EXHIBIT 4.2
AMENDED CERTIFICATE OF DESIGNATION OF
SERIES C CONVERTIBLE PREFERRED STOCK OF
YES! ENTERTAINMENT CORPORATION
The undersigned, Mark Shepherd, hereby certifies that:
I. He is 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 358,822 shares
are issued and outstanding.
III. No shares of Series C Convertible Preferred Stock are issued and
outstanding.
IV. The following is a true and correct copy of the consent dated
September 1, 1998 (which amends and restates in their entirety the resolutions
of the Board of Directors of the Company (the "Board of Directors") dated August
27, 1998 designating the rights, preferences, privileges and restrictions of the
Series C Convertible Preferred Stock) duly adopted by the Board of Directors,
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 C
Convertible Preferred Stock" (the "Series C Preferred"). The number of shares
constituting authorized Series C 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.
1.
(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 annum, payable
in shares of Series C Preferred Stock, on the last day of March, June, September
and December commencing on September 30, 1998 or on the Conversion Date (each a
"Dividend Payment Date"). Dividends on the Series C Preferred shall accrue daily
commencing on September 2, 1998, 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 C
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 C Preferred that number
of additional shares of Series C Preferred equal to the quotient of (a) the
aggregate dollar amount of accrued and unpaid dividends for all shares of Series
C 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 C Preferred
require the issuance and delivery of a fractional share or shares of Series C
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 C 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 C 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 C Preferred,
such payment shall be distributed ratably among the holders of the Series C
Preferred based upon the number of shares held by each holder.
SECTION 3A. NEW DIRECTORS. Within 10 days after the Closing Date, the
Company shall cause a majority of its Board of Directors to elect each of Clark
Hunt and Barrett Whissman to the Board.
SECTION 3B. VOTING RIGHTS. The holders of the Series C Preferred shall
have the right to elect two members of the Company's Board of Directors (the
"Series C Directors") at each annual and special meeting of the Company's
stockholders held for such purpose until such time as the number of shares of
Series C Preferred outstanding is less 25% of the number of such shares
outstanding on the date hereof (excluding the effects of reverse stock splits,
recapitalizations and other such events). So long as the holders of the Series
C Preferred shall have the right to elect two directors, the holders of a
majority of the Series C Preferred shall have the right to nominate such two
directors; provided that the holders of a majority of the Series C Preferred
shall have provided the Company written notice at least fifteen (15) days prior
to the date the Company files its proxy statement with respect to the election
of directors with the Securities and Exchange Commission setting forth the
nominees of the Series C Preferred in such notice; provided further, that this
advance notice shall not apply to the first meeting of the stockholders of the
Company, in which the nominees of the Series C Preferred shall be Clark
2.
Hunt and Barrett Whissman. The Company shall give the holders of the Series C
Preferred thirty (30) days advance written notice of its intention to file a
proxy statement with the Securities and Exchange Commission relating to the
election of directors. The two members shall be elected by the holders of a
majority of the shares of Series C Preferred outstanding on the record date for
the general election of directors. In addition, so long as any shares of Series
C Preferred are outstanding, the Company shall not, without the affirmative vote
of the holders of a majority of the shares of the Series C Preferred then
outstanding, (a) alter or change adversely the powers, preferences or rights
given to the Series C Preferred, (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 C Preferred or
(c) enter into any merger, recapitalization, consolidation or similar
transaction that would result in the change in any of the terms of the Series C
Preferred.
SECTION 3C. CONSENT OF SERIES C DIRECTORS. Without the consent and
approval of the Series C Directors, the Company shall not (i) incur more than
$100,000 in additional indebtedness (excluding trade debt incurred in the
ordinary course of business); (ii) permit to exist liens on its assets securing
payment of claims or obligations in an aggregate amount of $500,000 other than
existing liens or liens securing payment of (A) the BNY Bank Obligations, (B)
the Bridge Loan, or (C) the New Facility; (iii) use any of the proceeds of the
Bridge Loan or the New Facility for any purpose other than working capital in
connection with the operation of the Company's present business operations; (iv)
enter into any agreement to merge with or otherwise combine its assets or
operations with any other entity or sell any material assets outside the
ordinary course of business; (v) commence an action for relief under any
provision of the United States Bankruptcy Code or any similar statutory scheme;
(vi) pay any material additional or special compensation to any of its officers
that is not currently required under any existing agreements with its officers;
(vii) enter into any material transaction with any insider or affiliate; or
(viii) issue any shares of stock in the Company other than in satisfaction of
existing options, warrants, conversion rights, or existing obligations under the
Company's employee benefit plans. Any of the foregoing actions taken by the
Company without the consent and approval of the Series C Directors shall be null
and void and shall have no legal effect.
SECTION 4. LIQUIDATION. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a "Liquidation"), the holders
of Series C 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 C
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 C 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 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 C Preferred.
3.
SECTION 5. CONVERSION.
(a) CONVERSION AT HOLDER'S OPTION. Each share of Series C 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 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 the certificate or certificates representing the
shares of Series C 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 C
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(d). Subject to
Section 5(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 5(d) within 3 Trading Days of the
Conversion Date, at which time or any time thereafter the holder of the Series C
Preferred may, at its option, either (a) cancel the Conversion Notice or (b)
elect to have the Common Stock issuable upon conversion of Series C Preferred
deemed to be issued and outstanding and held of record as of the Conversion Date
by the holder of Series C Preferred which sent the Conversion Notice. 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(d)) a certificate of such number of shares as have 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 holders of a majority in interest of the outstanding
Series C Preferred on such date shall have delivered written notice to the
Company that the Series C Preferred shall not be redeemed pursuant to this
subsection (b)(i), the Company shall within five business days thereafter
redeem, from funds legally available therefor at the time of such redemption,
all of the Series C Preferred then outstanding, including shares subject to a
Conversion Notice, at a price per share equal to the Redemption Price (as
hereafter defined). If the Company fails for any reason to pay the Redemption
Price on or prior to December 23, 1998 if required, then the Company will pay
interest on such Redemption Price at a rate of 17% per annum to the converting
holder of Series C Preferred, accruing from December 21, 1998 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.
"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 B Preferred, Series C Preferred, the July
Debentures, the Debentures and the Warrants (all as
4.
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 Approval, then the Company shall issue
to the converting holder of the Series C Preferred 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
Series C Preferred on or prior to December 21, 1998, then any and all shares of
Series C Preferred 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 Adjustment Events occurring 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 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 C Preferred (subject to reduction pursuant to
Section 5(b)(ii)) and (ii) a certificate representing the shares of Series C
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 C Preferred
until certificates representing the shares of Series C Preferred to be converted
are either delivered to the Transfer Agent for conversion or the holder notifies
the Company that such shares of Series C 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 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
5.
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 and the Transfer Agent, in which event
the Company shall immediately instruct the Transfer Agent to return the
certificates representing shares of Series C Preferred 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 C 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 C
Preferred for which the Company shall have failed to issue Series C Preferred
certificates hereunder, in cash. If the holder has requested that the Company
redeem shares of Series C 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 on such
Redemption Price at a rate of 17% 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.
(e) ADJUSTMENTS.
(i) The following events shall be deemed to be "Adjustment
Events":
A. If the Company, at any time while any shares of Series C
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 C
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 C
Preferred are outstanding, shall distribute to all holders of Common
Stock (and not to holders of Series C 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(e)(i)(A) and (B) above).
(ii) ADJUSTMENT FOR STOCK SPLITS, COMBINATIONS. If an Adjustment
Event described in 5(e)(i)(A) occurs, then the Conversion Ratio, as adjusted
6.
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(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 5(e)(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
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 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 5(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 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.
(iv) ADJUSTMENT FOR DISTRIBUTION OF EVIDENCES OF INDEBTEDNESS OR
ASSETS TO COMMON STOCKHOLDERS. If an Adjustment Event described in
5(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)
7.
(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.
(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 C 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.
(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 C 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 C 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 C
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 C 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 C Preferred the right to receive the securities, cash
or property in this Section 5(e)(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.
8.
(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 Series C Preferred:
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 mailed to the holders of
Series C 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.
(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
9.
of Series C Preferred, as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the holders of
Series C Preferred, such number of shares of Common Stock as shall be issuable
upon the conversion of all outstanding shares of Series C Preferred. The Company
covenants that all shares of Series C Preferred that shall be so issuable shall,
upon issue, be duly and validly authorized, issued and fully paid and
nonassessable.
(g) RESERVATION OF SERIES C PREFERRED. The Company covenants that it
will at all times reserve and keep available out of its authorized and unissued
Series C Preferred solely for the purpose of payment of dividends on Series C
Preferred, as herein provided, free from preemptive rights or any other actual
contingent purchase rights of persons other than the holders of the Series C
Preferred, such number of shares of Series C Preferred as shall be issuable upon
payment of dividends hereunder. The Company covenants that all shares of Series
C Preferred Stock that shall be so issuable shall, upon issue, be duly and
validly authorized, issued and fully paid and nonassessable.
(h) 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 C Preferred shall be entitled to receive, in lieu of
the final fraction of a share, one whole share of Common Stock.
(i) CERTIFICATES. The issuance of certificates for shares of Common
Stock on conversion of Series C 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 C
Preferred so converted.
(j) CANCELLED SHARES. Shares of Series C Preferred converted into
Common Stock shall be canceled and shall have the status of authorized but
unissued shares of undesignated preferred stock.
(k) NOTICE. Any and all notices or other communications or deliveries
to be provided by a holder of Series C 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 C 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
10.
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.
SECTION 6. REDEMPTION.
(a) OPTIONAL REDEMPTION BY COMPANY.
(i) The Company shall have the right, exercisable at any time
upon fifteen (15) Trading Days notice to the holders of the Series C
Preferred (the "Optional Redemption Notice"), to redeem, from funds legally
available therefor at the time of such redemption, all of the shares of
Series C Preferred from a holder 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"); provided, however, that the Company
shall not redeem the Series C Preferred from a holder without
simultaneously repaying any and all indebtedness owed to such holder of
Series C Preferred. The entire Optional Redemption Price shall be paid in
cash.
(ii) The holders of the Series C Preferred shall have until the
Redemption Date to convert any and all shares of Series C Preferred into
shares of Common Stock by delivering a Conversion Notice on or prior to the
date that is the business day prior to the Redemption Date. On or after the
Redemption Date, no holder of Series C Preferred shall have the right to
continue to convert shares of Series C Preferred which have been noticed
for redemption.
(iii) On or before the fifth Trading Day after the Redemption
Date, each holder of Series C Preferred shall deliver to the Company the
shares of Series C 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 C Preferred tendered by or on behalf of such holder for redemption
in accordance with the provisions hereof.
(iv) Notwithstanding the other provisions of this Section 6, 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
Series C Preferred would have received upon conversion of the Series C
Preferred 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
11.
holders of the Series C Preferred that were redeemed on the Redemption Date
the difference between the Subsequent Consideration and the Redemption
Price.
(b) LIQUIDATED DAMAGES. If the Redemption Price shall not be paid in
full on or before the fifteenth Trading Day after the Redemption Date, the
Company shall pay to the holders of the Series C Preferred 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 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 on or before the
eighteenth Trading Day after the Redemption Date, then any holder of Series C
Preferred that was subject to such redemption may demand that the Company (i)
convert all or any portion of the shares of its Series C 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 C Preferred in a number equal to the Unpaid
Portion.
(c) BNY CONSENTS. Notwithstanding anything to the contrary contained
herein, so long as the BNY Bank Obligations are outstanding, 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
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.
"Bridge Loan" shall mean that certain $3 million loan from Infinity
Investors Limited in favor of the Company and executed on the date hereof.
"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.
12.
"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) 0.8125 and (b) the lowest Per Share Market Price during the 30 Trading
Days immediately preceding the Conversion Date; 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" 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.
"Dividend Payment Date" is as defined in Section 2(a).
"Issuable Maximum" is as defined in Section 5(b).
"July Debentures" is as defined in the Purchase Agreement.
"Junior Securities" means the Common Stock and all other equity securities
of the Company other than the Series B Preferred and Series C Preferred.
"Liquidation Preference" is as defined in Section 4.
"Maximum Conversion Price" is as defined in the definition of "Conversion
Price."
"New Facility" shall mean the proposed $10 million loan facility which may
be entered into between the Company and Infinity Investors Limited.
"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)
13.
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 C 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.
"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 Securities Exchange Agreement, dated
September 2, 1998.
"Receivables Agreement" means the Accounts Receivable Management and
Security Agreement, dated as of July 31, 1995, as amended, among the Company and
BNY.
"Redemption Date" is as defined in Section 5(d) 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.
"Stockholder 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 amended within
thirty (30) days of Closing (as defined in the Purchase Agreement).
"Underlying Shares" means the number of shares of Common Stock into which
the Series C Preferred are convertible in accordance with the terms hereof and
the Purchase Agreement.
"Unpaid Portion" is as defined in Section 6(a).
"Warrants" is as defined in the Purchase Agreement.
14.
SECTION 8. SUBORDINATION.
(a) The Series C 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 C Preferred.
Cash payments contemplated by Sections 5(b) and 5(d) 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 C 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(b) and 5(d) 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 C 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 C 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, 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
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
15.
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.
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]
16.
IN WITNESS WHEREOF, Yes! Entertainment Corporation has caused its corporate
seal to be hereunto affixed and this certificate to be signed by Mark Shepherd,
its Chief Executive Officer and Secretary this 2nd day of September, 1998.
YES! ENTERTAINMENT CORPORATION
/s/ Mark Shepherd
------------------------------------
Name: Mark Shepherd
Title: Chief Executive Officer
Attest:
/s/ Mark Shepherd
- ------------------------------------
Name: Mark Shepherd
Title: Secretary
17.
EXHIBIT A
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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 C 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 4.18 of the Securities Exchange Agreement between the Company,
Infinity Investors Limited, Infinity Emerging Opportunities Limited and Glacier
Capital Limited dated September 2, 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:
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Date to Effect Conversion
-------------------------------------------------------
Number of shares of Preferred Stock to be Converted
-------------------------------------------------------
Number of shares of Common Stock to be Issued
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Applicable Conversion Ratio (as adjusted to give
effect to prior Adjustment Events)
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Signature
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Name:
-------------------------------------------------------
Address:
18.