EXHIBIT 4.3 ================================================================================ AMENDED AND RESTATED CONVERTIBLE DEBENTURE AND CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT Between YES! ENTERTAINMENT CORPORATION, INFINITY INVESTORS LIMITED and FAIRWAY CAPITAL LIMITED ______________________________ Dated as of March 18, 1997 ______________________________ ================================================================================ TABLE OF CONTENTS ----------------- Page ---- ARTICLE I CERTAIN DEFINITIONS........................ 1 Section 1.1. Certain Definitions.................. 1 ARTICLE II PURCHASE OF SHARES......................... 5 Section 2.1. Purchase of Convertible Debentures; Closing.............................. 5 ARTICLE III REPRESENTATIONS AND WARRANTIES............. 6 Section 3.1. Representations and Warranties of the Company.............................. 6 Section 3.2. Representations and Warranties of the Purchasers........................... 11 ARTICLE IV OTHER AGREEMENTS OF THE PARTIES............ 14 Section 4.1. Transfer Restrictions................ 14 Section 4.2. Stop Transfer Instruction............ 15 Section 4.3. Furnishing of Information............ 15 Section 4.4. Copies and Use of Disclosure Materials............................ 16 Section 4.5. Blue Sky Laws........................ 16 Section 4.6. Integration.......................... 16 Section 4.7. Certain Agreements................... 16 Section 4.8. Purchaser Ownership of Common Stock.. 17 Section 4.9. Listing of Underlying Shares......... 17 Section 4.10. Purchaser's Rights if Trading in Common Stock is Suspended or Delisted 17 Section 4.11. No Violation of Applicable Law....... 18 Section 4.12. Repurchase Restrictions.............. 18 Section 4.13. Legal Opinion........................ 19 Section 4.14. Notice of Breaches................... 19 Section 4.15. The Warrants......................... 19 Section 4.16. Conversion Procedures................ 19 Section 4.17. Transfer Agent....................... 20 Section 4.18. Right of First Refusal............... 20 Section 4.19. Restriction on Debt.................. 21 ARTICLE V MISCELLANEOUS.............................. 21 Section 5.1. Fees and Expenses.................... 21 Section 5.2. Entire Agreement; Amendments......... 21 Section 5.3. Notices.............................. 21 Section 5.4. Amendments; Waivers.................. 23 Section 5.5. Headings............................. 23 Section 5.6. Successors and Assigns............... 23 Section 5.7. No Third-Party Beneficiaries......... 23 Section 5.8. Governing Law........................ 23 Section 5.9. Survival............................. 23 -i- Page ---- Section 5.10. Counterpart Signatures............... 24 Section 5.11. 24 Publicity......................... 24 Section 5.12. Severability......................... 24 Section 5.13. Remedies............................. 24 Exhibit A Form of 5% Convertible Debenture Exhibit B Form of Certificate of Designation Exhibit C Form of Registration Rights Agreement Exhibit D Form of Wilson Sonsini Goodrich & Rosati, P.C. Legal Opinion Exhibit E(1) Form of Fairway Warrant Exhibit E(2) Form of Infinity Warrant Exhibit F Conversion Procedures Schedule 2.1(b) Debentures and Warrants Schedule 3.1(c) Capitalization Schedule 3.1(f) Consents and Approvals Schedule 3.1(g) Litigation -ii- AMENDED AND RESTATED CONVERTIBLE DEBENTURE AND CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, dated as of March 18, 1997 (this "Agreement"), by and --------- among YES! Entertainment Corporation, a Delaware corporation (the "Company"), ------- Infinity Investors Limited, a corporation organized and existing under the laws of Nevis, West Indies ("Infinity") and Fairway Capital Limited, a corporation organized and existing under the laws of Nevis, West Indies ("Fairway"). Infinity and Fairway are each a "Purchaser" and are collectively, the --------- "Purchasers". - ----------- WHEREAS, the Company and the Purchasers are parties to that certain Convertible Debenture Purchase Agreement, dated as of January 28, 1997 (the "January Purchase Agreement"), pursuant to which, among other things, (i) the - --------------------------- Company issued and sold to the Purchasers an aggregate of $10,000,000 principal amount of the Company's 5% Convertible Debentures, due January 28, 2000 (collectively, the "January Debentures") and (ii) the Company delivered an ------------------ aggregate of 300,000 Common Stock purchase Warrants (collectively, the "January ------- Warrants"); - -------- WHEREAS, the Company and the Purchasers desire to supersede in their entirety all of the January Debentures and January Warrants with $1,566,667 aggregate principal amount of 5% Convertible Debentures, shares of a to be created series of convertible preferred stock of the Company with an aggregate stated value of $8,500,000 and newly issued Common Stock purchase warrants; WHEREAS, the Company and the Purchasers have agreed to supersede the January Purchase Agreement in its entirety hereby to effectuate the understandings and agreements set forth above; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: ARTICLE I CERTAIN DEFINITIONS ------------------- Section 1.1. Certain Definitions. As used in this Agree ment, and ------------------- unless the context requires a different meaning, the following terms have the meanings indicated: "Affiliate" means, with respect to any Person, any Person that, --------- directly or indirectly, controls, is controlled by or is under common control with such Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and ------- ------------- "under common control with") shall mean the possession, directly or indirectly, ------------------------- of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Appraiser" means a nationally recognized or major regional investment --------- banking firm or firm of independent certified public accountants of national standing retained to determine the Warrant Repurchase Price in accordance with the terms hereof. "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 except Saturday, Sunday and any day which ------------ shall be a legal holiday or a day on which banking institutions in the state of New York or the State of California are authorized or required by law or other government actions to close. "Certificate of Designation" means the certificate of designation, -------------------------- substantially in the form of Exhibit B attached hereto, the final form of which --------- is subject to the approval by the Purchasers, which is to be filed by the Company with the Secretary of State of the State of Delaware on or prior to the Closing Date. "Commission" means the Securities and Exchange Commission. ---------- "Common Stock" means the Company's common stock, par value $.001 per ------------ share. "Convertible Debentures" means the Company's 5% Convertible ---------------------- Debentures, due January 28, 2000, in the form attached -2- hereto as Exhibit A, to be issued in accordance with and subject to the terms --------- and conditions hereof. "Disclosure Materials" means, collectively, the SEC Documents and the -------------------- Schedules to this Agreement furnished by or on behalf of the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "Lien" means, with respect to any asset, any mortgage, lien, pledge, ---- encumbrance, right of first refusal, charge or security interest of any kind in or on such asset or the revenues or income thereon or therefrom. "Material Adverse Effect" shall have the meaning set forth in Section ----------------------- ------- 3.1(a). - ------ "Person" means an individual or a corporation, partnership, trust, ------ incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Preferred Stock" means the shares of the Company's Series A --------------- Convertible Preferred Stock, par value $.001 per share, with the respective rights, preferences and privileges set forth in the Certificate of Designation. "Receivables Agreement" means the Accounts Receivable Management and --------------------- Security Agreement, dated as of July 31, 1995, among the Company and BNY. "Registration Rights Agreement" means the Registration Rights ----------------------------- Agreement, dated as of January 28, 1997, by and between the Company and the Purchasers, as amended by the Amended and Restated Registration Rights Agreement of even date herewith, in the form attached hereto as Exhibit C, as the same may --------- be amended, supplemented or otherwise modified in accordance with its terms. "SEC Documents" shall have the meaning set forth in Section 3.1(k). ------------- -------------- "Securities Act" means the Securities Act of 1933, as amended. -------------- "Shares" shall have the meaning set forth in Section 2.1(a). ------ -3- "Subsidiaries" shall have the meaning set forth in Section 3.1(a). ------------ -------------- "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). "Transaction Documents" shall have the meaning set forth in Section --------------------- ------- 3.1(b). - ------ "Transfer Agent" shall have the meaning set forth in Section 4.17. -------------- ------------ "Transfer Agent Agreement" means the Book Entry Transfer Agent ------------------------ Agreement, dated as of the date hereof, between the Company, the Purchasers and the Transfer Agent. "Underlying Securities Registration Statement" means a registration -------------------------------------------- statement contemplated by the Registration Rights Agreement and relating to the Underlying Shares and Warrant Shares. "Underlying Shares" means the shares of Common Stock issuable upon the ----------------- conversion of the Convertible Debentures and the Shares in accordance with their terms and the Certificate of Designation. "Warrant Exercise Price" means the lesser of (a) $7.875 and (b) 125% ---------------------- of the average of the lowest Per Share Market Values for any five (5) consecutive Trading Days during the 60 Trading Days following the Closing Date. "Warrant Repurchase Price" with respect to any Warrant delivered ------------------------ hereunder shall equal (A) if the average Per Share Market Value for the five Trading Days immediately preceding the date of the notice triggering a repurchase hereunder or the date of payment in full of the repurchase price calculated under Section 4.10, whichever is greater, is greater than the Warrant ------------ Exercise Price, then the product of (1) the number of shares of Common Stock issuable upon exercise in full of such Warrant (less such number of -4- shares of Common Stock as shall have been previously issued upon conversion of such Warrant) and (2) the average Per Share Market Value for the five Trading Days immediately preceding (a) the date of the notice triggering such repurchase or (b) the date of payment in full of the repurchase price calculated under Section 4.10, whichever is greater, less the Warrant Exercise Price; or (B) if - ------------ the average Per Share Market Value for the five Trading Days immediately preceding the date of the notice triggering such repurchase or the date of payment in full of such repurchase price, whichever is greater, is less than or equal to the Warrant Exercise Price, then such amount as is determined in good faith by the Purchasers, provided that, if the Company notifies the Purchasers within 10 Business Days of its receipt of such Purchaser valuation that it disagrees with such valuation, within 10 Business Days of such Company notice, an Appraiser mutually acceptable to each of the Purchasers and the Company shall determine such amount; provided, however, if the Company and the Purchasers fail -------- ------- to appoint such mutually acceptable Appraiser within 10 Business Days of the expiration of such 10 day period, each of the Company and the Purchasers shall appoint an Appraiser, who (within 10 Business Days of such appointment) shall appoint a third Appraiser to determine conclusively the repurchase price for such Warrant, with the fees and disbursements of any such Appraiser being shared equally by the Company and the Purchasers. "Warrants" shall have the meaning set forth in Section 4.15. -------- ------------ "Warrant Shares" shall have the meaning set forth in Section 3(d). -------------- ------------ ARTICLE II PURCHASE OF SHARES ------------------ Section 2.1. Purchase of Convertible Debentures; Closing. ------------------------------------------- (a) Subject to the terms and conditions set forth in this Agreement, the Company shall issue and sell to the Purchasers, and the Purchasers shall purchase (i) an aggregate principal amount of $1,566,667 of Convertible Debentures and (ii) an aggregate of 85,000 shares of Preferred Stock (the "Shares"), having the respective rights, preferences and privileges set forth in ------ the Certificate of Designation, for an aggregate purchase price of $10,000,000 plus interest from the date of the January Purchase Agreement until the date hereof (the "Purchase Price"). -------------- -5- (b) The Closing. ----------- (i) The closing of the purchase and sale of the Convertible Debentures, Shares and Warrants (the "Closing") shall take place at the offices ------- of Robinson Silverman Pearce Aronsohn & Berman LLP, 1290 Avenue of the Americas, New York, New York 10104, immediately following the execution hereof, or at such other time and/or place as the Purchasers and the Company may agree. The date of the Closing is hereinafter referred to as the "Closing Date". ------------ (ii) At the Closing and in the manner described in the Transfer Agent Agreement, if applicable, (A) the Company shall deliver (i) the Debentures and Warrants and certificates representing the Shares to be issued and delivered to each Purchaser, as specified in Schedule 2.1(b) hereto, to the Persons (or as directed thereby), registered in the names and in the amounts set forth thereon, and (ii) to the Persons entitled thereto, all other documents, instruments and writings required to have been delivered at or prior to the Closing by the Company pursuant to this Agreement; (B) each Purchaser shall deliver to the Company (i) the January Debentures and January Warrants issued to such Purchaser (and shall deliver the January Warrants held by Brown Simpson, LLC) in connection with the closing of the transactions under the January Purchase Agreement and (ii) all documents, instruments and writings required to have been delivered at or prior to the Closing by such Purchaser pursuant to this Agreement. The Company acknowledges and agrees that the $10,000,000 paid it by the Purchasers at the closing of the transactions under the January Purchase Agreement shall constitute full payment of the Purchase Price for the Warrants, Shares and Convertible Debentures to be issued and sold to the Purchasers at the Closing pursuant to this Agreement, and no other consideration shall be due from the Purchasers at the Closing. For purposes of this Agreement, when used in connection with the Convertible Debentures, "Conversion Price," "Original Issue Date," "Conversion ---------------- ------------------- ---------- Date," "Conversion Ratio" and "Per Share Market Value" shall have the meanings - ---- ---------------- ---------------------- set forth in the Convertible Debentures and, when used in connection with the Preferred Stock such terms shall have the meanings set forth in the Certificate of Designation. -6- ARTICLE III REPRESENTATIONS AND WARRANTIES ------------------------------ Section 3.1. Representations and Warranties of the Company. The ------------------------------------- ------- Company hereby represents and warrants to the Purchasers as follows: (a) Organization and Qualification. The Company is a corporation, duly ------------------------------ incorporated, validly existing and in good standing under the laws of the State of Delaware, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. At the time the Company changed its state of incorporation from California to Delaware, the Company was in good standing under the laws of the State of California. The Company has no subsidiaries other than as set forth in the SEC Documents (collectively, the "Subsidiaries"). Each of the Subsidiaries is a ------------ corporation, duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, with the full corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not individually or in the aggregate have a material adverse effect on the results of operations, assets, prospects or financial condition of the Company and the Subsidiaries, taken as a whole (a "Material Adverse Effect"). ------------------------ (b) Authorization; Enforcement. The Company has the requisite -------------------------- corporate power and authority to enter into and to consummate the transactions contemplated hereby and by the Warrants, the Registration Rights Agreement, the Transfer Agent Agreement, the Convertible Debentures and the Certificate of Designation and otherwise to carry out its obligations hereunder and thereunder. This Agreement, the Registration Rights Agreement, the Transfer Agent Agreement, the Convertible Debentures, the Warrants and the Certificate of Designation are collectively referred to as the "Transaction Documents." The execution and --------------------- delivery of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company. Each Transaction Document has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company enforceable against the Company in -7- accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. (c) Capitalization. The authorized, issued and outstanding capital -------------- stock of the Company and each of the Subsidiaries is set forth in Schedule -------- 3.1(c). No shares of Common Stock are entitled to preemptive or similar rights. - ------ Except as specifically disclosed in Schedule 3.1(c), there are no outstanding --------------- options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or, except as a result of the purchase and sale of the Convertible Debentures, Shares and Warrants hereunder, securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate of incorporation, bylaws or other charter documents. (d) Issuance of Convertible Debentures, Shares and Warrants. The ------------------------------------------------------- Convertible Debentures have been duly and validly authorized for issuance, offer and sale pursuant to this Agreement and, when issued and delivered as provided hereunder against payment in accordance with the terms hereof, shall be valid and binding obligations of the Company enforceable in accordance with their terms free and clear of all Liens. The Shares are duly authorized and, when paid for in accordance with the terms hereof, shall be validly issued, fully paid and nonassessable. The Warrants are duly authorized, and when issued and paid for in accordance with the terms hereof, shall be validly issued, free and clear of all Liens. The Company has and at all times while the Convertible Debentures, Shares and Warrants are outstanding will maintain an adequate reserve of shares of Common Stock to enable it to perform its obligations under this Agreement, the Convertible Debentures, the Certificate of Designation and Warrants and in no circumstances shall such reserved and available shares of Common Stock be less than the sum of (i) two times the number of shares of Common Stock which would be issuable upon conversion in full of the aggregate principal amount of the Convertible Debentures and of the full number of Shares, assuming in each case such conversion occurred on the Original Issue Date (collectively the "Underlying Shares"), and (ii) the number of shares of Common Stock which would ----------------- be issuable upon exercise in full of the Warrants (the "Warrant ------- -8- Shares"). When issued in accordance with the terms hereof and the Convertible - ------- Debentures, the Certificate of Designation, the Underlying Shares will be duly authorized, validly issued, fully paid nonassessable, free and clear of all Liens; and when issued upon exercise of the Warrants in accordance with their respective terms, the Warrant Shares will be duly authorized, validly issued, fully paid, nonassessable and free and clear of all Liens. (e) No Conflicts. The execution, delivery and performance of the ------------ Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby do not and will not (i) conflict with or violate any provision of its certificate of incorporation or bylaws (each as amended through the date hereof) or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party or by which any property or asset of the Company is bound or affected, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including Federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected, except in the case of each of clauses (ii) or (iii), such conflicts, defaults, terminations, amendments, accel erations, cancellations and violations as could not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of any Transaction Document, (y) have a Material Adverse Effect or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under any Transaction Document. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the aggregate, do not have a Material Adverse Effect. (f) Consents and Approvals. Except as obtained prior to the execution ---------------------- hereof, neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) the filing with the Commission of an Underlying Securities Registration Statement contemplated by the Registration Rights Agreement and the making of the applicable blue-sky filings under state securities laws, each as contemplated by the Registration Rights Agreement, which shall be filed in the time periods set forth in the Registration Rights Agreement, (ii) the filing of the Certificate -9- of Designation with the Secretary of State of the State of Delaware, which shall occur prior to the Closing, and (iii) other than, in all other cases, where the failure to obtain such consent, waiver, authorization or order, or to give or make such notice or filing, could not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of any of the Transaction Documents, (y) have a Material Adverse Effect or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under any of the Transaction Documents. (g) Litigation; Proceedings. Except as specifically set forth in ----------------------- Schedule 3.1(g), there is no action, suit, notice of violation, proceeding or - --------------- investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective assets or properties before or by any court, governmental or administrative agency or regulatory authority (Federal, state, county, local or foreign) which (i) relates to or challenges the legality, validity or enforceability of the Transaction Documents, Underlying Shares or Warrant Shares (ii) could, individually or in the aggregate, if adversely determined, have a Material Adverse Effect or (iii) could, individually or in the aggregate, adversely impair the Company's ability to perform fully on a timely basis its obligations under the Transaction Documents. (h) No Default or Violation. Neither the Company nor any Subsidiary ----------------------- (i) is in default under or in violation of any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound, (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is in violation of any statute, rule or regulation of any governmental authority, except as could not, in any such case, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of any of the Transaction Documents, (y) have a Material Adverse Effect or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under the Transaction Documents. (i) Certain Fees. Except for $400,000 paid by the Company to ------------ Pennsylvania Merchant Group, no fees or commission will be payable by the Company to any broker, finder, investment banker or bank with respect to the consummation of the transactions contemplated hereby. (j) Private Offering. Assuming (without any independent investigation ---------------- or verification by or on behalf of the Company) the accuracy of the representations and warranties of the Purchasers set forth in Section 3.2, the ----------- offer and sale of the Convertible -10- Debentures, Shares, the Warrants, the Underlying Shares and the Warrant Shares are exempt from registration under Section 5 of the Securities Act of 1933, as amended (the "Securities Act"). Neither the Company nor any person acting on its -------------- behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of the Convertible Debentures or Shares under the Securities Act) which might subject the offering, issuance or sale of the Convertible Debentures, Shares, the Warrants, the Underlying Shares or the Warrant Shares to the registration requirements of Section 5 of the Securities Act. (k) SEC Documents. The Company has filed all forms, reports and ------------- documents required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (the foregoing reports being collectively referred to herein as the "SEC --- Documents") on a timely basis, or has received a valid extension of such time of - --------- filing. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder and none of the SEC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited and unaudited consolidated balance sheets of the Company and its Subsidiaries contained in the SEC Documents, and the related consolidated statements of income, changes in stockholders' equity and changes in cash flows for the periods then ended, including the footnotes thereto, except as indicated therein, have been prepared in accordance with generally accepted accounting principles consistently followed throughout the periods indicated, except that unaudited financial statements contained therein do not contain notes and may be subject to normal audit adjustments and normal annual adjustments and fairly present the financial condition of the Company and its consolidated Subsidiaries as of and for the dates thereof and, except as indicated therein, reflects all claims against and all material debts and liabilities of the Company and its consolidated Subsidiaries, fixed or contingent, as at and for the dates thereof; and the related statements of income, stockholders' equity and changes in cash flows fairly present the results of the operations of the Company and its consolidated Subsidiaries and the changes in financial position for the period indicated. Since the date of the financial statements included in the Company's last filed Quarterly Report on Form 10-Q, there has been no event, occurrence or development that has had a Material -11- Adverse Effect which is not specifically disclosed in any of the Disclosure Materials. (l) Form S-3 Eligibility. The Company is eligible to register for -------------------- resale securities with the Commission under Form S-3 promulgated under the Securities Act. (m) Investment Company. The Company is not, and following the Closing ------------------ and issuance of the Convertible Debentures and the Shares will not be, nor is it an Affiliate of an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (n) Solicitation Materials. The Company has not (i) distributed any ---------------------- offering materials in connection with the offering and sale of the Convertible Debentures, the Shares, the Warrants, the Underlying Shares or the Warrant Shares other than the Disclosure Materials or (ii) solicited any offer to buy or sell the Convertible Debentures, the Shares, the Warrants, the Underlying Shares or the Warrant Shares by means of any form of general solicitation or advertising. (o) Margin Requirements. The Company does not intend to, and will not, -------------------- use the proceeds of the offer and sale of the Convertible Debentures, Shares and Warrants hereunder, directly or indirectly, immediately, incidentally or ultimately, (i) to purchase or carry Margin Stock (as such term is defined under Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time) or to extend credit to others for the purpose of purchasing or carrying Margin Stock or to refund indebtedness originally incurred for such purpose, or (ii) for any purpose which entails a violation of, or which is inconsistent with, the provisions of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System. Section 3.2. Representations and Warranties of the Purchasers. Each ------------------------------------------------ of the Purchasers, severally and not jointly, hereby represents and warrants to the Company as follows: (a) Organization; Authority. Such Purchaser is a corporation duly ----------------------- incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation with the requisite corporate power and authority to enter into and to consummate the transactions contemplated hereby and by the Registration Rights Agreement, Transfer Agent Agreement and otherwise to carry out its obligations hereunder and thereunder. The acquisition of the Convertible Debentures and Shares to be purchased by such Purchaser hereunder has been duly authorized by all necessary action on the part of such Purchaser. Each of this -12- Agreement and the Registration Rights Agreement has been duly executed and delivered by such Purchaser and constitutes the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other general principles of equity. (b) Investment Intent. Such Purchaser is acquiring the Convertible ----------------- Debentures, Shares and the Warrant to be purchased by it hereunder, and the Underlying Shares and the Warrant Shares relating to such Convertible Debentures, Shares and Warrants, for its own account for investment purposes only and not with a view to or for distributing or reselling such Convertible Debentures, Shares, Underlying Shares, Warrant or Warrant Shares or any part thereof or interest therein, without prejudice, however, to such Purchaser's right, subject to the provisions of this Agreement and the Registration Rights Agreement, at all times to sell or otherwise dispose of all or any part of such Convertible Debentures, Shares, Underlying Shares, Warrant or Warrant Shares pursuant to under an effective registration statement under the Securities Act or pursuant to an available exemption from the registration requirements thereunder and in compliance with applicable state securities laws. (c) Purchaser Status. At the time such Purchaser was offered the ---------------- Convertible Debentures, Shares and Warrant to be acquired by it hereunder, it was and at the date hereof, it is, and at each date it exercises Warrants it will be, an "accredited investor" as defined in Rule 501(a) under the Securities Act. (d) Investment Company. The Purchaser is not, and following the ------------------ Closing and issuance of the Convertible Debentures and Shares will not be, nor is it an Affiliate of an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (e) Experience of Purchaser. Such Purchaser, either alone or together ----------------------- with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of an investment in the securities to be acquired by it hereunder, and has so evaluated the merits and risks of such investment. (f) Ability of Purchaser to Bear Risk of Investment. Such Purchaser is ----------------------------------------------- able to bear the economic risk of an investment in the securities to be acquired by it hereunder and, at the pre sent time, is able to afford a complete loss of such investment. -13- (g) Prohibited Transactions. The securities to be acquired by such ----------------------- Purchaser hereunder are not being acquired, directly or indirectly, with the assets of any "employee benefit plan", within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. (h) Access to Information. Such Purchaser acknowledges receipt of the --------------------- Disclosure Materials and further acknowledges that it has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the securities offered hereunder and the merits and risks of investing in such securities; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment in such securities; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment and to verify the accuracy and completeness of the information contained in the Disclosure Materials. (i) Reliance. Such Purchaser understands and acknowledges that (i) the -------- Convertible Debentures, the Shares and the Warrants being offered and sold to it hereunder are being offered and sold without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act under Regulation D promulgated thereunder and (ii) the availability of such exemption, depends in part on, and that the Company will rely upon the accuracy and truthfulness of, the foregoing representations and such Purchaser hereby consents to such reliance. The Company acknowledges and agrees that the Purchasers make no representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 3.2. ----------- ARTICLE IV OTHER AGREEMENTS OF THE PARTIES ------------------------------- Section 4.1. Transfer Restrictions. (a) If any Purchaser should --------------------- decide to dispose of any portion of the principal amount of the Convertible Debentures, any of the Shares or any portion of the Warrant to be purchased by it hereunder (and upon conversion or exercise thereof, any Underlying Shares or Warrant -14- Shares, as applicable), such Purchaser understands and agrees that it may do so only (i) pursuant to an effective registration statement under the Securities Act, (ii) to the Company or (iii) pursuant to an available exemption from registration under the Securities Act. No Purchaser may dispose of any portion of such securities pursuant to clause (iii) in the immediately prior sentence unless such Purchaser provides prior written notice thereof to the Company and complies with the provisions of the immediately following sentence. In connection with any transfer of any Convertible Debentures, Warrants, Underlying Shares or Warrant Shares other than pursuant to an effective registration statement or to the Company, the Company may require that the transferor provide to the Company an opinion of counsel experienced in the area of United States securities laws selected by the transferor, the form and substance of which opinion shall be reasonably satis factory to the Company, to the effect that such transfer of such Convertible Debentures, Shares, Warrants, Underlying Shares or Warrant Shares, as the case may be, is being made in compliance with the Securities Act. (b) The Purchasers agree to the imprinting, so long as required by the terms of this Section 4.1(b), of the following legend on certificates representing the Convertible Debentures, the Shares, the Underlying Shares, the Warrants and the Warrant Shares to be modified as applicable: NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE [OR EXERCISABLE] HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER, AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. [THIS WARRANT IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN AN AMENDED AND RESTATED CONVERTIBLE DEBENTURE AND CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, DATED AS OF MARCH 18, 1997, BETWEEN THE COMPANY AND THE ORIGINAL HOLDER HEREOF. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF YES! ENTERTAINMENT CORPORATION.] The legend set forth above shall be removed upon the conversion of Convertible Debentures or Shares or exercise of Warrants represented by such certificate at any time after an Underlying Securities Registration Statement has been declared, and -15- so long as such Underlying Securities Registration Statement remains effective under the Securities Act or, if not converted during such time, at such other time as in the opinion of counsel to the Company experienced in the area of United States securities laws such legend is no longer required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The certificates representing the Convertible Debentures, Shares, Warrants, Underlying Shares and Warrant Shares shall also bear any other legends required by applicable Federal or state securities laws, which legends may be removed as set forth above in the immediately preceding sentence, or, with respect to legends required pursuant to state securities laws, when such legends are no longer required under the applicable requirements of such securities laws. The Company agrees that it will provide each Purchaser, upon request, with a substitute certificate or certificates, free from such legend at such time as such legend is no longer applicable. Each Purchaser agrees that, in connection with any transfer of Underlying Shares or Warrant Shares by it pursuant to an effective registration statement under the Securities Act, such Purchaser will comply with all applicable prospectus delivery requirements of the Securities Act. The Company makes no representation, warranty or agreement as to the availability of any exemption from registration under the Securities Act with respect to any resale of the Convertible Debentures, Shares, Underlying Shares, Warrants or Warrant Shares. Section 4.2. Stop Transfer Instruction. For so long as an ------------------------- Underlying Securities Registration Statement is effective, the Company may not issue any stop transfer instruction or make any notation on its records with respect thereto to any transfer agent (including the Transfer Agent) of the Company and shall issue shares of Common Stock upon a conversion of Convertible Debentures or Shares or exercise of Warrants in accordance with Section 4.1. Section 4.3. Furnishing of Information. (a) As long as any ------------------------- Purchaser owns Convertible Debentures, Shares, Underlying Shares, Warrants or Warrant Shares, the Company covenants to timely file (or obtain extensions in respect thereof) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act and to promptly furnish each Purchaser with true and complete copies of all such filings. If the Company is not at the time required to file reports pursuant to such sections, it will prepare and furnish to each Purchaser annual and quarterly financial statements, together with a discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act in the time period that such filings -16- would have been required to have been made under the Exchange Act. (b) The Company shall deliver copies to the Purchasers of any documents or financial statements it delivers to BNY pursuant to Section 11(a), 11(b) or 11(c/d) of the Receivables Agreement concurrently with such delivery to BNY, provided that the Company shall not be obligated to deliver the accountant's consent required under Section 11 of the Receivables Agreement and shall not deliver to the Purchasers the other materials it is required to deliver to BNY under such Section 11. Section 4.4. Copies and Use of Disclosure Materials. The Company -------------------------------------- consents to the use of the SEC Documents, and any amendments and supplements thereto, by the Purchasers in connection with resales of the Underlying Shares or the Warrant Shares to the extent such resales are not pursuant to an effective registration statement. Section 4.5. Blue Sky Laws. The Company shall qualify the Underlying ------------- Shares and the Warrant Shares under the securities or Blue Sky laws of such jurisdictions as each Purchaser may request and shall continue such qualification at all times through the third anniversary of the Closing Date; provided, however, that the Company shall not be required in connection - -------- ------- therewith to qualify as a foreign corporation where it is not now so qualified, or take any action that would subject the Company to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject. Section 4.6. Integration. The Company shall not and shall use its ----------- best efforts to ensure that no Affiliate shall sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Convertible Debentures, the Shares, the Warrants, the Underlying Shares or the Warrant Shares in a manner that would require the registration under the Securities Act of the sale of the Convertible Debentures, the Shares, the Warrants, the Underlying Shares or the Warrant Shares to the Purchasers. Section 4.7. Certain Agreements. From the date hereof through the ------------------ third anniversary hereafter, the Company shall not and shall cause the Subsidiaries not to, without the consent of the Purchasers, (i) amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Purchasers under the Transaction Documents; (ii) repay, repurchase or offer to repay, repurchase or otherwise acquire in -17- excess of 10,000 shares of its Common Stock, other than shares which may be repurchased from employees of the Company in connection with the termination of their employment with the Company; or (iii) enter into any agreement with respect to any of the foregoing. The Company may not force any conversion or call a redemption of any portion of the principal amount of the Convertible Debentures until such time as all of the Shares have been converted or redeemed in accordance with the terms hereof and the Certificate of Designation. Section 4.8. Purchaser Ownership of Common Stock. No Purchaser may ----------------------------------- use its ability to convert the Convertible Debentures or Shares issued to it hereunder or to use its ability to acquire shares of Common Stock upon exercise of the Warrant to be issued to it pursuant to the terms hereof to the extent that such conversion or exercise would result in that Purchaser beneficially owning (for purposes of Rule 13d-3 under the Exchange Act) more than 4.9% of the outstanding shares of the Common Stock; provided, however, that the provisions -------- ------- of this Section 4.8 shall not apply to any forced conversion by the Company pursuant to Section 4(b) of the Convertible Debentures or pursuant to Section 5(b) of the Certificate of Incorporation and, provided, further, that if 10 days -------- ------- have elapsed since a Purchaser shall have declared an "Event of Default" (as such term is defined in the Convertible Debentures), the provisions of this Section 4.8 shall be null and void ab initio. - ----------- ------ Section 4.9. Listing of Underlying Shares. The Company shall, within ---------------------------- seven (7) Business Days of the Closing Date, file with the Nasdaq Stock Market an additional shares listing application covering the listing of an aggregate of 4,325,591 Underlying Shares and Warrant Shares and shall take all steps necessary to cause such application to be approved as soon as possible thereafter. The Company shall also take all steps necessary to cause such shares to be listed on any other national securities exchange or market on which the Common Stock is then listed as soon as possible after the Closing Date. The Company shall provide to each Purchaser evidence of such filings and listings, and shall maintain such listings as long as any Purchaser holds Convertible Debentures, Shares, Warrants, Underlying Shares or Warrant Shares. In the event the aggregate number of Underlying Shares and Warrant Shares exceeds 4,325,591, the Company shall promptly file one or more appropriate listing applications to continually list for trading a number of such additional shares, as the Company and the Purchasers shall reasonably agree. -18- Section 4.10. Purchaser's Rights if Trading in Common Stock is Suspended ---------------------------------------------------------- or Delisted. In the event that at any time within the three-year period after - ----------- the date hereof, trading in the shares of the Common Stock is suspended on or delisted from the Nasdaq National Market (other than as a result of the suspension of trading in securities on such market generally or temporary suspensions pending the release of material information and other than a suspension of trading if the Common Stock is quoted on the Nasdaq SmallCap Market within one Business Day after such suspension), at each Purchaser's option exercisable by five Business Days prior written notice to the Company, the Company shall repurchase and redeem as applicable, all of the Convertible Debentures, Shares, Warrants, Underlying Shares and Warrant Shares owned by such Purchaser at an aggregate purchase price equal to the sum of (I)(A) the product of (1) the average Per Share Market Value for the five (5) Trading Days immediately preceding (a) the day of such notice or (b) the date of payment in full of the repurchase price calculated under this Section 4.10, whichever is greater, multiplied by (2) the Conversion Ratio on the date of the repurchase notice, (II) the Warrant Repurchase Price, (III) the number of Underlying Shares and Warrant Shares then held by such Purchaser multiplied by the average Per Share Market Value for the five (5) Trading Days immediately preceding (A) the date of the notice or (B) the date of payment in full by the Company of the repurchase price calculated under this Section 4.10, whichever is greater, and (IV) interest on such amounts set forth in I - III above accruing from the 7th day after such notice until the repurchase price under this Section 4.10 is paid in full at the rate 15% per annum. Section 4.11. No Violation of Applicable Law. Notwithstanding any ------------------------------ provision of this Agreement to the contrary, if any repurchase or redemption otherwise required under this Agreement or the Registration Rights Agreement would be prohibited by the relevant provisions of Delaware General Corporation Law, such repurchase shall not be effected unless and until it is permitted under such law; provided, however, that interest payable by the Company with -------- ------- respect to any such repurchase or redemption shall continue to accrue in accordance with Section 4.10. ------------ Section 4.12. Repurchase Restrictions. Notwithstanding any provision of ----------------------- this Agreement to the contrary, if any repurchase or redemption otherwise required under this Agreement or the Registration Rights Agreement would be prohibited in the absence of consent from any lender of the Company or any of the Subsidiaries, or by the holders of any class of securities of the Company, the Company shall use its best efforts to obtain such consent as promptly as practicable after the repurchase or redemption is required and such repurchase or redemption shall not be effected -19- unless and until such consent is obtained. Interest payable by the Company with respect to any such repurchase or redemption shall continue to accrue until such consent is obtained and the repurchase price therefor paid. Nothing contained in this Section 4.12 shall be construed as a waiver by the Purchaser of any rights ------------ it may have by virtue of any breach of any representation or warranty of the Company herein as to the absence of any requirement to obtain any such consent. Section 4.13. Legal Opinion. The Company shall cause the legal opinions ------------- of Wilson Sonsini Goodrich & Rosati, P.C. in the form of Exhibit D, to be delivered at the Closing. Section 4.14. Notice of Breaches. Each of the Company and each ------------------ Purchaser shall give prompt written notice to the other of any breach of any representation, warranty or other agreement contained in this Agreement or in the Registration Rights Agreement, as well as any events or occurrences arising after the date hereof and prior to, with respect to the Closing, which would reasonably be likely to cause any representation or warranty or other agreement of such party, as the case may be, contained herein to be incorrect or breached as of such Closing Date. However, no disclosure by either party pursuant to this Section 4.14 shall be deemed to cure any breach of any representation, ------------ warranty or other agreement contained herein or in the Registration Rights Agreement. Notwithstanding the generality of the foregoing, the Company shall promptly notify each Purchaser of any notice or claim (written or oral) that it receives from any lender of the Company to the effect that the consummation of the transactions contem plated hereby and by the Registration Rights Agreement violates or would violate any written agreement or understanding between such lender and the Company, and the Company shall promptly furnish by facsimile to the holders of the Convertible Debentures and Shares a copy of any written statement in support of or relating to such claim or notice. Section 4.15. The Warrants. At the Closing, the Company will issue ------------ warrants to purchase an aggregate of 300,000 shares of Common Stock as specified in Schedule 2.1(b) hereto and as follows: (i) to or as directed by Fairway, a Common Stock purchase warrant, in the form of Exhibit D(1) (the "Fairway ------------ ------- Warrant"), pursuant to which Fairway shall have the right at any time thereafter through the Expiration Date (as such term is defined in the Warrants) thereof, to acquire the amount, specified on Schedule 2.1(b) hereto, of shares of Common Stock at the Warrant Exercise Price and (ii) to or as directed by Infinity, a Common Stock purchase warrant, in the form of Exhibit D(2) (the "Infinity ------------ -------- Warrant"), pursuant to which Infinity shall have the right at any time - ------- -20- thereafter through the Expiration Date thereof, to acquire the amount, specified on Schedule 2.1(b) hereto, of shares of Common Stock at the Warrant Exercise Price per share. The Infinity Warrant, the Fairway Warrant and any other warrants specified on Schedule 2.1(b) hereto are each referred to herein as a "Warrant" and are collectively referred to herein as the "Warrants." Section 4.16. Conversion Procedures. Exhibit F sets forth the --------------------- --------- procedures that are to followed in addition to the tendering of a Conversion Notice hereunder with respect to the conversion of the Convertible Debentures or Shares including the form of legal opinion, if necessary, that shall be rendered to the Transfer Agent and such other information and instructions as may be reasonably necessary to enable the Purchasers to exercise its right of conversion smoothly and expeditiously. Section 4.17. Transfer Agent. The First National Bank of Boston and -------------- State Street Bank shall act as transfer agents (the "Transfer Agent") of the -------------- Company. The Company may not remove or replace either Transfer Agent as its transfer agent without written consent of the Purchasers. Section 4.18. Right of First Refusal. Except for sales of stock to key ---------------------- employees and Company matching contributions pursuant to the Company's 401(k) plan, for a period of one year commencing the date hereof, the Company may not enter into any transaction with a Person other than the Purchasers to sell or otherwise dispose of securities in any transaction intended not to be subject to the registration requirements of the Securities Act (a "Private Placement"), ----------------- unless the Company first provides a written notice (the "Private Placement ----------------- Notice") to each Purchaser describing the terms and conditions of such Private - ------ Placement (to which the Company shall attach any written term sheet or other similar writing with respect thereto). Each Purchaser shall have the right, exercisable within five (5) Business Days of its receipt of such notice, to provide the Company with a written notice of its intention to provide the financing described in the Private Placement Notice on terms no less favorable to the Company than as set forth in the Private Placement Notice. If the Purchasers indicate a desire to provide, in the aggregate, in excess of the financing requested in the Private Placement Notice, each Purchaser shall have the right to provide up to such portion of the Private Placement as corresponds to the portion, expressed as a percentage, that the principal amount of Convertible Debentures and stated values of Preferred Stock, then held by such Purchaser bears to the aggregate principal amount of Convertible Debentures in the aggregate, then outstanding. If any Purchaser shall fail to elect to provide its respective pro rata portion of the Private Placement financing, the other Purchasers shall be entitled to provide a pro -21- rata portion (determined in the manner referenced above) of such shortfall. If the Purchasers fail to elect to exercise the right of first refusal set forth in this Section, then the Company (subject to the terms of the engagement letter agreement between the Company and Brown Simpson, LLC) may consummate the Private Placement on the terms and to the Persons (or Affiliates of such Persons) set forth in the Private Placement Notice; provided, however, that if the Company -------- ------- shall fail to consummate such Private Placement within forty-five (45) days after the date of the Private Placement Notice relating thereto, the Company may not consummate such Private Placement without again complying with the terms of first refusal set forth in this Section. The provisions of this Section shall not apply to any issuance of Company securities pursuant to a bona fide employee stock option, stock purchase or non-employee director plan duly adopted by the Company. Section 4.19. Restriction on Debt. The Company covenants and agrees ------------------- that from and after the date hereof and so long as any of the Convertible Debentures remain outstanding, or the Company shall have any obligation to the Purchasers hereunder or pursuant hereto, the Company shall not, and shall not permit any Subsidiary to, without the prior written consent of the Purchasers in each instance incur, create, assume, guarantee or suffer to exist, or become or remain liable directly or indirectly, for or on account of any indebtedness, obligations or liabilities that rank pari passu with or senior to the ---- ----- indebtedness, obligations and liabilities represented by the Convertible Debentures, except under the BNY Bank Obligations. ARTICLE V MISCELLANEOUS ------------- Section 5.1. Fees and Expenses. Each party shall pay the fees and ----------------- expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement, except as set forth in the Registration Rights Agreement. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Convertible Debentures and Shares pursuant hereto. Each Purchaser shall be responsible for such Purchaser's own tax liability that may arise as a result of the investment hereunder or the transactions contemplated by this Agreement. Section 5.2. Entire Agreement; Amendments. This Agreement, together ---------------------------- with the Exhibits and Schedules hereto, the definitive Convertible Debentures, the Certificate of Designation, the Registration Rights Agreement and the Warrants contain the -22- entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. Section 5.3. Notices. Any and all notices or other communications ------- or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 4:30 p.m. (Eastern Standard Time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in the Purchase Agreement later than 4:30 p.m. (Eastern Standard Time) on any date and earlier than 11:59 p.m. (Eastern Standard time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: If to the Company: YES! Entertainment Corporation 3875 Hopyard Road Pleasanton, CA 94588 Attn: Donald Kingsborough Facsimile No.: (510) 734-0997 With copies to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, CA 94304 Attn: Richard Char Facsimile No.: (415) 493-6811 If to any Purchaser: 27 Wellington Road Cork, Ireland Attn: J. A. Loughran Facsimile No.: 011-44-171-355-4975 With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1209 Avenue of the Americas New York, NY 10019 Attn: Eric L. Cohen Facsimile No.: (212) 541-4630 and -23- Mr. Stuart Chasanoff c/o HW Finance 160 Elm Street, Suite 4000 Dallas, Texas 75201 Facsimile No.: (214) 720-1662 and Brown Simpson, LLC Carnegie Hall Tower 152 West 57th Street, 40th Floor New York, NY 10019 Attn: James R. Simpson Facsimile No.: (212) 247-1329 or such other address as may be designated in writing hereafter, in the same manner, by such person. Section 5.4. Amendments; Waivers. No provision of this Agreement may ------------------- be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and the Purchasers, or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. Section 5.5. Headings. The headings herein are for convenience -------- only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. Section 5.6. Successors and Assigns. This Agreement shall be ---------------------- binding upon and inure to the benefit of the parties and their successors and permitted assigns. Neither the Company nor the Purchasers may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other, except that each Purchaser may assign its rights hereunder and under the Registration Rights Agreement to an Affiliate thereof, provided, that such assignee demonstrates to the reasonable satisfaction of the Company its satisfaction of the representations and warranties set forth in Section 3.2 ----------- herein. The assignment by a party of this Agreement or any rights hereunder shall not affect the obligations of such party under this Agreement. -24- Section 5.7. No Third-Party Beneficiaries. This Agreement is ---------------------------- intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person, except that the representations, warranties and other agreements contained herein of the Company are intended for the benefit of and may be relied upon and enforced by Brown Simpson, LLC to the extent such representations, warranties and agreements relate to the Warrant to be delivered to Brown Simpson, LLC. Section 5.8. Governing Law. This Agreement shall be governed by and ------------- construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. Section 5.9. Survival. Each of (i) the representations and -------- warranties of the Company and the Purchaser contained in Article III and the ----------- agreements and covenants of the parties contained in Article IV and this Article ---------- ------- V shall survive until a date that is three years after the last Closing date. - - Section 5.10. Counterpart Signatures. This Agreement may be executed in ---------------------- two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. Section 5.11. Publicity. The Company and the Purchasers shall consult --------- with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed, except for such releases or public statements that are required by law. Section 5.12. Severability. In case any one or more of the ------------ provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable -25- substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. Section 5.13. Remedies. In addition to being entitled to exercise all -------- rights provided herein or granted by law, including recovery of damages, the Purchasers will be entitled to specific performance of the obligations of the Company under this Agreement and the Company will be entitled to specific performance of the obligations of the Purchasers hereunder with respect to the subsequent transfer of Convertible Debentures, Shares and the Underlying Shares. Each of the Company and the Purchasers agrees that monetary damages would not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] [SIGNATURE PAGE FOLLOWS] -26- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first indicated above. YES! ENTERTAINMENT CORPORATION /s/DONALD D. KINGSBOROUGH By: _______________________________________ Name: Donald D. Kingsborough Title: Chief Executive Officer [PURCHASERS' SIGNATURE PAGE FOLLOWS] INFINITY INVESTORS LIMITED /s/J. A. LOUGHRAN By: _________________________________________ Name: J. A. Loughran Title: Director FAIRWAY CAPITAL LIMITED /s/JAMES E. MARTIN By: _________________________________________ Name: James E. Martin Title: President Schedule 2.1(b) --------------- Entity to Receive Securities to be - ----------------- ---------------- Securities Purchased and Issued - ---------- -------------------- Infinity Investors Limited Convertible Debentures in a Principal Amount of $1,410,000 76,500 shares of Preferred Stock Warrants to Purchase 202,500 shares of Common Stock Fairway Capital Limited Convertible Debentures in a Principal Amount of $156,667 8,500 shares of Preferred Stock Warrants to Purchase 22,500 shares of Common Stock Brown Simpson, LLC Warrants to Purchase 75,000 shares of Common Stock