EXHIBIT 4.1
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS.
THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND CONVERSION SET
FORTH IN A SECURITIES EXCHANGE AGREEMENT, DATED AUGUST 28, 1998, BETWEEN YES!
ENTERTAINMENT CORPORATION ("THE COMPANY") AND THE ORIGINAL HOLDER HEREOF. A
COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
No. [_] $[ ]
YES! ENTERTAINMENT CORPORATION
5% CONVERTIBLE DEBENTURE DUE APRIL 30, 2002
THIS DEBENTURE is one of a duly authorized issue of debentures of YES!
Entertainment Corporation, a corporation organized and existing under the laws
of Delaware and having a principal place of business at 3875 Hopyard Road, Suite
375, Pleasanton, California 94588 (the "Company"), designated as its 5%
Convertible Debentures, due April 30, 2002 (the "Debentures"), in an aggregate
principal amount of $[ ]. This Debenture supersedes in its
entirety the Debentures of like tenor, issued by the Company to the Holder on or
after July 25, 1997.
FOR VALUE RECEIVED, the Company promises to pay to [ ],
or its registered assigns (the "Holder"), the principal sum of [ ]
($[ ]) (together with all additional sums of deferred interest added to
the principal balance of this Debenture as provided below) on April 30, 2002 or
such earlier date as the Debentures are required to be repaid as provided
hereunder (the "Maturity Date") with interest (calculated on the basis of a 360-
day year and for the actual number of days elapsed) accruing on the unpaid
balance thereof from the date hereof at the rate of 5% per annum, payable (i) on
the last day of March, June, September and December of each year, commencing
September 30, 1998; (ii) upon conversion; or (iii) upon the Maturity Date if not
earlier converted. Accrued interest on this Debenture shall, at the Company's
option, be (i) paid in cash or (ii) added to the outstanding principal balance
of this Debenture with effect as of the day such interest is payable. Interest
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hereunder will be paid to the person in whose name this Debenture (or one or
more predecessor Debentures) is registered on the records of the Company
regarding registration and transfers of the Debentures (the "Debenture
Register"); provided, however, that the Company's obligation to a transferee of
this Debenture arises only if such transfer, sale or other disposition is made
in accordance with the terms and conditions hereof and of the Purchase Agreement
(as hereafter defined). All overdue amounts hereunder shall bear interest at the
rate of 15% per annum from the date such payment is due. Subject to the
foregoing, the principal of, and interest on, this Debenture are payable in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts, at the address of the
Holder last appearing on the Debenture Register. A transfer of the right to
receive principal and interest under this Debenture shall be transferable only
through an appropriate entry in the Debenture Register as provided herein.
This Debenture is subject to the following additional provisions:
SECTION 1. The Debentures are exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same but shall not be issuable in
denominations of less than integral multiplies of Fifty Thousand Dollars
($50,000). No service charge will be made for such registration of transfer or
exchange.
SECTION 2. This Debenture has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Securities Act,
pursuant to an effective registration statement or pursuant to an available
exemption from the registration requirements under the Securities Act. Prior to
due presentment to the Company for transfer of this Debenture, the Company and
any agent of the Company may treat the person in whose name this Debenture is
duly registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
SECTION 3. EVENTS OF DEFAULT.
"Event of Default," wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):
(a) any default in the payment of the principal of or interest on this
Debenture as and when the same shall become due and payable, either on the
Conversion Date (as hereafter defined) or the Maturity Date, by acceleration or
otherwise.
(b) the Company shall fail to timely observe or perform any other
covenant, agreement or warranty contained in, or otherwise commit any breach of,
this Debenture, the Purchase Agreement, the Certificate of Designation of the
Series C Preferred Stock of the Company (the "Certificate of Designation") or
the Amended and Restated Registration Rights
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Agreement, dated July 25, 1997 (the "Registration Rights Agreement"), and such
failure or breach shall not have been remedied within five (5) Business Days
thereafter or such other cure period as may specifically be provided herein or
in such other agreements with respect to any particular covenant, agreement or
warranty;
(c) the Company or any of its subsidiaries shall commence a voluntary
case under the United States Bankruptcy Code as now or hereafter in effect or
any successor thereto (the "Bankruptcy Code"); or an involuntary case is
commenced against the Company under the Bankruptcy Code and the petition is not
controverted within thirty (30) days, or is not dismissed within sixty (60)
days, after commencement of such involuntary case; or a "custodian" (as defined
in the Bankruptcy Code) is appointed for, or takes charge of, all or any
substantial part of the property of the Company or the Company commences any
other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or there
is commenced against the Company any such proceeding which remains undismissed
for a period of sixty (60) days; or the Company is adjudicated insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or the Company suffers any appointment of any custodian
or the like for it or any substantial part of its property which continues
undischarged or unstayed for a period of sixty (60) days; or the Company makes a
general assignment for the benefit of creditors; or the Company shall call a
meeting of its creditors with a view to arranging a composition or adjustment of
its debts; or the Company shall by any act or failure to act indicate its
consent to, approval of or acquiescence in any of the foregoing; or any
corporate or other action is taken by the Company for the purpose of effecting
any of the foregoing;
(d) the Company shall fail to pay any amount of principal or interest
on any mortgage, credit agreement or other facility, indenture or other
instrument under which there may be issued, or by which there may be secured or
evidenced, any indebtedness of the Company in an amount exceeding one hundred
thousand dollars ($100,000) (collectively, "Indebtedness"), whether such
Indebtedness now exists or shall hereafter be created, when and as the same
shall become due and payable, or the Company shall fail to observe or perform
any term, covenant or agreement contained in any agreement or instrument
evidencing or governing any of such Indebtedness if the cure period for such
term, covenant or agreement contained in such agreement or instrument has run
and the holder or holders of such Indebtedness or a trustee on their behalf
shall have the right to cause such Indebtedness to become due prior to its
stated maturity;
(e) the Company shall dispose of all or substantially all of its assets
in one or more transactions or shall be a party to any business combination
pursuant to which the Company shall not be the surviving entity, except if, upon
the effectiveness of such a business combination, (i) the holders of the Common
Stock immediately prior to such effectiveness beneficially own (as determined
under Rule 13d-3 promulgated under the Exchange Act in the aggregate, 66 2/3% or
more of the voting power of such surviving entity and (ii) no Person or group
(as described in Rule 13d-5(b) promulgated under the Exchange Act) who was not a
holder
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of the Common Stock immediately prior to such business combination beneficially
owns in excess of 16 2/3% of the voting power of such surviving entity;
(f) the Company shall redeem or repurchase more than ten thousand
(10,000) of its outstanding shares of Common Stock, other than a redemption or
repurchase of an employee's Common Stock upon termination of such employee's
employment with the Company for any reason and other than a redemption of shares
of Series B Convertible Preferred Stock (the "Series B Preferred") issued
pursuant to the Certificate of Designation; or
(g) the entry of any judgments against the Company aggregating more
than two hundred fifty thousand dollars ($250,000) (except in connection with
litigation specifically scheduled in paragraph 3 of Schedule 3.1 (g) to the
Purchase Agreement).
If any Event of Default occurs and is continuing, and in every such case,
then so long as such Event of Default shall then be continuing, Holders of a
majority of the aggregate principal amount of Debentures then outstanding may,
by notice to the Company, declare the full outstanding principal amount of this
Debenture, together with all accrued but unpaid interest thereon and other
amounts owing hereunder, through the date of acceleration to be, whereupon the
same shall become, immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are waived by the Company,
notwithstanding anything herein contained to the contrary, and the Holder may
immediately and without expiration of any grace period enforce any and all of
its rights and remedies hereunder and all other remedies available to it under
applicable law. Such declaration may be rescinded and annulled by Holder at any
time prior to payment hereunder. No such rescission or annulment shall affect
any subsequent Event of Default or impair any right consequent thereon.
SECTION 4. CONVERSION.
(a) CONVERSION AT HOLDER'S OPTION. This Debenture shall be convertible
in whole or in part into shares of Common Stock (as hereafter defined) (subject
to reduction pursuant to Section 4(b)) at the option of the Holder in whole or
in part at any time and from time to time and prior to 7:30 p.m. (Eastern
Standard Time) on the Maturity Date at the Conversion Ratio (as hereafter
defined), as adjusted to give effect to any and all Adjustment Events (as
hereafter defined) occurring prior to conversion. The Holder shall effect
conversions by surrendering to the Transfer Agent (as hereafter defined) the
Debentures (or such portions thereof) to be converted and to the Company and the
Transfer Agent deliver a conversion notice in the form attached hereto as
Exhibit A (the "Conversion Notice"). Each Conversion Notice shall specify the
principal amount (and the amount of accrued but unpaid interest thereon) of
Debentures to be converted and the date on which conversion is to be effected
(the "Conversion Date"), which date may not be prior to the date the Holder
delivers such Conversion Notice by facsimile. If no Conversion Date is specified
in a Conversion Notice, the Conversion Date shall be the date that the
Conversion Notice is deemed deliverable pursuant to Section 4(i). Subject to
Section 4(b), each Conversion Notice, once given, shall be irrevocable unless
the Company fails to deliver a certificate or certificates representing the
underlying Common Stock pursuant to Section 4(d) within 3 Trading Days of the
Conversion Date, at which time or any time thereafter
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the holder of the Debentures may, at its option either (a) cancel the Conversion
Notice or (b) elect to have the Common Stock issuable upon conversion of this
Debenture deemed to be issued and outstanding and held as of record as of the
Conversion Date by the holder of this Debenture which sent the Conversion
Notice. If a Holder is converting less than all of the principal amount
represented by the Debentures tendered by such Holder with the Conversion
Notice, or if a conversion hereunder cannot be effected in full for any reason,
the Company shall promptly deliver to such Holder (in the manner within the time
set forth in Section 4(d)) a new Debenture for such principal amount as has not
been converted.
(b) CERTAIN REGULATORY APPROVAL. (i) The Company shall have until
December 21, 1998 to obtain Stockholder Approval (as defined below) of the
issuance of Common Stock upon conversion/exercise of the Series C Preferred, the
Debentures and the Warrants (each as defined in the Purchase Agreement). In the
event the Company has not obtained such Stockholder Approval by December 21,
1998, then, unless the holder of this Debenture on such date shall have
delivered written notice to the Company that this Debenture shall not be
redeemed pursuant to this subsection (b)(i), the Company shall within five
business days thereafter repay all of the principal amount (and the amount of
accrued but unpaid interest thereon) of Debentures then outstanding at a price
equal to the Prepayment Price. If Company fails for any reason to pay the
Prepayment Price on or prior to December 23, 1998, if required, the Company will
pay interest on such Prepayment Price at a rate of 20% per annum to the Holder,
accruing from December 21, 1998 until the Prepayment Price plus any accrued
interest thereon is paid in full. The entire Prepayment Price, including
interest thereon, shall be paid in cash. "Stockholder 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 stockholders of the Company held in accordance with
the Company's certificate of incorporation and by-laws, of (A) the issuance by
the Company of shares of Common Stock pursuant to the conversion/exercise of
Series C Preferred, the Debentures and the Warrants (each as defined in the
Purchase Agreement) into Common Stock as and to the extent required pursuant to
Rule 4460(i) of the Nasdaq Stock Market (or any successor or replacement
provision thereof) and (B) an increase in the authorized number of shares of
Common Stock sufficient to cause the number of authorized and unissued and
unreserved shares of Common Stock on such date to exceed by at least 10 million
shares the number of shares of Common Stock issuable upon the conversion and
exercise of all of the outstanding shares of Series B Preferred and Series C
Preferred, the July Debentures, the Debentures and the Warrants.
(ii) 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 a
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 C Preferred and Debentures, 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 Stockholder
5
Approval, then the Company shall issue to the converting holder of this
Debenture up to the Issuable Maximum (and no more).
(c) AUTOMATIC CONVERSION. If the Company shall have obtained
Stockholder Approval of the issuance of the Common Stock upon conversion of the
Debentures on or prior to December 21, 1998, then the principal amount of (and
accrued but unpaid interest thereon) any and all Debentures outstanding on April
30, 2002 (the "Automatic Conversion Date") shall be automatically converted into
fully paid and nonassessable shares of Common Stock, at the Conversion Ratio, as
adjusted to give effect to any and all prior Adjustment Events prior to
conversion, in the manner provided herein.
(d) DELIVERY OF CERTIFICATES. Not later than three (3) Trading Days
after a Conversion Date or the Automatic Conversion Date, the Company shall
cause the Transfer Agent (as hereafter defined) to deliver to the Holder (i) a
certificate or certificates, representing the number of shares of Common Stock
being acquired upon the conversion of Debentures (subject to reduction pursuant
to Section 5(b)(ii)) and (ii) Debentures in a principal amount equal to the
principal amount of Debentures tendered in connection with a conversion
hereunder but not converted. Any certificates representing shares of Common
Stock to be delivered upon a conversion hereunder shall be free of restrictive
legends and trading restrictions, except those specified in Section 4.1(b) of
the Purchase Agreement. The Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of any Debentures
to be converted are either delivered to the Transfer Agent for conversion, or
until the Holder notifies the Company that such Debentures have been lost,
stolen or destroyed and provides a bond reasonably satisfactory to the Company
(or other adequate security reasonably acceptable to the Company) to indemnify
the Company from any loss incurred by it in connection therewith. The Company
shall, upon request of the Holder, use its best efforts to deliver any
Debentures required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions. If such certificate or
certificates are not delivered within ten (10) Trading Days after a Conversion
Date, the holder shall be entitled to rescind such Conversion Notice upon
written notice to the Company, in which event the Company shall immediately
instruct the Transfer Agent to return the Debentures subject to such Conversion
Notice that were tendered for conversion. The Company shall pay to the
converting Holder, as liquidated damages and not as penalty, $3,000 for each day
that the Company fails to deliver such certificate or certificates pursuant to
this Section commencing after the fifth (5th) Trading Day after the applicable
Conversion Date or Automatic Conversion Date. In addition, if the Company fails
to deliver to the Holder such Debentures pursuant to this Section prior to a
fifteenth (15th) day after the Conversion Date or Automatic Conversion Date, the
Company shall, at the Holder's option, repay the principal amount of (and
accrued but unpaid interest on) the Debentures then held by such Holder, as
requested by such Holder, in an amount equal to the Prepayment Price calculated
as of the Conversion Date or Automatic Conversion Date (which date may be
referred to herein as a "Prepayment Date"). If the Holder has requested that the
Company repay the Debentures pursuant to this Section and the Company fails for
any reason to pay the Prepayment Price hereunder within five (5) Business Days
after such notice, the Company will pay interest on such Prepayment Price at a
rate of 17% per annum, in cash to such
6
Holder, accruing from such fifth (5th) Business Day until such Prepayment Price
and any accrued but unpaid interest thereon is paid in full.
(e) ADJUSTMENTS.
(i) The following events shall be deemed to be "Adjustment
Events:"
A. If the Company, at any time while any Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Junior Securities payable in shares of either
Common Stock or of capital stock of any class (whether payable in shares of its
Common Stock or of capital stock of any class), (b) subdivide outstanding shares
of Common Stock into a larger number of shares, or (c) combine outstanding
shares of Common Stock into a smaller number of shares.
B. If the Company, at any time while any Debentures are
outstanding, shall issue rights or warrants to all Holders of Common Stock
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the Per Share Market Price of Common Stock as calculated on
the record date.
C. If the Company, at any time while any Debentures are
outstanding, shall distribute to all Holders of Common Stock (and not to the
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
4(e)(i)(A) and (i)(B) above).
(ii) ADJUSTMENT FOR STOCK SPLITS, COMBINATIONS. If an Adjustment
Event described in 4(e)(i)(A) occurs, then the Conversion Ratio, as adjusted to
give effect to all prior Adjustment Events, shall be multiplied by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
before such event and the denominator of which shall be the number of shares of
Common Stock outstanding after such event. Any adjustment computed pursuant to
this Section 4(e)(ii) shall become effective immediately after the record date
for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision or combination.
(iii) ADJUSTMENT FOR ISSUANCES TO COMMON STOCKHOLDERS. If an
Adjustment Event described in 4(e)(i)(B) occurs, then Conversion Ratio, as
adjusted to give effect to all prior Adjustment Events, shall be multiplied by a
fraction, the numerator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any, but including warrants or options that would
be included for purposes of determining earnings per share in accordance with
generally accepted accounting principles) outstanding on the date of issuance of
such rights or warrants plus the number of shares which the aggregate offering
price of the total number of shares so offered would purchase at such Per Share
Market Price, and the denominator of which shall be the number of shares of
Common Stock (excluding treasury shares, if any, but including warrants or
options that would be included for purposes of determining earnings per share in
accordance with generally accepted accounting principles) outstanding on the
date of issuance of such rights or warrants plus the number of additional shares
of Common Stock
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offered for subscription or purchase. Such adjustment shall be calculated
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such rights or warrants. However, upon the expiration of any right or
warrant to purchase Common Stock the issuance of which resulted in an adjustment
pursuant to this Section 4(e)(iii), if any such right or warrant shall expire
and shall not have been exercised, such adjustment shall immediately upon such
expiration be recomputed as if the adjustment calculated upon the issuance of
such rights or warrants been calculated on the basis of offering for
subscription or purchase only that number of shares of Common Stock actually
purchased upon the exercise of such rights or warrants actually exercised.
(iv) ADJUSTMENT FOR DISTRIBUTION OF EVIDENCES OF INDEBTEDNESS OR
ASSETS TO COMMON STOCKHOLDERS. If an Adjustment Event described in 4(e)(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; 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.
(v) Upon the occurrence of an Adjustment Event, the Company
shall promptly to mail to each Holder a notice setting forth (a) the adjustment
to the Conversion Ratio required by the Adjustment Event at issue, (b) the
cumulative adjustment to which the Conversion Ratio shall be subject after the
Adjustment Event, giving effect to any and all prior Adjustment Events, and (c)
a brief statement of the facts requiring the adjustment at issue.
(vi) ROUNDING. All calculations under this Section 4 shall be
made to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) RECLASSIFICATIONS OR SHARE EXCHANGE. In case of any
reclassification of the Common Stock or any compulsory share exchange pursuant
to which the Common Stock is converted into other securities, cash or property,
the Holder shall have the right thereafter to, at their option, (A) convert the
principal amount of (and accrued but unpaid interest on) this Debenture into the
shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of Common Stock following such reclassification or
compulsory share exchange, and the Holder shall be entitled upon such event to
receive such amount of securities or property as the shares of the Common Stock
of the
8
Company into which the principal amount (and accrued and unpaid interest
thereon) of the Debentures could have been converted immediately prior to such
event or (B) require the Company to repay the principal amount (and all accrued
and unpaid interest thereon) of the Debentures.
(viii) CERTAIN EVENTS. The Company shall not effect any of the
following actions prior to obtaining Stockholder Approval of the issuance of the
Common Stock upon conversion of the Debentures:
A. declare a dividend (or any other distribution) on its
Common Stock (other than a subdivision of the outstanding shares of Common
Stock); or
B. 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. 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. 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. authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company.
After obtaining such Stockholder Approval, in the event any of the
foregoing actions occur, then the Company shall cause to be filed at each office
or agency maintained for the purpose of conversion of Debentures and shall cause
to be mailed to the Holders at its last addresses as shall appear on the
Debenture Register, at least thirty (30) calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the Holders of Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger, sale, transfer,
share exchange, dissolution, liquidation or winding-up is expected to become
effective, and the date as of which it is expected that Holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities, cash, or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding-up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
9
(f) RESERVATION OF COMMON STOCK. The Company covenants, from and after
obtaining Stockholder Approval, that it shall at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Debentures, as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holder, such number of shares of Common Stock as shall be
issuable upon the conversion of the aggregate principal amount of all
outstanding Debentures. The Company covenants that all shares of Common Stock
that shall be so issuable shall, upon issue, be duly and validly authorized,
issued and fully paid and nonassessable.
(g) 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 shall be entitled to receive, in lieu of the final fraction of a share,
one whole share of Common Stock.
(h) CERTIFICATES. The issuance of certificates for shares of Common
Stock on conversion of Debentures shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder.
(i) NOTICE. Any and all notices or other communications or deliveries
to be provided by the Holder hereunder, including, without limitation, any
Holder Conversion Notice, shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service or sent by
certified or registered mail, postage prepaid, addressed to the attention of the
Chief Financial Officer of the Company at the facsimile telephone number or
address of the principal place of business of the Company, and if applicable, to
the Transfer Agent. Any and all notices or other communications or deliveries to
be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
the Holder at the facsimile telephone number or address of such Holder appearing
on the books of the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on the
earliest of (i) the date of transmission, if delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement prior to 4:30
p.m. (Eastern Standard Time) on a Trading Day, (ii) the Trading Day after the
transmission, if delivered via facsimile at the facsimile telephone number
specified in the Purchase Agreement later than 4:30 p.m. (Eastern Standard Time)
on any date and earlier than 11:59 p.m. (Eastern Standard Time) on such date,
(iii) the Trading Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (iv) upon actual receipt by the party
to whom such notice is required to be given.
10
SECTION 5. PREPAYMENT BY THE COMPANY.
(a) OPTIONAL PREPAYMENT BY COMPANY.
(i) The Company shall have the right, exercisable at any time
after or concurrent with such time as all shares of Series B Preferred have been
converted or redeemed upon fifteen (15) Trading Days notice to the Holders (the
"Optional Prepayment Notice"), to prepay all of the principal amount of the
Debentures then outstanding at the Prepayment Price calculated on the date of
the Optional Prepayment Notice (which date may be referred to herein as a
"Prepayment Date"); provided, however, that the Company shall not redeem the
Debentures from a holder without simultaneously repaying any and all
indebtedness owed to such holder of Debentures. The entire Prepayment Price
shall be paid in cash.
(ii) The holders of the Debentures shall have until the
Redemption Date to convert any and all Debentures into shares of Common Stock by
delivering a Conversion Notice on or prior to the date that is the business day
before the Redemption Date. On or after the Prepayment Date, no Holder shall
have the right to continue to convert Debentures which have been noticed for
redemption.
(iii) On or before the fifth Trading Day after the Optional
Prepayment Date, the Holder shall deliver to the Company the Debentures subject
to the Optional Prepayment Notice that have not been previously tendered for
conversion and the Company shall deliver a sum equal to the Prepayment Price as
calculated on the Prepayment Date.
(iv) Notwithstanding the other provisions of this Section 5, in
the event the Company effects a merger, redemption, consolidation,
recapitalization, sale of all or substantially all of its assets or other
business combination within 90 days of the Redemption Date and the Redemption
Price is less than the consideration that the Holders of the Debentures would
have received upon conversion of the Debentures into Common Stock pursuant to
such subsequent Event (the "Subsequent Consideration") then, prior to or
concurrently with such transaction the Company shall pay to the former holders
of the Debentures that were redeemed on the Redemption Date the difference
between the Subsequent Consideration and the Redemption Price.
(b) LIQUIDATED DAMAGES. If the Optional Prepayment Price shall not be
paid in full on or before the fifteenth Trading Day after the Prepayment Date,
the Company shall pay to the holders of Debentures subject to Redemption as
liquidated damages and not as a penalty the sum of seven thousand five hundred
dollars ($7,500) per day in cash until such Optional Prepayment Price, together
with all such liquidated damages, is paid in full. In addition, if the Company
shall have failed to pay any portion of the Optional Prepayment Price on or
before the eighteenth Trading Day after the Prepayment Date, then the Holder may
demand that the Company (i) convert all or any portion of the principal amount
of the Debentures for which the Optional Prepayment Price shall not have been
paid (the "Unpaid Principal Portion") at a Conversion Price calculated as at the
date of the Optional Prepayment Notice or the date of such conversion, whichever
is lower, or (ii) promptly issue to the Holders new Debentures for a principal
amount equal to the Unpaid Principal Portion.
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(c) BNY CONSENTS. Notwithstanding anything to the contrary contained
herein, so long as the BNY Bank Obligations are outstanding, the Company shall
not deliver an Optional Prepayment Notice unless (i) there are no outstanding
Debentures or all outstanding Debentures are subject to a delivered redemption
notice and (ii) it has received (and furnished to the Holder evidence thereof
reasonably satisfactory to it or) prior written consent of BNY to make such
prepayment free from the subordination provisions of Section 8 hereof.
SECTION 6. DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:
"AUTOMATIC CONVERSION DATE" is as defined in Section 4(c).
"BNY" means BNY Financial Corporation, 1290 Avenue of the Americas, New
York, New York 10104.
"BNY BANK OBLIGATIONS" means the borrowings and interest due thereon
(including, without limitation, any interest accruing after the commencement of
any case, proceeding or other action relating to the liquidation, dissolution,
assignment for the benefit of creditors, receivership, arrangement, bankruptcy,
insolvency or reorganization of the Company regardless of whether such interest
is allowable, payable or accruable to BNY in such case, proceeding or other
action) under the Receivables Agreement, as the same may from time to time be
amended, supplemented, otherwise modified, replaced or refinanced.
"BUSINESS DAY" means any day of the year on which commercial banks are not
required or authorized to be closed in New York City.
"CLOSING DATE" is as defined in the Purchase Agreement.
"COMMON STOCK" means shares now or hereafter authorized of the class of
Common Stock, par value $.001 per share, of the Company, stock of any other
class into which such shares may hereafter be reclassified or changed and any
other equity securities of the Company hereafter designated as Common Stock.
"CONVERSION DATE" is as defined in Section 4(d).
"CONVERSION NOTICE" is as defined in Section 4(d).
"CONVERSION PRICE" shall mean, as of any date of determination, the product
of (a) the Relevant Percentage as of the date of conversion and (b) the lowest
Per Share Market Price during the Measurement Period immediately preceding the
date of conversion; provided, however, that the Conversion Price shall not
exceed the product of (x) 81.25% and (y) the average Per Share Market Price for
the period from April 1, 1998 to and including April 30, 1998 (the "Maximum
Conversion Price").
"CONVERSION RATIO" means a fraction of the numerator which is one (1) the
denominator of which is the Conversion Price.
12
"DEBENTURE REGISTER" is as defined in paragraph two (2) of this Debenture.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"ISSUABLE MAXIMUM" is as defined in Section 4(d).
"JULY DEBENTURES" is as defined in the Purchase Agreement.
"JUNIOR SECURITIES" means the Common Stock, all other equity securities of
the Company and all other debt that is subordinated to the Debentures by its
terms.
"MAXIMUM CONVERSION PRICE" is as defined in the definition of "Conversion
Price."
"MEASUREMENT PERIOD" shall mean 30 Trading Days.
"OPTIONAL PREPAYMENT NOTICE" is as defined in Section 5(a)(i).
"MATURITY DATE" is as defined in paragraph two (2) of this Debenture.
"PER SHARE MARKET PRICE" means on any date of determination (a) the lowest
reported sales price per share of the Common Stock on such date on the Nasdaq
National Market or other stock exchange on which the Common Stock is then
listed, as reported on Bloomberg, L.P., or (b) if the Common Stock is not listed
on the Nasdaq National Market or such other stock exchange, the lowest reported
sales price for a share of Common Stock in the Nasdaq SmallCap Market, as
reported on Bloomberg, L.P. (or similar organization or agency succeeding to its
functions of reporting prices), or (c) if the Common Stock is no longer reported
on Bloomberg, L.P. (or similar organization or agency succeeding to its
functions of reporting prices), then the average of the "Pink Sheet" quotes for
the relevant conversion period as determined by the Holder, or (d) if the Common
Stock is no longer publicly traded, the fair market value of a share of Common
Stock as determined by an Appraiser selected in good faith by the holders of a
majority of principal amount of outstanding Debentures; provided, however, that
the Company, after receipt of the determination by such Appraiser, shall have
the right to select an additional Appraiser, in which case, the fair market
value shall be equal to the average of the determinations by each such
Appraiser.
"PERSON" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"PREPAYMENT DATE" is as defined in Section 4(e) if in connection with a
Conversion Notice and as defined in Section 5(a)(i) if in connection with an
Optional Prepayment Notice.
"PREPAYMENT PRICE" shall mean, as of any Prepayment Date a quotient equal
to (i) the principal amount of (and accrued but unpaid interest thereon) the
Debentures to be repaid, and (ii) the Relevant Percentage as of the Prepayment
Date.
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"PURCHASE AGREEMENT" means the Securities Exchange Agreement, dated August
28, 1998, as amended from time to time.
"RECEIVABLES AGREEMENT" means the Accounts Receivable Management and
Security Agreement, dated as of July 31, 1995, among the Company and BNY.
"REGISTRATION RIGHTS AGREEMENT" is as defined in Section 3(b).
"RELEVANT PERCENTAGE" shall mean 81.25%.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERIES C PREFERRED" means the Series C Preferred Stock designated in the
Series C Certificate of Designation.
"STOCKHOLDER APPROVAL" is as defined in Section 4(b).
"TRADING DAY" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the over-the-
counter market, as reported by the National Quotation Bureau Incorporated (or
any similar organization or agency succeeding its functions of reporting
prices).
"TRANSFER AGENT" means Boston EquiServe.
"UNDERLYING SECURITIES REGISTRATION STATEMENT" means the Registration
Statement (as defined in the Registration Rights Agreement) to be amended within
thirty (30) days of Closing (as defined in the Purchase Agreement).
"UNPAID PRINCIPAL PORTION" is as defined in Section 5(b).
"WARRANTS" is as defined in the Purchase Agreement.
SECTION 7. Except as expressly provided herein, no provision of this
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, and interest on, this Debenture at
the time, place, and rate, and in the coin or currency, herein prescribed. This
Debenture is a direct obligation of the Company. This Debenture ranks pari passu
with all other indebtedness, obligations or liabilities of the Company now or
hereafter issued under the terms set forth herein. The Company may not prepay
the outstanding principal amount on the Debentures except in accordance with the
specific terms hereof.
SECTION 8. (a) This Debenture is subordinated to full payment of all of
the Company's obligations under the BNY Bank Obligations. Except to the extent
otherwise specifically set forth in this Section, until such time as all BNY
Bank Obligations are
14
indefeasibly paid to BNY, the Company shall not, directly or indirectly, make
any cash or other payment (except for the issuance and delivery of shares of
Common Stock in respect of conversions or payments of interest hereunder) that
is due and owing under this Debenture. Cash payments contemplated by Sections
4(b) or 4(d) hereof, to the extent such payments do not exceed, in the
aggregate, five hundred thousand $500,000, may be made by the Company to (and
retained by) the Holders as long as (i) at the time any such payment is due
under such Sections, the Bank has not given notice to the Company of
acceleration of the Company's obligations under the Receivables Agreement or
(ii) the making of such payment shall not cause (as determined at the time such
payment shall become due to the Holders) the Company to exceed the borrowing
limitations set forth in Section 2 of the Receivables Agreement, or cause an
"Event of Default" (as defined under the Receivables Agreement) under Section
18(a) of the Receivables Agreement. Cash payments contemplated by Sections 4(b)
or 4(d) hereof, to the extent that such payments, in the aggregate, exceed five
hundred thousand ($500,000), may be made by the Company to (and retained by) the
Holders as long as (i) at the time any such payment is due under such Sections,
the Bank has not given notice to the Company of acceleration of the Company's
obligations under the Receivables Agreement, or (ii) at the time such payment
becomes due the Company shall not be in default of Sections 12(n), 12(o), 12(p),
12(q), 18(a), 18(i) or 18(j) of the Receivables Agreement, or (iii) the making
of such payment shall not cause (as determined at the time such payment shall
become due to the Holders) an Event of Default under such Receivables Agreement
sections set forth in (ii) immediately above or cause the Company to exceed the
borrowing limitations set forth in Section 2 of the Receivables Agreement. The
subordination provided hereunder shall in no way limit the Holders' ability to
convert Debentures into shares of Common Stock and to receive payment of
interest hereunder in shares of Common Stock, including after such time as any
Event of Default shall be declared hereunder.
(b) Should any payment, other than payments contemplated in Section
8(a) above, be received by the Holders, such payment shall be held in trust by
the Holders for the benefit of BNY and shall be delivered forthwith to BNY for
application to BNY Bank Obligations, in the form received with any necessary
endorsement or assignment.
SECTION 9. This Debenture shall not entitle the Holder to any of the
rights of a stockholder of the Company, including without limitation, the right
to vote, to receive dividends and other distributions, or to receive any notice
of, or to attend, meetings of stockholders or any other proceedings of the
Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
SECTION 10. If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
15
SECTION 11. This Debenture shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
conflicts of laws thereof.
SECTION 12. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Debenture. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any waiver
must be in writing.
SECTION 13. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
SECTION 14. Whenever any payment or other obligation hereunder shall be
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day (or, if such next succeeding Business Day falls in the
next calendar month, the preceding Business Day in the appropriate calendar
month).
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IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized as of September 2, 1998.
YES! ENTERTAINMENT CORPORATION
Attest: By:
------------------------- -----------------------------
Mark Shepherd Mark Shepherd
Secretary Chief Executive Officer
17
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert the above Debenture
No. [ ] into shares of Common Stock, par value $.001 per share (the "Common
Stock"), of YES! Entertainment Corporation (the "Company") according to the
conditions hereof, as of the date written below. As of the date set forth
below, the undersigned is in compliance with Section 4.18 of the Securities
Exchange Agreement between the Company, Infinity Investors Limited, Infinity
Emerging Opportunities Limited and Glacier Capital Limited dated August 28,
1998. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
Holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
----------------------------------------------------
Date to Effect Conversion
----------------------------------------------------
Principal Amount of Debentures to be Converted
----------------------------------------------------
Applicable Conversion Ratio (as adjusted to give
effect to all prior Adjustment Events)
----------------------------------------------------
Amount of Interest due on the Principal Amount of
Debentures to be Converted
----------------------------------------------------
Signature
----------------------------------------------------
Name:
----------------------------------------------------
Address:
18