<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1997
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 0-23000
The Harvey Entertainment Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-4217605
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1999 Avenue of the Stars, Suite 205, Los Angeles, California 90067-6055
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's phone number, including area code (310) 789-1990
--------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1997
- ----------- -----------------------------
Common 3,593,900
<PAGE> 2
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
FINANCIAL INFORMATION
Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 1-2
Consolidated Income Statements - Three and Six Months Ended June 30, 1997 and 1996 3
Consolidated Statements of Cash Flows - Six Months Ended June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition and Results of Operations 6-10
PART II
OTHER INFORMATION 11
</TABLE>
<PAGE> 3
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
ASSETS 1997 December 31,
(Unaudited) 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,887,000 $ 6,057,000
Accounts receivable, net of allowance for doubtful accounts
of $312,000 and $573,000 in 1997 and 1996, respectively 2,949,000 2,342,000
Prepaid expenses and other current assets 156,000 226,000
Prepaid income taxes 195,000 620,000
----------- -----------
Total current assets 9,187,000 9,245,000
LONG-TERM ACCOUNTS RECEIVABLE 103,000 410,000
FILM LIBRARY, Net of accumulated amortization of $2,956,000
and $2,853,000 in 1997 and 1996, respectively 10,144,000 10,106,000
FURNITURE AND EQUIPMENT, Net of accumulated
depreciation of $324,000 and $260,000 in 1997 and 1996,
respectively 477,000 277,000
GOODWILL, Net of accumulated amortization of $1,027,000
and $963,000 in 1997 and 1996, respectively 1,568,000 1,633,000
TRADEMARKS AND COPYRIGHTS, Net of accumulated
amortization of $185,000 and $160,000 in 1997 and 1996,
respectively 558,000 503,000
OTHER ASSETS 107,000 130,000
----------- -----------
TOTAL $22,144,000 $22,304,000
=========== ===========
See notes to consolidated financial statements.
(Continued)
</TABLE>
-1-
<PAGE> 4
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 December 31,
(Unaudited) 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES -
Accounts payable and accrued expenses $ 1,143,000 $ 1,075,000
------------ ------------
Total current liabilities 1,143,000 1,075,000
DEFERRED INCOME TAXES 2,637,000 2,610,000
ACCRUED RENT AND OTHER 205,000 137,000
------------ ------------
Total liabilities 3,985,000 3,822,000
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock $1 par value, authorized 3,000,000,
none issued Common stock, no par value, 10,000,000
shares authorized,
3,593,900 issued and outstanding at June 30, 1997 and
3,641,600 at December 31, 1996 18,936,000 18,900,000
Treasury stock, 47,700 shares at cost (357,000)
Accumulated deficit (420,000) (418,000)
------------ ------------
Total stockholders' equity 18,159,000 18,482,000
------------ ------------
TOTAL $ 22,144,000 $ 22,304,000
============ ============
See notes to consolidated financial statements. (Concluded)
</TABLE>
-2-
<PAGE> 5
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Filmed entertainment $ 2,142,000 $ 3,522,000 $ 2,905,000 $ 4,956,000
Merchandising 738,000 719,000 1,757,000 1,544,000
----------- ----------- ----------- -----------
Net operating revenues 2,880,000 4,241,000 4,662,000 6,500,000
----------- ----------- ----------- -----------
Cost of sales 1,065,000 989,000 1,697,000 1,435,000
Selling, general and administrative expenses 1,405,000 1,217,000 2,789,000 1,932,000
Amortization of film library, goodwill,
trademarks, copyrights and other 107,000 119,000 195,000 456,000
Depreciation expense 22,000 13,000 44,000 23,000
----------- ----------- ----------- -----------
Total operating expenses 2,599,000 2,338,000 4,725,000 3,846,000
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 281,000 1,903,000 (63,000) 2,654,000
OTHER INCOME 52,000 80,000 109,000 153,000
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 333,000 1,983,000 46,000 2,807,000
PROVISION FOR INCOME TAXES (150,000) (826,000) (46,000) (1,178,000)
----------- ----------- ----------- -----------
NET INCOME $ 183,000 $1,157,000 $ 0 $ 1,629,000
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,954,000 3,887,000 3,594,000 3,874,000
=========== ========== =========== ===========
NET INCOME PER SHARE $ 0.05 $ 0.30 $ 0.00 $ 0.42
=========== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 6
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ -- $ 1,629,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 44,000 23,000
Amortization of film library, goodwill, trademarks and copyrights
and other 192,000 456,000
Deferred Income Taxes 27,000 455,000
Warrant Expense 35,000 --
Write-off of leasehold improvements 20,000 --
Changes in operating assets and liabilities:
Accounts receivable (300,000) 2,022,000
Prepaid expenses and other assets 93,000 53,000
Prepaid income taxes 425,000 --
Account payable and accrued expenses 68,000 461,000
Accrued rent and other 68,000 --
----------- -----------
Net cash provided by operating activities 672,000 5,099,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (264,000) (75,000)
Investments in trademarks and copyrights and film library (221,000) (742,000)
----------- -----------
Net cash used in investing activities (485,000) (817,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants -- 40,000
Purchase of Treasury Stock (357,000) --
----------- -----------
Net cash (used in) provided by financing activities (357,000) 40,000
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (170,000) 4,322,000
CASH AND CASH EQUIVALENTS, Beginning of period 6,057,000 4,367,000
----------- -----------
CASH AND CASH EQUIVALENTS, End of period $ 5,887,000 $ 8,689,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 7
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements of The Harvey Entertainment Company and
Subsidiary (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
accompanying financial statements should be read in conjunction with the more
detailed financial statements and related footnotes included in the Company's
Form 10-KSB filed with the Securities and Exchange Commission on March 31, 1997.
In the opinion of the Company, the accompanying unaudited financial statements
as of June 30, 1997 and for the three and six months ended June 30, 1997 and
1996 contain all adjustments, which include normal recurring accruals, necessary
to present fairly the financial position of the Company as of June 30, 1997 and
the results of operations and cash flows for the six months ended June 30, 1997
and 1996.
The results of operations for the interim periods of the Company's fiscal year
are not necessarily indicative of the results to be expected for the entire
year.
* * * * * *
-5-
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENT FOR THE COMPANY
In May 1997, the Company entered into an agreement with Universal Studios, Inc.
("Universal") to produce and distribute a motion picture sequel to the "Casper"
movie released theatrically in 1995. To date, the 1995 "Casper" movie has
grossed over $307 million in worldwide box office revenues. The Company was paid
a non-refundable upfront advance for the sequel and, if the sequel is produced
the Company will receive additional non-refundable cash advances to be applied
against the Company's gross profit participations in worldwide distribution and
merchandising sales. As part of the Company's agreement with Universal the
Company was also paid a non-refundable advance against the Company's profit
participation from the first 1995 "Casper" movie. Additionally, Universal
released all rights, including merchandising, to all of the Company's
characters, other than certain limited Casper rights.
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Results of Operations - The Company's net operating revenues in the 1997 and
1996 six month periods were $4,662,000 and $6,500,000 respectively, a decrease
of $1,838,000 or 28%. The net decrease in revenues from 1997 to 1996 includes a
decrease of $2,051,000 in filmed entertainment revenues and an increase of
$213,000 in merchandising revenues.
Revenues - Net filmed entertainment revenues were $2,905,000 and $4,956,000 in
1997 and 1996, respectively, a decrease of $2,051,000 or 41%. The decrease in
filmed entertainment revenues was primarily due to the Company entering into an
agreement in the second quarter of 1996 with Saban Entertainment ("Saban") to
co-produce a feature length, direct-to-video film based on the Company's Casper
character. The Company received a $3,300,000 non-refundable advance from Saban
against its gross participation in distribution revenues. The first feature
length, direct-to-video film, "Casper, A Spirited Beginning", is slated for
release on September 9, 1997. There were no comparable revenues in 1997. Also
contributing to higher revenues in 1996 was a television agreement entered into
with Universal where the Company received a minimum non-refundable cash payment
advance of $840,000 for the right to broadcast episodes of "Casper and Friends"
in the United States for a period of twenty seven months. There were no such
revenues in the 1997 comparable period. In May 1997, the Company entered into an
agreement with Universal to produce and distribute a motion picture sequel to
the original "Casper" movie. The Company received a non-refundable upfront
advance for the sequel rights and may receive additional advances if the sequel
is produced. As part of the Company's agreement with Universal, the Company was
also paid a non-refundable advance against the Company's share of its profit
participation from the first 1995 "Casper" movie. There were no such revenues in
the 1996 comparable period. Other filmed entertainment revenues in 1997 consist
of license fees generated from "Casper" animated television show on Fox Kids's
Network, foreign sales of Harvey film library, domestic syndication of the
"Richie Rich" show, royalties from Richie Rich cartoon series which is
distributed by Hanna Barbera, a wholly owned subsidiary of Time Warner, and
other miscellaneous sources. The revenues from the above sources totaled
$1,405,000 in 1997, an increase of $589,000 over the 1996 results which is
primarily due to an increase in license fees from the "Casper" animated
television show. Included in the above total revenues are also license fees from
foreign broadcasters which are generally granted for a period of one to five
years, with all revenues recognized when the license period begins, provided
certain conditions have been met. Due to this accounting treatment, revenue
fluctuations will likely recur in the future on a quarterly and annual basis.
Net merchandising revenues were $1,757,000 and $1,544,000 in 1997 and 1996,
respectively, an increase of $213,000 or 14%. The increase in merchandising
revenue was due to the efforts of the Company's newly
-6-
<PAGE> 9
formed, in-house licensing division, Harvey Consumer Products. A number of the
licensees participating in the Company's worldwide Casper merchandising program
have also generated revenues which exceed minimum guaranteed amounts, resulting
in additional revenue to the Company. The Company cannot accurately project
future revenues derived from Casper or merchandising revenues from any of the
other Harvey Classic Characters because the ongoing success of the merchandising
program is in part dependent upon the attractiveness and marketability of the
particular Harvey Character. In addition, as a significant portion of
merchandising revenues were derived from the 1995 "Casper" movie licenses, of
which most have expired, there can be no assurance that merchandising revenues
will increase or continue at the same level in the future. 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.
Cost of Sales - Costs of sales relating to filmed entertainment revenues were
$877,000 and $992,000 in 1997 and 1996, respectively. The decrease in costs of
sales is due to a decrease in filmed entertainment activity for the period. As a
percentage of net filmed entertainment revenues, cost of sales were 30% and 20%
in 1997 and 1996, respectively. The increase in costs of sales as a percentage
of revenues is due to the low gross profit margin associated with the "Richie
Rich" syndicated show and the fact that there were no costs associated with
certain 1996 distribution agreements. Costs associated with the agreement with
Universal Studios, Inc. in the second quarter of 1997 were $330,000, of which
$150,000 was paid to officers of the Company as producers' fee.
Merchandising costs of sales were $820,000 and $443,000 in 1997 and 1996,
respectively. The increase in cost of sales is due to the shift of control of
merchandising for all the Company's characters including Casper to the Company,
and Universal Studios, Inc. becoming a third party participant. As a percentage
of merchandising revenues, cost of sales were 47% and 29% in 1997 and 1996,
respectively. The increase in costs of sales percentage is also due to Universal
Studios, Inc.'s participation in Casper merchandise. Universal will be a
participant in the Casper merchandising program for a limited period of time.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses (SG&A) were $2,789,000 and $1,932,000 for 1997 and 1996,
respectively, an increase of $857,000 or 44%. As a percentage of net operating
revenues, SG&A were 60% and 30% for 1997 and 1996, respectively. The increase in
SG&A is due to the additional overhead expenses related to the Company's two new
divisions, Harvey Consumer Products and Creative Affairs. Additionally, SG&A
expenses in the second quarter of 1997 include a charge for the write-off of the
remaining receivable due from Marvel Comics. Marvel Comics filed for bankruptcy
reorganization in December 1996 and the Company is uncertain as to the effect of
Marvel's bankruptcy on the Company's business, but does not believe the
remaining receivable from Marvel Comics to be collectible in full.
Depreciation and Amortization - Depreciation expense was $44,000 and $23,000 in
1997 and 1996, respectively. The increase in depreciation of $21,000 was due to
purchases of additional furniture, fixtures and equipment in 1997. Amortization
of the film library was $104,000 and $366,000 in 1997 and 1996, 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 $27,000 in
1997 and $26,000 in 1996. Amortization of goodwill was $64,000 in both 1997 and
1996.
Other Income - Other income was $109,000 and $153,000 in 1997 and 1996,
respectively. The decrease in other income was due to lower cash balances for
the period , which generated decreased interest income.
-7-
<PAGE> 10
Income Taxes - Provision for income taxes was $46,000 and $1,178,000 in 1997 and
1996, respectively. The decrease in the provision for income taxes is due to the
Company's decreased profitability.
Liquidity and Capital Resources - Net cash provided by operating activities was
$672,000 and $5,099,000 in 1997 and 1996, respectively. The decrease in cash
flows from operations was primarily due to Company's lower net income in the
first two quarters of 1997 and the increase in receivables.
Net cash used in investing activities was $485,000 and $817,000 in 1997 and
1996, respectively. The decrease in cash used in investing activities was
primarily due to less investment in the Company's film library.
Net cash (used in) provided by financing activities was $(357,000) and $40,000
in 1997 and 1996, respectively. The Company repurchased 47,700 shares of its
common stock for $357,000, or $7.48 per share, in the first quarter of 1997.
The Company has a $5,000,000 revolving credit facility (the "Revolving
Facility") with City National Bank, which expires on June 1, 1998. 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.
-8-
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Results of Operations - The Company's net operating revenues in the 1997 and
1996 three month periods were $2,880,000 and $4,241,000 respectively, a decrease
of $1,361,000 or 32%. The decrease in revenues from 1996 to 1997 includes a
decrease of $1,380,000 in filmed entertainment revenues and an increase of
$19,000 in merchandising revenues.
Revenues - Net filmed entertainment revenues were $2,142,000 and $3,522,000 in
1997 and 1996, respectively, a decrease of $1,380,000 or 39%. The decrease in
filmed entertainment revenues was due to the Company entering into an agreement
in the second quarter of 1996 with Saban Entertainment ("Saban") to co-produce a
feature length, direct-to-video film based on the Company's Casper character.
The Company received a $3,300,000 non-refundable advance from Saban against its
gross participation in distribution revenues. The first feature length,
direct-go-video film, "Casper, A Spirited Beginning", is slated for release on
September 9, 1997. There were no comparable revenues for 1997. In May 1997, the
Company entered into an agreement with Universal to produce and distribute a
motion picture sequel to the original "Casper" movie. The Company received a
non-refundable upfront advance for the sequel rights and may receive additional
advances if the sequel is produced. As part of the Company's agreement with
Universal, the Company was also paid a non-refundable advance against the
Company's share of its profit participation from the first 1995 "Casper" movie.
There were no such revenues in the 1996 comparable period. Other filmed
entertainment revenues in 1997 consist of license fees generated from "Casper"
animated television show on Fox Kids's Network, foreign sales of Harvey film
library, domestic syndication of the "Richie Rich" show, royalties from Richie
Rich cartoon series which is distributed by Hanna Barbera, a wholly owned
subsidiary of Time Warner, and other miscellaneous sources. The revenues from
the above sources totaled $642,000 in 1997, an increase of $420,000 over 1996
results which is primarily due to the increase in license fees from the "Casper"
animated television show. Included in the above total revenues are also license
fees from foreign broadcasters which are generally granted for a period of one
to five years, with all revenues recognized when the license period begins,
provided certain conditions have been met. Due to this accounting treatment,
revenue fluctuations will likely recur in the future on a quarterly and annual
basis.
Net merchandising revenues were $738,000 and $719,000 in 1997 and 1996,
respectively, an increase of $19,000 or 3%. The increase in merchandising
revenue was due to the efforts of the Company's newly formed, in-house licensing
division, Harvey Consumer Products. A number of the licensees participating in
the Company's worldwide Casper merchandising program have also generated
revenues which exceed minimum guaranteed amounts, resulting in additional
revenue to the Company. The Company cannot accurately project future revenues
derived from Casper or merchandising revenues from any of the other Harvey
Classic Characters because the ongoing success of the merchandising program is
in part dependent upon the attractiveness and marketability of the particular
Harvey Character. In addition, as a significant portion of merchandising
revenues were derived from the 1995 "Casper" movie licenses, of which most have
expired, there can be no assurance that merchandising revenues will increase or
continue at the same level in the future. 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.
Cost of Sales - Costs of sales relating to filmed entertainment revenues were
$690,000 and $787,000 in 1997 and 1996, respectively. The decrease in costs of
sales is due to a decrease in filmed entertainment activity for
-9-
<PAGE> 12
the period. As a percentage of net filmed entertainment revenues, cost of sales
were 32% and 22% in 1997 and 1996, respectively. The increase in costs of sales
percentage is due to the low gross profit margin associated with the "Richie
Rich" syndicated show and the fact that there were no costs associated with
certain 1996 distribution agreements. Costs associated with the agreement with
Universal Studios, Inc. were $330,000, of which $150,000 was paid to officers of
the Company as producers' fee.
Merchandising costs of sales were $375,000 and $202,000 in 1997 and 1996,
respectively. The increase in cost of sales is due to the shift of control of
merchandising for all the Company's characters including Casper to the Company,
and Universal Studios, Inc. becoming a third party participant. As a percentage
of merchandising revenues, cost of sales were 51% and 28% in 1997 and 1996,
respectively. The increase in costs of sales percentage is also due to Universal
Studios, Inc.'s participation in Casper merchandise. Universal will be a
participant in the Casper merchandising program for a limited period of time.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses (SG&A) were $1,405,000 and $1,217,000 for 1997 and 1996,
respectively, an increase of $188,000 or 15%. As a percentage of net operating
revenues, SG&A were 49% and 29% for 1997 and 1996, respectively. The increase in
SG&A is due to the additional overhead expenses related to the Company's two new
divisions, Harvey Consumer Products and Creative Affairs. Additionally, SG&A
expenses in the second quarter of 1997 include a charge for the write-off of the
remaining receivable due from Marvel Comics. Marvel Comics filed for bankruptcy
reorganization in December 1996 and the Company is uncertain as to the effect of
Marvel's bankruptcy on the Company's business, but does not believe the
remaining receivable from Marvel Comics to be collectible in full.
Depreciation and Amortization - Depreciation expense was $22,000 and $13,000 in
1997 and 1996, respectively. The increase in depreciation of $9,000 is due to
purchases of additional furniture, fixtures and equipment in 1997. Amortization
of the film library was $61,000 and $72,000 in 1997 and 1996, 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 $14,000 in
1997 and $15,000 in 1996. Amortization of goodwill was $32,000 in both 1997 and
1996.
Other Income - Other income was $52,000 and $80,000 in 1997 and 1996,
respectively. The decrease in other income was due to lower cash balances for
the period , which generated decreased interest income.
Income Taxes - Provision for income taxes was $150,000 and $826,000 in 1997 and
1996, respectively. The decrease in the provision for income taxes is due to the
Company's decreased profitability.
-10-
<PAGE> 13
OTHER INFORMATION
Item 1-1. Franklin Litigation. On September 30,1994, the Company filed suit
in the Los Angeles Superior Court against Jeffrey Franklin, Jeffrey
Franklin d/b/a ATI Enterprises, and Franklin/Waterman
Entertainment, Inc. In its lawsuit, the Company alleged, among
other things, that Franklin (while acting as a director and agent
of the Company) and ATI usurped corporate business opportunities
for Franklin and for Franklin/Waterman which rightfully belonged to
the Company, and misrepresented to the Company the facts
surrounding the transactions. Trial of the Company's claims
commenced May, 1997. On June 18, 1997, the twelve person jury
returned findings in the Company's favor. The jury found that
Jeffrey Franklin and ATI Equities, willfully breached their
fiduciary duties to the Company and that Franklin/Waterman
Entertainment interfered with the Company's prospective business
relationships and violated state unfair competition laws. The
Company was awarded damages in excess of $700,000. The jury's
findings additionally resulted in dismissal of the defendant's
counterclaims against the Company. The defendants are expected to
appeal the jury's verdict.
The Company is not currently involved in any other material
litigation.
Items 2 through 4 are omitted as not applicable.
Item 5 - Other Information
None
Item 6 (a) - Exhibit 10.54 Amendment to Merchandising Deal, dated October
26, 1996, between the Company and MCA/Universal Merchandising, Inc.
(portions of which have been redacted and filed under a
confidentiality request)
Exhibit 10.55 1997 Stock Option Plan (incorporated herein by
reference to the Registrant's 1997 definitive Proxy Statement)
Exhibit 10.56 Term Sheet For Universal/Harvey Restated Agreement,
dated May 15, 1997, between the Company and Universal Studios, Inc.
Exhibit 10.57 Pricing Letter, dated May 15, 1997, between the
Company and Universal Studios, Inc. (portions of which have been
redacted and filed under a confidentiality request)
Item 6 (b) - Reports on Form 8-K
None
-11-
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE HARVEY ENTERTAINMENT COMPANY
AND SUBSIDIARY (Registrant)
August 8, 1997 /s/Jeffrey A. Montgomery
------------------------------------------------
Jeffrey A. Montgomery
President and Chief Executive Officer
August 8, 1997 /s/Gregory M. Yulish
------------------------------------------------
Gregory M. Yulish
Executive Vice President and
Chief Financial Officer
-12-
<PAGE> 1
EXHIBIT 10.54
* Confidential Treatment
Requested under 17 C.F.R.
Sections 200.80(b)(4)
200.83 and 240.24b-2
Gregory M. Yulish
Executive Vice President, CFO
The Harvey Entertainment Company
1999 Avenue of the Stars
Suite 2050
Los Angeles, CA 90067
Re: AMENDMENT TO MERCHANDISING DEAL
-------------------------------
Dear Greg:
The Harvey Entertainment Company ("Harvey"), through its
predecessors Harvey Comics Entertainment, Inc., Harvey Comics, Inc. and HMH
Communications, Inc. has granted to MCA, Inc. ("MCA") certain merchandising
rights with respect to Harvey's Characters and Products featuring those
Characters pursuant to a Memorandum of Distribution Agreement (the "Distribution
Agreement") dated as of December 7, 1990, as amended by the letter agreement
between Harvey Comics Entertainment, Inc. and MCA dated April 22, 1993 (which
amendment has terminated and is of no force and effect), and an Animated
Television Agreement (the "PSO Agreement") dated as of August 1, 1994. As you
know, certain disputes have arisen between us over the scope of the parties'
merchandising rights under the agreements referenced hereinabove. This letter
will memorialize our agreement to amend certain of our respective rights and
obligations under the above referenced agreements and will settle all existing
disputes between the Universal Studios Consumer Products Group (formerly
MCA/Universal Merchandising, Inc.) and Harvey.
Each party hereby waives any claims against the other party with
respect to disputes which have arisen in the past between the Universal Studios
Consumer Products Group (formerly MCA/Universal Merchandising, Inc.) and Harvey,
and hereby releases the other party and its affiliates, officers, directors,
employees and agents, from such claims. Harvey hereby represents and warrants
that it has full power and authority to waive such claims and release such
parties on behalf of itself and its predecessors, Harvey Comics Entertainment,
Inc., Harvey Comics, Inc. and HMH Communications, Inc. MCA and MCA/Universal
Merchandising, Inc. hereby represent and warrant that they have full power and
authority to waive such claims and release such parties on behalf of themselves.
This letter is not intended to waive, release or otherwise affect any claims
with respect to disputes which have arisen between Harvey and other divisions of
MCA, including without limitation any claim by MCA that Harvey has failed to
comply with the terms of the Distribution Agreement in connection with its
agreement with Saban Entertainment and Saban International N.V. with respect to
a "Casper" live action direct-to-video Product, and each party hereby reserves
all of its respective rights with respect to such claims. Capitalized terms not
otherwise defined herein shall have the meanings given
<PAGE> 2
Gregory M. Yulish
Page 2
to them in the Distribution Agreement. The parties hereby agree
as follows:
1. DEFINITIONS:
a. MERCHANDISING: For the purposes of this agreement, Merchandising
shall mean Exploitation through merchandising, including
Promotional Tie-Ups as defined below, and publishing, and shall
include without limitation, direct response Merchandising
licensing and/or sales, Merchandising sales over the internet, and
licensing interactive games and software, but shall exclude comic
books in any format and filmed entertainment Products (including
but not limited to videos).
b. REVENUES FROM FILMED ENTERTAINMENT PRODUCTS: For purposes of
clarification, MCA shall not be entitled under this agreement to
share, in any form, revenues from any filmed entertainment Product
(including without limitation video) sold in connection with a
Promotional Tie-Up or other Merchandising activity for a Product
which is not produced or released by MCA. Nor shall MCA be
entitled under this agreement to share in any non-Merchandising
revenues received by Harvey for any filmed entertainment Product
not produced or released by MCA, including without limitation any
direct-to-video not produced or released by MCA.
c. CASPER CHARACTERS: For the purposes of this agreement, Casper
Characters shall refer to Casper, the Ghostly Trio, Kat Harvey,
Dr. Harvey, Spooky, Poil, Nightmare and all New MCA Elements.
d. PROMOTIONAL TIE-UPS: As used herein, Promotional Tie-Ups shall
refer to a type of advertising, marketing or Exploitation in which
some product, service or commodity (in addition to the Product) is
advertised, marketed or sold. Promotional Tie-Ups shall include
promotions, premium items, commercial tie-ins and tie-ups and
sponsorships.
<PAGE> 3
Gregory M. Yulish
Page 3
2. HARVEY'S MERCHANDISING RIGHTS FOR CHARACTERS OTHER THAN CASPER
CHARACTERS:
The parties hereby agree to terminate the provisions of Section V of
the Distribution Agreement, and that Merchandising rights for (a) all
Characters other than the Casper Characters, and for (b) all Products
other than those Products featuring the Casper Characters, shall
revert to Harvey. Harvey's Merchandising rights and obligations in the
Casper Characters and Products featuring the Casper Characters are set
forth in Paragraph 3 below. Harvey shall not be required to share any
Merchandising revenues with MCA, except as provided in Paragraph 3
below which applies solely to the Casper Characters and Products
featuring the Casper Characters. Nothing in this agreement shall
modify the terms of that certain letter agreement dated as of August
1, 1996 with respect to Merchandising revenues for the "Baby Huey"
character.
2.a MERCHANDISING RIGHTS FOR NEW CHARACTERS WHICH ARE NOT MCA NEW
ELEMENTS:
For purposes of clarification, all New Characters which are not New
MCA Elements, even if such New Character is created for or first
appears in a non-MCA produced Casper Product (such as a non-MCA
produced Casper direct-to-video), are governed by the terms of this
paragraph; i.e., Merchandising rights for such New Characters shall
revert to Harvey, and Harvey shall not be required to share any
Merchandising revenues for such New Characters with MCA. Thus, for
example, if any New Characters are created in the first live action
Casper direct-to-video currently being produced by Saban-Fox, all such
characters shall be governed by paragraph 2, and shall not be
considered Casper Characters as defined herein.
3. HARVEY'S MERCHANDISING RIGHTS FOR THE CASPER CHARACTERS AND PRODUCTS:
Harvey shall, subject to the terms of this agreement, be the exclusive
Merchandising licensing agent for the Casper Characters and Products
featuring the Casper Characters except as provided in paragraph 5
below. Harvey shall pay to MCA *
- ------------------
* Confidential Treatment Requested under 17 C.F.R. Sections 200.80(b)(4)
200.83 and 240.24b-2
<PAGE> 4
Gregory M. Yulish
Page 4
*
o *
o *
o *
For purposes of this agreement, gross revenues received by Harvey
shall mean (a) for Merchandising Exploitation by licensees, all
amounts received by Harvey from such licensees, and (b) for
Merchandising Exploitation by Harvey, an amount equal to 10% of the
costs incurred by Harvey in connection with such Merchandising.
For purposes of this paragraph, costs shall be defined as all
out-of-pocket direct expenses paid by or on behalf of Harvey in good
faith to third parties in connection with the exercise of
Merchandising rights under this paragraph, including without
limitation artwork and licensing kit development and reproduction
costs, freight, travel and entertainment directly related to the
Casper Characters, tradeshow expenses related to the Casper Characters
and Products featuring the Casper Characters, and directly related
promotional, marketing and advertising expenses. Costs shall also
include overhead, which is defined as employees' salaries, occupancy
costs, office supplies, equipment rental and corporate overhead.
- ------------------
* Confidential Treatment Requested under 17 C.F.R. Sections 200.80(b)(4)
200.83 and 240.24b-2
<PAGE> 5
Gregory M. Yulish
Page 5
In addition to the deductions set forth above, Merchandising-related
copyright and trademark expenses and litigation to protect or enforce
Merchandising-related copyright or trademark rights in the Casper
Characters or related to the specific Product featuring the Casper
Characters shall be deducted from gross revenues prior to calculating
the parties' shares of such revenues. Within 90 days after the
execution of this agreement by both parties hereto, Harvey shall be
responsible for handling all such matters, and shall use its best
efforts to protect and enforce the Merchandising-related copyrights
and trademarks in the Casper Characters and Products featuring the
Casper Characters. MCA, however, shall provide reasonable cooperation
and assistance to Harvey in protecting and enforcing the
Merchandising-related copyrights and trademarks in the Casper
Characters and Products featuring the Casper Characters. MCA shall
cooperate and assist Harvey in transitioning any Merchandising-
related copyright or trademark matters currently pending so that all
such matters may be transferred, where deemed appropriate by both MCA
and Harvey, to Harvey with a minimum of disruption.
4. PAYMENTS BY HARVEY:
Harvey agrees to provide MCA with quarterly accounting statements with
respect to amounts due to MCA under Paragraph 3 above. Such statements
shall conform to the end of Harvey's corresponding accounting periods,
shall be delivered within 90 days thereafter, and shall be accompanied
with payment of the amount, if any, shown to be due. MCA shall have
the right to audit Harvey's books of account, but only as they relate
to the Exploitation of rights under Paragraph 3, not more frequently
than once annually, by either (a) a national firm of certified public
accountants of a stature equal to Price Waterhouse LLP or Deloitte and
Touche, or (b) such other first-class reputable firm of certified
public accountants as Harvey in its good faith discretion may approve.
No audit may (i) go into transactions reported in any statement period
rendered prior to the commencement of any earlier audit, or (ii)
continue for longer than 45 consecutive business days. Harvey will use
its good faith efforts to cooperate with MCA in the conduct of any
audit. Each statement shall be deemed correct and conclusive and
binding on MCA on the expiration of 12 months after it is given,
<PAGE> 6
Gregory M. Yulish
Page 6
and the inclusion in any statement of information or items which
appeared in a previous statement shall not render any such information
or terms contestable or recommence the running of such 12 month period
with respect thereto; provided that if MCA delivers a written notice
to Harvey objecting to any such statement or item within such 12 month
period and if such notice specifies in detail the particular items to
which MCA objects and the nature of MCA's objections thereto, then
insofar as such particular items are concerned, such statements shall
not be deemed correct or binding on MCA hereunder. Any objection to
any statement given to MCA shall be deemed to have been waived unless
an arbitration based thereon has been instituted by MCA against Harvey
within 6 months following the expiration of such 12 month period. The
arbitration pursuant to this provision shall be conducted in
accordance with the Distribution Agreement, and shall be binding on
and non-appealable by both parties.
In addition, Harvey shall remit to MCA a projected Merchandise royalty
report approximately thirty (30) days after the end of each quarter,
and will request licensees to remit to MCA a copy of the Merchandise
royalty report which relates to MCA only. Nothing contained in this
Paragraph 4 shall affect the parties audit rights under any other
agreement.
5. MCA MERCHANDISING RIGHTS FOR CASPER FEATURE NEW PICTURES:
Notwithstanding the provisions of Paragraph 3 above, in connection
with a Feature New Picture featuring a Casper Character (a "Casper
Feature New Picture") initiated by MCA (or acquired by MCA, in
connection with the exercise of its First Negotiation or First
Negotiation/First Refusal Rights under the Distribution Agreement),
MCA shall have the exclusive right to initiate and control the
Merchandising Exploitation of the Casper Characters appearing in such
Casper Feature New Picture, but only in connection with Merchandising
related to or derived from such Casper Feature New Picture, during the
Harvey Preclusion Period (as defined in paragraph 6 below) which has
application to such Casper Feature New Picture. MCA shall be entitled
to retain certain fees from the revenues from such Merchandising
activities, and shall share the remaining
<PAGE> 7
Gregory M. Yulish
Page 7
revenues with Harvey, subject to negotiation in good faith pursuant to
the Distribution Agreement.
6. MERCHANDISING PRECLUSION FOR THE CASPER CHARACTERS:
A. HARVEY PRECLUSION:
i. HARVEY PRECLUSION PERIOD:
The Harvey Preclusion Period shall be the period commencing
upon Harvey's receipt of written notice from MCA (the
"Preclusion Notice") that MCA intends in good faith to: *
only be entitled to send a Preclusion Notice to Harvey if it
has a good faith intent to release (or reissue) the Casper
Feature New Picture and after a director and (if the Casper
Feature New Picture is live action) two principal cast
members for the Casper Feature New Picture have been made
pay or play for such Casper Feature New Picture.
- ------------------
* Confidential Treatment Requested under 17 C.F.R. Sections 200.80(b)(4)
200.83 and 240.24b-2
<PAGE> 8
Gregory M. Yulish
Page 8
ii. SCOPE OF PRECLUSION:
Harvey (and its agents and licensees) shall be permitted to
negotiate and enter into new Merchandising licenses, or
renew or extend any existing Merchandising licenses
(together, "New Licensee") for the Casper Characters
featured in a Casper Feature New Picture during the Harvey
Preclusion Period, provided however, that neither Harvey
(nor its agents or licensees) will grant to any New Licensee
the right to (a) release (and Harvey will not itself
release) Merchandise featuring such Casper Characters into
the marketplace; or (b) market or advertise (and Harvey will
not itself market or advertise) such Merchandise, in each
case during the Harvey Preclusion Period. If, however, at
the time Harvey receives the Preclusion Notice, Harvey (or
any of its licensees or agents) has already granted a
Merchandising license to a licensee ("Existing Licensee")
which license runs into the Harvey Preclusion Period, said
Existing Licensee shall not be precluded from releasing
Merchandise into the marketplace during the Harvey
Preclusion Period, provided that Harvey shall use its best
efforts to facilitate coordination between the Existing
Licensees and MCA's marketing and Merchandising efforts in
connection with the Casper Feature New Picture. For example,
if an Existing Licensee wishes to release Casper Merchandise
into the marketplace during the Harvey Preclusion Period,
Harvey shall use its best efforts to coordinate such release
so that it does not interfere with or undermine MCA's
Merchandising efforts in connection with a Casper Feature
New Picture. Each license with a New Licensee shall prohibit
the New Licensee from releasing Merchandise into the
marketplace during the Harvey Preclusion Period and require
the New Licensee to indemnify Harvey with respect to any
breach of the license, including any release of Merchandise
into the marketplace during the Harvey Preclusion Period,
and each license with an Existing Licensee shall require the
Existing Licensee to coordinate with Harvey
<PAGE> 9
Gregory M. Yulish
Page 9
with respect to the Merchandising Exploitation of the Casper
Characters and the Exploitation of other Products. Harvey
shall use its best efforts to ensure that each New Licensee
and Existing Licensee complies with the terms of its
Merchandising license.
a) Notwithstanding the foregoing, and except as
provided in Paragraph c below, there shall be no
Harvey Preclusion Period for Harvey's Merchandising
Exploitation through Promotional Tie-Ups in connection
with any filmed entertainment Product featuring the
Casper Characters produced or licensed by Harvey
(other than to MCA), including without limitation any
direct-to-video, provided that this provision is not
intended to affect MCA's exclusive rights with respect
to filmed Products based on or featuring New MCA
Elements.
b) There shall also be no Harvey Preclusion Period for
the manufacturing and sale of Merchandise at any
Harvey Family Entertainment Center. For purposes of
this agreement, "Harvey Family Entertainment Center"
shall mean an entertainment facility which does not
constitute a theme park within the meaning of the
Distribution Agreement, provided that Harvey's rights
to Exploit a Character through a Harvey Family
Entertainment Center shall remain subject to MCA's
First Negotiation/First Refusal Rights under the
Distribution Agreement, and provided further that this
provision is not intended to extend the term of such
rights.
c) Harvey shall be precluded from Merchandising
through Promotional Tie-Ups with quick service
restaurants (e.g., Burger King, Wendy's) for the
*
- ------------------
* Confidential Treatment Requested under 17 C.F.R. Sections 200.80(b)(4)
200.83 and 240.24b-2
<PAGE> 10
Gregory M. Yulish
Page 10
* MCA will use its best efforts in good faith to
provide Harvey with written notice of the initial
theatrical release (or reissue) date of a Casper
Feature New Picture 18 months before the anticipated
initial theatrical release (or reissue) date. Harvey
agrees that it will not enter into any Promotional
Tie-Up with any quick service restaurant more than 18
months in advance of the commencement thereof. In the
event Harvey enters into a long-term (i.e., more than
3 years) Promotional Tie-Up agreement with any quick
service restaurant, then Harvey may continue to honor
said Promotional Tie-Up agreement and the Fast Food
Preclusion Period shall not apply to that agreement.
However, if such event occurs, MCA shall have the
exclusive right to license Promotional Tie-Ups to
packaged foods (e.g., Kelloggs) during the Fast Food
Preclusion Period.
iii. The Fast Food Preclusion Period is not applicable in any
way to the first Harvey live-action "Casper"
direct-to-video, which distribution and marketing rights
Harvey does not control.
- ------------------
* Confidential Treatment Requested under 17 C.F.R. Sections 200.80(b)(4)
200.83 and 240.24b-2
<PAGE> 11
Gregory M. Yulish
Page 11
iv. The parties each recognize the significant value of the
"Casper" rights Harvey and MCA both possess. More
specifically, MCA recognizes that the "Casper"
direct-to-video rights are tremendously valuable to Harvey
and Harvey recognizes that the "Casper" theatrical motion
picture rights are tremendously valuable to MCA. In an
effort to aid each other in maximizing the value of the
other party's respective rights in "Casper", the parties
agree to use their best efforts to coordinate and maximize
each other's revenues. For example, if Harvey enters into a
Promotional Tie-Up with Pepsi for a Casper direct-to-video
and MCA wishes to enter into a Promotional Tie-Up with
Burger King for a Casper Feature New Picture (which has an
exclusive deal with Coke), Harvey will coordinate with MCA
and use its best efforts to avoid any conflict with MCA's
marketing plan for the "Casper" Feature New Picture and MCA
will do the same for Harvey. If, notwithstanding such
coordination and best efforts, a Promotional Tie-Up by one
party conflicts with the Promotional Tie-Up by the other
party, the party which has first entered into its
Promotional Tie-Up agreement shall prevail. In the event of
a dispute with respect to such conflict, the parties agree
to submit the matter to binding arbitration consistent with
the arbitration provisions of the Stock Purchase Agreement,
except that the parties shall use their best efforts to
expedite such arbitration as to the issue of which
Promotional Tie-Up agreement was entered into first, and
whether there is an actual conflict between the parties'
Promotional Tie-Ups.
B. MCA PRECLUSION:
MCA shall be precluded from entering into or requesting Harvey to
enter into any Promotional Tie-Up for any Casper Character which
operates during the months of September, October and November in
any calendar year when Harvey or any licensee of Harvey releases
a filmed entertainment Product featuring such Casper Character
(the "MCA
<PAGE> 12
Gregory M. Yulish
Page 12
Preclusion Period"), provided that Harvey has given MCA advanced
written notice of such release by July 31 of such calendar year,
and provided further that this provision is not intended to
affect MCA's exclusive rights with respect to filmed Products
based on or featuring New MCA Elements (with the Merchandising
rights to such Products being subject to this agreement).
However, an MCA Preclusion Period shall not apply during a Fast
Food Preclusion Period.
7. PAYMENT OF ADVANCE TO HARVEY:
MCA shall pay to Harvey, upon commencement of each 12 month period of
the Harvey Preclusion Period, an advance against the Merchandising
revenues payable by MCA under paragraph 5 above equal to the greater
of (a) *
8. HARVEY OVERHEAD RECOUPMENT:
Upon commencement of a Harvey Preclusion Period and continuing
throughout the term of such Harvey Preclusion Period, Harvey shall be
entitled to deduct from the gross revenues it receives from
Merchandising the Casper Characters 50% of that portion of Harvey's
overhead directly related to Merchandising the Casper Characters
featured in the Casper Feature New Picture
- ------------------
* Confidential Treatment Requested under 17 C.F.R. Sections 200.80(b)(4)
200.83 and 240.24b-2
<PAGE> 13
Gregory M. Yulish
Page 13
related to such Harvey Preclusion Period (and no other Characters),
which shall be computed as follows:
Total Merchandising revenues for the Casper Characters featured in the
Casper Feature New Picture related to the Harvey Preclusion Period for
the 12-month period immediately preceding the commencement of the
Harvey Preclusion Period, excluding (a) any revenues received by
Harvey from MCA theme parks or in connection with any Harvey Family
Entertainment Center, and (b) any payment made by MCA hereunder
("Casper Base Year Revenues"), divided by the total Harvey
Merchandising revenues for such 12-month period ("Harvey Base Year
Revenues"), times Harvey's overhead costs associated with
Merchandising (calculated in accordance with generally accepted
accounting principles) for such 12-month period. For example, if
Harvey Base Year Revenues were $3,000,000, and Casper Base Year
Revenues were $1,000,000 of the total, and Harvey's overhead costs for
such period associated with the Merchandising were $600,000, then
Harvey would be entitled to recoup, before MCA's or Harvey's
participation, $8,333 for each month that the Harvey Preclusion Period
is in effect, provided that in no event shall the amount of
Merchandising revenues payable to MCA pursuant to Paragraph 3 after
deducting such overhead costs be less than zero.
9. MCA THEME PARK RIGHTS:
Notwithstanding the provisions of Paragraphs 2 and 3 of this
Agreement, MCA shall continue to have all existing rights set forth in
the Distribution Agreement with respect to the Exploitation of
Characters and Products in theme parks, including without limitation
the right to conduct Merchandising activities in its theme parks under
the terms of existing agreements between the parties. Harvey will act
as the agent for MCA and agrees to continue to instruct licensees
under licenses assumed by Harvey pursuant to this agreement to charge
MCA only the amount of royalties currently paid by MCA under existing
MCA Merchandising licenses for Merchandise sold in MCA's theme parks,
so long as MCA theme parks continue to remit royalty payments to
Harvey, which payments shall not be included in MCA's Merchandising
revenues.
<PAGE> 14
Gregory M. Yulish
Page 14
10. RIGHTS GRANTED TO FOX CHILDREN'S NETWORK:
Nothing contained in this Agreement shall modify any rights previously
granted to Fox Children's Network, Inc. ("Fox") pursuant to that
certain letter agreement between Fox and MCA dated as of October 26,
1994.
11. MCA APPROVAL RIGHTS RELATING TO CASPER CHARACTERS:
MCA shall have the right during the term of this agreement (Paragraph
14 hereunder) to approve Harvey's choice of agents, and Harvey's
business decisions in connection with Harvey's (or any agent's) grant
of Merchandising licenses to third parties for (a) the Casper
character in all media, and (b) the Casper Characters in all media
produced or released by MCA, and any direct-to-video (live action or
animation) whether or not produced by MCA (e.g., initial deal
approval, the duration and other terms of any license or commitment in
connection therewith), provided, however, that MCA understands that
with respect to approvals related to Promotional Tie-Up rights for the
first live-action Casper direct-to-video produced by Saban-Fox, in the
event of a disagreement Harvey's decision shall be final. MCA shall
have mutual approval over Products and style guides with respect to
Merchandising for the Casper Characters and Products featuring the
Casper Characters by Harvey or its licensees, provided, however, that
in the event of a disagreement, Harvey's decision shall be final.
Harvey shall, regardless of whether MCA has approval rights for a
license under this paragraph, use its best efforts to ensure that all
of its licensees maintain the integrity of the Casper Characters and
produce high-quality Products so as not to diminish the value of the
Casper Characters.
MCA shall not unreasonably withhold any of its approvals granted
hereunder and shall use its best efforts to respond in writing to
Harvey within 5 business days of Harvey's initial request. In the
event Harvey reasonably requests MCA's expedited approval, MCA shall
use its best efforts to respond to Harvey within 3 business days. If
MCA fails to respond within the allotted time periods set forth
herein, MCA will be deemed to have approved of Harvey's request.
Harvey's request for approval of any Merchandising license shall be
accompanied by a deal memorandum in
<PAGE> 15
Gregory M. Yulish
Page 15
the form attached as Exhibit 1. For purposes of this paragraph,
approval of a license will not be deemed unreasonably withheld if the
terms of the license are inconsistent with industry standards.
Harvey shall have the right to approve of comparable matters with
respect to MCA's Merchandising Exploitation under Paragraph 5, which
approval rights shall be governed by the terms of this paragraph,
except that Harvey shall in all cases have final approval over
Products and style guides.
12. ASSUMPTION OF EXISTING MERCHANDISING LICENSE AGREEMENTS:
MCA hereby assigns to Harvey, and Harvey assumes and agrees to
perform, MCA's product review and approval obligations under all of
MCA existing Merchandising licensing agreements for the Casper
Characters.
13. HARVEY'S MERCHANDISING EFFORTS:
Within 90 days following execution hereof, Harvey agrees to hire and
maintain during the term of this agreement, at least four additional
employees to handle merchandising of Characters and Products, and to
use throughout the term of this agreement its best efforts in the
exploitation of rights under Paragraph 3 above to maximize quality,
exposure and revenues.
14. TERM; OTHER AGREEMENTS:
This agreement shall become effective as of the date hereof, and MCA's
Merchandising financial participation under Paragraph 3 and this
agreement shall expire on the earlier of (a) two and one-half years
after the completion of the last television motion picture produced
under the PSO Agreement, or (b) December 7, 2000. Except as
specifically set forth in this agreement, nothing contained herein is
intended to affect the parties' respective rights and obligations
under the Distribution Agreement, as amended by the April 22, 1993
letter agreement between Harvey and MCA (which amendment has
terminated and is of no force and effect), the PSO Agreement, and all
other agreements between the parties, and each party hereby reserves
all of its rights under such agreements other than as specifically
modified by this agreement. Paragraphs 1,
<PAGE> 16
Gregory M. Yulish
Page 16
3, 4, 5, 6, 7, 8, 14, 16, 18, and 19 shall survive expiration of this
agreement, but shall be effective after such expiration only so long
as MCA (or any of its direct or indirect transferees, assignees or
successors in interest) retains Casper motion picture rights. In
addition, Paragraphs 9 and 10 shall survive termination of this
Agreement, provided that the foregoing shall not extend the terms of
the agreements described in those paragraphs.
15. INTERACTIVE BONUS:
*
16. REPRESENTATION BY COUNSEL:
Each party hereto has been represented or has had the opportunity to
be represented by counsel of its own selection, and has reviewed this
agreement with such counsel and has had the terms of this agreement
explained by its counsel to the extent that the party believed
necessary.
17. PUBLIC ANNOUNCEMENT:
Within 10 days of execution by both parties to this agreement, the
parties will cooperate in notifying each current Casper Merchandising
licensee of the change of the exclusive Merchandising agent for the
Characters, and shall cooperate in issuing a press release regarding
the same.
18. MCA AND HARVEY PROMOTIONAL RIGHTS: Notwithstanding the provisions of
Paragraph 3 and subject to the terms of this agreement, MCA shall
continue to have the right to advertise, market, exploit and publicize
all Products released by MCA, including the right to conduct
Promotional Tie-Ups for such Products. Subject to the terms of this
agreement, Harvey shall continue to have the right to advertise,
market, exploit and publicize all Products released by Harvey,
including the right to conduct Promotional Tie-Ups for such Products.
19. RIGHTS UPON BREACH: No material or non-material breach of this
agreement by Harvey shall affect Harvey's rights under Paragraph 2 of
this Agreement. All
- ------------------
* Confidential Treatment Requested under 17 C.F.R. Sections 200.80(b)(4)
200.83 and 240.24b-2
<PAGE> 17
Gregory M. Yulish
Page 17
disputes hereunder between the parties shall be submitted to binding
arbitration consistent with the arbitration provisions of the Stock
Purchase Agreement.
Please acknowledge your acceptance of the foregoing agreement by countersigning
a copy of this letter below. This letter shall be of no force and effect unless
you have countersigned a copy and returned it to me by October 29, 1996.
Sincerely,
MCA, Inc.
Accepted and Agreed to:
The Harvey Entertainment Company
By:
------------------------------
Date: October 29, 1996
MCA/Universal Merchandising, Inc.
By:
------------------------------
Date: October 29, 1996
<PAGE> 18
Gregory M. Yulish
Page 18
EXHIBIT 1
FORM OF DEAL MEMORANDUM
<PAGE> 1
Exhibit 10.56
Execution Copy
Term Sheet For
Universal/Harvey Restated Agreement
Universal Studios, Inc. and The Harvey Entertainment Company, hereby agree to
the terms set forth in this Term Sheet as follows:
Currently Proposed
Videos Universal passes on the proposed videos, allowing
Harvey to proceed with any third party, subject to
the preclusion period and other relevant provisions
below.
Remaining Rights
FNFR FNFR and FN rights for all Characters (other
than Casper Characters as set forth below) and
all Products (other than new filmed or
television entertainment Products featuring a
Casper Character or having a Casper Character's
name in the title) will terminate immediately,
except to the extent provided below. In
addition, Universal agrees not to assert any
rights against Harvey that Universal may have
under the Universal/Paramount Pictures Agreement
so as to limit Harvey's rights with respect to
any Characters other than Casper.
FNFR rights to direct-to-videos featuring a
Casper Character or having a Casper Character's
name in the title will also terminate
immediately, but Universal will retain until
December 7, 2000 one FNFR right for the first
feature length post-theatrical sequel Casper
direct-to-video. In return, if the Casper
theatrical sequel were released in the summer of
1999 or 2000, Harvey agrees not to make any
proposal that would require the exercise of the
post-theatrical FNFR right until January of the
calendar year (i.e., January 1999 or January
2000, as applicable) during which such
theatrical sequel is scheduled to be released,
and such proposal will not be bundled with other
Harvey Products. It is understood that
Universal's FNFR right to the first
post-theatrical video will apply to any proposal
made prior to December 7, 2000 even if such
proposal relates to such a video that is
(because of the timing of the theatrical sequel)
to be released after December 7, 2000. It is
also understood that if the parties come to
agreement on such video pursuant to Universal's
FNFR rights, and such video is released in a
timely manner in accordance with such agreement,
then Harvey will not permit the initial release
of a direct-to-video that includes a Casper
Character
<PAGE> 2
Execution Copy
during the period from 6 months before to 9
months after the initial release of such
Universal direct to video except for
direct-to-videos of less than 35 minutes in
length.
All other rights with respect to filmed
entertainment Products featuring a Casper
Character or having a Casper Character's name in
the title will remain as provided under existing
agreements (including without limitation
Universal's exclusive right to make Casper
Pictures, as originally defined under the
Distribution Agreement), including, without
limitation, the expiry dates set forth therein
with respect to the FNFR and FN rights set forth
therein except as provided in the next sentence.
In regards to such expiry dates, the parties
acknowledge that (i) the FN rights in respect of
Pictures set forth in Section II.5(e) of the
Distribution Agreement will expire on December
7, 2000, or sooner if Universal owns less than
5% of Harvey; (ii) Universal's FNFR rights with
respect to the direct-to-video set forth in the
preceding paragraph will expire on December 7,
2000; and (iii) for purposes of the term set
forth in Section III of the Distribution
Agreement, Universal's FNFR and holdback rights
under Section III will expire on December 7,
2000, except as follows:
(A) On December 7, 2003, with respect to
FNFR for both live action and animated
television programs, in which the Character
Casper is the principal Character or in the
title for which Casper's name appears as a
reference to such Character;
(B) On June 30, 2001 with respect to FNFR
rights for both live action or animated
television programs in which another Casper
Character is the principal Character or in
the title of which Casper's name does not
appear but another Casper Character's name
does as a reference to such other Casper
Character;
(C) On December 7, 2003 with respect to
FNFR rights for domestic distribution of
Harvey TV Library Products; and
(D) On the date hereof with respect to FNFR
rights for foreign distribution of Harvey
TV Library Products;
Provided that the expiry dates for the FNFR
rights referred to in clauses (A), (B) and (C)
above will be December 7, 2000 unless (x)
2
<PAGE> 3
Execution Copy
on or before June 15, 2000, Universal has
provided Harvey with a Final Notice (as defined
under "Theatrical Preclusion Period" below) of
an anticipated release of the First Sequel (as
defined under "Theatrical Preclusion Period"
below) on or prior to Labor Day 2001, (y) such
First Sequel is, in fact, initially released in
at least 800 theatres in the domestic market
prior to Labor Day 2001, and (z) with respect to
clause (C) only, the projected domestic box
office for the First Sequel exceeds $100
million.
With respect to Universal's remaining FNFR
rights, the existing FNFR language will be
modified to provide that (i) the procedure shall
require Harvey, instead of Universal, to provide
its Bottom Line Terms to Universal for a
proposed "Transfer" and to provide Universal
with the matching right now set forth if Harvey
thereafter proposes to enter into an agreement
with a third party in which any financial or
other material term (including fixed
compensation/license fee) is not as beneficial
to Harvey as the Bottom Line Terms it proposed
to Universal (i.e., the "Conclusively More
Favorable" standard will no longer apply in
light of the change in procedure); and (ii) a
proposal will be deemed to qualify as a
"Product" if it includes at least a 1 page story
idea, a description of proposed principal
Characters, a proposed budget range, and a
proposed process for deciding other principal
elements, and Universal will have changed or
added elements protection up and to the deal
being made with the third party.
For purposes of this Term Sheet and the restated
agreement, the term "Casper Character" means the
fanciful characters Casper, each and all of the
Ghostly Trio, Kat Harvey, Dr. Harvey, Spooky,
Poil, Nightmare and all New MCA Elements, it
being understood, however, that neither this
Term Sheet nor the restated agreement will limit
Universal's and Harvey's existing rights with
respect to New MCA Elements except to the
extent, if any, set forth in the merchandising
amendment referred to below. It is understood
that Universal's exclusive rights to do Casper
Pictures under the Distribution Agreement,
without fees other than the Rights Fee
(including merchandising participation) called
for hereby, are limited to the use of Casper and
other Characters included in the original Casper
Feature as well as New MCA Elements and that,
except as so limited, the Rights Fee and
merchandising participation is an "all-in fee"
for the pertinent rights, including the
soundtrack. Subject to the further provisions
hereof, Harvey retains non-exclusive theatrical
movie rights to the Ghostly Trio, but will not
3
<PAGE> 4
Execution Copy
permit the release (except by Universal) of any
theatrical film that includes the Ghostly Trio
or any of them prior to December 31, 2002.
The rights and obligations of the parties set
forth in the August 1, 1996 Baby Huey agreement,
the rights and obligations of the parties in
respect of animated television programs
featuring a Casper Character set forth in the
September 22, 1994 Universal/Harvey animation
studio agreement (the "PSO Agreement"), and the
rights and obligations of the parties set forth
in the March 26, 1996 television Distribution
Agreement will be unaffected by this Term Sheet
or the restated agreement, except to the extent
expressly modified herein or by the
merchandising amendment referred to below, and
except that (i) the 2-year holdback set forth in
paragraph 6 of the PSO Agreement is increased to
3 years and is agreed to include only animated
television shows; and (ii) the separate PSO
entity will be eliminated from the PSO Agreement
without a material alteration of the parties'
underlying substantive rights.
Theme Parks Universal releases its theme park rights to all
Characters other than Casper Characters, subject
only to the rights that are granted under a
"Stroller Agreement" currently being negotiated.
Universal and Harvey will negotiate in good
faith definitions of the term "theme park" for
purposes of the Distribution Agreement, but if
no agreement can be reached after such good
faith negotiation the Distribution Agreement
will remain unmodified in this respect. In light
of the reduction in Characters committed to
Universal there will also be an equitable
reduction in the shelf space committed in the
Distribution Agreement to merchandising of
Harvey Characters and Products. Such equitable
reduction will be based on actual historical
usage, but shelf space committed will be no less
than 100 square feet. Except as set forth above,
Universal's theme park rights to the Casper
Characters will remain as set forth in the
Distribution Agreement.
Library As of January 25, 1997, Universal's unrecouped
costs with respect to the Harvey Classic Video
Library, including the cost of inventory on hand
and the $200,000 advance previously made to
Harvey, appear to be approximately the amount
set forth in that separate letter between the
parties of even date with this Term Sheet (the
"Pricing Letter"). Harvey will (a) make
Universal whole with regard to such amount (as
it exists as of the closing specified below) by
way of the payment specified below, and (b)
assume Universal's
4
<PAGE> 5
Execution Copy
legal obligations for future returns of product
then existing in the field (it being understood
that Harvey will not assume any other
obligations of Universal with respect to such
Video Library). In return, Universal will assign
to Harvey all of its rights in and to the Harvey
Classic Video Library and any related inventory
and artwork, including, without limitation,
assigning to Harvey all of Universal's third
party license agreements for the Video Library
and will indemnify Harvey against any breach of
such third party license agreements by
Universal. Harvey will pay 100% of such
unrecouped costs to Universal at the closing.
Other than as set forth in this paragraph,
Harvey shall have no further obligations to
Universal for revenue participation in
connection with the exploitation of the Video
Library. Closing of the above transaction will
occur upon the 90th day following execution of
this Term Sheet unless otherwise mutually agreed
by the parties. Universal will act expeditiously
after the execution of this term sheet to notify
relevant accounts and following such
notification may fulfill existing orders but
will not accept new orders (unless Harvey
approves).
Theatrical
Preclusion
Period Universal would be entitled to one Theatrical
Preclusion Period ("TPP") for each Casper
Picture (as originally defined in the
Distribution Agreement) theatrical sequel
released in at least 800 theatres in the U.S.
and Canada in the future, provided that
Universal will not be entitled to more than one
TPP if the first Casper theatrical sequel
("First Sequel") is not generally released
(i.e., in at least 800 theatres) in the U.S. and
Canada during the summer of either 1999 or 2000.
Each TPP would run for the period set forth in
the Pricing Schedule. In order for Universal's
TPP to be effective it must give written notice
(an "Initial Notice") by February 15 of the year
preceding the year a Casper theatrical sequel is
to be released either of (i) initial approval of
a screenplay (subject to changes), or (ii) the
commencement in good faith of pre- production
activity. Such Initial Notice shall be
accompanied by payment of $500,000 of the Rights
Fee in order to be effective. In addition, for
the TPP to be effective, Universal must give a
further written notice (a "Final Notice) by June
15 of the year preceding actual theatrical
release that the TPP will actually occur (which
Final Notice will be accompanied by 50% of the
balance of the Rights Fee as set forth below).
After the First Sequel and/or first TPP, no
subsequent TPP will commence earlier than the
third
5
<PAGE> 6
Execution Copy
anniversary of the beginning of the preceding
TPP or later than the sixth anniversary of the
beginning of the preceding TPP and then only if
there were an actual release during such
preceding TPP. If Universal does not give Final
Notice (as described in this paragraph above) by
June 15, 1999 of its intention to enter into
production of a sequel or fails to release the
sequel after giving such notice, then it will
lose any right to more than one TPP.
It is understood that, in order to be effective,
a Final Notice must specifically state in good
faith that the sequel will be produced with the
intention of initial theatrical release in the
Summer (by August 31) of the applicable year.
Late release of a sequel will be subject to
additional Rights Fees as described below,
except to the extent such late release is the
result of a force majeure event, but in no event
will late release extend the TPP.
Restrictions During
Preclusion Period Except as set forth below, during a TPP, there
will be no direct or indirect initial
exploitation or re-release (not including
re-runs of television shows) of any Precluded
Film Product (as defined below) in its initial
medium of exploitation, or any promotion,
marketing, solicitation of orders, manufacture,
shipping or fulfillment of orders, advertising,
etc. relating to any such Precluded Film
Product, by Harvey (or by any of its licensees
(other than Universal) or any distributor or
subdistributor of a licensee (other than
Universal)). A "Precluded Film Product" shall
mean any filmed entertainment Product first
released, broadcast or exhibited after January
1, 1998 that features a Casper Character.
Notwithstanding the foregoing, the restrictions
set forth in this paragraph will not apply to
the following:
o Harvey's Casper direct-to-video scheduled for
release in 1997.
o Episodes of a television series ordered by a
network (as defined in the Distribution
Agreement) and accepted by Harvey, prior to
the last date on which a Final Notice
respecting such TPP would be permissible, for
broadcast during the TPP, provided that (1)
the order that is accepted includes at least
6 episodes of a series, (2) Harvey gives
Universal prompt written notice of any such
acceptance of an order for a television
series and the proposed period of broadcast,
(3) such acceptance is with respect to a
series the
6
<PAGE> 7
Execution Copy
pilot script for which was ordered prior to
the last date on which an Initial Notice
respecting such TPP would be permissible, and
(4) any portion of the Rights Fee paid prior
to acceptance of the order by Harvey shall be
subject to prompt refund if Universal gives
notice of cancellation of the TPP within 5
business days of its receiving notice of such
acceptance by Harvey.
o After 6 months have expired from the initial
street release date in a relevant market of
the home video containing the theatrical
motion picture the release of which gave rise
to the TPP (but no later than expiration of
the TPP), Harvey (or such licensee,
distributor, etc.) may, with respect to
direct- to-video Products initially released
prior to the TPP, solicit (but not advertise,
promote, market, etc.) and ship orders in
such relevant market and manufacture home
video devices for such purpose, in all cases
generally consistent with the prior practice
of Harvey or such licensee or distributor or
consistent with industry practices generally
followed for direct-to-video products where
there is no competitive prequel, sequel or
related video in the marketplace (including a
video of a related theatrical film).
o With respect to any filmed entertainment
Product released prior to the TPP, Harvey (or
its licensees, distributors, etc.) may
release such Product in a secondary medium
(which includes re-runs of television shows),
other than theatrical release, and advertise,
market and promote such Product in such
secondary medium, in a manner generally
consistent with industry practice absent the
release of a related theatrical film (e.g., a
fourth quarter 1998 Casper video could be
broadcast on TV during a subsequent TPP).
o Commencing the second May 1st of a TPP with
respect to any direct-to-video Product
scheduled to be initially released after the
conclusion of such TPP, and commencing the
second July 1st of a TPP with respect to any
television Product scheduled to be initially
released after the conclusion of such TPP,
Harvey may commence trade advertising and
engage in general paid advertising for any
such post-TPP Product, and may engage in
manufacturing and solicitation of orders for
such post-TPP direct-to-video Product to be
fulfilled after the TPP, provided that such
7
<PAGE> 8
Execution Copy
activities are consistent with Harvey's prior
practices or customary industry practices and
are not designed to take advantage of the
marketing of the theatrical film or video
containing the same that were released during
the TPP.
o The appearance or featuring of Spooky, Poil,
Nightmare and/or any or all of the Ghostly
Trio in any filmed entertainment Product, in
each case after December 31, 2002, and the
"guest appearance" of Nightmare in one
direct-to-video in which Wendy the Good
Little Witch is featured as the primary
Character and which is released prior to such
date.
o Press announcements and public filings
required to be made by Harvey to comply with
law, stock exchange or NASDAQ rule.
Harvey will not exercise the rights it retains
during the TPP in a manner to intentionally
frustrate Universal's rights. It is understood
that, subject to the rights granted Universal,
there will be no restrictions on Harvey's right
to develop, finance and produce Casper Character
filmed entertainment Products during a TPP
(other than Casper Pictures) or merely to enter
into contracts to be performed outside a TPP, it
being acknowledged that the existence of the TPP
shall not prevent Harvey from entering into
promotional or commercial tie-in agreements or
into contractual arrangements for advertising so
long as the performance of any such agreement or
arrangement shall not occur during the TPP. It
is understood, however, that additional
merchandising restrictions may apply as
described below.
It is further understood that there will be no
restrictions on Universal's products, provided
that (i) during the fourth quarter of calendar
1997 and the fourth quarter of calendar 1998,
and (ii) during the first quarter following
Harvey's initial street release of the first
Casper direct-to-video initially released after
each TPP, Universal will agree to market,
advertise, promote, sell and otherwise
distribute its Casper video products (including
videos of its animated television show) in a
manner generally consistent with its or the
video industry's historical practices respecting
sales of such products without regard to the
concurrent release of a Harvey direct-to-video
Product during such quarter.
8
<PAGE> 9
Execution Copy
Rights Fee For the First Sequel, the fixed dollar amount
set forth in the Pricing Letter against the
percentages of gross proceeds set forth in the
Pricing Letter. Home video receipts will be
included in gross proceeds on the royalty bases
set forth in the Pricing Letter. The first
payment for the First Sequel would be the
non-refundable amount set forth in the Pricing
Letter and will be due immediately upon
executing this Term Sheet. The balance of the
fixed Rights Fee for the First Sequel, and the
fixed Rights Fee for any subsequent sequel,
would be paid as follows: $500,000 upon giving
of the Initial Notice for the TPP (it being
understood that such amount would be applied
against a later TPP if a Final Notice is not
given, except and to the extent set forth below
in the event a Final Notice is not given because
of an arbitration result that is not acceptable
to Universal); 50% of the balance upon giving
the Final Notice for the TPP; and the balance
upon commencement of principal photography but
no later than 12 months after the Final Notice.
The Rights Fees for theatrical sequels after the
First Sequel would be negotiated in good faith
by the parties, provided that if the sequel in
question is the subject of a TPP, then the
Rights Fee (both fixed and contingent) and
merchandising participation for such sequel
shall be no lower than the immediately preceding
sequel to which a TPP applied. Such good faith
negotiations concerning a subsequent sequel
shall be initiated by Universal's giving written
notice to Harvey that it desires to set such
Rights Fee, provided that such written notice
may be given only after the expiration of 90
days from the initial domestic theatrical
release of all sequels for which the Rights Fee
has previously been determined (including the
First Sequel), whether by agreement or
arbitration.
If after the giving of such notice, the parties
are unable to agree upon the pertinent Rights
Fee within thirty (30) days, then the Rights Fee
shall be determined by baseball arbitration,
which may be initiated by either party, and in
which the arbitrator(s) shall be instructed to
render a decision within 60 days following
commencement of the arbitration and to choose
between the last written offer made by Universal
and the last written offer made by Harvey during
the negotiations. With respect to any
disagreement between the parties in respect of
the Rights Fee, it is understood that: (i)
Universal may proceed to production pending
agreement or arbitration of the Fee, (ii) the
standard to be used by the arbitrator(s) will be
the market value of comparable rights taking
into account
9
<PAGE> 10
Execution Copy
the performance of the immediately preceding
theatrical sequel and whether the sequel in
question will be the subject of a TPP, (iii) no
payment, other than the amount due upon the
giving of the Initial Notice, will be due for a
subsequent sequel until the entire Fee is
resolved either by negotiation or by
arbitration, (iv) if the parties do not agree by
the time of the Initial Notice, then the
arbitration shall be commenced within 30 days,
with instructions to the arbitrator(s) to render
a decision no later than the following May 20,
(v) nothing will obligate Universal to pay any
arbitrated fee if it does not proceed to
production, or otherwise obligate Universal to
proceed to production, subject to Universal's
obligation to pay the pertinent portion of the
fixed fee if it has given an Initial Notice or
Final Notice of a TPP to which such fee relates,
and (vi) in the event Universal does not
proceed, then up to $250,000 of the amounts paid
at the time of the Initial Notice may be applied
by Universal as an advance against film payments
to Harvey for prior Features and the balance
shall be treated as an advance against a Rights
Fee for a future sequel.
Except to the extent caused by force majeure
events, in the event that for any reason after
Universal provides Harvey with a Final Notice,
the initial U.S. street release date of the home
video containing the Casper Picture to which
such notice relates does not occur by the second
April 15 of the TPP, then Universal will pay to
Harvey the delay amounts set forth in the
Pricing Letter. Such amount shall be in addition
to the Rights Fee if the initial U.S. street
release date of such home video occurs more than
120 days after the date of general U.S.
theatrical release of the Casper Picture, but
shall be treated only as an increase in the
fixed portion of the Rights Fee if such release
date of the home video occurs within such 120-
day period.
It is further understood that in addition to the
foregoing, Universal will pay Harvey (x) upon
the closing of the assignment of the Classic
Video Library, the nonrefundable $250,000 called
for by the merchandising amendment, and (y) upon
execution of this Term Sheet, the amount set
forth in the Pricing Letter as a nonrefundable
advance against future film payments that may
become due from Universal to Harvey as part of
the Rights Fee (other than merchandising
participation) from the First Casper Feature.
Merchandising As part of the restated agreement, the parties
would execute the merchandising amendment
substantially in the form of the October
10
<PAGE> 11
Execution Copy
29, 1996 draft previously negotiated (including
the proposed side letter regarding foreign
licensing agents and other matters), with the
following substantive changes respecting
merchandising of Products related to Casper
Characters. Harvey would be paid its minimum
advance for the first 12 months of the TPP upon
the commencement of the TPP, and its advance for
the remainder of the TPP after the first 12
months (pro-rated for a partial period) will be
paid upon the conclusion of the first 12 months
of such TPP. The substantive changes are:
o The Harvey Preclusion Period will mirror the
TPP when there is a TPP and will otherwise be
as set forth in the amendment.
o During the Preclusion Period:
- Harvey and its film and television
producer/distributor licensees will not be
permitted to engage in promotional tie-ins
(except with respect to the 1997 Casper
direct-to-video), including fast food
promotions, or other merchandising
activities, other than Harvey Family
Entertainment Centers and Harvey Retail
Stores, provided Universal shall be given
prompt notice of any such permitted
promotional tie-ins. The merchandising
amendment will retain provisions
permitting Harvey's Existing Licensees
(merchandising) to sell merchandise during
the Preclusion Period and the provisions
restricting Harvey's New Licensees
(merchandising) from selling merchandise
during the Preclusion Period.
"Harvey Retail Stores" shall be (i)
free-standing stores that have either the
Casper or Harvey name in the name of the
store and that carry merchandise that is
primarily based on Harvey Characters, and
(ii) clearly distinguishable
stores-within-stores meeting the following
criteria:
+ The store-within-a-store must be
comprised of at least 1,000 contiguous
square feet of space that is a
permanent installation (i.e., not
transitory or tied to any event or
season);
11
<PAGE> 12
Execution Copy
+ The store-within-a-store must be in
place prior to the giving of the First
Notice with respect to the TPP in
question (or notice with respect to a
non-TPP Preclusion Period);
+ The stores-within-stores may not be
installed within the stores of more
than one major retailer per region (in
addition to a national retailer in the
U.S.);
+ Each store-within-a-store must carry
merchandise exclusively (except for de
minimis items) based on Harvey
Characters and must have either the
Casper or Harvey name in the title of
the distinguishable store-
within-a-store area; and
+ Harvey will not sell from any such
store- within-a-store any Casper
related merchandise that has not been
purchased at arm's length from a third
party licensee, and if Universal does
not, under the merchandising amendment,
financially participate in Harvey's
arm's length purchase from a licensee
with respect to any such merchandise,
then Harvey will pay Universal a
royalty upon the sale of such
merchandise (to be set forth in the
definitive merchandising amendment)
designed to place Universal and Harvey
in roughly the same position as the
parties believe they would have been in
had such article of merchandise been
acquired by Harvey during the
Preclusion Period from a Universal
licensee.
It is understood that Harvey will not be
prohibited from purchasing merchandise for
its Family Entertainment Centers or Harvey
Retail Stores from merchandising
licensees.
- The parties will not be required to
coordinate competing promotional
activities (because of the limitation upon
Harvey's activities during the
12
<PAGE> 13
Execution Copy
Preclusion Period). However, in
negotiating the terms of the definitive
merchandising amendment, the parties will
consider articulating therein cooperative
strategies intended to address the need to
coordinate during a Preclusion Period the
activities of Harvey's then existing
merchandising licensees, Harvey's
enrollment of new licensees, Universal's
enrollment of feature-related
merchandising licensees, and the
activities of such feature-related
merchandising licensees, in ways that are
mutually beneficial to Harvey and
Universal. If the parties cannot agree
upon such strategies, such strategies will
not be included in the amendment.
- Harvey's approval rights will remain
intact, except with respect to promotional
tie-ins related to the initial theatrical
and home video release of the First Sequel
(which will not require Harvey's approval
except for Character integrity as
described in Section 5(a)(C) of the
Distribution Agreement).
- Universal will not be precluded from
conducting fall promotions, subject to
Harvey's approval rights, to the extent
applicable.
o Universal's approval rights for merchandising
licenses covering New MCA Elements as defined
in the Distribution Agreement (e.g., Kat,
Whipstaff Manor) will continue in perpetuity,
whether or not for media produced, released
or distributed by Universal, such approval
not to be unreasonably withheld.
o Universal's merchandising participation for
New MCA Elements only and other rights for
New MCA Elements only (as defined in the
original Distribution Agreement) will survive
the Agreement's termination. All other
Universal participation in merchandising will
terminate on the expiration of the
merchandising amendment, subject to the PSO
Agreement and the Baby Huey Agreement,
subject to Casper television merchandising
set forth below, and subject to Universal's
Casper Feature merchandising rights.
13
<PAGE> 14
Execution Copy
o During Universal's merchandising
distribution, Universal and Harvey's
participations will be as set forth in the
Pricing Letter. Once the merchandising
restrictions are in effect during a TPP,
Harvey will be guaranteed the merchandising
advance.
o Subject to the restrictions during a
Preclusion Period, Universal will not have
approval rights over promotional tie- ins for
direct-to-videos produced by Harvey or its
licensees. Harvey will not have approval
rights over promotional tie- ins for the
initial theatrical and home video release of
the First Sequel (except for Character
integrity as described in Section 5(a)(C) of
the Distribution Agreement).
o Universal's participation in Casper animated
television merchandising revenues derived
from Universal's animated television series
will expire on the later of December 7, 2000
or 2-1/2 years after completion of production
of the last television series episode
produced under the PSO Agreement (it being
understood that Universal's financial
participation in Classic Casper Character
Merchandising not derived from the animated
series will expire December 7, 2000, subject
to Universal's Casper Feature Picture
rights).
o Promotional tie-in arrangements entered into
by either Harvey or Universal or their
respective licensees with third parties will
be entered into on an arm's length basis, and
Harvey or Universal, as the case may be, will
provide the other party hereto with copies of
all such agreements promptly after they are
executed. Each of the parties will
participate in revenues from such promotional
tie-ups in accordance with the terms of the
merchandising amendment.
Releases Harvey and Universal mutually release each other
and their respective affiliates, officers,
employees, etc. from claims arising from or
related to the Distribution Agreement and the
agreements related thereto (including the
agreements referred to in the last paragraph
under "FNFR" above), other than with respect to
rights to payment and audit, including without
limitation claims relating to merchandising,
television, Harvey's 1997 Casper direct-to-video
and other filmed Products.
14
<PAGE> 15
Execution Copy
Consultation on
Casper Filmed
Products and
Merchandising In addition to the approval rights under the
merchandising amendment, Universal will have the
right to be apprised of creative and business
matters and to consult with respect to Harvey's
Casper Character Products and Exploitation,
including Casper Character merchandising. Harvey
will have this same consultation right with
respect to exploitation of the rights granted to
Universal by Harvey as well as the approval
rights previously granted in the Distribution
Agreement. Such consultation rights will,
subject to legal restrictions and requirements,
include the right of each party to be reasonably
informed of anticipated video release dates.
Make-up If a Final Notice for a TPP right is exercised
and a sequel movie is not "released" (on 800 or
more screens) at all for other than force
majeure reasons, Harvey will be entitled to
receive the maximum fixed fee to which it would
have been entitled had the cancelled sequel been
released and the release of the video containing
it been delayed past the second July 15 of the
TPP in question -- i.e., Harvey's fixed fee will
increase by the maximum delay amount set forth
in the Pricing Letter. Such amount shall be paid
to Harvey no later than the second July 15 of
the Preclusion Period. The payments for the
Rights Fee or for "delay" shall not be credited
against any future payments for sequels or
otherwise.
Credits Jeff Montgomery is to receive the same executive
producer credit as provided in the original
film, and Harvey will indemnify Universal
against claims from third parties for any
executive or co-executive producer credit due as
a result of grants from Harvey. Harvey will
receive a "Harvey Entertainment in association
with" credit immediately following the Amblin'
credit (or Universal credit, if no Amblin'
credit), if the Amblin' credit is above the
title credit, and immediately prior to the
Amblin' credit if the Amblin' credit is in the
end titles. The Harvey Entertainment logo will
appear on screen and in advertising to the same
extent as provided in Section II.5(b) of the
Distribution Agreement and when the Universal or
Amblin' logo appear.
Press Releases, Etc The specific terms of this Term Sheet, the
Pricing Letter, the merchandising amendment and
the restated agreement will remain confidential
(subject to customary exclusions) and all
written or scripted public statements and
interviews regarding the same will be
15
<PAGE> 16
Execution Copy
subject to mutual approval, subject to legal
requirements, including legally required public
reporting obligations of the parties. The
parties will reasonably cooperate in seeking
confidential treatment in their respective
public filings of any financial terms requested
by either to be kept confidential, and each of
the party's will reasonably cooperate with the
other in providing the other with information
required for its public filings related to the
restated agreement.
Efficacy THIS TERM SHEET WILL BE BINDING UPON ITS
EXECUTION BY THE PARTIES AND SUPERSEDES THE 1997
INTERIM MERCHANDISING LETTERS UNDER WHICH THE
PARTIES HAVE BEEN OPERATING. ALL REFERENCES TO
WHAT THE RESTATED AGREEMENT OR MERCHANDISING
AMENDMENT WILL CONTAIN SHALL BE GIVEN THE SAME
EFFECT AS THOUGH THE RESTATED AGREEMENT AND
MERCHANDISING AMENDMENT EXISTED AS OF THE DATE
HEREOF CONTAINING THE TERMS SET FORTH HEREIN.
NOTWITHSTANDING THE FOREGOING, THE PARTIES
INTEND TO NEGOTIATE A DEFINITIVE LONG- FORM
AGREEMENT OR AGREEMENTS INCORPORATING THE TERMS
SET FORTH HEREIN. IF THE PARTIES HAVE FAILED TO
AGREE UPON AND EXECUTE SUCH DEFINITIVE AGREEMENT
OR AGREEMENTS WITHIN THE TIME PERIOD SET FORTH
IN THE PRICING LETTER, THEN EITHER PARTY MAY
INITIATE THE PROCEDURE CONTEMPLATED BY SUCH
LETTER TO FINALIZE A DEFINITIVE AGREEMENT OR
AGREEMENTS.
16
<PAGE> 17
Execution Copy
IN WITNESS WHEREOF, the parties have executed this Term Sheet (which may be done
in counterpart) as of May 15, 1997.
THE HARVEY ENTERTAINMENT UNIVERSAL STUDIOS,
COMPANY INC.
By: [SIG] By: [SIG]
---------------------- ----------------------
Title: E.V.P. Title: Asst. Secretary
---------------------- ----------------------
17
<PAGE> 1
EXHIBIT 10.57
* Confidential Treatment
Requested under 17 C.F.R.
Sections 200.80(b)(4)
200.83 and 240.24b-2
UNIVERSAL STUDIOS, INC.
May 15, 1997
The Harvey Entertainment Company
100 Wilshire Boulevard, Suite 500
Santa Monica, CA 90401
Ladies and Gentlemen:
Reference is made to that certain "Term Sheet for Universal/Harvey
Restated Agreement" of even date herewith (the "Term Sheet"). This letter
constitutes the Pricing Letter referred to in the Term Sheet.
This letter will memorialize the content of certain matters referred to
in the Term Sheet, as follows:
1. Unrecouped Library Costs. The unrecouped costs with respect to the
Harvey Classic Video Library at January 25, 1997 were approximately *.
2. Period Encompassed By TPP. Each TPP will run from * for
the United States and Canada and from * through * in foreign
territories. For example, * .
3. Rights/Services Fee. For the First Sequel, the Rights/Services Fee
exclusive of merchandising participation will be *.
- ----------------
* Confidential Treatment Requested under 17 C.F.R. Sections 200.80(b)(4)
200.83 and 240.24b-2
<PAGE> 2
The Harvey Entertainment Company
Page 2
* For purposes of the foregoing, Universal's standard definition plus rider
for "gross proceeds" will be used, except that coop advertising will not be
deducted from accountable gross.
4. Merchandising Participation. During Universal's merchandising
distribution, the respective participations of the parties will be * .
5. Delay Amounts. The delay amounts referred to in the Term Sheet for
late release of the home video containing the pertinent Casper Picture will be
* .
6. Advance for First Casper Picture. The nonrefundable advance referred
to in the Term Sheet against future film payments that may become due from
Universal to Harvey as part of the Rights Fee (other than merchandising
participation) for the First Casper Feature shall be * . Such advance will
be due upon signing the Term Sheet and will not bear interest.
7. Baseball Arbitration. If, within 90 days of the date of the Term
Sheet, we fail to agree upon and execute definitive agreements including a
merchandising amendment implementing the terms of the Term Sheet and the October
29th, 1996 merchandising amendment as amended by the Term Sheet, then at any
time after the expiration of such 90 day period and prior to executing such
definitive agreements either party may initiate the following procedure
("Baseball Arbitration") by giving written notice to the other of its desire to
initiate such procedure. Thereafter the parties shall follow the following
procedure:
a. Selection of Panel. No later than the close of business on the
tenth business day following such written notice, each party shall provide
written notice to the other setting forth (i) the identity of an individual with
experience in the entertainment industry selected by such party (who shall not
be a present or former officer, director or partner of such party, or a current
employee or constituent partner of such party, or of any of its affiliates or of
any of its current investment bankers, accounting firms or law firms) to resolve
such disagreement, (ii) such individual's consent to serve for such individual's
customary hourly fees, and (iii) the identity of up to ten (10) suggested
neutral individuals with experience in the entertainment industry to serve as a
third mediator. The mediators originally designated by each party shall promptly
confer about the selection of a
- ----------------
* Confidential Treatment Requested under 17 C.F.R. Sections 200.80(b)(4)
200.83 and 240.24b-2
<PAGE> 3
The Harvey Entertainment Company
Page 3
third mediator from such lists, and within fifteen (15) business days following
the original notice of arbitration shall agree upon and (subject to
availability) select the third mediator from the lists submitted by the parties
or, if they cannot agree upon a third mediator from such lists, shall otherwise
agree upon and select a third mediator not on such lists, provided that if the
originally designated mediators cannot agree upon a third mediator by such date,
the third mediator shall be a retired judge designated by Judicial and
Arbitration Mediation Services, Inc., located in Los Angeles, California. The
three mediators so selected are herein referred to as the "Panel."
b. Submissions. Within fifteen (15) business days after the
designation of the third mediator, each party shall submit to the Panel in
writing its proposed written form for provisions of the definitive agreements
about which the parties remain in disagreement. Such proposed form for such
provisions shall in substance be materially in accordance with the last
proposals made by such party to the other party during the course of the
negotiations between them about the language of the definitive agreements.
c. Proceedings Along with their proposed forms of contractual
provisions, the parties may submit such written memoranda, arguments, briefs and
evidence in support of their respective positions as they see fit and as a
majority of the Panel may permit or determine. Subject to the foregoing, no
particular procedures are intended to be imposed upon the Panel, it being the
desire of the parties that any such disagreement shall be resolved as
expeditiously and inexpensively as reasonably practicable. In this regard, the
Panel may follow such procedures, consistent with the language of the Term Sheet
and this letter, as it deems appropriate to the circumstances and with reference
to the materiality of the provisions in issue, and may obtain testimonial
evidence under oath from the parties and their respective witnesses as the Panel
may determine.
d. Decision. No later than ninety (90) calendar days following the
selection of the third mediator, the Panel shall, by majority vote, select one
of the two forms of proposed contractual provisions submitted by the parties as
the form of disputed contractual provisions to be contained in the definitive
agreements to be executed by the parties, it being agreed that the Panel shall
have no authority to alter any such proposal in any way and that each proposal
shall be regarded as a single integrated package of contractual provisions. Such
selection shall be made by the Panel on the basis of its determination that such
contractual provisions reflect substantive terms that more closely than the
alternative proposal reflect the provisions of the Term Sheet and, where the
Term Sheet is unclear, industry norms
<PAGE> 4
The Harvey Entertainment Company
Page 4
for deals of this type, it being understood, however, that where the Term Sheet
sets forth the effect of the parties' inability to agree upon a particular
provision in the definitive agreement, then the Panel will nevertheless be
governed as to such provision by such effect (e.g., if the parties cannot
voluntarily agree upon the definition of the term "theme park," then the
definitive agreement will not contain such definition). Such determination by
the Panel shall be final and binding upon the parties and the incorporation
thereof into the definitive agreements shall be specifically enforceable; and
thereafter the parties shall promptly execute definitive agreements
incorporating the provisions selected by the Panel, and shall govern their
affairs accordingly on the basis of the definitive agreements as approved by the
Panel.
e. Costs. The party whose form of contractual provisions is not
selected by the Panel shall pay the costs of the arbitration, including the fees
of each member of the Panel, and shall additionally bear the reasonable fees and
costs (including reasonable attorney's fees) of the other party as determined by
the Panel in connection with such proceeding.
f. Hold Harmless of Panel Members. No member of the Panel shall have
any liability to the parties in connection with service on the Panel, and the
parties shall provide such indemnities to the members of the Panel as they shall
request.
* * *
<PAGE> 5
The Harvey Entertainment Company
Page 5
If the foregoing correctly sets forth our understanding, then kindly
execute the duplicate copy of this letter that is enclosed and return it to the
undersigned.
Sincerely,
UNIVERSAL STUDIOS, INC.
By: [SIG]
---------------------------------
Title: Asst. Secretary
---------------------------------
Agreed as of the date above:
THE HARVEY ENTERTAINMENT
COMPANY
By: [SIG]
---------------------------
Title: E.V.P.
---------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,887
<SECURITIES> 0
<RECEIVABLES> 3,261
<ALLOWANCES> 312
<INVENTORY> 0
<CURRENT-ASSETS> 9,187
<PP&E> 801
<DEPRECIATION> 324
<TOTAL-ASSETS> 22,144
<CURRENT-LIABILITIES> 1,143
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 18,159
<TOTAL-LIABILITY-AND-EQUITY> 22,144
<SALES> 4,662
<TOTAL-REVENUES> 4,662
<CGS> 1,697
<TOTAL-COSTS> 1,697
<OTHER-EXPENSES> 2,614
<LOSS-PROVISION> 175,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 46,000
<INCOME-TAX> 46,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> $0.00
<EPS-DILUTED> $0.00
</TABLE>
