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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-23000
THE HARVEY ENTERTAINMENT COMPANY
(Name of Small Business Issuer in its charter)
CALIFORNIA 95-4217605
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1999 AVENUE OF THE STARS, SUITE 2050, LOS ANGELES, CALIFORNIA 90067
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 310/789-1990
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days:
Yes [x] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to the Form 10-KSB: [ ]
State issuer's revenue for its most recent fiscal year: $9,168,000
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of March 12, 1997, a date
within the past 60 days, is: $16,533,825.
State the number of shares outstanding of each of issuer's classes of
common equity, as of March 13, 1997: 3,598,900.
Transitional Small Business Disclosure Format: Yes: [ ] No: [x]
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PART I
ITEM 1. BUSINESS
INTRODUCTION
The Harvey Entertainment Company (the "Company") owns and exploits a
substantial library of classic animated characters and other intellectual
property assets.
The Company was formed in 1989 by Jeffrey A. Montgomery to acquire
Harvey Comics, Inc. ("Harvey"). Harvey, now a wholly owned subsidiary of the
Company, was founded in 1939 and acquired or developed a number of widely
recognized characters associated with the golden age of comic books. Harvey's
assets include:
- The Harvey Classic Characters, a roster of many recognizable
and well-known trademarked characters in the entertainment industry, including
Casper, the Friendly Ghost, Fatso, Stinkie and Stretch (the Ghostly Trio),
Richie Rich, Baby Huey, Wendy, the Good Little Witch and Hot Stuff, as well as
Little Audrey, Little Lotta, Little Dot, Herman and Katnip, Stumbo the Giant,
and Buzzy the Funny Crow. (All characters referred to in this 10-K and annual
report are the copyrighted and trademarked property of Harvey Comics, Inc., a
wholly owned subsidiary of The Harvey Entertainment Company.)
- The Harvey Classic Film Library, a film library (exclusive of
the original musical score) consisting of 274 six- to eight- minute fully
animated color cartoon shorts, including 248 which were originally produced and
theatrically released by Paramount Pictures during the 1950s, 13 Baby Huey and
13 Richie Rich shorts which were produced in 1994 and 1996 respectively. (In
1990 and 1991, the Company made a substantial investment in the conversion of
its 248 older cartoon shorts from analog to digital format, including color
restoration, re-dubbing and re-scoring.)
- The Harvey Classic Comic Book Library, a comic book film
library which features the Harvey Classic Characters from which approximately
1,875 32-page comic books can be produced (of which approximately 1,100 feature
the most popular Harvey Classic Characters). The rights to publish these comic
books have been licensed to The Marvel Entertainment Group, Inc. ("Marvel")
until June 2000.
The Company's principal executive offices are located at 1999 Avenue
of the Stars, Suite 2050, Los Angeles, California 90067; its phone number is
(310) 789-1990.
RECENT DEVELOPMENTS FOR THE COMPANY
DIRECT-TO-VIDEO:
"CASPER, A SPIRITED BEGINNING": The Company and Saban Entertainment
announced in May 1996 that they had agreed to co-produce a feature length live
action direct-to-video based on the Company's Casper character. Twentieth
Century Fox Home Entertainment will serve as the exclusive worldwide home video
distributor and Saban Entertainment will handle worldwide ancillary sales such
as television, cable, and pay- per-view for the new feature. Principal
photography on the "Casper, A Spirited Beginning" home video feature was
completed in January 1997 and the film is scheduled for home video release in
Fall 1997.
"RICHIE RICH DIRECT-TO-VIDEO": In May 1996, the Company and Saban
Entertainment agreed to co-produce a feature length live action direct-to-video
based on Richie Rich. Warner Home Video will serve as the exclusive worldwide
home video distributor and Saban Entertainment will be responsible for
worldwide ancillary sales such as television, cable, and pay-per-view. The
"Richie Rich Direct-to-Video" video is tentatively scheduled for release in
1998. See "Business" for more details on the Company's direct-to-video
agreements.
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The Company will not bear the production or marketing costs of either
of these video productions.
TELEVISION PRODUCTION:
"CASPER": In February 1997 The Fox Kids Network ordered 26 additional
episodes of the all new "Casper" animated series, bringing the total of new
episodes to 52. The 26 new episodes will be co-produced by Universal Studios
Inc. (formerly known as MCA Inc.) and the Company, and 100% financed by
Universal Television. The Company receives a license fee for each episode
produced and shares in a percentage of the profits, if any, from the
exploitation of the animated series.
"RICHIE RICH": In 1996, the Company produced and self financed 13
Richie Rich 7 minute animated shorts that were packaged with 26 existing
animated shorts from the Harvey Classic film library to create a total of 13
half hour episodes for weekly television syndication for the 1996-1997 season.
The "Richie Rich" series is currently available to over 80% of the nation's
households and is distributed by Claster Television. The Company has not
chosen a foreign distributor for the "Richie Rich" animated series, but plans
to do so in 1997.
MERCHANDISING:
In April 1996, Universal Studios' right to act as the Company's
exclusive merchandising agent for its characters lapsed. Since that time, the
Company and Universal Studios have been negotiating the terms of a continuing
merchandising relationship. In January 1997, the Company and Universal Studios
tentatively agreed upon a new short-term merchandising agreement wherein the
Company, with certain exceptions, will serve as the exclusive merchandising
agent for the Company's characters, including Casper. The new merchandising
agreement between the Company and Universal Studios calls for, among other
things, the Company to (i) hire a minimum of four additional staff members to
support Casper merchandising and (ii) use its best efforts to maximize revenues
from Casper merchandising. (The Company and Universal Studios are continuing
to negotiate a long-term merchandising relationship in the context of a more
global agreement between them.)
MASTER TOY LICENSEE: In February 1997, the Company entered into a
master toy license with Trendmasters for Casper and has an agreement in
principle covering Richie Rich and Baby Huey toys. The agreements call for,
among other things, Trendmasters to produce and release a minimum number of
toys based on Casper over the next 18 months.
OTHER MATTERS:
NEW STAFF. The Company has recently hired a Vice President of
Consumer Products and a Vice President of Creative Affairs to oversee the
Company's merchandising division and the development of the Company's
characters. The Company has also hired a Director of Sales, Director of
Creative Affairs, Director of Finance Administration and two additional
assistants. The new personnel have been engaged to allow the Company to step
up its active involvement in the development and merchandising of the Company's
Classic Characters.
STOCK REPURCHASE PROGRAM. In January 1997, the Company announced that
its Board of Directors had authorized a stock repurchase program under Rule
10b-18 of the Securities Exchange Act of 1934. The Company may, from time to
time, in market transactions, purchase up to 10% of its outstanding Common
Stock (approximately 380,000 shares). Through March 13, 1997, the Company has
repurchased 42,700 shares at an average price of $7.46 per share. There is no
assurance that a material number of shares will be purchased pursuant to the
repurchase program.
LITIGATION SETTLEMENT. On November 13, 1995, the Company filed an
action against Fleischer Studios, Inc. and Stanley Handman for breach of
contract, fraud, accounting and copyright infringement in connection with the
copyright to Betty Boop. In the action, the Company sought, among other
things, to obtain a 10% participation in the exploitation of Betty Boop from
1980 to the present pursuant to an alleged earlier agreement, and sought
rescission of the agreement by which the Company allegedly transferred its
rights in Betty Boop to Fleischer. In December
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1996, the Company and Fleischer settled the action with the payment by
Fleischer to the Company of $375,000. In exchange, the Company gave up any
rights it may have had to the character.
BUSINESS
The Company derives its revenues primarily from filmed entertainment
and merchandising. The Company formerly was engaged in comic book publishing,
but phased out its unprofitable publishing operations in 1994 after entering
into a five-year agreement with Marvel pursuant to which Marvel publishes,
distributes and licenses comic books based upon the Harvey Classic Characters.
In 1996 and 1995, operating revenues were divided among these sources as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Filmed Entertainment 64% 39%
Merchandising 36% 61%
Total 100% 100%
=== ===
</TABLE>
BUSINESS STRATEGY.
The Company is attempting to capitalize on the success of its recently
reintroduced classic characters, Casper and Richie Rich, through exploitation
of new products utilizing the characters, enhancements and additions, in home
video, live action or animated television productions and in emerging
markets such as pay-per-view, interactive media and location-based
entertainment centers. Also, the Company has started an in-house creative
affairs and merchandising department to creatively redevelop and commercially
relaunch other select Harvey Calssic Characters. There can be no assurance
that the Company and its characters will be able to penetrate any of these
markets successfully or that, in the event that the Company does enter one or
more of these markets, it will be able to compete successfully or generate
profits.
FILMED ENTERTAINMENT.
DIRECT-TO-VIDEO (HOME VIDEO):
Based on the success of the Walt Disney Company and Universal Studios
with family fare direct-to-videos based on theatrical motion pictures, the
Company believes the direct-to-video business is an attractive and emerging
market in which to capitalize on the theatrical and home video success of the
Company's recent filmed entertainment projects featuring Casper and Richie
Rich. The Company also hopes to use direct-to-videos as a tool to reintroduce
its other Classic Characters to children of all ages.
"CASPER, A SPIRITED BEGINNING": In May 1996, the Company and Saban
Entertainment entered into an agreement to co-produce one feature length live
action direct-to-video feature based on the Company's Casper character.
Twentieth Century Fox Home Entertainment will serve as the exclusive worldwide
home video distributor and Saban Entertainment will handle worldwide ancillary
sales such as television, cable and pay-per- view. "Casper, A Spirited
Beginning" video feature completed principal photography in January 1997 and is
scheduled for home video release in Fall 1997. The Company will not bear any
of the production costs of this feature.
The agreement for "Casper, A Spirited Beginning" provides for a
nonrefundable $3.3 million advance payable to the Company (which amount was
received in June 1996) recoverable only from the Company's share of 50% of the
profits. The Company's 50% profit participation, if any, is payable after
Saban Entertainment recovers the $3.3 million advance, and all production,
marketing, and third-party out-of-pocket distribution costs have been recouped.
There is no distribution fee on the "Casper, A Spirited Beginning" home video
release. The agreement provides for a seven (7) year distribution term for
Saban Entertainment and Twentieth Century Fox Home Entertainment, which may be
extended to 10 years under certain circumstances, after which all distribution
and
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ownership rights will revert to the Company without any further obligation to
Saban Entertainment or Twentieth Century Fox Home Entertainment.
The Company has also begun development on a second live action Casper
feature length direct-to-video film that will introduce Casper's girlfriend,
Wendy, the Good Little Witch, targeted for a fall 1998 release, and a live
action direct-to-video film spin-off starring Wendy, the Good Little Witch
targeted for release in 1999. (There is no assurance that these films will
be produced or released and, if released, that they will be successful.)
"RICHIE RICH DIRECT-TO-VIDEO": In May 1996, the Company and Saban
Entertainment agreed to co-produce one feature- length live action "Richie Rich
Direct-to-Video." Warner Home Video will serve as the exclusive worldwide home
video distributor and Saban Entertainment will handle worldwide ancillary sales
such as television, cable, and pay-per-view. The "Richie Rich Direct-to-Video"
film is tentatively scheduled for video release in 1998. The agreement for
"Richie Rich Direct-to-Video" does not require that the Company bear production
expenses, and allows the Company to share in 50% of the profits, if any, after
Saban Entertainment recovers its marketing, production and out-of-pocket
distribution costs plus a twenty-five percent (25%) distribution fee. (The
Company did not receive an advance for the "Richie Rich Direct-to- Video"
feature.) Saban Entertainment will retain distribution rights in perpetuity
for the first "Richie Rich Direct-to-Video."
The Company is currently developing a second Richie Rich
direct-to-video feature targeted for release in 1999. There can be no
assurance that this feature will be produced or completed, or if completed,
that it will be successful.
The Company believes that additional Harvey Classic Characters may be
exploited in the direct-to-video market in the future, but there can be no
assurance that any direct-to-video features will be completed and released or
that, if released, such features will be successful.
TELEVISION:
Harvey Classic Film Library. The Company owns the Harvey Classic Film
Library, which consists of approximately 274 six- to eight- minute color
cartoon shorts, of which 248 were originally created in the 1950's for
theatrical exhibition. The Harvey Classic Film Library was restored,
digitized, re-dubbed and re-scored by the Company in 1990 and 1991. As part of
the restoration process, the Company created 65 30- minute episodes from the
original 248 shorts and entitled them "Casper and Friends." The Company has
the right to use the original musical score to the original 248 shorts in the
Harvey Classic Film Library, but ownership to that music was retained by
Paramount Pictures. Paramount receives music performance royalties when the
cartoons are shown publicly utilizing the original score. The writers and
publisher of the music receive performance royalties from BMI, which collects
such royalties from broadcasters. In 1994 and 1996, the Company added to its
animated film library 13 animated shorts for both Baby Huey and Richie Rich.
HIT Entertainment ("HIT") distributes the Harvey Classic Film Library
internationally, including "Casper and Friends," "Casper Classics" and "The
Baby Huey Show." The library is currently being broadcast in approximately 55
countries worldwide. Exhibitors generally remit film licensing receipts to the
distributor who remits such receipts to the Company, net of distribution fees
included in cost of sales. The Company's distribution agreement with HIT
expires in December 1997 and HIT and the Company are discussing extending the
distribution term. In the event the Company and HIT do not renew the
distribution agreement, the Company believes that it can replace HIT with a new
distributor.
New Television Production. In 1995 and 1996, Universal Studios and
the Company produced 26 thirty-minute all new animated episodes of "Casper,"
which began airing on the Fox Kid's Network in February 1996. In February
1997, Universal Studios and the Company received an order from Fox Kids Network
for an additional 26 thirty-minute episodes of Casper for a total of 52
animated episodes. All 52 animated "Casper" episodes have or will be financed
by Universal Studios. For each episode produced, the Company receives a fixed
license fee and is entitled to share in a percentage of the profits, if any.
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Additionally, in 1996 the Company produced an animated television
series featuring Richie Rich. The new series, distributed by Claster
Television, is available to over 80% of the nation's households in Fall 1996 in
first run syndication. The series was not renewed for first-run syndication
television for the 1997-1998 broadcast season in the United States.
"The Baby Huey Show," a weekly syndicated cartoon series which debuted
in September 1994, is currently broadcast in over 30 foreign countries. It
will not be aired in the United States for the 1996-1997 television season.
The Company is currently developing a live action series concept for Baby Huey.
However, there can be no assurance that any new episodes will be produced.
THEATRICAL LICENSING:
Motion pictures featuring Casper, the Friendly Ghost and Richie Rich
were released in May 1995 and December 1994, respectively. To date, Universal
Studios' "Casper" and Warner Bros.' "Richie Rich" have generated reported
worldwide box office receipts in excess of $280 million and $80 million,
respectively. The Company received certain character movie licensing fees and
merchandising participations for both features, but did not participate in box
office receipts, nor has it received revenues from its defined profit
participations, and there is no assurance it will receive any profit shares in
the future.
In January 1996, Warner Bros., which produced the film "Richie Rich,"
exercised its rights to produce a theatrical motion picture sequel to "Richie
Rich." Warner's exclusive rights with respect to the sequel extend to the
earlier of two years after the date of release of the sequel, or January 29,
2000.
The Company and Universal Studios are in discussions concerning a live
action theatrical sequel to the 1995 "Casper" feature film. However, there can
be no assurance that this feature will be produced or completed, or if
completed, that it will be successful.
MERCHANDISING.
In April 1996, Universal Studios' exclusive merchandising agency with
the Company terminated. Since April 1996, the Company and Universal Studios
have been negotiating new terms for a continuing merchandising relationship.
In January 1997, the Company and Universal Studios tentatively agreed to a new
short-term merchandising relationship wherein the Company will serve as the
exclusive merchandising agent for all of its characters, including Casper
(except with respect to certain future theatrical releases). The new
merchandising relationship between the Company and Universal Studios
calls for, among other things, the Company to hire a minimum of four additional
staff members to support the Casper merchandising program. In November 1996,
the Company hired a Vice President of Consumer Products to oversee the
division. He has hired a Director of Sales, Director of Business
Administration, Director of Creative Affairs and two assistants. The new
merchandising division will be available to exploit all of the Company's other
Classic Characters as well as Casper. The Company anticipates investing a
material portion of its available capital in this merchandising division,
although no assurances can be given the Company will be successful or
profitable in merchandising its Characters.
The Company and Universal Studios are currently negotiating a
permanent merchandising relationship in the context of a more global agreement
between them.
If Universal Studios and the Company do not enter into a permanent
merchandising relationship, the Company believes Universal Studios' rights to
Casper will be limited to the right to merchandise "Casper" the animated series
for two and one-half years after the last animated "Casper" episode is produced
by Universal Studios, and that Universal Studios will also be entitled to
certain other merchandising rights if a sequel to Universal Studios' "Casper"
feature is ever produced.
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COMIC BOOK PUBLISHING.
In 1994, the Company and Marvel entered into an agreement (the "Marvel
Agreement") pursuant to which Marvel publishes, distributes and licenses, on an
exclusive basis, comic books and magazines based upon the Harvey Classic
Characters. The Marvel Agreement remains in effect until June 30, 2000 and, if
not terminated by either party, is to be automatically renewed for successive
one-year periods. In addition, Marvel may extend the Marvel Agreement for an
additional three years in the event it has not paid the Company at least $2
million during the initial term. The Marvel Agreement provides for a minimum
royalty of $1,000,000 during the initial term and $600,000 over the extended
term, if any. Under the Marvel Agreement, the Company receives varying
royalties based on Marvel's revenues, which royalties are offset against the
minimum payments. The Company has retained reasonable approval rights over the
plots and pencil sketches of comic books Marvel proposes to publish based on
the Company's Harvey Classic Characters. The Company accounts for revenues
received under the Marvel Agreement as merchandising revenues. Marvel filed
for bankruptcy reorganization in December, 1996. The Company is uncertain as
to the effect of Marvel's bankruptcy on the Company's business, but does not
believe the Marvel bankruptcy will have a material impact. Receivables from
Marvel (which have been discounted to net present value, using a discount rate
of 10% per annum) totaled $479,000 at December 31, 1996.
INTELLECTUAL PROPERTY ASSETS.
The Company's principal assets are its copyright and trademark rights
in its proprietary Harvey Classic Characters, including Casper, the Friendly
Ghost, Fatso, Stinkie and Stretch (the Ghostly Trio), Richie Rich, Baby Huey,
Wendy, the Good Little Witch, Little Audrey, Herman and Katnip, Little Lotta,
Little Dot, Buzzy the Funny Crow, Stumbo the Giant and Hot Stuff. In addition,
the Company possesses copyrights to approximately 1,875 32-page comic books
published between approximately 1955 and 1993 and the copyrights to the film
shorts in its Harvey Classic Film Library. The Company has applied for and
received copyright and trademark protection in the United States and copyright
protection in certain foreign countries which are parties to the Berne
Convention on many, but not all, of its publications, the film shorts in the
Harvey Classic Film Library and the Harvey Classic Characters. The Company
attempts to vigorously protect against infringements on the rights it holds to
its proprietary characters and publications.
Substantially all of the United States copyrights on the Company's
cartoon shorts and comic books were acquired under the Copyright Act of 1909
(the "1909 Act"). Under the 1909 Act, copyrights were granted for an initial
term of 28 years and a renewal term of 28 years. Under the Copyright Act of
1976 (the "1976 Act"), copyright protection for existing and new copyrights was
extended for a total term of 75 years from the date of initial publication.
Therefore, for Company works published prior to the effective date of the 1976
Act, the terms of the Company's copyrights have been extended to 75 years from
the dates of initial publication of the underlying works. Substantially all of
the most important Harvey Classic Characters are protected in the United States
by United States trademarks which run for a period of 10 years, and which may
be renewed for an indefinite number of additional 10 year periods upon a
showing of continued use. While many countries have intellectual property laws
that protect United States holders of such property, others do not, and there
can be no assurance that the Company's rights will not be violated or its
characters "pirated" in foreign jurisdictions.
The Copyright registrations for seven cartoon shorts and a limited
number of comic books were not renewed by prior management and such
registrations have expired. By virtue of the expiration of the copyrights in a
limited number of original cartoon shorts and comic books, the Company's rights
to the sole and exclusive use of those cartoons and comic books is unclear.
From time to time, claims have been asserted against the Company
alleging that the Casper character may have fallen into the public domain and
thus can be freely used and exploited by anyone. However, the Company believes
that any such claims are meritless and that the Company's exclusive rights to
Casper are adequately protected by law.
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COMPETITION.
Management believes its principal competitors are The Walt Disney
Company, Fox Kids Worldwide, Warner Bros., and Nickelodeon. These competing
companies are all much larger and better financed than the Company.
EMPLOYEES.
The Company employs 17 persons on its full-time staff. For the
Company's filmed entertainment productions, in those instances where the
Company oversees and bears the costs of production, the Company hires
independent contractors or production facilities for creative work on an
as-needed basis. None of the Company's employees are represented by a union
and the Company believes relations with its employees are good.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company wishes to caution readers
that the following important factors, among others, in some cases have affected
and in the future could affect the Company's actual results and could cause
such results to differ materially from those expressed in forward-looking
statements made by or on behalf of the Company.
SUCCESS OF EXPANSION STRATEGY. The exploitation of the Company's
Harvey Classic Characters and related ancillary rights through the development
of new products and entry into emerging markets is a principal element of the
Company's growth strategy. Certain of these products, such as direct-to-video
and merchandising, are new to the Company and there can be no assurance that
the Company will be able to develop new products successfully or compete
effectively in new markets. In addition, there is no assurance that the Harvey
Classic Characters will enjoy sustained popularity such that the Company can
recover any of its upfront production and other development costs. As a
result, there is substantial risk that the Company will be unable to implement
successfully its expansion strategy.
NEW MERCHANDISING ACTIVITIES. In the past, the Company has relied
upon Universal Studios for substantially all merchandising of the Harvey
Classic Characters. Universal Studios' right to act as the Company's exclusive
merchandising agent terminated in April 1996 and the Company is now handling
merchandising for its Classic Characters itself. There is no assurance that
the Company, despite its additions to staff and related overhead, will be able
to promote and compete in the merchandising marketplace effectively. To the
extent the Company performs merchandising functions internally, there is no
assurance that its merchandising revenues will increase or be sustained at
current levels or be sufficient to defray its additional new costs associated
with its merchandising efforts.
NATURE OF THE ENTERTAINMENT INDUSTRY. The television, merchandising,
motion picture and direct-to-video industries are highly speculative and
historically have involved a substantial degree of risk. The success of a
trademarked or copyrighted character, television show, video production or
motion picture depends upon unpredictable and changing factors such as audience
acceptance, which may bear little or no correlation to the Company's production
and other costs. Although many of the Company's characters have been in
existence for more than 40 years, all are not currently popular and there is no
assurance that they will, despite the Company's increased efforts and
expenditures, become popular, or that those that are will continue to be
popular. Audience acceptance of the Company's products represents a response
not only to the artistic components of the products, but also to promotion by
the distributor, the availability of alternative forms of entertainment and
leisure time activities, general economic conditions and public taste
generally, and other intangible factors, all of which change rapidly and cannot
be predicted with certainty. Therefore, there is a substantial risk that some
or all of the Company's projects will not be commercially successful, resulting
in costs not being recouped or anticipated profits not being realized. In
addition, there can be no assurance that the Company's projects, if
commercially successful initially, will remain commercially successful or be
promoted effectively and/or renewed by third-party agents or distributors.
RELIANCE ON MAJOR DISTRIBUTORS. The commercial success of a
television show, motion picture or video production may depend upon, among
other things, promotion by a distributor. Historically, the Company has relied
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on two distributors for domestic and foreign syndication of its television
programming. Although Management believes these distributors could be replaced
if necessary, a termination of the Company's relationship with these
distributors could materially adversely affect the Company's results.
COMPETITION IN MERCHANDISING AND ANIMATION. Competition is intense in
merchandising and the animation industry in which the Company is engaged.
Management believes that the Company is in competition with major entertainment
companies, as well as with numerous smaller entertainment companies and other
leisure time activities, for the consumer entertainment dollar. Management
believes that the Company's principal competitor is The Walt Disney Company,
which has far greater resources and distribution capabilities than the Company.
There can be no assurance that the Company will produce and market its products
successfully or that its merchandising and filmed entertainment projects will
generate any profits.
FLUCTUATIONS IN QUARTERLY AND YEARLY OPERATING RESULTS. The Company's
quarterly and yearly operating results may fluctuate in part due to the manner
in which the Company is required to record revenue from film licensing and
merchandising agreements. Although film licensing and merchandising agreements
typically grant rights for a period of one to five years, all revenues are
recognized when the license period begins, provided certain conditions are met.
Additionally, possible fluctuations in quarterly and yearly operating results
may arise due to the Company's timing in entering into merchandising and film
licensing agreements. For example, merchandising revenues with respect to a
particular character tend to be concentrated around the period of initial
release of a filmed entertainment project featuring such character.
Accordingly, the Company believes that period-to-period comparisons of its
results of operations are not necessarily an accurate indication of future
performance.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts
and abilities of its senior management, particularly Jeffrey A. Montgomery,
the Company's Chief Executive Officer and Gregory M. Yulish, its Executive Vice
President and Chief Financial Officer. The Company maintains a $2,000,000
"keyman" life insurance policy on Mr. Montgomery. The loss of any of the
Company's key executives could have an adverse effect on the business and
prospects of the Company.
UNISSUED PREFERRED STOCK; SHARES ELIGIBLE FOR FUTURE SALE. The Board
of Directors without further action by the holders of Common Stock may issue up
to 3,000,000 shares of preferred stock, no par value (the "Preferred Stock") in
one or more series and may fix or alter the rights, preferences, privileges and
restrictions, including the voting rights, redemption provisions (including
sinking fund provisions), dividend rights, dividend rates, liquidation
preferences and conversion rights, and the description of and number of shares
constituting any wholly unissued series of Preferred Stock. No shares of
Preferred Stock presently are outstanding. The issuance of Preferred Stock
shares under certain circumstances could have the effect of delaying or
preventing a change of control or other corporate action and may dilute the
interests of the holders of Common Stock. In addition, sales of Common Stock
in the public market could adversely affect the market price of the Company's
shares. Options granted under the Company's stock option plans, registration
rights granted to certain individuals and shares of previously restricted
Common Stock are all eligible for sale in the public market, subject, in some
cases, to certain restrictions.
ITEM 2. PROPERTIES
The Company leases approximately 7,237 square feet (gross) of office
space in Century City (Los Angeles) pursuant to a five (5) year lease entered
into in August 1996. The Company also leases approximately 9,000 square feet
(gross) of office space in Santa Monica pursuant to a ten-year lease entered
into in December 1993. The Company has subleased approximately 6,000 square
feet of this space to an unaffiliated person through January 31, 2001, and
subleases approximately 3,000 square feet to a Universal Studios' subsidiary
for $7,000 per month. The Company is presently in discussions with Universal
Studios about converting the month-to-month sublease into a longer term
arrangement. The Company's principal business address is 1999 Avenue of the
Stars, Suite 2050, Los Angeles, California 90067.
-9-
<PAGE> 10
ITEM 3. LEGAL PROCEEDINGS
THE HARVEY ENTERTAINMENT COMPANY V. JEFFREY FRANKLIN ET AL. AND STEVE WATERMAN
On September 30, 1994, the Company filed suit in the Superior Court of
the State of California for the County of Los Angeles against Jeffrey Franklin,
Jeffrey Franklin d/b/a ATI Enterprises, and Franklin/Waterman Entertainment,
Inc. alleging breach of fiduciary duty, intentional interference with
prospective economic advantage, breach of contract, breach of the implied
covenant of good faith and fair dealing, tortious breach of the implied
covenant of good faith and fair dealing, fraud, intentional misrepresentation,
unfair competition and constructive trust. The Company filed a related claim
against Franklin's business partner Stephen Waterman in May, 1996. Jeffrey
Franklin is a former member of the Company's Board of Directors who, along with
his company ATI Equities and his partner Steve Waterman, entered into an
agreement (the "Contract") requiring Franklin et al. to act as the Company's
exclusive agent with regard to the presentation of motion picture, television,
video and music projects by the Company to potential buyers, distributors,
financiers, investors and other parties. Pursuant to the Contract, Franklin
was to consult with the Company regarding the negotiation of any agreements in
the above-mentioned areas. Franklin/Waterman Entertainment, Inc. is a
corporation closely related to Franklin and Waterman.
In this action, the Company has alleged among other things that
Franklin (while acting as a director and agent of the Company), ATI and
Waterman conspired to wrongfully usurp corporate business opportunities for
themselves and for Franklin/Waterman which rightfully belonged to the Company,
and misrepresented to the Company the facts surrounding the transactions. The
Company has sued for constructive trust to recover the profits the defendants
made from those wrongful acts, and for compensatory and punitive damages in an
amount exceeding $1,000,000.
On December 13, 1994, several months after a $50 million fraud
judgment (including punitive damages) was awarded against Franklin and Waterman
in Los Angeles Superior Court, Franklin and Waterman filed for bankruptcy
pursuant to Chapter 11 of the United States Bankruptcy Code in the United
States District Court for the Central District of California, Northern
Division, Case No. 94-15283. The automatic stay has been lifted against
Jeffrey Franklin and Steve Waterman.
Discovery has recently been completed. The Company believes that the
eventual outcome of the Franklin and Waterman actions will not have a material
effect on the financial position of the Company. However, given the
uncertainties of litigation, no assurances can be given as to the final outcome
of this action or its effect.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-10-
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET PRICES
The Company's Common Stock trades on The Nasdaq Stock Market's
National Market under the symbol HRVY. Prior to December 5, 1994, the
Company's Common Stock traded on The Nasdaq Stock Market's SmallCap Market.
The following table sets forth, for the fiscal quarters indicated, the high and
low sale price for the Company's Common Stock.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal year ended December 31, 1994:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . $14.00 $9.50
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . 11.00 8.25
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . 14.00 10.00
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . 19.50 11.75
Fiscal year ended December 31, 1995:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . $18.25 $13.75
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . 17.75 6.50
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . 15.00 7.50
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . 12.50 6.25
Fiscal year ended December 31, 1996
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . $10.00 $6.25
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . 12.00 6.75
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . 9.63 6.50
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . 9.13 5.25
Fiscal year ended December 31, 1997:
First Quarter through March 21, 1997 . . . . . . . . . . . . . $8.50 $5.63
</TABLE>
HOLDERS
As of February 28, 1997, there were approximately 183 holders of
record of the Company's Common Stock.
DIVIDENDS
To date, the Company has never paid cash dividends on its Common
Stock, and provisions in the Company's Revolving Credit Facility prohibit the
payment of dividends. The Board of Directors expects that the Company will
continue to retain any future earnings for use in its business.
RECENT SALES OF UNREGISTERED SECURITIES.
In January 1997, the Company issued two warrants to purchase Common
Stock. The first, for a total of 50,000 shares of the Company's Common Stock,
was issued to Arnhold and S. Bleichroeder, Inc. as compensation for investor
relations and other related services. Of the 50,000 shares, options for 25,000
shares vested immediately for services to the Company in 1997 and may be
exercised at any time through January 16, 2002. The second option, for 25,000
shares, will only vest if the Company requests that Arnhold and S. Bleichroeder
perform similar services for calendar year 1998 and, in such case, the option
will be available for exercise through January 16, 2003. The second option for
a total of 50,000 shares was issued to Michael Doherty, an advisor to the
Company and former employee of Arnhold and S. Bleichroeder, on similar terms.
Both warrants were issued in reliance on the private placement exemption of
Section 4(2) of the Securities Act of 1933, as amended.
-11-
<PAGE> 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
INTRODUCTION
The Company conducts its operations through its wholly-owned
subsidiary, Harvey Comics, Inc. The Company was formed by Jeffrey A.
Montgomery in 1989 and acquired Harvey that year from the families of its
founders.
The Company's revenues are derived from two principal sources: (i)
Merchandising and (ii) Filmed Entertainment. The Company no longer publishes
comic books.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Filmed Entertainment Revenues . . . . . . . . . . . . . . . . . . $5,824,000 $3,544,000
Merchandising Revenues . . . . . . . . . . . . . . . . . . . . . 3,344,000 5,554,000
--------- ---------
Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . 9,168,000 9,098,000
--------- ---------
Cost of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . 2,492,000 3,244,000
Selling, General & Administrative Expenses . . . . . . . . . . . 4,008,000 3,722,000
Interest, Depreciation and Amortization . . . . . . . . . . . . . 806,000 828,000
--------- ---------
Income from Operations . . . . . . . . . . . . . . . . . . . . . 1,862,000 1,304,000
Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . 377,000 234,000
--------- ---------
Income before Provision for Income Taxes . . . . . . . . . . . . 2,239,000 1,538,0000
Provision for Income Taxes . . . . . . . . . . . . . . . . . . . 972,000 685,000
--------- ---------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,267,000 $853,000
========= =========
Net Income Per Share . . . . . . . . . . . . . . . . . . . . . . $0.33 $0.21
========= =========
</TABLE>
RESULTS OF OPERATIONS
Fiscal Year 1996 Compared to Fiscal Year 1995
The Company's net operating revenues in the 1996 and 1995 were
$9,168,000 and $9,098,000, respectively, an increase of $70,000. The increase
in revenues from 1995 to 1996 includes an increase of $2,280,000 in filmed
entertainment revenues and a decrease of $2,210,000 in merchandising revenues.
REVENUES
Net filmed entertainment revenues were $5,824,000 and $3,544,000 in
1996 and 1995, respectively, an increase of $2,280,000. The increase in filmed
entertainment revenues was primarily due to the Company entering into an
agreement with Saban Entertainment to co-produce two feature length, live
action direct-to-video films based on the Company's Casper and Richie Rich
characters. For "Casper," the Company received a $3,300,000 nonrefundable
advance from Saban Entertainment against 50% of net receipts after production,
marketing and third-party out-of-pocket 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 obtained the exclusive license to distribute for television
broadcast through June 1998, 56 episodes of "Casper and Friends" in the United
States. The Company was paid a minimum nonrefundable 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 $819,000 in 1996 and $2,029,000 in 1995, a
decrease of $1,210,000 or 60%. The decrease is due to fewer licenses being
sold to third parties in 1996 versus 1995. 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
-12-
<PAGE> 13
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 $101,000 in 1996 and $696,000 in 1995. The
decrease in revenues is due to the Company receiving 100% of the revenues from
"The Baby Huey Show" in 1995 versus 25% in 1996. A portion of the 1996 "Baby
Huey Show," 13 7-minute "Baby Huey Shorts," was 100% financed by Universal
Studios and therefore the Company, which had no capital at risk, received a
lower participation. "The Baby Huey Show's" United States season ended in the
third quarter of 1996. The animated series "Richie Rich" premiered in
September 1996 and airs weekly in syndication. It is potentially available to
over 80% of the nation's households. Revenues associated with the domestic
barter sales of the "Richie Rich" animated series accounted for $430,000 in
1996. There were no such revenues in 1995. 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. Animation license fees
for the "Casper" series, which is being financed by Universal Studios and airs
on the Fox Kids Network, were $130,000 and $780,000 in 1996 and 1995,
respectively. The decrease in revenues is due to fewer shows being produced in
the later period. The balance of 1996 revenues consist of residuals from the
"Casper and Friends" animated series. The balance of 1995 revenues consist of
residuals from the "Casper and Friends" animated series and "Richie Rich"
cartoon royalties from Hanna-Barbera.
Net merchandising revenues were $3,344,000 and $5,554,000 in 1996 and
1995, respectively, a decrease of $2,210,000. The decrease in merchandising
revenue was due to a decline in licensees for the worldwide merchandising
program for Casper. The reason for the decline in licensees is primarily due
to the transition of merchandising for Casper from Universal Studios to the
Company and to the drop off in licensing fees after the release of the "Casper"
theatrical feature. 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, which has and will result 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 entered into in connection with the initial release of the
"Casper" motion picture have expired, and it is not known whether or how many
of such licenses will be renewed.
COST OF SALES
Costs of sales relating to filmed entertainment revenues were
$1,660,000 and $1,520,000 in 1996 and 1995, respectively. The increase in cost
of sales is due to an increase in filmed entertainment activity for the year.
As a percentage of net filmed entertainment revenues, cost of sales were 29%
and 43% 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 of "Casper and Friends" or "Richie Rich"
theatrical license fee. Costs associated with the Saban Entertainment
direct-to-video agreement were $550,000, of which amount $350,000 was paid to
officers of the Company as a producer's fee.
Merchandising costs of sales were $832,000 and $1,724,000 in 1996 and
1995, respectively. As a percentage of net merchandising revenues, cost of
sales were 25% and 31% in 1996 and 1995, respectively. The decrease in cost of
sales is due to a decrease in merchandising activity for the year. The
decrease in costs of sales as a percentage of revenues is due to lower fees
associated with revenues derived from non-theatrical Casper licenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) were $4,008,000
and $3,722,000 for 1996 and 1995, respectively, an increase of $286,000. The
increase in SG&A is due to an increase in legal expenses related to the
-13-
<PAGE> 14
Company's litigation and the hiring of additional employees in fall 1996. As a
percentage of net operating revenues, SG&A was 44% and 41% for 1996 and 1995,
respectively.
DEPRECIATION AND AMORTIZATION
Depreciation expense was $53,000 and $61,000 in 1996 and 1995,
respectively. Amortization of the film library was $558,000 and $580,000 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 $51,000 in 1996 and $44,000 in 1995.
Amortization of goodwill was $130,000 in both 1996 and 1995.
INTEREST EXPENSE
Interest expense was $14,000 and $13,000 in 1996 and 1995,
respectively. Interest expense in 1996 and 1995 was due to annual loan fees on
the Company's line of credit. See "Liquidity and Capital Resources."
OTHER INCOME
Other income, primarily interest income, was $377,000 and $234,000 in
1996 and 1995, respectively. The increase in other income was due to higher
cash balances for the period, which generated increased interest income on the
Company's short-term investments.
INCOME TAXES
Provision for income taxes was $972,000 and $685,000 in 1996 and 1995,
respectively. The increase in the provision for income taxes is due to the
Company's increased profitability in 1996 versus 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3,899,000 and
$1,594,000 in 1996 and 1995, respectively. Cash generated from operations was
primarily due to the increase in net income for the year and proceeds from the
collection of receivables.
The Company believes that obligors liable on all receivables are of
good quality and that the allowance for doubtful accounts at December 31, 1996
in the amount of $573,000 is adequate. The Company continually reevaluates its
receivables to reassess its allowance for bad debts. The Company does not
believe the bankruptcy of Marvel will have an adverse effect on its ability to
collect funds due under its comic book publishing arrangement.
Net cash (used in) provided by investing activities was $(2,265,000)
and $1,337,000 in 1996 and 1995, respectively. The decrease in cash flows from
investing activities is primarily attributed to the Company's investment of
$1,872,000 in the production of 13 "Richie Rich" animated shorts in 1996.
There were no such charges in 1995.
Net cash provided by financing activities was $56,000 and $831,000 in
1996 and 1995, respectively. The 1995 and 1996 cash flows were the result of
proceeds from the exercise of stock options. The Company did not draw on its
bank credit facility in 1996 or in 1995.
The Company has a $2,500,000 revolving credit facility (the "Revolving
Facility") with City National Bank, which expires on June 1, 1997. Interest on
advances made under the Revolving Facility accrues at 1% above the prime rate
as reported by the lender. The Company has not drawn on this facility. The
Revolving Facility is secured by substantially all of the assets of the
Company.
The Revolving Facility prohibits the payment of dividends or other
distributions by Harvey to the Company, the guaranty by Harvey of Company
obligations, the grant of additional liens or security interests by Harvey, the
sale
-14-
<PAGE> 15
of assets or the making of loans or other advances by Harvey (including loans
to the Company), or the incurrence of new indebtedness for borrowed money by
Harvey. In addition, as amended, the Revolving Facility prohibits Harvey from
(i) permitting its net worth to fall below $12,000,000 as of the end of any
fiscal quarter, (ii) permitting its current ratio to be less than 1.5 to 1.0,
or (iii) permitting its ratio of indebtedness to net worth to be greater than
.65 to 1.0.
INFLATION AND SEASONALITY
Inflation has not been material to the Company during the past four
years.
ITEM 7. FINANCIAL STATEMENTS
[Pages F-1 through F-16 follow.]
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
[PART III FOLLOWS PAGE F-16, AT PAGE 16.]
-15-
<PAGE> 16
ITEM 7. FINANCIAL STATEMENTS
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31,
1996 AND 1995:
Consolidated Balance Sheets F-3 to F-4
Consolidated Statements of Income F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-16
</TABLE>
F-1
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Harvey Entertainment Company
Los Angeles, California:
We have audited the accompanying consolidated balance sheets of The Harvey
Entertainment Company and subsidiary (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Harvey Entertainment Company
and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 14, 1997
F-2
<PAGE> 18
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,057,000 $ 4,367,000
Accounts receivable, net (Note 2) 2,342,000 3,465,000
Prepaid expenses and other current assets 226,000 171,000
Prepaid income taxes 620,000
Note receivable - officer/stockholder (Note 8) 128,000
----------- -----------
Total current assets 9,245,000 8,131,000
LONG-TERM ACCOUNTS RECEIVABLE (Note 2) 410,000 642,000
FILM LIBRARY, Net of accumulated amortization of $2,853,000
and $2,295,000 in 1996 and 1995, respectively 10,106,000 8,656,000
FURNITURE AND EQUIPMENT, Net of accumulated depreciation
of $260,000 and $207,000 in 1996 and 1995, respectively 277,000 170,000
GOODWILL, Net of accumulated amortization of $963,000 and
$833,000 in 1996 and 1995, respectively 1,633,000 1,762,000
TRADEMARKS AND COPYRIGHTS, Net of accumulated
amortization of $160,000 and $181,000 in 1996 and
1995, respectively 503,000 374,000
OTHER ASSETS 130,000 87,000
----------- -----------
TOTAL (Note 4) $22,304,000 $19,822,000
=========== ===========
</TABLE>
See notes to consolidated financial statements. (Continued)
F-3
<PAGE> 19
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Notes 8 and 9) $ 1,075,000 $ 789,000
Income taxes payable (Note 3) 87,000
------------ ------------
Total current liabilities 1,075,000 876,000
DEFERRED INCOME TAXES (Note 3) 2,610,000 1,724,000
ACCRUED RENT (Note 5) 137,000 63,000
------------ ------------
Total liabilities 3,822,000 2,663,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 6 and 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; authorized, 3,000,000 shares; none issued (Note 6)
Common stock, no par value; 10,000,000 common shares authorized; 3,642,000
shares issued and outstanding in 1996 and 3,630,000 in 1995 (Notes 6 and 7) 18,900,000 18,844,000
Accumulated deficit (418,000) (1,685,000)
------------ ------------
Total stockholders' equity 18,482,000 17,159,000
------------ ------------
TOTAL $ 22,304,000 $ 19,822,000
============ ============
</TABLE>
See notes to consolidated financial statements. (Concluded)
F-4
<PAGE> 20
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
OPERATING REVENUES (Note 2):
Filmed entertainment $5,824,000 $3,544,000
Merchandising 3,344,000 5,554,000
---------- ----------
Total operating revenues 9,168,000 9,098,000
---------- ----------
OPERATING EXPENSES:
Cost of sales (Note 2) 2,492,000 3,244,000
Selling, general and administrative expenses (Notes 5, 8 and 9) 4,008,000 3,722,000
Amortization of film library, goodwill, trademarks and copyrights,
and other 739,000 754,000
Depreciation 53,000 61,000
Interest expense (Note 4) 14,000 13,000
---------- ----------
Total operating expenses 7,306,000 7,794,000
---------- ----------
INCOME FROM OPERATIONS 1,862,000 1,304,000
OTHER INCOME (Note 8) 377,000 234,000
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,239,000 1,538,000
PROVISION FOR INCOME TAXES (Note 3) 972,000 685,000
---------- ----------
NET INCOME $1,267,000 $ 853,000
========== ==========
WEIGHTED AVERAGE COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING 3,882,000 4,005,000
========== ==========
NET INCOME PER SHARE $ 0.33 $ 0.21
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 21
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY YEARS
ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 3,536,000 $ 17,895,000 $(2,538,000) $15,357,000
Exercise of stock options and
warrants, including tax benefit
(Notes 3 and 7) 94,000 949,000 949,000
Net income 853,000 853,000
--------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1995 3,630,000 18,844,000 (1,685,000) 17,159,000
Exercise of stock options (Note 7) 12,000 56,000 56,000
Net income 1,267,000 1,267,000
--------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1996 3,642,000 $ 18,900,000 $ (418,000) $ 18,482,000
========= ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 22
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,267,000 $ 853,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 53,000 61,000
Amortization of film library, goodwill, trademarks and
copyrights, and other 739,000 754,000
Write-off of deferred offering costs 315,000
Loss on sublease 112,000
Deferred income taxes 886,000 561,000
Changes in operating assets and liabilities:
Accounts receivable 1,355,000 (1,063,000)
Prepaid expenses and other current assets (55,000) (77,000)
Prepaid income taxes (620,000)
Deferred offering costs (242,000)
Accounts payable and accrued expenses 287,000 277,000
Accrued rent 74,000 (44,000)
Income taxes payable (87,000) 87,000
----------- -----------
Net cash provided by operating activities 3,899,000 1,594,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sale of marketable securities 1,435,000
Purchase of furniture and equipment (160,000) (90,000)
Investments in trademarks and copyrights and film library (2,175,000) (87,000)
(Increase) decrease in other assets (58,000) 79,000
Proceeds from notes receivable - officer/stockholder 128,000
----------- -----------
Net cash (used in) provided by investing activities (2,265,000) 1,337,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES
Proceeds from exercise of stock options 56,000 831,000
----------- -----------
</TABLE>
See notes to consolidated financial statements. (Continued)
F-7
<PAGE> 23
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
NET INCREASE IN CASH AND CASH EQUIVALENTS $1,690,000 $3,762,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,367,000 605,000
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $6,057,000 $4,367,000
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during the year
for:
Interest $ 14,000 $ 13,000
Income taxes $ 797,000 42,000
</TABLE>
See notes to consolidated financial statements. (Concluded)
F-8
<PAGE> 24
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The Harvey Entertainment Company is incorporated in the state of
California and is primarily engaged in filmed entertainment production and
merchandise licensing of its classic characters.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of The Harvey Entertainment Company and its wholly
owned subsidiary, Harvey Comics, Inc. (collectively, the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist primarily of cash, cash equivalents, accounts receivable, accounts
payable and accrued liabilities. The carrying values of all financial
instruments, other than long-term receivables, are representative of their
fair values due to their short-term maturities. The carrying values of
long-term accounts receivable are considered to approximate their fair
values because the interest rates used to discount these instruments are
comparable to current rates offered to the Company.
CASH AND CASH EQUIVALENTS - The Company considers investments with
original maturities of 90 days or less to be cash equivalents.
FILM LIBRARY - The film library (which is recorded at the lower of cost or
estimated net realizable value) is amortized using the individual film
forecast method in accordance with SFAS No. 53, "Financial Reporting by
Producers and Distributors of Motion Picture Films." The individual film
forecast method amortizes costs in the ratio that the current year's
revenues bear to management's estimate of total remaining ultimate gross
film revenues from all sources. Such estimates are revised periodically,
and losses, if any, are provided for in full.
Based upon the Company's estimates of future gross revenues at December
31, 1996, approximately 18% of the unamortized film library will be
amortized during the three-year period ending December 31, 1999. In
addition, the Company estimates that approximately 60% of the unamortized
film library will be amortized over the next 15 years. Because of the
inherent uncertainties in estimating the remaining ultimate gross film
revenues, it is at least reasonably possible that the Company's estimates
of amortization will change in the near term.
FURNITURE AND EQUIPMENT - Furniture and equipment are stated at cost and
are depreciated using the straight-line method over three- to five-year
estimated lives.
F-9
<PAGE> 25
GOODWILL - Goodwill is amortized on a straight-line basis over 20 years.
The Company periodically reviews the recoverability of goodwill to
determine if there has been any permanent impairment. This assessment is
performed based on the estimated undiscounted future cash flows from
operating activities compared with the carrying value of goodwill. If the
undiscounted future cash flows are less than the carrying value, a
write-down would be recorded measured by the amount of the difference.
REVENUE RECOGNITION - The majority of the Company's licensing agreements
for merchandising and filmed entertainment call for nonrefundable
guaranteed fees, which are recognized when the license period begins,
provided certain conditions have been met. Additional merchandising and
film licensing revenues are recognized when earned based on royalty
statements.
CONCENTRATION OF CREDIT RISK - The Company's trade receivables result
primarily from licensing agreements for merchandising and the animation
film library, throughout the world. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.
Although the Company has a diversified customer base, a substantial
portion of its debtors' ability to honor their contracts is dependent upon
the merchandising and filmed entertainment industries.
NET INCOME PER SHARE - Net income per share is computed based on the
weighted average shares and common share equivalents outstanding during
the period.
2. SIGNIFICANT DISTRIBUTORS AND EXPORT SALES
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Accounts receivable:
Domestic $ 1,302,000 $ 2,573,000
Foreign 2,023,000 2,156,000
----------- -----------
3,325,000 4,729,000
Allowance for doubtful accounts (573,000) (622,000)
----------- -----------
2,752,000 4,107,000
Long-term portion (410,000) (642,000)
----------- -----------
$ 2,342,000 $ 3,465,000
=========== ===========
</TABLE>
In April 1996, Universal Studios, Inc.'s ("Universal," formerly MCA, Inc.)
right to act as the Company's exclusive merchandising agent lapsed. In
January 1997, the Company and Universal tentatively agreed upon a new
merchandising agreement whereby the Company will serve as the exclusive
merchandising agent for the Company's characters. Universal currently owns
approximately 9% of the Company's common stock.
Through April 1996, Universal acted as the Company's worldwide agent for
all merchandise licensing other than comic books. In such capacity,
Universal was entitled to recoup a certain amount of documented expenses
and retain a distribution fee based upon the amount of revenues derived
from the merchandising agreements. Merchandising revenues earned under
this agreement totaled $2,858,000 and $5,105,000 in 1996 and 1995,
respectively. In connection with this agreement, the Company has
receivables under merchandising licenses of $1,177,000 and $2,406,000 at
December 31, 1996 and 1995, respectively. Long-term receivables have been
discounted to their net present value, using discount rates of between 9%
and 10% per annum.
F-10
<PAGE> 26
In 1995, the Company entered into an agreement with Universal whereby
Universal produced 13 animated shorts featuring the Company's "Baby Huey"
character. In connection with this agreement, the Company recognized
$87,000 in revenue in 1995. In addition, the Company recognized $970,000
and $780,000 of revenue in connection with separate agreements with
Universal for license fees related to the production and distribution of
the "Casper" animated series and from its classic film library in 1996 and
1995, respectively. Receivables under these agreements totaled $128,000 at
December 31, 1995.
In 1996, the Company sold to an unrelated party the rights for direct to
video productions for two films featuring its characters. Minimum
nonrefundable guarantees received in 1996 totaled $3,300,000, which have
been recognized as income. In January 1996, Warner Bros., Inc., 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.
The Company has entered into a contract with a foreign distributor, which
expires in November 1997, to license its film product. Sales through this
distributor were $819,000 and $2,029,000 for the years ended December 31,
1996 and 1995, respectively. Cash receipts from film licensing are
remitted by the exhibitors to the distributor, who, in turn, remits these
receipts to the Company, net of distribution fees, which are included in
cost of sales. At December 31, 1996 and 1995, accounts receivable under
this distribution contract totaled $643,000 and $987,000, respectively.
The Company entered into agreements with a barter sales agent whereby the
agent sold domestically the commercial time the Company was entitled to
receive on two syndicated animated television series featuring the
Company's characters. Under the terms of the agreements, the agent
received commissions on all proceeds from advertising sales (net of
advertising agency commissions). The agent and advertising agency
commissions are included in cost of sales. Sales through this agent were
$531,000 and $608,000 for the years ended December 31, 1996 and 1995,
respectively. Accounts receivable from the sale of this commercial time
totaled $321,000 and $126,000 at December 31, 1996 and 1995, respectively.
The Company entered into an agreement with Marvel Entertainment Group,
Inc. ("Marvel"), effective July 25, 1994, whereby Marvel would exclusively
publish and distribute comic books in the United States based upon the
Company's characters. The agreement remains in effect until June 30, 2000
and will automatically renew for successive one-year periods until either
party gives written notice of termination. Marvel guarantees that the
Company will receive a minimum of $200,000 each year of the agreement (up
to a maximum guarantee of $1,000,000) against a royalty based upon the net
sales of comic books by Marvel. All revenues related to the agreement were
recognized in 1994. Receivables from Marvel (which have been discounted to
their net present value using a discount rate of 10% per annum) totaled
$479,000 and $642,000 at December 31, 1996 and 1995, respectively. Marvel
filed for bankruptcy reorganization in December 1996. The Company is
uncertain as to the effect of Marvel's bankruptcy on the Company's
business but does not believe that the Marvel bankruptcy will have a
material impact on the Company's financial statements.
F-11
<PAGE> 27
Export sales by geographic area for the years ended December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Asia $ 144,000 $ 883,000
Canada 179,000 117,000
Europe 1,309,000 3,141,000
Other 360,000 591,000
---------- ----------
$1,992,000 $4,732,000
========== ==========
</TABLE>
3. INCOME TAXES
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and income tax bases of assets
and liabilities that will result in taxable or deductible amounts in the
future. Such deferred income tax asset and liability computations are
based on enacted tax laws and rates applicable to periods in which the
differences are expected to reverse. A valuation allowance is established,
when necessary, to reduce deferred income tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred income tax assets and liabilities. In connection with the
acquisition of Harvey Comics, Inc. during 1989, the income tax basis of
the assets acquired remained at the pre-acquisition value. As a result,
all amortization of the acquired film library and trademarks and
copyrights is not deductible for income tax purposes, resulting in the
deferred income tax liability. The liability has been reduced by
approximately $228,000 to give effect to the benefit resulting from net
operating loss carryforwards.
For income tax purposes, the Company has available approximately $650,000
in federal net operating loss carryforwards that expire in 2004 through
2009.
The provision for income taxes for the years ended December 31, 1996 and
1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current $ 86,000 $124,000
-------- --------
Deferred 886,000 443,000
Amounts related to exercise of stock options 118,000
-------- --------
Total deferred 886,000 561,000
-------- --------
Provision for income taxes $972,000 $685,000
======== ========
</TABLE>
The income tax benefits resulting from the exercise of stock options have
been reflected as an addition to stockholders' equity.
F-12
<PAGE> 28
Income tax computed at the statutory federal income tax rate (35%) and the
provision for income taxes in the financial statements for the years ended
December 31, 1996 and 1995 differ as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Provision computed at the statutory rate $784,000 $539,000
State income taxes, net of federal income tax benefit 143,000 101,000
Amortization of goodwill 45,000 45,000
-------- --------
Provision for income taxes $972,000 $685,000
======== ========
</TABLE>
4. DEBT
The Company has a revolving loan and security agreement that allows
maximum borrowings of up to $2,500,000 and expires on June 1, 1997.
Borrowings under the line of credit are collateralized by substantially
all of the assets of the Company and bear interest at the lenders' prime
rate plus 1% per annum (9.25% at December 31, 1996). The agreement is
subject to certain requirements, including, but not limited to, the
maintenance of minimum net worth, current ratio and indebtedness to net
worth, and also disallows the payment of dividends. At December 31, 1996,
the Company was in compliance with these covenants. No amounts were
outstanding under this line of credit at December 31, 1996 and 1995.
5. COMMITMENTS AND CONTINGENCIES
LEASES - The Company is committed under operating leases to minimum rental
payments (exclusive of real estate taxes and maintenance, net of sublease
income) through 2004 as follows:
<TABLE>
<CAPTION>
YEAR ENDING GROSS SUBLEASE
DECEMBER 31, RENTALS INCOME NET
<C> <C> <C> <C>
1997 $ 581,000 $ 257,000 $ 324,000
1998 593,000 261,000 332,000
1999 605,000 246,000 359,000
2000 618,000 171,000 447,000
2001 513,000 14,000 499,000
Thereafter 742,000 742,000
---------- ---------- ----------
$3,652,000 $ 949,000 $2,703,000
---------- ---------- ----------
</TABLE>
The effective annual rent expense for the Company is the total rent to be
paid over the term of the lease, amortized on a straight-line basis. The
difference between the actual rent amount paid and the effective rent
recognized for financial statement purposes is reported as accrued rent.
Rent expense charged to operations was $216,000 and $233,000 for the years
ended December 31, 1996 and 1995, respectively. Rent expense is net of
sublease income of $162,000 and $50,000 in 1996 and 1995, respectively.
F-13
<PAGE> 29
EMPLOYMENT AGREEMENTS - In 1995, the Company entered into employment
contracts with its Chairman/Chief Executive Officer and Chief Financial
Officer that require periodic payments aggregating $450,000 per year
through April 1998. In addition, as part of the employment agreements, the
officers were issued options to purchase 150,000 shares of the Company's
common stock under the 1993 Stock Option Plan (see Note 7) and will be
issued additional options in April 1997 for 75,000 shares.
In 1996, the Company entered into employment contracts with two other
employees. The Company is committed to salaries under these contracts of
$254,000 in 1997 and $201,000 in 1998.
LITIGATION - The Company v. Franklin et. al. On September 30, 1994, the
Company filed a claim against a former member of the Board of Directors
and his affiliates (see Note 8) for damages arising from breach of
fiduciary duty, fraud and breach of contract, and seeks to recover the
former board member's profits from the wrongful acts, plus compensatory
and punitive damages. On November 15, 1994, an answer and cross-complaint
was filed against the Company for breach of contract and other breaches.
The former board member seeks $1.5 million in compensatory damage, an
accounting from the Company based on claims of breach of contract and
breach of implied covenant of good faith and fair dealing, and punitive
damages. On December 13, 1994, the former board member filed for
bankruptcy pursuant to Chapter 11 of the United States Bankruptcy Code.
The automatic stay has been lifted pursuant to a stipulated order of the
Bankruptcy Court. Discovery has been ongoing in these actions but is not
yet completed. Management of the Company believes that the former board
member's claims are without merit.
Management of the Company believes that the eventual outcome of this case
will not have a material effect on the financial position of the Company;
however, it is at least reasonably possible that the final outcome of this
action will have a material effect on the Company, although the amount
cannot be estimated.
The Company v. Fleischer Studios, Inc. et. al. In November 1995, the
Company filed an action against Fleischer Studios, Inc. and an individual
for breach of contract, fraud, and accounting and copyright infringement
in connection with the copyright to the character "Betty Boop." In an
agreement reached in 1996, the Company will receive $375,000 in settlement
of such claims, and the Company gave up all future rights to the
character.
6. PREFERRED STOCK
The Company is authorized to issue 3,000,000 shares of $1 par value
preferred stock. The Board of Directors, without further action by the
holders of the common stock, may fix or alter the rights, preferences,
privileges and restrictions of the preferred stock.
7. STOCK OPTIONS AND WARRANTS
1993 AND 1994 STOCK OPTION PLANS - Under the Company's 1993 Stock Option
Plan, the Company granted options to purchase 400,000 shares of common
stock to officers and employees. In 1994, the Company adopted the 1994
Stock Option Plan, under which the Company can grant options to purchase
200,000 shares of common stock. The Company has discretion, subject to the
terms of the Plans, to select the persons entitled to receive options, the
terms and conditions on which options are granted, the exercise price, the
time period for vesting such shares, and the number of shares subject
thereto.
F-14
<PAGE> 30
Options granted to any person who owns stock possessing more than 10% of
the combined voting power of all classes of the Company's stock shall be
at an exercise price no less than 110% of fair market value on the date of
grant. The exercise price in the case of options granted to all other
persons must be at least equal to the fair market value of the common
stock as of the date of grant.
SPECIAL STOCK OPTION PLAN OF 1993 - The Special Stock Option Plan of 1993
(the "Plan") compensated three executives for their agreement to reduce
previously agreed-upon compensation. The Plan provided for the grant of
options to these executives to purchase 200,000 shares and may also
provide options to other employees in similar circumstances. The exercise
price for the options is $4.40 per share, 110% of the fair market value at
the date of grant. The options became exercisable in January 1994, after
commencement of principal photography of a motion picture based on a
character licensed from the Company, and expire in January 1999.
STOCK OPTION PLAN OF 1997 - In December 1996, the Board of Directors
authorized (subject to stockholder approval) the 1997 Stock Option Plan,
which provides for the granting of up to 300,000 shares to employees,
directors and certain other third parties.
Transactions under the plans during 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1993 SPECIAL
1993 STOCK 1994 OPTION PRICE
PLAN OPTION PLAN PLAN PER SHARE
<S> <C> <C> <C> <C>
Options outstanding, January 1, 1995 372,000 180,000 5,000 $4.00 - $7.25
Options granted 164,000 $ 7.25
Options exercised (13,000) (18,000) $4.00 - $7.25
Options canceled (1,000) $ 7.50
-------- -------- --------
Options outstanding, December 31, 1995 358,000 162,000 169,000 $4.00 - $7.25
Options granted 20,000 19,000 7.25
Options exercised (12,000) 7.25
Options canceled (32,000) (1,000) 7.25
-------- -------- --------
Options outstanding, December 31, 1996 334,000 162,000 187,000 $4.00 - $7.25
======== ======== ======== =============
</TABLE>
In December 1996, the Board of Directors authorized that all options
outstanding with an exercise price in excess of $7.25 be repriced to $7.25
per share. The new exercise price was in excess of the trading price of
the Company's common stock.
At December 31, 1996, 30,000 and 12,000 shares were available for grant
under the 1993 Plan and the 1994 Plan, respectively. At December 31, 1996,
194,000, 162,000 and 80,000 options were exercisable under the 1993 Plan,
the Special Stock Option Plan of 1993, and the 1994 Plan, respectively. No
options has been granted under the 1997 Plan.
STOCK REPURCHASE PROGRAM - In January 1997, the Board of Directors
authorized (subject to stockholder approval) a stock repurchase program
whereby the Company may, from time to time, in market transactions,
purchase up to $10% of its outstanding common stock. Through February 14,
1997, the Company has repurchased 35,000 shares.
F-15
<PAGE> 31
OTHER - In connection with a terminated consulting agreement (see Note 8),
the Company granted an option during 1990 to a corporation owned by a
former member of the Board of Directors to purchase 99,000 shares of
common stock of the Company at 70% of the fair market value at the time
such option is exercised, subject to certain conditions as specified in
the consulting agreement. The Company has previously recognized the
expense related to this option.
WARRANTS - In connection with a public offering in 1993, the underwriters
received warrants to acquire 120,000 shares of the Company's common stock
for 145% of the offering price ($10.88 per share). During 1995, warrants
were exercised for 63,000 shares of common stock.
In February 1994, the Company issued warrants to purchase 100,000 shares
of its common stock at $13.48 per share (110% of the average closing price
of the Company's common stock on the ten days preceding the agreement
date) to a producer of a motion picture featuring one of the Company's
characters. The warrant expires five years from the date of grant.
In January 1997, the Company issued warrants to purchase 100,000 shares of
its common stock at $10.00 per share to advisors of the Company. The
warrants vest 50% upon date of grant and 50% one year from the date of
grant, but only if the Company requests the advisors to perform services
for 1998. The warrants expire five years from the date of vesting.
8. RELATED PARTIES
Through July 1993, the Company had a month-to-month consulting agreement
with a corporation owned by a former member of the Board of Directors of
the Company (see Note 5) whereby the Company paid a $5,000 per month
retainer against a fee equal to 10% of the gross margin, as defined, of
designated transactions. In addition, the related corporation receives
certain compensation when Universal develops motion pictures featuring
certain characters owned by the Company. The Company expensed $100,000 for
the year ended December 31, 1993 under this agreement, which is included
in accounts payable and accrued expenses at December 31, 1996 and 1995.
Another corporation owned by this former member of the Board of Directors
is the music publisher for certain films owned by the Company. The Company
will also share in future music publishing income, if any, generated by
these films. To date, no material income has been generated from music
publishing.
Note receivable consisted of a loan to the Company's Chairman/Chief
Executive Officer, collateralized by a deed of trust. This note was repaid
in 1996. Interest income on this note totaled $10,000 for each of the
years ended December 31, 1996 and 1995.
9. PROFIT-SHARING PLAN
The profit-sharing plan covers substantially all employees with over one
year of service with the Company. Contributions under the profit-sharing
plan are at the discretion of the Company and are limited to 15% of
eligible employee compensation. The profit-sharing plan expense totaled
$76,000 and $59,000 in 1996 and 1995, respectively, and is included in
accounts payable and accrued expenses.
******
F-16
<PAGE> 32
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company will file a definitive Proxy Statement pursuant to
Regulation 14A for its annual meeting of shareholders presently scheduled to be
held on June 2, 1997. The called for by Items 9-12 above will be included in
such definitive Proxy Statement under the captions "Election of Directors,"
"Management and Directors," "Executive Compensation and Other Remuneration,"
"Security Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions," which are hereby incorporated herein
by reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION
3.1 Second Amended and Restated Articles of Incorporation of the
Registrant (incorporated herein by reference to Exhibit 3.1 of
Company's Registration Statement No. 33-63363-LA)
3.2 First Amendment to Second Amended and Restated Articles of
Incorporation of the Registrant (incorporated herein by
reference to Exhibit 3.2 of Company's Registration Statement
No. 33-63363-LA)
3.3 Second Restated and Amended Bylaws of the Registrant
(incorporated herein by reference to Exhibit 3.3 of Company's
Registration Statement No. 33-63363-LA)
3.4 First Amendment to Second Restated and Amended Bylaws of the
Registrant (incorporated herein by reference to Exhibit 3.4 of
Company's Registration Statement No. 33-63363-LA)
4 Form of Stock Certificate (incorporated herein by reference to
Exhibit 4 of Company's Registration Statement No. 33-63363-LA)
10.1 Registration Agreement, dated as of December 7, 1990, by and
among the Company, AKAUSA and MCA (incorporated herein by
reference to Exhibit 10.11 of Company's Registration Statement
No. 33-63363-LA)
10.2 Shareholders Agreement, dated as of December 7, 1990, by and
among the Company, AKAUSA and MCA (incorporated herein by
reference to Exhibit 10.12 of Company's Registration Statement
No. 33-63363-LA)
10.3 Memorandum of Distribution Agreement, dated as of December 7,
1990, by and among the Company, Harvey and MCA (portions of
which have been filed under a confidentiality request)
-16-
<PAGE> 33
(incorporated herein by reference to Exhibit 10.13 of
Company's Registration Statement No. 33-63363-LA)
10.4 Employment Agreement, effective as of July 10, 1989, between
Jeffrey A. Montgomery and the Company (incorporated herein by
reference to Exhibit 10.14 of Company's Registration Statement
No. 33-63363-LA)
10.5 Amendment to Employment Agreement, effective April 1, 1993,
between Jeffrey A. Montgomery and the Company (incorporated
herein by reference to Exhibit 10.15 of Company's Registration
Statement No. 33-63363-LA)
10.6 Employment Agreement, effective as of April 1, 1993, between
Gregory M. Yulish and the Company (incorporated herein by
reference to Exhibit 10.17 of Company's Registration Statement
No. 33-63363-LA)
10.7 Syndication Agreement, dated as of November 28, 1990, by and
among Claster Television, Inc. and Harvey (incorporated herein
by reference to Exhibit 10.23 of Company's Registration
Statement No. 33-63363-LA)
10.8 License Agreement, dated as of March 1, 1990, by and among HIT
Communications Plc. and Harvey (incorporated herein by
reference to Exhibit 10.24 of Company's Registration Statement
No. 33-63363-LA)
10.9 Distribution Acquisition Agreement, dated as of March 15,
1992, by and among MCA Home Video, Inc. and Harvey (portions
of which have been filed under a confidentiality request)
(incorporated herein by reference to Exhibit 10.25 of
Company's Registration Statement No. 33-63363-LA)
10.10 Publishing Agent Agreement, dated as of July 1, 1990, and
Amendment, dated as of June 1992, by and among Marvel
Entertainment Group, Inc. and Harvey (incorporated herein by
reference to Exhibit 10.27 of Company's Registration Statement
No. 33-63363-LA)
10.11 Agreement, dated as of September 1, 1990, between ATI
Enterprises and the Company (incorporated herein by reference
to Exhibit 10.39 of Company's Registration Statement No.
33-63363-LA)
10.12 Agreement, dated as of December 19, 1991, between Stallion
Music, Inc. and Harvey (incorporated herein by reference to
Exhibit 10.40 of Company's Registration Statement No.
33-63363-LA)
10.13 1993 Stock Option Plan and Stock Option Agreements
(incorporated herein by reference to Exhibit 10.41 of
Company's Registration Statement No. 33-63363-LA)
10.14 Special Salary Reduction Stock Option Plan of 1993 and Stock
Option Agreements (incorporated herein by reference to Exhibit
10.42 of Company's Registration Statement No. 33-63363-LA)
10.15 Profit Sharing Plan and Trust Adoption Agreement (incorporated
herein by reference to Exhibit 10.43 of Company's Registration
Statement No. 33-63363-LA)
10.16 Promissory Note dated November 1, 1992 executed by Jeffrey A.
Montgomery in favor of Harvey together with short form deed of
trust (incorporated herein by reference to Exhibit 10.48 of
Company's Registration Statement No. 33-63363-LA)
-17-
<PAGE> 34
10.17 License Agreement, dated as of March 22, 1979, between Harvey
World Famous Comics Inc. and Hanna-Barbera Productions, Inc.
(incorporated herein by reference to Exhibit 10.49 of
Company's Registration Statement No. 33-63363-LA)
10.18 License Agreement, dated as of January 29, 1991, between
Merchandising Corporation of America, Inc. and Harvey
(incorporated herein by reference to Exhibit 10.52 of
Company's Registration Statement No. 33-63363-LA)
10.19 License Agreement, dated as of October 1, 1991, and amended
December 6, 1991, between MCA/Universal Merchandising, Inc.
and Harvey (incorporated herein by reference to Exhibit 10.56
of Company's Registration Statement No. 33-63363-LA)
10.20 License Agreement, dated as of January 1, 1992, between Jim
Henson Productions, Inc. and Harvey (incorporated herein by
reference to Exhibit 10.57 of Company's Registration Statement
No. 33-63363-LA)
10.21 License Agreement, dated as of January 9, 1992, between Turner
and Harvey (incorporated herein by reference to Exhibit 10.60
of Company's Registration Statement No. 33-63363-LA)
10.22 Distribution Contract, dated as June 1, 1990, between CINAR
Films Inc. and Harvey (incorporated herein by reference to
Exhibit 10.68 of Company's Registration Statement No.
33-63363-LA)
10.23 Letter Agreement between Claster Television Incorporated and
Registrant dated December 22, 1993 and amendment thereto dated
January 27, 1994 (incorporated herein by reference to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1993)
10.24 September 28, 1993, Amendment to Memorandum of Distribution
Agreement dated December 7, 1990 (incorporated herein by
reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1993)
10.25 Amendment to Employment Agreement between Registrant and
Gregory M. Yulish dated as of November 17, 1993 (incorporated
herein by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1993)
10.26 Warrant Agreement between Registrant and MCA, Inc. dated
November 18, 1993 (incorporated herein by reference to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1993)
10.27 Office Lease between Registrant and 100 Wilshire Associates
dated December 8, 1993 (incorporated herein by reference to
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1993)
10.28 Revolving Loan and Security Agreement between Registrant and
City National Bank dated October 27, 1993 (incorporated herein
by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1993)
10.29 Publishing License Agreement between Turner Publishing, Inc.
and Registrant dated as of May 26, 1993 (incorporated herein
by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1993)
10.30 1994 Stock Option Plan (incorporated by reference to the
Registrant's 1994 definitive Proxy Statement)
-18-
<PAGE> 35
10.31 Agreement dated July 25, 1994 between Marvel Entertainment
Group, Inc. and the Company (incorporated herein by reference
to the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1994)
10.32 Agreement dated September 22, 1994 between MCA, Inc. and the
Company (incorporated herein by reference to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1994)
10.33 Letter Agreement dated June 30, 1994 between the Company and
Barry Blumberg regarding his separation and consulting
services (incorporated herein by reference to Exhibit 10.80 of
Company's Registration Statement No. 33-86652)
10.34 Letter of Intent dated as of November 9, 1994 between the
Company and Arnhold and S. Bleichroeder, Inc. (incorporated
herein by reference to Exhibit 10.81 of Company's Registration
Statement No. 33-86652)
10.35 Letter re Sharing Agreement dated October 7, 1994 among AKAUSA
Holdings Limited, Registrant and Jeffrey A. Montgomery
(incorporated herein by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995)
10.36 Multi-Agreement Amendment No. 2 dated as of November 1, 1994
among Harvey Comics, Inc. and City National Bank (incorporated
herein by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995)
10.37 Multi-Agreement Amendment No. 3 dated as of September 1, 1995
among Harvey Comics, Inc. and City National Bank (incorporated
herein by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995)
10.38 Sublease Agreement dated as of November 14, 1995 between the
Company and Travelers Management, Inc., a California
corporation (incorporated herein by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1995)
10.39 Amended and Restated Employment Agreement effective as of
April 17, 1995 between the Company and Jeffrey A. Montgomery
(incorporated herein by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995)
10.40 Amended and Restated Employment Agreement effective as of
April 17, 1995 between the Company and Gregory M. Yulish
(incorporated herein by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995)
10.41 Stock Option Agreement dated as of July 13, 1995 between the
Company and Jeffrey A. Montgomery (incorporated herein by
reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1995)
10.42 Stock Option Agreement dated as of July 13, 1995 between the
Company and Gregory M. Yulish (incorporated herein by
reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1995)
10.43 Letter Agreement dated as of March 15, 1995 between MCA, Inc.
and the Company re: Baby Huey (incorporated herein by
reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1995)
-19-
<PAGE> 36
10.44 Agreement dated August 16, 1995 among the Company, Oppenheimer
& Co. and Arnhold and S. Bleichroeder, Inc. (incorporated
herein by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995)
10.45 Termination of Agreement dated January 18, 1996 among the
Company, Oppenheimer & Co. and Arnhold and S. Bleichroeder,
Inc. (incorporated herein by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1995)
10.46 Note Extension Agreement dated December 31, 1995 between the
Company and Jeffrey A. Montgomery (incorporated herein by
reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1995)
10.47 Casper Live Action Direct-To-Video Agreement dated May 28,
1996 between the Company and Saban Entertainment Inc.
(incorporated herein by reference to the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1996)
10.48 Sublease dated September 22, 1996 between MCA Records, Inc.
and the Company*
10.49 Warrant Agreement with Arnhold and S. Bleichroeder dated
January 16, 1997*
10.50 Warrant Agreement with Michael Doherty dated January 16, 1997*
10.51 Richie Rich Live Action Direct-To-Video Agreement between the
Company and Saban Entertainment Inc. (incorporated herein by
reference to the Company's Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1996)*
10.52 Summary of lease terms for the premises located at 1999 Avenue
of the Stars, Los Angeles*
10.53 Extension Agreement with City National Bank dated June 1, 1996*
11 Computation of Earnings Per Share*
21 List of subsidiaries of Registrant (incorporated herein by
reference to Exhibit 22 of Company's Registration Statement
No. 33-63363-LA)
23.1 Consent of Deloitte & Touche LLP*
24.1 Power of Attorney to sign Annual Report on Form 10-KSB, dated
March 28, 1997, executed by Gary M. Gray*
24.2 Power of Attorney to sign Annual Report on Form 10-KSB, dated
March 28, 1997, executed by Allan R. Raphael*
27 Financial Data Schedule
______________________
* Filed herewith
-20-
<PAGE> 37
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE HARVEY ENTERTAINMENT COMPANY
(Registrant)
Date: March 28, 1997 By: /s/ Gregory M. Yulish
--------------------------------
Gregory M. Yulish
Chief Financial Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jeffrey A. Montgomery Director and Chief March 28, 1997
- ------------------------------------------ Executive Officer
Jeffrey A. Montgomery
/s/ Gary M. Gray* Director March 28, 1997
- -----------------------------------------
Gary M. Gray
/s/ Allan R. Raphael* Director March 28, 1997
- ---------------------------------------------
Allan R. Raphael
</TABLE>
* By signing his name hereto, Jeffrey A. Montgomery, signs this document
as Chairman and Chief Executive Officer of the Company and on behalf of the
persons indicated above pursuant to powers of attorney duly executed by such
persons and filed herewith.
By: /s/ Jeffrey A. Montgomery
----------------------------------
Jeffrey A. Montgomery
Attorney-in-Fact
-21-
<PAGE> 1
EXHIBIT 10.48
SUBLEASE
1. PARTIES
This Sublease is entered into as of the 22 day of September, 1996 by and between
HARVEY COMICS ENTERTAINMENT, INC., A California corporation ("Sublandlord") and
MCA RECORDS, INC., a California corporation ("Subtenant"), with reference to the
Master Lease dated November 1, 1993 entered into by 100 Wilshire Associates, a
California limited partnership, as Landlord, and Sublandlord under this
Sublease, as Tenant. A copy of said Master Lease is attached hereto, and
incorporated herein by reference.
2. PROVISIONS CONSTITUTING SUBLEASE
a. This Sublease is subject to all of the terms and conditions of
the Master Lease attached as Exhibit A, except as specifically exempted
herein and Subtenant shall assume and perform the obligations of
Sublandlord as Tenant in said Master Lease, to the extent said terms and
conditions are applicable to the premises subleased pursuant to this
Sublease. Subtenant shall not commit or permit to be committed on the
Sublease Premises any act or omission which shall violate any term or
condition of the Master Lease. In the event of the termination of
Sublandlord's interest as Tenant under the Master Lease for any reason,
then this Sublease shall terminate coincidentally therewith without any
liability of Sublandlord to Subtenant provided such termination is not
the result of a default by Sublandlord as Tenant under the Master Lease.
b. All of the terms and conditions contained in the Master Lease are
incorporated herein, except: (i) for necessary modifications to the Basic
Lease Summary including Paragraphs A, G, I, J, K, L-1, L-2, O, and the
deletions of Paragraph 8.4, (ii) Exhibit B and Exhibit C, (iii) Addendum
II, (iv) Addendum III, Paragraphs 3, 4, 5, Paragraphs 8 & 9 (to the
extent they impose a burden or liability on Sublandlord), and 35 and (v)
Addendum IV as terms and conditions of this Sublease; (with each
reference therein to Landlord and Tenant to be deemed to refer to
Sublandlord and Subtenant except as otherwise provided in this Sublease)
and along with all of the following paragraphs set out in this Sublease,
shall be the complete terms and conditions of this Sublease. If there is
a conflict between the provisions of this Sublease and the Master Lease,
the provisions of this Sublease shall prevail as between Sublandlord and
Subtenant.
3. SUBLEASE PREMISES
Sublandlord leases to Subtenant and Subtenant hires from said Sublandlord the
approximately 3000 rentable square feet of the premises identified on the
drawing attached on Schedule I as Suite 1460 (the "Sublease Premises") which
premises are the same premises referred to as Suite 1450 in that certain
Sublease of the adjoining space known as Suite 1400 to Travelers Management,
Inc. Subtenant shall also be entitled to use two (2) parking spaces in the
<PAGE> 2
adjoining lot and five (5) parking spaces in the City parking structure which
spaces constitute Sublandlord's parking allocation applicable to the Sublease
Premises provided Subtenant pays all costs, expenses and fees imposed by
Landlord with respect to the use of such parking spaces.
4. TERM
4.1 Term. The term of this Sublease shall be for a period commencing
on October 1, 1996, and ending on January 31, 1997 subject to extension
as hereinafter provided unless sooner terminated pursuant to any
provisions hereof. The Sublease shall continue after January 31, 1997 on
a month to month basis upon all of the terms hereof for the remainder of
the term of the Master Lease unless either Sublandlord or Subtenant shall
give the other party a thirty (30) day notice of termination in which
event this Sublease shall terminate and Subtenant shall vacate the
Sublease Premises on the date specified in said notice which date shall
be at least thirty days after such notice is given.
4.2 Delay in Commencement. Notwithstanding said commencement date, if
for reasons beyond Sublandlord's control such as fire or other casualty
Sublandlord fails to timely deliver possession of the Sublease Premises,
Sublandlord shall not be subject to any liability therefor, nor shall
such failure extend the term hereof, but in such case, Subtenant shall
not be obligated to pay rent until possession of the Sublease Premises is
tendered to Subtenant; provided, however that if Sublandlord shall not
have vacated the Sublease Premises within thirty (30) days after said
scheduled commencement date, Subtenant may, at Subtenant's option, by
notice in writing to Sublandlord within ten (10) days thereafter, cancel
this Sublease.
4.3 Early Possession. In the event that Subtenant shall occupy all or
any part of the Sublease Premises prior to the commencement date of the
term, such occupancy shall be subject to all of the provisions of this
Sublease. Said early possession shall not advance the termination date of
this Sublease.
5. RENT
Subtenant shall pay to Sublandlord as rent for the Sublease Premises equal
monthly installments of SEVEN THOUSAND AND NO/100s DOLLARS ($7,000.00) in
advance, on the first (lst) day of each month of the term hereof. Subtenant
shall pay Sublandlord upon execution hereof the sum of SEVEN THOUSAND AND
NO/100s DOLLARS ($7000.00) as rent for the first month of the term, which amount
shall be paid in addition to the Security Deposit required hereunder. Rent for
any period during the term hereof which is for less than one (1) month shall be
a prorata portion of the monthly installment.
Except as otherwise provided in the Sublease or Master Lease, rent shall be
payable without notice or demand and without any deduction, offset, or abatement
in lawful money of the
-2-
<PAGE> 3
United States of America to Sublandlord at the address stated herein or to such
other persons or at such other places as Sublandlord may designate in writing.
In addition, Subtenant shall pay as additional rent: (i) all charges for after
hours air conditioning ordered for Subtenant's use of the Sublease Premises,
special cleaning services and other such charges imposed by Landlord with
respect to the Sublease Premises (but excluding increases in operating expenses
imposed by Landlord pursuant to the Master Lease), (ii) all taxes and insurance
on Subtenant's furniture, fixtures equipment and personal property located in
the Sublease Premises and imposed on Sublandlord pursuant to the Master Lease.
6. SECURITY DEPOSIT
Subtenant shall deposit with Sublandlord upon execution hereof the sum of SEVEN
THOUSAND AND NO/100s DOLLARS ($7,000.00) as security for Subtenant's faithful
performance of Subtenant's obligations hereunder. If Subtenant fails to pay rent
or other charges due hereunder, or otherwise defaults with respect to any
provision of this Sublease, Sublandlord may use, apply or retain all or any
portion of said deposit for the payment of any rent or other charge in default
or for the payment of any other sum to which Sublandlord may become obligated by
reason of Subtenant's default, or to compensate Sublandlord for any loss or
damage which Sublandlord may suffer thereby. If Sublandlord so uses or applies
all or any portion of said deposit, Subtenant shall with ten (10) days written
demand therefore deposit cash with Sublandlord in an amount sufficient to
restore said deposit to the full amount hereinabove stated and Subtenant's
failure to do so shall be a breach of this Sublease, and Sublandlord may at its
option terminate this Sublease. Sublandlord shall not be required to keep said
deposit separate from its general accounts. If Subtenant performs all of
Subtenant's obligations hereunder, said deposit or so much hereof as had not
theretofore been applied by Sublandlord shall be returned without payment of
interest for its use, to Subtenant (or, at Sublandlord's option, to the last
assignee, if any, of Subtenant's interest hereunder) within ten (10) days after
the expiration of the term hereof, or after Subtenant has vacated the Sublease
Premises, whichever is later.
7. USE
The Sublease Premises shall be used and occupied only for general office
purposes by Subtenant and its affiliates to the extent permitted by the Master
Lease.
8. STORAGE
Subtenant shall have no right to use any of the storage space presently occupied
by Sublandlord pursuant to the Master Lease.
9. GENERAL PROVISIONS
-3-
<PAGE> 4
a. Subtenant accepts the Sublease Premises in their present "AS IS"
condition provided they are delivered broom clean in substantially the
same condition as exists on the date of this Sublease, ordinary wear and
tear and loss by fire or other casualty excepted.
b. Subtenant shall have the right to sublease or assign all or any
portion of the Sublease Premises, subject to the Sublandlord's consent
which shall not be unreasonably withheld or delayed, subject to the
provisions of the Master Lease. Any Transfer Consideration associated
with said sublease or assignment shall be split on a fifty-fifty (50/50)
basis between Sublandlord and Subtenant.
c. The copy of the Master Lease attached to the sublease is a true
and correct copy and there are no amendments or other oral or written
agreements which affect the rights of Tenant to the Premises.
d. To the best of Sublandlord's knowledge the Master Lease is in
full force and effect and there are no defaults by Sublandlord or
Landlord thereunder and all rents and charges have been paid currently.
e. Sublandlord shall contemporaneously provide Subtenant with a copy
of all notices given to or received from Landlord pursuant to the Master
Lease which affect the Sublease or Sublease Premises.
f. Subtenant recognizes that except for the duty to comply with its
obligations as Tenant under the Master Lease, Sublandlord is not in a
position to render any of the services or to perform any of the
obligations required to be performed for the benefit of the Sublease
Premises by Landlord. Therefore, notwithstanding anything to the contrary
contained in this Sublease, Subtenant agrees that performance by
Sublandlord of its obligations hereunder are conditional upon due
performance by the Landlord of its corresponding obligations under the
Master Lease and Sublandlord shall not be liable to Subtenant for any
default of the Landlord under the Master Lease nor shall Sublandlord be
obligated to commence litigation or take other action against the
Landlord. Sublandlord hereby assigns to Subtenant the right to commence
litigation or take other action against Landlord for any default under
the Master Lease which affects the Sublease Premises, provided Subtenant
agrees to indemnify and hold Sublandlord harmless from and against any
and all claims, losses and damages, including attorney fees, that may be
incurred by Sublandlord due to such litigation including any counter-
claim raised by Landlord. Subtenant shall not have any claim against
Sublandlord by reason of the Landlord's failure or refusal to comply with
any of the provisions of the Master Lease unless such failure or refusal
is a result of Sublandlord's default under the Master Lease. This
Sublease shall remain in full force and effect notwithstanding the
Landlord's failure or refusal to comply with any such provisions of the
Master Lease and Subtenant shall pay the base rent and additional rent
and all other charges provided for herein without any abatement,
deduction or set-off whatsoever except as otherwise
-4-
<PAGE> 5
expressly provided in the Sublease or the Master Lease. Subtenant
covenants and warrants that it fully understands and agrees to be subject
to and bound by all of the covenants, agreements, terms, provisions and
conditions of the Master Lease, except as modified herein. Furthermore,
Subtenant and Sublandlord further covenant not to take any action or do
or perform any act or fail to perform any act which would result in the
failure or breach of any of the covenants, agreements, terms, provisions
or conditions of the Master Lease on the part of the Tenant thereunder.
g. In the event Subtenant fails or refuses to perform any of the
obligations required of it under this Sublease, then, in addition to all
other remedies available to Sublandlord hereunder or at law for
Subtenant's default and provided Subtenant has received notice of default
and any applicable cure period has expired as provided in this Sublease
or the Master Lease, then in addition to any rights or remedies of
Sublandlord under the Sublease or Master Lease or at law, Sublandlord
may, but shall not be obligated to, perform such obligations on behalf of
Subtenant and Subtenant shall reimburse Sublandlord for the costs and
expenses incurred by Sublandlord in performing such obligations along
with interest on such amounts at the maximum legal rate than allowable by
law from the date that such sums are expended by Sublandlord. Subtenant
shall defend, indemnify and hold Sublandlord harmless at all times
against claims, loss, damages, costs or expenses, including attorneys'
fees and actual court costs, which Sublandlord might incur by reason of
Subtenant's failure to perform any obligation to be performed by
Subtenant under the terms of this Sublease.
h. The parties hereto represent and warrant to each other that
neither party dealt with any broker or finder in connection with the
consummation of this Sublease except for LEE & ASSOCIATES COMMERCIAL REAL
ESTATE SERVICES which represented Subtenant and JULIEN J. STUDLEY, INC.
which represented Sublandlord (collectively the "Brokers"). The Brokers
shall be paid a commission by Sublandlord in accordance with their
separate written agreement which commission shall be payable one half
upon the execution of the Sublease and Landlord Consent and the balance
upon the commencement of the Sublease term. Each party agrees to
indemnify, hold and save the other party harmless from and against any
and all claims for brokerage commissions or finder's fees arising out of
their breach of the foregoing representation or their acts in connection
with this Sublease. The provisions of this Section shall survive the
expiration or earlier termination of this Sublease.
i. Any notice which may or shall be given by either party hereunder
shall be either delivered personally or sent by certified mail, return
receipt requested, addressed to:
-5-
<PAGE> 6
SUBTENANT:
at MCA Music Entertainment Group
70 Universal City Plaza
Universal City, California 91608
Attn: Norman Epstein
with a copy to:
Universal Studios
100 Universal City Plaza
Building 507 A/4
Universal City, California 91608
Attn: Jerry Blair
SUBLANDLORD:
Harvey Comics Entertainment, Inc.,
1999 Avenue of the Stars, Suite 2050
Los Angeles, CA 90067
Attention: President
or to such other address as may have been designated in a notice given in
accordance with the provisions of this Section.
j. It is expressly understood that Sublandlord shall have no
liability to Subtenant and no obligation to repair or restore the
Sublease Premises in the event they are damaged by fire or other casualty
or are otherwise in need of repair. If Landlord or Sublandlord as Tenant
under the Master Lease shall exercise a right to terminate the Master
Lease by reason of damage or destruction as provided in Paragraph 24 of
the Master Lease then this Sublease shall be deemed terminated and the
parties shall have no further obligations to each other, except for the
refund of the Security Deposit or prorated rent.
k. Subtenant shall cause Sublandlord and the Landlord to be named as
additional insureds on its liability insurance policies and shall furnish
a certificate of such coverage to Landlord and Sublandlord. The amount of
the insurance shall be not less than one million dollars (combined single
limit) or such other amount as may be required by Master Lease.
l. Subtenant hereby agrees to indemnify and hold Sublandlord
harmless from and against any and all claims, losses and damages,
including, without limitation, reasonable attorneys' fees and
disbursements, which may at any time be asserted against Sublandlord by
(a) the Landlord for failure of Subtenant to perform any of the
-6-
<PAGE> 7
covenants, agreements, terms, provisions or conditions contained in the
Master Lease which by reason of the provisions of this Sublease Subtenant
is obligated to perform, or (b) any person by reason of Subtenant's use
and/or occupancy of the Sublease Premises except to the extent any of the
foregoing is caused or by the negligence of Sublandlord or its employees
or agents. The provisions of this Section shall survive the expiration or
earlier termination of the Master Lease and/or this Sublease.
m. Sublandlord hereby agrees to indemnify and hold Subtenant
harmless from and against any and all claims, losses and damages,
including, without limitation, reasonable attorneys' fees and
disbursements, which may at any time be asserted against Subtenant by the
Landlord for failure of Sublandlord to perform any of the covenants,
agreements, terms, provisions or conditions contained in the Master Lease
which by reason of the provisions of this Sublease Sublandlord is
obligated to perform. The provisions of this Section shall survive the
expiration or earlier termination of the Master Lease and/or this
Sublease.
n. If any term or provision of this Sublease or the application
thereof to any person or circumstances shall, to any extent, be invalid
and unenforceable, the remainder of this Sublease or the application of
such term or provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected thereby
and each term or provision of this Sublease shall be valid and be
enforced to the fullest extent permitted by law
o. This Sublease contains the entire agreement between the parties
hereto and shall be binding upon and inure to the benefit of their
respective heirs, representatives, successors and permitted assigns. Any
agreement hereinafter made shall be ineffective to change, modify, waive,
release, discharge, terminate or effect an abandonment hereof, in whole
or in part, unless such agreement is in writing and signed by the parties
hereto.
p. The parties hereto agree that each of them, upon the request of
the other party, shall execute and deliver, in recordable form if
necessary, such further documents, instruments or agreements and shall
take such further action that may be necessary or appropriate to
effectuate the purposes of this Sublease.
q. This Sublease shall be governed by and in all respects construed
in accordance with the internal laws of the State of California.
r. The validity of this Sublease shall be subject to the Landlord's
prior written consent hereto pursuant to the terms of the Master Lease,
and if Landlord's consent shall not be obtained and a copy thereof
delivered to Subtenant within thirty (30) days
-7-
<PAGE> 8
of the date hereof, either Sublandlord or Subtenant shall have the option
to cancel this Sublease by notice to Sublandlord within forty-five (45)
days from the date hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Sublease to be
executed as of the day and year first above written.
SUBLANDLORD: SUBTENANT:
Harvey Comics Entertainment, Inc., a MCA Records, Inc., a California
California corporation corporation
By: [SIG] By: [SIG]
------------------------------- -------------------------------
Title: Executive Vice President Title: Exec. VP Admin.
---------------------------- ----------------------------
-8-
<PAGE> 9
EXHIBIT A
OFFICE LEASE
FOR
100 WILSHIRE
Landlord hereby leases to Tenant and Tenant hereby hired from Landlord
the Premises hereinafter described on the terms and conditions set forth in this
Lease (hereinafter referred to as this "Lease").
This Lease is subject to the terms, covenants and conditions set forth
below and Tenant covenants as a material part of the consideration for this
Lease to keep and perform each and all of said terms, covenants and conditions
by it to be kept and performed and that this Lease is made upon the condition
of said performance.
BASIC LEASE SUMMARY
The words, figures and definitions set forth in Paragraphs A to Q,
inclusive, are part of this Lease wherever appropriate reference is made
thereto, unless modified elsewhere in this Lease.
A. DATE OF THIS LEASE (for reference purposes only): As of November 1,
1993.
The scheduled Commencement Date is January 1, 1994.
The actual Commencement Date shall be as provided in Paragraph 6.2 and,
if applicable, Exhibit "C", the Construction and Construction Payment
Exhibit.
B. LANDLORD: 100 Wilshire Associates, a California Limited Partnership.
C. LANDLORD'S ADDRESS FOR NOTICES:
100 Wilshire Boulevard
Suite 1753
Santa Monica, CA 90401
D. TENANT: Harvey Comics Entertainment, Inc., a California Corporation
Tenant's Trade Name: same
E. TENANT'S ADDRESS AND PHONE NUMBER FOR NOTICES:
CURRENT UPON OCCUPANCY
100 Wilshire Boulevard 100 Wilshire Boulevard
Suite 500 Suite 1400
Santa Monica, CA 90401 Santa Monica, CA 90401
F. PROJECT: The term "Project" as used in this Lease shall mean and refer
to the development commonly known as 100 Wilshire, which is located at
100 Wilshire Boulevard, Santa Monica, California, and which consists of
a 21 story building ("Building") and all the real property adjacent to
and underlying such buildings, including all subterranean (if any) and
other parking areas and all Common Areas (as defined in this Lease). The
project is set forth on the Site Plan attached hereto as Exhibit "A".
Although not shown on Exhibit "A", for all purposes in this Lease, the
term "Project" shall include the top three (3) stories of The City of
Santa Monica parking structure located at 1235 Second Street between
Arizona Avenue and Wilshire Boulevard; and all references to parking
"structure" or "areas" shall include the same.
G. PREMISES: The space known or to be known as Suite 1400 on the 14th
floor. The Premises is outlined on the Premises Floor Plan, attached
hereto as Exhibit "B". The Premises has an estimated total rentable
square footage of 9,000 (7,407 usable square feet).
The said estimated rentable square footage represents 0.0367 of the
entire rentable area of office space of the Project. The Project
consists of 245,413 rentable square feet. Said percentage shall be
"Tenant's Proportionate Share" of certain charges referred to in this
Lease, but is subject to adjustment pursuant to Paragraph 2.1 of this
Lease. It is understood and agreed that such charges shall be based on
the entire Project, not merely the Building. The total rentable square
footage of the Premises shall be subject to verification by Landlord's
architect, whose
<PAGE> 10
determination shall be conclusive and binding on the parties. If
Landlord, at any time, so determines that the total rentable square
footage of the Premises is more or less than the estimated square
footage above in this Paragraph G, Landlord and Tenant shall execute the
Memorandum set forth in Paragraph Q below to confirm the actual total
rentable square footage. If, for any reason, Tenant fails or refuses to
execute said Paragraph Q, Landlord's sole execution of Paragraph Q shall
be binding upon Tenant to confirm the actual rentable square footage of
the Premises and the initial annual Base Rent.
H. PERMITTED USE: General Office.
I. TERM ("TERM" OR "LEASE TERM" OR "TERM OF THIS LEASE"):
ten (10) years, subject to the Provisions of Paragraph 6.1.
J. BASE RENT (ANNUAL): $286,200.00 payable in monthly installments on the
first (1st) day of each calendar month, subject to adjustments as
provided hereafter in this Lease. The initial Base Rent set forth above
in this Paragraph J is based upon $2.65 per rentable square foot of
Premises. If the actual total rentable square footage as set forth in
Paragraph Q below is different than that set forth in Paragraph G,
above, the initial Base Rent shall be adjusted in accordance with the
actual total rentable square footage as provided in Paragraph Q, below.
Upon execution of this Lease, Tenant shall pay to Landlord the sum of
$23,850.00, representing Base Rent for month one of the Lease term upon
Lease execution.
K. SECURITY DEPOSIT: Shall be payable upon Lease execution in the amount
of $23,850.00.
L-1 LANDLORD'S ANNUAL SHARE OF OPERATING COSTS: Base Year 1994.
L-2 LANDLORD'S ANNUAL SHARE OF PROPERTY TAXES: Base Year 1994.
M. PARKING SPACES: See Addendum I.
N. COMPREHENSIVE GENERAL LIABILITY INSURANCE:
COMBINED SINGLE LIMITED BODILY INJURY AND PROPERTY DAMAGE: $1,000,000.
O. REAL ESTATE BROKERS: Cushman Realty Corporation, Sommer Commercial
P. MEMORANDUM OF ACTUAL COMMENCEMENT AND EXPIRATION DATES
Commencement Date: ________________, 19___. Expiration Date: __________, 19___
(Which shall always be on the
last day of a calendar month).
___________________________________ ___________________________________
Tenant's Initials Landlord's Initials
Q. MEMORANDUM OF ACTUAL RENTABLE SQUARE FOOTAGE AND INITIAL BASE RENT.
Total Rentable Square Feet: ____________
Initial Annual Base Rent: $ ____________
___________________ ___________________
Tenant's Initials Landlord's Initials
The 33 pages attached hereto, consisting of Paragraphs 1 through 61,
together with the Exhibits listed below, together with Addenda I-IV.
<PAGE> 11
Exhibit "A" Site Plan Outlining Project
Exhibit "B" Premises Floor Plan
Exhibit "C" Construction and Construction Payment
Exhibit "C-1" Building Standard Improvements
Exhibit "D" Rules and Regulations
TENANT: LANDLORD:
Harvey Comics Entertainment, Inc. 100 WILSHIRE ASSOCIATES
a California Corporation Bank of America NT&SA
Attorney-in-Fact
By: /s/ GREGORY M. YULISH By: /s/ STEVEN W. ENGLAND
------------------------------ ----------------------------------
Gregory M. Yulish Steven W. England
Chief Financial Officer Vice President
Director of Asset Management
Date: Date: 12/8/93
---------------------------- ---------------------------------
By: /s/ MARTIN W. ELLIOTT
----------------------------------
Martin W. Elliott
Vice President
Executive Asset Manager
Date: December 8, 1993
---------------------------------
<PAGE> 1
EXHIBIT 10.49
_______________________________________________________________________________
WARRANT AGREEMENT OF
THE HARVEY ENTERTAINMENT COMPANY
50,000 SHARES
Dated as of January 16, 1997
________________________________________________________________________________
COMMON STOCK PURCHASE WARRANT
<PAGE> 2
WARRANT AGREEMENT dated as of January 16, 1997 between The Harvey
Entertainment Company, a California corporation (the "Company"), the Company as
Warrant Agent (in such capacity, "Warrant Agent"), and Arnhold & S.
Bleichroeder (the "Warrant Holder" or "Holder").
The Company proposes to issue two Common Stock Purchase Warrants as
hereinafter described (collectively the "Warrant") to purchase an aggregate of
up to 50,000 shares of its Common Stock (the "Common Stock"), no par value per
share (the shares of Common Stock issuable on exercise of the Warrant being
referred to herein as the "Warrant Shares"), in favor of Warrant Holder.
In consideration of the nonexclusive consulting services provided to
the Company in matters relating to possible acquisition transactions,
investment opportunities, investor relations and such services as the Company
may request from time to time (the "Services") from the Warrant Holder, and for
the purpose of defining the terms and provisions of the Warrant and the
respective rights and obligations thereunder of the Company and the Holder, the
Company and the Warrant Holder hereby agree as follows:
SECTION 1. TRANSFERABILITY AND FORM OF THE WARRANT.
1.1 REGISTRATION. The Warrant shall be numbered and
shall be registered on the books of the Company maintained at the principal
office of the Company in Los Angeles, California ("the Warrant Register"). The
Company shall be entitled to treat the Holder of the Warrant as the owner in
fact thereof for all purposes and shall not be bound to recognize any equitable
or other claim to or interest in such Warrant on the part of any other person,
and shall not be liable for any Company registration or transfer of Warrant
which is registered or to be registered in the name of a fiduciary or the
nominee of a fiduciary unless made with the actual knowledge that a fiduciary
or nominee is committing a breach of trust in requesting such registration of
transfer, or with such knowledge of such facts that its participation therein
amounts to bad faith.
1.2 TRANSFER RESTRICTIONS. The Holder may not
transfer the Warrant without the prior written consent of the Company, which
consent may be granted or denied in the sole discretion of the Company. Should
such consent be granted, the Warrant so transferred shall continue to be bound
by this restriction in the hands of a subsequent Holder, and the Company shall
not recognize any attempted transfer of the Warrant in violation of this
Agreement.
1.3 TRANSFER--GENERAL. Subject to the terms hereof,
the Warrant shall be transferable only on the books of the Company maintained
at its principal office upon delivery thereof duly endorsed by the Holder or by
his duly authorized attorney or representative, or accompanied by proper
evidence of succession, assignment or authority to transfer. In all cases of
transfer by an attorney, the original power of attorney, duly approved, or a
copy thereof, duly certified, shall be deposited and remain with the Company.
In case of transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be
<PAGE> 3
deposited and to remain with the Company in its discretion. Upon any
registration of transfer, the Company shall countersign and deliver a new
Warrant to the persons entitled thereto. The Company or the Warrant Agent may
require the payment of a sum sufficient to cover any tax or governmental charge
that may be imposed in connection with any such transfer.
1.4 FORM OF THE WARRANT. The text of the Warrant and
of the form of election to purchase Warrant Shares (the "Purchase Form") shall
be substantially as set forth respectively in Exhibits A, B and C attached
hereto. The price per Warrant Share and the number of Warrant Shares issuable
upon exercise of each Warrant are subject to adjustment upon the occurrence of
certain events, all as hereinafter provided. The Warrant shall be executed on
behalf of the Company by its Chairman of the Board, its Chief Executive
Officer, President or one of its Vice Presidents, under its corporate seal
reproduced thereon, and attested by its Secretary or an Assistant Secretary.
The Warrant shall be dated as of the date of
countersignature thereof by the Company either upon initial issuance or upon
transfer.
SECTION 2. TERM OF THE WARRANT; EXERCISE OF THE WARRANT;
WARRANT PRICE, ETC.
2.1 TERM OF THE WARRANT. Subject to the terms of this
Agreement, the Holder shall have the right, which may be exercised from time to
time, from and through the dates set forth in the Warrant, to purchase from the
Company the number of fully paid and nonassessable Warrant Shares which the
Holder may at the time be entitled to purchase on exercise of such Warrant. If
the last day for the exercise of the Warrant shall not be a business day, then
the Warrant may be exercised on the next succeeding business day.
2.2 VESTING OF THE WARRANT. Warrant No. One to
purchase 25,000 Warrant Shares shall immediately vest and may be exercised on
or after the date hereof in accordance with the terms of this Agreement and the
Warrant Certificate. Warrant No. Two to purchase 25,000 Warrant Shares may be
exercised and will vest on January 16, 1998, in the event that the Company has
requested and the Warrant Holder has agreed to continue to perform the Services
through January 16, 1999; provided, however, that in the event on January 16,
1998, the Company has not requested or the Warrant Holder has not agreed to
provide services through January 16, 1999 then Warrant No. Two shall not vest,
may not be exercised, and shall be of no force or effect.
2.3 EXERCISE OF THE WARRANT. The Warrant may be
exercised upon surrender to the Company, at its principal office, of the
certificate evidencing the Warrant to be exercised, together with the Purchase
Form on the reverse thereof duly filled in and signed, and upon payment to the
Company, of the Warrant Price (as defined in and determined in accordance with
the provisions of Sections 2 and 6 hereof), for the number of Warrant Shares in
respect of which such Warrant is then exercised. Upon partial exercise, a
Warrant Certificate for the unexercised portion shall be delivered to the
Holder. Payment
-2-
<PAGE> 4
of the aggregate Warrant Price shall be payable in cash, by certified or
official bank check or wire transfer.
Subject to Section 3 hereof, upon such surrender
of the Warrant and payment of the Warrant Price as aforesaid, the Company shall
issue and cause to be delivered with all reasonable dispatch to or upon the
written order of the Holder and in such name or names as the Holder may
designate, a certificate or certificates for the number of full Warrant Shares
so purchased upon the exercise of such Warrant, together with cash, as provided
in Section 8 hereof, in respect of any fractional Warrant Shares otherwise
issuable upon such surrender. Such certificate or certificates shall be deemed
to have been issued and any person so designated to be named therein shall be
deemed to have become a holder of record of such Warrant Shares as of the date
of the surrender of such Warrant and payment of the Warrant Price, as
aforesaid; provided, however, that if, at the date of surrender of such Warrant
and payment of such Warrant Price, the transfer books for the Warrant Shares or
other class of stock purchasable upon the exercise of such Warrant shall be
closed, the certificates for the Warrant Shares in respect of which such
Warrant are then exercised shall be issuable as of the date on which such books
shall next be opened (whether before or after the Expiration Date) and until
such date the Company shall be under no duty to deliver any certificate for
such Warrant Shares; provided, further, that the transfer books of record,
unless otherwise required by law, shall not be closed at any one time for a
period longer than 20 calendar days.
2.4 COMPLIANCE WITH GOVERNMENT REGULATIONS. Holder
acknowledges that none of the Warrant or Warrant Shares has been registered
under the Securities Act of 1933, as amended (the "Securities Act"), and
therefore may be sold or disposed of in the absence of such registration only
pursuant to an exemption from such registration and in accordance with this
Agreement. The Warrant and the Warrant Shares will bear a legend to the
following effect:
"THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR OTHER
DISPOSITION OR PLEDGE OF THESE SECURITIES OR THE SECURITIES UNDERLYING
THESE SECURITIES CAN BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATING THERETO OR AN AVAILABLE EXEMPTION FROM
REGISTRATION."
2.5 WARRANT PRICE. The price per share at which
Warrant Shares shall be purchasable upon exercise of the Warrant (the "Warrant
Price") shall be $10.00, subject to adjustment pursuant to Section 6 hereof.
-3-
<PAGE> 5
SECTION 3. PAYMENT OF TAXES AND INDEMNIFICATION.
3.1 PAYMENT OF TAXES. The Company will pay all
documentary stamp taxes, if any, attributable to the initial issuance of
Warrant and Warrant Shares upon the exercise of Warrant; provided, however,
that the Company shall not be required to pay any income tax or taxes resulting
from the issuance of the warrant or any other tax or taxes which may be payable
in respect of any transfer involved in the issue or delivery of the Warrant or
certificates for Warrant Shares.
3.2 INDEMNIFICATION. Warrant Holder hereby agrees to
indemnify and hold the Company harmless from any and all taxes which may be
imposed on Warrant Holder due to the issuance of the Warrant or any subsequent
exercise of the Warrant and issuance of the Warrant shares, including, but
without limitation, any income or transfer taxes.
SECTION 4. MUTILATED OR MISSING WARRANT. In case the Warrant
shall be mutilated, lost, stolen or destroyed, the Company shall issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
Warrant, or in lieu of and substitution for the Warrant lost, stolen or
destroyed, a new Warrant certificate of like tenor and representing an
equivalent right or interest; but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction of such Warrant
certificate and indemnity or bond, if requested, also reasonably satisfactory
to them. An applicant for such substitute Warrant certificate shall also
comply with such other reasonable regulations and pay such other reasonable
charges as the Company may prescribe.
SECTION 5. RESERVATION OF WARRANT SHARES.
5.1 RESERVATION OF WARRANT SHARES. There have been
reserved, and the Company shall at all times keep reserved, out of its
authorized shares of Common Stock, a number of shares of Common Stock
sufficient to provide for the exercise of the rights of purchase represented by
the outstanding Warrant. The transfer agent for the Common Stock ("Transfer
Agent"), and every subsequent transfer agent for any shares of the Company's
capital stock issuable upon the exercise of any of the rights of purchase
aforesaid will be and are hereby irrevocably authorized and directed at all
times until the Expiration Date to reserve such number of authorized shares as
shall be requisite for such purpose. The Company will keep a copy of this
Agreement on file with the Transfer Agent and with every subsequent transfer
agent for any shares of the Company's capital stock issuable upon the exercise
of the rights of purchase represented by the Warrant. The Company covenants
that all Warrant Shares which may be issued upon exercise of Warrant will, upon
issue, be fully paid, nonassessable, free of preemptive rights and free from
all taxes, liens, charges and security interests with respect to the issue
thereof. The Company will supply such Transfer Agent and any subsequent
transfer agent with duly executed stock certificates for such purpose and will
itself provide or otherwise make available any cash which may be payable as
provided in Section 8 of this Agreement. The Company will furnish to such
Transfer Agent a copy of all notices of adjustments, and certificates related
thereto, transmitted to
-4-
<PAGE> 6
each Holder. The Warrant surrendered in the exercise of the rights thereby
evidenced shall be cancelled by the Company.
5.2 CANCELLATION OF THE WARRANT. In the event the
Company shall purchase or otherwise acquire the Warrant, the same shall be
cancelled and retired.
SECTION 6. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT
SHARES. The number and kind of securities purchasable upon the exercise of the
Warrant and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as hereinafter defined.
6.1 MECHANICAL ADJUSTMENTS. The number of Warrant
Shares purchasable upon the exercise of the Warrant and the Warrant Price shall
be subject to adjustment as follows:
(a) In case the Company shall at any time
after the date of this Agreement (i) declare or pay a dividend in
shares of Common Stock or make a distribution in shares of Common
Stock, (ii) subdivide its outstanding shares of Common Stock, (iii)
combine its outstanding shares of Common Stock into a smaller number
of shares of Common Stock or (iv) issue any shares of its capital
stock in a reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing entity), the number of Warrant Shares
purchasable upon exercise of the Warrant immediately prior thereto
shall be adjusted so that the Holder of the Warrant shall be entitled
to receive the kind and number of Warrant Shares or other securities
of the Company which he would have owned or have been entitled to
receive after the happening of any of the events described above, had
such Warrant been exercised immediately prior to the happening of such
event or any record date with respect thereto. An adjustment made
pursuant to this paragraph (a) shall become effective immediately
after the effective date of such event retroactive to the record date,
if any, for such event.
(b) In case the Company shall issue rights,
options or warrants to holders of its outstanding Common Stock
entitling them (for a period within 45 days after the record date
mentioned below) to subscribe for or purchase shares of Common Stock
at a price per share which is lower at the record date mentioned below
than the then current market price per share of Common Stock (as
defined in paragraph (e) below), the number of Warrant Shares
thereafter purchasable upon the exercise of the Warrant shall be
determined by multiplying the number of Warrant Shares theretofore
purchasable upon exercise of the Warrant by a fraction, of which the
numerator shall be the number of shares of Common Stock outstanding on
the date of issuance of such rights, options or warrants plus the
number of additional shares of Common Stock offered for subscription
or purchase, and of which the denominator shall be the number of
shares of Common Stock outstanding on the date of issuance of such
rights, options or warrants plus the number of shares which the
aggregate offering price of the total number of shares of Common Stock
so offered
-5-
<PAGE> 7
would purchase at the current market price per share of Common Stock
at such record date. Such adjustments shall be made whenever such
rights, options or warrants are issued, and shall become effective
immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants.
(c) In case the Company shall distribute to
holders of its shares of Common Stock evidences of its indebtedness or
assets (excluding cash dividends or distributions payable out of
consolidated earnings or earned surplus legally available for payment
of dividends at the time of any such payment or distribution, but
excluding dividends or distributions referred to in paragraph (a)
above or in the paragraph immediately following this paragraph) or
rights, options or warrants, or convertible or exchangeable securities
containing the right to subscribe for or purchase shares of Common
Stock (excluding those referred to in paragraph (b) above), then in
each case the number of Warrant Shares thereafter purchasable upon the
exercise of the Warrant shall be determined by multiplying the number
of Warrant Shares theretofore purchasable upon the exercise of the
Warrant by a fraction, of which the numerator shall be the then
current market price per share of Common Stock (as defined in
paragraph (e) below) on the date of such distribution, and of which
the denominator shall be the then current market price per share of
Common Stock, less the then fair value (as determined by the Board of
Directors of the Company, whose determination shall be conclusive) of
the portion of the assets or evidences of indebtedness so distributed
or of such subscription rights, options or warrants, or of such
convertible or exchangeable securities applicable to one share of
Common Stock. Such adjustment shall be made whenever any such
distribution is made, and shall become effective on the date of
distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
In the event of a distribution by the Company to
holders of its shares of Common Stock of stock of a subsidiary or
securities convertible into or exercisable for such stock, then in
lieu of an adjustment in the number of Warrant Shares purchasable upon
the exercise of the Warrant, the Holder of the Warrant, upon the
exercise thereof at any time after such distribution, shall be
entitled to receive from the Company, such subsidiary or both, as the
Company shall determine, the stock or other securities to which such
Holder would have been entitled if such Holder had exercised such
Warrant immediately prior thereto, all subject to further adjustment
as provided in this Section 6.1; provided, however, that no adjustment
in respect of dividends or interest on such stock or other securities
shall be made during the term of a Warrant or upon the exercise of a
Warrant other than adjustments required by this Section 6.
(d) In case the Company shall issue shares
of Common Stock or rights, options or warrants containing the right to
subscribe for or purchase shares of Common Stock or securities
convertible into Common Stock (excluding (i) shares, rights, options,
warrants or convertible securities issued in any of the transactions
described in paragraphs (a), (b) or (c) above, or (ii) Warrant Shares
issued upon exercise of the Warrant), for a price per share of Common
Stock, in the case of the
-6-
<PAGE> 8
issuance of Common Stock, or for a price per share of Common Stock
initially deliverable upon conversion or exchange of such securities
less than the then current market price per share of Common Stock (as
defined in paragraph (e) below) on the date the Company fixed the
offering, conversion or exchange price of such additional shares, the
number of Warrant Shares thereafter purchasable upon the exercise of
the Warrant shall be determined by multiplying the number of Warrant
Shares theretofore purchasable upon exercise of the Warrant by a
fraction, of which the numerator shall be the number of shares of
Common Stock outstanding on such date plus the number of additional
shares of Common Stock offered for subscription or purchase, and of
which the denominator shall be the number of shares of Common Stock
outstanding on such date plus the number of shares which the aggregate
offering price of the total number of shares of Common Stock so
offered would purchase at the current market price per share of Common
Stock at such record date. Such adjustment shall be made whenever
such shares, rights, options or warranties are issued, and shall
become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(e) For the purpose of any computation under
paragraphs (b), (c) and (d) of this Section, the current market price
per share of Common Stock at any date shall be the average of the
daily closing prices for 10 consecutive trading days commencing 20
trading days before the date of such computation. The closing price
for each day shall be the last such reported sales price regular way
or, in case no such reported sale takes place on such day, the average
of the closing bid and asked prices regular way for such day, in each
case on the principal national securities exchange or in the NASDAQ
National Market System to which the shares of Common Stock are listed
or admitted to trading or, if not listed or admitted to trading, the
average of the closing bid and asked prices of the Common Stock in the
over-the-counter market as reported by NASDAQ or any comparable
system, or if the Common Stock is not listed on NASDAQ or a comparable
system, the average of the closing bid and asked prices as furnished
by two members of the National Association of Securities Dealers, Inc.
("NASD") selected from time to time by the Board of Directors of the
Company for that purpose. In the absence of one or more such
quotations, the Board of Directors of the Company shall determine the
current market price on the basis of such quotations as it considers
appropriate or in the case of securities which are not quoted, the
Board of Directors of the Company shall determine the current market
price based upon such information and advice as it considers
appropriate. In the case of rights, options, warrants or convertible
or exchangeable securities, the price per share of Common Stock shall
be determined by dividing (x) the total amount received or receivable
by the Company in consideration of the sale and issuance of such
rights, options, warrants or convertible or exchangeable securities,
plus the total consideration payable to the Company upon exercise or
conversion or exchange thereof, by (y) the total number of shares of
Common Stock covered by such rights, options, warrants or convertible
or exchangeable securities.
-7-
<PAGE> 9
(f) Whenever the number of Warrant Shares
purchasable upon the exercise of the Warrant is adjusted, as herein
provided, the Warrant Price payable upon exercise of the Warrant shall
be adjusted by multiplying such Warrant Price immediately prior to
such adjustment by a fraction, of which the numerator shall be the
number of Warrant Shares purchasable upon the exercise of the Warrant
immediately prior to such adjustment, and of which the denominator
shall be the number of Warrant Shares purchasable immediately
thereafter.
(g) In case the Company shall sell or issue
shares of Common Stock or rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe or purchase
shares of Common Stock in the following situations:
(i) to officers, directors,
consultants or employees of the Company pursuant to
an employee stock option plan approved by the
Company's shareholders either at a price not less
than 95% of the current market price of the
Company's Common Stock or in an amount (taking into
account all prior sales or issuances excluded
pursuant to this clause (i)) not greater than 5% of
the total number of shares of Common Stock
outstanding on a fully diluted basis; or
(ii) to sellers of assets or interests
in other enterprises in exchange for the arm's
length acquisition of such assets or interests,
there shall be no adjustment in the Warrant Price or the number of
Warrant Shares either upon the initial issuance of such securities or
upon the exercise or conversion thereof.
(h) No adjustment in the number of Warrant
Shares purchasable hereunder shall be required unless such adjustment
would result in an increase or decrease of at least one percent (1%)
of the Warrant Price; provided, however, that any adjustments which by
reason of this paragraph (h) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment or
upon exercise of the Warrant. All calculations shall be made to the
nearest cent or to the nearest one-thousandth of a share, as the case
may be.
(i) No adjustment in the number of Warrant
Shares purchasable upon the exercise of the Warrant need be made under
paragraphs (b), (c), or (d) if the Company issues or distributes to
the Holder of the Warrant the shares, rights, options, warrants, or
convertible or exchangeable securities, or evidences of indebtedness
or assets referred to in those paragraphs which the Holder of the
Warrant would have been entitled to receive had the Warrant been
exercised prior to the happening of such event or the record date with
respect thereto. No adjustment in the number of Warrant Shares
purchasable upon the exercise of the Warrant need be made for sales of
Warrant Shares pursuant to a Company plan for reinvestment of
-8-
<PAGE> 10
dividends or interest. No adjustment need be made for a change in the
par value of the Warrant Shares.
(j) For the purpose of this Section 6.1, the
term "shares of Common Stock" shall mean (i) the class of stock
designated as the Common Stock of the Company at the date of this
Agreement, or (ii) any other class of stock resulting from successive
changes or reclassifications of such shares consisting solely of
changes from no par value to par value, changes in par value, or
changes from par value to no par value. In the event that at any
time, as a result of an adjustment made pursuant to paragraph (a)
above, the Holder shall become entitled to purchase any securities of
the Company other than shares of Common Stock, thereafter the number
of such other shares so purchasable upon exercise of the Warrant and
the Warrant Price of such shares shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Warrant Shares
contained in paragraphs (a) through (h), inclusive, above, and the
provisions of Section 2 and Sections 6.2 through 6.3, inclusive, with
respect to the Warrant Shares, shall apply on like terms to any such
other securities; provided, however, that the Warrant Price shall at
no time be less than the par value of the Common Stock of the Company;
provided, further, that the Company shall reduce the par value of its
Common Stock from time to time as necessary so that such par value
shall not be more than the Warrant Price then in effect.
(k) Upon the expiration of any rights, options,
warrants or conversion or exchange privileges, the issuance of which
required an adjustment in the number of shares of Common Stock
purchasable upon exercise of the Warrant, if any thereof shall not
have been exercised, the Warrant Price and the number of shares of
Common Stock purchasable upon the exercise of the Warrant shall, upon
such expiration, be readjusted and shall thereafter be such as it
would have been had it been originally adjusted (or had the original
adjustment not been required, as the case may be) as if (A) the only
shares of Common Stock so issued were the shares of Common Stock, if
any, actually issued or sold upon the exercise of such rights,
options, warrants or conversion or exchange rights and (B) such shares
of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the aggregate
consideration, if any, actually received by the Company for the
issuance, sale or grant of all such rights, options, warrants or
conversion or exchange rights whether or not exercised; provided,
however, that no such readjustment shall have the effect of increasing
the Warrant Price or decreasing the number of shares of Common Stock
purchasable upon the exercise of the Warrant by an amount in excess of
the amount of the adjustment initially made in respect to the
issuance, sale or grant of such rights, options, warrants or
conversion or exchange rights, and provided further that the issuance
of shares of Common Stock pursuant to rights, options, warrants or
conversion or exchange rights shall not be cause for additional
adjustments beyond the adjustments provided in respect of the initial
issuance of the rights, options, warrants or conversion or exchange
rights.
-9-
<PAGE> 11
6.2 NOTICE OF ADJUSTMENT. Whenever the number of
Warrant Shares purchasable upon the exercise of the Warrant or the Warrant
Price of such Warrant Shares is adjusted, as herein provided, the Company shall
mail by first class, postage prepaid, to each Holder notice of such adjustment
or adjustments and shall deliver to the Holder a copy of a certificate of
either the Board of Directors of the Company or of a firm of independent public
accountants selected by the Board of Directors of the Company (who may be the
regular accountants employed by the Company) setting forth the number of
Warrant Shares purchasable upon the exercise of the Warrant and the Warrant
Price of such Warrant Shares after such adjustment, setting forth a brief
statement of the facts requiring such adjustment and setting forth the
computation by which such adjustment was made. Such certificate shall be
conclusive evidence of the correctness of such adjustment in the absence of
manifest error.
6.3 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in
Section 6.1, no adjustment in respect of any dividends shall be made during the
term of a Warrant or upon the exercise or conversion of a Warrant.
6.4 PRESERVATION OF PURCHASE RIGHTS UPON MERGER,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale, transfer or
lease to another corporation of all or substantially all the property of the
Company, the Company or such successor or purchasing corporation, as the case
may be, shall execute an amendment to this Agreement that each Holder shall
have the right thereafter upon payment of the Warrant Price in effect
immediately prior to such action to purchase upon exercise of the Warrant the
kind and amount of shares and other securities and property which he would have
owned or have been entitled to receive upon the happening of such
consolidation, merger, sale, transfer or lease had such Warrant been exercised
immediately prior to such action; provided, however, that no adjustment in
respect of dividends, interest or other income on or from such shares or other
securities and property shall be made during the term of a Warrant or upon the
exercise of a Warrant. Such agreement shall provide for adjustments, which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Section 6. The provisions of this Section 6.4 shall similarly
apply to successive consolidations, mergers, sales, transfers or leases.
6.5 STATEMENT ON THE WARRANT. Irrespective of any
adjustments in the Warrant Price or the number or kind of shares purchasable
upon the exercise of the Warrant, the Warrant theretofore or thereafter issued
may continue to express the same price and number and kind of shares as are
stated in the Warrant initially issuable pursuant to this Agreement.
SECTION 7. REGISTRATION RIGHTS.
7.1 CERTAIN DEFINITIONS.
As used in this Warrant Agreement, the following terms shall
have the following respective meanings:
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<PAGE> 12
(A) COMMISSION means the Securities and
Exchange Commission.
(B) EXCHANGE ACT means the Securities Exchange
Act of 1934, as amended, or any successor act, and the rules and regulations of
the Commission promulgated thereunder, all as the same shall be in effect at
the time.
(C) REGISTRABLE SECURITIES means the Warrant
Shares issued or issuable upon exercise of the Warrants. As to any particular
Registrable Security, once issued, such security shall cease to be one of the
Registrable Securities when (x) such security shall have been transferred to
any person pursuant to an effective registration statement, (y) such security
shall have been transferred to any person that is not an Affiliate (as defined
in the Exchange Act) of the initial Warrant Holder pursuant to Rule 144 (or any
successor provision) under the Securities Act and the shares thereupon become
freely tradeable, or (z) such security shall have ceased to be outstanding.
(D) REGISTRATION EXPENSES means all expenses
incident to the Company's performance of or compliance with the registration
rights herein, including, without limitation, all registration, filing, listing
and NASD fees, all fees and expenses of complying with securities or blue sky
laws, all word processing, duplicating and printing expenses, messenger and
delivery expenses, fees and expenses of Company's counsel and independent
public accountants, including the expenses of any special audits or "cold
comfort" letters required by or incident to such performance and compliance,
and any fees and disbursements of underwriters customarily paid by issuers and
sellers of securities; provided, however, that Registration Expenses shall not
include fees and expenses of counsel for the holders of Registrable Securities
nor shall it include underwriting discounts, commissions and transfer taxes, if
any, relating to the offer and sale of Registrable Securities, all of which
shall be borne by such holders.
(E) SECURITIES ACT means the Securities Act of
1933, as amended, or any successor act thereto, and the rules and regulations
of the Commission promulgated thereunder, all as the same shall be in effect at
the time.
7.2 REGISTRATION.
(A) COMPANY REGISTRATION. If (without any
obligation to do so) the Company proposes to register (including for this
purpose any registration effected by the Company for holders other than the
holders of Registrable Securities) any of its Common Stock or other securities
under the Securities Act in connection with the public offering of such
securities solely for cash (other than a registration on Forms S-4 or S-8 or
equivalent successor forms), then the Company shall, at such time, promptly
give all holders of Registrable Securities written notice of such registration.
Any such registration effected by the Company is referred to herein as a
"Company Registration." Upon the written request of such holders given within
fifteen (15) days after the giving of such notice by the Company, the Company
shall, subject to the provisions of Section 7.2(c) below, cause to be included
in such registration statement and registered under the Securities Act all of
the Registrable Securities that each such holder ("Participating Holders") has
requested to be registered.
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<PAGE> 13
(B) EXPENSES. The Company shall pay all
Registration Expenses incurred in connection with the registration of
Registrable Securities pursuant to Section 7.2(a).
(C) PRIORITY IN REQUESTED REGISTRATIONS. If
the Company Registration pursuant to Section 7.2(a) involves an underwritten
offering, and the managing underwriter shall advise the Company in writing,
with a copy to the Participating Holders that, in its opinion, the number of
securities requested to be included in such registration (including securities
of the Company which are not Registrable Securities) exceeds the number which
can be sold in such offering; then, in the case of a Company Registration (x)
first, other securities to be sold for the account of the Company to be
included in the Company Registration, and (y) second, the Registrable
Securities and other securities of the Company entitled to similar registration
rights, pro rata, in proportion to the number of Registrable Securities and
other securities requested to be included in such registration statement.
7.3 REGISTRATION PROCEDURES.
(a) If and whenever the Company is required to
use its best efforts to effect the registration of any Registrable Securities
under the Securities Act as provided in Section 7.2, the Company, as
expeditiously as possible and subject to the terms and conditions of Section
7.2, will:
(i) prepare and file with the
Commission the requisite registration statement to effect such registration and
use its best efforts to cause such registration to become effective;
(ii) furnish to each Participating
Holder such number of conformed copies of such registration statement and of
each such amendment and supplement thereto, such number of copies of the
prospectus contained in such registration statement (including each preliminary
prospectus and any summary prospectus) and any other prospectus filed under
Rule 424 under the Securities Act, in conformity with the requirements of the
Securities Act, and such other documents, as each Participating Holder may
reasonably request;
(iii) immediately notify the
Participating Holders at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading and at the request of the Participating Holders
promptly prepare and furnish to the Participating Holders a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
securities, such prospectus shall not include an untrue statement of a material
fact or omit to
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<PAGE> 14
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and
(iv) use its best efforts to list all
Registrable Securities covered by such registration statement on the securities
exchange, if any, on which the Common Stock is then listed.
(b) The Company may require each Participating
Holder to furnish the Company with such information and undertakings as it may
reasonably request regarding the holders requesting registration and the
distribution of such securities as the Company may from time to time reasonably
request in writing.
(c) Each Participating Holder agrees (A) that
upon receipt of any notice from the Company of the happening of any event of
the kind described in Section 7.3(a)(iii), such holder will forthwith
discontinue its disposition of Registrable Securities pursuant to the
registration statement relating to such Registrable Securities until receipt by
such Participating Holder of the copies of the supplemented or amended
prospectus contemplated by subdivision (a)(iii) of this Section 7.3 and, if so
directed by the Company, will deliver to the Company all copies, other than
permanent file copies, then in such holder's possession of the prospectus
relating to such Registrable Securities at the time of receipt of such notice
and (b) that it will immediately notify the Company, at any time when a
prospectus relating to the registration of such Registrable Securities is
required to be delivered under the Securities Act, of the happening of any
event as a result of which information previously furnished by such
Participating Holder to the Company in writing for inclusion in such prospectus
contains an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
(d) Nothing in this Agreement to the contrary,
the Company will not be required to file such a registration statement with
respect to, or include in any registration statement, any Registrable
Securities if the Company obtains an opinion (in form and substance
satisfactory to the holder requesting registration) of counsel acceptable to
the holder of such Registrable Securities to the effect that the sale of the
Registrable Securities in the manner contemplated by such holder may be
effected without registration regardless of the identity or status of the
buyer(s) of such Registrable Securities and that such securities are freely
tradeable.
7.4 INDEMNIFICATION.
(A) INDEMNIFICATION BY THE COMPANY. In the event of any
registration under the Securities Act pursuant to Section 7 hereof of any
Registrable Securities covered by such registration, the Company will, and
hereby does, indemnify and hold harmless the Participating Holders, their
directors and officers, each other person who participates as an underwriter in
the offering or sale of such securities (if so required by such underwriter as
a condition to including the Participating Holders' Registrable Securities in
such registration) and each other person, if any, who controls the
Participating Holders or any such
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<PAGE> 15
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which the Participating
Holders or any such director or officer or underwriter or controlling person
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which such securities were registered under
the Securities Act, any preliminary prospectus, final prospectus or summary
prospectus contained therein or any document incorporated therein by reference,
or any amendment or supplement thereto, or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and the Company will reimburse the
Participating Holders and each such director, officer, underwriter and
controlling person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, any such preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by any
Participating Holder either specifically for inclusion therein or which the
Company has informed the Participating Holder will be used for such purposes;
provided further that the Company shall not be liable to any person who
participates as an underwriter in the offering or sale of Registrable
Securities or any other person, if any, who controls such underwriter within
the meaning of the Securities Act, in any such case to the extent that any such
loss, claim, damage, liability (or action or proceeding in respect thereof) or
expense arises out of such person's failure to send or give a copy of the final
prospectus to the person claiming an untrue statement or alleged untrue
statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such person if such
statement or omission was corrected in such final prospectus.
(B) INDEMNIFICATION BY THE PARTICIPATING HOLDERS. The
Company may require, as a condition to including any Registrable Securities of
the Participating Holders in any registration statement filed pursuant to
Section 7, that the Company shall have received an undertaking satisfactory to
it from the Participating Holders to indemnify and hold harmless (in the same
manner and to the same extent as set forth in subdivision (a) of this Section
7.4) the Company, each director of the Company, each officer of the Company and
each other person, if any, who controls the Company within the meaning of the
Securities Act, with respect to any statement or alleged statement in or
omission or alleged omission from such registration statement, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by the Participating Holders
either specifically for inclusion therein or which the Company has informed the
Participating Holders will be used for such purposes.
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<PAGE> 16
(C) NOTICES OF CLAIMS, ETC. Promptly after receipt by
an indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subdivisions of this Section
7.4, such indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party, give written notice to the latter of the
commencement of such action, provided that the failure of any indemnified party
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under the preceding subdivisions of this Section 7.4, except to
the extent that the indemnifying party is actually prejudiced by such failure
to give notice. In case any such action is brought against an indemnified
party, unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist in respect
of such claim, the indemnifying party shall be entitled to participate in and
to assume the defense thereof, jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
for any legal or other expenses subsequently incurred by the latter in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall consent to entry of any judgment or
enter into any settlement without the consent of the indemnified party which
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation.
(D) OTHER INDEMNIFICATION. Indemnification similar to
that specified in the preceding subdivisions of this Section 7.4 (with
appropriate modifications) shall be given by the Company and the Participating
Holders with respect to any required registration or other qualification of
securities under any Federal or state law or regulation of any governmental
authority, other than the Securities Act.
(E) CONTRIBUTION. If the indemnification provided for
in this Section 7.4 from the indemnifying party is unavailable to an
indemnified party hereunder in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then the indemnifying party, to the
extent such indemnification is unavailable, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified parties in connection with the actions
that resulted in such losses, claims, damages, liabilities or expenses. The
relative fault of such indemnifying party and indemnified parties shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact, has been made by, or relates to
information supplied by, such indemnifying party or indemnified parties, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with any investigation or proceeding.
-15-
<PAGE> 17
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 7.4(e) were determined by
pro rata allocation or by any other method of allocation that does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. No person guilty of fraudulent misrepresentation (within
the meaning of Section 10(f) of the Securities Act) shall be entitled to
contribution from any person.
If indemnification is available under this Section 7.4, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in Sections 7.4(a) and 7.4(b) without regard to the relative fault of
said indemnifying parties or indemnified party or any other equitable
consideration provided for in this Section 7.4(e).
SECTION 8. FRACTIONAL INTERESTS. The Company shall not be
required to issue fractional Warrant Shares on the exercise of the Warrant. If
any fraction of a Warrant Share would, except for the provisions of this
Section 8, be issuable on the exercise of the Warrant (or specified portion
thereof), the Company shall pay an amount in cash equal to the closing price
for one share of the Common Stock, as defined in paragraph (e) of Section 6.1,
on the trading day immediately preceding the date the Warrant is presented for
exercise, multiplied by such fraction.
SECTION 9. NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDER.
Nothing contained in this Agreement or in the Warrant shall be construed as
conferring upon the Holder or his permitted transferees the right to vote or to
receive dividends or to consent to or receive notice as a stockholder in
respect of any meeting of stockholders for the election of directors of the
Company or any other matter, or any rights whatsoever as a stockholder of the
Company.
SECTION 10. INSPECTION OF WARRANT AGREEMENT. The Company shall
keep copies of this Agreement and any notices given or received hereunder
available for inspection by the Holder during normal business hours at its
principal office.
SECTION 11. IDENTITY OF TRANSFER AND WARRANT AGENT. Forthwith
upon the appointment of any subsequent transfer agent for the Common Stock or
Warrant Agent, or any other shares of the Company's capital stock issuable upon
the exercise of the Warrant, the Company will notify the Holder of the name and
address of such subsequent transfer agent.
SECTION 12. NOTICES. Any notice pursuant to this Agreement by
any Holder to the Company, shall be in writing and shall be mailed first class,
postage prepaid, or delivered to the Company at its office at 1999 Avenue of
the Stars, Suite 2050, Los Angeles, California, 90067, Attention: Chief
Executive Officer.
Each party hereto may from time to time change the address to
which notices to it are to be delivered or mailed hereunder by notice in
writing to the other party. Any notice mailed pursuant to this Agreement by
the Company or the Warrant Agent to the
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<PAGE> 18
Holder shall be in writing and shall be mailed first class, postage prepaid, or
delivered to the Holder at his address on the books of the Warrant Agent.
SECTION 13. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of California, without
giving effect to principles of conflict of laws. The parties hereto agree to
submit to the jurisdiction of the Courts of the State of California in any
action or proceeding arising out of or relating to this Agreement.
SECTION 14. SUPPLEMENTS AND AMENDMENTS. The Company and the
Warrant Agent may from time to time supplement or amend this Agreement in order
to cure any ambiguity or to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provision herein,
or to make any other provisions in regard to matters or questions arising
hereunder which the Company and the Warrant Agent may deem necessary or
desirable and which shall not be inconsistent with the provisions of the
Warrant and which shall not adversely affect the interests of the Holder.
SECTION 15. SUCCESSORS. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Warrant Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
SECTION 16. MERGER OR CONSOLIDATION OF THE COMPANY. So long as
the Warrant remains outstanding, the Company will not merge or consolidate with
or into, or sell, transfer or lease all or substantially all of its property
to, any other corporation unless the successor or purchasing corporation, as
the case may be (if not the Company), shall expressly assume, by supplemental
agreement, the due and punctual performance and observance of each and every
covenant and condition of this Agreement to be performed and observed by the
Company.
SECTION 17. BENEFITS OF THIS AGREEMENT. Nothing in this
Agreement shall be construed to give to any person or corporation other than
the Company, and the Holder any legal or equitable right, remedy or claim under
this Agreement, but this Agreement shall be for the sole and exclusive benefit
of the Company and the Holder.
SECTION 18. CAPTIONS. The captions of the Sections of this
Agreement have been inserted for convenience only and shall have no substantive
effect.
SECTION 19. COUNTERPARTS. This Agreement may be executed in any
number of counterparts each of which so executed shall be deemed to be an
original; but such counterparts together shall constitute but one and the same
instrument.
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<PAGE> 19
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed as of the day, month and year first above written.
THE COMPANY:
THE HARVEY ENTERTAINMENT
COMPANY, a California corporation
By: [SIG]
-------------------------------------
Title: EVP
----------------------------------
THE WARRANT AGENT:
THE HARVEY ENTERTAINMENT
COMPANY, a California corporation
By: [SIG]
-------------------------------------
Title: EVP
----------------------------------
THE WARRANT HOLDER:
ARNHOLD AND S. BLEICHROEDER, INC.
By:
------------------------------------
Name:
Title:
Address:
1345 Avenue of the Americas
New York, New York 10105-4300
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<PAGE> 20
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed as of the day, month and year first above written.
THE COMPANY:
THE HARVEY ENTERTAINMENT
COMPANY, a California corporation
By:
-------------------------------------
Title:
----------------------------------
THE WARRANT AGENT:
THE HARVEY ENTERTAINMENT
COMPANY, a California corporation
By:
-------------------------------------
Title:
----------------------------------
THE WARRANT HOLDER:
ARNHOLD AND S. BLEICHROEDER, INC.
By: [SIG]
------------------------------------
Name: [SIG]
Title: Co-President
Address:
1345 Avenue of the Americas
New York, New York 10105-4300
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<PAGE> 21
EXHIBIT A
Warrant Certificate
No. One 25,000 Shares
COMMON STOCK PURCHASE WARRANT
Void After 5:00 P.M.
Pacific Time on January 16, 2002
THIS CERTIFIES THAT, for value received, Arnhold & S. Bleichroeder,
the registered holder of this Common Stock Purchase Warrant (the "Warrant") or
permitted assigns (the "Holder"), is entitled to purchase from The Harvey
Entertainment Company, a California corporation (the "Company"), at any time
until 5:00 p.m. Pacific Time on January 16, 2002 (the "Expiration Date"), at
the purchase price of $10.00 per share (the "Warrant Price"), the number of
shares of Common Stock of the Company (the "Common Stock") which is equal to
the number of Shares set forth above. The number of shares purchasable upon
exercise of this Warrant and the Warrant Price per share shall be subject to
adjustment from time to time as set forth in the Warrant Agreement referred to
below.
This Warrant is issued under and in accordance with a Warrant
Agreement, dated as of January 16, 1997, between the Company, the Warrant Agent
and the Warrant Holder and is subject to the terms and provisions contained in
the Warrant Agreement, to all of which the Holder of this Warrant by acceptance
hereof consents. A copy of the Warrant Agreement may be obtained for
inspection by the Holder hereof upon written request to the Company.
This Warrant may be exercised in whole or in part by presentation of
this Warrant with the Purchase Form on the reverse side hereof duly executed
and simultaneous payment of the Warrant Price (subject to adjustment) at the
principal office of the Company in Los Angeles, California. Payment of such
price shall be payable at the option of the Holder hereof in cash or by
certified or official bank check or wire transfer. Terms relating to exercise
of Warrant is set forth more fully in the Warrant Agreement.
This Warrant may be exercised in whole or in part. Upon partial
exercise, a Warrant Certificate for the unexercised portion shall be delivered
to the Holder. No fractional shares will be issued upon the exercise of this
Warrant but the Company shall pay the cash value of any fraction upon the
exercise of the Warrant. This Warrant is transferable only in limited
circumstances as described in this Warrant Agreement at the office of the
Company in Los Angeles, California, in the manner and subject to the
limitations set forth in the Warrant Agreement.
<PAGE> 22
"THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). NO SALE OR
OTHER DISPOSITION OR PLEDGE OF THESE SECURITIES OR THE SECURITIES
UNDERLYING THESE SECURITIES CAN BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATING THERETO OR AN AVAILABLE EXEMPTION FROM
REGISTRATION."
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented hereby, or to the
transfer hereof on the books of the Company. Any notice to the contrary
notwithstanding, and until such transfer on which books, the Company may treat
the Holder hereof as the owner for all purposes.
This Warrant does not entitle any Holder hereof to any of the rights of
a stockholder of the Company.
THE HARVEY ENTERTAINMENT COMPANY
By:
-----------------------
Jeffrey A. Montgomery
Chief Executive Officer
Attest
---------------------------
Gregory Yulish
Secretary
DATED: As of January 16, 1997
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<PAGE> 23
EXHIBIT B
Warrant Certificate
No. Two 25,000 Shares
COMMON STOCK PURCHASE WARRANT
Void After 5:00 P.M.
Pacific Time on January 16, 2003
THIS CERTIFIES THAT, for value received, and subject to the Company's
prior written election, Arnhold & S. Bleichroeder, the registered holder of
this Common Stock Purchase Warrant (the "Warrant") or permitted assigns (the
"Holder"), subject to vesting, is entitled to purchase from The Harvey
Entertainment Company, a California corporation (the "Company"), from and after
January 16, 1998 through 5:00 p.m. Pacific Time on January 16, 2003 (the
"Expiration Date"), at the purchase price of $10.00 per share (the "Warrant
Price"), the number of shares of Common Stock of the Company (the "Common
Stock") which is equal to the number of Shares set forth above. The number of
shares purchasable upon exercise of this Warrant and the Warrant Price per
share shall be subject to adjustment from time to time as set forth in the
Warrant Agreement referred to below.
This Warrant is issued under and in accordance with a Warrant
Agreement, dated as of January 16, 1997 between the Company, the Warrant Agent
and the Warrant Holder and is subject to the terms and provisions contained in
the Warrant Agreement, to all of which the Holder of this Warrant by acceptance
hereof consents. A copy of the Warrant Agreement may be obtained for
inspection by the Holder hereof upon written request to the Company.
If and once vested, this Warrant may be exercised in whole or in part
by presentation of this Warrant with the Purchase Form on the reverse side
hereof duly executed and simultaneous payment of the Warrant Price (subject to
adjustment) at the principal office of the Company in Los Angeles, California.
Payment of such price shall be payable at the option of the Holder hereof in
cash or by certified or official bank check or wire transfer. Terms relating
to exercise of Warrant is set forth more fully in the Warrant Agreement.
This Warrant may be exercised in whole or in part. Upon partial
exercise, a Warrant Certificate for the unexercised portion shall be delivered
to the Holder. No fractional shares will be issued upon the exercise of this
Warrant but the Company shall pay the cash value of any fraction upon the
exercise of the Warrant. This Warrant is transferable only in limited
circumstances as described in this Warrant Agreement at the office of the
Company in Los Angeles, California, in the manner and subject to the
limitations set forth in the Warrant Agreement.
-1-
<PAGE> 24
"THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). NO SALE OR
OTHER DISPOSITION OR PLEDGE OF THESE SECURITIES OR THE SECURITIES
UNDERLYING THESE SECURITIES CAN BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATING THERETO OR AN AVAILABLE EXEMPTION FROM
REGISTRATION."
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented hereby, or to the
transfer hereof on the books of the Company. Any notice to the contrary
notwithstanding, and until such transfer on which books, the Company may treat
the Holder hereof as the owner for all purposes.
This Warrant does not entitle any Holder hereof to any of the rights
of a stockholder of the Company.
THE HARVEY ENTERTAINMENT COMPANY
By:
-------------------------
Jeffrey A. Montgomery
Chief Executive Officer
Attest
----------------------------
Gregory Yulish
Secretary
DATED: As of January 16, 1997
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<PAGE> 25
Exhibit C
PURCHASE FORM
Mailing Address
- ------------------------------------- ----------------------------------------
- ------------------------------------- ----------------------------------------
- ------------------------------------- ----------------------------------------
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant for, and to purchase thereunder,
_______________ shares of the stock provided for therein, and tenders herewith
payment of the purchase price in full in the form of cash or by cashier's check
in the amount of $______________.]
The undersigned requests that certificates for such shares be issued
in the name of:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print Name, Address and Social Security No.)
DATED: , ______
Name of Warrant Holder or Permitted Assignee:
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signature:
----------------------------------------------------------------------
Signature Guaranteed: Note: The above signature must correspond with
the name as written upon the face of this
Warrant Certificate in every particular,
without alteration or enlargement or any
change whatever, unless this Warrant has
been assigned.
-1-
<PAGE> 1
EXHIBIT 10.50
- --------------------------------------------------------------------------------
WARRANT AGREEMENT OF
THE HARVEY ENTERTAINMENT COMPANY
50,000 SHARES
Dated as of January 16, 1997
- --------------------------------------------------------------------------------
COMMON STOCK PURCHASE WARRANT
<PAGE> 2
WARRANT AGREEMENT dated as of January 16, 1997, between The Harvey
Entertainment Company, a California corporation (the "Company"), the Company as
Warrant Agent (in such capacity, "Warrant Agent"), and Michael Doherty (the
"Warrant Holder" or "Holder").
The Company proposes to issue two Common Stock Purchase Warrants as
hereinafter described (collectively the "Warrant") to purchase an aggregate of
up to 50,000 shares of its Common Stock (the "Common Stock"), no par value per
share (the shares of Common Stock issuable on exercise of the Warrant being
referred to herein as the "Warrant Shares"), in favor of Warrant Holder.
In consideration of the nonexclusive consulting services provided to
the Company in matters relating to possible acquisition transactions, investment
opportunities, investor relations and such services as the Company may request
from time to time (the "Services") from the Warrant Holder, and for the purpose
of defining the terms and provisions of the Warrant and the respective rights
and obligations thereunder of the Company and the Holder, the Company and the
Warrant Holder hereby agree as follows:
SECTION 1. TRANSFERABILITY AND FORM OF THE WARRANT.
1.1 REGISTRATION. The Warrant shall be numbered and shall
be registered on the books of the Company maintained at the principal office of
the Company in Los Angeles, California ("the Warrant Register"). The Company
shall be entitled to treat the Holder of the Warrant as the owner in fact
thereof for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in such Warrant on the part of any other person, and
shall not be liable for any Company registration or transfer of Warrant which is
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration of transfer, or
with such knowledge of such facts that its participation therein amounts to bad
faith.
1.2 TRANSFER RESTRICTIONS. The Holder may not transfer the
Warrant without the prior written consent of the Company, which consent may be
granted or denied in the sole discretion of the Company. Should such consent be
granted, the Warrant so transferred shall continue to be bound by this
restriction in the hands of a subsequent Holder, and the Company shall not
recognize any attempted transfer of the Warrant in violation of this Agreement.
1.3 TRANSFER-GENERAL. Subject to the terms hereof, the
Warrant shall be transferable only on the books of the Company maintained at its
principal office upon delivery thereof duly endorsed by the Holder or by his
duly authorized attorney or representative, or accompanied by proper evidence of
succession, assignment or authority to transfer. In all cases of transfer by an
attorney, the original power of attorney, duly approved, or a copy thereof, duly
certified, shall be deposited and remain with the Company. In case of transfer
by executors, administrators, guardians or other legal representatives, duly
authenticated
<PAGE> 3
evidence of their authority shall be produced, and may be required
to be deposited and to remain with the Company in its discretion. Upon any
registration of transfer, the Company shall countersign and deliver a new
Warrant to the persons entitled thereto. The Company or the Warrant Agent may
require the payment of a sum sufficient to cover any tax or governmental charge
that may be imposed in connection with any such transfer.
1.4 FORM OF THE WARRANT. The text of the Warrant and of the
form of election to purchase Warrant Shares (the "Purchase Form") shall be
substantially as set forth respectively in Exhibits A, B and C attached hereto.
The price per Warrant Share and the number of Warrant Shares issuable upon
exercise of each Warrant are subject to adjustment upon the occurrence of
certain events, all as hereinafter provided. The Warrant shall be executed on
behalf of the Company by its Chairman of the Board, its Chief Executive Officer,
President or one of its Vice Presidents, under its corporate seal reproduced
thereon, and attested by its Secretary or an Assistant Secretary.
The Warrant shall be dated as of the date of
countersignature thereof by the Company either upon initial issuance or upon
transfer.
SECTION 2. TERM OF THE WARRANT; EXERCISE OF THE WARRANT; WARRANT
PRICE, ETC.
2.1 TERM OF THE WARRANT. Subject to the terms of this
Agreement, the Holder shall have the right, which may be exercised from time to
time, from and through the dates set forth in the Warrant, to purchase from the
Company the number of fully paid and nonassessable Warrant Shares which the
Holder may at the time be entitled to purchase on exercise of such Warrant. If
the last day for the exercise of the Warrant shall not be a business day, then
the Warrant may be exercised on the next succeeding business day.
2.2 VESTING OF THE WARRANT. Warrant No. One to purchase
25,000 Warrant Shares shall immediately vest and may be exercised on or after
the date hereof in accordance with the terms of this Agreement and the Warrant
Certificate. Warrant No. Two to purchase 25,000 Warrant Shares may be exercised
and will vest on the earlier of (i) a Change of Control (as hereinafter defined)
of the Company or (ii) January 1, 1998, in the event that the Company has
requested and the Warrant Holder has agreed to continue to perform the Services
through December 31, 1998; provided, however, that in the event on January 1,
1998, (i) there has been no Change of Control of the Company or (ii) the Company
has not requested or the Warrant Holder has not agreed to provide services
through December 31, 1998, then Warrant No. Two shall not vest, may not be
exercised, and shall be of no force or effect. For this purpose, a "Change of
Control" is: (i) the consummation of a merger, consolidation or other
reorganization of the Company pursuant to which control of more than 50% of the
Company's voting securities has changed; (ii) successful completion of a tender
offer for more than 50% of the Company's outstanding capital stock; (iii) or the
sale of all or substantially all of the assets of the Company to any person
other than AKAUSA Limited and/or its affiliates or Jeffrey A. Montgomery and his
affiliates.
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<PAGE> 4
2.3 EXERCISE OF THE WARRANT. The Warrant may be exercised
upon surrender to the Company, at its principal office, of the certificate
evidencing the Warrant to be exercised, together with the Purchase Form on the
reverse thereof duly filled in and signed, and upon payment to the Company, of
the Warrant Price (as defined in and determined in accordance with the
provisions of Sections 2 and 6 hereof), for the number of Warrant Shares in
respect of which such Warrant is then exercised. Upon partial exercise, a
Warrant Certificate for the unexercised portion shall be delivered to the
Holder. Payment of the aggregate Warrant Price shall be payable in cash, by
certified or official bank check or wire transfer.
Subject to Section 3 hereof, upon such surrender of the
Warrant and payment of the Warrant Price as aforesaid, the Company shall issue
and cause to be delivered with all reasonable dispatch to or upon the written
order of the Holder and in such name or names as the Holder may designate, a
certificate or certificates for the number of full Warrant Shares so purchased
upon the exercise of such Warrant, together with cash, as provided in Section 8
hereof, in respect of any fractional Warrant Shares otherwise issuable upon such
surrender. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have become
a holder of record of such Warrant Shares as of the date of the surrender of
such Warrant and payment of the Warrant Price, as aforesaid; provided, however,
that if, at the date of surrender of such Warrant and payment of such Warrant
Price, the transfer books for the Warrant Shares or other class of stock
purchasable upon the exercise of such Warrant shall be closed, the certificates
for the Warrant Shares in respect of which such Warrant are then exercised shall
be issuable as of the date on which such books shall next be opened (whether
before or after the Expiration Date) and until such date the Company shall be
under no duty to deliver any certificate for such Warrant Shares; provided,
further, that the transfer books of record, unless otherwise required by law,
shall not be closed at any one time for a period longer than 20 calendar days.
2.4 COMPLIANCE WITH GOVERNMENT REGULATIONS. Holder
acknowledges that none of the Warrant or Warrant Shares has been registered
under the Securities Act of 1933, as amended (the "Securities Act"), and
therefore may be sold or disposed of in the absence of such registration only
pursuant to an exemption from such registration and in accordance with this
Agreement. The Warrant and the Warrant Shares will bear a legend to the
following effect:
"THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR OTHER
DISPOSITION OR PLEDGE OF THESE SECURITIES OR THE SECURITIES UNDERLYING
THESE SECURITIES CAN BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATING THERETO OR AN AVAILABLE EXEMPTION FROM
REGISTRATION."
2.5 WARRANT PRICE. The price per share at which Warrant
Shares shall be purchasable upon exercise of the Warrant (the "Warrant Price")
shall be $10.00, subject to
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<PAGE> 5
adjustment pursuant to Section 6 hereof.
SECTION 3. PAYMENT OF TAXES AND INDEMNIFICATION.
3.1 PAYMENT OF TAXES. The Company will pay all documentary
stamp taxes, if any, attributable to the initial issuance of Warrant and Warrant
Shares upon the exercise of Warrant; provided, however, that the Company shall
not be required to pay any income tax or taxes resulting from the issuance of
the warrant or any other tax or taxes which may be payable in respect of any
transfer involved in the issue or delivery of the Warrant or certificates for
Warrant Shares.
3.2 INDEMNIFICATION. Warrant Holder hereby agrees to
indemnify and hold the Company harmless from any and all taxes that may result
from the issuance of the Warrant or any subsequent exercise of the Warrant and
issuance of the Warrant shares, including, but without limitotion, any income or
transfer taxes.
SECTION 4. MUTILATED OR MISSING WARRANT. In case the Warrant shall
be mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant certificate of like tenor and representing an equivalent right or
interest; but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction of such Warrant certificate and
indemnity or bond, if requested, also reasonably satisfactory to them. An
applicant for such substitute Warrant certificate shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company may prescribe.
SECTION 5. RESERVATION OF WARRANT SHARES.
5.1 RESERVATION OF WARRANT SHARES. There have been
reserved, and the Company shall at all times keep reserved, out of its
authorized shares of Common Stock, a number of shares of Common Stock sufficient
to provide for the exercise of the rights of purchase represented by the
outstanding Warrant. The transfer agent for the Common Stock ("Transfer Agent"),
and every subsequent transfer agent for any shares of the Company's capital
stock issuable upon the exercise of any of the rights of purchase aforesaid will
be and are hereby irrevocably authorized and directed at all times until the
Expiration Date to reserve such number of authorized shares as shall be
requisite for such purpose. The Company will keep a copy of this Agreement on
file with the Transfer Agent and with every subsequent transfer agent for any
shares of the Company's capital stock issuable upon the exercise of the rights
of purchase represented by the Warrant. The Company covenants that all Warrant
Shares which may be issued upon exercise of Warrant will, upon issue, be fully
paid, nonassessable, free of preemptive rights and free from all taxes, liens,
charges and security interests with respect to the issue thereof. The Company
will supply such Transfer Agent and any subsequent transfer agent with duly
executed stock certificates for such purpose and will itself provide or
otherwise make available any cash which may be payable as provided in Section 8
of this Agreement. The Company will furnish to such Transfer Agent a copy of all
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<PAGE> 6
notices of adjustments, and certificates related thereto, transmitted to each
Holder. The Warrant surrendered in the exercise of the rights thereby evidenced
shall be cancelled by the Company.
5.2 CANCELLATION OF THE WARRANT. In the event the Company
shall purchase or otherwise acquire the Warrant, the same shall be cancelled and
retired.
SECTION 6. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT
SHARES. The number and kind of securities purchasable upon the exercise of the
Warrant and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as hereinafter defined.
6.1 MECHANICAL ADJUSTMENTS. The number of Warrant Shares
purchasable upon the exercise of the Warrant and the Warrant Price shall be
subject to adjustment as follows:
(a) In case the Company shall at any time after
the date of this Agreement (i) declare or pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock, (iii) combine its
outstanding shares of Common Stock into a smaller number of shares of
Common Stock or (iv) issue any shares of its capital stock in a
reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing entity), the number of Warrant Shares
purchasable upon exercise of the Warrant immediately prior thereto
shall be adjusted so that the Holder of the Warrant shall be entitled
to receive the kind and number of Warrant Shares or other securities of
the Company which he would have owned or have been entitled to receive
after the happening of any of the events described above, had such
Warrant been exercised immediately prior to the happening of such event
or any record date with respect thereto. An adjustment made pursuant to
this paragraph (a) shall become effective immediately after the
effective date of such event retroactive to the record date, if any,
for such event.
(b) In case the Company shall issue rights,
options or warrants to holders of its outstanding Common Stock
entitling them (for a period within 45 days after the record date
mentioned below) to subscribe for or purchase shares of Common Stock at
a price per share which is lower at the record date mentioned below
than the then current market price per share of Common Stock (as
defined in paragraph (e) below), the number of Warrant Shares
thereafter purchasable upon the exercise of the Warrant shall be
determined by multiplying the number of Warrant Shares theretofore
purchasable upon exercise of the Warrant by a fraction, of which the
numerator shall be the number of shares of Common Stock outstanding on
the date of issuance of such rights, options or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the denominator shall be the number of shares of
Common Stock outstanding on the date of issuance of such rights,
options or warrants plus the number of shares which the aggregate
offering price of the total
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<PAGE> 7
number of shares of Common Stock so offered would purchase at the
current market price per share of Common Stock at such record date.
Such adjustments shall be made whenever such rights, options or
warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive
such rights, options or warrants.
(c) In case the Company shall distribute to
holders of its shares of Common Stock evidences of its indebtedness or
assets (excluding cash dividends or distributions payable out of
consolidated earnings or earned surplus legally available for payment
of dividends at the time of any such payment or distribution, but
excluding dividends or distributions referred to in paragraph (a) above
or in the paragraph immediately following this paragraph) or rights,
options or warrants, or convertible or exchangeable securities
containing the right to subscribe for or purchase shares of Common
Stock (excluding those referred to in paragraph (b) above), then in
each case the number of Warrant Shares thereafter purchasable upon the
exercise of the Warrant shall be determined by multiplying the number
of Warrant Shares theretofore purchasable upon the exercise of the
Warrant by a fraction, of which the numerator shall be the then current
market price per share of Common Stock (as defined in paragraph (e)
below) on the date of such distribution, and of which the denominator
shall be the then current market price per share of Common Stock, less
the then fair value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the portion of the
assets or evidences of indebtedness so distributed or of such
subscription rights, options or warrants, or of such convertible or
exchangeable securities applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made, and
shall become effective on the date of distribution retroactive to the
record date for the determination of stockholders entitled to receive
such distribution.
In the event of a distribution by the Company to
holders of its shares of Common Stock of stock of a subsidiary or
securities convertible into or exercisable for such stock, then in lieu
of an adjustment in the number of Warrant Shares purchasable upon the
exercise of the Warrant, the Holder of the Warrant, upon the exercise
thereof at any time after such distribution, shall be entitled to
receive from the Company, such subsidiary or both, as the Company shall
determine, the stock or other securities to which such Holder would
have been entitled if such Holder had exercised such Warrant
immediately prior thereto, all subject to further adjustment as
provided in this Section 6.1; provided, however, that no adjustment in
respect of dividends or interest on such stock or other securities
shall be made during the term of a Warrant or upon the exercise of a
Warrant other than adjustments required by this Section 6.
(d) In case the Company shall issue shares of
Common Stock or rights, options or warrants containing the right to
subscribe for or purchase shares of Common Stock or securities
convertible into Common Stock (excluding (i) shares, rights, options,
warrants or convertible securities issued in any of the transactions
described in paragraphs (a), (b) or (c) above, or (ii) Warrant Shares
issued upon
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<PAGE> 8
exercise of the Warrant), for a price per share of Common Stock, in the
case of the issuance of Common Stock, or for a price per share of
Common Stock initially deliverable upon conversion or exchange of such
securities less than the then current market price per share of Common
Stock (as defined in paragraph (e) below) on the date the Company fixed
the offering, conversion or exchange price of such additional shares,
the number of Warrant Shares thereafter purchasable upon the exercise
of the Warrant shall be determined by multiplying the number of Warrant
Shares theretofore purchasable upon exercise of the Warrant by a
fraction, of which the numerator shall be the number of shares of
Common Stock outstanding on such date plus the number of additional
shares of Common Stock offered for subscription or purchase, and of
which the denominator shall be the number of shares of Common Stock
outstanding on such date plus the number of shares which the aggregate
offering price of the total number of shares of Common Stock so offered
would purchase at the current market price per share of Common Stock at
such record date. Such adjustment shall be made whenever such shares,
rights, options or warranties are issued, and shall become effective
immediately after the effective date of such event retroactive to the
record date, if any, for such event.
(e) For the purpose of any computation under
paragraphs (b), (c) and (d) of this Section, the current market price
per share of Common Stock at any date shall be the average of the daily
closing prices for 10 consecutive trading days commencing 20 trading
days before the date of such computation. The closing price for each
day shall be the last such reported sales price regular way or, in case
no such reported sale takes place on such day, the average of the
closing bid and asked prices regular way for such day, in each case on
the principal national securities exchange or in the NASDAQ National
Market System to which the shares of Common Stock are listed or
admitted to trading or, if not listed or admitted to trading, the
average of the closing bid and asked prices of the Common Stock in the
over-the-counter market as reported by NASDAQ or any comparable system,
or if the Common Stock is not listed on NASDAQ or a comparable system,
the average of the closing bid and asked prices as furnished by two
members of the National Association of Securities Dealers, Inc.
("NASD") selected from time to time by the Board of Directors of the
Company for that purpose. In the absence of one or more such
quotations, the Board of Directors of the Company shall determine the
current market price on the basis of such quotations as it considers
appropriate or in the case of securities which are not quoted, the
Board of Directors of the Company shall determine the current market
price based upon such information and advice as it considers
appropriate. In the case of rights, options, warrants or convertible or
exchangeable securities, the price per share of Common Stock shall be
determined by dividing (x) the total amount received or receivable by
the Company in consideration of the sale and issuance of such rights,
options, warrants or convertible or exchangeable securities, plus the
total consideration payable to the Company upon exercise or conversion
or exchange thereof, by (y) the total number of shares of Common Stock
covered by such rights, options, warrants or convertible or
exchangeable securities.
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<PAGE> 9
(f) Whenever the number of Warrant Shares
purchasable upon the exercise of the Warrant is adjusted, as herein
provided, the Warrant Price payable upon exercise of the Warrant shall
be adjusted by multiplying such Warrant Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the number of
Warrant Shares purchasable upon the exercise of the Warrant immediately
prior to such adjustment, and of which the denominator shall be the
number of Warrant Shares purchasable immediately thereafter.
(g) In case the Company shall sell or issue
shares of Common Stock or rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe or purchase
shares of Common Stock in the following situations:
(i) to officers, directors, consultants or
employees of the Company pursuant to an employee
stock option plan approved by the Company's
shareholders either at a price not less than 95% of
the current market price of the Company's Common
Stock or in an amount (taking into account all prior
sales or issuances excluded pursuant to this clause
(i)) not greater than 5% of the total number of
shares of Common Stock outstanding on a fully
diluted basis; or
(ii) to sellers of assets or interests in
other enterprises in exchange for the arm's length
acquisition of such assets or interests,
there shall be no adjustment in the Warrant Price or the number of
Warrant Shares either upon the initial issuance of such securities or
upon the exercise or conversion thereof.
(h) No adjustment in the number of Warrant Shares
purchasable hereunder shall be required unless such adjustment would
result in an increase or decrease of at least one percent (1%) of the
Warrant Price; provided, however, that any adjustments which by reason
of this paragraph (h) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment or upon
exercise of the Warrant. All calculations shall be made to the nearest
cent or to the nearest one-thousandth of a share, as the case may be.
(i) No adjustment in the number of Warrant Shares
purchasable upon the exercise of the Warrant need be made under
paragraphs (b), (c), or (d) if the Company issues or distributes to the
Holder of the Warrant the shares, rights, options, warrants, or
convertible or exchangeable securities, or evidences of indebtedness or
assets referred to in those paragraphs which the Holder of the Warrant
would have been entitled to receive had the Warrant been exercised
prior to the happening of such event or the record date with respect
thereto. No adjustment in the number of Warrant Shares purchasable upon
the exercise of the Warrant need be made for sales of Warrant Shares
pursuant to a Company plan for reinvestment of dividends or interest.
No adjustment need be made for a change in the par value of the Warrant
Shares.
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<PAGE> 10
(j) For the purpose of this Section 6.1, the term
"shares of Common Stock" shall mean (i) the class of stock designated
as the Common Stock of the Company at the date of this Agreement, or
(ii) any other class of stock resulting from successive changes or
reclassifications of such shares consisting solely of changes from no
par value to par value, changes in par value, or changes from par value
to no par value. In the event that at any time, as a result of an
adjustment made pursuant to paragraph (a) above, the Holder shall
become entitled to purchase any securities of the Company other than
shares of Common Stock, thereafter the number of such other shares so
purchasable upon exercise of the Warrant and the Warrant Price of such
shares shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with
respect to the Warrant Shares contained in paragraphs (a) through (h),
inclusive, above, and the provisions of Section 2 and Sections 6.2
through 6.3, inclusive, with respect to the Warrant Shares, shall apply
on like terms to any such other securities; provided, however, that the
Warrant Price shall at no time be less than the par value of the Common
Stock of the Company; provided, further, that the Company shall reduce
the par value of its Common Stock from time to time as necessary so
that such par value shall not be more than the Warrant Price then in
effect.
(k) Upon the expiration of any rights, options,
warrants or conversion or exchange privileges, the issuance of which
required an adjustment in the number of shares of Common Stock
purchasable upon exercise of the Warrant, if any thereof shall not have
been exercised, the Warrant Price and the number of shares of Common
Stock purchasable upon the exercise of the Warrant shall, upon such
expiration, be readjusted and shall thereafter be such as it would have
been had it been originally adjusted (or had the original adjustment
not been required, as the case may be) as if (A) the only shares of
Common Stock so issued were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such rights, options,
warrants or conversion or exchange rights and (B) such shares of Common
Stock, if any, were issued or sold for the consideration actually
received by the Company upon such exercise plus the aggregate
consideration, if any, actually received by the Company for the
issuance, sale or grant of all such rights, options, warrants or
conversion or exchange rights whether or not exercised; provided,
however, that no such readjustment shall have the effect of increasing
the Warrant Price or decreasing the number of shares of Common Stock
purchasable upon the exercise of the Warrant by an amount in excess of
the amount of the adjustment initially made in respect to the issuance,
sale or grant of such rights, options, warrants or conversion or
exchange rights, and provided further that the issuance of shares of
Common Stock pursuant to rights, options, warrants or conversion or
exchange rights shall not be cause for additional adjustments beyond
the adjustments provided in respect of the initial issuance of the
rights, options, warrants or conversion or exchange rights.
6.2 NOTICE OF ADJUSTMENT. Whenever the number of Warrant
Shares purchasable upon the exercise of the Warrant or the Warrant Price of such
Warrant Shares is adjusted, as herein provided, the Company shall mail by first
class, postage prepaid, to each
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<PAGE> 11
Holder notice of such adjustment or adjustments and shall deliver to the Holder
a copy of a certificate of either the Board of Directors of the Company or of a
firm of independent public accountants selected by the Board of Directors of the
Company (who may be the regular accountants employed by the Company) setting
forth the number of Warrant Shares purchasable upon the exercise of the Warrant
and the Warrant Price of such Warrant Shares after such adjustment, setting
forth a brief statement of the facts requiring such adjustment and setting forth
the computation by which such adjustment was made. Such certificate shall be
conclusive evidence of the correctness of such adjustment in the absence of
manifest error.
6.3 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in
Section 6.1, no adjustment in respect of any dividends shall be made during the
term of a Warrant or upon the exercise or conversion of a Warrant.
6.4 PRESERVATION OF PURCHASE RIGHTS UPON MERGER,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale, transfer or
lease to another corporation of all or substantially all the property of the
Company, the Company or such successor or purchasing corporation, as the case
may be, shall execute an amendment to this Agreement that each Holder shall have
the right thereafter upon payment of the Warrant Price in effect immediately
prior to such action to purchase upon exercise of the Warrant the kind and
amount of shares and other securities and property which he would have owned or
have been entitled to receive upon the happening of such consolidation, merger,
sale, transfer or lease had such Warrant been exercised immediately prior to
such action; provided, however, that no adjustment in respect of dividends,
interest or other income on or from such shares or other securities and property
shall be made during the term of a Warrant or upon the exercise of a Warrant.
Such agreement shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
6. The provisions of this Section 6.4 shall similarly apply to successive
consolidations, mergers, sales, transfers or leases.
6.5 STATEMENT ON THE WARRANT. Irrespective of any
adjustments in the Warrant Price or the number or kind of shares purchasable
upon the exercise of the Warrant, the Warrant theretofore or thereafter issued
may continue to express the same price and number and kind of shares as are
stated in the Warrant initially issuable pursuant to this Agreement.
SECTION 7. REGISTRATION RIGHTS.
7.1 CERTAIN DEFINITIONS.
As used in this Warrant Agreement, the following terms shall
have the following respective meanings:
(a) COMMISSION means the Securities and Exchange
Commission.
(b) EXCHANGE ACT means the Securities Exchange
Act of 1934, as
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<PAGE> 12
amended, or any successor act, and the rules and regulations of
the Commission promulgated thereunder, all as the same shall be in effect at the
time.
(c) REGISTRABLE SECURITIES means the Warrant
Shares issued or issuable upon exercise of the Warrants. As to any particular
Registrable Security, once issued, such security shall cease to be one of the
Registrable Securities when (x) such security shall have been transferred to any
person pursuant to an effective registration statement, (y) such security shall
have been transferred to any person that is not an Affiliate (as defined in the
Exchange Act) of the initial Warrant Holder pursuant to Rule 144 (or any
successor provision) under the Securities Act and the shares thereupon become
freely tradeable, or (z) such security shall have ceased to be outstanding.
(d) REGISTRATION EXPENSES means all expenses
incident to the Company's performance of or compliance with the registration
rights herein, including, without limitation, all registration, filing, listing
and NASD fees, all fees and expenses of complying with securities or blue sky
laws, all word processing, duplicating and printing expenses, messenger and
delivery expenses, fees and expenses of Company's counsel and independent public
accountants, including the expenses of any special audits or "cold comfort"
letters required by or incident to such performance and compliance, and any fees
and disbursements of underwriters customarily paid by issuers and sellers of
securities; provided, however, that Registration Expenses shall not include fees
and expenses of counsel for the holders of Registrable Securities nor shall it
include underwriting discounts, commissions and transfer taxes, if any, relating
to the offer and sale of Registrable Securities, all of which shall be borne by
such holders.
(e) SECURITIES ACT means the Securities Act of
1933, as amended, or any successor act thereto, and the rules and regulations of
the Commission promulgated thereunder, all as the same shall be in effect at the
time.
7.2 REGISTRATION.
(a) COMPANY REGISTRATION. If (without any
obligation to do so) the Company proposes to register (including for this
purpose any registration effected by the Company for holders other than the
holders of Registrable Securities) any of its Common Stock or other securities
under the Securities Act in connection with the public offering of such
securities solely for cash (other than a registration on Forms S-4 or S-8 or
equivalent successor forms), then the Company shall, at such time, promptly give
all holders of Registrable Securities written notice of such registration. Any
such registration effected by the Company is referred to herein as a "Company
Registration." Upon the written request of such holders given within fifteen
(15) days after the giving of such notice by the Company, the Company shall,
subject to the provisions of Section 7.2(c) below, cause to be included in such
registration statement and registered under the Securities Act all of the
Registrable Securities that each such holder ("Participating Holders") has
requested to be registered.
(b) EXPENSES. The Company shall pay all
Registration Expenses
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<PAGE> 13
incurred in connection with the registration of Registrable Securities pursuant
to Section 7.2(a).
(c) PRIORITY IN REQUESTED REGISTRATIONS.
If the Company Registration pursuant to Section 7.2(a) involves an underwritten
offering, and the managing underwriter shall advise the Company in writing, with
a copy to the Participating Holders that, in its opinion, the number of
securities requested to be included in such registration (including securities
of the Company which are not Registrable Securities) exceeds the number which
can be sold in such offering; then, in the case of a Company Registration (x)
first, other securities to be sold for the account of the Company to be included
in the Company Registration, and (y) second, the Registrable Securities and
other securities of the Company entitled to similar registration rights, pro
rata, in proportion to the number of Registrable Securities and other securities
requested to be included in such registration statement.
7.3 REGISTRATION PROCEDURES.
(a) If and whenever the Company is required to
use its best efforts to effect the registration of any Registrable Securities
under the Securities Act as provided in Section 7.2, the Company, as
expeditiously as possible and subject to the terms and conditions of Section
7.2, will:
(i) prepare and file with the
Commission the requisite registration statement to effect such registration and
use its best efforts to cause such registration to become effective;
(ii) furnish to each Participating
Holder such number of conformed copies of such registration statement and of
each such amendment and supplement thereto, such number of copies of the
prospectus contained in such registration statement (including each preliminary
prospectus and any summary prospectus) and any other prospectus filed under Rule
424 under the Securities Act, in conformity with the requirements of the
Securities Act, and such other documents, as each Participating Holder may
reasonably request;
(iii) immediately notify the
Participating Holders at any time when a prospectus relating thereto is required
to be delivered under the Securities Act, of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading and at the request of the Participating Holders promptly prepare and
furnish to the Participating Holders a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
and
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<PAGE> 14
(iv) use its best efforts to list all
Registrable Securities covered by such registration statement on the securities
exchange, if any, on which the Common Stock is then listed.
(b) The Company may require each Participating
Holder to furnish the Company with such information and undertakings as it may
reasonably request regarding the holders requesting registration and the
distribution of such securities as the Company may from time to time reasonably
request in writing.
(c) Each Participating Holder agrees (A) that
upon receipt of any notice from the Company of the happening of any event of the
kind described in Section 7.3(a)(iii), such holder will forthwith discontinue
its disposition of Registrable Securities pursuant to the registration statement
relating to such Registrable Securities until receipt by such Participating
Holder of the copies of the supplemented or amended prospectus contemplated by
subdivision (a)(iii) of this Section 7.3 and, if so directed by the Company,
will deliver to the Company all copies, other than permanent file copies, then
in such holder's possession of the prospectus relating to such Registrable
Securities at the time of receipt of such notice and (b) that it will
immediately notify the Company, at any time when a prospectus relating to the
registration of such Registrable Securities is required to be delivered under
the Securities Act, of the happening of any event as a result of which
information previously furnished by such Participating Holder to the Company in
writing for inclusion in such prospectus contains an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(d) Nothing in this Agreement to the contrary,
the Company will not be required to file such a registration statement with
respect to, or include in any registration statement, any Registrable Securities
if the Company obtains an opinion (in form and substance satisfactory to the
holder requesting registration) of counsel acceptable to the holder of such
Registrable Securities to the effect that the sale of the Registrable Securities
in the manner contemplated by such holder may be effected without registration
regardless of the identity or status of the buyer(s) of such Registrable
Securities and that such securities are freely tradeable.
7.4 INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. In the event
of any registration under the Securities Act pursuant to Section 7 hereof of any
Registrable Securities covered by such registration, the Company will, and
hereby does, indemnify and hold harmless the Participating Holders, their
directors and officers, each other person who participates as an underwriter in
the offering or sale of such securities (if so required by such underwriter as a
condition to including the Participating Holders' Registrable Securities in such
registration) and each other person, if any, who controls the Participating
Holders or any such underwriter within the meaning of the Securities Act,
against any losses, claims, damages or liabilities,
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<PAGE> 15
joint or several, to which the Participating Holders or any such director or
officer or underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such securities were registered under the Securities Act, any
preliminary prospectus, final prospectus or summary prospectus contained therein
or any document incorporated therein by reference, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and the Company will reimburse the Participating Holders
and each such director, officer, underwriter and controlling person for any
legal or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, liability, action or
proceeding; provided that the Company shall not be liable in any such case to
the extent that any such loss, claim, damage, liability (or action or proceeding
in respect thereof) or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement, any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished to the Company by any Participating Holder
either specifically for inclusion therein or which the Company has informed the
Participating Holder will be used for such purposes; provided further that the
Company shall not be liable to any person who participates as an underwriter in
the offering or sale of Registrable Securities or any other person, if any, who
controls such underwriter within the meaning of the Securities Act, in any such
case to the extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises out of such person's failure to
send or give a copy of the final prospectus to the person claiming an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Registrable Securities to such
person if such statement or omission was corrected in such final prospectus.
(b) INDEMNIFICATION BY THE PARTICIPATING HOLDERS. The
Company may require, as a condition to including any Registrable Securities of
the Participating Holders in any registration statement filed pursuant to
Section 7, that the Company shall have received an undertaking satisfactory to
it from the Participating Holders to indemnify and hold harmless (in the same
manner and to the same extent as set forth in subdivision (a) of this Section
7.4) the Company, each director of the Company, each officer of the Company and
each other person, if any, who controls the Company within the meaning of the
Securities Act, with respect to any statement or alleged statement in or
omission or alleged omission from such registration statement, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by the Participating Holders either
specifically for inclusion therein or which the Company has informed the
Participating Holders will be used for such purposes.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an
indemnified party
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<PAGE> 16
of notice of the commencement of any action or proceeding involving a claim
referred to in the preceding subdivisions of this Section 7.4, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, give written notice to the latter of the commencement of such action,
provided that the failure of any indemnified party to give notice as provided
herein shall not relieve the indemnifying party of its obligations under the
preceding subdivisions of this Section 7.4, except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice. In
case any such action is brought against an indemnified party, unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, the
indemnifying party shall be entitled to participate in and to assume the defense
thereof, jointly with any other indemnifying party similarly notified to the
extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall consent to entry of any judgment or enter into any settlement
without the consent of the indemnified party which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
(d) OTHER INDEMNIFICATION. Indemnification similar to that
specified in the preceding subdivisions of this Section 7.4 (with appropriate
modifications) shall be given by the Company and the Participating Holders with
respect to any required registration or other qualification of securities under
any Federal or state law or regulation of any governmental authority, other than
the Securities Act.
(e) CONTRIBUTION. If the indemnification provided for in
this Section 7.4 from the indemnifying party is unavailable to an indemnified
party hereunder in respect of any losses, claims, damages, liabilities or
expenses referred to herein, then the indemnifying party, to the extent such
indemnification is unavailable, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions that resulted in
such losses, claims, damages, liabilities or expenses. The relative fault of
such indemnifying party and indemnified parties shall be determined by reference
to, among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with any investigation or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution
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<PAGE> 17
pursuant to this Section 7.4(e) were determined by pro rata allocation or by any
other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. No person
guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of
the Securities Act) shall be entitled to contribution from any person.
If indemnification is available under this Section 7.4, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in Sections 7.4(a) and 7.4(b) without regard to the relative fault of
said indemnifying parties or indemnified party or any other equitable
consideration provided for in this Section 7.4(e).
SECTION 8. FRACTIONAL INTERESTS. The Company shall not be required
to issue fractional Warrant Shares on the exercise of the Warrant. If any
fraction of a Warrant Share would, except for the provisions of this Section 8,
be issuable on the exercise of the Warrant (or specified portion thereof), the
Company shall pay an amount in cash equal to the closing price for one share of
the Common Stock, as defined in paragraph (e) of Section 6.1, on the trading day
immediately preceding the date the Warrant is presented for exercise, multiplied
by such fraction.
SECTION 9. NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDER. Nothing
contained in this Agreement or in the Warrant shall be construed as conferring
upon the Holder or his permitted transferees the right to vote or to receive
dividends or to consent to or receive notice as a stockholder in respect of any
meeting of stockholders for the election of directors of the Company or any
other matter, or any rights whatsoever as a stockholder of the Company.
SECTION 10. INSPECTION OF WARRANT AGREEMENT. The Company shall keep
copies of this Agreement and any notices given or received hereunder available
for inspection by the Holder during normal business hours at its principal
office.
SECTION 11. IDENTITY OF TRANSFER AND WARRANT AGENT. Forthwith upon
the appointment of any subsequent transfer agent for the Common Stock or Warrant
Agent, or any other shares of the Company's capital stock issuable upon the
exercise of the Warrant, the Company will notify the Holder of the name and
address of such subsequent transfer agent.
SECTION 12. NOTICES. Any notice pursuant to this Agreement by any
Holder to the Company, shall be in writing and shall be mailed first class,
postage prepaid, or delivered to the Company at its office at 1999 Avenue of the
Stars, Suite 2050, Los Angeles, California, 90067, Attention: Chief Executive
Officer.
Each party hereto may from time to time change the address to
which notices to it are to be delivered or mailed hereunder by notice in writing
to the other party. Any notice mailed pursuant to this Agreement by the Company
or the Warrant Agent to the Holder shall be in writing and shall be mailed first
class, postage prepaid, or delivered to the Holder at his address on the books
of the Warrant Agent.
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<PAGE> 18
SECTION 13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to principles of conflict of laws. The parties hereto agree to submit to
the jurisdiction of the Courts of the State of California in any action or
proceeding arising out of or relating to this Agreement.
SECTION 14. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant
Agent may from time to time supplement or amend this Agreement in order to cure
any ambiguity or to correct or supplement any provision contained herein which
may be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Agent may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrant and which shall not
adversely affect the interests of the Holder.
SECTION 15. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
SECTION 16. MERGER OR CONSOLIDATION OF THE COMPANY. So long as the
Warrant remains outstanding, the Company will not merge or consolidate with or
into, or sell, transfer or lease all or substantially all of its property to,
any other corporation unless the successor or purchasing corporation, as the
case may be (if not the Company), shall expressly assume, by supplemental
agreement, the due and punctual performance and observance of each and every
covenant and condition of this Agreement to be performed and observed by the
Company.
SECTION 17. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company,
and the Holder any legal or equitable right, remedy or claim under this
Agreement, but this Agreement shall be for the sole and exclusive benefit of the
Company and the Holder.
SECTION 18. CAPTIONS. The captions of the Sections of this
Agreement have been inserted for convenience only and shall have no substantive
effect.
SECTION 19. COUNTERPARTS. This Agreement may be executed in any
number of counterparts each of which so executed shall be deemed to be an
original; but such counterparts together shall constitute but one and the same
instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed as of the day, month and year first above written.
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<PAGE> 19
THE COMPANY:
THE HARVEY ENTERTAINMENT
COMPANY, a California corporation
By: [SIG]
--------------------------------------
Title: EVP
-----------------------------------
THE WARRANT AGENT:
THE HARVEY ENTERTAINMENT
COMPANY, a California corporation
By: [SIG]
--------------------------------------
Title: EVP
-----------------------------------
THE WARRANT HOLDER:
/s/ MICHAEL DOHERTY
----------------------------------------
Address:
1128 Princeton #6
----------------------------------------
Santa Monica, CA 90403
----------------------------------------
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<PAGE> 20
EXHIBIT A
Warrant Certificate
No. One 25,000 Shares
COMMON STOCK PURCHASE WARRANT
Void After 5:00 P.M.
Pacific Time on January 16, 2002
THIS CERTIFIES THAT, for value received, Michael Doherty, the
registered holder of this Common Stock Purchase Warrant (the "Warrant") or
permitted assigns (the "Holder"), is entitled to purchase from The Harvey
Entertainment Company, a California corporation (the "Company"), at any time
until 5:00 p.m. Pacific Time on January 16, 2002 (the "Expiration Date"), at the
purchase price of $10.00 per share (the "Warrant Price"), the number of shares
of Common Stock of the Company (the "Common Stock") which is equal to the number
of Shares set forth above. The number of shares purchasable upon exercise of
this Warrant and the Warrant Price per share shall be subject to adjustment from
time to time as set forth in the Warrant Agreement referred to below.
This Warrant is issued under and in accordance with a Warrant
Agreement, dated as of January 16, 1997, between the Company Agent and the
Warrant Holder and is subject to the terms and provisions contained in the
Warrant Agreement, to all of which the Holder of this Warrant by acceptance
hereof consents. A copy of the Warrant Agreement may be obtained for inspection
by the Holder hereof upon written request to the Company.
This Warrant may be exercised in whole or in part by presentation of
this Warrant with the Purchase Form on the reverse side hereof duly executed and
simultaneous payment of the Warrant Price (subject to adjustment) at the
principal office of the Company in Los Angeles, California. Payment of such
price shall be payable at the option of the Holder hereof in cash or by
certified or official bank check or wire transfer. Terms relating to exercise of
Warrant is set forth more fully in the Warrant Agreement.
This Warrant may be exercised in whole or in part. Upon partial
exercise, a Warrant Certificate for the unexercised portion shall be delivered
to the Holder. No fractional shares will be issued upon the exercise of this
Warrant but the Company shall pay the cash value of any fraction upon the
exercise of the Warrant. This Warrant is transferable only in limited
circumstances as described in this Warrant Agreement at the office of the
Company in Los Angeles, California, in the manner and subject to the limitations
set forth in the Warrant Agreement.
"THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT
<PAGE> 21
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). NO SALE OR OTHER DISPOSITION OR PLEDGE OF THESE SECURITIES OR
THE SECURITIES UNDERLYING THESE SECURITIES CAN BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN AVAILABLE
EXEMPTION FROM REGISTRATION."
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented hereby, or to the
transfer hereof on the books of the Company. Any notice to the contrary
notwithstanding, and until such transfer on which books, the Company may treat
the Holder hereof as the owner for all purposes.
This Warrant does not entitle any Holder hereof to any of the rights of
a stockholder of the Company.
THE HARVEY ENTERTAINMENT COMPANY
By: /s/ GREGORY M. YULISH
----------------------------------
Gregory M. Yulish
Chief Executive Officer
Attest /s/ GREGORY YULISH
----------------------------
Gregory Yulish
Secretary
DATED: As of January 16, 1997
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<PAGE> 22
EXHIBIT B
Warrant Certificate
No. Two 25,000 Shares
COMMON STOCK PURCHASE WARRANT
Void After 5:00 P.M.
Pacific Time on January 16, 2003
THIS CERTIFIES THAT, for value received, and subject to the Company's
prior written election, Michael Doherty, the registered holder of this Common
Stock Purchase Warrant (the "Warrant") or permitted assigns (the "Holder"),
subject to vesting, is entitled to purchase from The Harvey Entertainment
Company, a California corporation (the "Company"), from and after January 1,
1998 through 5:00 p.m. Pacific Time on January 16, 2003 (the "Expiration Date"),
at the purchase price of $10.00 per share (the "Warrant Price"), the number of
shares of Common Stock of the Company (the "Common Stock") which is equal to the
number of Shares set forth above. The number of shares purchasable upon exercise
of this Warrant and the Warrant Price per share shall be subject to adjustment
from time to time as set forth in the Warrant Agreement referred to below.
This Warrant is issued under and in accordance with a Warrant
Agreement, dated as of January 16, 1997, between the Company Agent and the
Warrant Holder and is subject to the terms and provisions contained in the
Warrant Agreement, to all of which the Holder of this Warrant by acceptance
hereof consents. A copy of the Warrant Agreement may be obtained for inspection
by the Holder hereof upon written request to the Company.
If vested, this Warrant may be exercised in whole or in part by
presentation of this Warrant with the Purchase Form on the reverse side hereof
duly executed and simultaneous payment of the Warrant Price (subject to
adjustment) at the principal office of the Company in Los Angeles, California.
Payment of such price shall be payable at the option of the Holder hereof in
cash or by certified or official bank check or wire transfer. Terms relating to
exercise of Warrant is set forth more fully in the Warrant Agreement.
This Warrant may be exercised in whole or in part. Upon partial
exercise, a Warrant Certificate for the unexercised portion shall be delivered
to the Holder. No fractional shares will be issued upon the exercise of this
Warrant but the Company shall pay the cash value of any fraction upon the
exercise of the Warrant. This Warrant is transferable only in limited
circumstances as described in this Warrant Agreement at the office of the
Company in Los Angeles, California, in the manner and subject to the limitations
set forth in the Warrant Agreement.
"THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT
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<PAGE> 23
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). NO SALE OR OTHER DISPOSITION OR PLEDGE OF THESE SECURITIES OR
THE SECURITIES UNDERLYING THESE SECURITIES CAN BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN AVAILABLE
EXEMPTION FROM REGISTRATION."
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented hereby, or to the
transfer hereof on the books of the Company. Any notice to the contrary
notwithstanding, and until such transfer on which books, the Company may treat
the Holder hereof as the owner for all purposes.
This Warrant does not entitle any Holder hereof to any of the rights of
a stockholder of the Company.
THE HARVEY ENTERTAINMENT COMPANY
By: /s/ GREGORY M. YULISH
----------------------------------
Gregory M. Yulish
Chief Executive Officer
Attest /s/ GREGORY YULISH
----------------------------
Gregory Yulish
Secretary
DATED: As of January 16, 1997
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<PAGE> 24
Exhibit C
PURCHASE FORM
Mailing Address
- -------------------------------------- ------------------------------------
- -------------------------------------- ------------------------------------
- -------------------------------------- ------------------------------------
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant for, and to purchase thereunder,
_______________ shares of the stock provided for therein, and tenders herewith
payment of the purchase price in full in the form of cash or by cashier's check
in the amount of $_________________.]
The undersigned requests that certificates for such shares be issued in
the name of:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print Name, Address and Social Security No.)
DATED: , ______
Name of Warrant Holder or Permitted Assignee:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signature:
----------------------------------------------------------------------
Signature Guaranteed: Note: The above signature must correspond with
the name as written upon the face of this
Warrant Certificate in every particular,
without alteration or enlargement or any
change whatever, unless this Warrant has
been assigned.
-1-
<PAGE> 1
EXHIBIT 10.51
The Harvey Entertainment Company
Richie Rich Live Action Direct-To-Video
1. Intentionally deleted.
2. DISTRIBUTION FEES: 25% in all media (inclusive of Warner Home Video's
or Fox Home Video's fee).
3. FINANCING: Saban (meaning Saban Entertainment, Inc., and Saban
International N.V.) will prepare the budget not to exceed $5,000,000 inclusive
of a $250,000 production fee to Saban and overhead at 10% of all other direct
costs of production.
Saban shall be the Producer of the Picture and will bear responsibility for
all overages.
Production costs will be fully recoupable with interest at prime plus one
percent (1%) ("Interest").
4. Intentionally deleted.
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 and
it subdistributor (e.g., Warner or Fox) from the exploitation of the Picture,
less the continuing deduction of the following items, in the following order:
(i) Saban's distribution fee set forth in paragraph 2 above;
(ii). all third party out-of-pocket costs and charges incurred in
connection with the distribution, license, exhibition, manufacturing,
marketing and/or exploitation of the Picture in all media;
(iii). production costs plus Interest.
The definition of gross receipts (which shall include home video at 100% of
receipts of Saban or its subdistributors in lieu of a royalty rate) net of a
reasonable reserve for returns and shall be based upon Saban's standard
definition subject to good faith negotiation of changes by the parties.
6. PICTURE ("PICTURE"): One (1) Richie Rich 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. Intentionally deleted.
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<PAGE> 2
8. TERRITORY: Saban Entertainment, Inc., is granted the territory of the
U.S. and its territories and possessions, and Saban International N.V. is
granted the universe, except the U.S. and its territories and possessions.
9. DISTRIBUTION TERM: In perpetuity.
10. Intentionally deleted.
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 no later than June 30, 1998, in the
United States; provided, however, that Saban will use reasonable business
efforts to produce and deliver the Picture for a street date of April 15, 1998.
(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 nine (9) 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). If Saban fails to meet the outside initial U.S. street date all
rights in and to the Picture will revert to Harvey free and clear of any
obligations to Saban,
12. PRODUCTION: Saban will produce the Picture.
Saban 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 basic character designs,
attributes and characterization of the Harvey characters to be included in the
Picture only for the purposes of ensuring that such 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
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;
provided, however, that in the event of a disagreement, Saban's determination
regarding the content of the treatment will control. All approvals herein shall
be exercised in a timely manner by Harvey so that development/production
exigencies may be met by Saban. If Harvey has not exercised any of its approvals
in a timely manner as required, Saban may proceed on the basis that such
material subject to Harvey's approval is deemed irrevocably approved. Saban will
consult with Harvey with
-2-
<PAGE> 3
respect to all other key creative matters; provided, however, that all other
such creative matters and decisions and all business decisions (except as set
forth in paragraph 14, below) related to production of the Picture shall be
within Saban's sole determination. 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 Fox
Home Video or Warner Home Video, whose distribution fees will be subsumed in
Saban's Distribution Fees set forth in paragraph 2 hereinabove, for Home Video
Devices, Saban shall have the sole and exclusive right to distribute,
subdistribute, and exploit the Picture in linear non-interactive form in the
following media: (i) all forms of television now and hereafter known (including
without limitation pay, pay-per-view, video-on-demand, near video-on-demand,
network, free and basic cable, dbs and syndication); (ii) non-theatrical; (iii)
airlines; and (iv) all formats and channels of home-video distribution now and
hereafter known 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 contracted by Saban
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 mutually
approve third party contingent compensation, which approval shall not be
unreasonably withheld.
15. DELIVERY OF PICTURE: Saban shall be fully responsible for delivery of
all 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.
16. DISTRIBUTION: Saban will use reasonable efforts to maximize revenues
in the distribution of the Picture.
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: Saban shall establish suggested retail and wholesale prices
for the Picture in consultation with Harvey.
18. MANUFACTURING: Saban shall advance all manufacturing costs as a
recoupable distribution expense.
-3-
<PAGE> 4
19. MARKETING AND SALES PLANNING AND EXECUTION: Saban shall have the
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 consultation with Harvey. Harvey's logo and Saban and
its subdistributor's logos will be displayed on all packaging, in equal size and
prominence. Saban or its subdistributor will solicit and process all orders.
Saban or its subdistributor 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: As part of its quarterly accountings to Harvey, Saban
or its subdistributor will provide Harvey with quarterly reports of product
sales and returns.
22. FINANCIAL REPORTING: Accounting statements, which are subject to audit
by a first-class, reputable firm of certified public accountants, 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. Saban will use reasonable business efforts to
include Fox's or Warner's (as applicable) financial officer to participate in
such review meetings. All financial records shall be subject to audit every
twelve (12) months. In the event a discrepancy resulting in an underpayment to
Harvey of greater than five percent (5%) is found, Saban shall pay Harvey's
direct, out-of-pocket audit costs.
23. RIGHT OF FIRST NEGOTIATION/FIRST REFUSAL ("FNFR"): Subject to the
rights of MCA, if any, if Harvey desires directly or indirectly to option,
license, sell, grant, dispose of, or transfer to any third person made for home
video live action sequel distribution rights in "Richie Rich", within two (2)
years after June 30, 1998, 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 (if properly given),or if Saban
does not wish to proceed then Harvey shall be free to negotiate with a third
person without any further 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 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.
-4-
<PAGE> 5
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 Richie Rich video sequel earlier than January of 1999.
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 Richie Rich 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 or new elements created originally for
the Warner Bros. "Richie Rich" motion picture. Notwithstanding the foregoing in
the event of a claim by MCA or Warner Bros. (including, without limitation
asserting a matching right on which MCA prevails), Saban agrees that its damages
will be limited to repayment of the direct out of pocket costs incurred by Saban
in connection with the Picture and Saban's reasonable outside attorneys fees.
25. Intentionally deleted.
26. 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 agree to mutually approve the press release relating to
this transaction.
-5-
<PAGE> 6
AGREED TO AND ACCEPTED:
HARVEY ENTERTAINMENT
By: [SIG]
-------------------------------------
Its
SABAN ENTERTAINMENT, INC.
By: [SIG]
-------------------------------------
Its SR. VICE PRESIDENT
SABAN INTERNATIONAL N.V.
By: /s/ R.A. de MEZA
-------------------------------------
Its MANAGING DIRECTOR
-6-
<PAGE> 1
EXHIBIT 10.52
OFFICE LEASE
1999 AVENUE OF THE STARS
CONSTELLATION LAND LIMITED PARTNERSHIP,
an Illinois limited partnership,
as Landlord,
and
HARVEY ENTERTAINMENT COMPANY,
a California corporation,
as Tenant
<PAGE> 2
1999 AVENUE OF THE STARS
------------------------
SUMMARY OF BASIC LEASE INFORMATION
----------------------------------
The undersigned hereby agree to the following terms of this Summary of
Basic Lease Information (the "Summary"). The Summary is hereby incorporated into
and made a part of the attached Office Lease (the Summary and Office Lease to be
known collectively as the "Lease") which pertains to the office building (the
"Building") at 1999 Avenue of the Stars, Los Angeles, California. Each reference
in the Office Lease to any term of this Summary shall have the meaning as set
forth in this Summary for such term. In the event of a conflict between the
terms of this Summary and the Office Lease, the terms of the Office Lease shall
prevail. Any capitalized terms used herein and not otherwise defined herein
shall have the meaning as set forth in the Office Lease.
<TABLE>
<CAPTION>
TERMS OF LEASE
(References are to
The Office Lease) DESCRIPTION
----------------- -----------
<S> <C> <C>
1. Date: August 9, 1996
2. Landlord: CONSTELLATION LAND LIMITED
PARTNERSHIP, an Illinois limited
partnership
3. Address of Landlord c/o Heitman Properties, Ltd.
(Section 29.14): 1999 Avenue of the Stars
Suite 1050
Los Angeles, California 90067
Attention: Mr. Mark McCaslin
and
c/o Heitman Properties, Ltd.
180 North LaSalle Street
Chicago, Illinois 60601
Attention: Mr. Roger Smith
4. Landlord's Managing None
Agent (Article 3):
5. Tenant: Harvey Entertainment Company,
a California corporation
6. Address of Tenant Prior to Lease Commencement Date:
(Section 29.14):
Harvey Entertainment Company
100 Wilshire Boulevard
Suite 1460
Santa Monica, California 90401
Attention: Mr. Greg Yulish
After Lease Commencement Date:
Harvey Entertainment Company
1999 Avenue of the Stars
Suite 2050
Los Angeles, California 90067
Attention: Mr. Greg Yulish
7. Premises (Article 1)
7.1 Location on 20th Floor, as set forth on
floor(s) in the Exhibit "A" attached to the
Building: Lease.
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
7.2 Number of rentable Approximately 7,237
square feet in
Premises:
7.3 Number of usable Approximately 6,177
square feet in
Premises:
7.4 First Right Space Suite 2030
7.5 First Negotiation Suite 2040
Space
8. Term (Article 2)
8.1 Lease Term: Approximately five (5) years.
8.2 Lease Commencement The earlier to occur of
Date: (i) fourteen (14) calendar days
from the Early Access Date and
(ii) the date Tenant commences
business in any portion of the
Premises.
8.3 Lease Expiration August 31, 2001
Date:
8.4 Early Access Date: The date of Substantial
Completion (which is anticipated
to be August 15, 1996).
8.5 Option Term Five (5) years
9. Base Rent (Article 3):
</TABLE>
<TABLE>
<CAPTION>
Monthly Annual Rate
Period of Annual Installments Per
Lease Term Base Rent of Base Rent Rentable
---------- --------- ------------ Square
Foot ("RSF")
------------
<S> <C> <C> <C> <C>
1 $290,927.40 $24,243.95 $40.20
2 $302,578.97 $25,214.91 $41.81
3 $314,664.76 $26,222.06 $43.48
4 $327,257.14 $27,271.43 $45.22
5 $340,356.11 $28,363.01 $47.03
</TABLE>
<TABLE>
<S> <C> <C>
10. Additional Rent (Article 4)
10.1 Base Tax Year 1997
10.2 Base Expenditure 1997
Year
10.3 Tenant's Share 0.935%
11. Security Deposit $24,243.95
(Article 20):
12. Parking Pass Ratio 3 parking passes for every 1,000
(Article 27): RSF of the Premises: 2 per every
1,000 RSF for On-Site parking
and 1 per every 1,000 RSF for
off- Site parking.
13. Building Directory Seven (7) lines
Allocation (Section
29.19):
14. Name and address of Ms. Tammy Shegerian
Broker (Section 29.25): Julien J. Studley, Inc.
10960 Wilshire Boulevard
Suite 1500
Los Angeles, California 90024
</TABLE>
ii
<PAGE> 4
15. Intentionally Omitted
16. Exhibits: "A" through "F"
The foregoing terms of this Summary are hereby agreed to by Landlord and
Tenant.
<TABLE>
<S><C> <C>
"Landlord": "Tenant":
CONSTELLATION LAND LIMITED HARVEY ENTERTAINMENT
PARTNERSHIP, COMPANY,
an Illinois limited partnership a California corporation
By: JMB/Constellation, Inc., By: /s/ GREGORY M. YULISH
an Illinois corporation, ---------------------------------
General Partner Name: Gregory M. Yulish
------------------------------
Title: Executive Vice President, CFO
-----------------------------
By: [SIG] By:
--------------------------- ---------------------------------
Name: Name:
------------------- -------------------------------
Title: Vice President Title:
------------------- ------------------------------
</TABLE>
iii
<PAGE> 5
EXHIBIT A
1999 AVENUE OF THE STARS
OUTLINE OF FLOOR PLAN OF PREMISES
[FLOORPLAN - GRAPHIC]
EXHIBIT A - Page 1
<PAGE> 1
EXHIBIT 10.53
MULTI-AGREEMENT AMENDMENT NO. 4
Multi-Agreement Amendment, dated as of June 1, 1996 by and among Harvey
Comics, Inc., a New York corporation ("Borrower") and City National Bank, N.A.
("Bank"). For good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Recital of Certain Facts:
(a) Borrower and Bank are parties to that certain Revolving Loan and
Security Agreement, dated as of October 27, 1993 (the "Original Loan
Agreement"), and as amended by that certain Multi-Agreement Amendment, dated
August 30, 1994 (the First "Amendment"), that certain Multi-Agreement Amendment
No. 2, dated as of November 1, 1994 (the "Second Amendment") and that certain
Multi-Agreement Amendment No. 3, dated as of September 1, 1995 (the "Third
Amendment"). The Original Loan Agreement, the First Amendment, the Second
Amendment and the Third Amendment are hereinafter referred to as the Loan
Agreement. Capitalized terms not otherwise defined herein shall have the same
meaning as set forth in the Loan Agreement.
(b) Borrower has requested that the Commitment Termination Date be
extended.
(c) Bank has agreed to extend the Commitment Termination Date to
June 1, 1997 as herein provided, subject to the terms of this Agreement.
2. Amendment to Loan AP Agreement and Revolving Note: Bank and Borrower
agree that the Commitment Termination Date shall be extended to June 1, 1997.
The Revolving Note shall also be deemed amended so that the payment due date
contained in the fourth paragraph thereof shall be changed to June 1, 1997.
Except as specifically amended hereby, all other provisions of the Loan
Agreement and the Collateral Documents shall remain in full force and effect.
3 . Consents: Each of the parties hereto consents to the foregoing
amendments to the extent the consent of any such party is required under the
Loan Agreement's current notice provisions.
4. Representations and Warranties of Borrower: In order to induce Bank to
enter into this Agreement, Borrower represents and warrants to Bank that:
(a) Borrower has the power and authority and has taken all action
necessary to execute, deliver and perform this Agreement and all other
agreements and instruments executed or delivered to be executed or delivered in
connection herewith and therewith and this Agreement and such other agreements
and instruments constitute the valid, binding and enforceable obligations of
1
<PAGE> 2
Borrower.
(b) The representations and warranties contained in the Loan Agreement
are true and correct in all respects on and as of the date hereof as though made
on and as of the date hereof and no Event of Default (as said term is defined in
the Loan Agreement) or event which with the passage of time or the giving or
notice or both would constitute an Event of Default has occurred and is
continuing as of the date hereof.
(c) Since the date of the most recent financial statements, if any,
furnished by Borrower to Bank, there has been no material adverse change in the
business or assets or in the financial condition of Borrower.
5. Representations and Warranties of Borrower.
(a) The Guaranty of Borrower remains in full force and effect and
Guarantor provides that as of the date of this Agreement, it has not offsets,
claims or defenses against any of its obligations under the Guaranty.
6. Acknowledgment of Borrower: Borrower acknowledges and agrees that as
of the date of this Agreement, it has no offsets, claims or defenses whatsoever
against any of its obligations under the Revolving Note, or its obligations
under the Loan Agreement, the Collateral Documents, or any other agreements,
documents or instruments securing or pertaining to the Revolving Note or the
Loan Agreement.
7. Fee: As an additional consideration for the extension contemplated
under this Agreement, Borrower shall concurrently pay to (i) Bank the sum of
$15,625.00 as additional loan fees and to (ii) Kelly & Meyer, the Bank's
counsel, such sums as may be owing in respect of the preparation of this
amendment and the filing fees related thereto.
8. Full Force and Effect: Each of the Collateral Documents, and all other
documents, agreements and instruments relating to thereto remain in full force
and effect.
9. Governing Law: This Agreement and the rights and obligations of the
parties hereunder shall be governed by, construed and enforced in accordance
with the laws of the State of California applicable to agreements executed and
to be wholly performed therein.
10. Counterparts: This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which when
taken together shall constitute one and the same instrument.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers, all as of the date first above
written.
Harvey Comics, Inc.
By: /s/ GREGORY M. YULISH
--------------------------------------
Its: CFO
-----------------------------
The Harvey Entertainment Company
By: /s/ GREGORY M. YULISH
--------------------------------------
Its: CFO
-----------------------------
City National Bank, N.A.
By: [SIG]
--------------------------------------
Its: Vice President
-----------------------------
3
<PAGE> 1
EXHIBIT 11
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WEIGHTED
DAYS AVERAGE
1996 SHARES OUTSTANDING SHARES
<S> <C> <C> <C>
Shares outstanding 3,630,000 365 3,630,000
Shares issued for exercise of options 12,000 Various 10,000
Incremental shares - options and warrants (1) 243,000 365 242,000
---------
3,882,000
=========
1995
Shares outstanding 3,536,000 365 3,536,000
Shares issued for exercise of options 94,000 Various 62,000
Incremental shares - options and warrants (1) 407,000 365 407,000
---------
4,005,000
=========
</TABLE>
(1) Assumes that outstanding options and warrants were exercised and
outstanding for the entire year, reduced by the assumed shares
repurchased using the treasury method at the average market price of the
Company's common stock for the year as computed below.
<TABLE>
1996 1995
<S> <C> <C>
Assumed proceeds from exercise of options $ 1,968,000 $ 3,989,000
Assumed proceeds from exercise of warrants 3,545,000 1,499,000
----------- -----------
Total proceeds $ 5,513,000 $ 5,488,000
=========== ===========
Shares assumed repurchased 602,000 434,000
Shares issuable under warrants and options 844,000 841,000
----------- -----------
Incremental shares 242,000 407,000
=========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No. 33-81208 on Form S-8 and No. 33-86652 on Form S-3 of our report dated
February 14, 1997, appearing in this Annual Report on Form 10-K of the Harvey
Entertainment Company for the year ended December 31, 1996.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 19, 1997
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Gary M. Gray constitutes
and appoints Jeffrey A. Montgomery and Gregory M. Yulish, and each of them, his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Form 10-KSB, and to file same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the foregoing, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitute, may lawfully do or
cause to be done by virtue hereof.
/s/ GARY M. GRAY
-------------------------------- Director March 28, 1997
<PAGE> 1
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Allan R. Raphael
constitutes and appoints Jeffrey A. Montgomery and Gregory M. Yulish, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Form 10-KSB, and to file same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute, may
lawfully do or cause to be done by virtue hereof.
/s/ Allan R. Raphael Director March 28, 1997
- ------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,057
<SECURITIES> 0
<RECEIVABLES> 2,915
<ALLOWANCES> 573
<INVENTORY> 0
<CURRENT-ASSETS> 9,245
<PP&E> 537
<DEPRECIATION> 260
<TOTAL-ASSETS> 22,304
<CURRENT-LIABILITIES> 1,075
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 18,482
<TOTAL-LIABILITY-AND-EQUITY> 22,304
<SALES> 9,168
<TOTAL-REVENUES> 9,168
<CGS> 2,492
<TOTAL-COSTS> 2,492
<OTHER-EXPENSES> 3,668
<LOSS-PROVISION> 340
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,239
<INCOME-TAX> 972
<INCOME-CONTINUING> 1,862
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,267
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
