EXHIBIT 4.1
CERTIFICATE OF DESIGNATION OF
SERIES A CONVERTIBLE PREFERRED STOCK OF
YES! ENTERTAINMENT CORPORATION
The undersigned, Donald D. Kingsborough and Bruce D. Bower, hereby
certify that:
I. They are the duly elected and acting Chief Executive Officer and
Secretary, respectively, of YES! Entertainment Corporation, a Delaware
corporation (the "Company").
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II. The Certificate of Incorporation of the Company authorizes
2,000,000 shares of preferred stock, par value $.001 per share, of which no
shares are issued and outstanding.
III. The following is a true and correct copy of the consent duly
adopted by the Board of Directors of the Company (the "Board of Directors")
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dated March 17, 1997, which constituted all requisite action on the part of the
Company for adoption of such consent.
RESOLUTIONS
WHEREAS, the Board of Directors is authorized to provide for the
issuance of shares of preferred stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each 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. The series of preferred
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stock shall be designated as the Series A Convertible Preferred Stock (the
"Preferred Stock"), and the number of shares so designated shall be 85,000
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(which shall not be subject to increase). Each
share of Preferred Stock shall have a par value of $.001 per share and a stated
value of $100 per share (the "Stated Value").
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Section 2. Dividends.
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(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 (as a
percentage of the Stated Value per share) equal to 6-1/2% per annum, payable, in
cash or shares of Common Stock, semi-annually in arrears, but in no event later
than the Conversion Date (as hereinafter defined). Notwithstanding the
foregoing, the Company may not pay dividends in cash unless it has received the
prior written consent of BNY (as defined in Section 7) to such payment, free
from the subordination provisions of Section 8. Dividends on the Preferred Stock
shall accrue daily commencing the Original Issue Date (as defined in Section 7),
and shall be deemed to accrue on such 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 party that holds the Preferred Stock
on an applicable record date for any dividend payment will be entitled to
receive such dividend payment and any other accrued and unpaid dividends which
accrued prior to such dividend payment date, without regard to any sale or
disposition of such Preferred Stock 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 Preferred Stock, such payment shall be
distributed ratably among the holders of the Preferred Stock based upon the
number of shares held by each holder. Payment of dividends on the Preferred
Stock is further subject to the provisions of Section 5(a)(ii).
(b) Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends (and must
deliver cash in respect thereof) on the Preferred Stock if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes, or held as treasury stock, is
insufficient to issue such dividends to be paid in shares of Common Stock;
(ii) the shares of Common Stock to be issued in respect of such
dividends are not registered for resale pursuant to an effective registration
statement that names the recipient of such dividend as a selling stockholder
thereunder;
(iii) the shares of Common Stock to be issued in respect of such
dividends are not listed on the Nasdaq SmallCap Market or Nasdaq National Market
and any other exchange or quotation system on which the Common Stock is then
listed for trading; or
(iv) if the recipient thereof is a "Purchaser" under the Purchase
Agreement (or an affiliate thereof) and the issuance of such shares would result
in such recipient beneficially
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owning more than 4.9% of the issued and outstanding shares of Common Stock
provided, however, if ten Business Days shall have elapsed from the date that
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the Holder under the Convertible Debentures (as that term is defined in Section
7) shall have declared an Event of Default (as defined thereunder) as having
occurred, then the provisions of this clause (iv) shall be null and void, ab
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initio.
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(c) 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 an employee
upon such employee's termination of employment with the Company), nor shall the
Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any Junior Securities,
nor shall any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any Junior Securities unless all
dividends on the Preferred Stock for all past dividend periods shall have been
paid free of the subordination provisions of Section 8.
Section 3. Voting Rights. Except as otherwise provided herein and as
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otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not, without the affirmative vote of the holders of a majority of the
shares of the Preferred Stock then outstanding, alter or change adversely the
powers, preferences or rights given to the Preferred Stock or 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 Preferred Stock.
Section 4. Liquidation. Upon any liquidation, dissolution or
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winding- up of the Company, whether voluntary or involuntary (a "Liquidation"),
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the holders of Preferred Stock shall be entitled to receive out of the assets of
the Company, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to the Stated Value plus all accrued but unpaid
dividends per share, whether declared or not, before any distribution or payment
shall be made to the holders of any Junior Securities, 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 Preferred
Stock ratably in accordance with the respective amounts that would be payable on
such shares if all amounts payable thereon were paid in full. Any of a sale,
conveyance or disposition of all or substantially all of the assets of the
Company or the effectuation by the Company of a transaction or series of related
transactions in which more than 331/3% of the voting power of the Company is
disposed of, or a consolidation or merger of the Company with or into any other
company or companies or a reclassification of the Common Stock shall not be
treated as a Liquidation, but instead shall be subject to the provisions of
Section 5. The Company shall mail written notice of any such Liquidation, not
less than 45 days prior to the payment date stated therein, to each record
holder of Preferred Stock.
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Section 5. Conversion.
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(a)(i) Each share of Preferred Stock shall be convertible into shares
of Common Stock (subject to reduction pursuant to Section 5(a)(ii) and (iii) and
to adjustment under Section 5(c)) at the option of the holder in whole or in
part at any time and from time to time after the date hereof at the Conversion
Ratio (as defined in Section 7). The holder shall effect conversions by
surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Company, together with the form of
conversion notice attached hereto as Exhibit A (the "Holder Conversion Notice").
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Each Holder Conversion Notice shall specify the number of shares of Preferred
Stock to be converted and the date on which such conversion is to be effected,
which date may not be prior to the date the holder delivers such Holder
Conversion Notice by facsimile (the "Holder Conversion Date"). If no Holder
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Conversion Date is specified in a Holder Conversion Notice, the Holder
Conversion Date shall be the date that the Holder Conversion Notice is deemed
delivered pursuant to Section 5(i). Subject to Sections 5(a)(ii) and 5(c) and,
as to the holders (or their designees) party to the Purchase Agreement (as
defined in Section 7), subject to Section 4.10 of the Purchase Agreement each
Holder Conversion Notice, once given, shall be irrevocable. If a holder is
converting less than all shares of Preferred Stock represented by the
certificate or certificates tendered by such holder with the Holder 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(c)) a certificate for such number of shares as have not
been converted.
(ii) Certain Regulatory Approval. If on the Conversion Date
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applicable to any conversion of shares of Preferred Stock (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 any successor or replacement provision thereof) to the Nasdaq
SmallCap Market, on the Nasdaq SmallCap Market, (B) the Conversion Price then in
effect is such that the aggregate number of shares of Common Stock that would
then be issuable upon conversion of all outstanding shares of Preferred Stock
and Debentures (as defined in Section 7), together with any shares of Common
Stock previously issued upon conversion of Preferred Stock and Debentures, and
together with any shares of Common Stock issued in payment of dividends
hereunder and interest under the Debentures in shares of Common Stock, would
equal or exceed 20% of the number of shares of Common Stock outstanding on the
Original Issue Date (the "Issuable Maximum"), and (C) the Company has not
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previously obtained Shareholder Approval (as defined below), then the Company
shall issue to the converting holder of the Preferred Stock up to the Issuable
Maximum and, with respect to any shares of Common Stock that would be issuable
to such holder in respect of the Conversion Notice at issue in excess of the
Issuable Maximum, the holder shall have the option to require the Company to
either (1) as promptly as possible, but in no event later than 60 days after
such Conversion Date, convene a meeting of the holders of the Common Stock and
obtain the Shareholder Approval, or (2) redeem, from funds legally available
therefor at the time of such redemption, the balance of the Preferred Stock then
outstanding, including shares subject to the Conversion Notice at issue at a
price per share equal to the product of (i) the average Per Share Market Value
for the five (5)
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Trading Days immediately preceding (1) the Conversion Date or (2) the date of
payment in full by the Company of such redemption price, whichever is greater,
and (ii) the Conversion Ratio calculated on the Conversion Date; provided,
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however, that if the holder has requested that the Company obtain Shareholder
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Approval under paragraph (1) above and the Company fails for any reason to
obtain such Shareholder Approval within the time period set forth in (1) above,
the Company shall be obligated to redeem all of the shares of Preferred Stock
then outstanding, including shares subject to the Conversion Notice at issue and
not converted as a result of the provisions of this Section, in accordance with
the provisions of paragraph (2) above, and in such case the interest
contemplated by the immediately succeeding sentence shall be deemed to accrue
from the Conversion Date. If the holder has requested that the Company redeem
shares of Preferred Stock pursuant to this Section and the Company fails for any
reason to pay the redemption price under (2) above within seven days after the
Conversion Date or fails to deliver good funds to the Transfer agent for such
purpose, the Company will pay interest on such redemption price at a rate of 15%
per annum to the converting holder of Preferred Stock, accruing from the
Conversion Date until the redemption price plus any accrued interest thereon is
paid in full. The entire redemption price, including interest thereon, shall be
paid in cash. "Shareholder Approval" means the approval by a majority of the
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total votes cast on the proposal, in person or by proxy, at a meeting of the
shareholders of the Company held in accordance with the Company's Certificate of
Incorporation and by-laws, of the issuance by the Company of shares of Common
Stock exceeding the Issuable Maximum as a consequence of the conversion of
Preferred Stock into Common Stock at a price less than the greater of the book
or market value on the Original Issue Date as and to the extent required
pursuant to Rule 4460(i) of the Nasdaq Stock Market (or any successor or
replacement provision thereof).
(ii) If on any Conversion Date under Section 5 or the date of any
redemption pursuant to Section 6 (a "Redemption Date") the average Per Share
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Market Value for the five (5) Trading Days immediately preceding such Conversion
Date or Redemption Date, as the case may be, exceeds the Initial Conversion
Price (defined in Section 5(d)(i) below) by more than 50%, the Conversion Price
otherwise applicable to such conversion or redemption shall be increased by an
amount equal to 50% of the difference between (A) the average Per Share Market
Value for the five (5) Trading Days immediately preceding such Conversion Date
or Redemption Date, as the case may be, less (B) 150% of the Initial Conversion
Price.
(b) At any time on or after the first anniversary of the Original
Issue Date, each share of Preferred Stock shall be convertible in whole or in
part and from time to time at the option of the Company into shares of Common
Stock at the Conversion Ratio; provided, however, that the Company is not
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permitted to deliver or cause to be delivered a Company Conversion Notice (as
defined below) (i) within 10 days of issuing any press release or other public
statement relating to such conversion, (ii) prior to the 270th day after the
date the Commission shall have declared effective a Registration Statement (as
defined in the Amended and Restated Registration Rights Agreement, dated as of
March 18, 1997, by and among the Company and the original holders of the
Preferred Stock (the "Registration Rights Agreement"))
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(an "Underlying Securities Registration Statement"), (iii) at any time that an
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Underlying Securities Registration Statement is not then effective, (iv) if the
shares of Common Stock issuable upon such conversion are not then listed for
trading on the Nasdaq National Market or Nasdaq SmallCap Market, (v) if the
Company shall not have duly reserved for issuance to the holders of the
Preferred Stock a sufficient number of shares of Common Stock to issue upon such
conversion or (vi) such conversion shall not contravene Section 5(a)(ii). The
Company shall effect such conversion by delivering or causing to be delivered to
the holders of the Preferred Stock a written notice in the form attached hereto
as Exhibit B (the "Company Conversion Notice"), which Company Conversion Notice,
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once given, shall be irrevocable. Each Company Conversion Notice shall specify
the number of shares of Preferred Stock required by the Company to be converted.
The Company shall deliver or cause to be delivered such Company Conversion
Notice at least two (2) Trading Days before the date of conversion indicated in
the Company Conversion Notice (such date is hereinafter referred to as the
"Company Conversion Date"). Any such conversion shall be effected on a pro rata
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basis among all holders of shares of Preferred Stock. Upon its receipt of a
Company Conversion Notice, the holder shall surrender the shares of Preferred
Stock held by it and subject to such Company Conversion Notice at the office of
the Company or the Transfer Agent for the Preferred Stock or Common Stock. The
Company shall, upon conversion of the Preferred Stock subject to such Company
Conversion Notice deliver or cause to be delivered to the appropriate tendering
holder, a replacement certificate representing shares of Preferred Stock
tendered but not converted in response to the Company Conversion Notice. Each of
a Holder Conversion Notice and a Company Conversion Notice is sometimes referred
to herein as a "Conversion Notice," and each of a "Holder Conversion Date" and a
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"Company Conversion Date" is sometimes referred to herein as a "Conversion
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Date."
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(c) Not later than three (3) Trading Days after the Conversion Date,
the Company will cause the Transfer Agent to deliver to the holder (i) a
certificate or certificates, representing the number of shares of Common Stock
being acquired upon the conversion of Preferred Stock (subject to reduction
pursuant to Section 5(a)(ii) and (iii)), (ii) a certificate representing the
shares of Preferred Stock tendered in connection with a conversion hereunder but
not converted; (iii) a bank check in the amount of all accrued and unpaid
dividends in respect of the shares of Preferred Stock tendered for conversion
(if the Company has elected (or is required pursuant to the terms hereof) to pay
accrued interest in cash) and (iv) if the Company has elected (and is permitted
pursuant to the terms hereof) to pay accrued dividends in shares of Common
Stock, certificates representing such number of shares of Common Stock as equals
such dividends divided by the average Per Share Market Value for the five (5)
Trading Days immediately preceding the Conversion Date. 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 Preferred Stock and the counting of Trading Days for
purposes of any consequences under this Section for a failure to deliver such
certificates under this Section shall not begin until certificates representing
the shares of Preferred Stock to be converted are either delivered for
conversion to the Transfer Agent for the Common Stock, or until the holder
notifies the Company that such
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shares of Preferred Stock 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, provided, however, that, if the
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Company or the Transfer Agent receives the original shares of Preferred Stock
being converted on or prior to the time specified for the delivery of such
shares of Common Stock or on or prior to the time at which liquidated damages
begin to accrue, the date of the Holder Conversion Notice shall be deemed to be
the date of delivery of such original shares of Preferred Stock. The Company
shall, upon request of the holder, use its best efforts to deliver any
certificate or certificates required to be delivered by the Company under this
Section electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. If such
certificate or certificates are not delivered by the date required under this
Section, the holder shall be entitled by written notice to the Company and the
Transfer Agent at any time on or before its receipt of such certificate or
certificates, to rescind such conversion, in which event the Company shall
immediately instruct the Transfer Agent to return the certificates representing
shares of Preferred Stock subject to such conversion 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 the
fifth (5th) Trading Day after the applicable Conversion Date. In addition, if
the Company fails to deliver to the holder such certificate or certificates
pursuant to this Section prior to the 15th day after the Conversion Date, the
Company shall, at the Holder's option, (i) redeem the shares of Preferred Stock
then held by such holder, as requested by such holder, at the redemption price
contemplated below, and (ii) pay all accrued but unpaid dividends on account of
the Preferred Stock for which the Company shall have failed to issue Common
Stock certificates hereunder, in cash. The redemption price shall be equal to
the product of (A) the average Per Share Market Value for the five (5) Trading
Days immediately preceding (1) the Conversion Date or (2) the date of payment in
full by the Company of such redemption price, whichever is greater, and (B) the
Conversion Ratio calculated on the Conversion Date. If the holder has requested
that the Company redeem shares of Preferred Stock pursuant to this Section and
the Company fails for any reason to pay the redemption price under (2) above
within seven days after such notice, the Company will pay interest on such
redemption price at a rate of 15% per annum, in cash to such Holder, accruing
from such seventh day until such redemption price and any accrued but unpaid
interest thereon is paid in full.
(d) (i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be the lowest of (a)
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the average Per Share Market Value for the five (5) Trading Days immediately
preceding the Original Issue Date (the "Initial Conversion Price"), (b) the
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average of the lowest Per Share Market Values for any five (5) consecutive
Trading Days during the sixty (60) Trading Days immediately following the
Original Issue Date or (c) 82.5% of the average Per Share Market Value for the
five (5) Trading Days immediately preceding the Conversion Date; provided that,
if (1) an Underlying Securities Registration Statement is not filed with the
Securities and Exchange Commission (the "Commission") on or prior to March 24,
1997, or (2) the Company fails to file with the Commission a request for
acceleration in accordance with Rule 12d1-2 promulgated under the
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Securities Exchange Act of 1934, as amended, within five (5) days of the date
that the Company is notified by the Commission that an Underlying Securities
Registration Statement will not be reviewed, or (3) if the Underlying Securities
Registration Statement is not declared effective by the Commission on or prior
to May 5, 1997, or (4) if such Underlying Securities Registration Statement is
filed with and declared effective by the Commission but thereafter ceases to be
effective at any time prior to the expiration of the "Effectiveness Period" (as
such term as defined in the Registration Rights Agreement), without being
succeeded within 10 Business Days by a subsequent Underlying Securities
Registration Statement filed with and declared effective by the Commission (any
such failure being referred to as an "Event," and for purposes of clauses (1)
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and (2) the date on which such Event occurs, or for purposes of clause (3)
the date on which such five (5) day period is exceeded, or for purposes of
clause (4) the date which such 10 Business Day-period is exceeded being referred
to as "Event Date"), the Initial Conversion Price (as adjusted) and the discount
comprising the Conversion Price (if the Conversion Price is not the Initial
Conversion Price) shall be decreased by 1% each month (i.e., 81 1/2% as of the
Event Date and 80 1/2% as of the one month anniversary of the Event Date) until
such time as the applicable Event is cured. If such Event is not cured by the
third month anniversary of the Event Date, commencing such third month
anniversary the Initial Conversion Price (as adjusted) and the discount
comprising the Conversion Price (if the Conversion Price is not the Initial
Conversion Price) shall be decreased each month by .5% (i.e., 80% as of the
third anniversary of the Event Date and 79 1/2% as of the fourth month
anniversary of the Event Date) and the Company shall pay to each holder in cash,
as liquidated damages and not a penalty, .5% of the aggregate stated value of
the Preferred Stock then held by such holder on each monthly anniversary of the
Event Date, until such time as the applicable Event is cured. If such Event is
not cured by the fifth month anniversary of the Event Date, the Company shall
pay to each holder in cash, as liquidated damages and not a penalty, 1% of the
aggregate stated value of the Preferred Stock then held by such holder until
such time as the applicable Event is cured. The adjustments contained in this
Section are intended to be cumulative and any decrease in the Conversion Price,
pursuant to the terms of this Section, shall be permanent. The provisions of
this Section are not exclusive and shall in no way limit the Company's
obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any shares of Preferred
Stock 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 Common Stock (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, the Initial Conversion Price (as
adjusted, if applicable) shall be designated in Section 5(d)(i) 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 made
pursuant to this Section 5(c)(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.
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(iii) If the Company, at any time while any shares of Preferred
Stock 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 Value of Common Stock at the
record date in the immediately following sentence, the Initial Conversion Price
designated in Section 5(d)(i) (as adjusted if applicable) shall be multiplied by
a fraction, 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, and 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 Value. Such adjustment
shall be made 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 in the Initial Conversion Price pursuant to this
Section 5(c)(iii), if any such right or warrant shall expire and shall not have
been exercised, the Initial Conversion Price shall immediately upon such
expiration be recomputed and effective immediately upon such expiration be
increased to the price which it would have been (but reflecting any other
adjustments in the Initial Conversion Price made pursuant to the provisions of
this Section 5 after the issuance of such rights or warrants) had the adjustment
of the Initial Conversion Price made upon the issuance of such rights or
warrants been made 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) If the Company, at any time while shares of Preferred
Stock are outstanding, shall distribute to all holders of Common Stock (and not
to holders of Preferred Stock) evidences of its indebtedness or assets or rights
or warrants to subscribe for or purchase any security (excluding those referred
to in Sections 5(c)(ii) and (iii) above), then in each such case the Initial
Conversion Price at which each share of Preferred Stock
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shall thereafter be convertible shall be determined by multiplying the Initial
Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction the denominator of which shall be the Per Share Market Value of Common
Stock determined as of such record date, and the numerator of which shall be
such Per Share Market Value 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; provided, however, that in the event of a
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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
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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
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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. In either
case the adjustments shall be described in a statement provided to the holders
of Preferred Stock of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
(v) 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.
(vi) Whenever the Initial Conversion Price is adjusted pursuant
to Section 5(c)(ii),(iii) or (iv), the Company shall instruct the Transfer Agent
to promptly mail to each holder of Preferred Stock, a notice setting forth the
Initial Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
(vii) 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 Preferred Stock 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
Preferred Stock 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 Preferred Stock 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
Preferred Stock at a price per share equal to the product of (i) the
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average Per Share Market Value for the five (5) Trading Days immediately
preceding (1) the effective date or the date of the closing of such transaction,
as the case may be, of the reclassification, consolidation, merger, sale,
transfer or share exchange the triggering such redemption right or (2) the date
of payment in full by the Company of the redemption price hereunder, whichever
is greater, and (ii) the Conversion Ratio 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(c).
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 Preferred
Stock the right to receive the securities, cash or property set forth in this
Section 5(c)(vii) upon any conversion or redemption following such
consolidation, merger, sale, transfer or share exchange. This provision shall
similarly apply to successive reclassifications, consolidations, mergers, sales,
transfers or share exchanges. Notwithstanding the foregoing, if upon the
effectiveness of any business combination to which the Company is a party and
from which the Company is not the surviving entity, if (i) the holders of the
Common Stock immediately prior to the effectiveness of such business combination
beneficially own (as determined under Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), in the
aggregate, 66-2/3% or more of the voting power of such surviving entity and (ii)
no Person or group (as described in Rule 13d-5(d) promulgated under the Exchange
Act) who was not a holder of the Common Stock immediately prior to such business
combination beneficially owns in excess of 16-2/3% of the voting power of such
surviving entity, then the holders of the Preferred Stock shall only be entitled
to elect the conversion set forth in (A) above.
(viii) If:
A. the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than a
subdivision of the outstanding shares of Common
Stock); or
B. the Company shall declare a special nonrecurring
cash dividend on or authorize a repurchase or
redemption of more than 10,000 shares of its then
outstanding Common Stock, other than a repurchase
or redemption of the Common Stock of an employee
upon termination of employment with the Company
for any reason; or
C. the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to
subscribe for or purchase any shares of capital
stock of any class or of any rights; or
-11-
D. the approval of any stockholders of the Company
shall be required in connection with any
reclassification of the Common Stock (other than a
subdivision or combination of then outstanding
shares of Common Stock), any consolidation or
merger to which the Company is a party, any sale
or transfer of all or substantially all of the
assets of the Company, or any compulsory share
exchange whereby the Common Stock is converted
into other securities, cash or property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up
of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Preferred Stock, and shall cause to be mailed to
the holders of Preferred Stock at their last addresses as shall appear upon the
stock books of the Company, at least 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.
(e) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Preferred Stock and payment of dividends on
Preferred Stock, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the holders of
Preferred Stock, such number of shares of Common Stock as shall be issuable upon
the conversion of all outstanding shares of Preferred Stock and payment of
dividends hereunder. 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.
(f) 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
-12-
payment in respect of any final fraction of a share based on the Per Share
Market Value at such time. If the Company elects not to, or is unable to, make
such a cash payment, the holder of a share of Preferred Stock shall be entitled
to receive, in lieu of the final fraction of a share, one whole share of Common
Stock.
(g) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock 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 Preferred
Stock so converted.
(h) Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
undesignated preferred stock.
(i) Any and all notices or other communications or deliveries to be
provided by a holder of Preferred Stock 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, at the address set forth on the Book
Entry Transfer Agent Agreement. 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 Preferred Stock 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 date of 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.
-13-
Section 6. Redemptions.
-----------
(a)(i) The Company shall have the right, exercisable at any time upon
20 Trading Days notice to the holders of the Preferred Stock (the "Optional
--------
Redemption Notice"), to redeem, from funds legally available therefor at the
- -----------------
time of such redemption, all or any portion of the shares of Preferred Stock
which have not been previously converted or redeemed at a price per share (the
"Optional Redemption Price") equal to the product of (i) the average Per Share
-------------------------
Market Value for the five Trading Days immediately preceding (1) the 20th
Trading Day after the date of the Optional Redemption Notice or (2) the date of
payment in full by the Company of the Optional Redemption Price, whichever is
greater, and (ii) the Conversion Ratio calculated on the 20th Trading Day after
the Optional Redemption Notice. The entire Optional Redemption Price shall be
paid in cash.
(ii) The holders of Preferred Stock shall have the right to
continue to convert shares of Preferred Stock hereunder (and the Company shall
honor such conversions) at any time from the date of the Optional Redemption
Notice through the 15th Trading Day thereafter.
(iii) On the 16th Trading Day after the date of the Optional
Redemption Notice, each holder of Preferred Stock shall deliver to the Transfer
Agent the shares of Preferred Stock owned by it and subject to the Optional
Redemption Notice that have not been previously tendered for conversion and the
Company shall deliver to the Transfer Agent in escrow for the benefit of each
such holder a sum (the "Escrowed Amount") equal to the product of (i) the
---------------
average Per Share Market Value for the five (5) Trading Days immediately
preceding the 15th Trading Day after the date of the Optional Redemption Notice
and (ii) the Conversion Ratio calculated on the 15th Trading Day after the
Optional Redemption Notice, multiplied by the number of shares of Preferred
Stock tendered by or on behalf of such holder for redemption in accordance with
the provisions hereof.
(iv) On the 20th Trading Day after the date of the Optional
Redemption Notice the Transfer Agent shall pay to the each holder the Escrowed
Amount applicable to the shares of Preferred Stock which were tendered by or on
behalf such holder for redemption in accordance with the provisions hereof and
the Company shall pay to such holder the Optional Redemption Price multiplied by
the number of shares of Preferred Stock subject to the redemption provisions
hereof, minus the Escrowed Amount.
(b) On the third year anniversary of the Original Issue Date (the
"Mandatory Redemption Date"), the Company shall redeem, from funds legally
- --------------------------
available therefor at the time of such redemption, all shares of Preferred Stock
which have not previously been converted or redeemed at a price per share (the
"Mandatory Redemption Price") equal to the product of (i) the average Per Share
- ---------------------------
Market Value for the five (5) Trading Days immediately preceding (1) the
Mandatory Redemption Date or (2) the date of payment in full by the Company of
the Mandatory
-14-
Redemption Price, whichever is greater, and (ii) the Conversion Ratio calculated
on the Mandatory Redemption Date. The entire Mandatory Redemption Price shall
be paid in cash.
(c) If the Optional Redemption Price shall not be paid in full within
three Trading Days of the 20th Trading Day after the date of the Optional
Redemption Notice, or the Mandatory Redemption Price shall not be paid in full
within three Trading Days of the Mandatory Redemption Date, the Company shall
pay as liquidated damages and not as a penalty the sum of $7,500 per day in cash
until the Optional Redemption Price or Mandatory Redemption Price, as the case
may be, 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
Redemption Price or Mandatory Redemption Price, as the case may be, within the
applicable three Trading Day period set forth above, then any holder of
Preferred Stock that was subject to such redemption may demand that the Company
(i) convert all or any portion of the shares of its Preferred Stock for which
the Optional Redemption Price or Mandatory Redemption Price, as the case may be,
shall not have been paid (the "Unpaid Portion") at a Conversion Price calculated
--------------
as at the date of the Optional Redemption Notice (in the case of optional
redemptions) or the Mandatory Redemption Date (in the case of a mandatory
redemption), as the case may be, or the date of such conversion, whichever is
lower, or (ii) promptly issue to such holder new certificates representing
shares of Preferred Stock in a number equal to the Unpaid Portion.
(b) Notwithstanding anything to the contrary contained herein, the
Company may not deliver an Optional Redemption Notice and may not pay the
Mandatory Redemption Price unless it has received (and furnished to the each
holder evidence thereof reasonably satisfactory to it of) prior written consent
of BNY 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:
"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.
-15-
"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 Ratio" means, at any time, the quotient obtained by
----------------
dividing the Stated Value plus accrued but unpaid dividends, but only to the
extent not paid in shares of Common Stock pursuant to the terms hereof, by the
Conversion Price at such time.
"Debentures" means the 5% Convertible Debentures delivered by the
----------
Company pursuant to the Purchase Agreement.
"Junior Securities" means the Common Stock and all other equity
-----------------
securities of the Company.
"Original Issue Date" shall mean the date of the first issuance of any
-------------------
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing
----------------------
bid 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 if there is no such bid price on such date, then
the last closing bid price on such exchange on the date nearest preceding such
date, as reported on Bloomberg, L.P., or (b) if the Common Stock is not listed
on the Nasdaq National Market or any stock exchange, the closing bid 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.
"Purchase Agreement" means the Convertible Debenture Purchase
------------------
Agreement, dated as of January 28, 1997, between the Company and the original
holders of the Preferred
-16-
Stock, as superseded by the Amended and Restated Convertible Debenture and
Convertible Preferred Stock Purchase Agreement, dated as of March 18, 1997.
"Receivables Agreement" means the Accounts Receivable Management and
---------------------
Security Agreement, dated as of July 31, 1995, among the Company and BNY.
"Trading Day" means (a) a day on which the Common Stock is traded on
-----------
the Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the over-the-
counter market, as reported by the Nasdaq Stock Market, or (c) if the Common
Stock is not listed on the American Stock Exchange, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices).
"Underlying Shares" means the number of shares of Common Stock into
-----------------
which the Shares are convertible in accordance with the terms hereof and the
Purchase Agreement.
Section 8. Subordination.
-------------
(a) The Preferred Stock 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 Preferred Stock.
Cash payments contemplated by Sections 5(a)(ii), 5(c) and 5(d) hereof, to the
extent such payments do not exceed, in the aggregate, $500,000, may be made by
the Company to (and retained by) the holders of Preferred Stock 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 5(a)(ii), 5(c) or 5(d) hereof, to the extent that such
payments, in the aggregate, exceed $500,000, may be made by the Company to (and
retained by) the holders of the Preferred Stock 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
-17-
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 Preferred
Stock to convert Debentures into shares of Common Stock and to receive payment
of dividends hereunder in shares of Common Stock, including after such time as
any Event of Default shall be declared under the Convertible Debentures.
(b) Should any payment, other than payments contemplated in Section
8(a) above, be received by the a holder of the Preferred Stock, such payment
shall be held in trust by such holder for the benefit of BNY and shall be
delivered forthwith to BNY for application to BNY Bank Obligations, in the form
received with any necessary endorsement or assignment.
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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
-18-
IN WITNESS WHEREOF, YES! Entertainment Corporation has caused its
corporate seal to be hereunto affixed and this certificate to be signed by
Donald D. Kingsborough, its Chief Executive Officer, and attested by Bruce
Bower, its Secretary, this 18th day of March, 1997.
YES! ENTERTAINMENT CORPORATION
By: /s/ Donald D. Kingsborough
------------------------------------------
Name: Donald D. Kingsborough
Title: Chief Executive Officer
Attest:
By: /s/ Bruce D. Bower
----------------------------------------------------
Name: Bruce D. Bower
Title: Executive Vice President,
General Counsel and Secretary
-19-
EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registration Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series A 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. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
______________________________________________________
Date to Effect Conversion
______________________________________________________
Number of shares of Preferred Stock to be Converted
______________________________________________________
Number of shares of Common Stock to be Issued
______________________________________________________
Applicable Conversion Price
______________________________________________________
Signature
______________________________________________________
Name:
______________________________________________________
Address:
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested hereby),
notify the converting holder by facsimile of the number of shares of Common
Stock outstanding on such date and the number of shares of Common Stock which
would be issuable to the holder if the conversion requested in this conversion
notice were effected in full, whereupon, if the Company determines that such
conversion would result in it owning in excess of 4.9% of the outstanding shares
of Common Stock on such date, the Company shall convert up to an amount equal to
4.9% of the outstanding shares of Common Stock and issue to the holder one or
more certificates representing shares of Preferred Stock which have not been
converted as a result of this provision.
EXHIBIT B
YES! ENTERTAINMENT CORPORATION
NOTICE OF CONVERSION
AT THE ELECTION OF THE COMPANY
The undersigned in the name and on behalf of YES! Entertainment Corporation (the
"Company") hereby notifies the addressee hereof that the Company hereby elects
to exercise its right to force the conversion of the shares of Series A
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.001 per share (the "Common Stock"), of the Company according to the
conditions hereof, as of the date written below. No fee will be charged to the
holder for any conversion hereunder, except for such transfer taxes, if any,
which may be incurred by the Company if shares are to be issued in the name of a
person other than the person to whom this notice is addressed.
Conversion calculations:
______________________________________________________
Date to Effect Conversion
______________________________________________________
Number of shares of Preferred Stock to be Converted
______________________________________________________
Number of shares of Common Stock to be Issued
______________________________________________________
Number of shares of outstanding at the close of trading
on Conversion Date
______________________________________________________
Applicable Conversion Price
______________________________________________________
Signature
______________________________________________________
Name:
______________________________________________________
Address: