<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, 1999
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)
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<CAPTION>
CALIFORNIA 95-4217605
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<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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1999 Avenue of the Stars, Suite 2050, Los Angeles, California 90067-6055
------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's phone number, including area code (310) 789-1990
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
Class Outstanding at August 2, 1999
- -------------------------- ----------------------------------------
<S> <C> <C>
Common Stock, no par value 4,186,941 (6,705,459 shares, including
2,518,518 shares into which the Series A
Preferred Stock could be converted)
</TABLE>
<PAGE> 2
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
INDEX
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PAGE
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Balance Sheets -- June 30, 1999 and December 31, 1998 1-2
Condensed Consolidated Statements of Operations -- Three and Six Months Ended June 30, 1999
and 1998 3
Condensed Consolidated Statements of Cash Flows -- Six Months Ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5-7
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8-12
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 13
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K 13-14
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 9,475,000 $ 451,000
Marketable securities 3,048,000 --
Accounts receivable, net of allowance for doubtful accounts
of $491,000 and $298,000 in 1999 and 1998, respectively 1,158,000 1,689,000
Prepaid expenses and other assets 143,000 541,000
Income tax receivable 542,000 567,000
Film library, net of accumulated amortization of $7,144,000
and $6,894,000 in 1999 and 1998, respectively 10,519,000 10,873,000
Furniture and equipment, net of accumulated
depreciation of $766,000 and $658,000 in 1999 and 1998,
respectively 401,000 501,000
Goodwill, net of accumulated amortization of $1,287,000
and $1,222,000 in 1999 and 1998, respectively 1,309,000 1,373,000
Trademarks and copyrights, net of accumulated
amortization of $319,000 and $266,000 in 1999 and 1998,
respectively 1,207,000 1,039,000
----------- -----------
TOTAL $27,802,000 $17,034,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
----------- ------------
(Unaudited)
LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 953,000 $ 871,000
Participations payable 750,000 861,000
Accrued marketing expenses 1,200,000 1,200,000
Note payable 2,049,000 --
Line of credit -- 250,000
Accrued rent and other liabilities 150,000 170,000
----------- -----------
Total liabilities 5,102,000 3,352,000
----------- -----------
Series A convertible preferred stock, $100 stated value,
170,000 shares issued and outstanding at June 30, 1999,
liquidation preference of $17,212,000 at June 30, 1999 12,684,000 --
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,000,000 shares authorized
(170,000 shares have been designated as Series A preferred) -- --
Common stock, no par value, 10,000,000 shares authorized,
4,187,000 issued and outstanding at June 30, 1999 and
December 31, 1998 4,451,000 4,451,000
Additional paid in capital 21,656,000 17,709,000
Accumulated other comprehensive income (3,178,000) --
Accumulated deficit (12,913,000) (8,478,000)
----------- -----------
Total stockholders' equity 22,700,000 13,682,000
----------- -----------
TOTAL $27,802,000 $17,034,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 5
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
OPERATING REVENUES:
<S> <C> <C> <C> <C>
Filmed entertainment $ -- $ 20,000 $ -- $ 105,000
Merchandising 364,000 400,000 794,000 1,175,000
Publishing (3,000) -- 129,000 --
----------- ----------- ----------- -----------
Net operating revenues 361,000 420,000 923,000 1,280,000
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of sales 561,000 418,000 1,384,000 1,556,000
Selling, general and administrative expenses 1,245,000 1,636,000 3,286,000 4,290,000
Amortization of intangibles 58,000 39,000 117,000 104,000
Depreciation expense 55,000 32,000 108,000 66,000
----------- ----------- ----------- -----------
Total operating expenses 1,919,000 2,125,000 4,895,000 6,016,000
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,558,000) (1,705,000) (3,972,000) (4,736,000)
OTHER INCOME 381,000 72,000 405,000 106,000
STOCK BASED COMPENSATION -- (367,000) -- (800,000)
INTEREST EXPENSE (38,000) -- (57,000) --
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (1,215,000) (2,000,000) (3,624,000) (5,430,000)
INCOME TAX BENEFIT -- 797,000 -- 2,168,000
----------- ----------- ----------- -----------
NET LOSS $(1,215,000) $(1,203,000) $(3,624,000) $(3,262,000)
=========== =========== =========== ===========
Net loss $(1,215,000) $(1,203,000) $(3,624,000) $(3,262,000)
Preferred stock dividends and amortization of
beneficial conversion feature (810,000) -- (810,000) --
----------- ----------- ----------- -----------
Net loss applicable to common stock $(2,025,000) $(1,203,000) $(4,434,000) $(3,262,000)
=========== =========== =========== ===========
NET LOSS PER SHARE OF COMMON STOCK:
Basic and Diluted $ (0.48) $ (0.29) $ (1.06) $ (0.83)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted 4,187,000 4,174,000 4,187,000 3,908,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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<CAPTION>
SIX MONTHS ENDED
JUNE 30,
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1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,624,000) $(3,262,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 108,000 66,000
Amortization of film library, goodwill, trademarks and
copyrights and other 366,000 623,000
Deferred income taxes -- (2,211,000)
Stock based compensation -- 800,000
Changes in operating assets and liabilities:
Accounts receivable, net 531,000 2,155,000
Prepaid expenses and other assets 397,000 (128,000)
Income taxes receivable, net of income taxes payable 25,000 (1,318,000)
Account payable and accrued expenses 82,000 (826,000)
Participations payable (111,000) --
Accrued rent and other liabilities (20,000) 56,000
----------- -----------
Net cash used in operating activities (2,246,000) (4,045,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (9,000) (130,000)
Investments in trademarks, copyrights and film library (115,000) (249,000)
----------- -----------
Net cash used in investing activities (124,000) (379,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of tax effect -- 3,722,000
Borrowings on line of credit 1,750,000 --
Repayment on line of credit (2,000,000) --
Net proceeds from issuance of convertible preferred stock 9,595,000 --
Proceeds from issuance of note payable 2,049,000 --
----------- -----------
Net cash provided by financing activities 11,394,000 3,722,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,024,000 (702,000)
CASH AND CASH EQUIVALENTS, Beginning of period 451,000 6,316,000
----------- -----------
CASH AND CASH EQUIVALENTS, End of period $ 9,475,000 $ 5,614,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid (received) during the year for:
Interest $ 32,000 $ --
Income taxes $ (21,000) $ 775,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 7
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background and Operations: The Harvey Entertainment Company, together with its
wholly-owned subsidiaries Harvey Comics, Inc. and Baby Huey Productions, Inc.
(the "Company") owns and exploits a library of widely recognized classic
characters and other intellectual property assets, including a related film
library of animated short features. The Company is the successor to Harvey
Comics, Inc. which was founded in 1939 by the Harvey family. In 1989, the
Company's predecessor purchased Harvey Comics, Inc. to exploit its intellectual
property and in 1993 the Company completed its initial public offering of common
stock. The roster of the Company's classic characters includes the well known
characters Casper, the Friendly Ghost, Richie Rich, Baby Huey, Wendy, the Good
Little Witch, and Hot Stuff, among many others.
Basis of Presentation: The accompanying consolidated financial statements and
footnotes are unaudited and condensed, as contemplated by the Securities and
Exchange Commission under rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The accompanying
condensed consolidated financial statements should be read in conjunction with
the more detailed consolidated financial statements and related footnotes
included in the Company's Form 10-KSB filed with the Securities and Exchange
Commission on April 13, 1999.
In the opinion of the Company's management, the accompanying unaudited condensed
consolidated financial statements as of June 30, 1999 and for the three and six
month periods ended June 30, 1999 and 1998 contain all adjustments, which
include normal recurring accruals, necessary to present fairly the consolidated
financial position of the Company as of June 30, 1999 and the consolidated
results of operations and consolidated cash flows for the six month periods
ended June 30, 1999 and 1998.
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. Certain reclassifications of 1998 amounts have been made in order to
conform with the 1999 financial statement presentation.
Net Loss Per Share: Net loss per share is computed by dividing the net loss
applicable to common shareholders for the period by the weighted average number
of common shares outstanding. Shares associated with stock options, warrants and
convertible preferred stock are not included to the extent they are
anti-dilutive. Net loss per share information has been determined on the basis
of 4,187,000 weighted average number of shares outstanding for the three and six
month periods ended June 30, 1999 and 4,174,000 and 3,908,000 weighted average
number of shares outstanding for the three and six month periods ended June 30,
1998, respectively. The net loss per common share for the three and six month
periods ended June 30, 1999 gives effect to stock dividends of $212,000 and the
amortization of the beneficial conversion feature of $598,000 related to the
Series A Preferred Stock issued on April 26, 1999 (See Note 2 -- Equity
Infusion).
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes: Deferred income taxes represent the tax consequences in future
years of differences between the income tax basis of assets and liabilities and
their basis for financial reporting purposes.
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<PAGE> 8
Comprehensive Income: Effective January 1, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 130 ("SFAS No.
130"), "Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. The Company reported an unrealized loss
of approximately $3.2 million as part of comprehensive income for the quarter
ended June 30, 1999, resulting from the adjustment to the fair market value, as
of June 30, 1999, of the common stock of The Kushner-Locke Company (See Note 2
- -- Equity Infusion).
Contingencies: From time to time, the Company has been party to various
litigation and administrative proceedings relating to claims arising from its
operations in the normal course of business. Based on the advice of counsel,
management believes that the resolution of these matters will not have a
material effect on the Company's business, results of operations, financial
condition or cash flows.
Year 2000: The Company utilizes various computer software packages as tools in
running its operations. Management plans to implement any necessary vendor
upgrades and modifications to ensure continued functionality with respect to the
software problems associated with the year 2000. At present, management does not
expect that material incremental costs will be incurred, or significant Company
resources dedicated in 1999 to become year 2000 compliant.
NOTE 2 -- EQUITY INFUSION
On April 7, 1999 the Company entered into a Stock Purchase Agreement by and
among the Company and Michael R. Burns, Roger A. Burlage, Ken Slutsky and The
Kushner-Locke Company ("Kushner-Locke") pursuant to which the Company agreed to
issue and sell 170,000 shares of its Series A Preferred Stock ("Series A
Preferred Stock") and warrants ("Warrants") to purchase up to 2.4 million shares
of the Company's Common Stock in consideration of cash and common stock of
Kushner-Locke ( the "1999 Refinancing"). Of the Warrants issued, 1.2 million
were granted immediately to investors participating in the 1999 Refinancing (the
"Investor Warrants") and 1.2 million will be granted in the future at the
discretion of new management ("Management Warrants"). In addition, as described
in Note 4 below, as a result of the 1999 Refinancing being oversubscribed and
the desire of the Company to realize the potential benefits of additional
capital, on June 30, 1999 the Company issued a subordinated note (the "Note") in
the amount of approximately $2.049 million. The total cash consideration
received in the 1999 Refinancing and issuance of the Note was approximately
$11.578 million, net of transaction fees and expenses of approximately $1.97
million. Under United States Generally Accepted Accounting Principles ("U.S.
GAAP"), the investment by Kushner-Locke in the form of Kushner-Locke common
stock has been fair valued at approximately $6.2 million. The fair value of the
investments of the Kushner-Locke common stock, the net cash consideration and
the Note were initially allocated in the following manner for financial
accounting purposes: Series A Preferred Stock: $11.9 million, Additional Paid in
Capital related to the Investor Warrants: $2.1 million and Additional Paid in
Capital related to a beneficial conversion feature of the Series A Preferred
Stock: $1.8 million. The beneficial conversion feature of the Series A Preferred
Stock will be amortized into retained earnings ratably over a six-month period
from April 26, 1999 until the convertibility provision of the Series A Preferred
Stock becomes effective on October 26, 1999.
On April 26, 1999, in connection with the issuance and sale of the Series A
Preferred Stock and Warrants, the Company entered into a Registration Rights
Agreement (the "1999 Agreement") with Michael R. Burns, Roger A. Burlage, Al
Checchi, Ken Slutsky and Kushner-Locke (the "Shareholders"). The 1999 Agreement
gives the Shareholders certain demand and piggyback registration rights,
commencing 18 months following the issuance and sale of the Series A Preferred
Stock and the Warrants, to register the Common Stock issuable upon conversion of
the Series A Preferred Stock and the exercise of the Warrants. The transactions
contemplated by the Stock Purchase Agreement were consummated on April 26, 1999.
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<PAGE> 9
NOTE 3 -- MARKETABLE SECURITIES
In connection with the 1999 Refinancing, the Company received approximately
470,000 common shares of Kushner-Locke fair valued for financial accounting
purposed under U.S. GAAP at approximately $6.2 million. As of June 30, 1999, the
market value of such shares was approximately $3.048 million. As the Company is
currently holding the Kushner-Locke shares as available for sale securities, in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", the unrealized loss from
this investment is being recorded in an unrealized holding loss account as a
separate component of Stockholders' Equity.
NOTE 4 -- NOTE PAYABLE
As discussed above, as a result of the 1999 Refinancing being oversubscribed,
and the desire of the Company to realize the potential benefits of additional
capital, on June 30, 1999 the Company issued the Note in the amount of
approximately $2.049 million. The Note bears interest at an annual rate of 7%,
payable quarterly on the last day of each March, June, September and December,
commencing on June 30, 1999. Subject to shareholder approval of certain
proposals at the Company's Annual Meeting of Shareholders' on August 17, 1999,
the Note will be converted into 20,488 shares of Series A Preferred Stock and
144,618 warrants to purchase Common Stock immediately after the Annual Meeting.
If the proposals are not approved, the repayment of the Note may be accelerated
and the Company may be required to repay all amounts due thereunder upon demand.
NOTE 5 -- STOCK BASED COMPENSATION
The 1999 Refinancing included the issuance of 2.4 million of Warrants to
purchase shares of the Company's Common Stock, 1.2 million of which were
Investor Warrants and 1.2 million of which were Management Warrants. Of the 1.2
million Investor Warrants granted, those granted to non-employees are fully
vested, non-forfeitable and are exercisable commencing six months from their
issuance date, at prices ranging from $9.00 to $12.00 per share of the Common
Stock. Management Warrants, and any Investor Warrants, granted to employees vest
and become exercisable according to schedules set forth in their respective
warrant agreements, and are exercisable at prices ranging from $9.00 to $12.00
per share of Common Stock. The Company accounts for stock issued to
non-employees in accordance with Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", and Emerging
Issues Task Force 96-18 ("EITF 96-18"). In accordance with SFAS 123 and EITF
96-18, the fair value of any Management Warrants granted in the future to
non-employees will be measured either at the date of grant or at the end of the
reporting period, as appropriate. Based on the determination of the fair value
of the Company's Common Stock, the Company may incur substantial non-cash
charges to earnings in future reporting quarters.
* * * * * *
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<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains forward-looking statements made based on current
management expectations pursuant to the "safe-harbor" provisions of the Private
Securities Litigation Act of 1995. These statements are not guarantees of future
performance and actual outcomes may differ materially from what is expressed or
forecasted. There are many factors that may affect the Company's business and
its results of operations. These include, without limitation, risks relating to
the Company's expansion strategy, risks of the Company's merchandising and
filmed entertainment activities, the management of growth, fluctuations in
quarterly and annual operating results, accounting principles applicable to
filmed entertainment, the release of filmed entertainment products and other
factors discussed herein and in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1998 and any other filings made by the
Company with the Securities and Exchange Commission.
RECENT DEVELOPMENTS FOR THE COMPANY
On April 7, 1999 the Company entered into a Stock Purchase Agreement by and
among the Company and Michael R. Burns, Roger A. Burlage, Ken Slutsky and The
Kushner-Locke Company ("Kushner-Locke") pursuant to which the Company agreed to
issue and sell 170,000 shares of its Series A Preferred Stock ("Series A
Preferred Stock") and warrants ("Warrants") to purchase up to 2.4 million shares
of the Company's Common Stock for a total consideration of approximately $17.7
million (the "1999 Refinancing"). On April 26, 1999, in connection with the
issuance and sale of the Series A Preferred Stock and Warrants, the Company
entered into a Registration Rights Agreement (the "1999 Agreement") with Michael
R. Burns, Roger A. Burlage, Al Checchi, Ken Slutsky and Kushner-Locke (the
"Shareholders"). The 1999 Agreement gives the Shareholders certain demand and
piggyback registration rights, commencing 18 months following the issuance and
sale of the Series A Preferred Stock and the Warrants, to register the Common
Stock issuable upon conversion of the Series A Preferred Stock and the exercise
of the Warrants. The transactions contemplated by the Stock Purchase Agreement
were consummated on April 26, 1999.
The 1999 Refinancing was oversubscribed, and, in order to enable the Company to
realize the potential benefits of additional capital, the Company issued a note
in the amount of $2,048,750 to Paul Guez (the "Note"). The Note bears interest
at an annual rate of 7%, payable quarterly on the last day of each March, June,
September and December, commencing on June 30, 1999. Subject to shareholder
approval of an increase in the authorized shares of Series A Preferred Stock and
the conversion of the Note, the Company's Board of Directors approved the
conversion of the Note into 20,488 shares of Series A Preferred Stock
(convertible into 303,525 shares of Common Stock) and Warrants to purchase
144,618 shares of Common Stock. Upon the issuance of Series A Preferred Stock to
Mr. Guez, the Company will have 190,488 shares of Series A Preferred Stock
outstanding (convertible into an aggregate of 2,822,044 shares of Common Stock).
If either (i) the increase in authorized shares of Series A Preferred Stock or
(ii) the conversion of the Note are not approved, then Mr. Guez may accelerate
the Note and require the Company to repay all amounts due thereunder on demand.
From March 23, 1998 until April 26, 1999 the Company had been under the
management services of Global Media Management Group, LLC ("Global Media").
Through a management services agreement with Global Media, the Board of
Directors retained the non-exclusive services of Anthony J. Scotti as the
Company's Interim Chief Executive Officer and Interim President, and Michael S.
Hope as the Company's Interim Chief Financial Officer. On April 26, 1999 Mr.
Scotti resigned as Interim Chief Executive Officer and Interim President and
Roger A. Burlage was appointed Chairman and Chief Executive Officer, and shortly
thereafter Eric S. Mischel was appointed President and Chief Operating Officer.
On April 26, 1999, Mr. Hope resigned as Interim Financial Officer and Interim
Secretary. Shortly thereafter Ronald B. Cushey was appointed Executive Vice
President, Chief Financial Officer and Secretary.
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<PAGE> 11
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Results of Operations -- The Company is in the early stages of developing new
film products and formulating a corporate strategy regarding a range of business
opportunities under its new permanent management, the results of which will not
be realized until subsequent periods. The development of new revenue
opportunities in the filmed entertainment area requires significant lead time.
The number of projects expected to generate revenues in 1999 is therefore
limited and, accordingly, the Company expects 1999 operating results to be
adversely impacted.
Revenues -- Net filmed entertainment revenues were $0 and $20,000 in 1999 and
1998. The 1998 revenues consisted of foreign broadcast license revenues from the
Harvey Classic Film Library through the Company's prior foreign distributor,
whose distribution agreement expired in November 1997. There were no such
comparable revenues for 1999.
Net merchandising revenues were $364,000 and $400,000 in 1999 and 1998,
respectively, a decrease of $36,000. The revenues in 1999 and 1998 consist of
new licenses for the worldwide merchandising of the Harvey Classic Characters
and the licensing revenues from the Company's direct-to-video features entered
into by the Company's in-house licensing division. Although merchandising
licenses are generally granted for a period of one to three years, the majority
of the 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. The ongoing success
of the merchandising program depends, in part, upon the attractiveness and
future exploitation of the Harvey Classic Characters.
Net publishing revenues related to the Company's monthly magazine, approved for
publishing by the Board of Directors in July 1998 during interim management's
tenure, were $(3,000) for the current quarter. There were no comparable sales in
1998. The negative revenues were mainly due to subscription refunds as the
publication of the magazine has ceased resulting from new management's decision
to focus on the Company's core entertainment business operations. The July 1999
issue was the last issue published for distribution.
Cost of Sales -- Cost of sales related to filmed entertainment revenues were
$4,000 and $14,000 in 1999 and 1998, respectively. The cost of sales related to
filmed entertainment for 1999 and 1998 were low due to sparse activity in both
periods. Amortization of the film library was $0 and $4,000 in 1999 and 1998,
respectively. There was no amortization in the current quarter as there were no
revenues derived from the film library, which is amortized in accordance with
the individual film forecast method.
Merchandising cost of sales were $386,000 and $404,000 in 1999 and 1998,
respectively. The decrease in cost of sales is due to slightly lower
merchandising activity for the current quarter.
Publishing cost of sales were $171,000 in 1999.
Selling, General and Administrative Expenses -- Selling, general and
administrative expenses ("SG&A") were $1,245,000 and $1,636,000 for 1999 and
1998, respectively, a decrease of $391,000. The decrease in SG&A is primarily
due to lower costs incurred for consulting services in the current quarter.
Depreciation and Amortization -- Depreciation expense was $55,000 and $32,000 in
1999 and 1998. Amortization of trademarks and copyrights was $26,000 in 1999 and
$7,000 in 1998. Amortization of goodwill was $32,000 in both 1999 and 1998.
Other Income -- Other income was $381,000 and $72,000 in 1999 and 1998,
respectively. The increase in other income was due to higher investment income
from the sale of certain securities in the current quarter.
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<PAGE> 12
Income Taxes -- Income tax benefit was $0 and $797,000 in 1999 and 1998,
respectively. The income tax benefit for 1998 is due to the use of operating
losses generated in 1998 against the deferred income tax liabilities and prior
year operating income. A valuation allowance was established at the 1998 year
end to reduce deferred income tax assets to the amount expected to be realized.
At the end of the current quarter, an additional valuation allowance was
established to offset the benefit generated by current quarter's loss.
Realizable income tax benefits from the Company's cumulative tax losses have
been reported as an income tax receivable of $542,000 at the end of the current
quarter.
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues -- Net filmed entertainment revenues were $0 and $105,000 in 1999 and
1998, respectively. The 1998 revenues consisted of license fee revenues received
from Fox Kids' Network for the "Casper" animated episodes and from foreign
broadcast license revenues for the Harvey Classic Film Library, distributed
through the Company's prior foreign distributor through November 1997. There
were no such comparable revenues for 1999.
Net merchandising revenues were $794,000 and $1,175,000 in 1999 and 1998,
respectively, a decrease of $381,000. The revenues in 1999 and 1998 consist of
new licenses for the worldwide merchandising of the Harvey Classic Characters
and the licensing revenues from the Company's direct-to-video features entered
into by the Company's in-house licensing division. Although merchandising
licenses are generally granted for a period of one to three years, a substantial
portion of the 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. The
ongoing success of the merchandising program depends, in part, upon the
attractiveness and future marketability of the Harvey Classic Characters.
Net publishing revenues related to the Company's monthly magazine, approved for
publishing by the Board of Directors in July 1998 during interim management's
tenure, were $129,000 for 1999. There were no comparable sales in 1998. The
publication of the magazine has ceased, with the July 1999 issue being the last
issue published for distribution, as a result of new management's decision to
focus on the Company's core entertainment business operations.
Cost of Sales -- Cost of sales relating to filmed entertainment revenues were
$256,000 and $754,000 in 1999 and 1998, respectively. The decrease in costs of
sales is due to a decrease in filmed entertainment activity for the period.
Amortization of the film library was $250,000 and $519,000 in 1999 and 1998,
respectively. The amortization amount in 1999 reflects an additional estimated
loss related to "Baby Huey's Great Easter Adventure", the live-action,
direct-to-video produced in 1998, featuring the Company's classic character Baby
Huey, and released in March 1999. The amortization amount in the 1998 period
includes the write-off of $500,000 of previously capitalized product development
costs due to uncertainties concerning the recoverability of such costs based on
the Company's business plan contemplated in 1998. Additionally, 1998 cost of
sales included a $150,000 adjustment in the carrying value of certain video
inventory.
Merchandising cost of sales were $747,000 and $802,000 in 1999 and 1998,
respectively. The decrease in merchandising costs is due to a decrease in
merchandising activity for the period.
Publishing cost of sales were $381,000 in 1999.
Selling, General and Administrative Expenses -- Selling, general and
administrative expenses ("SG&A") were $3,286,000 and $4,290,000 for 1999 and
1998, respectively, a decrease of $1,004,000. The higher SG&A expenses in the
1998 period is primarily due to the effect of an approximate $500,000 provision
relating to doubtful accounts from previously recognized guarantees from agents
and licensees operating in the Pacific Rim
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<PAGE> 13
territories and a $450,000 provision relating to the Company's prior
participation interest in Universal Studio's Harvey-related merchandising
business.
Depreciation and Amortization -- Depreciation expense was $108,000 and $66,000
in 1999 and 1998, respectively. Amortization of trademarks, copyrights and other
was $53,000 in 1999 and $40,000 in 1998. Amortization of goodwill was $64,000 in
both 1999 and 1998.
Other Income -- Other income was $405,000 and $106,000 in 1999 and 1998,
respectively. The increase in other income was due to higher investment income
from the sale of certain securities in the current quarter.
Income Taxes -- Income tax benefit provision was $0 and $2,168,000 in 1999 and
1998, respectively. The income tax benefit for 1998 is due to the use of
operating losses generated in 1998 against the deferred income tax liabilities
and prior year operating income. A valuation allowance was established at the
1998 year end to reduce deferred income tax assets to the amount expected to be
realized. At the end of the current quarter, an additional valuation allowance
was established to offset the benefit generated by current quarter's losses.
Realizable income tax benefits from the Company's cumulative tax losses have
been reported as an income tax receivable of $542,000 at the end of the current
period.
Year 2000 -- The Company utilizes various computer software packages as tools in
running its operations. Management plans to implement any necessary vendor
upgrades and modifications to ensure continued functionality with respect to the
software problems associated with the year 2000. At present, management does not
expect that material incremental costs will be incurred, or significant Company
resources dedicated in 1999 to become year 2000 compliant.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $2,246,000 and $4,045,000 in 1999 and
1998, respectively. The reduction in cash used in operating activities was
primarily due to the reduction of deferred tax liability and accounts
receivable balances in 1998.
Net cash used in investing activities was $124,000 and $379,000 in 1999 and
1998, respectively. The decrease in cash used for investing activities was
primarily due to less investment by the Company in its trademarks, copyrights
and film library and purchase of less furniture and equipment in 1999.
Net cash provided by financing activities was $11,394,000 and $3,722,000 in the
second quarter periods in 1999 and 1998, respectively. The increase is due to
the cash proceeds from the 1999 Refinancing and the issuance of a subordinated
note payable as described below.
As a result of the 1999 Refinancing being oversubscribed, and the desire of the
Company to realize the potential benefits of additional capital, on June 30,
1999 the Company issued a subordinated note (the "Note") in the amount of
approximately $2.049 million. The Note bears interest at an annual rate of 7%,
payable quarterly on the last day of each March, June, September and December,
commencing on June 30, 1999. Subject to shareholder approval of certain
proposals at the Company's Annual Meeting of Shareholders' on August 17, 1999,
the Note will be converted into 20,488 shares of Series A Preferred Stock and
144,618 warrants to purchase Common Stock immediately after the Annual Meeting.
If the proposals are not approved, the repayment of the Note may be accelerated
and the Company may be required to repay all amounts due thereunder upon demand.
The Company is party to a $2.5 million revolving line of credit with City
National Bank ("Bank") to provide funds for operations. The facility originally
had a maturity date of March 31, 1999. On April 9, 1999, the bank extended the
maturity of the debt to April 30, 1999 and amended the covenants such that the
Company was in compliance at that date. Interest on advances made under the
facility accrues at 1% above the prime rate as reported by the
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<PAGE> 14
lender. The facility is secured by substantially all of the assets of the
Company. As of March 31, 1999, the Company had $1.75 million outstanding under
this line of credit and interest expense of $19,000 was paid during the first
quarter of 1999. On April 27, 1999 the entire outstanding balance of $2.013
million, inclusive of accrued interest through the date of payment, was paid off
with the funds the Company received in connection with the 1999 Refinancing. The
Company is currently in negotiations with the Bank to renew the credit facility
for an additional six month term. Although the Company has received a verbal
commitment from the Bank for the extension of the credit facility, the
completion of such an extension is not assured.
The 1999 Refinancing included the issuance of 2.4 million of Warrants to
purchase shares of the Company's Common Stock, 1.2 million of which were
Investor Warrants and 1.2 million of which were Management Warrants. Of the 1.2
million Investor Warrants granted, those granted to non-employees are fully
vested, non-forfeitable and are exercisable commencing six months from their
issuance date, at prices ranging from $9.00 to $12.00 per share of the Common
Stock. Management Warrants, and any Investor Warrants, granted to employees vest
and become exercisable according to schedules set forth in their respective
warrant agreements, and are exercisable at prices ranging from $9.00 to $12.00
per share of Common Stock. The Company accounts for stock issued to
non-employees in accordance with Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", and Emerging
Issues Task Force 96-18 ("EITF 96-18"). In accordance with SFAS 123 and EITF
96-18, the fair value of any Management Warrants granted in the future to
non-employees will be measured either at the date of grant or the end of the
reporting period, as appropriate. Based on the determination of the fair value
of the Company's Common Stock, the Company may incur substantial non-cash
charges to earnings in future reporting quarters.
On April 26, 1999, the Company consummated the transactions contemplated by the
Stock Purchase Agreement and received gross proceeds of approximately $17.7
million. In connection with such transactions, the Company incurred fees and
expenses of approximately $1.9 million. In addition, the Company received
additional capital of approximately $2 million from the issuance of the Note on
June 30, 1999. Management believes that the Company's current and anticipated
sources of working capital will provide adequate liquidity for the Company's
financial needs for at least the next twelve months. From time to time, the
Company considers acquisition and investment possibilities, including film
libraries and companies ancillary to the Company's business, subject to the
availability of financing as necessary. No assurance can be given that such
financing will be available or, if available, will be at costs comparable to
current financings or on terms acceptable to the Company.
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<PAGE> 15
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
Realty Trust Advisors, Inc. On December 31, 1997, Realty Trust
Advisors, Inc. ("RTA") filed suit against the Company in Los Angeles
Superior Court seeking damages arising out of the alleged failure of
the Company to pay certain commissions. On May 11, 1998, the Company
filed a demurrer and a motion to strike the fraud and punitive damage
portions of the first amended complaint, which were granted. In August
1998, RTA unsuccessfully sought relief from that order in the Court of
Appeal. On or about July 9, 1998, the Company filed an answer to the
first amended complaint and a cross-complaint against RTA and its
principal, Anne Keshen, for fraud and declaratory relief. RTA filed a
demurrer and a motion to strike the fraud and punitive damage portions
of the Company's cross-complaint, which were denied. RTA and Keshen
filed an answer in November 1998. RTA and Keshen moved for summary
adjudication on the Company's cross-complaint which was denied in
June, 1999. On July 1, 1999, the parties to the above actions entered
into a Settlement Agreement and Mutual General Release and executed a
dismissal with prejudice of the entire action. The Company's defense
and prosecution costs of this matter were covered in their entirety
by its insurer.
Item 2 -- Changes in Securities and Use of Proceeds
On April 26, 1999 the Company completed the 1999 Refinancing and
received a total gross consideration of approximately $17.7 million.
The Company received such consideration net of fees paid to Donaldson,
Lufkin & Jenrette Securities Corporation for rendering a fairness
opinion and providing advisory services in connection with the 1999
Refinancing. The Company also paid Prudential Securities Inc. fees of
approximately $450,000 for advisory services rendered. Michael R.
Burns, a Director of the Company, is a Managing Director of Prudential
Securities Inc. There were no underlying discounts or commissions paid
by the Company in connection with the sale of Series A Preferred
Stock. The Company completed the sale of Series A Preferred Stock in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Act"). The Company received
various representations and warranties from the investors including a
representation that the investors are "accredited investors" within
the meaning of Rule 501(a) under the Act.
Items 3 and 4 are omitted as not applicable.
Item 5 -- Other Information
None
Item 6 -- Exhibits and Reports an Form 8-K
<TABLE>
<S> <C> <C>
Item 6(a) -- Exhibit 10.61 Employment Agreement dated as of April 26, 1999 between the Company and Ronald B. Cushey
Exhibit 10.62 Employment Agreement dated as of April 26, 1999 between the Company and Eric S. Mischel
Exhibit 10.63 Note Payable Agreement dated as of June 30, 1999 between the Company and Paul Guez
</TABLE>
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<PAGE> 16
<TABLE>
<S> <C> <C>
Exhibit 10.64 Warrant Agreement dated as of June 30, 1999 between the Company and Paul Guez
Exhibit 10.65 Registration Rights Agreement dated as of June 30, 1999 by and between the Company and Paul Guez
Exhibit 27 Financial Data Schedule (Electronic Filing Only)
</TABLE>
Item 6(b) -- Reports on Form 8-K
Report filed on April 26, 1999 pursuant to Item 5 reporting the sale
of $17 million of newly-issued Series A Preferred Stock by the
Company.
Report filed on June 25, 1999 pursuant to Item 4 reporting a change in
the Company's certifying accountant.
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<PAGE> 17
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 SUBSIDIARIES
(Registrant)
August 16, 1999 /s/ Ronald B. Cushey
---------------------------------
Name: Ronald B. Cushey
Title: Executive Vice President
and Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.61
EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into as of this 26th day
of April, 1999, by and between THE HARVEY ENTERTAINMENT COMPANY, a California
corporation (the "Company"), and RONALD B. CUSHEY (the "Employee").
Whereas, Company desires to engage the services of Employee, whose
experience, knowledge and abilities are extremely valuable to Company, and
Employee desires to enter the employ of Company,
Now, therefore, Company and Employee agree as follows:
1. Position and Duties; Reporting.
(a) Company hereby employs Employee, and Employee hereby accepts
employment, as Executive Vice President, Chief Financial Officer, and
corporate Secretary of Company during the Term hereof as specified in
Paragraph 6 below, with powers and duties consistent with such
positions. Employee shall perform such additional, different and/or
incidental duties, and accept the election or appointment to such other
offices or positions, as designated by the Chairman and Chief Executive
Officer of Company. Employee shall perform such duties and
responsibilities incidental to his employment as may from time-to-time
be requested by Company, consistent with Employee's position, stature
and experience, and shall faithfully observe Company's policies and
procedures consistent with the provisions hereof. Employee shall render
his services at the Company's executive offices located in the Century
City area of Los Angeles or such other location(s) in the greater Los
Angeles area as may be designated by the Company, spending such time at
the Company's executive offices and traveling on the business of the
Company as the Company shall reasonably deem necessary. The provisions
of this Paragraph 1(a) shall be subject to the terms of Paragraph 6
hereof. Employee shall report to the Chairman/CEO of the Company.
(b) Employee shall devote his full working time to the promotion
of Company's business and welfare, and as such his services in the
entertainment industry shall be exclusive to Company hereunder during
the Term. Notwithstanding any contrary provisions hereof, Employee may
engage in other business activities with Company's prior
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<PAGE> 2
written consent provided the same shall not adversely affect the
performance of Employee's services hereunder and provided further,
during the Term hereunder, Employee shall not, directly or indirectly,
(i) engage in any business for his own account which is competitive with
the businesses of Company or Company's subsidiaries or affiliates
(collectively, "Competitive Business") so long as Company or the
Company's subsidiaries or affiliates (as the case may be) continue to
engage in such business; (ii) enter the employ of, or render any
services to, any person engaged in a Competitive Business; or (iii)
become interested in a Competitive Business in any capacity including,
without limitation, as an individual, partner, shareholder, officer,
director, principal, agent, trustee or consultant. In addition, during
the Term and the one-year period following termination of his employment
hereunder, Employee shall not, directly or indirectly (i) induce any
customer or supplier of Company or Company's subsidiaries or affiliates
to terminate its relationship with Company or Company's subsidiaries or
affiliates (as the case may be), or (ii) solicit or induce any of
Company's employees to terminate their employment with Company, or hire
or cause any of the then current employees of Company to be hired by any
other company (except companies controlled by Company). Notwithstanding
anything to the contrary, without the consent of the Company Employee
may acquire and/or retain, solely as an investment, and take customary
actions to maintain and preserve Employee's ownership of:
(i) securities of any corporation which are registered under
Sections 12(b) or 12(g) of the Securities Exchange Act of 1934,
as amended, and which are publicly traded, as long as Employee
is not part of any control group of such corporation; and
(ii) any securities of a partnership, trust, corporation or
other person, the ownership of income producing real estate or
other passive investments, so long as Employee remains a passive
investor in that entity and does not become part of any control
group thereof (except in a passive capacity) and so long as such
entity is not, directly or indirectly, in competition with the
Company or its subsidiaries or affiliates.
2
<PAGE> 3
2. Compensation.
(a) Annual Guaranteed Salary. During the term of his employment
hereunder, Company shall pay to Employee a salary, in equal installments
not less frequently than monthly, at the rate of $150,000 per year for
the first year of the Term, $165,000 per year for the second year of the
Term, and $180,000 per year for the third year of the Term provided,
however, that such salary shall be increased to a level equivalent to
$200,000 per year from and after the time that Company either (i)
achieves in any consecutive period of twelve (12) complete calendar
months, beginning at any time on or after the first day of Employee's
employment hereunder, annual gross revenues in excess of $20,000,000; or
(ii) closes an agreement with respect to that certain insurance backed
motion picture financing proposal currently referred to as "Heartland
Entertainment", and all parties thereto (including without limitation,
Chase Securities, the insurance companies involved, all necessary equity
investors, and a major (or acceptable mini-major such as New Line) U.S.
theatrical distributor have executed binding and effective agreements.
(b) Incentive Compensation. Employee shall be eligible for
consideration to receive an annual bonus based on Company's performance,
which bonus (if any) shall be determined by the Board of Directors in
its sole discretion; however, the bonus shall be no less than the bonus
to be paid to any other senior management executive of Company of
similar stature or position as Employee.
(c) Additional Bonus. Company shall pay Employee the sum of Ten
Thousand Dollars ($10,000) upon execution of this agreement in
consideration of Employee's services related to the recent infusion of
new capital into the Company in connection with which Employee made a
significant commitment of time and services.
3. Warrants and Stocks.
(a) Warrants to Purchase Common Stock. On the effective date
hereof, Employee shall be granted warrants ("Warrants") to purchase
eighty thousand (80,000) shares of common stock no par value per share
("Common Stock"), of Company pursuant to the terms of the Warrant
Agreement dated as of April 5, 1999, among the Company, Roger Burlage
and the other signatories thereto (the "Warrant Agreement"). The
Warrants granted to Employee shall consist equally of Series A Warrants,
Series B Warrants and Series C
3
<PAGE> 4
Warrants of Company. The Warrants shall vest as provided in Schedule I
attached hereto.
(b) Stock Options. Employee shall have the right to participate
in stock option plans available to any other senior executive employee
of Company of equal or lesser stature to Employee. With the exception of
the number of options, such participation shall be on terms no less
favorable than those provided to any other senior executive employee of
comparable or lesser level to Employee in Company. Any such stock
options granted hereunder shall vest if Employee is terminated other
than for Cause. The time Employee has to exercise his options after
termination shall be governed by the Company's stock option plan.
4. Expenses. Company will reimburse or pay Employee for all usual,
reasonable and necessary expenses paid or incurred by Employee in the
performance of his duties hereunder, consistent with Company's expense
reimbursement policies and subject to receipt by Company of appropriate
documentary proof of all expenditures for which reimbursement is sought.
5. Employee Benefits. Employee shall be entitled to participate to
the full extent of the participation by any other senior executive employee of
Company of comparable level or below to Employee in any profit-sharing, pension,
vacation, health insurance, life insurance and disability or other plans,
benefits or policies available to the senior executive employees of comparable
level or below to Employee established by Company (in its sole and absolute
discretion) from time to time and not duplicative of those provided herein.
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<PAGE> 5
6. Term.
(a) The period of Employee's employment by Company hereunder
(the "Term") shall commence on the effective date hereof and shall
terminate upon the first to occur of the following events: (i) three (3)
years from the effective date as set forth in Paragraph 17 herein, (ii)
the death of Employee, (iii) at the option of Company upon twenty (20)
days prior written notice to Employee, in the event of the inability of
Employee to perform his duties hereunder, whether by reason of injury,
illness (physical or mental) or otherwise, for a period of four (4)
consecutive months or six (6) months in the aggregate ("disability"), or
(iv) the discharge of Employee for Cause. Cause shall mean, and be
limited to, (x) acts of deliberate dishonesty constituting either the
commission of a felony or the misappropriation of substantial corporate
assets for personal benefit, (y) willful failure to observe or follow
reasonable and explicit instructions or directives of Company, or (z)
willful malfeasance or willful failure to act involving material
nonfeasance, if in either case such malfeasance or nonfeasance would
have a material adverse effect on Company.
Company agrees to give written notice to Employee specifying the claimed
Cause and, provided such Cause is curable, to permit Employee to correct
the claimed Cause as soon as practical thereafter but no later than
seven (7) business days after receipt of the applicable notice. However,
in no event shall the occurrence of Cause within clause (x) of this
Paragraph 6(a) be subject to cure. Upon the termination of Employee's
employment pursuant to this Paragraph 6(a), Company shall have no
further liability or obligation of any kind or nature whatsoever to
Employee under this Agreement, except that any salary or other benefits
accrued or earned by Employee to the date of termination but not paid
shall be paid by Company to Employee or his estate, and Employee shall
be entitled to such benefits, if any, under Sections 4 and 5 hereof to
which he has become entitled prior to the date of his termination of
employment.
Notwithstanding the foregoing, by a date not earlier than seven (7)
months nor later than six (6) months prior to the expiration of the
Term, Employee will give Company written notice that the Term of his
Agreement will expire on a specified date in such notice. If the
Employee desires to discuss with Company an extension of this Agreement
or a new agreement in substitution for this Agreement, Employee shall so
advise Company, and thereafter Company shall have thirty (30) days to
respond thereto; if Company elects to do so, Company and Employee will
thereafter negotiate in good faith with respect thereto.
5
<PAGE> 6
Nothing herein contained shall be deemed to obligate Employee or Company
to enter into any extension or new agreement.
(b) If, without Cause, Company without Employee's consent
determines to remove Employee from the office of the Executive Vice
President and Chief Financial Officer of Company, Employee shall have
the right to elect to treat such event as a termination of his
employment by Company without Cause with the consequences provided in
this Paragraph 6(b). If Employee's employment is terminated by Company
without Cause, Employee shall be entitled to receive from Company until
the ending date of the period of employment hereunder (determined as
provided in Paragraph 6(a) hereof) the salary, benefits and emoluments
in effect at the date of such termination, including without limitation,
the immediate vesting of any unvested stock options and/or Warrants
theretofore granted. Upon the payment of the amounts provided in this
Paragraph 6(b), Company shall have no further liability or obligation of
any kind or nature whatsoever to Employee under this Agreement. If
Company shall be merged, consolidated with another corporation, and/or
reorganized, and if as a result of such merger, consolidation or
reorganization Employee is not the Executive Vice President and Chief
Financial Officer of a unit of the surviving or resulting corporation
which encompasses most of the business and operations previously within
the jurisdiction of Employee's activities, Employee shall be entitled to
terminate his employment upon written notice given to Company by
Employee within three (3) months of such merger, consolidation or
reorganization, and such termination shall be deemed to be a termination
by Company without Cause hereunder. No such termination by Employee
shall be effective before forty-five (45) days after the giving of such
notice by Employee unless otherwise agreed by Company.
(c) Key Man Clause. Employee may terminate this Agreement at any
time during the first two years of the Term hereunder upon ninety (90)
days written notice if Roger Burlage ceases to occupy and discharge both
of the offices of Chairman of the Board and Chief Executive Officer of
Company, which notice by Employee may be given no later than ninety (90)
days after such departure of Roger Burlage. Upon the effective date of
such termination by Employee, Company shall be relieved of the
obligation to pay or provide salary or other compensation and/or
benefits to Employee for any period subsequent to such termination date,
but upon such termination Company (i) shall pay to Employee a lump sum
payment in an amount equal to nine (9) months salary; (ii) provide
Employee any Warrants and/or stock options vested at that time; and
(iii) shall pay up to but not in excess
6
<PAGE> 7
of the first nine (9) months of so-called COBRA health benefits payments
incurred by Employee in continuing his health benefits insurance.
7. Mitigation. Employee shall have no obligation to seek employment
if Employee's employment hereunder is terminated without Cause; provided,
however, that Employee agrees that if Employee furnishes his services for other
engagements or employment after such termination hereunder, the total
compensation actually earned by Employee together with any welfare or other
benefits earned by Employee shall reduce any amounts and benefits which Company
would otherwise be required to pay or provide to Employee. Employee agrees that
he shall give written notice to Company (promptly after accepting employment or
furnishing his services after such termination of his employment with Company)
of any amounts earned (or to be earned) by Employee and any benefits provided
(or to be provided) to Employee pursuant to his new employment agreement.
8. Nondisclosure of Confidential Information.
(a) "Confidential Information" shall include, but not be limited
to, all of Company's and its subsidiaries' and affiliates' performance,
sales, financial, pricing, cost, manufacturing, contractual and
marketing information, ideas, knowledge and data, and all processes,
products, formulae, designs, practices, techniques, trade secrets,
research, know-how, merchandising agreements, licensing agreements,
distribution agreements, customer lists, technical requirements of
customers and identity and purchasing terms of suppliers.
(b) Employee acknowledges that Company, and its subsidiaries and
affiliates, have exclusive rights to all of their respective
Confidential Information and agrees to assign all rights he might
otherwise possess in any Confidential Information to the Company. Except
as required in the performance of his duties hereunder, Employee shall
not at any time during or after the term of his employment, directly or
indirectly use, communicate, disclose or disseminate, lecture
upon/publish articles or otherwise put in the public domain, any
Confidential Information or any other information of a secret,
proprietary, confidential or generally undisclosed nature relating to
Company, or its subsidiaries or affiliates, or their products,
operations and activities until such Confidential Information is
disclosed by law or legal process or becomes generally available to the
public by independent discovery, development or publication or generally
known within the industry other than as a result of
7
<PAGE> 8
Employee's breach hereof.
(c) All documents, records, notebooks, notes, memoranda,
computer records and other repositories of or containing Confidential
Information or any other information of a secret, proprietary,
confidential or generally undisclosed nature relating to Company, or its
subsidiaries or affiliates, or to its products, operations and
activities made or compiled by Employee at any time or made available to
Employee prior to or during the term of his employment by Company,
including any and all copies thereof shall be the property of Company,
shall be held by Employee in trust solely for the benefit of the
Company, and shall be delivered to Company by Employee on the
termination of Employee's employment or at any other time on the request
of Company.
9. Warranties/Indemnities. Employee hereby represents and warrants
that he: (i) is free to enter into this Agreement and to furnish Company all of
the services and grant all of the rights herein set forth; (ii) is in good
health and free from any disability or other condition which will or could
interfere with the full performance of his obligations hereunder; and (iii) has
not made nor will make any commitments or do any acts in conflict with this
Agreement or in derogation of Company's rights hereunder. Employee shall defend,
indemnify and hold harmless Company and all those claiming under Company from
and against any claims, damages, liabilities, costs and expenses (including
reasonable attorney's fees and costs, whether or not in connection with
litigation) arising out of any breach or default by Employee hereunder. Employee
agrees that Company shall have the sole right to control the legal defense
against any such claims, demands or litigation, including the right to select
counsel of its choice and to compromise or settle any such claims, demands or
litigation.
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<PAGE> 9
10. Ownership of Properties. Company, as employer, shall own, and
Employee hereby transfers and assigns to Company, all rights in and to any
material and/or ideas written, suggested or submitted by Employee during the
Term and all other results and proceeds of his services for Company
("Properties"). Company and its licensees and assigns shall have the right to
adapt, change, revise, delete from, add to and/or rearrange the Properties or
any part thereof written or submitted by Employee and to combine the same with
other works to any extent, and to change or substitute the title thereof, and in
this connection Employee hereby waives any so-called "moral rights" of authors.
Employee agrees to execute and deliver to Company such assignments or other
instruments as Company may require from time to time to evidence its ownership
of the results and proceeds of Employee's services, failing which Company shall
have the irrevocable right to do so as Employee's attorney-in-fact; provided,
however, that nothing in this Paragraph 10 shall be deemed in any manner to
restrict or qualify Employee's ownership or right to exploit Employee's personal
memoirs.
11. Right to Injunction/Remedies. Employee acknowledges that
Company's remedies at law for a breach by him of the provisions of Paragraphs 1,
8 and 10 hereof will be inadequate. Accordingly, in the event of the breach or
threatened breach by Employee of any such provisions, Company shall be entitled
to seek injunctive relief in addition to any other remedy it may have. In the
event of any breach by Company of this Agreement, Employee shall be limited to
his remedy at law for damages, if any, and shall not have the right to terminate
or rescind this Agreement or in any way to enjoin or restrain the production,
distribution, advertising or other exploitation of any motion pictures or other
productions, it being specifically agreed that all rights granted and agreed to
be granted to Company under this Agreement shall be irrevocably vested in
Company and shall not be subject to rescission for any cause.
12. Assignment. Employee may not assign, transfer or convey this
Agreement or any interest therein. This Agreement and all of Company's rights
and obligations hereunder may be assigned or transferred by it, in whole but not
in part, to and shall be binding upon and inure to the benefit of any successor
of Company, but any such assignment shall not relieve Company of any of its
obligations. The term successors shall mean only any corporation or other
business entity which by merger, consolidation, purchase of assets or otherwise
succeeds to or otherwise acquires all or substantially all of the assets of
Company; provided that nothing herein shall limit the provisions Paragraph 6(b)
hereof.
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13. Arbitration.
(a) Without limiting Company's right to seek injunctive relief
as described in Paragraph 11, in the event of a disagreement or dispute
between Company and Employee related to this Agreement, the matter will
be finally settled in Los Angeles, California by arbitration by a single
arbitrator (unless the parties cannot agree on such arbitrator in which
case each party will select an arbitrator and the two arbitrators so
selected shall select the third arbitrator) in a proceeding conducted
under the rules of the American Arbitration Association or any similar
successor body, the arbitrator also apportioning the costs of the
arbitration. The decision of the arbitrator(s) in writing shall be final
and binding upon the parties and will not be subject to appeal. If
either party fails to abide by such decision, the other party may seek
the order of any federal or state court having jurisdiction thereof
which shall enter judgment on the decision of the arbitrator(s), and the
party so failing to abide shall be responsible for the payment of the
expenses of the court proceeding and all resulting enforcement expenses,
including actual attorneys' fees. The parties agree to use their best
efforts to complete any arbitration hereunder expeditiously.
(b) The prevailing party in any arbitration shall be entitled to
be reimbursed for attorneys fees and costs in connection with the
pursuit of such arbitration, subject to the following limitation: such
reimbursement shall not exceed the total attorneys fees and costs
incurred by whichever of the two parties to such arbitration has the
lesser aggregate attorneys fees and costs. By way of example, if
Employee brings an arbitration against Company and Company prevails in
such arbitration, (thus entitling Company to reimbursement of attorneys
fees and costs), and if Employee's legal fees and costs amount to
$50,000 and Company's legal fees and costs amount to $85,000, Company's
recovery of legal fees and costs against Employee in such instance shall
be limited to $50,000.
14. Indemnification. Employee shall be entitled to the benefit of
indemnification to the fullest extent permitted by applicable law at the time of
assertion of any liability against Employee, and, in any event, to the most
favorable indemnification provisions or agreements available to any other senior
executive of Company. Company represents that it currently has and shall
maintain directors' and officers' liability insurance with coverage of at least
$5,000,000 and Employee will be covered thereunder.
15. Notices. All notices hereunder shall be in writing and shall be
given either by personal delivery, telegram or telecopy (toll prepaid) or by
registered or certified mail (postage
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prepaid) to the appropriate party at the address listed below, and the date of
such personal delivery, mailing, telegraphing or telecopying shall be the date
of the giving of such notice.
If to Company: The Harvey Entertainment Company
1999 Avenue of the Stars
Suite 2050
Los Angeles, California 90067
Attention: Chairman of the Board
with a copy to: The Harvey Entertainment Company
1999 Avenue of the Stars
Suite 2050
Los Angeles, California 90067
Attention: Legal Department
If to Employee: Ronald B. Cushey
7520 W. 82nd Street
Playa del Rey, California 90293
with a copy to: Joseph P. Bartlett, Esq.
Kinsella, Boesch, Fujikawa & Towle, LLP
1901 Avenue of the Stars, 7th Floor
Los Angeles, California 90067
16. Miscellaneous.
(a) In the event there is any conflict between the provisions of
this Agreement and any statute, law or regulation, the latter shall
prevail; provided, however, that in such event the provision(s) of this
Agreement so affected shall be curtailed and limited only to the minimum
extent necessary to permit compliance with the minimum mandatory
requirement(s) thereof, and no other provision(s) of this Agreement
shall be affected thereby, and all such other provisions will continue
in full force and effect.
(b) This Agreement shall be governed by the laws of the State of
California applicable to agreements executed and to be wholly performed
therein and shall not be modified except by a written document executed
by the parties hereto.
(c) This Agreement expresses the entire understanding of the
parties hereto and replaces any and all former agreements, negotiations
or understandings, written or oral, relating to the subject matter
hereof.
(d) The remedies herein provided are cumulative and the exercise
of one shall not preclude the exercise of any other.
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(e) No waiver by either party hereto of any failure by the other
party to keep or perform any covenant or condition of this Agreement
shall be deemed a waiver of any preceding, succeeding or continuing
breach of the same, or any other covenant or condition.
(f) Paragraph headings are for the convenience of the parties
only and shall not be used in construing meaning.
(g) This Agreement shall not be construed to create a joint
venture or partnership between the parties, and shall not be interpreted
in favor of or against either party on grounds that said party drafted
this Agreement.
(h) This Agreement shall be executed in a number of identical
counterparts, each of which shall be construed as an original for all
purposes, but all of which taken together shall constitute one and the
same Agreement.
17. This Employment Agreement shall become effective (the "Effective
Date") as of April 26, 1999.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
EMPLOYEE THE HARVEY ENTERTAINMENT COMPANY
___________________________________ By: ___________________________________
RONALD B. CUSHEY
Title:_______________________________
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SCHEDULE I (RON CUSHEY)
Employee's right to exercise the Warrants granted pursuant to Paragraph
3 of the Agreement to which this Schedule I is attached shall vest in accordance
with the following schedule:
<TABLE>
<CAPTION>
Length of Employment Employee's Warrants that Vest
-------------------- -----------------------------
<S> <C>
On signing this Agreement 40,000
One year after the Effective Date
described in Paragraph 17 20,000
End of the second year of the Term 10,000
End of the year of the Term 10,000
</TABLE>
Notwithstanding anything to the contrary herein or in the Warrant
Agreement, in the event of the termination of Employee's employment by Company
without Cause or as a result of Employee's death or disability during the term
of and pursuant to the attached Employment Agreement, all unvested Warrants held
individually by Employee shall immediately vest and shall remain exercisable for
a period equal to the then balance of the term of the Warrants (i.e., the
balance of the six year, seven year or eight year term depending on the relevant
Warrants).
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<PAGE> 1
EXHIBIT 10.62
EMPLOYMENT AGREEMENT
This Employment Agreement is made and entered into as of this 26th day
of April, 1999, by and between THE HARVEY ENTERTAINMENT COMPANY, a California
corporation (the "Company"), and RICK MISCHEL (the "Employee").
Whereas, Company desires to engage the services of Employee, whose
experience, knowledge and abilities are extremely valuable to Company, and
Employee desires to enter the employ of Company,
Now, therefore, Company and Employee agree as follows:
1. Position and Duties; Reporting.
(a) Company hereby employs Employee, and Employee hereby accepts
employment, as President and Chief Operating Officer of Company during
the Term hereof as defined in Paragraph 6 below, with powers and duties
consistent with such position. Employee shall perform such additional,
different and/or incidental duties, and accept the election or
appointment to such other offices or positions, as designated by the
Chairman and Chief Executive Officer of Company and shall faithfully
observe Company's policies and procedures consistent with the provisions
hereof. Employee shall report directly to the Chairman and Chief
Executive Officer of the Company. All entertainment industry divisions
and their employees of the Company shall report to Employee, excepting
only finance/CFO, business affairs and legal. Notwithstanding the
foregoing, no one except the Chairman or Chief Executive Officer of
Company shall occupy a position at or above the level of Employee with
respect to the entertainment business operations of the Company as
currently configured.
Notwithstanding any contrary provision of this Agreement, if
Company shall be merged, consolidated with another corporation,
reorganized or restructured, or if as a result of one or more
acquisitions or otherwise, a holding company shall be established, and
if as a result of such merger, consolidation, reorganization,
restructuring or the establishment of such holding company, Employee is
not the President and Chief Operating Officer of a unit which
encompasses most of the business and operations theretofore under
Employee's
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purview,Employee shall be entitled to terminate his employment upon
written notice given to Company by Employee within three (3) months of
such change, and such termination shall be deemed to be a termination by
Company without Cause hereunder with the results and consequences
specified in Paragraph 6(b) below. No such termination shall be
effective before ninety (90) days after the giving of such notice by
Employee unless otherwise agreed by Company.
(b) Employee shall devote his full working time to the promotion
of Company's business and welfare, and as such his services in the
entertainment industry shall be exclusive to Company hereunder during
the Term, subject only to the provisions of Paragraph 10 below.
Notwithstanding any contrary provisions hereof, Employee may engage in
other business activities with Company's prior written consent provided
the same shall not adversely affect the performance of Employee's
services hereunder and provided further, during the Term hereunder,
Employee shall not, directly or indirectly, (i) engage in any business
for his own account which is competitive with the businesses of Company
or Company's subsidiaries or affiliates (collectively, "Competitive
Business") so long as Company or the Company's subsidiaries or
affiliates (as the case may be) continue to engage in such business;
(ii) enter the employ of, or render any services to, any person engaged
in a Competitive Business; or (iii) become interested in a Competitive
Business in any capacity including, without limitation, as an
individual, partner, shareholder, officer, director, principal, agent,
trustee or consultant. In addition, during the Term and the one-year
period following termination of his employment hereunder, Employee shall
not, directly or indirectly (i) induce any customer or supplier of
Company or Company's subsidiaries or affiliates to terminate its
relationship with Company or Company's subsidiaries or affiliates (as
the case may be), or (ii) solicit or induce any of Company's employees
to terminate their employment with Company, or hire or cause any of the
then current employees of Company to be hired by any other company
(except companies controlled by Company). Notwithstanding anything to
the contrary, Employee may acquire and/or retain, solely as an
investment, and take customary actions to maintain and preserve
Employee's ownership of:
(i) securities of any corporation which are registered under
Sections 12(b) or 12(g) of the Securities Exchange Act of 1934,
as amended, and which are publicly traded, as long as Employee
is not part of any control group of such corporation; and
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<PAGE> 3
(ii) any securities of a partnership, trust, corporation or
other person so long as Employee remains a passive investor in
that entity and does not become part of any control group
thereof (except in a passive capacity) and so long as such
entity is not, directly or indirectly, in competition with the
Company or its subsidiaries or affiliates.
2. Compensation.
(a) Annual Guaranteed Salary. During the term of his employment
hereunder, the Company shall pay to Employee a salary, in equal
installments not less frequently than monthly, at the rate of $250,000
per year subject to review annually by the Board of Directors for
increase in the Board's discretion (however, the annual increase shall
be no less than 7-1/2% per year on a cumulative basis).
(b) Incentive Compensation. Employee shall be eligible for
consideration to receive an annual bonus based on Company's performance,
which bonus (if any) shall be determined by the Board of Directors in
its sole discretion; however, the bonus shall be no less than the bonus
to be paid to any other senior management executive of Company of
similar stature or position as Employee. Notwithstanding the foregoing,
Employee's bonus for the first year of the Term shall be no less than
fifty percent (50%) of the bonus received by Roger Burlage for the same
bonus period.
3. Warrants and Stocks.
(a) Warrants to Purchase Common Stock. On the effective date
hereof, Employee shall be granted warrants ("Warrants") to purchase two
hundred ten thousand (210,000) shares of common stock no par value per
share ("Common Stock"), of Company pursuant to the terms of the Warrant
Agreement dated as of April 5, 1999, among the Company, Roger Burlage
and the other signatories thereto (the "Warrant Agreement"). The
Warrants granted to Employee shall consist equally of Series A Warrants,
Series B Warrants and Series C Warrants of Company. The Warrants shall
vest as provided in Schedule I attached hereto.
(b) Stock Options. Employee shall have the right to participate
in stock option
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<PAGE> 4
plans available to any other senior executive employee of Company of
equal or lesser stature to Employee. With the exception of the number of
options, such participation shall be on terms no less favorable than
those provided for any other senior executive employee of comparable or
lesser level to Employee in Company. Notwithstanding the foregoing,
Employee shall be entitled to not less than fifty percent (50%) of the
total stock options to which Roger Burlage is entitled for the first
year of the Term, or if no stock options are awarded to Roger Burlage
during the first year of the Term, then Employee shall be entitled to
not less than fifty percent (50%) of the total stock options initially
awarded to Roger Burlage.
4. Expenses. Company will reimburse or pay Employee for all usual,
reasonable and necessary expenses paid or incurred by Employee in the
performance of his duties hereunder, consistent with Company's expense
reimbursement policies and subject to receipt by Company of appropriate
documentary proof of all expenditures for which reimbursement is sought, and in
any case, on a basis no less favorable than applicable to any Company executive
at or below Employee's level.
5. Employee Benefits. Employee shall be entitled to participate to
the full extent of the participation by any other senior executive employee of
Company of comparable level or below to Employee in any profit-sharing, pension,
vacation, health insurance, life insurance and disability or other plans,
benefits or policies available to the senior executive employees of comparable
level or below to Employee established by Company (in its sole and absolute
discretion) from time to time and not duplicative of those provided herein.
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<PAGE> 5
6. Term.
(a) The period of Employee's employment by Company hereunder
(the "Term") shall commence on the effective date hereof and shall
terminate upon the first to occur of the following events: (i) four (4)
years from the effective date as set forth in Paragraph 17 herein, (ii)
the death of Employee, (iii) at the option of Company upon twenty (20)
days prior written notice to Employee, in the event of the inability of
Employee to perform his duties hereunder, whether by reason of injury,
illness (physical or mental) or otherwise, for a period of four (4)
consecutive months or six (6) months in the aggregate ("disability"), or
(iv) the discharge of Employee for Cause. Cause shall mean, and be
limited to, (x) acts of deliberate dishonesty constituting either the
commission of a felony or the misappropriation of substantial corporate
assets for personal benefit, (y) willful failure to observe or follow
reasonable and explicit instructions or directives of Company, or (z)
willful malfeasance or willful failure to act involving material
nonfeasance, if in either case such malfeasance or nonfeasance would
have a material adverse effect on Company.
Company agrees to give written notice to Employee specifying the claimed
Cause and, provided such Cause is curable, to permit Employee to correct
the claimed Cause as soon as practical thereafter but no later than
seven (7) business days after receipt of the applicable notice. However,
in no event shall the occurrence of Cause within clause (x) of this
Paragraph 6(a) be subject to cure. Upon the termination of Employee's
employment pursuant to this Paragraph 6(a), Company shall have no
further liability or obligation of any kind or nature whatsoever to
Employee under this Agreement, except that any salary or other benefits
accrued or earned by Employee to the date of termination but not paid
shall be paid by Company to Employee or his estate, and Employee shall
be entitled to such benefits, if any, under Sections 4 and 5 hereof to
which he has become entitled prior to the date of his termination of
employment.
(b) If, without Cause, Company without Employee's consent
determines to remove Employee from the office of the President and Chief
Operating Officer of Company, Employee shall have the right to elect to
treat such event as a termination of his employment by Company without
Cause with the consequences provided in this Paragraph 6(b). If
Employee's employment is terminated by Company without Cause, Employee
shall be entitled to receive from Company until what would otherwise
have been the ending date of the period of employment hereunder
(determined as provided in Paragraph 6(a) hereof)
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<PAGE> 6
the salary, benefits and emoluments in effect at the date of such
termination, including without limitation, any stock options and/or
Warrants heretofore granted which would have vested during the Term.
Upon the payment of the amounts provided in this Paragraph 6(b), Company
shall have no further liability or obligation of any kind or nature
whatsoever to Employee under this Agreement.
(c) Key Man Clause. Employee may terminate this Agreement at any
time during the first two years of the Term hereunder upon ninety (90)
days written notice if Roger Burlage ceases to occupy and discharge both
of the offices of Chairman of the Board and Chief Executive Officer of
Company, which notice by Employee may occur no later than ninety (90)
days after such departure of Roger Burlage. Upon the effective date of
such termination by Employee, Company shall be relieved of the
obligation to pay or provide salary or other compensation and/or
benefits to Employee for any period subsequent to such termination date,
excepting only the obligation to pay to Employee a lump sum amount equal
to nine (9) months salary and provide Employee any Warrants and/or stock
options vested at that time.
7. Mitigation: Employee shall have no obligation to seek employment
if Employee's employment hereunder is terminated without Cause; provided,
however, that Employee agrees that if Employee furnishes his services for other
engagements or employment after such termination hereunder, the total
compensation actually earned by Employee together with any welfare or other
benefits earned by Employee shall reduce any amounts and benefits which Company
would otherwise be required to pay or provide to Employee. Employee agrees that
he shall give written notice to Company (promptly after accepting employment or
furnishing his services after such termination of his employment with Company)
of any amounts earned (or to be earned) by Employee and any benefits provided
(or to be provided) to Employee pursuant to his new employment agreement.
8. Nondisclosure of Confidential Information.
(a) "Confidential Information" shall include, but not be limited
to, all of Company's and its subsidiaries' and affiliates' performance,
sales, financial, pricing, cost, manufacturing, contractual and
marketing information, ideas, knowledge and data, and all processes,
products, formulae, designs, practices, techniques, trade secrets,
research, know-how, merchandising agreements, licensing agreements,
distribution agreements,
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<PAGE> 7
customer lists, technical requirements of customers and identity and
purchasing terms of suppliers.
(b) Employee acknowledges that Company, and its subsidiaries and
affiliates, have exclusive rights to all of their respective
Confidential Information and agrees to assign all rights he might
otherwise possess in any Confidential Information to the Company. Except
as required in the performance of his duties hereunder, Employee shall
not at any time during or after the term of his employment, directly or
indirectly use, communicate, disclose or disseminate, lecture
upon/publish articles or otherwise put in the public domain, any
Confidential Information or any other information of a secret,
proprietary, confidential or generally undisclosed nature relating to
Company, or its subsidiaries or affiliates, or their products,
operations and activities until such Confidential Information is
disclosed by law or legal process or becomes generally available to the
public by independent discovery, development or publication or generally
known within the industry other than as a result of Employee's breach
hereof.
(c) All documents, records, notebooks, notes, memoranda,
correspondence, computer records and other repositories of or containing
Confidential Information or any other information of a secret,
proprietary, confidential or generally undisclosed nature relating to
Company, or its subsidiaries or affiliates, or to its products,
operations and activities made or compiled by Employee at any time or
made available to Employee prior to or during the term of his employment
by Company, including any and all copies thereof shall be the property
of Company, shall be held by Employee in trust solely for the benefit of
the Company, and shall be delivered to Company by Employee on the
termination of Employee's employment or at any other time on the request
of Company. Employee may retain a copy of his personal rolodex subject
to the Company's right to cause to be deleted therefrom any Confidential
Information or other information of a proprietary nature to Company.
9. Warranties/Indemnities. Employee hereby represents and warrants
that he: (i) is free to enter into this Agreement and to furnish Company all of
the services and grant all of the rights herein set forth; (ii) is in good
health and free from any disability or other condition which will or could
interfere with the full performance of his obligations hereunder; and (iii) has
not made nor will make any commitments or do any acts in conflict with this
Agreement or in derogation of Company's rights hereunder. Employee shall defend,
indemnify and hold harmless Company and
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<PAGE> 8
all those claiming under Company from and against any claims, damages,
liabilities, costs and expenses (including reasonable outside attorney's fees
and costs, whether or not in connection with litigation) arising out of any
breach or default by Employee hereunder. Employee agrees that Company shall have
the sole right to control the legal defense against any such claims, demands or
litigation, including the right to select counsel of its choice and to
compromise or settle any such claims, demands or litigation.
10. Ownership of Properties.
(a) Materials Created Prior to the Term: Heretofore Employee has
created or acquired interests in various potential motion picture,
television or other entertainment projects (either directly or through
an entity known as The Mischel Company). A list of all such properties
is attached hereto as Schedule II (including sections II-A and II-B
thereof). All such projects and properties may be hereinafter referred
to as "Pre-existing Projects".
Employee hereby assigns to the Company all of his right, title
and interest in and to the Pre-existing Projects and shall retain no
interest whatsoever thereto except as hereinafter specified in this
Paragraph 10(a). Of the projects listed in Schedule II, eight (8)
projects, hereinafter referred to as "Schedule II-A Projects", are
generally acknowledged by the parties to be those which have the
greatest potential of future viability. The remaining projects shall be
referred to as "Schedule II-B Projects". In consideration for assigning
to the Company all of his (or The Mischel Company's) right, title and
interest in and to the Pre-existing Projects, Company agrees to pay to
Employee and Employee agrees to accept concurrently with the execution
of all necessary documentation (satisfactory to counsel for the Company)
to effect the transfer of all of Employee's (or The Mischel Company's)
interest with respect thereto and to secure a proper chain of title
thereto, the sum of Sixty-Five Thousand Dollars ($65,000), of which sum
Employer acknowledges Thirty-Five Thousand Dollars ($35,000) heretofore
was paid by Company and received by Employee.
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<PAGE> 9
If and to the extent any of the Schedule II-A or II-B Projects
is produced at any time, and including the first and any subsequent
versions, remakes, sequels, television or other adaptations, or the
like, all results and proceeds thereof shall be the sole property of the
Company provided that the Company shall pay or cause to be paid to
Employee (or to The Mischel Company) the following: With respect to any
Schedule II-A Property which is produced, an amount equal to sixty
percent (60%) of the Company's net proceeds derived from such Project
(such net proceeds being the remainder, if any, of the Company's gross
proceeds from such Project after payment of all amounts, if any,
required to be paid by Company as successor-in-interest to Employee, in
connection therewith to third parties and recoupment of all of the
Company's direct out-of-pocket expenses, if any, incurred in connection
with such Project, but excluding any overhead charges unless the Company
is involved in the financing of the Project, in which case the Company
shall be entitled to recover its investment in such production plus
interest at the rate normally charged and recouped by the Company on its
own projects, and also including the Company's then standard overhead
charges). Furthermore, if and to the extent that Employee (or The
Mischel Company) has any unrecouped costs associated with such Schedule
II-A Project, then Employee and all others involved in financing such
project shall recoup their respective then unrecouped contributions
proportionately out of such net proceeds of Company from such Project
prior to the division and distribution of such net proceeds.
With respect to Schedule II-B Projects which are produced, all
proceeds derived therefrom by the Company shall be the sole property of
the Company without any obligation to pay any portion thereof to
Employee (or The Mischel Company); provided however that if Employee (or
The Mischel Company) is unrecouped on account of any expenses incurred
by it in conjunction with such Schedule II-B Project (after taking into
account the $65,000 payment paid by the Company pursuant to this
Paragraph 10(a), then Employee (or The Mischel Company) shall have the
right to recoup the same proportionately with other financiers.
Employee shall be entitled to receive any credits to which he
was contractually entitled prior to the date hereof with respect to any
Schedule II-A Projects which are produced, subject to the provision for
a presentation credit for Company if contractually permitted and on a
reasonable efforts basis, should it elect to receive same, or in such
other capacity as Company may designate. Employee agrees that in no
event will his services related to any projects referred to in this
Paragraph 10(a) interfere with or hinder in any way
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<PAGE> 10
the services provided to be rendered to Company hereunder.
Notwithstanding to any contrary provision of this Paragraph 10
(a), if Employee is no longer employed by the Company at such time as
the Company elects to abandon further development or production of any
Schedule II-A Project, Company agrees to offer such project in
turnaround to Employee (or to the Mischel Company) subject to the
rights, if any, of any other producer attached or assigned to such
Schedule II-A Project by Company, but provided further that Company
agrees that the attachment of a producer other than Employee may not be
on such terms and conditions as to fully divest Employee of his interest
therein. In all other respects, such turnaround rights in favor of
Employee to such Schedule II-A Project shall be negotiated in good faith
based upon customary practices in the entertainment industry in Los
Angeles involving projects and producers of comparable stature.
(b) Script Previously Co-Written by Employee: Heretofore
Employee co-wrote with Alda Tern the original screenplay entitled "Boy
Meets Girl" (hereinafter called the "Previous Script"). A copy of the
Previous Script will be delivered to the Company under cover of a letter
dated June 15, 1999, identifying it as such. Company agrees that
Employee may dispose of his interest in the Previous Script through an
authorized and recognized agent to be identified and appointed in the
near future, provided Employee does not render any further services
concerning the Previous Script (either writing, producing or otherwise)
and his activities are simply to consult with his co-writer and the
aforesaid agent regarding disposition of Employee's interest in such
script. Provided Employee complies with his obligations hereunder,
Company shall have no claim to any portion of the results and proceeds
of disposition of the Previous Script.
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(c) Materials Created During the Term: Company, as employer,
shall own, and Employee hereby transfers and assigns to Company, all
rights in and to any material and/or ideas written, suggested or
submitted by Employee during the Term and all other results and proceeds
of his services for Company ("Properties"). Company and its licensees
and assigns shall have the right to adapt, change, revise, delete from,
add to and/or rearrange the Properties or any part thereof written or
submitted by Employee and to combine the same with other works to any
extent, and to change or substitute the title thereof, and, further, to
grant such credits in connection therewith as Company, in its sole
discretion, shall determine, and in this connection Employee hereby
waives any so-called "moral rights" of authors. Employee agrees to
execute and deliver to Company such assignments or other instruments as
Company may require from time to time to evidence its ownership of the
results and proceeds of Employee's services, failing which (after notice
opportunity to sign himself) Company shall have the irrevocable right to
do so as Employee's attorney-in-fact; provided, however, that nothing in
this Paragraph 10 shall be deemed in any manner to restrict or qualify
Employee's ownership or right to exploit Employee's personal memoirs.
11. Right to Injunction/Remedies. Employee acknowledges that
Company's remedies at law for a breach by him of the provisions of Paragraphs 1,
8 and 10 hereof may be inadequate. Accordingly, in the event of the breach or
threatened breach by Employee of any such provisions, Company shall be entitled
to seek injunctive relief in addition to any other remedy it may have. In the
event of any breach by Company of this Agreement, Employee shall be limited to
his remedy at law for damages, if any, and shall not have the right to terminate
or rescind this Agreement or in any way to enjoin or restrain the production,
distribution, advertising or other exploitation of any motion pictures or other
productions, it being specifically agreed that all rights granted and agreed to
be granted to Company under this Agreement shall be irrevocably vested in
Company and shall not be subject to rescission for any cause.
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<PAGE> 12
12. Assignment. Employee may not assign, transfer or convey this
Agreement or any interest therein. Subject to the provisions of Paragraph 1(a)
hereof, this Agreement and all of Company's rights and obligations hereunder may
be assigned or transferred by it, in whole but not in part, to and shall be
binding upon and inure to the benefit of any successor of Company, but any such
assignment shall not relieve Company of any of its obligations. The term
successors shall mean only any corporation or other business entity which by
merger, consolidation, purchase of assets or otherwise succeeds to or otherwise
acquires all or substantially all of the assets of Company.
13. Arbitration.
(a) Without limiting Company's right to seek injunctive relief
as described in Paragraph 11, in the event of a disagreement or dispute
between Company and Employee related to this Agreement, the matter will
be finally settled in Los Angeles, California by arbitration by a single
arbitrator (unless the parties cannot agree on such arbitrator in which
case each party will select an arbitrator and the two arbitrators so
selected shall select the third arbitrator) in a proceeding conducted
under the rules of the American Arbitration Association or any similar
successor body, the arbitrator also apportioning the costs of the
arbitration. The decision of the arbitrator(s) in writing shall be final
and binding upon the parties and will not be subject to appeal. If
either party fails to abide by such decision, the other party may seek
the order of any federal or state court having jurisdiction thereof
which shall enter judgment on the decision of the arbitrator(s), and the
party so failing to abide shall be responsible for the payment of the
expenses of the court proceeding and all resulting enforcement expenses,
including actual attorneys' fees. The parties agree to use their best
efforts to complete any arbitration hereunder expeditiously.
(b) The prevailing party in any arbitration shall be entitled to
be reimbursed for attorneys fees and costs in connection with the
pursuit of such arbitration, subject to the following limitation: such
reimbursement shall not exceed the total attorneys fees and costs
incurred by whichever of the two parties to such arbitration has the
lesser aggregate attorneys fees and costs. By way of example, if
Employee brings an arbitration against Company and Company prevails in
such arbitration, (thus entitling Company to reimbursement of attorneys
fees and costs), and if Employee's legal fees and costs amount to
$50,000 and Company's legal fees and costs amount to $85,000, Company's
recovery of legal fees and costs against Employee in such instance shall
be limited to $50,000.
12
<PAGE> 13
14. Indemnification. Employee shall be entitled to the benefit of
indemnification to the fullest extent permitted by applicable law at the time of
assertion of any liability against Employee, and, in any event, to the most
favorable indemnification provisions or agreements available to any other senior
executive of Company. Company represents that it currently has and shall
maintain directors' and officers' liability insurance with coverage of not less
than $5,000,000 and Employee will be covered thereunder.
15. Notices. All notices hereunder shall be in writing and shall be
given either by personal delivery, telegram or telecopy (toll prepaid) or by
registered or certified mail (postage prepaid) to the appropriate party at the
address listed below, and the date of such personal delivery, mailing,
telegraphing or telecopying shall be the date of the giving of such notice.
If to Company: The Harvey Entertainment Company
1999 Avenue of the Stars
Suite 2050
Los Angeles, California 90067
Attention: Chairman of the Board and Legal
Department
with a copy to: Kaye, Scholer, Fierman, Hays & Handler, LLP
1999 Avenue of the Stars
Suite 1600
Los Angeles, CA 90067-6048
Attn: Barry Dastin, Esq.
If to Employee: Rick Mischel
420 Main, #5
Santa Monica, CA 90405
with a copy to: Kleinberg Lopez Lange Brisbin & Cuddy, LLP
2049 Century Park East, Suite 3180
Los Angeles, California 90067
Attention: Scott Edel, Esq.
13
<PAGE> 14
16. Miscellaneous.
(a) In the event there is any conflict between the provisions of
this Agreement and any statute, law or regulation, the latter shall
prevail; provided, however, that in such event the provision(s) of this
Agreement so affected shall be curtailed and limited only to the minimum
extent necessary to permit compliance with the minimum mandatory
requirement(s) thereof, and no other provision(s) of this Agreement
shall be affected thereby, and all such other provisions will continue
in full force and effect.
(b) This Agreement shall be governed by the laws of the State of
California applicable to agreements executed and to be wholly performed
therein and shall not be modified except by a written document executed
by the parties hereto.
(c) This Agreement expresses the entire understanding of the
parties hereto and replaces any and all former agreements, negotiations
or understandings, written or oral, relating to the subject matter
hereof.
(d) The remedies herein provided are cumulative and the exercise
of one shall not preclude the exercise of any other.
(e) No waiver by either party hereto of any failure by the other
party to keep or perform any covenant or condition of this Agreement
shall be deemed a waiver of any preceding, succeeding or continuing
breach of the same, or any other covenant or condition.
(f) Paragraph headings are for the convenience of the parties
only and shall not be used in construing meaning.
(g) This Agreement shall not be construed to create a joint
venture or partnership between the parties, and shall not be interpreted
in favor of or against either party on grounds that said party drafted
this Agreement.
(h) This Agreement shall be executed in a number of identical
counterparts, each of which shall be construed as an original for all
purposes, but all of which taken together shall constitute one and the
same Agreement.
17. This Employment Agreement shall become effective (the "Effective
Date") as of April 26, 1999.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
14
<PAGE> 15
EMPLOYEE THE HARVEY ENTERTAINMENT COMPANY
_______________________________ By:_______________________________
RICK MISCHEL
Title:_________________________
15
<PAGE> 16
SCHEDULE I
Employee's right to exercise the Warrants granted pursuant to Paragraph
3(b) of the Agreement to which this Schedule I is attached shall vest in
accordance with the following schedule:
<TABLE>
<CAPTION>
Length of Employment Employee's Warrants that Vest
-------------------- -----------------------------
<S> <C>
On signing this Agreement 105,000
One year after the Effective Date
described in Paragraph 17 52,500
At the end of the second year
of the Term 26,250
At the end of the third year
of the Term 26,250
TOTAL 210,000 Warrants
</TABLE>
Notwithstanding anything to the contrary herein or in the Warrant
Agreement, in the event of the termination of Employee's employment by Company
without Cause or as a result of Employee's death or disability during the term
of and pursuant to the attached Employment Agreement, all unvested Warrants held
individually by Employee shall immediately vest and shall remain exercisable for
a period equal to the then balance of the term of the Warrants (i.e., the
balance of the six year, seven year or eight year term depending on the relevant
Warrants).
16
<PAGE> 17
SCHEDULE II-A
Title of Project
CHAIN LETTER
CHET GEKKO
FAMILY MOVIES - SKINNING THE CAT
YOUNG BLADES
MINERVA LOUISE
THE SPECIALS
STREET FIGHTER
HAZARDOUS WASTE
17
<PAGE> 18
SCHEDULE II-B
Title of Project
ANTOINETTE FRANK
BLACK LAGOON
CON TOWN
COOLEY BROTHERS
DUDLEY THE DRAGON
THE FIX
SLEEPY HOLLOW
LOOKING GLASS
HAPPENCHANCE
PRINCESS ALICE
STRANGELY, PA
STUY HIGH
WET HOT AMERICAN SUMMER
YAHOOLIGANS
18
<PAGE> 1
EXHIBIT 10.63
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR
AN EXEMPTION THEREFROM UNDER SAID ACT. IN ADDITION, THE TRANSFERABILITY OF THE
SECURITIES REPRESENTED HEREBY IS RESTRICTED AS SET FORTH IN SECTION 2 HEREOF.
THE HARVEY ENTERTAINMENT COMPANY
7% Non-Negotiable Note Due 2000
$2,048,750 June 30, 1999
SECTION 1. GENERAL.
(a) THE HARVEY ENTERTAINMENT COMPANY, a California corporation
(the "Company"), for value received, hereby promises to pay Mr. Paul Guez
("Investor") (or such Persons' permitted transferees), the aggregate principal
amount of Two Million Forty-Eight Thousand Seven Hundred and Fifty Dollars
($2,048,750) (the "Principal Amount"), together with accrued and unpaid interest
on the Principal Amount, on May 20, 2000 (the "Payment Date"), in such coin or
currency of the United States of America as at the time of payment shall be
legal tender therein for the payment of public and private debts.
(b) This Note shall accrue interest at a rate per annum of 7%
with respect to the unpaid Principal Amount plus any accrued but unpaid interest
thereon (the "Interest"), such Interest to be paid in four equal quarterly
payments on the last day of each March, June, September and December, commencing
June 30, 1999. The Company agrees to pay additional interest at the rate of 3%
per annum on any overdue principal and (to the full extent permitted by
applicable law) on any overdue Interest, from the due date thereof until the
obligation of the Company with respect to the payment thereof shall be
discharged. Interest shall be calculated on the basis of a 365 (or 366, as
applicable)-day year and the actual number of days elapsed.
SECTION 2. NON-NEGOTIABILITY; NON-TRANSFERABILITY.
(a) This Note or any interest herein shall not be negotiable,
assignable or transferable other than pursuant to (i) an effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act")
and any applicable state securities laws, or (ii) an exemption from the
requirements of the Securities Act and any applicable state securities laws and,
in addition, (A) in the case of a holder who is an individual, pursuant to
gifts, applicable laws of descent and distribution or by will among the Family
Group (as such term is defined below) of the individual holder to whom this Note
(provided that if this Note is a replacement Note, such reference shall be to
the original Note from which this Note was derived) was
<PAGE> 2
originally issued, (B) in the case of a holder which is a trust, pursuant to
gifts, applicable laws of descent and distribution or by will among the Family
Group of the direct beneficiaries of the trust to whom this Note (provided that
if this Note is a replacement Note, such reference shall be to the original Note
from which this Note was derived) was originally issued (to the extent such
beneficiaries were beneficiaries of the trust to which this Note (provided that
if this Note is a replacement Note, such reference shall be to the original Note
from which this Note was derived) was issued at the time of the issuance of such
Note), (C) in the case of any holder which is a corporation, partnership or
limited liability company, to any member of the Group (as such term is defined
below) of the holder to whom this Note is originally issued (or of the holder
which has acquired this Note in a transaction described in either clause (A)(3)
or (B)(2) of the definition of "Group", or (D) in the case of any holder, to any
other holder of a Note at the time of such negotiation, transfer or assignment;
provided that, any such transferee shall be bound by the provisions of this
Section 2 with respect to future transfers.
(b) For purposes of this Note, the following terms shall have the
following meanings:
(i) "Family Group" means, with respect to any natural Person,
(A) such Person, (B) the spouse, former spouse and issue (whether
natural or adopted) of such Person, (C) the parents or step-parents of
such Person (whether natural or adopted), (D) the siblings of such
Person (whether natural or adopted), (E) assuming such Person is
deceased, the heirs or descendants of such Person (whether natural or
adopted), and (F) any one or more trusts solely for the benefit of any
one or more of the Persons described in clause (A) through clause (E)
above;
(ii) "Group" means:
(1) In the case of any holder which is a partnership or
limited liability company, (1) such partnership and any of its
limited or general partners, (2) such limited liability company
and any of its members, (3) any corporation or other business
organization to which such partnership or limited liability
company shall sell all or substantially all of its assets or
with which it shall be merged and (4) any Affiliate of such
partnership or limited liability company; and
(2) In the case of any holder which is a corporation, (1)
such corporation, (2) such corporation or other business
organization to which such corporation shall sell or transfer
all or substantially all of its assets or with which it shall be
merged and (3) any Affiliate of such corporation.
(iii) "Affiliate" means, with respect to any Person, any other
Person that, directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with, another
Person. For the purposes of this Note, the term "control" including,
with correlative meaning, the terms "controlling," "controlled by" and
"under common control with" as used with respect to any Person means the
possession directly or indirectly of the power to direct or cause the
direction of the management or policies of a Person, whether through the
ownership of voting securities,
2
<PAGE> 3
by contract or otherwise.
(iv) "Person" shall be construed broadly and shall include,
without limitation, an individual, a partnership, an investment fund, a
limited liability company, a corporation, an association, a joint stock
company, a trust, a joint venture, an unincorporated organization and a
government entity or any department, agency or political subdivision
thereof.
SECTION 3. PREPAYMENTS.
If the conditions for conversion of this Note set forth in
subsections 6(a), (b), (c) and (d) hereof are not fulfilled at the Company's
meeting of shareholders next held following the date of this Note (the "Annual
Meeting"), then (A) the Company may, at its sole discretion, at any time
following the completion of the Annual Meeting prepay this Note without penalty
or premium, in whole or in part, together with all accrued and unpaid interest
on the principal amount so prepaid to the date of such prepayment (the
"Prepayment Date") and (B) the Investor may at any time following the completion
of the Annual Meeting accelerate the repayment of this Note, in whole or in
part, and if this Note is so accelerated, the Company shall prepay this Note and
all accrued and unpaid interest hereon through the date of such repayment.
SECTION 4. SUBORDINATION.
Intentionally Omitted.
SECTION 5. COMPANY REPRESENTATIONS AND WARRANTIES.
(a) The Company hereby represents and warrants to the Investor as
follows:
(i) Organization and Qualification; Subsidiaries. The Company
and each of its Subsidiaries (as hereinafter defined) is a corporation
duly incorporated, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has the requisite power and
authority and all necessary governmental approvals to own, lease and
operate its properties and to carry on its business as it is now being
conducted, except where the failure to be so incorporated, existing or
in good standing or to have such power, authority and governmental
approvals would not, individually or in the aggregate, have a Company
Material Adverse Effect (as defined below). The Company is and each of
its Subsidiaries is duly qualified or licensed as a foreign corporation
to do business, and is in good standing, in each jurisdiction where the
character of the properties owned, leased or operated by it or the
nature of its business makes such qualification or licensing necessary,
except for such failure to be so qualified or licensed and in good
standing that would not, individually or in the aggregate, have a
Company Material Adverse Effect. The term "Company Material Adverse
Effect" means any change, effect or circumstance that individually or
when taken together with all other such changes, effects or
circumstances that have occurred prior to the date of determination of
the occurrence of the Company Material Adverse Effect, (x) will be
3
<PAGE> 4
materially adverse to the business, operations, properties, assets,
financial condition or results of operations of the Company and all of
its Subsidiaries taken as a whole, or (y) will impair in any material
respect the Company's ability to perform any of its obligations or
agreements hereunder, provided that none of the following shall
constitute a Company Material Adverse Effect: (i) general changes in the
economy or changes affecting the entertainment industry in general, (ii)
the filing, initiation and subsequent prosecution, or results of
litigation that challenges or otherwise seeks damages with respect to
the issuance of this Note, or (iii) changes arising directly or
indirectly from the execution or issuance of this Note. For purposes of
this Agreement, the term "Subsidiary" shall includes the following:
Harvey Comics, Inc., a New York corporation, and Baby Huey Productions,
Inc., a California corporation. The Company owns directly or indirectly
all of the issued and outstanding shares of capital stock of each of its
Subsidiaries.
(ii) Articles of Incorporation and Bylaws. The Company has
heretofore furnished to the Investor a complete and correct copy of the
Articles of Incorporation and bylaws of the Company and each of its
subsidiaries as most recently restated and subsequently amended to date.
The Articles of Incorporation and bylaws of the Company and each of the
Subsidiaries are in full force and effect. As of the date of this Note,
neither the Company nor any of its subsidiaries is in violation of any
of the provisions of its respective Articles of Incorporation or bylaws.
(iii) Capitalization. The authorized capital stock of the
Company consists of (i) 10,000,000 shares of Common Stock, (ii) 299,600
shares of Class B Common Stock (the "Class B Common Stock"), (iii)
2,830,000 shares of Series Preferred Stock (the "Series Preferred
Stock") and (iv) 170,000 shares of Series A Preferred Stock ("Series A
Preferred Stock"). As of June 15, 1999, (i) approximately 4,186,941
shares of Common Stock were issued and outstanding, all of which were
validly issued, fully paid and nonassessable, (ii) no shares of Common
Stock were held in the treasury or by its subsidiaries and (iii)
approximately 3,169,560 shares of Common Stock were reserved for future
issuance upon exercise of outstanding options and warrants. As of June
15, 1999, (i) no shares of Class B Common Stock were issued and
outstanding or held in treasury or by the subsidiaries and (ii) no
shares of Class B Common Stock were reserved for future issuance. As of
June 15, 1999, 170,000 shares of Series A Preferred Stock were issued
and outstanding. As of June 15, 1999, (i) no shares of Series Preferred
Stock were issued and outstanding or held in treasury or by its
Subsidiaries other than the 170,000 shares of Series A Preferred Stock
mentioned in the previous sentence and (ii) no shares of Preferred Stock
were reserved for future issuance. Except as described above and except
as described in the attached disclosure schedule or contemplated hereby,
there are no options, warrants or other rights, agreements, arrangements
or commitments of any character relating to the issued or unissued
capital stock of the Company or obligating the Company to issue or sell
any shares of capital stock of, or other equity interests in, the
Company. All shares of the Company's capital stock subject to issuance,
upon issuance on the terms and conditions specified in the instruments
pursuant to which they are issuable, will be duly authorized, validly
issued, fully paid and nonassessable. To the best of the Company's
knowledge, there are no shareholder agreements, voting trusts or other
4
<PAGE> 5
agreements relating to voting or disposition of any shares of the
Company's capital stock or, except as set forth in that certain Stock
Purchase Agreement dated as of April 26, 1999 by and among the Company,
Michael R. Burns, Roger A. Burlage, Ken Slutsky and The Kushner-Locke
Company, a copy of which has been provided to the Investor prior to the
date hereof, granting to any person or group of persons the right to
elect, or to designate or nominate for election, a director to the
Company's board of directors.
(iv) Authority Relative to the Transaction Agreements. The
Company has all necessary corporate power and authority to execute and
deliver this Note, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and
delivery of this Note and the consummation by the Company of the
transactions contemplated hereby have been duly and validly authorized
by all necessary corporate action and no other corporate proceedings on
the part of the Company are necessary to authorize this Note or to
consummate the transactions contemplated hereby. This Note has been duly
and validly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company, enforceable against
the Company in accordance with its respective terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditors' rights generally and to general
principles of equity.
(v) No Conflicts. This Note and the transactions contemplated by
this Note will not result in a default (either by passage of time or
otherwise) of any material contract to which the Company is a party.
(vi) Litigation. As of the date of this Note, except as set
forth in the attached disclosure schedule, there is no suit, claim,
action, proceeding or investigation pending, or, to the Company's best
knowledge, threatened against the Company or any of its Subsidiaries
that could reasonably be expected to have a Company Material Adverse
Effect or prevent or materially delay the consummation of the
transactions contemplated hereby.
(vii) Brokers. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated hereby based upon
arrangements made by or on behalf of the Company.
(viii) Shares Fully Paid, Etc. The shares of Series A Preferred
Stock, when issued and paid for pursuant to the terms of this Note, and
any additional shares of Series A Preferred Stock issued as dividends
pursuant to the terms and conditions of the Company's certificate of
determination for the Series A Preferred Stock as it is proposed to be
amended in accordance with the terms of this Note (and assuming it is so
amended) (the "Amended Certificate of Determination"), will be duly
authorized, validly issued and outstanding, fully paid, nonassessable
shares and shall have all rights, privileges and preferences specified
in the Amended Certificate of Determination and shall be free and clear
of all pledges, liens, encumbrances and restrictions. Subject to
receiving the approval of holders of Common Stock and Series A Preferred
Stock, the Company will reserve for issuance the shares of Common Stock
issuable upon conversion of Series A
5
<PAGE> 6
Preferred Stock acquired upon conversion of this Note ("Conversion
Shares") and shares of Common Stock issuable upon exercise of the
warrants issuable upon conversion of this Note (the "Warrant Shares"),
and when issued upon conversion or exercise, as the case may be, such
shares will be duly authorized, validly issued and outstanding, fully
paid, nonassessable and free and clear of all pledges, liens,
encumbrances and restrictions.
(ix) Shares of Common Stock. The outstanding shares of Common
Stock of the Company are duly authorized, validly issued, fully paid and
non-assessable, and have been issued in full compliance with the
Securities Act and applicable blue sky laws.
(x) No Preemptive Rights. The issuance, sale and delivery of
this Note and, assuming the conditions in Section 6 hereof have been
met, of the Series A Preferred Stock, Warrants, Conversion Shares and
Warrant Shares are not subject to any preemptive right of shareholders
of the Company arising under law or the Articles of Incorporation or
Bylaws or to any contractual right of first refusal or other contractual
right in favor of any Person.
(b) The Investor hereby represents and warrants to the Company
that:
(i) This Note being acquired by the Investor is being acquired
and, when acquired, the shares of Series A Preferred Stock and the
Warrants issuable upon conversion of this Note, and the Conversion
Shares and Warrant Shares, will be acquired for investment for such
Investor's own account and not with the view to, or for resale in
connection with, any distribution or public offering thereof. Such
Investor understands that this Note, the shares of Series A Preferred
Stock, the Conversion Shares, the Warrants and the Warrant Shares have
not been registered under the Securities Act or any state securities
laws by reason of their contemplated issuance in transactions exempt
from the registration requirements of the Securities Act pursuant to
Section 4(2) thereof and applicable state securities laws, and that the
reliance of the Company and others upon these exemptions is predicated
in part upon this representation by the Investor. The Investor further
understands that this Note, the shares of Series A Preferred Stock, the
Conversion Shares, the Warrants and the Warrant Shares may not be
transferred or resold without (i) registration under the Securities Act
and any applicable state securities laws, or (ii) an exemption from the
requirements of the Securities Act and applicable state securities laws.
(ii) This Note, the shares of Series A Preferred Stock,
Conversion Shares, Warrants and Warrant Shares are only transferrable
pursuant to (a) a public offering registered under the Securities Act,
(b) an exemption from the registration requirements of the Securities
Act and applicable state securities or blue sky laws, (c) a transfer not
involving a change in beneficial ownership or (d) in the case of a
partnership, distribution of such securities to its partners or a
partner's estate.
(iii) Each certificate representing shares of Series A Preferred
Stock, Conversion Shares, Warrants and Warrant Shares shall be endorsed
with the following legend:
6
<PAGE> 7
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR WITH THE SECURITIES COMMISSION OF ANY STATE UNDER ANY
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS
OF THOSE SECURITIES LAWS (IF REQUESTED BY THE COMPANY, UPON PROVISION OF
AN OPINION OF COUNSEL IN FORM SATISFACTORY TO THE COMPANY).
(iv) Location of Principal Office, Qualification, etc. The state
in which the Investor's domicile is located is the state set forth in
the Investor's address in Section 14 of this Note. The Investor
acknowledges that the Company has made available to the Investor at a
reasonable time prior to the execution of this Note the opportunity to
ask questions and receive answers concerning the terms and conditions of
the sale of securities contemplated by this Note and to obtain any
additional information (which the Company possesses or can acquire
without unreasonable effort or expense) as may be necessary to verify
the accuracy of information furnished to the Investor. The Investor (a)
is able to bear the loss of its entire investment in the shares of
Series A Stock without any material adverse effect on its business,
operations or prospects, and (b) has such knowledge and experience in
financial and business matters that it is capable of evaluating the
merits and risks of the investment to be made by it pursuant to this
Agreement.
(v) Acts and Proceedings. This Note has been duly authorized by
all necessary action on the part of the Investor, has been duly executed
and delivered by the Investor, and is a valid and binding agreement of
the Investor.
(vi) No Brokers or Finders. No person, firm or corporation has
or will have, as a result of any act or omission by the Investor, any
right, interest or valid claim against the Company for any commission,
fee or other compensation as a finder or broker, or in any similar
capacity, in connection with the transactions contemplated by this Note.
The Investor will indemnify and hold the Company harmless against any
and all liability with respect to any such commission, fee or other
compensation which may be payable or determined to be payable as a
result of the actions of the Investor in connection with the
transactions contemplated by this Note.
(vii) Accredited Investor. The Investor is an "accredited
investor" within the meaning of Rule 501 promulgated under the
Securities Act.
(viii) Reliance by the Company. The Investor acknowledges and
agrees
7
<PAGE> 8
that the Company may rely upon the representations made by it in this
Section 5(b) in connection with its issuance to the Investor of the
Series A Preferred Stock and the Warrants upon the conversion of this
Note.
(ix) Note. The Investor has read and understands fully the terms
of this Note, including the exhibits hereto.
SECTION 6. CONVERSION INTO SHARES OF SERIES A PREFERRED STOCK; WARRANTS.
(a) Upon the satisfaction of the conditions specified below, this
Note shall automatically be converted into 20,488 shares of the Company's Series
A Preferred Stock and 144,618 warrants ("Warrants") to purchase the Company's
common stock, no par value ("Common Stock") and all accrued and unpaid interest
shall be paid in cash:
(i) the approval of a majority of the holders of the Series A
Preferred Stock and Common Stock voting together as a single class to
authorize additional shares of Common Stock sufficient to cover the
additional shares of Common Stock issuable upon the conversion of Series
A Preferred Stock and exercise of Warrants issuable upon conversion of
this Note;
(ii) the approval of a majority of the holders of the Series A
Preferred Stock to authorize additional shares of Series A Preferred
Stock and the issuance and sale of such shares;
(iii) the approval of a majority of the holders of the Series A
Preferred Stock and Common Stock, voting together as a single class to
authorize additional shares of Series A Preferred Stock and the issuance
and sale of such shares.
8
<PAGE> 9
(iv) the approval of the holders of the Series A Preferred Stock
and Common Stock voting together as a single class to convert this Note
into shares of Series A Preferred Stock and Warrants; and
(v) the filing with the Secretary of State of California and
effectiveness thereof, of the Amended Certificate of Determination for
Series A Preferred Stock authorizing the issuance and sale of additional
shares of Series A Preferred Stock.
(b) The Warrants shall have the terms and conditions set forth in
the Form of Warrant Agreement attached hereto as Exhibit A.
SECTION 7. COVENANTS.
(a) The Company hereby agrees that:
(i) In connection with the Annual Meeting, the Company will (A)
prepare a proxy statement as required by the regulations of the
Securities Exchange Act of 1934, as amended, and will include therein as
part of the proposals to be voted upon by the Company's shareholders at
such Annual Meeting, the matters set forth in Section 6 hereof (the
"Proposals") and (B) make a good faith effort to solicit proxies in
favor of the Proposals.
(ii) The Company will hold the Annual Meeting as soon as
practicable, and in any event not later than September 30, 1999.
(iii) Upon approval by the requisite shareholders of the matters
set forth in Section 6 hereof at the Annual Meeting, the Company will
(A) promptly prepare and file with the Secretary of State of California
the Amended Certificate of Determination in substantially the form
attached hereto as Exhibit B and (B) reserve for issuance that number of
shares of Common Stock issuable upon conversion of the Series A
Preferred Stock and exercise of Warrants issuable upon conversion of
this Note.
(iv) In connection with the execution and delivery of this Note,
the Company will deliver the opinion of Kaye, Scholer, Fierman, Hays &
Handler, LLP in the form previously provided to the Investor.
(b) Covenant of the Investor.
(i) In the event (and on each occasion) that prior to the
conversion of the Series A Preferred Stock, the Investor shall seek to
sell its shares of Series A Preferred Stock to any person or entity
(other than (i) an affiliate of the Investor or another "Investor" (as
defined in that certain Stock Purchase Agreement made and entered into
as of April 7, 1999 among the Company, The Kushner-Locke Company,
Michael R. Burns, Roger A. Burlage and Ken Slutsky) (each an "Other
Investor") or an affiliate of any Other Investor, or (ii) any family
member of the Investor or any Other Investor or in connection with
estate planning matters), the Investor shall obtain a bona
9
<PAGE> 10
fide written offer from such person or entity and give the Company
written notice (a "Sale Notice") describing the material terms of such
offer, including the identity of such person or entity and the proposed
closing date. The Company shall have ten (10) business days from the
date on which the Investor shall give the written Sale Notice to agree
to purchase all or any portion of such shares of Series A Preferred
Stock, upon the terms (other than the proposed closing date) specified
in the Sale Notice, by giving written notice (the "Purchase Notice") to
the Investor. If the Company agrees to purchase all or any portion of
such shares in accordance with the foregoing, the closing of such
purchase shall occur on a date chosen by the Company which is no later
than the later of (x) the closing date specified in the Sale Notice and
(y) ten (10) Business Days (defined below) from the date of the Purchase
Notice. If the Company does not agree to purchase such shares, the
Investor may sell such shares to such person or entity on or prior to
the closing date set forth in the Sale Notice on terms and conditions no
less favorable to the Investor than those set forth in the Sale Notice.
If the Investor fails to timely provide the Company with a Sale Notice
prior to selling shares of Series A Preferred Stock, the Company may, in
its sole discretion, refuse to permit the transfer of such shares of
Series A Preferred Stock on its stock transfer ledger. The provisions of
this Section 7(b) shall terminate with respect to any shares of Series A
Preferred Stock which are converted into shares of Common Stock (or
other securities or assets) pursuant to the terms of the Amended
Certificate of Determination.
SECTION 8. REGISTRATION RIGHTS; WARRANTS.
In connection with the issuance and sale of the Series A
Preferred Stock and the Warrants to the Investor upon the satisfaction of the
conditions set forth in Section 6 hereof, the Company shall execute and deliver
to the Investor the Registration Rights Agreement, in substantially the form
attached hereto as Exhibit C and the Warrant Agreement, in substantially the
form attached hereto as Exhibit A.
SECTION 9. REPLACEMENT OF NOTE.
Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Note and, in case of loss, theft
or destruction, of indemnity reasonably satisfactory to it, or, in the case of
mutilation or at the request of the Investor, upon surrender and cancellation of
this Note, and in all cases upon reimbursement to the Company of all reasonable
expenses incidental thereto, the Company will make and deliver a new Note of
like tenor in lieu of this Note. A holder, through the Investor, may also
request that this Note be exchanged for one or more Notes of like tenor in the
same aggregate principal amount as such Note being exchanged, subject to the
provisions of Section 2 hereof, and appropriate notation on any newly issued
Note to indicate which holders have an interest therein.
SECTION 10. AMENDMENTS AND WAIVERS.
No covenant, agreement or condition contained in this Note may be
amended or waived (either generally or in a particular instance and either
retroactively or prospectively) without the prior written consent of the
Investor (in its sole discretion) and the Company;
10
<PAGE> 11
provided, however, that the provisions of Section 1, Section 3, Section 4 hereof
and this Section 10 may not be amended or modified without the prior written
consent of the holders of the Designated Senior Debt. Any such amendment or
waiver shall be binding upon each of the Investor, each future holder of this
Note and the Company. Upon the request of the Company, the Investor or any
holder of this Note shall submit this Note to the Company so that this Note may
be marked to indicate such amendment or waiver, and any Note issued thereafter
shall bear a similar notation referring to any such amendment or continuing
waiver.
SECTION 11. EVENT OF DEFAULT.
(a) In case of the occurrence of any of the following events (an
"Event of Default"):
(i) default shall be made in the payment of the principal of or
interest on this Note, when and as the same shall become due and
payable, whether at the due date thereof or by acceleration thereof or
otherwise and such default, (A) in the case of interest due, shall
continue unremedied for five (5) Business Days after written notice from
the holder of this Note to the Company of such default and (B) in the
case of principal due, shall continue unremedied for two (2) Business
Days after written notice from the holder of this Note to the Company of
such default (for the purpose of this Note "Business Day" shall mean any
day other than a Saturday, Sunday or other day or in which commercial
banks in the State of California are authorized or required to be
closed);
(ii) the Company shall (A) apply for or consent to the
appointment of a receiver, trustee or liquidator for itself or all or a
substantial part of its property, (B) admit in writing its inability to
pay its debts as they mature, (C) make a general assignment for the
benefit of creditors, (D) be adjudicated a bankrupt or insolvent, (E)
file a voluntary petition in bankruptcy or petition or answer seeking a
reorganization or an arrangement with its creditors, (F) take advantage
of any bankruptcy, reorganization, insolvency, readjustment of debt,
dissolution or liquidation law or statute or file an answer admitting
the material allegations of a petition filed against it in any
proceeding under any such law or (G) take any corporate action for the
purpose of effecting any of the foregoing;
(iii) an order, judgment or decree shall be entered, without the
application, approval or consent of the Company, by any court of
competent jurisdiction, approving a petition seeking reorganization of
the Company or all or a substantial part of the assets of the Company,
or appointing a receiver, trustee or liquidator of the Company, and such
order, judgment or decree shall continue unstayed and in effect for any
period of 90 days;
(iv) any material breach by the Company of: (A) any provision of
this Note (other than those described in subpart (i) of this Section
11(a) and Section 7(a) hereof) and the failure to cure such breach
within ten (10) days after written notice from the Investor to the
Company of such default and (B) any provision of Subsection 7(a)(ii) of
this Note and the failure to cure such breach within twenty (20) days
after written
11
<PAGE> 12
notice from the Investor to the Company, in each case provided that such
breach is subject to cure; or
(v) a default occurs under the Primary Bank Facility (as defined
below), provided that, as a result of such default, the maturity of any
Senior Debt under the Primary Bank Facility (as defined below) has been
accelerated prior to its expressed maturity;
then the Investor may declare this Note to be forthwith due and payable,
whereupon this Note shall become forthwith due and payable, both as to principal
and interest, without presentment, demand, protest, or other notice of any kind,
all of which are hereby expressly waived. The term "Senior Debt" means (i) all
indebtedness (including any debt securities) of the Company and/or its
subsidiaries whether outstanding on the date hereof or hereafter created
(including all principal, interest, fees and expenses) owed to any person(s) or
entity for (A) money borrowed by, or purchase money obligations of, the Company
and/or its subsidiaries or (B) guarantees by the Company and/or its subsidiaries
of money borrowed or purchase money obligations, and (ii) all deferrals,
renewals, extensions, refinancings and refundings of, and amendments,
modifications and supplements to any such indebtedness, unless, by the terms of
the instrument creating or evidencing any such indebtedness, it is expressly
provided that such indebtedness is not superior in right of payment to this
Note. "Senior Debt" includes interest that accrues on any such indebtedness
after the commencement of any case or proceeding relating to the bankruptcy or
insolvency of the Company and/or its affiliates (whether or not such interest is
allowed or allowable as a claim in such case or proceeding. The term "Primary
Bank Facility" means all indebtedness under the Company's primary bank credit
facility existing from time to time, including as amended or restated from time
to time).
(b) In case any one or more of the Events of Default shall have
occurred and be continuing, the holder of this Note may proceed to protect and
enforce its rights either by suit in equity and/or by action at law, whether for
the specific performance of any covenant or agreement contained in this Note or
in aid of the exercise of any power granted in this Note, or proceed to enforce
the payment of this Note or to enforce any other legal or equitable right of a
holder of this Note.
(c) No remedy conferred hereunder is intended to be exclusive of
any other remedy and each and every such remedy shall be cumulative and shall be
in addition to every other remedy given hereunder or hereafter existing at law
or in equity or by statute or otherwise. No course of dealing between the
Company and the holder of this Note or any delay on the part of the holder of
this Note in exercising its rights hereunder shall operate as a waiver of any
rights of such holder.
(d) The Company hereby waives notice of protest, dishonor, intent
to accelerate, acceleration and all other notices of any type or character,
demand, presentment for payment, protest, diligence in collecting or bringing
suit and notice, other than required service, with respect to the filing of suit
for the purpose of fixing liability.
12
<PAGE> 13
SECTION 12. EXTENSION OF MATURITY.
Should the principal of and interest on this Note become due and
payable on other than a Business Day, the maturity hereof shall be extended to
the next succeeding Business Day, and principal and interest shall be payable
thereon at the rate per annum herein specified during such extension.
SECTION 13. SUCCESSORS AND ASSIGNS.
The provisions of this Note shall be binding upon and inure to
the benefit of the Company and its successors and permitted assigns, and to the
holder and its successors and permitted assigns and their respective heirs,
executors, administrators and duly appointed legal representatives who shall
succeed to the holder's rights and obligations in, to and under this Note
pursuant to Section 2 hereof.
SECTION 14. NOTICES.
All notices or other communications pursuant to this Agreement
shall be in writing and shall be deemed to be sufficient if delivered
personally, telecopied, sent by nationally-recognized, overnight courier or
mailed by registered or certified mail (return receipt requested), postage
prepaid, to the parties at the following addresses (or at such other address for
a party as shall be specified by like notice):
(i) if to the holder to:
Paul Guez
c/o Azteca Productions
5804 E. Slauson Avenue
Commerce, CA 90040
Attention: Paul Guez
Telecopier: 323-728-1641
(ii) with a copy to:
Paul, Hastings, Janofsky & Walker LLP
Seventeenth Floor
695 Town Center Drive
Costa Mesa, CA 92626-1924
Attention: Stephen D. Cooke, Esq.
Telecopier: 714-979-1921
(iii) if to the Company:
The Harvey Entertainment Company Inc.
1999 Avenue of the Stars
Suite 2050
Los Angeles, CA 90067
13
<PAGE> 14
Attention: Ronald B. Cushey
Chief Financial Officer
Telecopier: 310-789-1991
with a copy to:
Kaye, Scholer, Fierman, Hays & Handler, LLP
1999 Avenue of the Stars, Suite 1600
Los Angeles, CA 90067
Attention: Barry L. Dastin, Esq.
Telecopier: 310-788-1200.
All such notices and other communications shall be deemed to have been given and
received (A) in the case of personal delivery, on the date of such delivery, (B)
in the case of delivery by telecopy, on the date of such delivery, (C) in the
case of delivery by nationally-recognized, overnight courier, on the Business
Day following dispatch, and (D) in the case of mailing, on the third Business
Day following such mailing.
Either party may change its address from time to time for
purposes of notice or other communication hereunder by giving notice to the
other party in accordance with this section.
SECTION 15. GOVERNING LAW.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF CALIFORNIA WITHOUT GIVING EFFECT TO ANY CHOICE OR
CONFLICT OF LAW PROVISION OR RULE (WHETHER IN THE STATE OF CALIFORNIA OR ANY
OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF CALIFORNIA.
SECTION 16. EXPENSES.
Each of the parties shall pay its own expenses incurred in
connection with the preparation, negotiation, execution and delivery of this
Note, including all Exhibits hereto. The Company agrees to pay or reimburse the
Investor for its reasonable costs and expenses (including reasonable legal fees
and costs) incurred by the Investor in connection with the enforcement of its
rights under this Note.
SECTION 17. INTEREST DEFICIT.
If the provisions of this Note would at any time require payment
by the Company to the holder of any amount of interest in excess of the maximum
amount then permitted by applicable law, the interest payments to the holder
shall be reduced but only to the extent necessary so that such holder shall not
receive interest in excess of such maximum amount. If, as a result of the
foregoing, a holder shall receive interest payments under the Note in an amount
14
<PAGE> 15
less than the amount otherwise provided hereunder, such deficit (hereinafter
called the "Interest Deficit") will, to the fullest extent permitted by
applicable law, cumulate and will be carried forward (without interest) until
the payment in full of this Note or such earlier time as it may be paid.
Interest otherwise payable to the holder under the Note for any subsequent
period shall be increased by the maximum amount of the Interest Deficit that may
be so added without causing such holder to receive interest in excess of the
maximum amount then permitted by the law applicable thereto.
The amount of any Interest Deficit relating to a particular Note
(if any) shall be treated as a prepayment penalty and shall, to the fullest
extent permitted by applicable law, be paid in full at the time of any optional
prepayment by the Company to the holder of the Note. The amount of any Interest
Deficit relating to a particular Note at the time of any complete payment of the
Note (if any) (other than an optional prepayment thereof) shall, except to the
full extent then permitted to be paid under applicable law, be canceled and not
paid. The parties agree that if this Note did not have the conversion features
set forth herein, the interest rate would only be 1% more than the rate stated
on the face hereof.
IN WITNESS WHEREOF, each of the parties hereto has duly executed
and delivered this Note as of the date first written above.
THE HARVEY ENTERTAINMENT COMPANY
By:
-------------------------------
Name:
Title:
Paul Guez
15
<PAGE> 16
DISCLOSURE SCHEDULE TO
NOTE
DATED AS OF JUNE 30, 1999
Introduction
------------
This Disclosure Schedule of The Harvey Entertainment Company, a
California corporation (the "Company"), has been prepared in connection with the
Note, dated June 30, 1999, in the amount of $2,048,750 made by the Company in
favor of Paul Guez (the "Investor").
The disclosure of any matter in this disclosure schedule should not be
construed as indicating that such matter is necessarily required to be disclosed
in order for any representation or warranty in the Note to be true and correct
in all material respects.
Any description of any document included in this disclosure schedule is
qualified in all respects by reference to such documents. Except as set forth in
the Note, by accepting this disclosure schedule, the Investor acknowledges that
the Company makes no representations or warranties, express or implied, to the
Investor, and the Investor shall not be entitled to rely upon any other matters
with respect to the transactions contemplated in the Note. Headings in this
disclosure schedule are for convenience only and shall not affect in any way
the meaning of this disclosure schedule.
16
<PAGE> 17
Company Option Securities
-------------------------
The Harvey Entertainment Company Options and Warrants
<TABLE>
<CAPTION>
Number of Options
-----------------
<S> <C>
Gary Gray - 5/94 5,000
Gary Gray - 5/95 2,500
Gary Gray - 5/96 2,500
Gary Gray - 3/96 7,500
Gary Gray - 5/97 10,000
Gary Gray - 6/97 20,000
Gary Gray - 4/98 50,000
Gary Gray - 5/98 10,000
Gary Gray - 5/99 10,000
Michael Doherty - 5/98 10,000
Michael Doherty - 5/99 10,000
Michael R. Burns - 5/99 10,000
Donald Kushner - 5/99 5,000
Peter Locke - 5/99 5,000
Allan Raphael - 5/95 2,500
Allan Raphael - 3/96 7,500
Allan Raphael - 5/96 2,500
Allan Raphael - 5/97 10,000
Allan Raphael - 6/97 20,000
Allan Raphael - 5/98 10,000
Anthony Scotti Warrants - 3/98 155,200
Anthony Scotti - 4/98 38,800
Anthony Scotti - 7/98 77,600
Michael Hope Warrants - 3/98 38,800
Michael Hope - 4/98 9,700
Michael Hope - 7/98 19,400
Leonard Breijo Warrants - 3/98 6,000
Leonard Breijo - 4/98 1,500
Leonard Breijo - 7/98 3,000
Charles Day - 10/96 11,500
Charles Day - 12/97 5,000
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
Number of Options
-----------------
<S> <C>
Other Employees 93 & 95 10,650
Other Employees - 5/97 20,500
Michael Doherty Warrants - 1/97 25,000
Michael Doherty Warrants - 3/98 25,000
Arnhold & S. Bleichroeder Warrants - 1/97 25,000
Arnhold & S. Bleichroeder Warrants - 3/98 25,000
Matty Simmons - 5/98 10,000
Investors and Management 4/99 2,400,000
Cruttenden & Co. 52,000
Total 3,169,650
</TABLE>
18
<PAGE> 19
Litigation
----------
Realty Trust Advisors, Inc. v. The Harvey Entertainment Company, Inc. (Los
Angeles Superior Court Case No. SC 050660).
19
<PAGE> 1
EXHIBIT 10.64
WARRANT AGREEMENT OF
THE HARVEY ENTERTAINMENT COMPANY
144,618 SHARES
Dated as of June 30, 1999
COMMON STOCK PURCHASE WARRANT
<PAGE> 2
WARRANT AGREEMENT (the "Agreement") dated as of June 30, 1999 between
The Harvey Entertainment Company, a California corporation (the "Company") and
Mr. Paul Guez (collectively with any permitted transferee hereunder the
"Holder").
The Company and the Holder hereby agree as follows:
SECTION 1. ISSUANCE OF THE WARRANTS; TRANSFERABILITY AND FORM OF THE
WARRANTS.
1.1 THE WARRANTS. Subject to satisfaction of the conditions set
forth in Schedule 6 of that certain Note dated as of June 30, 1999 made by the
Company in favor of the Holder, the Company hereby grants to the Holder, (i)
48,206 Common Stock Purchase Warrants (Series A) (the "Series A Warrants") each
to purchase one share of its common stock, no par value per share (the "Common
Stock"); (ii) 48,206 Common Stock Purchase Warrants (Series B) (the "Series B
Warrants"), each to purchase one share of the Common Stock; and (iii) 48,206
Common Stock Purchase Warrants (Series C) (the "Series C Warrants" and
collectively with the Series A Warrants and the Series B Warrants, the
"Warrants") each to purchase one share of the Common Stock. The shares of Common
Stock issuable upon exercise of the Warrant are referred herein as the "Warrant
Shares."
1.2 REGISTRATION. The Warrant Shares constitute "Shareholder
Common Stock" under that certain Registration Rights Agreement, dated as of June
30, 1999, between the Company and the Holder and, accordingly, have the benefit
of the registration rights pursuant to that agreement.
1.3 TRANSFER RESTRICTIONS. The Holder may not transfer any
Warrant without the prior written consent of the Company, which consent may be
granted or denied in the sole discretion of the Company, provided that all or a
portion of any Warrant may be transferred to any family member of the Holder or
in connection with estate planning matters (including by operation of law).
Should such consent be granted, the Warrants so transferred shall continue to be
bound by this restriction in the hands of a subsequent Holder, and the Company
shall not be required to recognize any attempted transfer of the Warrants in
violation of this Agreement.
1.4 TRANSFER - GENERAL. Subject to the terms hereof, the Warrants
shall be transferable only on the books of the Company maintained at its
principal office upon delivery thereof duly endorsed by the Holder or by his
duly authorized attorney or representative, or accompanied by proper evidence of
succession, assignment or authority to transfer. In all cases of transfer by an
attorney, the original power of attorney, duly approved, or a copy thereof, duly
certified, shall be deposited and remain with the Company. In case of transfer
by executors, administrators, guardians or other legal representatives, duly
authenticated evidence of their authority shall be produced, and may be required
to be deposited and to remain with the Company in its discretion. Upon any
registration of transfer, the person to whom such transfer is made shall receive
a new Warrant or Warrants as to the portion of the Warrant transferred, and
<PAGE> 3
the Holder of such Warrant shall be entitled to receive a new Warrant or
Warrants from the Company as to the portion thereof retained. The Company may
require the payment of a sum sufficient to cover any tax or governmental charge
that may be imposed in connection with any such transfer.
1.5 FORM OF THE WARRANTS. The form of the Warrants and of the
election to purchase Warrant Shares (the "Purchase Form") shall be substantially
as set forth respectively in Annex A and B attached hereto. Except for the
exercise price thereof, the Series A Warrants, the Series B Warrants and the
Series C Warrants shall be identical in all respects. The Warrants shall be
executed on behalf of the Company by its Chairman of the Board, its Chief
Executive Officer, President or one of its Vice Presidents.
The Warrants shall be dated as of the date of execution thereof
by the Company either upon initial issuance or upon transfer.
SECTION 2. TERM OF THE WARRANTS; EXERCISE OF THE WARRANTS; EXERCISE
PRICE, ETC.
2.1 TERM OF THE WARRANTS. Subject to the terms of this Agreement,
the Holder shall have the right, which right may be exercised in whole or in
part, from time to time, beginning on the date six months following the Closing
and ending on the date set forth in the respective Warrant (the "Expiration
Date"), to purchase from the Company the number of fully paid and nonassessable
Warrant Shares which the Holder may at the time be entitled to purchase on
exercise of such Warrant. If the last day for the exercise of the Warrants shall
not be a business day, then the Warrants may be exercised on the next succeeding
business day.
2.2 VESTING OF THE WARRANTS. The Warrants are vested in full and,
subject to Section 2.1 hereof, may be exercised on or after the date hereof in
accordance with the terms of this Agreement and the Warrants.
2.3 EXERCISE OF THE WARRANTS. The Warrants may be exercised upon
surrender to the Company, at its principal office, of the certificate evidencing
the Warrants to be exercised, together with the Purchase Form on the reverse
thereof completed and signed, and upon payment to the Company, of the Exercise
Price (as defined in and determined in accordance with the provisions of
Sections 2.5 and 6 hereof) for the number of Warrant Shares in respect of which
such Warrants are then being exercised (such surrender of Warrants, delivery of
the Purchase Form and payment of the Exercise Price hereinafter called the
"Exercise of the Warrants"). Upon partial exercise, a Warrant certificate for
the unexercised portion shall be delivered by the Company to the Holder. Payment
of the Exercise Price shall be by delivery of cash, or a certified or official
bank check in the amount of such Exercise Price.
Subject to Section 3 hereof, upon such surrender of a Warrant and
payment of the Exercise Price as aforesaid, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
Holder thereof and in such name or names as the Holder may designate, a
certificate or certificates for the number of Warrant Shares so
2
<PAGE> 4
purchased upon the exercise of such Warrant, together with cash, as provided in
Section 6.3 hereof, in lieu of any fractional Warrant Shares otherwise issuable
upon such surrender. Such certificate or certificates shall be deemed to have
been issued and any person so designated to be named therein shall be deemed to
have become a holder of record of such Warrant Shares as of the date of the
surrender of such Warrant and payment of the Exercise Price, as aforesaid.
2.4 COMPLIANCE WITH GOVERNMENT REGULATIONS. The Holder
acknowledges that none of the Warrants or Warrant Shares have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), and
therefore may be sold or disposed of in the absence of such registration only
pursuant to an exemption from such registration and in accordance with this
Agreement. The Warrant Shares will bear a legend to the following effect:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR WITH THE SECURITIES COMMISSION OF ANY
STATE UNDER ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND
ARE SUBJECT TO THE WARRANT AGREEMENT, DATED AS OF JUNE 30, 1999,
BETWEEN THE HARVEY ENTERTAINMENT COMPANY AND PAUL GUEZ (A COPY OF
WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY). SECURITIES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT OR IN A TRANSACTION EXEMPT FROM
THE REGISTRATION REQUIREMENTS OF THOSE SECURITIES LAWS (IF
REQUESTED BY THE COMPANY, UPON PROVISION OF AN OPINION OF COUNSEL
IN FORM SATISFACTORY TO THE COMPANY)."
2.5 EXERCISE PRICE. The price per share at which Warrant Shares
shall be purchasable upon exercise of each Warrant (the "Exercise Price") shall
be (i) $9.00 per share of Common Stock in the case of the Series A Warrants;
(ii) $11.00 per share of Common Stock in the case of the Series B Warrants; and
(iii) $12.00 per share of Common Stock in the case of the Series C Warrants, in
each case subject to adjustment as provided in Section 6 hereof.
SECTION 3. PAYMENT OF TAXES. The Company will pay all documentary stamp
taxes, if any, attributable to the initial issuance of the Warrants and Warrant
Shares upon the exercise of Warrants. The Company shall not be required to pay
any income tax or taxes resulting from the issuance of the Warrants or any other
tax or taxes which may be payable in respect of any transfer involved in the
issue or delivery of the Warrants or certificates for Warrant Shares.
SECTION 4. MUTILATED OR MISSING WARRANT. In case any Warrant certificate
shall be mutilated, lost, stolen or destroyed, the Company shall issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
Warrant, or in lieu of and substitution for
3
<PAGE> 5
the Warrant lost, stolen or destroyed, a new Warrant certificate of like tenor
and representing an equivalent right or interest; but only upon receipt of
evidence reasonably satisfactory to the Company of such loss, theft or
destruction of such Warrant certificate and indemnity or bond, if requested,
also reasonably satisfactory to them. An applicant for such substitute Warrant
certificate shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Company may prescribe.
SECTION 5. RESERVATION OF WARRANT SHARES.
5.1 RESERVATION OF WARRANT SHARES. There have been reserved, and
the Company shall at all times keep reserved, out of its authorized and unissued
shares of Common Stock, that number of shares of Common Stock sufficient to
provide for the exercise of the outstanding Warrants. The transfer agent for the
Common Stock and every subsequent transfer agent ("Transfer Agent") for any
shares of the Company's capital stock issuable upon the exercise of any of the
Warrants will be and are hereby irrevocably authorized and directed at all times
until 5:00 p.m. Pacific Time on the Expiration Date applicable to each Series of
Warrants to reserve such number of authorized shares as shall be requisite for
such purpose. The Company will keep a copy of this Agreement on file with the
Transfer Agent for any shares of the Company's capital stock issuable upon the
exercise of the rights of purchase represented by the Warrants. The Company
covenants that all Warrant Shares which may be issued upon exercise of Warrants
will, upon payment in accordance with this Agreement be validly issued, fully
paid, nonassessable, free of preemptive rights and free from all taxes, liens,
charges, pledges, mortgages and security interests with respect to the issue
thereof. The Company will supply the Transfer Agent with duly executed stock
certificates for such purpose and will itself provide or otherwise make
available any cash which may be payable as provided in Section 6.3 of this
Agreement. The Company will furnish to such Transfer Agent a copy of all notices
of adjustments, and certificates related thereto, transmitted to the Holder. Any
Warrant surrendered in the exercise of the rights thereby evidenced shall be
canceled by the Company.
5.2 CANCELLATION OF WARRANTS. In the event the Company shall
purchase or otherwise acquire any Warrants, the same shall be canceled and
retired.
SECTION 6. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.
The number and kind of securities purchasable upon the exercise of the Warrants
and the Exercise Price shall be subject to adjustment from time to time upon the
happening of certain events, as hereinafter defined.
6.1 MECHANICAL ADJUSTMENTS. The number of Warrant Shares
purchasable upon the exercise of the Warrants and the Exercise Price shall be
subject to adjustment as follows:
(a) PROHIBITED ACTIONS. So long as any Warrants are
outstanding, then, the Company will not avoid or seek to avoid the
observance or performance of any of the terms of this Agreement or the
Warrants or impair the ability of the Holder to realize the full
intended economic value thereof, but will at all times in
4
<PAGE> 6
good faith assist in the carrying out of all such terms, and of the
taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder of the Warrants against dilution or
other impairment.
(b) ADJUSTMENT OF NUMBER OF SHARES. Subject to any
applicable exceptions set forth in Section 6.1(g) below, if and whenever
after the date hereof the Company shall in any manner (i) issue or sell
any shares of its Common Stock for less than Fair Value (as defined in
Section 6.1 (k) below) as determined at the time of such issuance or
sale, or (ii) grant (whether directly or by assumption in a merger or
otherwise) any rights to subscribe for or to purchase any options,
warrants, convertible securities, securities and other rights to acquire
from the Company shares of Common Stock ( the "Common Stock
Equivalents"), or issue or sell (whether directly or by assumption in a
merger or otherwise) Common Stock Equivalents, and the price per share
for which Common Stock is issuable upon exercise, conversion or exchange
of such Common Stock Equivalents (determined by dividing (x) the
aggregate amount received or receivable by the Company as consideration
for the issue, sale or grant of such Common Stock Equivalents, plus the
minimum aggregate amount of additional consideration, if any, payable to
the Company upon the exercise, conversion or exchange thereof, by (y)
the total maximum number of shares of Common Stock issuable upon the
exercise, conversion or exchange of all such Common Stock Equivalents)
shall be less than the Fair Value (after taking into account any
consideration received or receivable by the Company with respect to the
exercise, exchange or conversion of any Common Stock Equivalents) on the
date of such issue, sale or grant, whether or not the rights to
exercise, exchange or convert thereunder are immediately exercisable or
(iii) declare a dividend or make any other distribution upon any stock
of the Company payable in Common Stock or Common Stock Equivalents, then
(A) the Exercise Price shall be reduced to a price determined by
multiplying the Exercise Price in effect prior to the adjustment
referred to in this Section 6.1 (b) by a fraction, the numerator of
which is an amount equal to the sum of (x) the number of shares of
Common Stock outstanding (including shares of Common Stock issuable upon
conversion of all outstanding shares of Series A Preferred Stock)
immediately prior to such issue, sale, grant, dividend or distribution,
plus (y) (A) the consideration, if any, received or receivable by the
Company upon any such issue or sale, plus, in the case of Common Stock
Equivalents, the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the exercise, conversion or exchange
of Common Stock Equivalents divided by (B) the Fair Value as determined
at the time of such issue or sale, and the denominator of which is the
total number of shares of Common Stock outstanding (including shares of
Common Stock issuable upon conversion of all outstanding shares of
Series A Preferred Stock) immediately after such issue, sale, grant,
dividend or distribution, and (B) the number of shares of Common Stock,
taking into account all shares of Common Stock thereto issued upon
exercise of each Warrant, required to be issued by the Company to the
Holder (the "Exercise Quantity") shall be adjusted to equal the number
obtained by dividing (x) the Exercise Price in effect immediately prior
to such issue, sale, grant, dividend or distribution multiplied by the
Exercise Quantity immediately prior to such issue, sale, grant, dividend
5
<PAGE> 7
or distribution by (y) the Exercise Price resulting from the adjustment
made pursuant to clause (A) above.
(c) RECORD DATE. The record date for the holders of the
Common Stock for the purpose of entitling them (a) to receive a dividend
or other distribution payable in shares of Common Stock or Common Stock
Equivalents, or (b) to subscribe for or purchase shares of Common Stock
or Common Stock Equivalents shall be the date determined by the Board as
the record date for such purposes or, if none is established by the
Board, then the record date shall be the effective date for such action;
provided, however, that if such shares are not actually issued or sold
on the applicable issuance or sale date, then such shares of Common
Stock or Common Stock Equivalents shall not be deemed to have been sold
or issued on such record date.
(d) CERTAIN DIVIDENDS. In case the Company shall pay a
dividend or make a distribution generally to the holders of its Common
Stock of shares of its capital stock (other than shares of Common
Stock), evidences of its indebtedness, assets or rights, warrants or
options (excluding (i) dividends or distributions payable in cash out of
the current year's or retained earnings of the Company, (ii)
distributions relating to subdivisions and combinations covered by
Section 6.1 (e), (iii) distributions relating to reclassifications,
changes, consolidations, mergers, sales or conveyances covered by
Section 6.1 (f) and (iv) rights, warrants or options to purchase or
subscribe for shares of Common Stock or Common Stock Equivalents or
other issuances covered by Section 6(b)), then in each such case (A) the
Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the Exercise Price in effect immediately prior
to the record date mentioned below by a fraction, the numerator of which
shall be (x) the total number of shares of Common Stock then outstanding
(including shares of Common Stock issuable upon conversion of all
outstanding shares of Series A Preferred Stock) multiplied by the Fair
Value per share of Common Stock on the record date mentioned below,
minus (y) the Fair Value as of such record date of said shares of stock,
evidences of indebtedness or assets so paid or distributed or of such
rights, warrants or options, plus (z) in the case of rights, warrants or
options, the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the exercise of such rights, warrants
or options, and the denominator of which shall be the total number of
shares of Common Stock then outstanding (including shares of Common
Stock issuable upon conversion of all outstanding shares of Series A
Preferred Stock) multiplied by the Fair Value per share of Common Stock
on the record date mentioned below, and (B) the Exercise Quantity shall
be adjusted to equal the number obtained by dividing (x) the Exercise
Price in effect immediately prior to such dividend or distribution
multiplied by the Exercise Quantity immediately prior to such dividend
or distribution by (y) the Exercise Price resulting from the adjustment
made pursuant to clause (A) above. Such adjustments shall be made
whenever any such dividend is paid or such distribution is made and
shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or
distribution.
6
<PAGE> 8
In the event of a distribution by the Company of stock of a
subsidiary or securities convertible into or exercisable for such stock,
then in lieu of an adjustment in the Exercise Price, the Holder of this
Warrant, upon the exercise thereof at any time after such distribution,
shall be entitled to receive from the Company, such subsidiary or both,
as the Company shall determine, the stock or other securities to which
the Holder would have been entitled if the Holder had exercised such
Warrant immediately prior thereto, all subject to further adjustment as
provided in this Section 6; provided, however, that no adjustment in
respect of dividends or interest on such stock or other securities shall
be made during the term of the Warrants or upon the exercise of the
Warrants.
(e) SUBDIVISION OR COMBINATION OF SHARES. In case the
Company shall at any time subdivide its outstanding shares of Common
Stock into a greater number of shares, the Exercise Price in effect
immediately prior to such subdivision shall be proportionally reduced
and the number of Warrant Shares purchasable hereunder shall be
proportionately increased. In case the outstanding shares of the Common
Stock of the Company shall be combined into a smaller number of shares,
the Exercise Price in effect immediately prior to such combination shall
be proportionately increased, but in no event to greater than the
aggregate Exercise Price of all Warrant Shares in effect on the date
hereof, and the number of Warrant Shares purchasable hereunder shall be
proportionately reduced.
(f) REORGANIZATION, MERGER, ETC. In case of any capital
reorganization, reclassification or similar transaction involving the
capital stock of the Company (other than as provided in Section 6.1
(e)), any consolidation, merger or business combination of the Company
with another corporation, or the sale or conveyance of all or
substantially all of its assets to another corporation, shall be
effected in such a way that holders of the Common Stock shall be
entitled to receive stock, securities, or assets (including cash) with
respect to or in exchange for shares of the Common Stock, then, prior to
and as a condition of such reorganization, reclassification,
consolidation, merger, business combination, sale or conveyance, lawful
and adequate provision shall be made whereby the Holder shall thereafter
have the right to receive upon exercise of the Warrants and in lieu of
the Warrant Shares immediately theretofore purchasable upon the exercise
of the Warrants, such shares of stock, securities or assets (including
cash) as may be issued or payable with respect to or in exchange for a
number of outstanding shares of Common Stock equal to the number of
shares of Common Stock immediately theretofore purchasable upon the
exercise of the Warrants had such reorganization, reclassification,
consolidation, merger, business combination, sale or conveyance not
taken place. In any such case, appropriate provision shall be made with
respect to the rights and interests of the Holder to the end that the
provisions hereof (including, without limitation, provisions for
adjustment of the Exercise Price and of the number of Warrant Shares
purchasable upon the exercise of the Warrants) shall thereafter be
applicable, as nearly as possible in relation to any stock, securities
or assets thereafter deliverable upon the exercise of the Warrants. The
Company shall not effect any such
7
<PAGE> 9
consolidation, merger, business combination, sale or conveyance unless
prior to or simultaneously with the consummation thereof the survivor or
successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument executed and sent to the Holder, the
obligation to deliver to the Holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, the Holder may
be entitled to receive, and containing the express assumption by such
successor corporation of the due and punctual performance and observance
of every provision of this Agreement to be performed and observed by the
Company and of all liabilities and obligations of the Company hereunder.
(g) EXCEPTIONS TO ADJUSTMENT. No adjustment will be made
(i) upon the exercise or conversion of any Warrants, options,
subscriptions, convertible notes, convertible debentures, convertible
preferred stock or other convertible securities issued and outstanding
on the date hereof; (ii) upon the grant or exercise of any stock or
options which may hereinafter be granted or exercised under any employee
benefit plan of the Company now existing or to be implemented in the
future, or upon grant or exercise of any stock or options to or by any
officer, director, employee, agent, consultant or other entity providing
services to the Company, whether or not under a plan; (iii) upon
conversion of any of the Series A Convertible Preferred Stock; (iv) upon
the issuance of securities in connection with any merger, acquisition or
consolidation, or purchase of assets or business from another person, so
long as the Company is the surviving corporation; (v) upon the issuance
of securities issued as the result of anti-dilution rights granted to a
third party; (vi) upon the issuance of securities in a private placement
made within six months of the original issuance date of the Series A
Preferred Stock at a discount below the market price thereof which does
not exceed 20%.
(h) TREASURY SHARES. The number of shares of the Common
Stock outstanding at any time shall not include shares owned or held by
or for the account of the Company or any of its subsidiaries, and the
disposition (but not the cancellation) of any such shares shall be
considered an issue or sale of the Common Stock for the purposes of
Section 6.
(i) ADJUSTMENT NOTICES TO HOLDER. Upon any increase or
decrease in the number of Warrant Shares purchasable upon the exercise
of the Warrants, or upon any adjustment in the Exercise Price, then, and
in each such case, the Company shall promptly deliver written notice
thereof to the Holder, which notice shall state the increased or
decreased number of Warrant Shares purchasable upon the exercise of the
Warrants, setting forth in reasonable detail the method of calculation
and the facts upon which such calculations are based. Such notice shall
also contain a certificate of the Company's independent public
accountants as to the correctness of such adjustments and calculations
and to the effect that such adjustments and calculations have been made
in accordance with the terms hereof.
(j) EXERCISE PRICE DEFINED. As used in these Warrants, the
8
<PAGE> 10
term "Exercise Price" shall mean the purchase price per share specified
in these Warrants until the occurrence of an event specified in this
Section 6 and thereafter shall mean said price, as adjusted from time to
time, in accordance with the provisions of said subsection. No such
adjustment shall be made unless such adjustment would change the
Exercise Price at the time by $.125 or more; provided, however, that all
adjustments not so made shall be deferred and made when the aggregate
thereof would change the Exercise Price at the time by $.125 or more.
(k) FAIR VALUE DEFINED. Fair Value as of a particular date
shall mean the average of the daily closing prices for the preceding
twenty trading days before the day in question. The closing price for
each day shall be the last reported sale price regular way or, in case
no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the
principal national securities exchange on which the Common Stock is
listed or admitted to trading or, if not listed or admitted to trading
on any national securities exchange, the average of the closing bid and
asked prices as reported by the National Association of Securities
Dealers Automated Quotation System. If such quotations are unavailable,
or with respect to other appropriate security, property, assets,
business or entity, "Fair Value" shall mean the fair value of such item
as determined by mutual agreement reached by the Company and [the
holders constituting a majority of the unexercised shares of Common
Stock issuable under the Warrants and the warrants issued under that
certain Warrant Agreement dated as of April 26, 1999 (the "April
Warrants") among the Company, Roger A. Burlage, Michael R. Burns, The
Kushner-Locke Company, Al Checchi and Ken Slutsky (collectively, the
"Majority of the Holders")] or, in the event the parties are unable to
agree, an opinion of an independent investment banking firm or firms in
accordance with the following procedure. In the case of any event which
gives rise to a requirement to determine "Fair Value" pursuant to this
Agreement, the Company shall be responsible for initiating the process
by which Fair Value shall be determined as promptly as practicable, but
in any event within sixty (60) days following such event and if the
procedures contemplated herein in connection with determining Fair Value
have not been complied with fully, then any such determination of Fair
Value for any purpose of this Agreement shall be deemed to be
preliminary and subject to adjustment pending full compliance with such
procedures. Upon the occurrence of an event requiring the determination
of Fair Value, the Company shall give the Holder and the holders of the
April Warrants notice of such event, and the Company, the Holder and the
holders of the April Warrants shall engage in direct good faith
discussions to arrive at a mutually agreeable determination of Fair
Value. In the event the Company and the Majority of the Holders are
unable to arrive at a mutually agreeable determination within thirty
(30) days of the notice, Deloitte & Touche LLP shall make such
determination and render such an opinion. The determination so made
shall be conclusive and binding on the Company and such holders. The
fees and expenses of the investment banking firm retained for such
purpose shall be equally shared by the Company and the holders.
(l) ADJUSTMENTS: ADDITIONAL SHARES, SECURITIES OR ASSETS.
9
<PAGE> 11
In the event that at any time, as a result of an adjustment made
pursuant to this Section 6, the Holder of these Warrants shall, upon
Exercise of these Warrants, become entitled to receive shares and/or
other securities or assets (other than Common Stock) then, wherever
appropriate, all references herein to shares of Common Stock shall be
deemed to refer to and include such shares and/or other securities or
assets; and thereafter the number of such shares and/or other securities
or assets shall be subject to adjustment from time to time in a manner
and upon terms as nearly equivalent as practicable to the provisions of
this Section 6.
(m) COMPUTATION OF ADJUSTMENT. If any adjustment to the
number of shares of Common Stock issuable upon the exercise of each
Warrant or any adjustment to the Exercise Price is required pursuant to
Section 6 hereof, the number of shares of Common Stock issuable upon
exercise of each Warrant or the Exercise Price shall be rounded up to
the nearest 1/10th cent or 1/100th Share, as appropriate.
6.2 NOTICE OF ADJUSTMENT. Whenever the number of Warrant Shares
purchasable upon the exercise of the Warrants or the Exercise Price of such
Warrant Shares is adjusted, as herein provided, the Company shall mail by first
class, postage prepaid, to the Holder notice of such adjustment or adjustments
and shall deliver to the Holder a copy of a certificate of either the Board of
Directors of the Company or of a firm of independent public accountants selected
by the Board of Directors of the Company (who may be the regular accountants
employed by the Company) setting forth the number of Warrant Shares purchasable
upon the exercise of the Warrants and the Exercise Price of such Warrant Shares
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made. Such certificate shall be conclusive evidence of the correctness of such
adjustment in the absence of manifest error.
6.3 FRACTIONAL INTERESTS. No fractional shares or scrip
representing fractional shares shall be issuable upon an Exercise of Warrants,
but on Exercise of Warrants, the Holder hereof may purchase only a whole number
of shares of Common Stock. The Company shall make a payment in cash in respect
of any fractional shares which might otherwise be issuable upon Exercise of
these Warrants, calculated by multiplying the fractional share amount by the
closing bid price of the Company's Common Stock on the Date of Exercise as
reported by the NASDAQ National Market or such other principal exchange or
trading market upon which the Common Stock is then traded; provided that the
Exercise of multiple Warrants shall be aggregated so that a cash payment in
respect of fractional shares pursuant to this Section 6.3 shall not be made as
to a total number greater than one for any single Exercise.
6.4 STATEMENT ON THE WARRANTS. Irrespective of any adjustments in
the Exercise Price or the number or kind of shares purchasable upon the exercise
of the Warrants, the Warrants theretofore or thereafter issued may continue to
express the same price and number and kind of shares as are stated in the
Warrants initially issuable pursuant to this Agreement.
10
<PAGE> 12
SECTION 7. NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDER. Nothing
contained in this Agreement or in the Warrants shall be construed as conferring
upon the Holder or its permitted transferees the right to vote or to receive
dividends or to consent to or receive notice as a stockholder in respect of any
meeting of stockholders for the election of directors of the Company or any
other matter, or any rights whatsoever as a stockholder of the Company.
SECTION 8. INSPECTION OF WARRANT AGREEMENT. The Company shall keep
copies of this Agreement and any notices given or received hereunder available
for inspection by the Holder during normal business hours at its principal
office.
SECTION 9. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment of
any subsequent transfer agent for the Common Stock or any other shares of the
Company's capital stock issuable upon the exercise of the Warrants the Company
will notify the Holder of the name and address of such subsequent transfer
agent.
SECTION 10. NOTICES. Any notice pursuant to this Agreement by any Holder
to the Company, shall be in writing and shall be mailed first class, postage
prepaid, or delivered to the Company at its office at 1999 Avenue of the Stars,
Suite 2050, Los Angeles, California 90067, Attention: Chief Executive Officer.
Any notice mailed pursuant to this Agreement by the Company to
the Holder shall be in writing and shall be mailed first class, postage prepaid,
or delivered to the Holder at its address on the signature page hereto.
Each party hereto may from time to time change the address to
which notices to it are to be delivered or mailed hereunder by notice in writing
to the other party.
SECTION 11. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to principles of conflict of laws. The parties hereto agree to submit to
the jurisdiction of the Courts of the State of California in any action or
proceeding arising out of or relating to this Agreement.
SECTION 12. SUPPLEMENTS AND AMENDMENTS. The Company and Majority of the
Holders may from time to time supplement or amend this Agreement in order to
cure any ambiguity or to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provision herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Majority of the Holders may deem necessary or
desirable and which shall not be inconsistent with the provisions of the
Warrants and which shall not adversely affect the interests of the Holder.
SECTION 13. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company shall bind and inure to the
benefit of its successors and assigns hereunder.
11
<PAGE> 13
SECTION 14. MERGER OR CONSOLIDATION OF THE COMPANY. So long as the
Warrant remains outstanding, the Company will not merge or consolidate with or
into, or sell, transfer or lease all or substantially all of its property to,
any other corporation unless the successor or purchasing corporation, as the
case may be (if not the Company), shall expressly assume, by supplemental
agreement, the due and punctual performance and observance of each and every
covenant and condition of this Agreement to be performed and observed by the
Company.
SECTION 15. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to confer upon any person other than the Company and the Holder any
legal or equitable right, remedy or claim under this Agreement and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Holder.
SECTION 16. CAPTIONS. The captions of the Sections of this Agreement
have been inserted for convenience only and shall have no substantive effect.
SECTION 17. COUNTERPARTS. This Agreement may be executed in any number
of counterparts each of which when so executed shall be deemed to be an
original; but such counterparts together shall constitute but one and the same
instrument.
SECTION 18. LIMITATION OF LIABILITY. No provision hereof, in the absence
of affirmative action by the Holder to purchase shares of Common Stock, and no
enumeration herein of the rights or privileges of the Holder of a Warrant, shall
give rise to any liability of the Holder for the purchase price of any Common
Stock or as a shareholder of the Company, whether such liability is asserted by
the Company or by creditors of the Company.
SECTION 19. WAIVER AND COURSE OF DEALING. No course of dealing or any
delay or failure to exercise any right hereunder on the part of any party
thereto shall operate as a waiver of such right or otherwise prejudice the
rights, powers or remedies of such party.
SECTION 20. WAVIER OF JURY TRIAL. THE COMPANY AND THE HOLDER HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR FOR ANY COUNTERCLAIM THEREIN.
12
<PAGE> 14
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed as of the day, month and year first above written.
THE COMPANY:
THE HARVEY ENTERTAINMENT COMPANY
By:
-------------------------------
Name:
Title:
PAUL GUEZ
Signature
Address:
13
<PAGE> 15
ANNEX A
Warrant Certificate
Warrant No. ______________ ______________ Shares
[SERIES A] [SERIES B] [SERIES C] COMMON STOCK PURCHASE WARRANT
Void After 5:00 P.M.
Pacific Time on [June ___, 2005] [June ___, 2006] [June ____, 2007]
THIS CERTIFIES THAT, for value received, _______________, the registered
holder of this [Series A] [Series B] [Series C] Common Stock Purchase Warrant
(the "Warrant") or permitted assigns (the "Holder"), is entitled to purchase
from The Harvey Entertainment Company, a California corporation (the "Company"),
at any time until 5:00 p.m. Pacific Time on [June ___, 2005] [June ___, 2006]
[June ____, 2007] (the "Expiration Date"), ___________ shares of the common
stock of the Company, no par value per share (the "Common Stock") at a price per
share of [$9.00] [$11.00] [$12.00] (the "Purchase Price"). The number of shares
purchasable upon exercise of this Warrant and the Purchase Price per share shall
be subject to adjustment from time to time as set forth in the Warrant Agreement
referred to below.
This Warrant is issued under and in accordance with a Warrant Agreement,
dated as of June __, 1999, between the Company the Holder and is subject to the
terms and provisions contained in the Warrant Agreement, to all of which the
Holder of this Warrant by acceptance hereof consents. A copy of the Warrant
Agreement may be obtained for inspection by the Holder hereof upon written
request to the Company.
This Warrant may be exercised in whole or in part by presentation of
this Warrant with the Purchase Form on the reverse side hereof duly executed and
simultaneous payment of the Exercise Price (subject to adjustment) at the
principal office of the Company in Los Angeles, California. Payment of such
price shall be payable at the option of the Holder hereof in cash or by
certified or official bank check or wire transfer. Terms relating to exercise of
Warrant is set forth more fully in the Warrant Agreement.
This Warrant may be exercised in whole or in part. Upon partial
exercise, a Warrant Certificate for the unexercised portion shall be delivered
to the Holder. No fractional shares will be issued upon the exercise of this
Warrant but the Company shall pay the cash value of any fraction upon the
exercise of the Warrant. This Warrant is transferable only in limited
circumstances as described in this Warrant Agreement at the office of the
Company in Los Angeles, California, in the manner and subject to the limitations
set forth in the Warrant Agreement.
<PAGE> 16
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR WITH THE SECURITIES COMMISSION OF ANY
STATE UNDER ANY APPLICABLE STATE SECURITIES OR BLUE SKY LAWS AND
ARE SUBJECT TO THE WARRANT AGREEMENT, DATED AS OF JUNE __, 1999,
BETWEEN THE HARVEY ENTERTAINMENT COMPANY AND PAUL GUEZ (A COPY
OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY).
SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR IN A
TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THOSE
SECURITIES LAWS (IF REQUESTED BY THE COMPANY, UPON PROVISION OF
AN OPINION OF COUNSEL IN FORM SATISFACTORY TO THE COMPANY)."
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented hereby, or to the
transfer hereof on the books of the Company. Any notice to the contrary
notwithstanding, and until such transfer on such books, the Company may treat
the Holder hereof as the owner for all purposes.
This Warrant does not entitle any Holder hereof to any of the rights of
a stockholder of the Company.
THE HARVEY ENTERTAINMENT COMPANY
By:
-------------------------------
Name: Roger A. Burlage
Title: Chief Executive Officer
DATED: As of ____ ___, 1999
2
<PAGE> 17
ANNEX B
PURCHASE FORM
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant for, and to purchase thereunder,
__________ shares of the stock provided for therein, and tenders herewith
payment of the purchase price in full in the form of cash or by cashier's check
in the amount of $_____________.
The undersigned requests that certificates for such shares be issued in
the name of:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please Print Name, Address and Social Security No.)
DATED: , ______
Name of Warrant Holder:
________________________________________________________________________________
Address:
________________________________________________________________________________
________________________________________________________________________________
Signature:______________________________________________________________________
<PAGE> 1
EXHIBIT 10.65
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of June 30, 1999, by and between
The Harvey Entertainment Company, a California corporation (the "Company"), and
Paul Guez (the "Shareholder").
W I T N E S S E T H
WHEREAS, pursuant to the Note dated as of June 30, 1999, made by the
Company in favor of the Shareholder (the "Note"), upon satisfaction of the
conditions set forth in Section 6 of the Note, the Note will be converted into
20,488 shares of the Company's Series A Preferred Stock ("Series A Preferred
Stock") and Warrants (the "Warrants") to purchase 144,618 shares of the
Company's Common Stock, no par value (the "Common Stock");
WHEREAS, the Series A Preferred Stock and Warrants will, subject to the
respective terms thereof, be convertible into shares of Common Stock; and
WHEREAS, it is a condition to the Note and the transactions contemplated
thereby that the Shareholder and the Company enter into this Registration Rights
Agreement;
NOW, THEREFORE, in order to implement the foregoing and in consideration
of the mutual representations, warranties, covenants and agreements contained
herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
I.1 Defined Terms. Capitalized terms used herein but not otherwise
defined shall have the meaning given to such terms in the Note.
"Closing" shall mean the issuance of the Note.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder as the same may be
amended from time to time.
"Person" shall mean any individual, partnership, joint venture,
corporation, limited liability company, trust, joint stock company, business
trust, unincorporated association, joint venture, governmental authority or any
department or agency thereof or other entity of any nature whatsoever.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, and
all rules and
<PAGE> 2
regulations promulgated thereunder as the same may be amended from time to time.
"Selling Securityholder" shall have the meaning given such term in
Section 3.4.
"Shareholder Common Stock" shall mean the shares of Common Stock
issuable to the Shareholder, holders of the Company's outstanding Series A
Preferred Stock, the Warrants and warrants issued pursuant to that certain
Warrant Agreement dated as of April 26, 1999 among the Company, Roger A.
Burlage, Michael R. Burns, The Kushner-Locke Company, a California corporation,
Al Checchi and Ken Slutsky (the "April Warrants") upon conversion of Series A
Preferred Stock and upon exercise of the Warrants and the April Warrants.
ARTICLE II
TRANSFERS OF SHARES
II.1 Shareholder Common Stock Unregistered. The Shareholder acknowledges
and represents that he has been advised by the Company that, with respect to the
Shareholder Common Stock issuable to or issued to the Shareholder:
(a) the offer and sale of the Shareholder Common Stock have not
been registered under the Securities Act;
(b) the Shareholder Common Stock must be held and the Shareholder
must continue to bear (and is able to bear) the economic risk of the investment
in the Shareholder Common Stock, subject to the terms and conditions of the
Purchase Agreement until (i) the Shareholder Common Stock is registered pursuant
to an effective registration statement under the Securities Act and all
applicable state securities laws or (ii) an exemption from such registration is
available;
(c) when and if shares of the Shareholder Common Stock may be
disposed of without registration under the Securities Act in reliance on Rule
144 thereunder ("Rule 144"), such disposition can be made only in limited
amounts in accordance with the terms and conditions of such Rule;
(d) if the Rule 144 exemption is not available, public offer or
sale of Shareholder Common Stock without registration will require compliance
with some other exemption under the Securities Act;
(e) a restrictive legend in the form set forth in Section
5(b)(iii) of the Note shall be placed on the certificates representing the
Shareholder Common Stock; and
(f) a notation shall be made in the appropriate records of the
Company indicating that the Shareholder Common Stock is subject to restrictions
on transfer, and appropriate stop-transfer instructions will be issued to the
Company's transfer agent with respect to the Shareholder Common Stock.
II.2 Rule 144 Reporting. The Company agrees that to the extent
reasonably necessary to permit the Shareholder to sell shares of the Shareholder
Common Stock in accordance with
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and in reliance on Rule 144, and for so long as such shares are owned by the
Shareholder and such shares are not registered for resale under the Securities
Act, the Company will use its reasonable best efforts to:
(a) Make and keep public information available within the meaning
of Rule 144 under the Securities Act, at all times from and after the date of
the Closing (the "Closing Date");
(b) File with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) So long as the Shareholder owns any Shareholder Common Stock
issued to the Shareholder pursuant to the Note and the transactions contemplated
thereby, inform such person upon request as to its compliance with the reporting
requirements of Rule 144 and of the Securities Act and the Exchange Act, and
provide a copy of the most recent annual or quarterly report of the Company and
such other reports and documents filed with the SEC and available to the public
as may reasonably be requested in availing the Shareholder of any rule or
regulation of the SEC allowing a sale of any such securities without
registration.
Anything to the contrary contained in this Section 2.2 notwithstanding, the
Company may deregister any of its securities under the Exchange Act if it is
then permitted to do so pursuant to the Exchange Act in which case the
provisions of this Section 2.2 insofar as they relate to obligations to make
filings under the Exchange Act that would no longer be required as a result of
such delisting shall be of no further force or effect. Nothing in this Section
shall be deemed to limit in any manner the restriction on sales of Shareholder
Common Stock contained in this Agreement.
ARTICLE III
REGISTRATION RIGHTS
III.1 Demand Registration. If at any time commencing 18 months from
April 26, 1999, the Company shall receive from holders of more than 50% of the
Shareholder Common Stock that has not been registered pursuant to Article III of
this Agreement and Article III of that certain Registration Rights Agreement
dated as of April 26, 1999 by and among the Company, The Kushner-Locke Company,
Roger A. Burlage, Michael R. Burns and Ken Slutsky (the "April Registration
Rights Agreement"), a written request that the Company effect any registration
of Shareholder Common Stock, the Company will:
(a) promptly give written notice of the proposed registration to
all other holders of Shareholder Common Stock; and
(b) file a registration statement on Form S-3 or any successor
form with the SEC within 45 days after the initiating shareholders' request and
use its best efforts to effect the registration for resale of the Shareholder
Common Stock (including, without limitation, the execution of an undertaking to
file post-effective amendments, appropriate qualifications under applicable blue
sky or other state securities laws and appropriate compliance with applicable
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regulations issued under the Securities Act) as would permit the sale and
distribution by the Shareholder of such shares of Shareholder Common Stock under
applicable law, together with all Shareholder Common Stock of any shareholders
joining in such request as are specified in a written request received by the
Company within 30 days after receipt of such written notice from the Company
provided, however that the Company shall not be obligated to take any action to
effect any such registration, qualification or compliance pursuant to this
Section 3.1:
(i) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(ii) If, at such time as a request for registration
pursuant to this Section 3.1 is pending, the Company has already effected two
such registrations pursuant to this Section 3.1, and each such registration has
been declared or ordered effective;
(iii) With respect to any of the Shareholder Common Stock
which has been transferred to any holder other than the Shareholder or a
"Shareholder" as defined in the April Registration Rights Agreement, or a family
member of any such shareholder or a trust for the benefit of any such
shareholder or family member; or
(iv) During the period starting with the date 60 days
prior to the filing of, and ending on a date three months following the
effective date of, a registration statement (other than with respect to a
registration statement relating to a Rule 145 transaction, an offering solely to
employees or any other registration which is not appropriate for the
registration of Shareholder Common Stock).
III.2 Right to Include Securities. If at any time during the period
commencing 18 months from April 26, 1999 all of the shares of Shareholder Common
Stock are not then registered for resale under the Securities Act, and the
Company proposes to register any shares of its Common Stock under the Securities
Act on Forms S-1, S-2 or S-3 or any successor or similar forms (except for
registrations on such forms solely for registration of Common Stock in
connection with any warrant, option, employee benefit or dividend reinvestment
plan), whether or not for sale for its own account, it will each such time as
soon as practicable give written notice of its intention to do so to the
Shareholder. In such event, upon the written request (which request shall
specify the total number of shares of Shareholder Common Stock intended to be
disposed of by the Shareholder) of the Shareholder made within 15 days after the
receipt of any such notice (10 days if the Company gives telephonic notice with
written confirmation to follow promptly thereafter, stating that (i) such
registration will be on Form S-3 and (ii) such shorter period of time is
required because of a planned filing date), the Company will use all reasonable
efforts to effect the registration under the Securities Act in the manner
initially proposed by the Company of all Shareholder Common Stock held by the
Shareholder which the Company has been so requested to register for sale. If the
Company thereafter determines for any reason in its sole discretion not to
register or to delay registration of the Common Stock, the Company may, at its
election, give written notice of such determination to the Shareholder and (i)
in the case of a determination not to register, shall be relieved of the
obligation to register any Shareholder
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Common Stock in connection with such registration and (ii) in the case of a
determination to delay registering, shall be permitted to delay registering any
Shareholder Common Stock of the Shareholder for the same period as the delay in
registration of such other securities.
III.3 Priority in Incidental Registration. In a registration pursuant to
Section 3.2 hereof, if the managing underwriter of any such underwritten
offering to which Section 3.2 pertains shall inform the Company by letter of its
belief that the number of shares of Shareholder Common Stock to be included in
such registration would adversely affect its ability to effect such offering,
then the Company will be required to include in such registration only that
number of shares of Shareholder Common Stock which it is so advised can be
included in such offering without so adversely affecting it. With respect to a
registration that is the subject of Section 3.2 hereof, shares of Common Stock
proposed by the Company to be registered for issuance by the Company or for sale
by third parties exercising "demand" registration rights shall have the first
priority and all other shares of Common Stock to be registered, including any
and all shares of Shareholder Common Stock shall be given second priority
without preference among the relevant holders. If less than all of the shares of
Shareholder Common Stock duly requested to be included in such registration are
to be registered therein, such shares of Shareholder Common Stock shall be
included in the registration pro rata based on the total number of such shares
sought to be registered other than for issuance by the Company or sale by third
parties exercising "demand" registration rights in accordance with the preceding
sentence.
III.4 Registration Procedures. In connection with the Company's
obligations to register the Shareholder Common Stock for resale pursuant to this
Article III, the Company will use its reasonable best efforts to effect such
registration in accordance herewith and the Company will promptly:
(a) prepare and file with the SEC as soon as practicable after
request for registration hereunder the requisite registration statement to
effect such registration and use its reasonable best efforts to cause such
registration statement to become effective and to remain continuously effective
until the earlier to occur of (x) 180 days following the date on which such
registration statement is declared effective (the "Effective Date") or (y) the
termination of the offering being made as set forth thereunder;
(b) prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective as set forth
above and to comply with the provisions of the Securities Act with respect to
the disposition of all shares of Shareholder Common Stock covered by such
registration statement until such Shareholder Common Stock has been sold or such
lesser period of time as the Company, any seller of such Shareholder Common
Stock ("Selling Securityholder") or any underwriter is required under the
Securities Act to deliver a prospectus in accordance with the intended methods
of disposition by the Selling Securityholders set forth in such registration
statement or supplement to such prospectus;
(c) furnish to the managing underwriter, if any, and to the
Shareholder, at least one executed original of the registration statement and to
each of the Selling Securityholders such number of conformed copies of such
registration statement and of each such amendment and
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supplement thereto (in each case including all exhibits), such number of copies
of the prospectus contained in such registration statement (including each
preliminary prospectus and any summary prospectus) and any other prospectus
filed under Rule 424 under the Securities Act, in conformity with the
requirements of the Securities Act as may reasonably be requested by such
Selling Securityholder;
(d) use its reasonable best efforts (i) to register or qualify,
to the extent necessary, all shares of Common Stock covered by such registration
statement under the securities or "blue sky" laws of such jurisdictions where an
exemption is not available as the Selling Securityholders shall reasonably
request, (ii) to keep such registration or qualification in effect for so long
as such registration statement remains in effect and (iii) to take any other
action which may be reasonably necessary or advisable to enable the Selling
Securityholders to consummate the disposition in such jurisdictions of such
Common Stock, provided that the Company will not be required to qualify
generally to do business or as a dealer in any jurisdiction where it is not then
so qualified, subject itself to taxation in any such jurisdiction or take any
action which would subject it to general service of process in any such
jurisdiction;
(e) notify the Selling Securityholders and the managing
underwriter, if any, promptly, and confirm such advice in writing (i) when a
prospectus or any prospectus supplement or post-effective amendment has been
filed, and, with respect to a registration statement or any post-effective
amendment, when the same has become effective, (ii) of any request by the SEC
for amendments or supplements to a registration statement or related prospectus
or for additional information, (iii) of the issuance by the SEC of any stop
order suspending the effectiveness of a registration statement or the initiation
of any proceedings for that purpose, (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification of any of the
registered securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, (v) of the happening of any
event or information becoming known which requires the making of any changes in
a registration statement or related prospectus so that such documents will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading and (vi) of the Company's reasonable determination that a
post-effective amendment to a registration statement would be appropriate;
(f) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a registration statement, or the lifting
of any suspension of the qualification of any of the registered securities for
sale in any jurisdiction, at the earliest possible moment;
(g) upon the occurrence of any event contemplated by clause
(e)(v) above, prepare a supplement or post-effective amendment to the applicable
registration statement or related prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the securities being sold thereunder, such
prospectus will not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading;
(h) use its reasonable best efforts to furnish to the Selling
Securityholders a
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signed counterpart, addressed to the Selling Securityholders and the
underwriters, if any, of an opinion of counsel for the Company as to the
effectiveness of the registration statement registering the resale of the
Shareholder Common Stock under the Securities Act.
(i) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC in connection with a registration pursuant
hereto;
(j) cooperate with the Selling Securityholders and the managing
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing shares of Shareholder Common Stock to be sold; and
enable such shares of Shareholder Common Stock to be in such denominations and
registered in such names as the Selling Securityholders or the managing
underwriters, if any, may request at least two business days prior to any sale
of shares of Shareholder Common Stock to the underwriters;
(k) cause all shares of Common Stock covered by the registration
statement to be listed on each securities exchange, if any, or Nasdaq, on which
securities of such class, series and form issued by the Company, if any, are
then listed or traded if requested by the managing underwriters, if any, or the
holders of a majority of the shares of Common Stock covered by the registration
statement and entitled hereunder to be so listed; and
(l) cooperate and assist in any filings required to be made with
the National Association of Securities Dealers, Inc. (the "NASD") and in the
performance of any due diligence investigation by any underwriter (including any
qualified independent underwriter that is required to be retained in accordance
with the rules and regulations of the NASD).
The Company may require each Selling Securityholder to furnish to the
Company such information and documents regarding such Selling Securityholder and
the distribution of such securities as the Company may from time to time
reasonably request in writing in order to comply with the Securities Act.
Each of the Selling Securityholders agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 3.4(e)(ii), (iii), (iv), (v) or (vi) hereof, it will forthwith
discontinue disposition pursuant to such registration statement of any shares of
Common Stock covered by such registration statement or prospectus until its
receipt of the copies of the supplemented or amended prospectus relating to such
registration statement or prospectus or until it is advised in writing by the
Company that the use of the applicable prospectus may be resumed (and the period
of such discontinuance shall be excluded from the calculation of the period
specified in clause (x) of Section 3.4(a)) and, if so directed by the Company,
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in their possession, of the prospectus covering such
securities in effect at the time of receipt of such notice. Each of the Selling
Securityholders agrees to furnish the Company a signed counterpart, addressed to
the Company and the underwriters, if any, of an opinion of counsel covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) as are customarily covered in opinions of
selling stockholder's counsel delivered to the underwriters in underwritten
public offerings of securities (and dated the dates such opinions are
customarily dated) and such other legal matters as the
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Company or the underwriters may reasonably request.
III.5 Incidental Underwritten Offerings. If the Company at any time
proposes to register any shares of its common stock under the Securities Act as
contemplated by Section 3.2 and such shares are to be distributed by or through
one or more underwriters, the Company and, if the managing underwriter shall
elect in writing to include the shares of Shareholder Common Stock sought to be
included in such registration, the Selling Securityholders who hold Shareholder
Common Stock to be distributed by such underwriters in accordance with Section
3.2 hereof shall be parties to the underwriting agreement between the Company
and such underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of them and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be conditions
precedent to their obligations. The Company may, at its option, require that any
or all of the representations and warranties by, and the other agreements on the
part of the Selling Securityholders to and for the benefit of such underwriters
shall also be made to and for the benefit of the Company.
III.6 Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the Selling Securityholders,
the underwriters, if any, and their respective counsel and accountants the
opportunity (but such Persons shall not have the obligation except as set forth
herein) to participate (in the case of a registration pursuant to Section 3.2
hereof such participation shall be at their expense) in the preparation of such
registration statement, each prospectus included therein or filed with the SEC,
and, to the extent practicable, each amendment thereof or supplement thereto,
and will give each of them such access to its books and records (to the extent
customarily given to the underwriters of the Company's securities) and such
opportunities to discuss the business of the Company with its officers and the
independent public accountants who have certified its financial statements as
shall be necessary, in the opinion of the Selling Securityholders, and the
underwriters' respective outside counsel to conduct a reasonable investigation
within the meaning of the Securities Act.
III.7 Limitations, Conditions and Qualifications to Obligations under
Registration Covenants. The obligations of the Company to use its reasonable
efforts to cause the Shareholder Common Stock to be registered under the
Securities Act are subject to each of the following limitations, conditions and
qualifications:
(a) The Company shall be entitled to postpone for a reasonable
period of time the filing or effectiveness of, or suspend the rights of Selling
Securityholders to make sales pursuant to, any registration statement otherwise
required to be prepared, filed and made and kept effective by it hereunder (but
the duration of such postponement or suspension may not exceed the earlier to
occur of (w) 30 days after the cessation of the circumstances described in
clauses (i) and (ii) below or (x) 120 days after the date of the determination
of the Board of Directors referred to below, and the duration of such
postponement or suspension shall be excluded from the calculation of the period
specified in clause (x) of Section 3.4(a)) if the Board of Directors of the
Company determines in good faith that (i) there is a material undisclosed
development in the
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business or affairs of the Company (including any pending or proposed financing,
recapitalization, acquisition or disposition), the disclosure of which at such
time would be adverse to the Company's interests or (ii) the Company has filed a
registration statement with the SEC, such registration statement has not yet
been declared effective, the Company is using its reasonable best efforts to
have such registration statement declared effective, and the underwriters with
respect to such registration advise that such registration would be adversely
affected. If the Company shall so delay the filing of a registration statement,
it shall, as promptly as practicable, notify the Selling Securityholders of such
determination, and the Selling Securityholders shall have the right (y) in the
case of a postponement of the filing or effectiveness of a registration
statement to withdraw the request for registration by giving written notice to
the Company within 10 days after receipt of the Company's notice or (z) in the
case of a suspension of the right to make sales, to receive an extension of the
registration period equal to the number of days of the suspension.
(b) The Company's obligations shall be subject to the obligations
of the Selling Securityholders, which the Shareholder hereby acknowledges, to
furnish all information and materials and to take any and all actions as may be
required under applicable federal and state securities laws and regulations to
permit the Company to comply with all applicable requirements of the SEC and
state securities regulations and to obtain any acceleration of the effective
date of such registration statement or maintain the effectiveness or currency
thereof.
(c) The Company shall not be obligated to cause any special audit
to be undertaken in connection with any registration pursuant hereto unless such
audit is requested by the underwriters with respect to such registration.
(d) If requested by an underwriter in an underwritten offering,
the Shareholder agrees not to effect any public sale or distribution, including
any sale pursuant to Rule 144 under the Securities Act, of any Common Stock
(other than in accordance with Sections 3.1 or 3.2) within 30 days before or 60
days after the effective date of a registration statement filed pursuant to
Sections 3.1 or 3.2.
III.8 Expenses. The Company will pay its own actual expenses (including
legal fees) incurred in connection with each demand and incidental registration
of Shareholder Common Stock pursuant to Sections 3.1 or 3.2 of this Agreement,
including, without limitation, any and all filing fees payable to the SEC, fees
with respect to filings required to be made with stock exchanges, Nasdaq and the
NASD, fees and expenses of compliance with state securities or blue sky laws,
printing expenses, fees and disbursements of counsel and accountants of the
Company, including costs associated with comfort letters, and fees and expenses
of other Persons retained by the Company, and, in the case of a demand
registration pursuant to Section 3.1 of this Agreement, all reasonable costs,
expenses and fees of one legal counsel for the Selling Securityholders (which
legal counsel shall be chosen by the majority-in-interest of the Selling
Securityholders in their discretion), but each Selling Securityholder shall pay
its own underwriters' expenses (such as but not limited to discounts,
commissions and fees of underwriters and expenses included therein of selling
brokers, dealer managers or similar securities industry professionals relating
to the distribution of the securities being registered) and legal expenses
(except as set forth above). The Company shall pay its internal expenses
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(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), and the expense of securities
law liability insurance and rating agency fees, if any.
III.9 Indemnification.
(a) Indemnification by the Company. In connection with any
registration pursuant hereto in which Shareholder Common Stock is to be disposed
of, the Company shall indemnify and hold harmless, to the fullest extent
permitted by law, the Shareholder and, when applicable, its officers, directors,
agents and employees and each Person who controls (or is controlled by or under
common control with) the Shareholder (within the meaning of the Securities Act
or the Exchange Act) against all losses, claims, damages, liabilities and
expenses caused by any untrue or alleged untrue statement of a material fact
contained in any registration statement, prospectus or preliminary prospectus or
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
including, without limitation, any loss, claim, damage, liability or expense
resulting from the failure to keep a prospectus current as required hereunder,
except insofar as the same (i) are caused by or contained in any information
furnished in writing to the Company by or on behalf of the Shareholder expressly
for use therein or (ii) are caused by the Shareholder's failure to deliver a
copy of the current required prospectus after the Company has furnished the
Shareholder with a sufficient number of copies of such prospectus as requested
hereunder or (iii) arise in respect of any offers to sell or sales made during
any period when the Shareholder is required to discontinue sales under Section
3.4(e) or otherwise under applicable law. The Company shall also indemnify
underwriters, selling brokers, dealer managers and similar securities industry
professionals (if any), participating in the distribution of the Shareholder
Common Stock, their officers and directors and each person who controls such
Persons (within the meaning of the Securities Act and the Exchange Act) to the
same extent (and subject to the same exceptions) as provided above with respect
to the indemnification of the Shareholder and shall enter into an
indemnification agreement with such Persons containing such terms, if requested.
(b) Indemnification by the Shareholder. In connection with each
registration statement effected pursuant hereto in which Shareholder Common
Stock held by the Shareholder is to be disposed of, the Shareholder shall
indemnify and hold harmless, to the fullest extent permitted by law, the
Company, each other Selling Securityholder and their respective directors,
officers, agents and employees and each Person who controls the Company and each
other Selling Securityholder (within the meaning of the Securities Act and the
Exchange Act) and the managing underwriter if any, and its directors, officers,
agents, and employees and each Person who controls such underwriter (within the
meaning of the Securities Act and Exchange Act), in each case against any
losses, claims, damages, liabilities and expenses resulting from any untrue
statement of a material fact or any omission of a material fact required to be
stated in such registration statement or prospectus or preliminary prospectus or
necessary to make the statements therein not misleading, to the extent but only
to the extent, that such untrue statement or omission is contained in any
information furnished in writing by the Shareholder to the Company expressly for
inclusion in such registration statement or prospectus. In no event shall the
liability of the Shareholder hereunder be greater in amount than the dollar
amount of the
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proceeds received or to be received by the Shareholder upon the sale of the
securities giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. Any Person entitled
to indemnification hereunder shall give prompt notice to the indemnifying party
of any claim with respect to which it shall seek indemnification and shall
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party; provided, however, that any
Person entitled to indemnification hereunder shall have the right to employ
separate counsel and to participate in the defense of such claim, but the fees
and expenses of such counsel shall be at the expense of such Person unless (i)
the indemnifying party shall have agreed to pay such fees or expenses, or (ii)
the indemnifying party shall have failed to assume the defense of such claim and
to employ counsel reasonably satisfactory to such Person or (iii) such
assumption would constitute an actual conflict of interest (in which case, if
the Person notifies the indemnifying party in writing that such Person elects to
employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such claim
on behalf of such Person). If such defense is not assumed by the indemnifying
party, the indemnifying party shall not be subject to any liability for any
settlement made without its consent (but such consent shall not be unreasonably
withheld). No indemnified party shall be required to consent to entry of any
judgment or enter into any settlement that does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a written release in form and substance reasonably satisfactory to such
indemnified party from all liability in respect of such claim or litigation. An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim shall not be obligated to pay the fees and expenses of more than one
firm of counsel (and, if necessary, local counsel) for all parties (including
all applicable holders of Shareholder Common Stock) indemnified by such
indemnifying party with respect to such claim, unless a conflict of interest as
to the subject matter exists between such indemnified party and another
indemnified party with respect to such claim, in which event the indemnifying
party shall be obligated to pay the fees and expenses of additional counsel for
such indemnified party.
(d) Contribution. If for any reason the indemnification provided
for herein is unavailable to an indemnified party or is insufficient to hold it
harmless as contemplated hereby, then the indemnifying party shall contribute to
the amount paid or payable by the indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect not
only the relative benefits received by the indemnified party and the
indemnifying party, but also the relative fault of the indemnified party and the
indemnifying party, as well as any other relevant equitable considerations,
provided that in no event shall the liability of the Shareholder for such
contribution and indemnification exceed, in the aggregate, the dollar amount of
the proceeds received or to be received by the Shareholder upon the sale of
securities giving rise to such indemnification and contribution obligation.
III.10 Participation in Underwritten Registrations. The Shareholder may
not participate in any underwritten registration hereunder unless the
Shareholder (a) agrees to sell its Shareholder Common Stock on the basis
provided in and in compliance with any underwriting arrangements approved by the
persons entitled hereunder to approve such arrangements and to comply with
Regulation M under the Exchange Act, and (b) completes and executes all
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questionnaires, appropriate and limited powers-of-attorney, escrow agreements,
indemnities, underwriting agreements and other documents reasonably required
under the terms of such underwriting arrangements; provided that all such
documents shall be consistent with the provisions hereof.
ARTICLE IV
MISCELLANEOUS
IV.1 Recapitalizations, Exchanges, Etc. Affecting Shareholder Common
Stock. The provisions of this Agreement shall apply, to the fullest extent set
forth herein with respect to Shareholder Common Stock, to any and all shares of
capital stock of the Company or any successor or assign of the Company (whether
by merger, consolidation, sale of assets or otherwise) which may be issued in
respect of, in exchange for, or in substitution of the Shareholder Common Stock,
by reason of any stock dividend, stock split, stock issuance, reverse stock
split, combination recapitalization, reclassification, merger, consolidation or
otherwise; provided, however, that such provisions shall apply only to any class
or classes of stock which have the right, without limitation as to amount,
either to all or a share of the balance of current dividends and liquidating
dividends after payment of dividends and distributions on any shares entitled to
preference so issued or issuable upon the conversion, exchange or exercise, as
the case may be, of securities of the Company so issued.
IV.2 Binding Effect. The provisions of this Agreement shall be binding
upon and accrue to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and assigns. In the case of a transferee
permitted under this Agreement, such transferee shall be deemed the Shareholder
hereunder; provided, however, that no transferee shall derive any rights under
this Agreement unless and until such transferee has executed and delivered to
the Company a valid undertaking and becomes bound by the terms of this
Agreement.
IV.3 Amendment; Waiver. This Agreement may be amended only by a written
instrument signed by the parties hereto. No waiver by either party hereto of any
of the provisions hereof shall be effective unless set forth in a writing
executed by the party so waiving.
IV.4 Notices. All notices, requests, demands and other communications
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy, electronic or digital transmission
method; the day after it is sent, if sent for next day delivery to a domestic
address by recognized overnight delivery service (e.g., Federal Express) and
upon receipt, if sent by certified or registered mail, return receipt requested.
In each case notice shall be sent to:
(a) if to the Company, addressed to:
The Harvey Entertainment Company
1999 Avenue of the Stars, Suite 2050
Los Angeles, California 90067
12
<PAGE> 13
Fax: (310) 789-1990
Attn: Secretary
(b) If to the Shareholder, at the address set forth on the
signature pages hereto.
IV.5 Governing Law. This Agreement shall be governed by and construed,
interpreted and the rights of the parties determined in accordance with the laws
of the State of California without regard to choice of law principles hereof.
IV.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
IV.7 Invalidity. In the event that any one or more of the provisions
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
IV.8 Cumulative Remedies. All rights and remedies of the party hereto
are cumulative of each other and of every other right or remedy such party may
otherwise have at law or in equity, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
13
<PAGE> 14
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE HARVEY ENTERTAINMENT COMPANY
By:
-------------------------------
Name:
Title:
SHAREHOLDER:
----------------------------------
Name: Paul Guez
Address:
xiv
<PAGE> 15
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS....................................................................... 1
1.1 Defined Terms................................................................ 1
ARTICLE II TRANSFERS OF SHARES.............................................................. 2
2.1 Shareholder Common Stock Unregistered........................................ 2
2.2 Rule 144 Reporting........................................................... 3
ARTICLE III REGISTRATION RIGHTS............................................................. 3
3.1 Demand Registration.......................................................... 3
3.2 Right to Include Securities.................................................. 4
3.3 Priority in Incidental Registration.......................................... 5
3.4 Registration Procedures...................................................... 5
3.5 Incidental Underwritten Offerings............................................ 8
3.6 Preparation; Reasonable Investigation........................................ 8
3.7 Limitations, Conditions and Qualifications to Obligations under Registration
Covenants.................................................................... 8
3.8 Expenses..................................................................... 9
3.9 Indemnification.............................................................. 10
3.10 Participation in Underwritten Registrations.................................. 11
ARTICLE IV MISCELLANEOUS.................................................................... 12
4.1 Recapitalizations, Exchanges, Etc. Affecting Shareholder Common Stock........ 12
4.2 Binding Effect............................................................... 12
4.3 Amendment; Waiver............................................................ 12
4.4 Notices...................................................................... 12
4.5 Governing Law................................................................ 13
4.6 Counterparts................................................................. 13
4.7 Invalidity................................................................... 13
4.8 Cumulative Remedies.......................................................... 13
</TABLE>
ii
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,475
<SECURITIES> 3,048
<RECEIVABLES> 1,649
<ALLOWANCES> (491)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,167
<DEPRECIATION> (766)
<TOTAL-ASSETS> 27,802
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
12,684
<COMMON> 4,451
<OTHER-SE> 5,565
<TOTAL-LIABILITY-AND-EQUITY> 27,802
<SALES> 361
<TOTAL-REVENUES> 361
<CGS> 561
<TOTAL-COSTS> 561
<OTHER-EXPENSES> 1,121
<LOSS-PROVISION> 124
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> (1,125)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,215)
<EPS-BASIC> (0.48)
<EPS-DILUTED> (0.48)
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
