert such shares only into the
shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the holders of the
Series B Preferred shall be entitled upon such event to receive such amount of
securities, cash or property as the shares of the Common Stock of the Company
into which such shares of Series B Preferred could have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange would have been entitled or (B) require the Company
to redeem, from funds legally available therefor at the time of such redemption,
its shares of Series B Preferred at a price per share equal to the Redemption
Price calculated on the date of the closing of the reclassification,
consolidation, merger, sale, transfer or share exchange, as the case may be,
triggering such redemption right. The entire Redemption Price shall be paid in
cash, and the terms of payment of such Redemption Price shall be subject to the
provisions set forth in Section 6(b). The terms of any such consolidation,
merger, sale, transfer or share exchange shall include such terms so as to
continue to give to the holder of Series B Preferred the right to receive the
securities, cash or property in this Section 5(f)(vii) upon any conversion or
redemption following such consolidation, merger, sale, transfer, or share
exchange. This provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges. Notwithstanding
the foregoing, if upon the effectiveness of any business combination to which
the Company is a party and from which the Company is not the surviving entity,
if (i) the holders of the Common Stock immediately prior to the effectiveness of
such business combination beneficially own (as determined under Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), in the aggregate, 66-2/3% or more of the voting power of such surviving
entity and (ii) no Person or group (as described in Rule 13d-5(d) promulgated
under the Exchange Act) who was not a holder of the Common Stock immediately
prior to such business combination beneficially owns in excess of 16-2/3% of the
voting power of such surviving entity, then the holders of the Series B
Preferred shall only be entitled to elect the conversion set forth in (A) above.
(viii) NOTICE OF CERTAIN EVENTS. If:
A. the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than a subdivision of the outstanding
shares of Common Stock); or
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B. the Company shall declare a special nonrecurring cash
dividend on or authorize a repurchase or redemption of more than ten thousand
(10,000) shares of its then outstanding Common Stock, other than a repurchase or
redemption of the Common Stock of an employee upon termination of employment
with the Company for any reason; or
C. the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe for or purchase any shares
of capital stock of any class or of any rights; or
D. the approval of any stockholders of the Company shall
be required in connection with any reclassification of the Common Stock (other
than a subdivision or combination of then outstanding shares of Common Stock),
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Company;
then the Company shall cause to be mailed to the holders of Series B Preferred
at their last addresses as shall appear on the stock books of the Company, at
least thirty (30) calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as of which the holders of
Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on which
such reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding-up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities, cash, or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding-up; provided,
however, that the failure to mail such notice or any defect therein or in the
mailing thereof shall not affect the validity of the corporate action required
to be specified in such notice.
(g) RESERVATION OF COMMON STOCK. The Company covenants that it will
at all times reserve and keep available out of its authorized and unissued
Common Stock solely for the purpose of issuance upon conversion of Series B
Preferred, as herein provided, free from preemptive rights or any other actual
contingent purchase rights of persons other than the holders of Series B
Preferred, such number of shares of Common Stock as shall be issuable upon the
conversion of all outstanding shares of Series B Preferred. The Company
covenants that all shares of Series B Preferred that shall be so issuable shall,
upon issue, be duly and validly authorized, issued and fully paid and
nonassessable.
(h) RESERVATION OF SERIES B PREFERRED. The Company covenants that it
will at all times reserve and keep available out of its authorized and unissued
Series B Preferred
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solely for the purpose of payment of dividends on Series B Preferred, as herein
provided, free from preemptive rights or any other actual contingent purchase
rights of persons other than the holders of the Series B Preferred, such number
of shares of Series B Preferred as shall be issuable upon payment of dividends
hereunder. The Company covenants that all shares of Series B Preferred Stock
that shall be so issuable shall, upon issue, be duly and validly authorized,
issued and fully paid and nonassessable.
(i) FRACTIONAL SHARES. Upon a conversion hereunder the Company shall
not be required to issue stock certificates representing fractions of shares of
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the Per Share Market Price at such time.
If the Company elects not to, or is unable to, make such a cash payment, the
holder of a share of Series B Preferred shall be entitled to receive, in lieu of
the final fraction of a share, one whole share of Common Stock.
(j) CERTIFICATES. The issuance of certificates for shares of Common
Stock on conversion of Series B Preferred shall be made without charge to the
holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the holder of such shares of Series B
Preferred so converted.
(k) CANCELLED SHARES. Shares of Series B Preferred converted into
Common Stock shall be canceled and shall have the status of authorized but
unissued shares of undesignated preferred stock.
(l) NOTICE. Any and all notices or other communications or deliveries
to be provided by a holder of Series B Preferred hereunder, including, without
limitation, any Holder Conversion Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
the attention of the Chief Financial Officer of the Company at the facsimile
telephone number or address of the principal place of business of the Company,
and, if applicable, to the Transfer Agent. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to the holder of Series B Preferred at the facsimile
telephone number or address of such holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if delivered via facsimile at the facsimile telephone
number specified in the Purchase Agreement prior to 4:30 p.m. (Eastern Standard
Time) on a Trading Day, (ii) the Trading Day after the transmission, if
delivered via facsimile at the facsimile telephone number specified in the
Purchase Agreement later than 4:30 p.m. (Eastern Standard Time) on any date and
earlier than 11:59 p.m. (Eastern Standard Time) on such date, (iii) the Trading
Day following the date of mailing, if sent by nationally recognized
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overnight courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given.
SECTION 6. REDEMPTION.
(a) OPTIONAL REDEMPTION BY COMPANY.
(i) The Company shall have the right, exercisable at any time
upon five (5) Trading Days notice to the holders of the Series B Preferred (the
"Optional Redemption Notice"), to redeem, from funds legally available therefor
at the time of such redemption, all or any portion of the shares of Series B
Preferred which have not been previously converted or redeemed at a price per
share equal to the Redemption Price calculated on the date of the Optional
Redemption Notice (which date may be referred to herein as a "Redemption Date").
The entire Optional Redemption Price shall be paid in cash.
(ii) On or after the date of the Optional Redemption Notice, no
holder of Series B Preferred shall have the right to continue to convert shares
of Series B Preferred which have been noticed for redemption.
(iii) On the fifth (5th) Trading Day after the date of the
Optional Redemption Notice, each holder of Series B Preferred shall deliver to
the Company the shares of Series B Preferred owned by it and subject to the
Optional Redemption Notice that have not been previously tendered for conversion
and the Company shall deliver a sum equal to the product of (i) the Redemption
Price as calculated on the Redemption Date and (ii) the number of shares of
Series B Preferred tendered by or on behalf of such holder for redemption in
accordance with the provisions hereof.
(b) LIQUIDATED DAMAGES. If the Redemption Price shall not be paid in
full within three (3) Trading Days of the fifth (5th) Trading Day after the date
of the Optional Redemption Notice, the Company shall pay as liquidated damages
and not as a penalty the sum of seven thousand five hundred dollars ($7,500) per
day in cash until the Redemption Price, together with all such liquidated
damages, is paid in full. In addition, if the Company shall have failed to pay
any portion of the Redemption Price, within the applicable three Trading Day
period set forth above, then any holder of Series B Preferred that was subject
to such redemption may demand that the Company (i) convert all or any portion of
the shares of its Series B Preferred for which the Redemption Price, shall not
have been paid (the "Unpaid Portion") at the Conversion Ratio, as adjusted to
give effect to any and all Adjustment Events occurring prior to conversion,
calculated as at the date of the Optional Redemption Notice, or the date of such
conversion (a "Conversion Date"), whichever is higher, or (ii) promptly issue to
such holder new certificates representing shares of Series B Preferred in a
number equal to the Unpaid Portion.
(c) BNY CONSENTS. Notwithstanding anything to the contrary contained
herein, the Company may not deliver an Optional Redemption Notice unless it has
received (and furnished to the each holder evidence thereof reasonably
satisfactory to it of) prior written
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consent of BNY (as hereafter defined) to pay the redemption amounts contemplated
by this Section free from the subordination provisions of Section 8 hereof.
SECTION 7. DEFINITIONS. For the purposes hereof, the following terms shall have
the following meanings:
"AUTOMATIC CONVERSION DATE" is as defined in Section 5(c).
"BNY" means BNY Financial Corporation, 1290 Avenue of the Americas, New
York, New York 10104.
"BNY BANK OBLIGATIONS" means the borrowings and interest due thereon
(including, without limitation, any interest accruing after the commencement of
any case, proceedings or other action relating to the liquidation, dissolution,
assignment for the benefit of creditors, receivership, arrangement, bankruptcy,
insolvency or reorganization of the Company regardless of whether such interest
is allowable, payable or accruable to BNY in such case, proceeding or other
action) under the Receivables Agreement, as the same may from time to time be
amended, supplemented, otherwise modified, replaced or refinanced.
"BUSINESS DAY" means any day of the year on which commercial banks are
not required or authorized to be closed in New York City.
"CLOSING DATE" is as defined in the Purchase Agreement.
"COMMON STOCK" means shares now or hereafter authorized of the class of
Common Stock, par value $.001 per share, of the Company, stock of any other
class into which such shares may hereafter be reclassified or changed and any
other equity securities of the Company hereafter designated as Common Stock.
"CONVERSION DATE" is as defined in Section 5(a).
"CONVERSION NOTICE" is as defined in Section 5(a).
"CONVERSION PRICE" shall mean, as of any date of determination, the
product of (a) the Relevant Percentage as of the Conversion Date and (b) the
lowest Per Share Market Price during the Measurement Period immediately
preceding the Conversion Date; provided, however, that the Conversion Price as
of any date of determination on or after May 1, 1998 shall not exceed the
product of (x) 81.25% and (y) the average Per Share Market Price for the period
from April 1, 1998 to and including April 30, 1998 (the "Maximum Conversion
Price").
"CONVERSION RATIO" shall mean, as of any date of determination, a
fraction the numerator of which is the Liquidation Preference and the
denominator of which is the Conversion Price.
"DEBENTURES" means the 5% Convertible Debentures delivered by the
Company pursuant to the Purchase Agreement.
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"DIVIDEND PAYMENT DATE" is as defined in Section 2(a).
"ISSUABLE MAXIMUM" is as defined in Section 5(b).
"JUNIOR SECURITIES" means the Common Stock and all other equity
securities of the Company other than the Series B Preferred.
"LIQUIDATION PREFERENCE" is as defined in Section 4.
"MAXIMUM CONVERSION PRICE" is as defined in the definition of
"Conversion Price".
"MEASUREMENT PERIOD" shall mean (i) with respect to any Conversion Date
occurring during the period from November 1, 1997 to and including November 30,
1997, 14 Trading Days, (ii) with respect to any Conversion Date occurring during
the period from December 1, 1997 to and including December 31, 1997, 16 Trading
Days, (iii) with respect to any Conversion Date occurring during the period from
January 1 to and including January 31, 1998, 18 Trading Days, (iv) with respect
to any Conversion Date occurring during the period from February 1 to and
including February 28, 1998, 20 Trading Days, (v) with respect to any Conversion
Date occurring during the period from March 1 to and including March 31, 1998,
22 Trading Days, (vi) with respect to any Conversion Date occurring during the
period from April 1, 1998 to and including April 30, 1998, 24 Trading Days,
(vii) with respect to any Conversion Date occurring during the period from May
1, 1998 to and including May 31, 1998, 26 Trading Days, (viii) with respect to
any Conversion Date occurring during the period from June 1 to and including
June 30, 1998, 28 Trading Days and (ix) with respect to any Conversion Date
occurring on or after July 1, 1998, 30 Trading Days.
"OPTIONAL REDEMPTION NOTICE" is as defined in Section 6(a)(i).
"PER SHARE MARKET PRICE" means on any date of determination (a) the
lowest reported sales price per share of the Common Stock on such date on the
Nasdaq National Market or other stock exchange on which the Common Stock is then
listed, as reported on Bloomberg, L.P. or (b) if the Common Stock is not listed
on the Nasdaq National Market or such other stock exchange, the lowest reported
sales price for a share of Common Stock in the Nasdaq SmallCap Market, as
reported on Bloomberg, L.P. (or similar organization or agency succeeding to its
functions of reporting prices), or (c) if the Common Stock is no longer reported
on Bloomberg, L.P. (or similar organization or agency succeeding to its
functions of reporting prices), then the average of the "Pink Sheet" quotes for
the relevant conversion period as determined by the holder, or (d) if the Common
Stock is no longer publicly traded, the fair market value of a share of Common
Stock as determined by an Appraiser selected in good faith by the holders of a
majority of shares of Series B Preferred; provided, however, that the Company,
after receipt of the determination by such Appraiser, shall have the right to
select an additional Appraiser, in which case, the fair market value shall be
equal to the average of the determinations by each such Appraiser.
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"PERSON" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"PURCHASE AGREEMENT" means the Amended and Restated Securities Purchase
Agreement, dated July 25, 1997.
"RECEIVABLES AGREEMENT" means the Accounts Receivable Management and
Security Agreement, dated as of July 31, 1995, among the Company and BNY.
"REDEMPTION DATE" is as defined in Section 5(e) if in connection with a
Conversion Notice and as defined in Section 6(a)(i) if in connection with an
Optional Redemption Notice.
"REDEMPTION PRICE" shall mean, as of any Redemption Date, a fraction,
the numerator of which is the Liquidation Preference and the denominator of
which is the Relevant Percentage as of the Redemption Date.
"RELEVANT PERCENTAGE" shall mean (i) with respect to any Redemption
Date occurring during the period from the Closing Date to and including October
31, 1997, 100%, (ii) with respect to any Conversion Date or Redemption Date
occurring during the period from November 1, 1997 to and including November 30,
1997, 88.25%, (iii) with respect to any Conversion Date or Redemption Date
occurring during the period from December 1 to and including December 31, 1997,
86.75%, (iv) with respect to any Conversion Date or Redemption Date occurring
during the period from January 1, 1998 to and including January 31, 1998,
85.25%, (v) with respect to any Conversion Date or Redemption Date occurring
during the period from February 1, 1998 to and including February 28, 1998,
84.00%, (vi) with respect to any Conversion Date or Redemption Date occurring
during the period from March 1 to and including March 31, 1998, 82.50%, (vii)
with respect to any Conversion Date or Redemption Date occurring on or after
April 1, 1998, 81.25%.
"SHAREHOLDER APPROVAL" is as defined in Section 5(b).
"TRADING DAY" means (a) a day on which the Common Stock is traded on
the Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices).
"TRANSFER AGENT" means Boston EquiServe.
"UNDERLYING SECURITIES REGISTRATION STATEMENT" means the Registration
Statement (as defined in the Registration Rights Agreement to be filed within
thirty (30) Trading Days of Closing (as defined in the Purchase Agreement).
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"UNDERLYING SHARES" means the number of shares of Common Stock into
which the Series B Preferred are convertible in accordance with the terms hereof
and the Purchase Agreement.
"UNPAID PORTION" is as defined in Section 6(a).
SECTION 8. SUBORDINATION.
(a) The Series B Preferred is subordinated to full payment of all of
the Company's obligations under the BNY Bank Obligations. Except to the extent
otherwise specifically set forth in this Section, until such time as all BNY
Bank Obligations are indefeasibly paid to BNY, the Company shall not, directly
or indirectly, make any cash or other payment (except for the issuance and
delivery of shares of Common Stock in respect of conversions or payments of
dividends hereunder) that is due and owing on account of the Series B Preferred.
Cash payments contemplated by Sections 5(c), 5(e), and 5(g) hereof, to the
extent such payments do not exceed, in the aggregate, five hundred thousand
dollars ($500,000), may be made by the Company to (and retained by) the holders
of Series B Preferred as long as (i) at the time any such payment is due under
such Sections, the Bank has not given notice to the Company of acceleration of
the Company's obligations under the Receivables Agreement of (ii) the making of
such payment shall not cause (as determined at the time such payment shall
become due to the holders) the Company to exceed the borrowing limitations set
forth in Section 2 of the Receivables Agreement, or cause an "Event of Default"
(as defined under the Receivables Agreement) under Section 18(a) of the
Receivables Agreement. Cash payments contemplated by Sections 5(c), 5(e), and
5(g) hereof, to the extent that such payments, in the aggregate, exceed five
hundred thousand dollars ($500,000), may be made by the Company to (and retained
by) the holders of the Series B Preferred as long as (1) at the time any such
payment is due under such Sections, the Bank has not given notice to the Company
of acceleration of the Company's obligations under the Receivables Agreement, or
(ii) at the time such payment becomes due the Company shall not be in default of
Sections 12(n), 12(o), 12(p), 12(q), 18(a), 18(i) or 18(j) of the Receivables
Agreement, or (iii) the making of such payment shall not cause (as determined at
the time such payment shall become due to the holders) an Event of Default under
such Receivables Agreement sections set forth in (ii) immediately above or cause
the Company to exceed the borrowing limitations set forth in Section 2 of the
Receivables Agreement. The subordination provided hereunder shall in no way
limit the ability of the holders of the Series B Preferred to convert Debentures
into shares of Common Stock and to receive payment of dividends hereunder in
shares of Common Stock, including after such time as any Event of Default shall
be declared under the Convertible Debentures.
(b) Should any payment, other than payments contemplated in Section
8(a) above, be received by the holder of the Series B Preferred, such payment
shall be held in trust by such holder for the benefit of BNY and shall be
delivered forthwith to BNY for application to BNY Bank Obligations, in the form
received with any necessary endorsements or assignment.
SECTION 9. REDEMPTION OR PURCHASE OF JUNIOR SECURITY
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So long as any Preferred Stock shall remain outstanding, neither the
Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire
directly or indirectly any Junior Securities (as defined in Section 7) except
that the Company may (i) repurchase or redeem up to 10,000 shares of Common
Stock and (ii) repurchase or redeem shares of Common Stock of any employee upon
such employee's termination of employment with the Company), nor shall the
Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any Junior Securities,
nor shall any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any Junior Securities unless all
dividends on the Preferred Stock for all post dividend period shall have been
paid free of the subordination provisions of Section 8. The foregoing provision
shall not restrict the Company from adopting and implementing a Stockholder
Rights Plan pursuant to Delaware General Corporate Law.
RESOLVED FURTHER, that the Chief Executive Officer and Secretary of the
Company be, and they hereby are, authorized and directed to prepare, execute,
verify, and file with the Secretary of State of Delaware, a Certificate of
Designation in accordance with these resolutions and as required by law.
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[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, Yes! Entertainment Corporation has caused its
corporate seal to be hereunto affixed and this certificate to be signed by
Donald D. Kingsborough, its Chief Executive Officer, and attested by Sol
Kershner, its Secretary this 21st day of July, 1997.
YES! ENTERTAINMENT CORPORATION
/s/ Donald D. Kingsborough
_________________________________________
Name: Donald D. Kingsborough
Title: Chief Executive Officer
Attest:
/s/ Sol Kershner
_________________________________
Name: Sol Kershner
Title: Secretary
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EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registration Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series B Convertible Preferred Stock indicated below, into shares of Common
Stock, par value $.001 per share (the "Common Stock"), of YES! Entertainment
Corporation (the "Company") according to the conditions hereof, as of the date
written below. As of the date set forth below, the undersigned is in compliance
with Section 4.19 of the Amended and Restated Securities Purchase Agreement
between the Company, Infinity Investors Limited, Fairway Capital Limited and
Cappello & Laffer Capital Corp. dated July 25, 1997. If shares are to be issued
in the name of a person other than undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates and opinions as reasonably requested by the Company in accordance
therewith. No fee will be charged to the holder for any conversion, except for
such transfer taxes, if any.
Conversion calculations: ___________________________________________________
Date to Effect Conversion
___________________________________________________
Number of shares of Preferred Stock to be Converted
___________________________________________________
Number of shares of Common Stock to be Issued
___________________________________________________
Applicable Conversion Ratio (as adjusted to give
effect to prior Adjustment Events)
___________________________________________________
Signature
___________________________________________________
Name:
___________________________________________________
Address:
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested hereby),
notify the converting holder by facsimile of the number of shares of Common
Stock outstanding on such date and the number of shares of Common Stock which
would be issuable to the holder if the conversion requested in this conversion
would result in it owning in excess of 4.9% of the outstanding shares of Common
Stock on such date, the Company shall convert up to an amount equal to 4.9% of
the outstanding shares of Common Stock and issue to the holder one or more
certificates representing shares of Preferred Stock which have not been
converted as a result of this provision.
18.