<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1996
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-23000
The Harvey Entertainment Company
(Exact name of registrant as
specified in its charter)
California 95-4217605
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Wilshire Boulevard, Suite 1460, Santa Monica, California 90401-1115
(Address of principal executive offices)
Registrant's phone number, including area code (310) 451-3377
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 1996
------ ----------------------------
Common 3,639,400
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
INDEX
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<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
FINANCIAL INFORMATION
Consolidated Balance Sheets - June 30, 1996 and December 31, 1995 1-2
Consolidated Income Statements - Three and Six Months Ended June 30, 1996 and 1995 3
Consolidated Statements of Cash Flows - Six Months Ended June 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition and Results of Operations 6-9
PART II
OTHER INFORMATION 10
</TABLE>
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
June 30 December 31,
ASSETS 1996 1995
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,689,000 $ 4,367,000
Accounts receivable, net of allowance for doubtful accounts
of $628,000 and $622,000 in 1996 and 1995, respectively 1,777,000 3,465,000
Prepaid expenses 117,000 171,000
Other current assets 128,000 128,000
----------- -----------
Total current assets 10,711,000 8,131,000
LONG-TERM ACCOUNTS RECEIVABLE 308,000 642,000
FILM LIBRARY, Net of accumulated amortization of $2,661,000
and $2,295,000 in 1996 and 1995, respectively 8,901,000 8,656,000
GOODWILL, Net of accumulated amortization of $897,000
and $833,000 in 1996 and 1995, respectively 1,698,000 1,762,000
TRADEMARKS AND COPYRIGHTS, Net of accumulated
amortization of $205,000 and $181,000 in 1996 and 1995,
respectively 482,000 374,000
FURNITURE AND EQUIPMENT, Net of accumulated
depreciation of $230,000 and $207,000 in 1996 and 1995,
respectively 222,000 170,000
OTHER ASSETS 85,000 87,000
----------- -----------
TOTAL $22,407,000 $19,822,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
(Continued)
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<PAGE> 4
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
June 30, December 31,
LIABILITES AND STOCKHOLDERS' EQUITY 1996 1995
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES -
Accounts payable and accrued expenses $ 1,266,000 $ 789,000
Income taxes payable 563,000 87,000
----------- -----------
Total current liabilities 1,829,000 876,000
DEFERRED INCOME TAXES 1,703,000 1,724,000
ACCRUED RENT 47,000 63,000
----------- -----------
Total liabilities 3,579,000 2,663,000
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock $1 par value, authorized 3,000,000, none issued
Common stock, no par value, 10,000,000 shares aurthorized,
3,639,400 issued and outstanding at June 30, 1996 and
3,629,400 at December 31, 1995 18,884,000 18,844,000
Accumulated deficit (56,000) (1,685,000)
----------- -----------
Total stockholders' equity 18,828,000 17,159,000
----------- -----------
TOTAL $22,407,000 $19,822,000
=========== ===========
</TABLE>
See notes to consolidated financial statements. (Concluded)
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<PAGE> 5
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS (Unaudited)
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ------------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Merchandising $719,000 $1,814,000 $1,544,000 $2,674,000
Filmed entertainment 3,522,000 541,000 4,956,000 1,822,000
---------- ---------- ---------- ----------
Net operating revenues 4,241,000 2,355,000 6,500,000 4,496,000
---------- ---------- ---------- ----------
Cost of sales 989,000 860,000 1,435,000 1,668,000
Selling, general and administrative expenses 1,217,000 802,000 1,932,000 1,391,000
Amortization of film library, goodwill,
trademarks, copyrights and other 119,000 146,000 456,000 457,000
Depreciation expense 13,000 16,000 23,000 31,000
---------- ---------- ---------- ----------
Total operating expenses 2,338,000 1,824,000 3,846,000 3,547,000
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 1,903,000 531,000 2,654,000 949,000
OTHER INCOME 80,000 50,000 153,000 102,000
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,983,000 581,000 2,807,000 1,051,000
PROVISION FOR INCOME TAXES (826,000) (246,000) (1,178,00) (447,000)
---------- ---------- ---------- ----------
NET INCOME $1,157,000 $335,000 $1,629,000 $604,000
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,887,000 3,846,000 3,874,000 3,814,000
========== ========== ========== ==========
NET INCOME PER SHARE $0.30 $0.09 $0.42 $0.16
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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<TABLE>
<CAPTION>
Six Months Ended
June 30
---------------------------------
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,629,000 $604,000
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 23,000 31,000
Amortization of film library, goodwill, trademarks and copyrights
and other 456,000 457,000
Changes in operating assets liabilites:
Accounts receivable 2,022,000 (1,734,000)
Inventories - 58,000
Prepaid expenses and other assets 53,000 26,000
Account payable and accrued expenses 461,000 (92,000)
Income tax liabilities 455,000 449,000
---------- -----------
Net cash provided by (used in) operating activities 5,099,000 (201,000)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities - 1,435,000
Purchase of furniture and equipment (75,000) (65,000)
Investments in trademarks and copyrights and film library (742,000) (8,000)
---------- -----------
Net cash (used in) provided by investing activities (817,000) 1,362,000
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants 40,000 835,000
Deferred offering costs - (227,000)
---------- -----------
Net cash provided by financing activities 40,000 608,000
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,322,000 1,769,000
CASH AND CASH EQUIVALENTS, Beginning of period 4,367,000 605,000
---------- -----------
CASH AND CASH EQUIVALENTS, End of period $8,689,000 $2,374,000
========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 7
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements of The Harvey Entertainment Company and
Subsidiary (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
accompanying financial statements should be read in conjunction with the more
detailed financial statements and related footnotes included in the Company's
Form 10-KSB filed with the Securities and Exchange Commission on March 29,
1996.
In the opinion of the Company, the accompanying unaudited financial statements
as of June 30, 1996 and for the three and six months ended June 30, 1996 and
1995 contain all adjustments, which include normal recurring accruals,
necessary to present fairly the financial position of the Company as of June
30, 1996 and the results of operations and cash flows for the six months ended
June 30, 1996 and 1995.
The results of operations for the interim periods of the Company's fiscal year
are not necessarily indicative of the results to be expected for the entire
year.
* * * * * *
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<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Results of Operations - The Company's net operating revenues in the 1996 and
1995 six month periods were $6,500,000 and $4,496,000 respectively, an increase
of $2,004,000. The increase in revenues from 1995 to 1996 includes a decrease
of $1,130,000 in merchandising revenues and an increase of $3,134,000 in filmed
entertainment revenues.
Revenues - Net merchandising revenues were $1,544,000 and $2,674,000 in 1996
and 1995, respectively, a decrease of $1,130,000. The decrease in
merchandising revenue was due to a decline in minimum license guarantees from
the worldwide merchandising program for the Casper motion picture. Although
merchandising licenses are generally granted for a period of one to three
years, all minimum guaranteed license revenues are recognized when the license
period begins, provided certain conditions have been met. Due to this
accounting treatment, revenue fluctuations from the Company's merchandising
activities will likely recur in the future on a quarterly and annual basis. A
number of the licensees participating in the Company's worldwide Casper
merchandising program have generated revenues which exceed minimum guaranteed
amounts, resulting in additional revenue to the Company. The Company cannot
accurately project future revenues derived from Casper or any other
merchandising revenues because the ongoing success of the merchandising program
is in part dependent upon anticipated enhancements to the attractiveness and
marketability of the Harvey Classic Characters. In addition, there can be no
assurance that merchandising revenues will increase or continue at the same
level in the future because many of the Casper licenses were entered into in
connection with the initial release of the Casper motion picture and it is not
known whether or how many of such licenses will be renewed.
Net filmed entertainment revenues were $4,956,000 and $1,822,000 in 1996 and
1995, respectively, an increase of $3,134,000. The increase in filmed
entertainment revenues was due to the Company entering into an agreement with
Saban Entertainment to co-produce two feature length, direct-to-video films
based on the Company's Casper and Richie Rich characters. The Company received
a $3,300,000 non-refundable advance from Saban against 50% of net receipts
after production, marketing and out of pocket third party distribution expenses
are recouped. There were no such revenues in 1995. Also contributing to the
increase in revenues was the distribution agreement entered into with MCA
Television Ltd. wherein MCA has the exclusive right to distribute for
television broadcast, 56 episodes of Casper and Friends in the United States,
until June 1998. The Company was paid a minimum non-refundable guarantee of
$840,000 for the license. There were no such revenues in the 1995 comparable
period. Foreign broadcast license revenues from the Harvey Classic Film
Library and The Baby Huey Show accounted for $449,000 in 1996 and $1,290,000 in
1995, a decrease of $841,000. Although foreign broadcasting licenses are
generally granted for a period of one to five years, all revenues are
recognized when the license period begins, provided certain conditions have
been met. Due to this accounting treatment, revenue fluctuations will likely
recur in the future on a quarterly and annual basis. Revenues associated with
the domestic barter sales of The Baby Huey Show accounted for $100,000 in 1996
and $461,000 in 1995. The decrease in revenues is due to the Company receiving
100% of the show's revenues in 1995 versus 25% in 1996. The reduction in
revenues is due to the show being produced by The Universal/Harvey Animation
Studios, a production joint venture between the Company and MCA, Inc., financed
wholly by MCA, Inc. In January 1996, Warner Bros., which produced the Richie
Rich motion picture, exercised its right for the theatrical motion picture
sequel to Richie Rich and paid the Company $200,000. There were no comparable
revenues for 1995. Casper animation license fees were $65,000 and $60,000 in
1996 and 1995 respectively. The balance of 1995 and 1996 revenues consist of
residuals from the Casper and Friends animated series.
- 6 -
<PAGE> 9
Cost of Sales - Merchandising costs of sales were $443,000 and $668,000 in 1996
and 1995, respectively. The decrease in cost of sales is due to a decrease in
merchandising activity for the period.
Costs of sales relating to filmed entertainment revenues were $992,000 and
$1,000,000 in 1996 and 1995, respectively. As a percentage of net filmed
entertainment revenues, cost of sales were 20% and 55% in 1996 and 1995,
respectively. The decrease in costs of sales as a percentage of revenues is
due to there being no cost of sales associated with the MCA domestic television
license or Richie Rich theatrical license fee. The Company paid $550,000 in
connection with the Saban direct-to-video agreement of which $350,000 was paid
to officers of the Company as a producer's fee.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses (SG&A) were $1,932,000 and $1,391,000 for 1996 and
1995, respectively, an increase of $541,000. The increase in SG&A is due to an
increase in legal expenses related to the Company's litigation and the
protection and enforcement of the Company's trademarks.
Depreciation and Amortization - Depreciation expense was $23,000 and $31,000 in
1996 and 1995, respectively. Amortization of the film library was $366,000 and
$372,000 in 1996 and 1995, respectively. The film library is being amortized
in accordance with the individual film forecast method. Amortization of
trademarks, copyrights and other was $26,000 in 1996 and $21,000 in 1995.
Amortization of goodwill was $64,000 in both 1996 and 1995.
Other Income - Other income was $153,000 and $102,000 in 1996 and 1995,
respectively. The increase in other income was due to interest earned on cash
balances and the interest income associated with the discounting to present
value of the Company's long-term accounts receivable.
Income Taxes - Provision for income taxes was $1,178,000 and $447,000 in 1996
and 1995, respectively. The increase in the provision for income taxes is due
to the Company's increased profitability.
Liquidity and Capital Resources - Net cash provided by (used in) operating
activities was $5,099,000 and $(201,000) in 1996 and 1995, respectively. Cash
generated from operations was primarily due to the Company producing net income
for the first two quarters of 1996 and proceeds from the collection of
receivables.
The Company's long-term accounts receivables are attributable to the portion of
merchandising activity with payment terms greater than one year. The Company
believes that obligors liable on all receivables are of good quality and that
the allowance for doubtful accounts at June 30, 1996 in the amount of $628,000
is adequate. The Company continually reevaluates its receivables to reassess
its allowance for bad debts.
In April of 1996, the Company entered into an agreement with a third party to
produce 13 animated Richie Rich shorts. The total cost of production is
projected to be $1,920,000. The Company has paid $585,000 of that total to
date and will fund the balance with working capital.
The Company has a $2,500,000 revolving credit facility (the "Revolving
Facility") which expires in May 1997. Interest on advances made under the
Revolving Facility accrues at 1% above the prime rate as reported by the
lender. The credit agreement obligates the Company to maintain a minimum net
worth and current ratio and disallows the payment of dividends. The Company
has not drawn on this facility. The Revolving Facility is secured by
substantially all of the assets of the Company.
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<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Results of Operations - The Company's net operating revenues in the 1996 and
1995 three month periods were $4,241,000 and $2,355,000 respectively, an
increase of $1,886,000. The increase in revenues from 1995 to 1996 includes a
decrease of $1,095,000 in merchandising revenues and an increase of $2,981,000
in filmed entertainment revenues.
Revenues - Net merchandising revenues were $719,000 and $1,814,000 in 1996 and
1995, respectively, a decrease of $1,095,000. The decrease in merchandising
revenue was due to a decline in minimum license guarantees from the worldwide
merchandising program for the Casper motion picture. Although merchandising
licenses are generally granted for a period of one to three years, all minimum
guaranteed license revenues are recognized when the license period begins,
provided certain conditions have been met. Due to this accounting treatment,
revenue fluctuations from the Company's merchandising activities will likely
recur in the future on a quarterly and annual basis. A number of the licensees
participating in the Company's worldwide Casper merchandising program have
generated revenues which exceed minimum guaranteed amounts, resulting in
additional revenue to the Company. The Company cannot accurately project
future revenues derived from Casper or any other merchandising revenues because
the ongoing success of the merchandising program is in part dependent upon
anticipated enhancements to the attractiveness and marketability of the Harvey
Classic Characters. In addition, there can be no assurance that merchandising
revenues will increase or continue at the same level in the future because many
of the Casper licenses were entered into in connection with the initial release
of the Casper motion picture and it is not known whether or how many of such
licenses will be renewed.
Net filmed entertainment revenues were $3,522,000 and $541,000 in 1996 and
1995, respectively, an increase of $2,981,000. The increase in filmed
entertainment revenues was due to the Company entering into an agreement with
Saban Entertainment to co-produce two feature length, direct-to-video films
based on the Company's Casper and Richie Rich characters. The Company received
a $3,300,000 non-refundable advance from Saban against 50% of net receipts
after production, marketing and out of pocket third party distribution expenses
are recouped. There were no such revenues in the 1995 comparable period.
Foreign broadcast license revenues from the Harvey Classic Film Library and The
Baby Huey Show accounted for $144,000 in 1996 and $194,000 in 1995, a decrease
of $50,000. Although foreign broadcasting licenses are generally granted for a
period of one to five years, all revenues are recognized when the license
period begins, provided certain conditions have been met. Due to this
accounting treatment, revenue fluctuations will likely recur in the future on a
quarterly and annual basis. Revenues associated with the domestic barter sales
of The Baby Huey Show accounted for $36,000 in 1996 and $276,000 in 1995. The
decrease in revenues is due to the Company receiving 100% of the show's
revenues in 1995 versus 25% in 1996. The reduction in revenues is due to the
show being produced by The Universal/Harvey Animation Studios, a production
joint venture between the Company and MCA, Inc., financed wholly by MCA, Inc.
Casper animation license fees were $40,000 and $60,000 in 1996 and 1995
respectively. The balance of 1995 and 1996 revenues consist of residuals from
the Casper and Friends animated series.
Cost of Sales - Merchandising costs of sales were $202,000 and $545,000 in 1996
and 1995, respectively. The decrease in cost of sales is due to a decrease in
merchandising activity for the period.
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<PAGE> 11
Costs of sales relating to filmed entertainment revenues were $787,000 and
$315,000 in 1996 and 1995, respectively. As a percentage of net filmed
entertainment revenues, cost of sales were 22% and 58% in 1996 and 1995,
respectively. The decrease in costs of sales as a percentage of revenues is
due to there being lower cost of sales associated with the Saban
direct-to-video agreement. The Company paid $550,000 in connection with the
Saban direct-to-video agreement of which $350,000 was paid to officers of the
Company as a producer's fee.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses (SG&A) were $1,217,000 and $802,000 for 1996 and 1995,
respectively, an increase of $415,000. The increase in SG&A is due to an
increase in legal expenses related to the Company's litigation and the
protection and enforcement of the Company's trademarks.
Depreciation and Amortization - Depreciation expense was $13,000 and $16,000 in
1996 and 1995, respectively. Amortization of the film library was $72,000 and
$102,000 in 1996 and 1995, respectively. The decrease in amortization is due
to the decrease in revenue derived from the film library, which is being
amortized in accordance with the individual film forecast method. Amortization
of trademarks, copyrights and other was $15,000 in 1996 and $12,000 in 1995.
Amortization of goodwill was $32,000 in both 1996 and 1995.
Other Income - Other income was $80,000 and $50,000 in 1996 and 1995,
respectively. The increase in other income was due to the interest income
earned on cash balances.
Income Taxes - Provision for income taxes was $826,000 and $246,000 in 1996 and
1995, respectively. The increase in the provision for income taxes is due to
the Company's increased profitability.
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<PAGE> 12
OTHER INFORMATION
Item 1 - 1. Shareholder Litigation. On August 4, 1995, certain shareholders
of the Company filed a class-action complaint against the Company
and its directors alleging that the defendants have failed to
maximize, defend and protect adequately the Company's stock price
and that they have failed to investigate alleged market
manipulations involving such stock. The complaint seeks various
equitable remedies and unspecified damages. The Company and the
plaintiffs have reached an agreement in principle with respect to
settlement of the allegations specified in the complaint. If
such agreement is consummated, the plaintiffs will dismiss the
complaint without prejudice upon receipt and confirmation through
additional discovery of representations from the Company's
directors that they have no knowledge of the alleged short sales
and the Company will toll the statute of limitations as
applicable to the plaintiff's allegations for a limited period of
time.
2. Fleischer/Betty Boop Litigation. On November 13, 1995, the
Company filed an action against Fleischer Studios, Inc. and
Stanley Handman for breach of contract, fraud, an accounting and
copyright infringement in connection with the copyright to "Betty
Boop." In the action, the Company seeks to recover its 10%
participation in the exploitation of "Betty Boop" from 1980 to
the present pursuant to an earlier agreement and seeks rescission
of the agreement by which the Company transferred its rights in
"Betty Boop" to Fleischer. Defendants answered denying the
material allegations of the complaint and Fleischer filed an
amended counterclaim against the Company for breach of the
implied covenant of good faith and fair dealing and declaratory
relief. Discovery is ongoing, therefore the Company cannot
predict the outcome of this litigation with any certainty.
3. Brown Litigation. On July 24, 1995, Gregory Brown, who briefly
worked for the Company in or around 1989, filed a lawsuit pro per
(without the assistance of counsel) against the Company in United
States District Court for declaratory relief, fraud, trademark
misuse, unfair competition and violations of the Lanham Act.
Brown alleges that he is currently in the business of
manufacturing recreations, restorations and reproductions of
vintage animation artwork from the 1930s and 1940s, and he would
like to reproduce a particular CASPER(R) animated cell from a
1945 animated motion picture which he alleges has fallen into the
public domain. Brown maintains that because the 1945 animated
motion picture has fallen into the public domain, CASPER(R) has
likewise fallen into the public domain. Brown previously made a
similar claim against Disney in connection with "Mickey Mouse"
and "Pluto," and lost. On or about November 15, 1995, the Court
granted the Company's motion to dismiss Brown's complaint in full
and subsequently awarded the Company nearly $70,000 of its
attorneys' fees and costs. Brown has filed an appeal with
respect to the Court's decision. No appellate briefs have yet
been filed and, as a result, the Company cannot predict the
outcome of this appeal.
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<PAGE> 13
4. Franklin Litigation. In September 1994, the Company filed suit
against Jeffrey Franklin, a former director, and certain related
entities alleging various claims in connection with an agency
agreement between the Company and Franklin. In addition, the
Company has alleged that Franklin wrongfully usurped corporate
opportunities belonging to the Company. Franklin has denied the
Company's allegations and has filed a cross-complaint against the
Company and certain present and former directors alleging, among
other things, breach of contract. The litigation is still in the
discovery stages and the Company is unable to predict the outcome
with any certainty.
There have been no material changes in the Company's legal
proceedings since the Company filed its Form 10-KSB with the
Securities and Exchange Commission on March 29, 1996. More
detailed information on the Company's legal proceedings is
available in the Company's Form 10-KSB.
Items 2 through 4 are omitted as not applicable.
Item 5 - Other Information
None
Item 6 (a)- Exhibit 10.47 Casper Live Action Direct-To-Video Agreement Dated
May 28, 1996 between Saban Entertainment Inc. and The Harvey
Entertainment Company.
Item 6 (b)- Report on Form 8-K
None
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<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
THE HARVEY ENTERTAINMENT COMPANY
AND SUBSIDIARY (Registrant)
August 13, 1996 /s/Jeffrey A. Montgomery
-------------------------------------
Jeffrey A. Montgomery
President and Chief Executive Officer
August 13, 1996 /s/Gregory M. Yulish
-------------------------------------
Gregory M. Yulish
Executive Vice President and
Chief Financial Officer
-12 -
<PAGE> 1
Exhibit 10.47
The Harvey Entertainment Company
Casper Live Action Direct-To-Video
1. FIXED COMPENSATION/LICENSE FEE: $3,300,100 as a
non-refundable advance against Harvey's "net receipts" participation. Payable
upon execution of this deal memo. For purposes of recoupment, such advance
will bear interest at the rate of prime plus one percent (1%).
2. DISTRIBUTION FEES: 0%.
3. FINANCING: Saban will commit to a Harvey prepared and
Saban approved budget that will not exceed $12,000,000 inclusive of
contingencies.
If, under Paragraph 11 below, Harvey elects to be producer,
then:
(i). Harvey will be responsible for arranging financing
and a completion bond;
(ii). completion bond costs will be included in $12,000,000
budget;
(iii). the $12,000,000 budget will be increased by interest
and financing charges;
(iv). Saban will pay actual costs up to the budgeted
maximum upon delivery of the Picture to Saban;
(v). overages will be the responsibility of Harvey (unless
otherwise mutually agreed to by Saban and Harvey in advance); and
(vi). if Harvey fails to deliver the Picture it shall
refund the Fixed Compensation/License Fee with accrued interest thereof.
If under Paragraph 12 below, Harvey elects to have Saban be
the Producer, then clauses (i) through (v) will not apply, and overages will be
the responsibility of the Saban.
Production costs will be fully recoupable with interest at
prime plus one percent (1%) ("Interest").
4. MARKETING COMMITMENT: Saban will agree to a worldwide
pre-approved marketing budget of $10 million.
May 24, 1996
<PAGE> 2
5. HARVEY'S NET RECEIPT PARTICIPATION: 50% of net receipts
attributable to the exploitation of the Picture.
"Net receipts" shall be defined as the gross receipts received
by Saban from the exploitation of the Picture, less the continuing deduction of
the following items, in the following order:
(i) all third party out-of-pocket costs and charges incurred
by Saban in connection with the distribution, license, exhibition,
manufacturing, marketing and/or exploitation of the Picture in all media; (ii)
Harvey fixed compensation/license fee plus Interest; (iii) production costs
plus Interest.
The definition of gross receipts (which shall include home
video at 100% of Saban's receipts of in lieu of a royalty rate and a deduction
for a reserve for returns) shall be based upon MCA's or Saban's standard
definition (as Harvey shall elect) subject to good faith negotiation of changes
by the parties.
6. PICTURE ("PICTURE"): One (1) Casper live action feature
length film to be initially released in the home video market to be no less
than seventy-five (75) minutes (excluding main and end titles) and no greater
than one hundred (100) minutes in running time.
7. DELAY PAYMENT: In the event (a) Saban delays the release of
the Picture (subject to force majeure [which definition of force majeure shall
not include any third party claims against Saban other than those claims
arising out of a breach of Harvey's representations and warrants under 24(B)
below] and timely delivery of Picture by Harvey if Harvey is the Producer)
beyond the release date of the fourth quarter of 1997 or (b) if the Picture is
not distributed in home video by Twentieth Century Fox as required by paragraph
13 below, then for the first year of delayed release or if the Picture is not
distributed by Twentieth Century Fox as required by paragraph 13 below Saban
will pay Harvey $20,000,000; for the second year of delayed release an
additional $15,000,000; for the third year of delayed release an additional
$15,000,000. All amounts shall be paid within five (5) business days of
December 31st of the applicable year. The forgoing sums are in addition to any
other monies payable to Harvey hereunder.
8. TERRITORY: The Universe.
9. DISTRIBUTION TERM: The distribution term ("Distribution
Term") for the respective Picture shall commence upon the earlier of December
31, 1997 or the initial United States home video street date release of the
Picture, and shall continue for a period of seven (7) years thereafter, at
which time all distribution rights shall revert to Harvey, subject to Paragraph
10.
- 2 -
May 24, 1996
<PAGE> 3
10. SELL-OFF/PLAY-OFF: Upon expiration of the Distribution
Term for the Picture, Saban shall be entitled to:
(A). If Saban is in a fully recouped position:
(i). HOME VIDEO: A six (6) month sell-off
period.
(ii). ALL OTHER MEDIA: A right to play-off
existing license agreements in media other than home video which were entered
into prior to the expiration of the Distribution Term and extend beyond the
expiration of the Distribution Term, subject to Harvey's prior written approval
of the term of such licenses, which approval shall not be unreasonably
withheld.
(B). If Saban is in an unrecouped position, the
Distribution Term for the Picture shall be extended for an additional three (3)
year period.
11. RELEASE: Saban shall commit to release the Picture
initially in Home Video in accordance with the following schedule:
(A).(i). Home video street date of forth
quarter 1997 (i.e., no later than December 31, 1997) in the United States.
(ii). An initial street date in each major
territory (i.e., United Kingdom, Japan, Spain, France, Italy, Germany,
Australia and Scandinavia) outside the United States of America no later than
six (6) months thereafter, each subject to Saban's good faith analysis of the
prevailing market conditions prior to the release of the Picture to determine
whether or not market conditions support such release date or indicate a change
to such release date is necessary.
(B). Saban will have the right to defer the initial U.S.
release date, in its discretion beyond December 31, 1997, subject to the
provisions of Paragraph 7 above.
12. PRODUCTION: At Harvey's election, either Saban will be
the Producer or Harvey will be the Producer ("Producer").
Producer will perform all of the customary services provided
by a Producer, will produce the Picture in accordance with the approved budget
and will be fully responsible for the production of the Picture, which shall
include hiring of all necessary personnel, obtaining necessary insurance,
contracting with applicable guilds, etc.
Harvey shall have the right to approve the character designs,
attributes and characterization of the Harvey characters to be included in the
Picture only for the purposes of ensuring that the characters are depicted in a
manner consistent with the integrity and artistic representation of the
characters as they have been depicted heretofore (such approval not to be
- 3 -
May 24, 1996
<PAGE> 4
unreasonably withheld). If such characters are not consistent with the
characters as they have been depicted heretofore, Harvey shall have the right
of approval over such depiction (such approval not to be unreasonably
withheld). Harvey and Saban shall have the right to mutually approve the
initial treatment. It is agreed that all approvals herein shall be exercised
in a timely way by Harvey so that development/production exigencies may be met
by Saban. If Harvey has not exercised said mutual approval(s) in a timely way
as required, Saban may proceed. All other key creative and business decisions
related to production shall be subject to Saban's and Harvey's mutual approval
but in the event of any disagreement, Saban's decision shall control. Key
creative and business decisions shall include the script (which in any event
must conform to the approved treatment), the director, the writer, special
effects, principal cast, development and production schedules, key production
crew, form and content of material contracts, all elements of the budget,
financing and production cash flow schedules, terms of completion guaranty,
screen credits and insurance. Saban will have final cut.
13. RIGHTS GRANTED: Harvey shall own all right, title and
interest, including the copyright in and to the Picture and all elements
including the copyright in and to the Picture and all elements thereof. Upon
condition that Saban, as required by Harvey, enters into a subdistribution
agreement with Twentieth Century Fox for Home Video Devices which agreement is
subject to the reasonable approval of Harvey, Saban shall have the sole and
exclusive right to distribute and exploit the Picture in linear non-interactive
form in the following media: (i) all forms of television (pay, pay-per-view,
video-on-demand, near-video-on-demand, network, free and basic cable, dbs and
syndication); (ii) non-theatrical; (iii) airlines; (iv) all formats and
channels of home-video distribution intended for linear viewing, which shall
include without limitation, videocassette, laser disc, and digital video disc
("Home Video Devices"). All rights not granted expressly herein are
specifically reserved to Harvey.
14. THIRD PARTY PAYMENT: Producer shall be responsible for
any and all costs of the production of the Picture. All payments and any
contingent compensation or residual participations due third parties shall be
made by Saban and advanced and recouped as a distribution cost by Saban; it
being understood that Saban and Harvey will have the right to approve third
party contingent compensation, which approval shall not be unreasonably
withheld.
15. DELIVERY OF PICTURE: Producer shall be fully responsible
for delivery all of the technical physical elements and artwork which Saban may
require for the manufacturing, packaging and promotion/marketing for the
Picture in accordance with Saban's standard delivery specifications or Producer
may elect to have Saban perform the services listed above.
16. DISTRIBUTION: Saban will use reasonable efforts to maximize
revenues in the distribution of the Picture.
- 4 -
May 24, 1996
<PAGE> 5
Saban shall be responsible for all aspects of distribution of
the Picture, fulfillment of all orders and inventory maintenance.
Saban shall establish the release patterns and holdbacks for
the Picture, subject to consultation with Harvey.
17. PRICING: Harvey and Saban shall mutually establish
suggested retail and wholesale prices for the Picture; it being understood that
Harvey shall have the final decision in the case of disagreement.
18. MANUFACTURING: Saban shall arrange for the manufacturing of
Home Video Devices at the same rate Saban obtains for Saban pictures based upon
comparable running times. Saban shall advance all manufacturing costs as a
recoupable distribution expense.
19. MARKETING AND SALES PLANNING AND EXECUTION: Harvey and
Saban shall have the mutual control over marketing plans, tactics, including
(but not limited to) packaging, titles, title content, advertising, promotion
and pricing, subject to practical or legal restrictions. In the event that
there is a disagreement, Saban's decision will be final. Harvey's logo and
Saban's logo will be displayed on all packaging, in equal size and prominence.
Saban will solicit and process all orders. Saban will handle all returns.
20. CREDIT AND COLLECTION: Saban will evaluate each account's
credit worthiness and apply the same standards to the Picture that it does to
all other pictures it distributes. Saban will bear the responsibility for
collection.
21. SALES/SHIPMENTS: Saban will provide Harvey with a
weekly report of product sales and returns. If Saban chooses, instead of
distributing weekly shipment reports, Saban may install at Harvey's
headquarters an on-line terminal to its computer system to provide the same
data.
22. FINANCIAL REPORTING: Accounting statements, which
are subject to audit, shall be rendered quarterly and shall conform with the
end of each such corresponding accounting period. Statements shall be given
thirty (30) days after the end of such accounting period and any payments due
to Harvey as indicated therein shall accompany such statement. Saban
acknowledges that fifteen (15) days after the end of each quarter, Saban's
financial officer will meet with Harvey's financial officer and review the
performance of the Picture and will provide guidance on ultimate revenues for
the Picture according to G.A.A.P. in order to facilitate Harvey's reporting
obligations. All financial records shall be subject to audit every twelve (12)
months. In the event a discrepancy of greater than five percent (5%) is found,
Saban shall pay audit costs.
23. RIGHT OF FIRST NEGOTIATION/FIRST REFUSAL ("FNFR"): If
Harvey desires directly or indirectly to option, license, sell, grant, dispose
of, or transfer to any third person
- 5 -
May 24, 1996
<PAGE> 6
made for home video live action sequel distribution rights in "Casper", within
two (2) years after December 31, 1997, Harvey shall give Saban written notice
of such desired transfer. Saban shall respond to such notice within five (5)
business days. If Saban fails to respond to such notice or if it does not wish
to proceed then Harvey shall be free to negotiate with a third person without
any obligation to Saban. If Saban notifies Harvey that it desires to
negotiate, Harvey shall be obligated to negotiate in good faith with Saban for
a period of ten (10) business days. If an agreement is not reached prior to
the expiration of the said ten (10) business day period, then upon such
expiration Saban will provide to Harvey a written statement of the terms least
favorable to the Saban that Saban is willing to accept in connection with the
transfer and Harvey shall have the right to accept such business terms within
two (2) business days following receipt of such notice. If Harvey does not
accept such terms, Harvey is free to negotiate with a third person with respect
to the transfer and to conclude an agreement on terms more favorable but only
if "conclusively more favorable", than the last terms proposed. If the terms
of the proposed agreement with a third party are not conclusively more
favorable to Harvey, then Harvey shall not have the right to enter into such
third person agreement until Harvey notifies Saban in writing of such proposed
terms and gives Saban a period of five (5) business days following receipt of
such notice to accept such proposed terms. If Saban does not accept such
proposed terms by the end of said period, Harvey shall have the right to enter
into the proposed third party agreement. An agreement with third person shall
be deemed conclusively more favorable if the fixed compensation and license fee
offered by such third person exceeds the last fixed compensation and license
fee offered by Saban by 10% or more, and all other terms, evaluated and
computed on an aggregate basis are the same or more favorable to Harvey.
Notwithstanding the foregoing, Harvey agrees not to authorize the initial
release of a Casper video sequel earlier than October 1, 1998.
24. TRADEMARK COPYRIGHT PROTECTION:
(A). The Long Form Agreement will contain appropriate
language protecting Harvey's trademark and copyrights. This language will
include a direct statement that Harvey owns any and all goodwill in and to such
trademarks and copyrights and will provide for appropriate Saban actions to
protect Harvey's interest in all such trademarks and copyrights.
(B). Harvey represents and warrants that is owns all
rights in and to the Casper characters granted to Saban hereunder, free of any
encumbrances or obligations; that the rights granted to Saban hereunder will
not infringe or violate the rights of any third party; that the characters are
fully protected by trademark; and there exists no claim or litigation relating
to the characters or any rights in and to the characters which would affect
adversely the rights to be acquired by Saban hereunder. The parties
acknowledge that Harvey does not solely own or control any new characters
(e.g., Dr. Harvey and Kat) or new elements (e.g., Whipstaff Manor) created
originally for the MCA "Casper" motion picture and television series.
Notwithstanding the foregoing in the event of a claim by MCA (including,
without limitation asserting a matching right on which MCA prevails), Saban
agrees that its damages
- 6 -
May 24, 1996
<PAGE> 7
will be limited to repayment of the license fee, direct out of pocket costs
incurred by Saban in connection with the Picture and Saban's reasonable outside
attorneys fees.
25. LONG FORM AGREEMENT: The parties to this Agreement may
enter into a Long Form Agreement incorporating the terms set forth in this
agreement and adding other standard terms and conditions customary in home
video distribution agreements in the entertainment industry. Notwithstanding
the parties' intention to create and execute a Long Form Agreement, upon the
execution of this Agreement by both parties hereto, this Agreement shall
immediately be in full force and effect, and shall be fully binding on and
enforceable by both parties to this Agreement. There shall be no assignment of
the agreement by Saban without Harvey's prior written consent, which consent
shall not be unreasonably withheld. The parties shall mutually approve a press
release relating to this transaction.
AGREED TO AND ACCEPTED:
HARVEY ENTERTAINMENT COMPANY
By: /s/ Gregory M. Yulish
-------------------------------------
SABAN ENTERTAINMENT
By: /s/ William Josey
-------------------------------------
SABAN INTERNATIONAL N.V.
By:________________________________________
- 7 -
May 24, 1996
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Results of Operations - The Company's net operating revenues in the 1996 and
1995 three month periods were $4,241,000 and $2,355,000 respectively, an
increase of $1,886,000. The increase in revenues from 1995 to 1996 includes a
decrease of $1,095,000 in merchandising revenues and an increase of $2,981,000
in filmed entertainment revenues.
Revenues - Net merchandising revenues were $719,000 and $1,814,000 in 1996 and
1995, respectively, a decrease of $1,095,000. The decrease in merchandising
revenue was due to a decline in minimum license guarantees from the worldwide
merchandising program for the Casper motion picture. Although merchandising
licenses are generally granted for a period of one to three years, all minimum
guaranteed license revenues are recognized when the license period begins,
provided certain conditions have been met. Due to this accounting treatment,
revenue fluctuations from the Company's merchandising activities will likely
recur in the future on a quarterly and annual basis. A number of the licensees
participating in the Company's worldwide Casper merchandising program have
generated revenues which exceed minimum guaranteed amounts, resulting in
additional revenue to the Company. The Company cannot accurately project
future revenues derived from Casper or any other merchandising revenues because
the ongoing success of the merchandising program is in part dependent upon
anticipated enhancements to the attractiveness and marketability of the Harvey
Classic Characters. In addition, there can be no assurance that merchandising
revenues will increase or continue at the same level in the future because many
of the Casper licenses were entered into in connection with the initial release
of the Casper motion picture and it is not known whether or how many of such
licenses will be renewed.
Net filmed entertainment revenues were $3,522,000 and $541,000 in 1996 and
1995, respectively, an increase of $2,981,000. The increase in filmed
entertainment revenues was due to the Company entering into an agreement with
Saban Entertainment to co-produce two feature length, direct-to-video films
based on the Company's Casper and Richie Rich characters. The Company received
a $3,300,000 non-refundable advance from Saban against 50% of net receipts
after production, marketing and out of pocket third party distribution expenses
are recouped. There were no such revenues in the 1995 comparable period.
Foreign broadcast license revenues from the Harvey Classic Film Library and The
Baby Huey Show accounted for $144,000 in 1996 and $194,000 in 1995, a decrease
of $50,000. Although foreign broadcasting licenses are generally granted for a
period of one to five years, all revenues are recognized when the license
period begins, provided certain conditions have been met. Due to this
accounting treatment, revenue fluctuations will likely recur in the future on a
quarterly and annual basis. Revenues associated with the domestic barter sales
of The Baby Huey Show accounted for $36,000 in 1996 and $276,000 in 1995. The
decrease in revenues is due to the Company receiving 100% of the show's
revenues in 1995 versus 25% in 1996. The reduction in revenues is due to the
show being produced by The Universal/Harvey Animation Studios, a production
joint venture between the Company and MCA, Inc., financed wholly by MCA, Inc.
Casper animation license fees were $40,000 and $60,000 in 1996 and 1995
respectively. The balance of 1995 and 1996 revenues consist of residuals from
the Casper and Friends animated series.
Cost of Sales - Merchandising costs of sales were $202,000 and $545,000 in 1996
and 1995, respectively. The decrease in cost of sales is due to a decrease in
merchandising activity for the period.
- 8 -
<PAGE> 9
Costs of sales relating to filmed entertainment revenues were $787,000 and
$315,000 in 1996 and 1995, respectively. As a percentage of net filmed
entertainment revenues, cost of sales were 22% and 58% in 1996 and 1995,
respectively. The decrease in costs of sales as a percentage of revenues is
due to there being lower cost of sales associated with the Saban
direct-to-video agreement. The Company paid $550,000 in connection with the
Saban direct-to-video agreement of which $350,000 was paid to officers of the
Company as a producer's fee.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses (SG&A) were $1,217,000 and $802,000 for 1996 and 1995,
respectively, an increase of $415,000. The increase in SG&A is due to an
increase in legal expenses related to the Company's litigation and the
protection and enforcement of the Company's trademarks.
Depreciation and Amortization - Depreciation expense was $13,000 and $16,000 in
1996 and 1995, respectively. Amortization of the film library was $72,000 and
$102,000 in 1996 and 1995, respectively. The decrease in amortization is due
to the decrease in revenue derived from the film library, which is being
amortized in accordance with the individual film forecast method. Amortization
of trademarks, copyrights and other was $15,000 in 1996 and $12,000 in 1995.
Amortization of goodwill was $32,000 in both 1996 and 1995.
Other Income - Other income was $80,000 and $50,000 in 1996 and 1995,
respectively. The increase in other income was due to the interest income
earned on cash balances.
Income Taxes - Provision for income taxes was $826,000 and $246,000 in 1996 and
1995, respectively. The increase in the provision for income taxes is due to
the Company's increased profitability.
- 9 -
<PAGE> 10
OTHER INFORMATION
Item 1 - 1. Shareholder Litigation. On August 4, 1995, certain shareholders
of the Company filed a class-action complaint against the Company
and its directors alleging that the defendants have failed to
maximize, defend and protect adequately the Company's stock price
and that they have failed to investigate alleged market
manipulations involving such stock. The complaint seeks various
equitable remedies and unspecified damages. The Company and the
plaintiffs have reached an agreement in principle with respect to
settlement of the allegations specified in the complaint. If
such agreement is consummated, the plaintiffs will dismiss the
complaint without prejudice upon receipt and confirmation through
additional discovery of representations from the Company's
directors that they have no knowledge of the alleged short sales
and the Company will toll the statute of limitations as
applicable to the plaintiff's allegations for a limited period of
time.
2. Fleischer/Betty Boop Litigation. On November 13, 1995, the
Company filed an action against Fleischer Studios, Inc. and
Stanley Handman for breach of contract, fraud, an accounting and
copyright infringement in connection with the copyright to "Betty
Boop." In the action, the Company seeks to recover its 10%
participation in the exploitation of "Betty Boop" from 1980 to
the present pursuant to an earlier agreement and seeks rescission
of the agreement by which the Company transferred its rights in
"Betty Boop" to Fleischer. Defendants answered denying the
material allegations of the complaint and Fleischer filed an
amended counterclaim against the Company for breach of the
implied covenant of good faith and fair dealing and declaratory
relief. Discovery is ongoing, therefore the Company cannot
predict the outcome of this litigation with any certainty.
3. Brown Litigation. On July 24, 1995, Gregory Brown, who briefly
worked for the Company in or around 1989, filed a lawsuit pro per
(without the assistance of counsel) against the Company in United
States District Court for declaratory relief, fraud, trademark
misuse, unfair competition and violations of the Lanham Act.
Brown alleges that he is currently in the business of
manufacturing recreations, restorations and reproductions of
vintage animation artwork from the 1930s and 1940s, and he would
like to reproduce a particular CASPER(R) animated cell from a
1945 animated motion picture which he alleges has fallen into the
public domain. Brown maintains that because the 1945 animated
motion picture has fallen into the public domain, CASPER(R) has
likewise fallen into the public domain. Brown previously made a
similar claim against Disney in connection with "Mickey Mouse"
and "Pluto," and lost. On or about November 15, 1995, the Court
granted the Company's motion to dismiss Brown's complaint in full
and subsequently awarded the Company nearly $70,000 of its
attorneys' fees and costs. Brown has filed an appeal with
respect to the Court's decision. No appellate briefs have yet
been filed and, as a result, the Company cannot predict the
outcome of this appeal.
- 10 -
<PAGE> 11
4. Franklin Litigation. In September 1994, the Company filed suit
against Jeffrey Franklin, a former director, and certain related
entities alleging various claims in connection with an agency
agreement between the Company and Franklin. In addition, the
Company has alleged that Franklin wrongfully usurped corporate
opportunities belonging to the Company. Franklin has denied the
Company's allegations and has filed a cross-complaint against the
Company and certain present and former directors alleging, among
other things, breach of contract. The litigation is still in the
discovery stages and the Company is unable to predict the outcome
with any certainty.
There have been no material changes in the Company's legal
proceedings since the Company filed its Form 10-KSB with the
Securities and Exchange Commission on March 29, 1996. More
detailed information on the Company's legal proceedings is
available in the Company's Form 10-KSB.
Items 2 through 4 are omitted as not applicable.
Item 5 - Other Information
None
Item 6 (a)- Exhibit 10.47 Casper Live Action Direct-To-Video Agreement Dated
May 28, 1996 between Saban Entertainment Inc. and The Harvey
Entertainment Company.
Item 6 (b)- Report on Form 8-K
None
- 11 -
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
THE HARVEY ENTERTAINMENT COMPANY
AND SUBSIDIARY (Registrant)
August 13, 1996 /s/Jeffrey A. Montgomery
-------------------------------------
Jeffrey A. Montgomery
President and Chief Executive Officer
August 13, 1996 /s/Gregory M. Yulish
-------------------------------------
Gregory M. Yulish
Executive Vice President and
Chief Financial Officer
-12 -
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