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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-23000
THE HARVEY ENTERTAINMENT COMPANY
(Name of Small Business Issuer in its charter)
CALIFORNIA 95-4217605
(State or Other Jurisdiction (I.R.S. Employer Incorporation or
of Organization) Identification No.)
1999 AVENUE OF THE STARS, SUITE 2050,
LOS ANGELES, CALIFORNIA 90067
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: 310-789-1990
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for past 90 days: Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K SB or any amendment to
the Form 10-K SB: /X/
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State issuer's revenue for its most recent fiscal year: $(1,569,000)
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of April 12, 1999, a date within the past
60 days, is: $25,121,646.
State the number of shares outstanding of each of issuer's classes of common
equity, as of April 12, 1999: 4,186,941.
Transitional Small Business Disclosure Format: Yes: / / No: /X/
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this report: portions
of issuer's Proxy Statement for its 1999 Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission within 120 days after the
close of issuer's fiscal year, are incorporated herein by reference in Part III
of this Annual Report.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
GENERAL:
The Harvey Entertainment Company, together with its subsidiaries Harvey
Comics, Inc. and Baby Huey Productions, Inc. (the "Company"), owns and exploits
a library of widely recognized classic characters (the "Harvey Classic
Characters") and other intellectual property assets, including a related film
library of animated short features (the "Harvey Classic Library"). The roster of
Harvey Classic Characters includes the following well known characters:
o Casper, the Friendly Ghost
o Richie Rich
o Baby Huey
o Wendy, the Good Little Witch
o the Ghostly Trio (Fatso, Stinkie and Stretch)
o Hot Stuff
as well as Little Audrey, Little Lotta, Little Dot, Herman and Katnip, Stumbo
the Giant and Buzzy the Funny Crow among others. The Harvey Classic Library
includes 274 six- to eight-minute animated short features, which in most cases
star one or more of the Harvey Classic Characters.
HISTORY:
The Company is the successor to Harvey Comics, Inc. ("Harvey Comics")
which was founded in 1939 by the Harvey family. In the late 1950s Harvey Comics
acquired rights to many of the popular Paramount Pictures cartoon stars,
including Casper, Baby Huey, Little Audrey and many others. Harvey Comics was
active during the 1950s and 1960s - the "golden age" of comics. However, as its
founders retired in the early 1980s, the family-owned Harvey Comics became
dormant. In 1989 the Company's predecessor purchased Harvey Comics to exploit
its intellectual property.
In 1990, the Company sold an approximately 20% equity share to an
affiliate of Universal Studios, Inc. ("Universal") and entered into a
merchandising and distribution agreement with Universal. In 1993, the Company
completed its initial public offering of common stock. In 1994 and 1995, two
motion pictures licensed by the Company were released featuring Harvey Classic
Characters - Richie Rich (Warner Bros.) and Casper (Universal). In 1996, the
weekly animated television series "Casper" premiered on Fox Kid's Network
produced in conjunction with Universal Cartoon Studios (52 episodes produced
during two seasons). In 1996 and 1997, the Company contracted with Saban
Entertainment to produce two direct-to-video live action full-length "Casper"
films and one direct-to-video live action full-length "Richie Rich" film. In
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addition, in order to exert more direct control over its character rights and
merchandising activities, the Company reacquired from Universal control of all
merchandising rights (except those relating to a Casper or Casper character
motion picture produced or released by Universal, as further described below)
and rights of First Negotiation/First Refusal and First Negotiation in all the
Harvey Classic Characters (other than certain rights to Casper, Casper
characters and new characters appearing in the "Casper" movie). The Company
agreed to provide Universal an exclusive release window for the first sequel to
the 1995 "Casper" movie, the right of First Refusal/First Negotiation for the
first direct-to-video production featuring Casper after the release of any
"Casper" sequel, and the right to exploit related movie merchandising. In 1997,
the Company also terminated a license agreement with Marvel Comics and
reacquired the right to publish, distribute and license comic books based upon
the Harvey Classic Characters. In 1998, the Fox Family Channel commenced the
running of a daily program entitled "Harvey Toons," scheduled to end in August
1999. In 1998, the Company also released its direct-to-video live action feature
"Baby Huey's Great Easter Adventure" through Columbia-TriStar Home Video.
RECENT DEVELOPMENTS
CHANGE IN MANAGEMENT:
On March 20, 1998, the Board of Directors voted not to renew the
employment agreements of the Company's then Chief Executive Officer, Jeffrey A.
Montgomery, and then Chief Financial Officer and Executive Vice President,
Gregory M. Yulish which expired on April 17, 1998. On March 27, 1998 and March
30,1998 respectively, Messrs. Yulish and Montgomery resigned from the Board of
Directors. Effective as of March 23, 1998 the Board of Directors retained the
non-exclusive services of Anthony J. Scotti as the Company's Interim Chief
Executive Officer and Michael S. Hope as the Company's Interim Chief Financial
Officer, through a management services agreement with Global Media Management
Group, LLC ("Global Media"). The management services of Global Media are
currently being provided on a month-to-month basis.
STRATEGIC ALTERNATIVES:
On September 21, 1998, the Company's board of directors (the "Board of
Directors") announced that it had engaged the investment banking firm of
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") as a financial
advisor to the Company. Under the terms of the engagement, DLJ helped the
Company to evaluate and pursue strategic alternatives intended to maximize
shareholder value. Such alternatives included, but were not limited to the
sale, merger, consolidation or recapitalization of the business, securities or
assets of the Company.
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On April 7, 1999, in connection with the Company's review of strategic
alternatives, the Company entered into a definitive Stock Purchase Agreement
with Roger A. Burlage, Michael R. Burns, Ken Slutsky and The Kushner-Locke
Company pursuant to which Harvey will receive $11.5 million in cash and $5.5
million in common stock of Kushner-Locke in consideration of the issuance of
newly-issued shares of Harvey's Series A Convertible Preferred Stock. As part
of such transaction, Roger A. Burlage, formerly President and Chief Executive
Officer of LIVE Entertainment Inc., will lead a new permanent management team
for Harvey. Completion of the transaction remains subject to satisfaction or
waiver of certain conditions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Company's principal executive offices are located at 1999 Avenue of
the Stars, Suite 2050, Los Angeles, California 90067; its phone number is (310)
789-1990.
BUSINESS
The Company's business strategy has historically involved exploiting
the Harvey Classic Characters through filmed entertainment and capitalizing upon
the relationship between filmed entertainment, merchandising and other ancillary
markets.
FILMED ENTERTAINMENT: Filmed entertainment includes direct-to-video films,
television series and theatrical releases.
DIRECT-TO-VIDEO (HOME VIDEO)
Direct-to-video productions are full-length feature films released on
video without a prior theatrical release. In 1996 and 1997, the Company
contracted with Saban Entertainment ("Saban") to produce two direct-to-video
live action full-length films featuring Casper and one direct-to-video live
action full-length film featuring Richie Rich. During those years, the Company
derived a substantial portion of its revenues from its direct-to-video
licensing. While the Company in past years has co-produced direct-to-video
product through agreements with third parties who bear the economic risks of
production, the Company approved a business plan in 1998 to produce and market
direct-to-video products itself in order to capture a greater share of the
potential profits of such products. In this regard, the Company assumed greater
risk if the product ultimately is unsuccessful.
"BABY HUEY'S GREAT EASTER ADVENTURE"
In November 1998, the Company completed production of a
direct-to-video, live-action, full-length musical comedy film, "Baby Huey's
Great Easter Adventure." The video was released through Columbia-TriStar Home
Video in March 1999 and based on preliminary estimates of the ultimate
profitability of the title, the Company recorded a $3,000,000 loss in the fourth
quarter of 1998. It is possible that additional losses could be incurred in
future periods based upon actual results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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"RICHIE RICH'S CHRISTMAS WISH"
In November 1998 the Company released "Richie Rich's Christmas Wish," a
feature-length live-action direct-to-video feature film based on the Harvey
Classic Character Richie Rich. The Company co-produced the film with Saban.
Warner Home Video is serving as the exclusive worldwide home video distributor
and Saban is responsible for worldwide ancillary sales such as television,
cable, and pay-per-view. In addition, Saban retained distribution rights for the
film in perpetuity.
The co-production agreement for "Richie Rich's Christmas Wish" required
Saban to bear production, manufacturing or marketing expenses, and allows the
Company to share in net profits, if any, after Saban first recovers its
marketing, production and distribution costs plus a distribution fee.
"CASPER MEETS WENDY"
In September 1998, the Company released "Casper Meets Wendy," a feature
length, live-action, direct-to-video film, based on the Company's Casper and
Wendy the Witch characters. The Company co-produced the film with Saban.
Twentieth Century Fox Home Entertainment is serving as the exclusive worldwide
home video distributor and Saban is handling worldwide ancillary sales including
broadcast television, cable and pay-per-view.
As with "Richie Rich's Christmas Wish," the production agreement for
"Casper Meets Wendy" required Saban to bear production, marketing and
distribution expenses, and allows the Company to share in the net profits, if
any, after Saban first recovers its costs plus a distribution fee. The Company
recognized a nonrefundable advance from Saban in 1997, but to date has not
received any revenues from its net profit interest.
"CASPER, A SPIRITED BEGINNING"
In September 1997, the Company released, through Twentieth Century Fox
Home Entertainment, its first direct-to-video feature, "Casper, a Spirited
Beginning," a co-production with Saban. The Company received a nonrefundable
advance from Saban in 1996.
The production agreement for "Casper, A Spirited Beginning" required
Saban to bear production, marketing and distribution expenses and allows the
Company to share in the net profits, if any, after Saban first recovers its
costs. In 1997, based on shipments of video cassettes to date and the resultant
lifetime profitability of the title, the Company recorded approximately
$4,000,000 as its share of the net profits. Reports which the Company received
from Saban during 1998 state that Saban had experienced a higher than expected
return rate and had yet to recoup its costs and that the title may not generate
net profits. As a result, in 1998 the Company reversed the amount of net profits
which it had previously recognized in 1997 (which reversal includes a $1,675,000
loss on the title that was recorded in the fourth quarter of 1998). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company expects to exercise its right to audit the books and
records of Saban to review
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the accuracy of the reports which it has received, but there can be no
assurance that the Company will realize any additional proceeds from this title.
TELEVISION:
HARVEY CLASSIC LIBRARY
The Company owns the Harvey Classic Library, which consists of
approximately 274 six- to eight-minute color cartoon shorts, of which 248 were
originally created in the 1950's for theatrical exhibition. Portions of the
library are currently broadcast in more than 25 countries worldwide. The Harvey
Classic Library was restored, digitized, re-dubbed and re-scored by the Company
in 1990, 1991 and 1997. As part of the restoration process, the Company created
65 half-hour episodes from the original 248 shorts and entitled them "Casper and
Friends." In 1994 and 1996, the Company added 13 animated shorts to its film
library for each of the Baby Huey and Richie Rich characters. In 1998, the
Company re-packaged the 65 half hour episodes into "Harvey Toons" which airs on
the Fox Family Channel from September 1998 through August 1999.
The Company has the right to use the original musical score to the
original 248 shorts in the Harvey Classic Library, but Paramount Pictures
retained ownership to that music. Paramount receives music performance royalties
when the cartoons are shown publicly utilizing the original music score. The
writers and publisher of the music receive performance royalties from BMI, which
collects such royalties from broadcasters.
FOREIGN SALES
In March 1998, the Company hired a foreign distribution consultant
based in London to assist with and oversee foreign sales of the Harvey Classic
Library. The consulting agreement expired in February 1999 and the Company has
not renewed it.
TELEVISION PRODUCTION
From 1995 to 1997, the Universal/Harvey Animation Studios, a joint
venture of the Company and Universal, produced a total of 52 new half-hour
television episodes of the animated series "Casper, the Friendly Ghost" which
currently airs in more than 50 countries around the world. In 1996 the series
premiered on the Fox Kids Network. For each episode produced, the Company
received a fixed license fee and is entitled to share in a percentage of the
profits, if any. The Company controls the merchandising rights associated with
the new animated episodes. There are no current plans to produce additional
animated television episodes of "Casper, the Friendly Ghost."
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THEATRICAL LICENSING:
In 1994 and 1995, two motion pictures licensed by the Company were
released featuring Harvey Classic Characters -- Richie Rich (through Warner
Bros.) and Casper (through Universal). As part of its distribution agreement
with Universal the Company agreed to provide Universal an exclusive release
window for the first sequel to the 1995 Casper movie, the right of first
refusal/first negotiation for the first direct-to-video production featuring
Casper after the release of any Casper sequel, and the right to exploit related
movie merchandising. Motion pictures featuring Casper, the Friendly Ghost and
Richie Rich were released in May 1995 and December 1994, respectively.
To date, "Casper" and "Richie Rich" have generated reported worldwide
box office gross receipts in excess of $307 million and $80 million,
respectively. While the Company received certain character movie licensing fees
and merchandising participations for both features, it has not received revenues
from its defined profit participations except for a payment from Universal
received in 1997. There can be no assurance that the Company will receive any
further profit shares from these films.
In January 1996, Warner Bros. exercised its rights to produce a
theatrical motion picture sequel to "Richie Rich." Warner's exclusive rights
with respect to the sequel extend to January 29, 2000. In the event Warner Bros.
produces a sequel, the Company would become entitled to an additional amount.
There can be no assurance that the sequel will be produced or released.
In May 1997, the Company entered into an agreement with Universal to
produce and distribute a motion picture sequel to the original Casper movie to
be produced by Universal Pictures and Amblin' Entertainment. The Company
received a non-refundable advance for the sequel rights and, if a sequel is
produced, is contractually entitled to receive additional advances against a
percentage of the gross receipts from all sources of exploitation of the motion
picture. As part of the Company's agreement with Universal for a potential
Casper sequel, the Company was also paid a non-refundable advance against the
Company's share of its profit participation from the 1995 Casper movie. There
can be no assurance that the sequel will be produced, completed or released, or
that the sequel will generate gross receipts sufficient to entitle the Company
to amounts in excess of advances.
Pursuant to a May 1997 amendment to the Company's 1990 distribution
agreement with Universal and subsequent agreements with Universal, Universal has
the exclusive right to initiate, develop and produce further Casper sequels. The
agreement with Universal provides that the rights fees for the second and
subsequent sequels will be negotiated in good faith, and subject to resolution
by arbitration. The Company agreed to a "window" around the theatrical release
of any Casper sequel during which time the Company would not permit the initial
release of any other Casper filmed entertainment product. Universal also has
certain rights to other pictures in which Casper may make a "guest appearance,"
and first negotiation rights for pictures involving other characters appearing
in the Casper pictures. In May 1997, the Company reimbursed Universal for
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the unrecouped costs on the Harvey Classic Video Library, the rights to which
then reverted to the Company.
As stated above, Universal holds the right to produce and release
Casper feature films. Universal is required to give the Company notice on
February 15 of the year before it wishes to release a Casper feature film that
it has either approved a script or commenced pre-production on such film,
triggering a limited fixed payment obligation to the Company. On February 17,
1999, Universal advised the Company that it had not met either condition but
that it was reviewing a script for potential approval. In the event of such
approval, Universal would likely request an extension from the February 15
notice date once such approval was received to trigger a period of certain
exclusive rights in favor of Universal. There can be no assurance that Universal
will actually request such extension or produce or release a Casper feature film
in 2000 or at any time.
MERCHANDISING:
In May 1997 the Company reacquired from Universal control of all
merchandising rights (except those relating to a Casper or Casper character
motion picture produced or released by Universal) and rights of first
negotiation/first refusal and first negotiation in all the Harvey Classic
Characters (other than certain limited rights to Casper, Casper characters and
new characters appearing in the Casper movie) in exchange for the Company
providing Universal an exclusive release window for the first sequel to the
Casper movie, a first negotiation/first refusal right with respect to the first
direct-to-video production featuring Casper after the release of any Casper
sequel and the right to exploit related merchandising.
In October 1996 the Company hired a senior vice president of consumer
products to assist in the management of its reacquired merchandising rights.
Since that time the Company has focused on increasing its merchandising
revenues. However, the level of merchandising activities is dependent, in part,
on the level of product releases. The Company cannot ascertain at this time
whether its merchandising strategy will ultimately be successful.
PUBLISHING:
In November 1998, the Company launched Harvey, the Magazine for
Kids(C), a monthly magazine targeted for children four to ten years of age, with
an initial print run of 200,000. The magazine is domestically distributed by
Warner Publisher Services and Diamond Comic Distributors, Inc.
LOCATION-BASED FAMILY ENTERTAINMENT:
In 1995 the Company entered into a licensing agreement with an
Indonesian company for the construction of a 50,000 square-foot family
entertainment center based on the Harvey Classic Characters and featuring Harvey
character rides and merchandising areas. The facility opened in the largest
shopping mall in Jakarta, Indonesia, on November 1, 1997. The Company recognized
a license fee for the initial term, payable in six annual installments, and is
entitled to a portion of the licensee's merchandising revenue. The licensee is
in default on its payments and the Company is unable to predict what effect the
current political and economic turmoil in Indonesia will have on receipts, if
any, from the licensing agreement.
INTELLECTUAL PROPERTY ASSETS:
The Company's principal assets are its intellectual property rights in
its proprietary Harvey Classic Characters, including Casper the Friendly Ghost,
the Ghostly Trio (Fatso, Stinkie and Stretch), Richie Rich, Baby Huey, Wendy,
the Good Little Witch, Little Audrey, Herman and Katnip, Little Lotta, Little
Dot, Buzzy the Funny Crow, Stumbo the Giant and Hot Stuff. In
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addition, the Company possesses rights to approximately 1,875 comic books
published between 1955 and 1993 and the film shorts in its Harvey Classic
Library. The Company has applied for and received copyright and trademark
protection in the United States and copyright protection in certain foreign
countries which are parties to the Berne Convention, on many but not all of its
publications, the film shorts in the Harvey Classic Library and the Harvey
Classic Characters. The Company attempts vigorously to protect against
infringements on the rights it holds to its proprietary characters and
publications.
Substantially all of the United States copyrights on the Company's
cartoon shorts and comic books were acquired under the Copyright Act of 1909
(the "1909 Act"). Under the 1909 Act, copyrights were granted for an initial
term of 28 years and a renewal term of 28 years. Under the Copyright Act of 1976
(the "1976 Act"), copyright protection for existing and new copyrights was
extended for a total term of 75 years from the date of initial publication.
The copyright registrations for seven cartoon shorts and a limited
number of comic books involving Casper and other characters were not timely
renewed by the Harvey family and such registrations have expired. By virtue of
the expiration of the copyrights in these original cartoon shorts and comic
books, certain rights may have fallen into the public domain and the Company's
rights to the sole and exclusive use of those cartoons and comic books is
unclear.
Substantially all of the most important Harvey Classic Characters are
protected in the United States by United States trademarks which run for a
period of ten years and which may be renewed for an indefinite number of
additional ten year periods upon a showing of continued use. While many
countries have intellectual property laws that protect United States holders of
such property, others do not, and there can be no assurance that the Company's
rights will not be violated or its characters "pirated" in foreign
jurisdictions.
From time to time, claims have been asserted against the Company
alleging that the Casper character may have fallen into the public domain and
thus can be freely used and exploited by anyone. However, those claims have not
prevailed.
COMPETITION:
Competition is intense in the filmed entertainment, merchandising and
animation industries in which the Company operates. The Company's licensed
products compete with products produced and/or distributed by major
entertainment companies, as well as numerous smaller entertainment companies.
The Company believes that its principal competitors include The Walt Disney
Company, Warner Brothers, Fox Kids Worldwide and Nickelodeon, all of which have
children's networks and far greater resources and distribution capabilities than
the Company.
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EMPLOYEES:
The Company employs approximately 25 persons on its full-time staff.
For the Company's filmed entertainment productions, the Company has hired
independent contractors or production facilities for creative work on an
as-needed basis. In October 1996 the Company created new creative affairs and
consumer products divisions. In February 1998, the Company hired a senior vice
president for home entertainment, whose primary responsibilities include
overseeing domestic marketing and distribution of the Company's home videos and
other home entertainment products. In March 1998, the Company hired a foreign
distribution consultant based in London to coordinate foreign distribution of
the Harvey Classic Library with sales agents. None of the Company's employees
are represented by a union and the Company believes relations with its employees
are good. In March 1998, the Company retained certain management services from
Global Media. See "Change in Management."
FACTORS WHICH MAY AFFECT FUTURE RESULTS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company wishes to caution that the
following important factors, among others, in some cases have affected and in
the future could affect the Company's actual results and could cause such
results to differ materially from those expressed in forward-looking statements
made by or on behalf of the Company.
UNCERTAINTY AS TO FUTURE OPERATIONS. The Company has been working with
DLJ to pursue its strategic alternatives. Further, the maturity of the Company's
outstanding line of credit expires April 30, 1999. In connection with the
Company's review of strategic alternatives, the Company entered into various
agreements which will provide the Company with a substantial equity infusion and
permanent management. The consummation of such transaction is subject to certain
conditions and there is no assurance that the transaction will be completed. If
the transaction is not completed and a replacement equity infusion or other
strategic alternative is not promptly completed, the Company's ability to
operate as a going concern would be seriously jeopardized.
DEPENDENCE ON MANAGEMENT. On March 20, 1998, the Company's Board of
Directors voted not to renew the employment agreements of the Company's Chief
Executive Officer, Jeffrey A. Montgomery, and Chief Financial Officer and
Executive Vice President, Gregory M. Yulish which expired on April 17, 1998. On
March 27, 1998 and March 30,1998 respectively, Messrs. Yulish and Montgomery
resigned from the Board of Directors. To replace Messrs Montgomery and Yulish,
the Board of Directors obtained the non-exclusive services of Anthony J. Scotti
as the Company's Interim Chief Executive Officer and Michael S. Hope as the
Company's Interim Chief Financial Officer, effective as of March 23, 1998,
through a management services agreement with Global Media, for an initial
six-month term.
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In July 1998, at the request of the Company's Board of Directors,
Global Media agreed to extend its management services agreement for an
additional three-month term, through December 23, 1998. Although the written
services agreement has not been formally extended, Global Media continues to
provide management services to the Company on a month-to-month basis. On April
7, 1999, the Company entered into various agreements pursuant to which Roger A.
Burlage will lead a new permanent management team for Harvey. If such agreements
are not consummated, or if Global Media ceases to provide services, there can be
no assurance that the Company will be able to attract a senior management team
capable of exploiting the Company's assets.
ABSENCE OF PRODUCT SLATE. The Company currently does not have any new
programs or products involving Harvey Characters scheduled for release or in
development. Although the Company's interim management developed a business
plan, approved by the Board of Directors, involving twelve new direct-to-videos
and made substantial progress on the terms of a distribution agreement with a
major studio, this plan required debt and equity financing and identification of
a permanent management team which the Board of Directors was unable to secure
during fiscal 1998. Accordingly, the Board of Directors instructed interim
management to retain DLJ to develop strategic alternatives for the Company. As a
result, pending the results of the process of pursuing strategic alternatives,
in order to conserve capital and maximum flexibility for future exploitation of
rights, the Company has not pursued any new programming. This absence of
products will have a material adverse effect on the Company's results of
operations for the foreseeable future. In addition, the new business plan, even
if implemented, contemplates that the Company will produce direct-to-video
products for its own account (as opposed to licensing third parties in
consideration of an advance and potential royalty). This strategy maximizes
upside potential for the Company in the exploitation of its characters, but it
also subjects the Company to greater risk if the products are not successful.
FLUCTUATION IN REVENUE RECOGNITION FROM FILM LICENSING AND
MERCHANDISING. The Company's quarterly and yearly operating results may
fluctuate in part due to the manner in which the Company is required to record
revenue from film licensing and merchandising agreements. Although film
licensing and merchandising agreements typically grant rights for a period of
one to five years, revenues are typically recognized when the license period
begins, provided certain conditions are met. Fluctuations in quarterly and
yearly operating results may also arise due to the Company's timing in entering
into merchandising and film licensing agreements. For example, merchandising
revenues with respect to a particular character tend to be concentrated around
the period of initial release of a filmed entertainment project featuring such
character. Accordingly, until such time as additional products are licensed,
excess royalties are remitted by existing licensees, or existing licensing
agreements expire and are renewed or replaced, no additional revenue will be
recognized from the rights the Company has previously licensed. Therefore, the
Company believes that period-to-period comparisons of its results from
operations are not necessarily an accurate indication of future performance.
MERCHANDISING ACTIVITIES. Prior to May 1997, the Company relied upon
Universal to merchandise the Harvey Classic Characters. In 1997 the Company
began merchandising the Harvey Classic Characters for its own account. The
Company also hired new personnel to handle merchandising, including a senior
vice president of consumer products. There can be no assurance that the Company,
despite its additions to staff and related overhead, will be able to promote and
compete effectively in the merchandising marketplace. To the extent the Company
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performs merchandising functions internally, there can be no assurance that its
merchandising revenues will increase or be sustained at current levels or be
sufficient to defray the additional costs associated with its new merchandising
efforts. In addition, the level of merchandising activities is dependent, in
part, on the level of product releases.
INTELLECTUAL PROPERTY RIGHTS. The Company's principal assets are its
intellectual property rights in its proprietary Harvey characters and
publications and other works featuring those characters. The Company has applied
for and received copyright and trademark protection in the United States, and
copyright protection in many foreign countries, on many publications and other
works featuring Harvey characters. The Company attempts vigorously to protect
against infringements on the rights it holds to its proprietary characters,
works and publications.
Certain copyrights held by the Company on some animated cartoons and
comic books published before about 1960 were not timely renewed and may have
fallen into the public domain. The term of copyright protection in the U.S. is
limited by statute and trademark rights, while potentially of indefinite
duration, must be continually used and, depending on the date of publication,
may have to be periodically renewed.
The Company believes it has protectible rights with respect to all of
its proprietary characters, works and publications subject to licenses granted
by the Company. There is, however, no assurance that claims will not be asserted
against the Company which, if successful, would have a material adverse effect
on the Company's business.
SPECULATIVE NATURE OF THE ENTERTAINMENT INDUSTRY. The television,
merchandising, motion picture and direct-to-video industries are highly
speculative and historically have involved a substantial degree of risk. The
success of a trademarked or copyrighted character, television show, video
production or motion picture depends upon unpredictable and changing factors
such as audience acceptance, which may bear little or no correlation to the
Company's production and other costs. Although many of the Company's characters
have been in existence for more than 40 years, not all are currently popular and
there can be no assurance that they will become popular, or that those that are
popular will continue to be popular.
Audience acceptance of the Company's products represents a response not
only to the artistic components of the products, but also to promotion by the
distributor, the availability of alternative forms of entertainment and leisure
time activities, general economic conditions and public taste generally, and
other intangible factors, all of which change rapidly and cannot be predicted
with certainty.
RELIANCE ON MAJOR DISTRIBUTORS/SELF-DISTRIBUTION. Historically, the
Company relied on a single foreign distributor for sales of the Harvey Classic
Library. In November 1997, the Company's prior agreement for the Harvey Classic
Library with it's foreign distributor expired and in March 1998, the Company
hired a foreign distribution consultant based in London to assist with and
oversee foreign sales of the Harvey Classic Library. With respect to its
direct-to-video productions, with certain exceptions, the Company is free to
contract with any distributor in
13
<PAGE> 14
connection with a given production. Approximately 69% of the Company's revenues
in 1998 were derived from its agreements with Saban and Universal. However,
such terminations of the Company's relationship with its distributors could
adversely affect the Company's results of operations, financial condition and
cash flow.
ITEM 2. PROPERTIES
The Company leases approximately 10,207 square feet (gross) of office
space in Century City (Los Angeles), California pursuant to a five (5) year
lease entered into in August 1996 and the Company has an option to extend such
lease for an additional five-year term. The Company also leases approximately
9,000 square feet (gross) of office space in Santa Monica pursuant to a ten-year
lease entered into in December 1993. The Company has subleased approximately
6,000 square feet of this space to an unaffiliated person through January 31,
2001, and subleases approximately 3,000 square feet to a Universal Studios'
subsidiary through September 30, 2001. The Company's principal business address
is 1999 Avenue of the Stars, Suite 2050, Los Angeles, California 90067.
ITEM 3. LEGAL PROCEEDINGS
REALTY TRUST ADVISORS, INC. V. THE HARVEY ENTERTAINMENT COMPANY.
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 was
denied. Trial of this action is scheduled for July 1999. The Company's defense
of this claim is covered by its insurer.
The Company is not currently involved in any other material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR ISSUER'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET PRICES
The Company's common stock, no par value (the "Common Stock") trades on
the Nasdaq National Market under the symbol HRVY. Prior to December 5, 1994, the
Common Stock traded on the Nasdaq SmallCap Market. The following table sets
forth, for the fiscal quarters indicated, the high and low sale price for the
Common Stock.
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW
- ---------------- ---- ---
<S> <C> <C>
Fiscal year ended December 31, 1997:
First Quarter ......................... 8.50 5.63
Second Quarter ........................ 14.25 7.50
Third Quarter ......................... 18.00 12.25
Fourth Quarter ........................ 16.50 9.13
Fiscal year ended December 31, 1998:
First Quarter ......................... 15.25 9.37
Second Quarter ........................ 14.50 8.75
Third Quarter ......................... 10.63 5.00
Fourth Quarter ........................ 9.75 7.00
Fiscal year ended December 31, 1999:
First Quarter ......................... 8.125 4.375
Second Quarter
(through April 12, 1999)............. 6.50 4.75
</TABLE>
HOLDERS
As of April 12, 1999, there were approximately 160 holders of record of
the Company's Common Stock.
DIVIDENDS
The Company has never paid cash dividends on the Common Stock, and
provisions in the Company's revolving credit facility with City National Bank
N.A. prohibit the payment of dividends. The Board of Directors expects that the
Company will continue to retain any future earnings for use in its business.
15
<PAGE> 16
RECENT SALES OF UNREGISTERED SECURITIES
In January 1997, the Company issued two warrants to purchase Common
Stock to Arnhold and S. Bleichroeder, Inc. as compensation for investor
relations and other related services. The first warrant, for 25,000 shares, for
services to the Company in 1997 vested immediately and is exercisable at any
time through January 16, 2002. The second warrant, also for 25,000 shares,
vested upon the Company's request that Arnhold and S. Bleichroeder perform
services for calendar year 1998 and is exercisable through January 16, 2003.
In January 1997, the Company issued two warrants to purchase Common
Stock to Michael Doherty on terms similar to those provided to Arnhold and S.
Bleichroeder. At the time of issuance, Mr. Doherty was an advisor to the Company
and a former employee of Arnold and S. Bleichroeder. Mr. Doherty is presently a
director of the Company. The first warrant, for 25,000 shares, vested
immediately and is exercisable at any time through January 16, 2002. The second
warrant, also for 25,000 shares, vested upon Mr. Doherty's rendering of services
to the Company in 1998 and is exercisable at any time through January 16, 2003.
Upon entering into the management services agreement in March 1998, the
Company issued three warrants to purchase an aggregate of 200,000 shares of
Common Stock, each of which vested upon issuance, may be exercised by the holder
at any time through March 23, 2003 and has a strike price of $12.75 per share
(the closing price of a share of Common Stock on the Nasdaq National Market on
the date the warrants were authorized). The first warrant, for a total of
155,200 shares of the Company's Common Stock, was issued to Anthony J. Scotti as
compensation for services to be rendered as the Company's Interim Chief
Executive Officer. The second warrant, for a total of 38,800 shares of the
Company's Common Stock, was issued to Michael S. Hope as compensation for
services to be rendered as the Company's Interim Chief Financial Officer. The
third warrant, for a total of 6,000 shares of the Company's Common Stock, was
issued to Leonard Breijo of Global Media as compensation for services to be
rendered as head of business affairs of the Company. In addition, the Company
granted to Messrs. Scotti, Hope and Breijo fully vested options to purchase an
aggregate of 50,000 shares of Common Stock pursuant to the terms of the
Company's 1997 stock option plan at an exercise price of $12.69 per share (the
closing price of a share of Common Stock on the Nasdaq National Market on the
date the options were authorized).
On July 22, 1998, in connection with an extension of the term of
their services, the Company granted to Messrs. Scotti, Hope and Breijo fully
vested options to purchase an aggregate of 100,000 shares of Common Stock
pursuant to the terms of the Company's 1997 stock option plan at an exercise
price of $9.63 (the closing price of a share of Common Stock on the Nasdaq
National Market on the date the options were authorized).
All warrants described above were issued in reliance on the private placement
exemption of Section 4(2) of the Securities Act of 1933, as amended.
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<PAGE> 17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company conducts its operations through its wholly-owned
subsidiary, Harvey Comics, Inc. The Company's revenues are derived from three
primary sources: (i) filmed entertainment, (ii) merchandising and (iii)
publishing. This report includes forward-looking statements made based on the
expectations of current management pursuant to the safe harbor provisions of the
Private Securities Litigation Reform 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 affect the
Company's business and its results of operations, including the factors
discussed below and in "Business--Factors which May Affect Future Results."
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Filmed entertainment revenues $ (3,842,000) $ 10,565,000
Merchandising revenues 2,183,000 4,839,000
Publishing revenues, net of returns 90,000
------------ ------------
Total operating revenues (1,569,000) 15,404,000
Cost of sales 1,056,000 3,900,000
Selling, general &
administrative expenses 9,334,000 5,774,000
Interest, depreciation and
amortization 3,627,000 827,000
------------ ------------
(Loss) income from operations (15,586,000) 4,903,000
Other income 149,000 255,000
------------ ------------
(Loss) income before provision
for income taxes (15,437,000) 5,158,000
Income tax benefit (provision) 4,199,000 (1,980,000)
------------ ------------
Net (loss) income $ 11,238,000 $ 3,178,000
============ ============
Basic net (loss) income per share $(2.77) $0.89
====== =====
Diluted net income per share $(2.77) $0.80
====== =====
</TABLE>
17
<PAGE> 18
RESULTS FROM OPERATIONS
Fiscal Year 1998 Compared to Fiscal Year 1997
The number of projects generating revenues in 1998 has been limited
and, accordingly, the Company's operating results have been and will be
adversely impacted in contrast to prior periods. The Company's newly formulated
business plan, which would require entering into long-term video distribution
agreements and obtaining a financing package to fund production activities, has
not been implemented. Thus any possible results will not be realized until
subsequent periods, if ever, especially in light of the Board of Directors'
decision to engage the investment banking firm of DLJ as a financial advisor to
the Company in order to pursue strategic alternatives, which include, but may
not be limited to the sale, merger, consolidation and recapitalization of the
business, securities or assets of the Company.
The Company has finished producing one live-action, direct-to-video
featuring the Company's classic character Baby Huey entitled "Baby Huey's Great
Easter Adventure." Development of all other new products is subject to the
results of the Company's pursuit of certain strategic alternatives. The Company
has continued to develop and exploit its licensing and merchandise rights for
the Company's portfolio of classic characters. In July 1998, as part of the
business plan, the Board of Directors approved the publishing of a new monthly
magazine, targeted for children four to ten years of age, entitled Harvey, the
Magazine for Kids(C). The on-sale date for the December premiere issue was
November 17, 1998.
REVENUES
The Company's net filmed entertainment revenues were a negative
$3,842,000 in 1998 compared to positive revenue of $10,565,000 in 1997. The
current year reflects an adjustment of $3,991,000 to reduce the Company's
estimate of the lifetime profitability of the 1997 direct-to-video title
"Casper, A Spirited Beginning." The Company's original forecast of worldwide
sales exceeded actual sales as reported to the Company by the video's
distributor, necessitating the adjustment in the current period. Based on the
most recent report by the video distributor, the realization of overages beyond
the original advance on this title will be contingent upon the completion of a
successful participation audit of the distributor's books and records. Although
a second direct-to-video title, "Casper Meets Wendy", was released on September
22, 1998, the Company does not expect that it will record additional revenues on
that title beyond the non-refundable advance of $3,300,000 received in 1997
until such time (if at all) as the actual shipments indicate that the Company's
profit participation will exceed the advance. The Company entered into an
agreement with Columbia TriStar Home Video, Inc. ("Columbia") for the
distribution of "Baby Huey's Great Easter Adventure" which was released in March
1999. Filmed entertainment revenues in 1997 include revenues relating to the
estimated lifetime profitability of the "Casper, A Spirited Beginning" video and
the recognition of the aforementioned advance on the "Casper Meets Wendy" video.
Additionally, in the second quarter of 1997 the Company entered into an
agreement with Universal to produce and distribute a
18
<PAGE> 19
motion picture sequel to the original "Casper" movie for theatrical release. The
Company was paid a non-refundable advance of $600,000 for the sequel and, if the
sequel is produced the Company will receive additional non-refundable cash
advances. As part of the Company's agreement with Universal, the Company was
also paid a non-refundable advance of $900,000 against the Company's profit
participation from the first 1995 "Casper" movie. There were no such revenues in
1998.
Also contributing to the higher revenues in 1997 were license fees
generated from the "Casper" animated television show on Fox Kids' Network. In
February 1997, the Company and Universal Cartoon Studios received an order from
Fox Kids' Network for an additional 26 thirty minute episodes for a total of 52
animated episodes resulting in license fee revenues of $829,000 in 1997, but
only $84,000 in 1998.
Foreign broadcast license revenues from the Harvey Classic Library
accounted for $62,000 in 1998 and $293,000 in 1997. The low revenues were due in
part to the expiration of the Company's distribution agreement with its prior
foreign distributor, which expired in November 1997. Other filmed entertainment
revenues in 1997 relate to domestic syndication of the "Richie Rich" show,
royalties from Richie Rich cartoon series which is distributed by Hanna Barbera,
a wholly owned subsidiary of Time Warner Inc., and other miscellaneous sources.
Net merchandising revenues were $2,183,000 and $4,839,000 in 1998 and
1997, respectively, a decrease of $2,656,000. The revenues in 1998 consist of
new licenses for the worldwide merchandising of the Harvey Classic Characters
and 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 is in part dependent upon the attractiveness,
future marketability and the release of new product involving the Harvey Classic
Characters.
Net publishing revenues related to the Company's new monthly magazine
were $90,000 for the December and January issues published in 1998. Publishing
sales were on a fully returnable basis recorded upon shipment, net of a reserve
based on estimated returns. Publishing revenues also include sales of
advertising space and subscriptions to the Company's new magazine. This monthly
magazine is currently distributed and shipped throughout the United States and
Canada by Warner Publisher Services and Diamond Comic Distributors, Inc.
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<PAGE> 20
COST OF SALES
Costs of sales relating to filmed entertainment revenues were $99,000
and $1,773,000 in 1998 and 1997, respectively. The decrease in cost of sales is
due to a decrease in filmed entertainment activity for the year.
Merchandising costs of sales were $584,000 and $2,127,000 in 1998 and
1997, respectively. The decrease in cost of sales is due to a decrease in
merchandising activity in 1998.
Publishing costs of sale were $373,000 in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $9,334,000 and
$5,774,000 for 1998 and 1997, respectively, an increase of $3,560,000. The
increase in selling, general and administrative expenses in 1998 includes 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 territories and a $450,000 provision relating to the Company's prior
participation interest in Universal's Harvey-related merchandising business.
Additionally, the Company incurred increased consulting, legal, office rent and
other personnel related expenses in 1998, including expenses of $969,000
related to the issuance and extension of stock options and warrants.
DEPRECIATION AND AMORTIZATION
Depreciation expense was $161,000 and $97,000 in 1998 and 1997,
respectively. The increase in depreciation was due to additions of leasehold
improvements and furniture, fixtures and equipment in 1998. Amortization of the
film library was $3,519,000 and $520,000 in 1998 and 1997, respectively. The
film amortization amount in 1998 includes the recognition of an approximately
$3,000,000 estimated loss related to "Baby Huey's Great Easter Adventure" and
write-offs of $500,000 of product development costs capitalized in 1997 due to
uncertainties concerning the recoverability of such costs. Amortization of
trademarks, copyrights and other was $61,000 in 1998 and $53,000 in 1997.
Amortization of goodwill was $130,000 in both 1998 and 1997.
INTEREST EXPENSE
Interest expense of $27,000 in 1997 represented annual loan fees on the
Company's line of credit. See "Liquidity and Capital Resources." In 1998, the
Company reclassified these annual loan fees of $59,000 to selling, general and
administrative expenses.
OTHER INCOME
Other income was $149,000 and $255,000 in 1998 and 1997, respectively.
20
<PAGE> 21
INCOME TAXES
Income tax benefit (provision) was $4,199,000 and $(1,980,000) in 1998
and 1997, respectively. The income tax benefit for 1998 was due to the use of
operating losses generated in 1998 against the deferred income tax liabilities
and prior year operating income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash (used in) provided by operating activities was $(5,511,000)
and $2,249,000 in 1998 and 1997, respectively. The decrease in cash flows from
operations was primarily due to the operating loss in 1998.
Net cash used in investing activities was $3,642,000 and $1,143,000 in
1998 and 1997 respectively. The increase in cash used in investing activities
was primarily due to more investment by the Company in its trademarks and
copyrights including new programming and the production of the live-action,
direct-to-video "Baby Huey's Great Easter Adventure.".
Net cash provided by (used in) financing activities was $3,288,000 and
$(847,000) in 1998 and 1997 respectively. The increase is due to the exercise of
employee stock options in 1998 compared to the Company's repurchase of common
stock in 1997.
The Company entered into a $2,500,000 revolving credit line with City
National Bank to provide funds for operations. The facility originally had a
maturity date of March 31, 1999 but the bank has provided a commitment to extend
the facility (and waive the tangible net worth covenant) through April 30, 1999.
Interest on advances made under the facility accrues at 1% above the prime rate
as reported by the lender. The facility is secured by substantially all of the
assets of the Company. The facility is subject to certain requirements,
including, but not limited to, the maintenance of minimum net worth and also
disallows the payment of dividends. The facility is believed to be sufficient to
fund business through April 30, 1999 assuming limited operations. As of
April 12, the Company had drawn $2.0 million under the facility.
On April 7, 1999, in connection with the Company's review of strategic
alternatives, the Company entered into a definitive agreement with certain
investors which contemplates that the Company will receive a $17 million equity
infusion (less applicable costs), consisting of $11.5 million in cash and $5.5
million in the common stock of The Kushner-Locke Company, a publicly-traded
company engaged in television and feature film production and distribution, and
public record search services over the Internet and more conventional means. As
part of such transaction, Roger A. Burlage would lead a new permanent management
team for Harvey. Under the definitive agreement, the investors have deposited
$750,000 as liquidated damages recoverable by Harvey in the event of a failure
by the investors to close the transaction in breach of their obligations.
Completion of the transaction, which is expected prior to April 30,
1999, remains subject to satisfaction or waiver of a number of conditions,
including obtaining an exception to any applicable shareholder approval
requirements under the Nasdaq Stock Market listing rules, completion of a
five-business day period during which the principal investors will identify
other members of their investor group and various customary conditions. There
is no assurance that the transaction will be completed. If the transaction is
not completed and a replacement equity infusion or other strategic alternative
is not promptly completed, the Company's ability to operate as a going concern
would be seriously jeopardized.
Upon completion of the transaction, the Company believes it would have
sufficient liquidity for at least the next twelve months. However, given the
current absence of a product slate, it can be anticipated that, even if
successful, there will be a lag time before the efforts of the new management
team to exploit the Company's assets will be realized.
INFLATION AND SEASONALITY
Inflation has not been material to the Company during the past five
years.
21
<PAGE> 22
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.
ITEM 7. FINANCIAL STATEMENTS
Pages F-1 through F-__ follow.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company will file a definitive Proxy Statement pursuant to
Regulation 14A for its annual meeting of shareholders presently anticipated to
be held in June, 1999. The information called for by Items 9-12 above will be
included in such definitive Proxy Statement under the captions "Election of
Directors," "Management and Directors," "Executive Compensation and Other
Remuneration," "Security Ownership of Certain Beneficial Owners and Management"
and "Certain Relationships and Related Transactions," which are hereby
incorporated herein by reference.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 10-KSB
Exhibit Number Description
3.1 Second Amended and Restated Articles of Incorporation of the Issuer
(incorporated herein by reference to Exhibit 3.1 of Company's
Registration Statement No. 33-63363-LA)
22
<PAGE> 23
3.2 First Amendment to Second Amended and Restated Articles of
Incorporation of the Issuer (incorporated herein by reference to
Exhibit 3.2 of Company's Registration Statement No. 33-63363-LA)
3.3 Second Restated and Amended Bylaws of the Issuer (incorporated herein
by reference to Exhibit 3.3 of Company's Registration Statement No.
33-63363-LA)
3.4 First Amendment to Second Restated and Amended Bylaws of the Issuer
(incorporated herein by reference to Exhibit 3.4 of Company's
Registration Statement No. 33-63363-LA)
4 Form of Stock Certificate (incorporated herein by reference to Exhibit
4 of Company's Registration Statement No. 33-63363-LA)
10.1 Registration Agreement, dated as of December 7, 1990, by and among the
Company, AKAUSA and MCA (incorporated herein by reference to Exhibit
10.11 of Company's Registration Statement No. 33-63363-LA)
10.2 Shareholders Agreement, dated as of December 7, 1990, by and among the
Company, AKAUSA and MCA (incorporated herein by reference to Exhibit
10.12 of Company's Registration Statement No. 33-63363-LA)
10.3 Memorandum of Distribution Agreement, dated as of December 7, 1990, by
and among the Company, Harvey and MCA (portions of which have been
filed under a confidentiality request) (incorporated herein by
reference to Exhibit 10.13 of Company's Registration Statement No.
33-63363-LA)
10.5 1993 Stock Option Plan and Stock Option Agreements (incorporated herein
by reference to Exhibit 10.41 of Company's Registration Statement No.
33-63363-LA)
10.6 Special Salary Reduction Stock Option Plan of 1993 and Stock Option
Agreements (incorporated herein by reference to Exhibit 10.42 of
Company's Registration Statement No. 33-63363-LA)
10.7 Profit Sharing Plan and Trust Adoption Agreement (incorporated herein
by reference to Exhibit 10.43 of Company's Registration Statement No.
33-63363-LA)
10.13 September 28, 1993, Amendment to Memorandum of Distribution Agreement
dated December 7, 1990 (incorporated herein by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1993)
10.14 Office Lease between Issuer and 100 Wilshire Associates dated December
8, 1993 (incorporated herein by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1993)
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<PAGE> 24
10.15 Revolving Loan and Security Agreement between Issuer and City National
Bank dated October 27, 1993 (incorporated herein by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1993)
10.16 1994 Stock Option Plan (incorporated by reference to the Issuer's 1994
definitive Proxy Statement)
10.17 Agreement dated September 22, 1994 between MCA, Inc. and the Company
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q SB for the quarter ended September 30, 1994)
10.18 Multi-Agreement Amendment No. 2 dated as of November 1, 1994 among
Harvey Comics, Inc. and City National Bank (incorporated herein by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995)
10.19 Multi-Agreement Amendment No. 3 dated as of September 1, 1995 among
Harvey Comics, Inc. and City National Bank (incorporated herein by
reference to the Company's Annual Report on Form 10- KSB for the year
ended December 31, 1995)
10.20 Sublease Agreement dated as of November 14, 1995 between the Company
and Travelers Management, Inc., a California corporation (incorporated
herein by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1995)
10.21 Amended and Restated Employment Agreement effective as of April 17,
1995 between the Company and Jeffrey A. Montgomery (incorporated herein
by reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995)
10.22 Amended and Restated Employment Agreement effective as of April 17,
1995 between the Company and Gregory M. Yulish (incorporated herein by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995)
10.23 Stock Option Agreement dated as of July 13, 1995 between the Company
and Jeffrey A. Montgomery (incorporated herein by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995)
10.24 Stock Option Agreement dated as of July 13, 1995 between the Company
and Gregory M. Yulish (incorporated herein by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995)
10.25 Letter Agreement dated as of March 15, 1995 between MCA, Inc. and the
Company re: Baby Huey (incorporated herein by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995)
24
<PAGE> 25
10.26 Casper Live Action Direct-To-Video Agreement dated May 28, 1996 between
the Company and Saban Entertainment Inc. (incorporated herein by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1996)
10.27 Sublease dated September 22, 1996 between MCA Records, Inc. and the
Company (incorporated herein by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996)
10.28 Warrant Agreement with Arnhold and S. Bleichroeder dated January 16,
1997 (incorporated herein by reference to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996)
10.29 Warrant Agreement with Michael Doherty dated January 16, 1997
(incorporated herein by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996)
10.30 Richie Rich Live Action Direct-To-Video Agreement between the Company
and Saban Entertainment Inc. (incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q SB for the quarter ended June
30, 1996) (incorporated herein by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996)
10.31 Summary of lease terms for the premises located at 1999 Avenue of the
Stars, Los Angeles (incorporated herein by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1996)
10.32 Extension Agreement with City National Bank dated June 1, 1996
(incorporated herein by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996)
10.33 The Harvey Entertainment Company 1997 Stock Option Plan (incorporated
herein by reference to the Company's 1997 definitive Proxy Statement)
10.34 Term Sheet for Universal/Harvey Restated Agreement, dated May 15, 1997
between the Company and Universal Studios, Inc. (incorporated herein by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1997 (portions of which were redacted and filed
under a confidentiality request))
10.35 Casper Meets Wendy Direct-to-Video Agreement, dated September 5, 1997,
between the Company and Saban Entertainment Inc. (incorporated herein
by reference to the Company's Quarterly Report on Form 10-Q SB for the
quarter ended September 30, 1997 (portions of which were redacted and
filed under a confidentiality request))
25
<PAGE> 26
10.36 Stock Option Agreement dated April 17, 1997 between the Company and
Gregory M. Yulish (incorporated herein by reference to the Company's
Annual report on Form 10-KSB for the year ended December 31, 1997)
10.37 Stock Option Agreement dated April 17, 1997 between the Company and
Jeffrey A. Montgomery (incorporated herein by reference to the
Company's Annual report on Form 10-KSB for the year ended December 31,
1997)
10.38 Multi-Agreement Amendment No. 5 dated June 1, 1997 to Revolving Loan
and Security Agreement dated October 27, 1993, between the Company and
City National Bank, N.A.(incorporated herein by reference to the
Company's Annual report on Form 10-KSB for the year ended December 31,
1997)
10.39 Employment Agreement dated as of October 1996 between the Company and
Charles Day (incorporated herein by reference to the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998)
10.40 Stock Option Agreement dated as of October 1996 between the Company and
Charles Day (incorporated herein by reference to the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998)
10.41 Amendment dated December 19, 1997 to Employment Agreement dated as of
October 1996 between the Company and Charles Day (incorporated herein
by reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1998)
10.42 Stock Option Agreement dated December 19, 1997 between the Company and
Charles Day (incorporated herein by reference to the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998)
10.43 Employment Agreement dated February 27, 1998 between the Company and
Don Gold (incorporated herein by reference to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1998)
10.44 Stock Option Agreement dated February 27, 1998 between the Company and
Don Gold (incorporated herein by reference to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1998)
10.45 Management Consulting Agreement dated March 23, 1998 between the
Company and Global Media Management Group, LLC (incorporated herein by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1998)
10.46 Warrant Agreement dated March 23, 1998 between the Company and Anthony
J. Scotti, Michael S. Hope and Leonard Breijo (incorporated herein by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1998)
26
<PAGE> 27
10.47 Stock Option Agreement Director dated April 13, 1998 between the
Company and Gary M. Gray (incorporated herein by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1998)
10.48 Stock Option Agreement Services dated April 13, 1998 between the
Company and Anthony J. Scotti (incorporated herein by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1998)
10.49 Stock Option Agreement Services dated April 13, 1998 between the
Company and Michael S. Hope (incorporated herein by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1998)
10.50 Stock Option Agreement Services dated April 13, 1998 between the
Company and Leonard Breijo (incorporated herein by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1998)
10.51 Termination and Consulting Agreement and Mutual General Release dated
April 17, 1998 between the Company on one hand, and Gregory M. Yulish,
Jane McGregor and JEM Entertainment, Inc., on the other (incorporated
herein by reference to the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1998)
10.52 Multi-Agreement No 6 dated June 1, 1998 to Revolving Loan and Security
Agreement dated October 27, 1993, between the Company and City National
Bank, N.A. (incorporated herein by reference to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1998)
10.53 Extension to the Management Consulting Agreement dated July 22, 1998
between the Company and Global Media Management Group, LLC
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1998 (portions of which
have been redacted and filed under a confidentiality request))
10.54 Agreement dated September 18, 1998 between the Company and Donaldson,
Lufkin & Jenrette Securities Corporation (incorporated herein by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1998 (portions of which have been redacted and
filed under a confidentiality request)
10.55 Consulting Agreement dated May 1, 1998 between the Company and Matty
Simmons Productions.*
10.56 Publishing Distribution Agreement dated June 23, 1998 between the
Company and Warner Publisher Services, Inc.*
10.57 Video Distribution Letter Agreement dated October 30, 1998 between the
Company and Columbia TriStar Home Video, Inc.*
27
<PAGE> 28
10.58 Video Distribution Agreement dated October 30, 1998 between the Company
and Columbia TriStar Home Video, Inc.*
10.59 Multi-Agreement No. 7 dated December 11, 1998 to Revolving Loan and
Security Agreement dated October 27, 1993, between the Company and City
National Bank, N.A.*
10.60 Extension Letter dated March 31, 1999 between the Company and City
National Bank.*
21 List of subsidiaries of Issuer (incorporated herein by reference to
Exhibit 22 of Company's Registration Statement No. 33-63363-LA)
23.1 Consent of Deloitte & Touche LLP*
27 Financial Data Schedule*
* Filed herewith
28
<PAGE> 29
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Issuer has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE HARVEY ENTERTAINMENT COMPANY
Date: April 13, 1999 By: /s/ ANTHONY J. SCOTTI
--------------------------------------
Name: Anthony J. Scotti
Title: Interim Chief Executive Officer
Date: April 13, 1999 By: /s/ MICHAEL S. HOPE
--------------------------------------
Name: Michael S. Hope
Title: Interim Chief Financial Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ GARY M. GRAY Director April 13, 1999
- ---------------------------
Gary M. Gray
/s/ MICHAEL S. DOHERTY Director April 13, 1999
- ---------------------------
Michael S. Doherty
29
<PAGE> 30
ITEM 7. FINANCIAL STATEMENTS
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31,
1998 AND 1997:
Consolidated Balance Sheets F-3 to F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-20
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS F-21
</TABLE>
F-1
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Harvey Entertainment Company
Los Angeles, California:
We have audited the accompanying consolidated balance sheets of The Harvey
Entertainment Company and subsidiaries (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. Our audits also included the
financial statement schedules listed in the Index at Item 7. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1997, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's loss from operations, negative cash flows,
limited cash balance and lack of available credit raise substantial doubt about
its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Los Angeles, California
April 9, 1999
F-2
<PAGE> 32
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS (NOTE 4) 1998 1997
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 451,000 $ 6,316,000
ACCOUNTS RECEIVABLE, Net (Note 9) 1,689,000 8,013,000
PREPAID EXPENSES AND OTHER ASSETS 541,000 489,000
INCOME TAX RECEIVABLE (Note 3) 567,000
FILM LIBRARY, Net of accumulated amortization of $6,894,000
and $3,373,000 in 1998 and 1997, respectively (Note 2) 10,873,000 10,236,000
FURNITURE AND EQUIPMENT, Net of accumulated depreciation
of $658,000 and $497,000 in 1998 and 1997, respectively 501,000 483,000
GOODWILL, Net of accumulated amortization of $1,222,000 and
$1,092,000 in 1998 and 1997, respectively 1,373,000 1,503,000
TRADEMARKS AND COPYRIGHTS, Net of accumulated
amortization of $266,000 and $210,000 in 1998 and 1997, respectively 1,039,000 590,000
----------- -----------
TOTAL $17,034,000 $27,630,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
(Continued)
F-3
<PAGE> 33
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Note 11) $ 871,000 $ 856,000
PARTICIPATIONS PAYABLE 861,000 1,444,000
ACCRUED MARKETING EXPENSES 1,200,000
LINE OF CREDIT (Note 4) 250,000
INCOME TAXES PAYABLE (Note 3) 498,000
DEFERRED INCOME TAXES (Note 3) 3,788,000
ACCRUED RENT (Note 5) 170,000 131,000
------------ ------------
Total liabilities 3,352,000 6,717,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 10 and 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value; authorized, 3,000,000 shares; none issued (Note 6)
Common stock, no par value; 10,000,000 common shares authorized; 4,187,000
shares issued and outstanding in 1998 and 3,573,000 in 1997 (Notes 7 and 8) 22,160,000 18,153,000
(Accumulated deficit) retained earnings (8,478,000) 2,760,000
------------ ------------
Total stockholders' equity 13,682,000 20,913,000
------------ ------------
TOTAL $ 17,034,000 $ 27,630,000
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 34
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
OPERATING REVENUES (Note 9):
Filmed entertainment $ (3,842,000) $ 10,565,000
Merchandising 2,183,000 4,839,000
Publishing 90,000
------------ ------------
Total operating revenues (1,569,000) 15,404,000
------------ ------------
OPERATING EXPENSES:
Cost of sales (Note 9) 1,056,000 3,900,000
Selling, general and administrative expenses (Notes 10 and 11) 9,334,000 5,801,000
Amortization of film library, goodwill, trademarks and copyrights,
and other 3,707,000 703,000
Depreciation 161,000 97,000
Interest income (241,000) (157,000)
------------ ------------
Total operating expenses 14,017,000 10,344,000
------------ ------------
(LOSS) INCOME FROM OPERATIONS (15,586,000) 5,060,000
OTHER INCOME 149,000 98,000
------------ ------------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (15,437,000) 5,158,000
(BENEFIT) PROVISION FOR INCOME TAXES (Note 3) (4,199,000) 1,980,000
------------ ------------
NET (LOSS) INCOME $(11,238,000) $ 3,178,000
============ ============
BASIC NET (LOSS) INCOME PER SHARE (Note 8) $ (2.77) $ 0.89
============ ============
DILUTED NET (LOSS) INCOME PER SHARE (Note 8) $ (2.77) $ 0.80
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 35
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
-------------------------------- (ACCUMULATED
SHARES AMOUNT DEFICIT) TOTAL
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 3,642,000 $ 18,900,000 $ (418,000) $ 18,482,000
Exercise of stock options,
including income tax benefit
(Notes 3 and 7) 27,000 288,000 288,000
Shares repurchased and retired (96,000) (1,035,000) (1,035,000)
Net income 3,178,000 3,178,000
--------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 3,573,000 18,153,000 2,760,000 20,913,000
Exercise of stock options (Note 7) 614,000 3,038,000 3,038,000
Issuance of warrants (Note 7) 969,000 969,000
Net loss (11,238,000) (11,238,000)
--------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 4,187,000 $ 22,160,000 $ (8,478,000) $ 13,682,000
========= ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 36
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(11,238,000) $ 3,178,000
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Write-off of accounts receivable 5,071,000
Depreciation 161,000 97,000
Amortization of film library, goodwill, trademarks and copyrights,
and other 3,707,000 703,000
Loss on disposals 55,000
Deferred income taxes (3,788,000) 1,278,000
Issuance of warrants 969,000 35,000
Changes in operating assets and liabilities:
Accounts receivable 1,253,000 (5,261,000)
Prepaid expenses and other assets (52,000) (138,000)
Income taxes receivable (567,000) 620,000
Accounts payable 15,000 1,225,000
Participations payable (583,000)
Income taxes payable (498,000) 498,000
Accrued rent 39,000 (6,000)
------------ ------------
Net cash (used in) provided by operating activities (5,511,000) 2,249,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in film library (2,958,000) (648,000)
Purchase of furniture and equipment (179,000) (358,000)
Investments in trademarks and copyrights (505,000) (137,000)
------------ ------------
Net cash used in investing activities (3,642,000) (1,143,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 3,038,000 188,000
Borrowings on line of credit 250,000
Repurchased and retired common stock (1,035,000)
------------ ------------
Net cash provided by (used in) financing activities 3,288,000 (847,000)
------------ ------------
NET (DECREASED) INCREASE IN CASH AND
CASH EQUIVALENTS (5,865,000) 259,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,316,000 6,057,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 451,000 $ 6,316,000
============ ============
</TABLE>
See notes to consolidated financial statements.
(Continued)
F-7
<PAGE> 37
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest $(241,000) $ 37,500
Income taxes $(119,000) $(416,000)
</TABLE>
NON-CASH FINANCING ACTIVITY:
During the year ended December 31, 1998, the Company granted warrants and
extended the lives of warrants granted in previous years, with the fair
value of these warrants totaling $969,000. During the year ended December
31, 1997, the Company granted warrants with a fair value of $35,000.
During the year ended December 31, 1998, the Company invested in film costs by
accruing a liability of $1,200,000.
See notes to consolidated financial statements.
(Concluded)
F-8
<PAGE> 38
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The Harvey Entertainment Company is incorporated in the state of
California and is primarily engaged in filmed entertainment production and
merchandise licensing of its classic characters.
BASIS OF PRESENTATION - During 1998 the Company incurred significant losses
and substantial negative cash flows and has limited remaining available
borrowing capacity. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
As discussed in Note 12, on April 7, 1999, the Company entered into a
definitive agreement with certain investors which contemplates that the
Company will receive a $17 million equity infusion. Completion of the
transaction remains subject to the satisfaction or waiver of a number of
conditions. There is no assurance that the transaction will be completed.
If the transaction is not completed and a replacement equity infusion or
other strategic alternative is not promptly completed, the Company would be
forced to discontinue operations.
Upon completion of the transaction, the Company believes it would have
sufficient liquidity for at least the next 12 months. Management believes
that this transaction will provide the Company with the capital needed to
exploit its assets.
The financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of The Harvey Entertainment Company and its wholly owned
subsidiaries, Harvey Comics, Inc. and Baby Huey Productions, Inc.
(collectively, the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist primarily of cash and cash equivalents, accounts receivable, and
accounts payable. The carrying values of all financial instruments, other
than long-term receivables, are representative of their fair values due to
their short-term maturities.
CASH AND CASH EQUIVALENTS - The Company considers investments with original
maturities of 90 days or less to be cash equivalents.
F-9
<PAGE> 39
FILM LIBRARY - Film costs are stated at the lower of cost less accumulated
amortization or estimated net realizable value. Film costs consist of
direct production costs, production overhead, and capitalized interest and
are amortized using the individual film forecast computation method. The
individual film forecast method amortizes costs in the ratio that the
current period's gross revenues bear to the total estimated gross revenues
to be derived from all sources. Such estimates are revised periodically,
and estimated losses, if any, are provided for in full at the time
determined.
FURNITURE AND EQUIPMENT - Furniture and equipment are stated at cost and
are depreciated using the straight-line method over three- to five-year
estimated lives. Leasehold improvements are amortized over the shorter of
the lease term or the estimated life of the improvement. Repairs and
maintenance are charged to expense as incurred; replacements and
betterments are capitalized.
GOODWILL - Goodwill is amortized on a straight-line basis over 20 years.
TRADEMARKS AND COPYRIGHTS - Trademarks and copyrights are amortized on a
straight-line basis over 17 years.
LONG-LIVED ASSETS - As of each balance sheet date, the Company evaluates
the recovery of its long-lived assets and recognizes impairment if it is
probable that the recorded amounts are not recoverable based upon future
undiscounted cash flows or if there is an event or change in circumstances
which indicates that the carrying amount of an asset may not be
recoverable.
REVENUE RECOGNITION - The majority of the Company's licensing agreements
for merchandising and filmed entertainment call for nonrefundable
guaranteed fees, which are recognized when the license period begins,
provided certain conditions have been met. Additional merchandising and
film licensing revenues are recognized when earned based on royalty
statements.
The Company recognizes revenue related to videotape sales upon shipment of
the videotapes. At the time it recognizes the revenue, the Company
estimates returns and records a corresponding reduction of revenue. During
1998, the Company experienced a large difference between the amount of
returns it had estimated for a particular product and the actual return
rate. As a result, it recorded a change in its estimated returns, which
caused a reduction of revenue. The reduction was equal to the difference
between the previously estimated returns and the actual returns. As the
difference was greater than other sources of revenue generated in 1998, the
Company has negative revenues for the year ended December 31, 1998.
CONCENTRATION OF CREDIT RISK - The Company at times maintains cash balances
at certain financial institutions in excess of federally insured deposits.
The Company's trade receivables result primarily from licensing agreements
for merchandising and the animation film library, throughout the world. The
Company performs ongoing credit evaluations of its customers and generally
does not require collateral. Although the Company has a diversified
customer base, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the merchandising and filmed entertainment
industries.
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.
F-10
<PAGE> 40
STOCK-BASED COMPENSATION - In fiscal 1997, the Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation." The Company
continues to account for its stock compensation arrangements using the
intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees."
RECLASSIFICATIONS - Certain reclassifications have been made to the 1997
consolidated financial statements to conform with the current year's
presentation.
2. FILM INVENTORY
Film inventory consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Films released, net of accumulated amortization $10,873,000 $ 9,728,000
Development 508,000
----------- -----------
Total film inventory $10,873,000 $10,236,000
=========== ===========
</TABLE>
Based upon the Company's estimates of future gross revenues at December 31,
1998, approximately 18% of the unamortized film library will be amortized
during the three-year period ending December 31, 2001. In addition, the
Company estimates that approximately 65% of the unamortized film library
will be amortized over the next 15 years. Because of the inherent
uncertainties in estimating the remaining ultimate gross film revenues, it
is at least reasonably possible that the Company's estimates of
amortization will change in the near term.
Included in amortization expense in 1998 is $508,000 related to the
write-off of abandoned development projects.
3. INCOME TAXES
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and income tax bases of assets
and liabilities that will result in taxable or deductible amounts in the
future. Such deferred income tax asset and liability computations are based
on enacted tax laws and rates applicable to periods in which the
differences are expected to reverse. A valuation allowance has been
established, for the year ended December 31, 1998, to reduce deferred
income tax assets to the amount expected to be realized. Income tax expense
is the tax payable or refundable for the period plus or minus the change
during the period in deferred income tax assets and liabilities. In
connection with the acquisition of Harvey Comics, Inc. during 1989, the
income tax basis of the assets acquired remained at the pre-acquisition
value. As a result, all amortization of the acquired film library and
trademarks and copyrights is not deductible for income tax purposes,
resulting in the deferred income tax liability.
F-11
<PAGE> 41
The provision for income taxes for the years ended December 31, 1998 and
1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current $ 565,000 $ 702,000
----------- -----------
Deferred (4,764,000) 1,178,000
Amounts related to exercise of stock options 100,000
----------- -----------
Total deferred (4,764,000) 1,278,000
----------- -----------
(Benefit) provision for income taxes $(4,199,000) $ 1,980,000
=========== ===========
</TABLE>
The income tax benefits resulting from the exercise of stock options in 1997
have been reflected as an addition to stockholders' equity.
Income tax computed at the statutory federal income tax rate of 34% and the
provision for income taxes in the financial statements for the years ended
December 31, 1998 and 1997 differ as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Provision computed at the statutory rate $(5,153,000) $ 1,754,000
State income taxes, net of federal income tax benefit (351,000) 247,000
Change in valuation allowance 1,787,000
Other (482,000) (21,000)
----------- -----------
(Benefit) provision for income taxes $(4,199,000) $ 1,980,000
=========== ===========
</TABLE>
F-12
<PAGE> 42
The following are the components of the Company's deferred tax asset and
liability at December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Federal net operating loss carryforward $ 1,922,000 $ --
State net operating loss carryforward 351,000
Accounts receivable 77,000 209,000
Stock compensation 294,000 14,000
Other 148,000 143,000
----------- -----------
Total deferred tax asset 2,792,000 366,000
----------- -----------
Film library (395,000) (1,973,000)
Trademarks and copyrights (304,000) (256,000)
Deferred revenue (306,000) (1,925,000)
----------- -----------
Total deferred tax liability (1,005,000) (4,154,000)
----------- -----------
Valuation allowance (1,787,000) --
----------- -----------
Net deferred tax liability $ -- $(3,788,000)
=========== ===========
</TABLE>
At December 31, 1998, the Company has a net operating loss carryforward of
$7,359,000 and $4,826,000 for federal and state income tax purposes,
respectively. These net operating loss carryforwards expire in 2013 and
2003, respectively. Included in the aforementioned net operating loss
carryforwards are amounts the Company can use to offset future taxable
income, but the effect of which will not be recognized in operations.
Instead, as these amounts relate to the exercise of stock options, they
will be recorded directly to equity. Such amounts are $1,705,000 and
$853,000 for federal and state, respectively.
4. DEBT
The Company has a revolving loan and security agreement that allows maximum
borrowings of up to $2,500,000 and expired on March 31, 1999. Borrowings
under the line of credit are collateralized by substantially all of the
assets of the Company and bear interest at the lenders' prime rate (8.75%
at December 31, 1998) plus 1% per annum. The agreement is subject to
certain requirements, including, but not limited to, the maintenance of
minimum net worth, and also disallows the payment of dividends.
At December 31, 1998, the Company was not in compliance with these
covenants. 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. At December 31, 1998, the Company had $250,000
outstanding under this line of credit. No amounts were outstanding at
December 31, 1997.
F-13
<PAGE> 43
5. COMMITMENTS AND CONTINGENCIES
LEASES - The Company is committed under operating leases to minimum rental
payments (exclusive of real estate taxes and maintenance, net of sublease
income) through 2004 as follows:
<TABLE>
<CAPTION>
YEAR ENDING GROSS SUBLEASE
DECEMBER 31, RENTALS INCOME NET
<S> <C> <C> <C>
1999 $ 753,000 $ 275,000 $ 478,000
2000 763,000 316,000 447,000
2001 613,000 126,000 487,000
2002 286,000 286,000
2003 286,000 286,000
Thereafter 167,000 167,000
---------- ---------- ----------
$2,868,000 $ 717,000 $2,151,000
========== ========== ==========
</TABLE>
The effective annual rent expense for the Company is the total rent to be
paid over the term of the lease, amortized on a straight-line basis. The
difference between the actual rent amount paid and the effective rent
recognized for financial statement purposes is reported as accrued rent.
Rent expense charged to operations was $439,000 and $259,000 for the years
ended December 31, 1998 and 1997, respectively. Rent expense is net of
sublease income of $261,000 and $257,000 in 1998 and 1997, respectively.
EMPLOYMENT AGREEMENTS - The Company has employment contracts with four
employees and one consultant that require payments aggregating $344,000 and
$57,000 in 1999 and 2000, respectively.
YEAR 2000 - The Company utilizes various computer software packages as
tools in running its accounting 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 the
aggregate or in any single future year to become year 2000 compliant.
LITIGATION - The Company is named as a defendant in a lawsuit in which the
plaintiff claims to have suffered damages in excess of $1,000,000. The
Company is vigorously defending itself against this action, and it is
currently not possible to predict the outcome and damages that may be
awarded, if any. The Company expects its insurance company to pay for legal
costs and any damages that may be assessed. To date, the insurance company
has been paying for the legal costs; however, the insurance company has
reserved rights to recover its costs from the Company.
6. PREFERRED STOCK
The Company is authorized to issue 3,000,000 shares of $1 par value
preferred stock. The Board of Directors, without further action by the
holders of the common stock, may fix or alter the rights, preferences,
privileges and restrictions of the preferred stock.
F-14
<PAGE> 44
7. STOCK OPTIONS AND WARRANTS
1993 AND 1994 STOCK OPTION PLANS - Under the Company's 1993 Stock Option
Plan, the Company granted options to purchase 400,000 shares of common
stock to officers and employees. In 1994, the Company adopted the 1994
Stock Option Plan, under which the Company can grant options to purchase
200,000 shares of common stock. As of December 31, 1997, 200 shares
remained unissued under the plans. The Company has discretion, subject to
the terms of the plans, to select the persons entitled to receive options,
the terms and conditions on which options are granted, the exercise price,
the time period for vesting such shares, and the number of shares subject
thereto.
Options granted to any person who owns stock possessing more than 10% of
the combined voting power of all classes of the Company's stock shall be at
an exercise price no less than 110% of fair market value on the date of
grant. The exercise price in the case of options granted to all other
persons must be at least equal to the fair market value of the common stock
as of the date of grant.
SPECIAL STOCK OPTION PLAN OF 1993 - The Special Stock Option Plan of 1993
(the "Plan") compensated three executives for their agreement to reduce
previously agreed-upon compensation. The Plan provided for the grant of
options to these executives to purchase 200,000 shares and may also provide
options to other employees in similar circumstances. The exercise price for
the options is $4.40 per share, 110% of the fair market value at the date
of grant. The options became exercisable in January 1994, after
commencement of principal photography of a motion picture based on a
character licensed from the Company, and expire in January 1999.
STOCK OPTION PLAN OF 1997 - The stock option plan of 1997 initially
provided for the grant of options to purchase an aggregate of 250,000
shares of common stock. In April 1998, the Board of Directors approved an
increase in the number of options that could be granted under this plan to
450,000. As of December 31, 1998, 70,300 shares remained unissued under the
plan. Officers, directors and other key employees are eligible to receive
grants of either incentive stock options or nonqualified stock options;
non-employee directors may be granted only nonqualified stock options. The
exercise price of each option granted under the 1997 plan must be at least
100% of the fair market value per share on the date option is granted,
except that options granted to any person who owns stock possessing more
than 10% of the combined voting power of all classes of the Company's stock
shall be at an exercise price no less than 110% of fair market value on the
date of grant.
The term of each option may not exceed 10 years from the date of grant (5
years for any 10% stockholder). Vesting of the options is determined on a
case-by-case basis.
F-15
<PAGE> 45
The following table summarizes option transactions during the two years
ended December 31, 1998 under the aforementioned plans:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF SHARES AVERAGE
PRICE
PER SHARE
<S> <C> <C>
Balance, January 1, 1997 683,000 $ 5.33
Granted 164,000 $ 8.33
Exercised (26,000) $ 6.44
--------
Balance, December 31, 1997 821,000 $ 5.89
Granted 264,000 $ 11.11
Exercised (614,000) $ 5.21
Cancelled (73,000) $ 7.08
--------
Balance, December 31, 1998 398,000 $ 10.00
========
Vested as of December 31, 1998 354,000
========
</TABLE>
The following summarizes pricing and term information for options outstanding as
of December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ --------------------------------
WEIGHTED
RANGE OF NUMBER AVERAGE WEIGHTED WEIGHTED
EXERCISE OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
PRICES AT DECEMBER 31, CONTRACTUAL EXERCISE AT DECEMBER 31, EXERCISE
1998 LIFE PRICE 1998 PRICE
<S> <C> <C> <C> <C> <C>
7.25 92,000 7.55 $ 7.25 87,000 $ 7.25
8.81 21,000 8.33 $ 8.81 4,000 $ 8.81
9.50-9.63 120,000 9.22 $ 9.61 120,000 $ 9.61
10.00-10.50 50,000 9.42 $ 10.40 30,000 $ 10.50
11.00 5,000 9.00 $ 11.00 3,000 $ 11.00
12.69 100,000 9.33 $ 12.69 100,000 $ 12.69
13.13 10,000 9.33 $ 13.13 10,000 $ 13.13
------- -------
7.25-13.13 398,000 7.25 $ 10.00 354,000 $ 10.07
======= =======
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The estimated fair value of
options granted during 1998 and 1997 pursuant to SFAS No. 123 was
approximately $292,000 and $367,000, respectively. Had the Company adopted
SFAS No. 123, pro forma net (loss) income would have been $(11,530,000) and
$2,729,000, and pro forma net (loss) income per share would have been
$(2.84) and $0.77 for 1998 and 1997, respectively. The fair value of each
option grant was estimated using the Black-Scholes option-pricing model
with the following weighted average assumptions: dividend yield of zero, a
risk-free interest rate of 6.28%, and a volatility of 65% and 30% and
expected lives of one year and three years for 1998 and 1997, respectively.
F-16
<PAGE> 46
WARRANTS - In connection with a public offering in 1993, the underwriters
received warrants to acquire 120,000 shares of the Company's common stock
for 145% of the offering price ($10.88 per share). During 1997, warrants
were exercised for 5,000 shares of common stock. At December 31, 1997,
warrants to acquire 52,000 shares remained outstanding. The warrants
expired in June 1998 but were extended for an additional three years, until
June 2001. The Company recorded an expense of $255,000 related to the
extension of these warrants.
In February 1994, the Company issued warrants to purchase 100,000 shares of
its common stock at $13.48 per share (110% of the average closing price of
the Company's common stock on the ten days preceding the agreement date) to
a producer of a motion picture featuring one of the Company's characters.
The warrant expires five years from the date of grant.
In January 1997, the Company issued warrants to purchase 100,000 shares of
its common stock at $10.00 per share to advisors of the Company. The
warrants vest 50% upon date of grant and 50% one year from the date of
grant, but only if the Company requests the advisors to perform services
for 1998. The warrants expire five years from the date of vesting. The
Company recorded an expense of $35,000 related to these warrants.
In March 1998, the Company issued fully vested warrants to purchase 200,000
shares of its common stock at $12.75 per share to consultants providing
certain management services to the Company. The warrants expire five years
from the date of grant. The Company recorded an expense of $433,000 related
to the issuance of these warrants and an additional $281,000 related to the
issuance of options to these same individuals.
STOCK REPURCHASE PROGRAM - In January 1997, the Board of Directors
authorized (subject to stockholder approval) a stock repurchase program
whereby the Company may, from time to time, in market transactions,
purchase up to 10% of its outstanding common stock. The Company has
repurchased 96,000 shares during the year ended December 31, 1997.
8. EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. Due to the
loss incurred in 1998, the effect of potential shares, such as options and
warrants, on the Company's EPS would be anti-dilutive. Therefore, such
effect has not been used to calculate the diluted EPS for 1998.
The following table reconciles basic EPS to diluted EPS for the years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998
---------------------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS $ (11,238,000) 4,059,000 $ (2.77)
============= ========= ========
Diluted EPS -
Net loss $ (11,238,000) 4,059,000 $ (2.77)
============= ========= ========
</TABLE>
F-17
<PAGE> 47
<TABLE>
<CAPTION>
1997
------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS $3,178,000 3,555,000 $ 0.89
========
Effect of dilutive securities:
Options 403,000
Warrants 6,000
---------- ----------
Diluted EPS -
Net income and assumed conversions $3,178,000 3,964,000 $ 0.80
========== ========== ========
</TABLE>
Warrants to purchase 100,000 shares of common stock at $13.48 per share
were outstanding as of December 31, 1997 but were not included in the
computation of diluted EPS because the warrants' exercise price was greater
than the average market price of the common shares. The warrants expire at
various dates from June 1998 through January 1999.
9. SEGMENT INFORMATION
The Company operates in one segment: the licensing of its intellectual
property. Depending on the type of licensee, it will enter into a variety
of agreements, including film production and distribution agreements,
merchandising agreements, and publishing agreements. Typically, the
licensee will distribute a product which incorporates the Company's
animated characters. The products range from television series to magazines
and consumer products.
The products are sold internationally. Export sales by geographic area for
the years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Asia $ 165,000 $ 1,480,000
Canada (135,000) 40,000
Europe (543,000) 2,261,000
Other (177,000) 625,000
----------- -----------
$ (690,000) $ 4,406,000
=========== ===========
</TABLE>
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Accounts receivable:
Domestic $ 865,000 $ 4,098,000
Foreign 1,122,000 4,521,000
----------- -----------
1,987,000 8,619,000
Allowance for doubtful accounts (298,000) (606,000)
----------- -----------
$ 1,689,000 $ 8,013,000
=========== ===========
</TABLE>
F-18
<PAGE> 48
Through January 1997, Universal acted as the Company's exclusive
merchandising agent. In January 1997, the Company and Universal entered
into a new merchandising agreement whereby the Company serves as its own
agent and, for a limited period of time, will remit a percentage of the
merchandising revenues, net of certain expenses, to Universal. The amount
due to Universal under this agreement is $861,000 and $1,444,000 at
December 31, 1998 and 1997, respectively.
At December 31, 1997, accounts receivable due from Saban totaled
$4,291,000. No amounts were due from Saban at December 31, 1998.
10. RELATED PARTIES
In September 1997, the Company entered into a related party
consulting/producing arrangement with JEM Entertainment, Inc. The Company
recognized expense of $37,000 for the year ended December 31, 1998 under
this arrangement.
11. PROFIT-SHARING PLAN
The profit-sharing plan covers substantially all employees with more than
one year of service with the Company. Contributions under the
profit-sharing plan are at the discretion of the Company and are limited to
15% of eligible employee compensation. The profit-sharing plan expense
totaled $0 and $129,000 in 1998 and 1997, respectively, and is included in
accounts payable and accrued expenses.
12. SUBSEQUENT EVENT
On April 7, 1999, the Company entered into a definitive agreement with
certain investors which contemplates that the Company will receive a $17
million equity infusion (less related expenses), consisting of $11.5
million in cash and $5.5 million in the common stock of The Kushner-Locke
Company, a publicly traded company engaged in television and feature film
production and distribution, and public record search services on the
Internet and more conventional means.
In exchange for the investment, the Company will issue 170,000 shares of
Series A preferred stock. The Series A preferred stock pays cumulative
dividends of 7% per annum and is convertible to the Company's common stock
at an initial conversion price of $6.75 per share.
Additionally, the Company will issue 2,400,000 warrants to purchase the
Company's common stock at prices ranging from $9.00 to $12.00 per share.
The number of warrants may increase depending on the Company's financial
condition at March 31, 1999.
Under the definitive agreement, the investors have deposited $750,000 as
liquidated damages recoverable by the Company in the event of a failure by
the investors to close the transaction in breach of their obligations.
Likewise, if the Company decides not to go forward with the transaction it
may be liable to the investors in the amount of $750,000 plus applicable
expenses. Completion of the transaction remains subject to the satisfaction
or waiver of a number of conditions. There is no assurance that the
transaction will be completed.
F-19
<PAGE> 49
13. FOURTH QUARTER ADJUSTMENTS
The Company made certain adjustments in the fourth quarter to the carrying
value of its accounts receivable and film library. Accounts receivable was
written down by $1,675,000 related to a change in estimated returns for
"Casper, A Spirited Beginning." The Company also reduced its film library
by recognizing a charge of $3,000,000 related to "Baby Huey's Great Easter
Adventure."
******
F-20
<PAGE> 50
<TABLE>
<CAPTION>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
--------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING OF COSTS AND ACCOUNTS - DEDUCTIONS - AT END
DESCRIPTION PERIOD EXPENSES (1) DESCRIBE (2) DESCRIBE OF PERIOD
1997 activity:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 573,000 $ 875,000 $ (842,000)(1) $ 606,000
Deferred tax valuation allowance
Reserve for sales returns
Net realizable value reserve for film costs
1998 activity:
Allowance for doubtful accounts 606,000 830,000 (1,138,000)(1) 298,000
Deferred tax valuation allowance 1,787,000
Reserve for sales returns 4,352,000 (3,991,000)(2) 361,000
Net realizable value reserve for film costs 2,900,000 2,900,000
</TABLE>
(1) Decrease to accounts receivable.
(2) Decrease to revenues
F-21
<PAGE> 51
THE HARVEY ENTERTAINMENT COMPANY
10K EXHIBITS
10.55 Consulting Agreement dated May 1, 1998 between the Company and Matty
Simmons Productions
10.56 Publishing Distribution Agreement dated June 23, 1998 between the
Company and Warner Publisher Services, Inc.
10.57 Video Distribution Letter Agreement dated October 30, 1998 between the
Company and Columbia TriStar Home Video, Inc.
10.58 Video Distribution Agreement dated October 30, 1998 between the Company
and Columbia TriStar Home Video, Inc.
10.59 Multi-Agreement No. 7 dated December 11, 1998 to Revolving Loan and
Security Agreement dated October 27, 1993, between the Company and City
National Bank, N.A.
10.60 Extension Letter dated March 31, 1999 between the Company and City
National Bank.
<PAGE> 1
Exhibit 10.55
THE HARVEY ENTERTAINMENT COMPANY
1999 Avenue of the Stars, Suite 2050
Los Angeles, California 90067
As of May 1, 1998
Matty Simmons Productions
4338 Redwood Avenue, Suite 302
Marina Del Rey, California 90292
Re: Consulting Agreement
Gentlemen:
When executed by you ("Lender") and by a duly authorized representative
of The Harvey Entertainment Company (the "Company"), this letter will set forth
the terms and conditions of your provision to Company of the services of Matty
Simmons ("Simmons") (this document is hereinafter referred to as the
"Agreement").
1. SERVICES.
1.1 CONSULTANCY. Company hereby contracts with Lender during the
Term (as hereinafter defined) to provide the consulting services of Simmons to
create, during the Term, an entertainment magazine prototype, together with
certain subsequent issues of such magazine should the prototype be accepted by
Company for publication, featuring Company's characters and properties in a
form and content deemed acceptable by Company, as determined in Company's sole
discretion, together with such other services related to Company's characters
and properties, as requested by Company, for exploitation in other
entertainment related fields, such as, but not limited to, Direct to Video
programs and Theatrical films (all such activities are referred to herein as
the "Services") and such other duties as Company may from time to time
reasonably request and which are consistent with Simmons' stature and
experience. The Services shall be performed at Company's principal offices in
the City of Los Angeles, and from time to time on a temporary travel basis at
such other location as Company shall reasonably request consistent with its
reasonable business needs. Simmons agrees to perform such Services in a
competent and professional manner.
-1-
<PAGE> 2
1.2. REPORTING REQUIREMENTS. Simmons shall report to the Chief Executive
Officer ("CEO") and the Chief Financial Officer ("CFO") of Company and/or such
other individuals as may be designated by the CEO, the CFO, or their authorized
representatives, as the case may be.
1.3. TERM/EXCLUSIVITY.
1.3.1. The Term of this Agreement shall be for one (1) year; shall
commence as of May 1, 1998 and shall end on May 1, 1999 (the "Initial Term")
unless sooner terminated in accordance with the provisions of this Agreement and
subject to the following sentence. Notwithstanding the foregoing, Company shall
have two (2) separate, immediately subsequent options, consisting of one (1)
year each (referred to, respectively, as the First Option Period and the Second
Option Period) to extend the term of this agreement, upon notice to Lender or
Simmons, upon the same terms and conditions contained herein. Each such option
period shall commence upon the expiration of the immediately preceeding Initial
Term or, if exercised, the First Option Period. Any such option periods, to the
extent exercised, taken together with the Initial Term, shall be referred to
herein as the "Term". Options can only be exercised if Simmons has been paid at
least two hundred thousand dollars ($200,000) for the prior year.
1.3.2. The Services shall be rendered on a full time basis during normal
working hours and all Services of Simmons shall be exclusive to Company except
for those activities not competitive with Company's activities and only to the
extent the performance of such activities do not reduce or inhibit the
performance of the Services by Simmons for the Company. Simmons agrees that
during the Term he shall not, without the further approval of an authorized
officer of Company, directly or indirectly engage in or participate as an
officer, employee, director, agent of or consultant for any business directly
competitive with that of Company's business. Simmons can be a passive executive
producer on a non-competitive (non-children's) project.
1.3.3. Notwithstanding anything to the contrary contained in this
Section 1.3, Simmons may acquire and/or retain, solely as an investment, and may
take customary actions to maintain and preserve Simmon's ownership of:
(a) Securities of any partnership, trust, corporation or other person
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 Executive's
investment amounts to less than five percent (5%) of the equity in such entity;
and
(b) Any securities of a partnership, trust, corporation or other person
not registered as set forth in 1.3.3.(a) above so long as Simmons remains a
passive investor in that entity and does not become part of any control group
thereof and so long as such entity is not, directly or indirectly, in
competition with Company.
-2-
<PAGE> 3
1.4. CONFIDENTIALITY. Simmons acknowledges that the Services will,
throughout the Term, bring Simmons into close contact with many confidential
affairs of Company, including information about costs, profits, markets, sales,
products, key personnel, pricing policies, operational methods, technical
processes and other business affairs and methods and other information not
readily available to the public, and plans for future development. Simmons
further acknowledges that the business of Company is international in scope,
that its products are marketed throughout the world, that Company competes in
nearly all of its business activities with other organizations which are or
could be located in nearly any part of the world and that the nature of Simmons'
services, position and expertise are such that he is capable of competing with
Company from nearly any location in the world. In recognition of the foregoing,
Simmons covenants and agrees:
1.4.1. That Simmons will keep secret all trade secrets of Company which are
not otherwise in the public domain and will not intentionally disclose them to
anyone outside of Company, either during or after the Term, except with
Company's written consent and except for such disclosure as is necessary in the
performance of Simmons' duties during the Term; and
1.4.2. That Simmons will deliver promptly to Company on termination of the
Term or at any other time Company may so request, at Simmons' expense, all
confidential memoranda, notes, records, reports and other documents (and all
copies thereof) relating to Company's business, which Simmons obtained while
consulting, or otherwise serving or acting on behalf of, Company or which
Simmons may then possess or have under his control.
2. COMPENSATION.
As compensation and consideration for all Services provided by Simmons
during the Term pursuant to this Agreement, Company agrees to pay to Lender the
compensation set forth below.
2.1. PUBLISHING PROTOTYPE COSTS. Company shall provide Twenty Five Thousand
Dollars ($25,000.00) for the prototype issue of the magazines to be produced by
Simmons pursuant to his performance of the Services. Said advance shall cover
all preliminary expenses necessary for the production of such prototype and
shall be inclusive of the first issue payment of Ten Thousand Dollars
($10,000.00) for the month of May, 1998 pursuant to paragraph 2.2 below and
shall be payable upon the complete execution of this agreement. Simmons shall
provide Company with original invoices and detailed accountings of all costs, as
they are incurred, relating to the expenditure of the Fifteen Thousand Dollar
expense allotment for the production of the prototype specified in this
paragraph. The prototype shall be completed in a manner deemed satisfactory to
Company and delivered to Company (together with proof of payments) by June 30,
1998. Simmons shall be solely responsible for the payment of costs incurred in
connection with the production of the prototype, and shall be reimbursed by the
Company upon submission of appropriate documentation.
-3-
<PAGE> 4
2.2. PUBLISHING COSTS. Subsequent to the production of the prototype
specified in 2.2 above, Company shall provide Ten Thousand Dollars ($10,000.00)
per issue for Simmons' services on the magazines which are the subject of the
Services. Such amount shall be payable by Company upon the initial date of U.S.
commercial publication of each wholly new issue of the relevant magazine
subsequent to the prototype issue. In addition to the foregoing, Company shall
pay Lender a bonus in an amount equal to ten percent (10%) of the pre-tax net
income actually derived by Company from the magazines which are the subject of
the Services. The bonus specified in the immediately preceding sentence shall
be separate from the per issue payment specified in the first sentence of this
paragraph and shall be subject to an annual maximum limit of One Hundred
Thousand Dollars ($100,000.00) per year (regardless of the number of issues or
magazines involved) and shall be calculated and accounted for according to
Company's standard definitions and accounting practices. Bonuses will be paid
on completion of annual audit.
2.3. THEATRICAL MOTION PICTURES. Should Simmons render substantial
Services on any full length theatrical motion picture to be domestically
released in the United States featuring a character or property of the Company,
at Company's sole request, then Lender shall be entitled to an executive
producing fee of One Hundred and Fifty Thousand Dollars ($150,000.00) for each
such motion picture if Company is not the Producer (as such term is commonly
understood in the motion picture industry) of the motion picture in question.
In addition, if Company does not produce such motion picture, Lender shall be
entitled to an additional fee equal to ten percent (10%) of Company's actually
received net receipts derived from the exhibition of the picture concerned and
received from the producer or distributor of the picture in question. In the
event that the Company serves as the Producer of the motion picture in
question, then the fees to be payable to Lender for Simmons' Services shall be
negotiated in good faith between the parties hereto. With respect to the fees
payable pursuant to this paragraph, the Company shall make the sole
determination, in its reasonable business judgment, as to whether Simmons has
rendered Services substantial enough to qualify for such fees. Payment of the
executive production fees specified in the first sentence of this paragraph
shall be made: One third (1/3) upon the commencement of principal photography;
one third (1/3) upon the completion of principal photography; and the remaining
one third (1/3) upon the delivery of the answer print to, and acceptance of
such by, the Company. Bonuses will be paid on completion of annual audit.
2.4. DIRECT TO VIDEO MOTION PICTURES. The parties agree that Simmons
render substantial Services on any full length "direct to video" motion picture
to be domestically released in the United States featuring a character or
property of the Company. Lender shall be entitled to a producing fee of One
Hundred Thousand Dollars ($100,000.00) per each such direct to video motion
picture. In addition, Lender shall be entitled to an additional fee equal to
two percent (2%) of Company's actually received net receipts derived from the
sale of the home video version of the picture concerned plus ten percent (10%)
of the Company's actually received net receipts derived from ancillary
exploitation of such direct to video motion picture. All net receipts payments
specified in this paragraph shall be subject to a maximum payable of
-4-
<PAGE> 5
One Hundred and Fifty Thousand Dollars ($150,000.00) per motion picture, subject
to the following sentence. In the event that any direct to video motion picture
specified in this paragraph, and for which a payment is payable to Lender, is
domestically theatrically released and generally distributed throughout the
United States, then the maximum cap specified in the immediately preceding
sentence shall be removed (in which event the provisions of this paragraph shall
apply and the provisions of the immediately preceding paragraph shall not be
applicable even though it may be claimed that the direct to video motion picture
should now be qualified as a motion picture under paragraph 2.3 above). With
respect to the fees payable pursuant to this paragraph, the Company shall make
the sole determination, in its reasonable business judgment, as to whether
Simmons' has rendered Services substantial enough to qualify for such fees.
Payment of the production fees specified in the first sentence of this paragraph
shall be made: One third (1/3) upon the commencement of principal photography;
one third (1/3) upon the completion of principal photography; and the remaining
one third (1/3) upon the delivery of all video masters to, and acceptance of
such by, the Company. Bonuses will be paid upon completion of annual audit.
2.5. STOCK OPTION AWARDS. Lender shall receive a grant of Ten
Thousand (10,000) performance based options in and to the Company's common stock
at the beginning of each year of the Term at a price equal to the market price
then in effect at the time of each such grant, pursuant to the Company's 1997
Stock Option Plan.
2.6 EXPENSES. Company will reimburse Simmons for his reasonable
Company approved business expenses incurred in connection with the performance
of his Services under the Agreement, subject to, and in accordance with,
Company's general policies regarding business expenses.
3. TERMINATION.
3.1. TERMINATION BY COMPANY.
(a) Simmons' or Lender's Material Breach. The Company shall have the
right, at its election, to terminate the Term for "Simmons' or Lender's Material
Breach," which shall consist of (i) material and repeated instances of
misconduct or habitual inability to perform the Services, or violation of
Company's established policies or procedures, (ii) a single act so grievous as
to constitute the equivalent of such repeated instances (including, without
limitation, theft, misappropriation of Company's assets, conviction of a felony,
or sexual harassment), (iii) unauthorized intentional disclosure of any of
Company's trade secrets or (iv) a material breach of any covenant, condition
agreement or term of this Agreement and only if Company shall have given written
notice to Lender or Simmons specifying the claimed cause or breach and, provided
such breach is curable, Lender or Simmons fail to correct the claimed breach or
fails to alter the objectionable patter of conduct specified in the applicable
written notice as soon as practical thereafter but no later than thirty (30)
days after receipt of the applicable notice or such longer time as may be
reasonably required by the nature of the claimed breach.
-5-
<PAGE> 6
(b) Effect of Termination by Company. Should the Term be terminated
by Company by reason of Lender's or Simmons' Material Breach, Lender or Simmons
shall have no right to any further benefits or compensation from and after
termination.
3.2 TERMINATION BY LENDER OR SIMMONS.
(a) Company's Material Breach. Lender or Simmons shall have the
right, at their election, to terminate the Term only for "Company's Material
Breach," which shall consist of the Company's failure or refusal to comply with
a material term of this Agreement or misfeasance or gross negligence in
performing under this Agreement. In order to terminate the Term, Lender or
Simmons shall be required to give written notice specifying the claimed breach
and the Company shall have failed to correct the claimed breach, if such breach
is curable, or alter the objectionable pattern of conduct specified in the
applicable written notice, no later than thirty (30) days after receipt of the
applicable notice or such longer time as may be reasonably required by the
nature of the claimed breach.
(b) Effect of Termination by Lender or Simmons. Should Lender or
Simmons terminate the Term due to Company's Material Breach, the Company shall,
subject to any right of offset for any indebtedness of Lender or Simmons, pay
Lender what Lender would have been entitled to during the then remaining
portion of the Term with respect to the producer's fees or percentage
participations specified above.
4. DEATH AND DISABILITY.
4.1 DEATH. The Term shall immediately terminate upon Simmons' death
as certified in accordance with the provisions of California law ("Death").
4.2 DISABILITY. As used herein, the term "Disability" shall mean
Simmons becoming unable to fully perform the Services as a result of his
permanent or temporary, total or partial, physical or mental disability for any
two (2) months during the Term ("Disability"). In such event, Company shall
have the right (notwithstanding any other provision of this Agreement to the
contrary) to terminate the Term upon notice to Lender or Simmons.
4.3 EFFECT OF DEATH OR DISABILITY. Should the Term be terminated in
accordance with the provisions of Paragraphs 4.1 or 4.2 by reason of Death or
Disability, Simmons (or his estate) or Lender shall have no right to any
further compensation (other than any stock options vested at the time of such
Death or Disability; fees or percentage participations, but solely to the
extent Services have been fully performed in connection with such).
-6-
<PAGE> 7
5. COVENANT NOT TO SOLICIT.
Until one year after actual termination of Simmons' consultancy with
the Company, Simmons or Lender shall not, directly or indirectly, solicit or
induce any of the Company's or its parent's or subsidiaries' employees to
terminate their employment with the Company or its parent or any of its
subsidiaries or knowingly interfere with the Company's or its parent or any of
its subsidiaries then contractual relationships or knowingly disparage the
company or its parent or any of its subsidiaries or its executives.
6. ATTORNEY'S FEES.
In the event there is commenced any action, suit or proceeding in
respect of a dispute arising out of this Agreement, the parties hereto agree
that the prevailing party shall be entitled to reimbursement upon demand for
all reasonable fees and actual expenses of counsel in connection with each
claim constituting a portion of such action, suit or proceeding in which he is
the prevailing party. A party shall be a "prevailing party" as to a claim if
such party is successful in proving or disproving the cause of action asserted
or contested.
7. GENERAL.
7.1 APPLICABLE LAW CONTROLS. Nothing contained in this Agreement shall be
construed to require the commission of any act contrary to law and wherever
there is any conflict between any provisions of this Agreement and any material
statute, law, ordinance or regulation contrary to which the parties have no
legal right to contract, then the latter shall prevail; provided, however, that
in any such event the provisions of the Agreement so affected shall be
curtailed and limited only to the extent necessary to bring them within
applicable legal requirements.
7.2 WAIVER/ESTOPPEL. Any party hereto may waive the benefit of any term,
condition or covenant in this Agreement or any right or remedy by law or in
equity to which any party may be entitled but only by an instrument in writing
signed by the parties to be charged. No estoppel may be raised against any
party except to the extent the other parties rely on an instrument in writing,
signed by the party to be charged, specifically reciting that the other parties
may rely thereon. The parties' rights and remedies under and pursuant to this
Agreement or at law or in equity shall be cumulative and the exercise of any
rights or remedies under one provision hereof or rights or remedies at law or
in equity shall not be deemed an election of remedies; and any waiver or
forbearance of any breach of this Agreement or remedy granted hereunder or at
law or in equity shall not be deemed a waiver of any preceding or succeeding
breach of the same or any other provision hereof or of the opportunity to
exercise such right or remedy or any other right or remedy, whether or not
similar, at any preceding or subsequent time.
-7-
<PAGE> 8
7.3. NOTICES. Any notice which Company is required or may
desire to give to Lender hereunder shall be in writing and may be served by
delivering it to Lender or Simmons, or by sending it to Lender or Simmons by
mail, telex, or telegraph, at such address as Lender or Simmons may from time to
time designate to Company. Any notice which is required or may be served upon
Company hereunder shall be in writing and may be served by delivering it
personally or by sending it by mail, telex or telegraph to the address set forth
on Page 1 hereof or such other substitute addresses as Company may from time to
time designate by notice. Notices regarding cure of an alleged breach hereof
shall be sent by certified registered mail and shall be effective upon receipt.
7.4 GOVERNING LAW. This Agreement shall be governed by,
construed and enforced, and the legality and validity of each term and condition
shall be determined, in accordance with the internal, substantive laws of the
State of California applicable to agreements fully executed and performed
entirely in California. Any actions brought relating to this Agreement may be
brought only in the Courts, State or Federal, located within County of Los
Angeles, State of California.
7.5 CAPTIONS. The section headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
7.6 NO JOINT VENTURES. Nothing herein contained shall
constitute a partnership between or joint venture by the parties hereto or
appoint any party the agent of any other party. No party shall hold itself out
contrary to the terms of this paragraph and, except as otherwise specifically
provided herein, no party shall become liable for the representation, act or
omission of any third party who is not referred to herein and shall not be
deemed to give right or remedy to any such third party.
7.7 NO EMPLOYMENT. In entering into this Agreement, and in
providing the Services, Lender and Simmons have and shall have the status of
independent consultants and contractors and nothing herein shall contemplate or
constitute Lender or Simmons as Company's agents or employees.
7.8 VALIDITY. This Agreement shall not become effective,
further subject 7.10 below, until executed by all proposed parties hereto.
7.9 MODIFICATION/ENTIRE AGREEMENT. This Agreement may not be
altered, modified or amended except by an instrument in writing signed by all
of the parties hereto. No person, whether or not an officer, agent, employee or
representative of any party, has made or has any authority to make for or on
behalf of that party any agreement, representation, warrant, statement,
promise, arrangement or understanding not expressly set forth in any other
document executed by the parties concurrently herewith ("Parol Agreements").
This Agreement and all other documents executed by the parties concurrently
herewith constitute the entire agreement between the parties and supersede all
express or implied, prior or concurrent, Parol Agreements
-8-
<PAGE> 9
and prior written agreements with respect to the subject matter hereof. The
parties acknowledge that in entering into this Agreement, they have not relied
and will not in any way rely upon any Parol Agreements.
7.10 BOARD APPROVAL. Notwithstanding anything to the contrary contained
herein, the validity and effectiveness of this Agreement, as well as any of
Company's obligations thereunder, are expressly contingent upon the approval by
the Company's Board of Directors of all material terms contained above.
Notwithstanding the foregoing, in the event that the Company's Board of
Directors fails to approve this Agreement, Lender shall nonetheless receive
from Company an amount representing the "commencement of photography" payment
($33,333.00) referred to in paragraph 2.4 above for services already rendered
by Simmons in connection with the direct to video motion picture currently
referred to as "Baby Huey's Easter."
Please confirm your agreement to the foregoing by signing below where
indicated.
Very truly yours,
THE HARVEY ENTERTAINMENT COMPANY
By: /s/ MICHAEL S. HOPE
-----------------------------
Agreed to and Accepted
/s/ MATTY SIMMONS PRES. MATTY SIMMONS PRODUCTIONS, INC.
- ------------------------------------------------------
Matty Simmons Productions
Tax ID# 95-3743735
I have read and understand the foregoing agreement and agree to be bound by its
terms and conditions insofar as they relate to my services as an independent
consultant.
/s/ MATTY SIMMONS
- --------------------------------
Matty Simmons
SS# ###-##-####
-9-
<PAGE> 1
Exhibit 10.56
[WARNER PUBLISHER SERVICES LETTERHEAD]
THIS AGREEMENT, dated June 23, 1998, between WARNER PUBLISHER SERVICES, INC., a
New York corporation (herein called "Warner"), and, HARVEY ENTERTAINMENT
COMPANY a California corporation (herein called "Publisher").
1. DEFINITIONS. As used in this agreement, the following terms shall have the
following respective meanings:
(a) "Publication(s)" shall mean that certain magazine(s) entitled Harvey;
The Magazine For Kids, which shall be published monthly.
(b) "Territory" shall mean the United States of America, including Puerto
Rico and the Military and the Dominion of Canada.
(c) "Printer's Completion Notice" shall mean a notice delivered to Warner
and executed by the traffic manager or shipping manager of the
Publisher's printer for each issue of each Publication, specifying the
number of copies of such issue shipped in accordance with Warner's
instructions, and the date of completion of such shipment. Under no
circumstances may a Printer's Completion Notice be sent to Warner
prior to the completion of shipping to Warner's customers, whether or
not an intermediary is used.
(d) "Net Sales" shall mean (with respect to each issue of each
Publication) the number of copies of the Publication(s) specified in
each Printer's Completion Notice (as the same may be modified or
amended by additional information furnished by the printer or
Publisher), less the number of copies of that issue returned to Warner
pursuant to the provisions of Paragraph 8 and less the number of
copies of that issue lost or damaged in shipments to wholesale
distributors per subparagraph 3(c).
(e) "Cover Price" shall mean the suggested retail selling price of each
Publication(s) (as specified by Publisher on the cover of each copy
thereof), as the same may be increased or decreased by Publisher
during the Term.
(f) "Warner's Commission" shall mean a sum equal to seven point two (7.2%)
percent of the Cover Price of the Net Sales.
(g) "Customer Discount" shall mean the discount off the Cover Price at
which Publisher directs Warner to bill Warner's customers for copies
of the Publication(s). Publisher agrees that the Customer Discount
shall remain the same as that prior to this agreement, unless
Publisher and Warner's customer(s) agree otherwise in writing to be
furnished to Warner.
(h) "Gross Billings" shall mean the Cover Price, less the Customer
Discount, multiplied by the number of copies of the Publication(s)
specified on a Printer's Completion Notice and less Warner's
Commission with respect to such number of copies.
(i) "Final Billings" shall mean the Cover Price, less the Customer
Discount, multiplied by the Net Sales and less Warner's Commission
(j) "On Sale Date" shall mean the date, as designated by Publisher, that
each issue of the Publisher(s) is to be place for initial sale at
retail outlets.
(k) "Off-Sale Date" shall mean the date, designated by Publisher, for
recall of issue of the Publication(s) from sale at retail outlets,
provided, however, that the Off-Sale Date of any issue of a
Publication shall not be later than one (1) day prior to the On-Sale
Date of the next succeeding issue of the same Publication. The
Off-Sale Date of "one-shots" shall also be determined by Publisher.
(l) (i) "Term" shall mean the period commending with the on-sale date of
the first issue of the Publication(s) distributed by Warner, and
shall continue thereafter for a period of three (3) years. The
Term shall thereafter be automatically extended for successive
three (3) year periods upon the same terms and conditions as
herein contained, subject, however, to the right of
<PAGE> 2
either party, on prior written notice to the other party as
provided below, to terminate the Term upon the expiration of
the original Term or any renewal period.
(ii) The notice of termination shall specify the On-Sale Date of the
last issue of each Publication to be distributed under this
agreement and shall be served not less than Ninety (90) days
prior to the end of the original Term or any renewal period by
registered mail or national courier system addressed to the
party being notified at the address specified under paragraph
15 hereof. Notwithstanding such termination, this agreement
shall continue in full force and effect after the termination
date for the purpose of distributing such last issue, handling
and crediting returns of unsold copies, and effecting a final
settlement of Publisher's account. Warner shall have the right,
upon the giving by either party of such written termination
notice, to suspend any further payments to or on behalf of
Publisher and to withhold all further sums relating to the
Publication(s) until final settlement is effected, one hundred
eighty (180) days after the Off-Sale Date of the last issue of
the Publication(s) distributed by Warner hereunder. Warner
shall be entitled to set up a reasonable reserve at that time
for anticipated returns from areas located outside the United
States and Canada, and for all proper and reasonable charges or
reimbursements due Warner pursuant to the terms of this
agreement.
(iii) Notwithstanding anything to the contrary in this agreement,
Publisher shall not be entitled to terminate this agreement at
any time if Publisher is indebted to Warner for any such reason
without first reimbursing Warner the full amount of such
indebtedness.
2. RIGHTS GRANTED: Publisher hereby grants to Warner, for the Term and
throughout the Territory, the exclusive right to distribute the
Publication(s) and any "one shots" derived from the Publication(s) as agent
for Publisher. The provisions of this paragraph 2 shall not apply to copies
of the Publication(s) furnished by Publisher to individual subscribers and
to direct comics market.
3. THE PUBLISHER AGREES:
(a) To publish the Publication(s) at the frequency specified in
subparagraph 1(a), and in substantially the same physical form
(including, but not limited to, size, quality of paper and
reproduction) and with editorial, creative and artistic elements at
least equal to those in previous issues and to print on the cover of
the Publication(s) a UPC code including Warner's bi-pad number.
(b) That upon receipt from Warner of the lists of wholesale distributors
and the number of copies of each of the Publication(s) to be shipped
thereto, Publisher shall complete shipment to wholesale distributors
in accordance with such lists far enough in advance of the On-Sale
Dates of the respective issues to enable distribution to and by
wholesale distributors by the On-Sale Dates. Publishers shall pay all
transportation charges relating to the shipment of the Publication(s)
to wholesale distributors.
(c) That Warner may deduct from the payments due Publishers, as provided
in subdivision 9(b)(ii) hereof, all amounts attributable to copies of
the Publication(s) lost or damaged in shipment to wholesale
distributors. Subject to the provisions of paragraph 16 hereof, all
such loss or damage adjustments made by Warner for the benefit of said
wholesale distributors shall be conclusive on the question of loss
and/or damage and binding upon Publisher. Warner and Publisher shall
assist one another in the handling of claims against carriers for
copies of the Publication(s) that are delayed, lost or damaged in
transit.
<PAGE> 3
(d) That Warner shall allow wholesale distributors the privilege of
returning all unsold copies of the Publication(s) and receiving credit
at the rate charged therefor, in accordance with the terms of
paragraph 8 hereof.
(e) That Warner may refuse to distribute any issues of Publication(s)
which, in its opinion, contain libelous, obscene or indecent matter;
which infringe the copyright, right of privacy or publicity or any
other right of any third party; which are unlawful; or which are
refused use of the mails by postal authorities; or, in its sole
discretion, Warner may elect to terminate this agreement with respect
to the Publication(s) concerned. Warner shall have no obligation to
review the content of any Publication.
(f) That if Warner incurs any expenses hereunder on behalf of Publisher or
the Publications(s), then Warner may recover, pursuant to subdivision
9(b)(viii) hereof, any or all such expenses from any advances and/or
payments due or becoming due to Publisher, or, at its option, may
require Publisher to reimburse Warner by check within 10 days
following Warner's request therefor.
4. WARNER AGREES:
(a) To furnish shipping instructions and addressed labels to Publisher at
a reasonable time prior to the scheduled shipping date for
distribution of the Publication(s).
(b) To bill and collect all payments from wholesale distributors for
Warner's own account and to designate wholesale distributors and other
customers.
(c) To make payments to Publisher as specified in paragraph 9.
(d) To consult with Publisher's designated representatives, upon request,
with respect to:
(i) The number of copies of each issue to be printed;
(ii) The number of copies of each issue to be allotted and shipped to
each wholesale distributor;
(iii) The sales history of the Publication(s); and
(iv) The advertising and promotion campaigns for the Publication(s).
(e) To designate an employee of Warner as the non-exclusive account
executive for the Publication(s).
(f) To render to Publisher a sales performance statement for each issue of
the Publication(s) showing, in summary form, the issue date, On-Sale
and Off-Sale Dates, number of copies distributed, returns accepted,
Net Sales (in both numerical and percentage terms), and the sales
trend of the Publication(s) (a numerical comparison of Net Sales of
that issue versus Net Sales of the previous issue and of the same
issue one year earlier.)
(g) To render to Publisher a payment statement for each issue of the
Publication(s) summarizing the appropriate calculations pursuant to
this agreement.
(h) The activities described in this paragraph shall be performed in
Warner principal corporate offices, except as otherwise agreed between
Warner and Publisher.
5. WARNER NOT A TRUSTEE: In no event shall Warner be obligated to segregate
any of the sums collected by it hereunder from any of its other funds, nor
shall Warner be considered a trustee, pledgeholder or fiduciary of
Publisher. Publisher acknowledges and agrees that Warner shall be entitled
to perform distribution and other services for other publishers regardless
of whether such other publishers' publications may be competitive with the
Publication(s).
6. RETAIL DISPLAY ALLOWANCES:
(a) Warner shall, only if requested by Publisher, perform the work of
receiving and collating information from retail magazine dealers and
issuing payments on behalf
<PAGE> 4
of Publisher for amounts due to them under retail or checkout display
allowance ("RDA") programs conducted by the Publisher in reference to
the Publication(s) as previously authorized by Publisher in writing
for each retail outlet. Such RDA payments shall be charged to the
Publisher's account and recovered and received by Warner as provided
in subparagraph 1(i) and subdivision 9(b)(iii) hereof, at such time as
Warner determines (whether such determination is based upon an
estimate made by Warner or otherwise) that such dealers are entitled
thereto, whether such payment is actually made by Warner at such time.
Any adjustments made by Warner regarding the amount of such allowances
shall be credited or charged (as the case may be) to Publisher's
account at the time such adjustment is actually made by Warner.
(b) In consideration of the services to be performed by Warner pursuant to
this paragraph 6, Warner shall receive an RDA service fee of $.55 for
each issue of the Publication(s) per retailer claim, which sum shall
be recovered by Warner pursuant to subdivision 9(b)(iv) hereof.
(c) Publisher shall have the right, upon timely notice to Warner, to
assume all obligations to perform all RDA services and issue all RDA
payments. Publisher hereby gives the notice of assumption specified in
the preceding sentence.
7. CREDIT TO WHOLESALE DISTRIBUTORS:
(a) Warner will bill customers at Customer Discount.
(b) In the event Warner's customers make deductions from payments to
Warner for adjustments to Customer Discount or other special
allowances not agreed to by the Publisher, Warner will notify
Publisher of such adjustments and shall deduct from any payments to
Publisher pursuant to subdivision 9(b)(vii) hereof, the amount of such
deductions. Publisher may direct Warner to hold up or stop future
shipments to the customer.
(c) Publisher agrees that Warner shall be entitled to make all decisions
as to which customer to sell the Publication(s) to, and all credit and
collection decisions with respect to wholesale distributors, including
whether to stop or hold up shipment to delinquent accounts and to
secure substitute accounts. Warner shall bear any losses from
uncollectible accounts and all collection expenses, provided that
Publisher has adhered to directions by Warner to stop or hold up any
shipment to a wholesale distributor. If Publisher fails to adhere to
any such directions, Publisher shall bear all resulting losses of
uncollectible accounts, including any collection expenses, and any
such losses sustained by Warner shall be charged to Publisher's
account and recovered by Warner as provided in subdivision 9(b)(v)
hereof. Nothing herein contained, however, shall require Warner to
institute any legal action or collection proceedings. Publisher agrees
and acknowledges that Warner may recommend new or substitute accounts
in place of or in addition to customers that Warner thinks are
inadequate, an unacceptable credit risk, or irregular in payments.
Publisher will adhere to Warner's recommendation to change customers.
8. RETURNS:
(a) In determining the sums payable to Publisher, Warner shall be entitled
to deduct returns of each issue of the Publication(s) shipped to
Warner from Warner's customers located in the Territory at any time
within 120 days of the Off-Sale Date of each such issue, but as to the
last issue distributed pursuant to this agreement, or any one-shots or
special issues, Warner may accept returns shipped at any time within
180 days of the Off-Sale Date of such issues. The aforesaid 120 and
180 day periods shall be subject to extension by reason of delay or
delays resulting from the use of Reshipping Wholesaler Agencies (as
that term is commonly understood in the magazine trade), in mail
delivery, "acts of God", or any other cause beyond the reasonable
control of Warner, or with Publisher's consent.
(b) If Warner receives returns of any issue hereunder after final
settlement of such issue pursuant to subparagraph 9(b) hereof, Warner
may deduct such returns at the rate charged therefor from any
remittance becoming due Publisher, or, after termination of this
agreement, the Publisher shall promptly reimburse Warner upon receipt
of Warner's statement regarding such returns.
<PAGE> 5
(c) Warner may accept returns of unsold copies of the Publication(s) by
means of front covers, headings, affidavits, or electronic notification
in form satisfactory to Warner. If Publisher shall request, in writing,
full copy returns, Warner shall use its reasonable efforts to obtain
same, and in such case, Publisher agrees to pay for returns
transportation and such handling charges as are required. Warner shall
furnish Publisher with returns statements which, subject to paragraph
16 hereof, shall be accepted by Publisher as conclusive evidence
thereof, and Warner is hereby authorized to destroy any and all front
covers or headings representing such returns.
9. PAYMENT TO PUBLISHER: Warner shall make the following payments to
Publisher with respect to each issue of the Publication(s).
(a) As an advance against any and all sums which may become payable to
Publisher pursuant to subparagraph (b) with respect to each issue of
the Publication(s).
(i) For the first three issues of the Publication, an amount equal to
fifteenth (15%) percent of Gross Billings and for the fourth and
subsequent issue of the Publication, an amount equal to fifty
(50%) percent of Warner's estimate of Final Billings (determined
in Warner's sole discretion), due on the on-sale date of the
Publication and after receipt by Warner of the Printer's
Completion Notice, less an estimated amount to cover the
deductions specified in subdivisions 9(b)(ii) - 9(b) (viii) to the
extent that such deductions are determinable at such date.
In the event that Publisher and Warner do not agree as to the
number of copies of each issue of the Publication(s) to be
allotted and shipped to each wholesale distributor, Warner may,
thereafter, at its ole discretion, base the computation of the
advances to become due to Publisher pursuant to this paragraph 9
on the number of copies of each issue of the Publication(s) that
Warner deemed appropriate to be allotted and shipped to each
wholesale distributor, rather than the number actually printed and
shipped.
(ii) An amount equal to sixty-five (65%) percent of Warner's estimate
of the Final Billings (determined in Warner's sole discretion),
sixty (60) days after the Off-Sale Date of such issue, less the
first advance and an estimate of any unpaid deductible expenses
provided for under subdivisions 9(b)(ii) - 9(b)(viii) to the
extent that such deductions have not previously been deducted and
retained by Warner.
(b) An amount equal tot he Final Billings shall be paid to Publisher one
hundred twenty (120) days after the Off-Sale Date of that issue, less
any of the following deductible expenses which have not been recovered
by Warner:
(i) All sums advanced to Publisher pursuant to subparagraph (a) above;
(ii) All loss and damage adjustments pursuant to subparagraph 3(c)
above;
(iii) All RDA payments pursuant to paragraph 6 above;
(iv) Warner's RDA service fee pursuant to paragraph 6 above;
(v) All uncollectible amounts and other items properly chargeable to
Publisher referred to in paragraph 7 above;
(vi) The following special allowances which may be granted by Warner:
I. With respect to Reshipping Wholesaler Agencies (as the term is
commonly understood in the magazine trade):
A. A charge of $12.45 per cwt. on all non-second-class entry
magazines for U.S. and Canada reshipping agencies.
B. A charge of $6.40 per cwt. on all second-class entry
magazines for U.S. and Canada reshipping agencies.
II. The charges referred to in subdivision A and B above are
subject to change in proportion to any increase in the
aforesaid rates.
<PAGE> 6
III. A charge of $3,000.00 will be made if an analysis of
circulation by population is requested and required
for the Audit Bureau of Circulation report. No charge
will be made for the Sate Circulation analyses which
are customarily made once a year for the Publication.
(vii) Diskettes containing O&R or history data will be furnished
at the Publisher's request upon a charge of $200 per
diskette subject to increases from time to time.
(viii) All other charges, payments or other reimbursements due
Warner pursuant to the terms of this agreement,including but
not limited to, any foreign exchange losses (any foreign
exchange gains shall be credited to Publisher).
10. ONE-SHOTS:
(a) Warner shall have the right to refuse to distribute any one-shots
as may hereafter be published. In the event Warner agrees to
distribute such one-shots, Warner shall pay Publisher its Final
Billings as computed for each one-shot less the deductions specified
in subdivisions 9(b)(ii) - 9(b)(viii).
(b) All the terms and conditions of the agreements shall be applicable
to such one-shots as may be distributed hereunder, except that with
respect to advance payments the parties hereby agree to negotiate in
good faith as to the amount and timing of such payments.
11. CROSS-COLLATERALIZATION/OVERDRAFTS:
The Estimated Final Billings of each issue of all Publication(s)
distributed by Warner pursuant to this agreement shall be treated as a
unit. If the sum of advance payments due and the deductible expenses
incurred by Warner pursuant to subdivisions 9(b)(ii) - 9(b)(viii) with
respect to any issue of any Publication(s) exceeds the Estimated Final
Billings for such issue (such excess is hereunder referred to as the
"Overdraft"), the Overdraft may be deducted by Warner from any advance
and/or payment of Final Billings which Warner may be required to make on
any issue or issues of the same Publication(s), or any other
Publication(s), the distribution rights to which have been granted to
Warner by Publisher or any affiliate,parent or subsidiary of Publisher
pursuant to this or any other agreement, or shall be refunded or paid
thereby immediately upon demand.
12. PUBLISHER'S WARRANTIES; INDEMNITY:
(a) Publisher warrants and represents that:
(i) the rights herein granted to Warner have not been granted to
any other person, firm, or corporation; it has the right and
authority to enter into this agreement and to perform its
obligations hereunder, free and clear of any encumbrances; and
there are no suits or proceedings pending or threatened against
or affecting Publisher which, if adversely determined, would
impair the rights herein granted to Warner;
(ii) it is duly organized and incorporated under the laws of the
State of California.
(iii) it is the sole and exclusive owner of the Publication(s) and
all rights therein.
(iv) that the Customer Discounts and all pricing,discount, and
allowance terms shall be in compliance with all applicable
antitrust and trade laws in the territory; and
(v) that the Publication(s) and distribution of the Publication(s)
under the Agreement will not violate any laws or rights of any
third parties or entities.
(b) Publisher agrees to defend and indemnify Warner and its officers,
agents, representatives, Warner's customers and retailers against any
damages, costs, expenses (including reasonable counsel fees),
judgements, settlements, penalties, liabilities or losses arising out
of any claim, action or proceeding alleging copyright
<PAGE> 7
or trademark infringement, libel, obscenity, violations of the rights
of privacy, publicity or any other rights of any person, or any
federal, state or local statute or regulation, in connection with the
title, cover, contents or advertising of the Publication(s),
including, but not limited to, advertisements, illustrations, or
photographs, or in the text thereof, or arising out of the breach or
alleged breach of any of the foregoing representations or warranties.
Warner and Publisher shall each, with all reasonable promptness,
notify the other of any suit, proceeding, claim or demand brought in
connection with the Publication(s). If any such suit, proceeding,
claim or demand is brought against Warner, Warner may elect (i) to
undertake the defense thereof at the Publisher's expense or (ii) to
notify the Publisher to undertake the defense thereof. If Warner does
so notify the Publisher, the Publisher shall undertake the defense at
its own expense; and in such case, Warner may at its option join in
the defense but at its own expense.
(c) During the pendency of any such suit, proceedings, claim or demand,
Warner may withhold payments from Publisher, under this or any other
agreement between Publisher and Warner, to the extent reasonably
necessary to remedy any damage, cost, expense, settlement, judgement
or liability which may result therefrom.
(d) The warranties and representations of Publisher hereunder shall, along
with the indemnity, survive the termination of this agreement.
13. CUSTOMER BANKRUPTCY - COMPUTATION OF NET SALES:
In the event that a wholesale distributor or other customer to which Warner
distributes the Publication(s) on Publisher's behalf shall take advantage
of any federal or state insolvency law for relief of debtors, including
reorganization, or shall cease its business operation with the effect that
such wholesale distributor or other customer shall not return its unsold
copies of the Publication(s), Warner shall use the average Net Sales of the
Publication(s) as reported by such wholesale distributor or customer for
the twelve (12) months (or such lesser period if applicable) prior to those
months for which such wholesale distributor or customer failed to return
unsold copies of the Publication(s), for determining the Net Sales of the
Publication(s) shipped to such wholesale distributor or customer for said
months.
14. ASSIGNMENT:
This agreement shall bind and inure to the benefit of the parties hereto
and their respective successors and assigns, provided that no assignment of
this agreement, voluntary or by operation or law, shall be binding upon
either of the parties hereto without the prior written consent of the
other, unless it is an assignment to a parent, subsidiary or affiliate as
part of the sale or transfer of all or substantially all of such party's
assets. Notwithstanding this, Publisher may sell, assign, transfer or
otherwise dispose of its interest in any Publication or any trademark(s)
associated therewith to any third party (whether by means of a sale of
assets or equity) if such third party agrees in writing to assume and be
bound by all the terms and conditions of this agreement to be performed by
Publisher and prior to such sale, assignment, transfer or other disposition
Publisher reimburses Warner the full amount of any indebtedness owed by
Publisher to Warner; provided, however, that Publisher shall guarantee and
remain responsible for the performance of all obligations hereunder with
respect to such Publication, and that Warner shall have the right to
terminate this agreement with respect to such Publication.
15. NOTICES:
All notices which either party hereto is required or may desire to give to
the other shall be given by addressing the same to the other at the address
hereinafter set forth, or at such other address as may be designated in
writing by any such party in a notice to the other given in the manner
prescribed in this paragraph. All such notices shall be sufficiently given
when the same shall be deposited so addressed, postage prepaid, in the
United States mail and/or when the same shall have been delivered, so
addressed, by national courier system, or to a telegraph or cable company
toll prepaid and the date of said mailing or telegraphing shall be the date
of the giving of such notice. The addresses to which any such notices shall
be given are the following:
TO WARNER: TO PUBLISHER:
Warner Publisher Services Harvey Entertainment Company
Attn: President 1999 Avenue of the Stars, 17th Floor
1271 Avenue of the Americas Los Angeles, California 90067
New York, New York 10020
<PAGE> 8
16. AUDIT RIGHTS:
Publisher may, at its own, expense, audit the books and records of Warner
relative to the distribution of the Publication(s) pursuant to this
agreement at the place where Warner maintains such books and records in
order to verify statements rendered to Publisher hereunder. Any such audit
shall be conducted only by a reputable public accountant during reasonable
business hours in such manner as not to interfere with Warner's normal
business activities. A true copy of all reports made by Publisher's
accountant shall be delivered to Warner at the same time such respective
reports are delivered to Publisher by said accountant. In no event shall an
audit with respect to any statement commence later than twelve (12) months
from the date of dispatch to Publisher of such statement nor shall any
audit continue for longer than five (5) consecutive business days, nor
shall audits be made hereunder more frequently than twice annually, nor
shall the records supporting any such statement be audited more than once.
All statements rendered hereunder shall be binding upon Publisher and not
subject to objection for any reason unless such objection is made in
writing stating the basis thereof and delivered to Warner within twelve
(12) months from delivery of such statement, or, if an audit is commenced
prior thereto, within thirty (30) days from the completion of the relative
audit.
17. INTEGRATION; WAIVER; MODIFICATION:
This agreement constitutes the complete and entire understanding of the
parties hereto concerning the subject matter hereof and supersedes any
prior agreements, understandings and representations. This agreement is not
being executed in reliance upon any representation or warranty not
expressly set forth herein. No waiver, modification or cancellation of any
term or condition of this agreement shall be effective unless executed in
writing by the party charged therewith. No written waiver shall excuse the
performance of any act other than those specifically referred to therein.
18. NO PARTNERSHIP, ETC.:
This agreement does not constitute and shall not be construed as
constituting a partnership or joint venture between Warner and Publisher.
Neither party shall have any right to obligate or bind the other party in
any manner whatsoever, except as otherwise specifically set forth herein,
and nothing herein contained shall give, or is intended to give, any rights
of any kind to any third persons.
19. CONSTRUCTION:
This agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to agreements executed and fully
performed therein. It is agreed that New York courts (state and federal)
only, will have jurisdiction over any controversies regarding this
agreement; any action or proceeding which involves such a controversy will
be brought only in those courts, in New York County. Any process in any
such action or proceeding may, among other methods, be served by delivery,
certified or registered mail, national courier system or any other
receipted form of delivery. Any such delivery, mail service, courier
service, or other receipted form of delivery shall be deemed to have the
same force and effect as personal service within the state of New York.
20. FORCE MAJEURE:
If because of act of God; accident; fire; lockout; strike or other labor
dispute; riot or civil commotion; act of public enemy; law enactment,
regulation, rule, order or act of government or governmental
instrumentality (whether federal, state, local or foreign); or other cause
of a similar or different nature beyond the control of Publisher or Warner,
the performance of Publisher's or Warner's obligations hereunder is delayed
or prevented, such delay or prevention shall not be considered a breach of
this agreement.
21. HEADINGS:
The headings in this agreement are for convenience of reference only, and
shall not limit or otherwise affect the meaning thereof.
<PAGE> 9
22. CONFIDENTIALITY:
Publisher agrees that this agreement contains confidential business terms
and that disclosure thereof could be damaging to Warner. Accordingly,
Publisher agrees to treat this agreement as proprietary information and
not to reveal any of the terms hereof to any third party, for any purpose
unrelated to performance under this agreement, except upon Warner's prior
approval.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their duly authorized officers as of the day and year first
above written.
HARVEY ENTERTAINMENT COMPANY: WARNER PUBLISHER SERVICES, INC.
BY: LEONARD BREIJO BY: [SIGNATURE ILLEGIBLE]
------------------------- ----------------------------
TITLE: TITLE:
---------------------- --------------------------
<PAGE> 1
Exhibit 10.57
[COLUMBIA TRISTAR HOME VIDEO LETTERHEAD]
Don Gold
Harvey Entertainment
1999 Avenue of the Stars
Suite 2050
Los Angeles, CA 90067
Fax #: 310-789-0046
Re: Baby Huey's Great Easter Adventure
Dear Don:
The following shall set forth the terms by which Columbia TriStar Home Video,
Inc. ("CTHV") has agreed to acquire video distribution rights from Harvey
Entertainment, Inc. ("Licensor") to the program currently entitled "Baby Huey's
Great Easter Adventure."
1. Program: A feature length motion picture entitled "Baby Huey's Great Easter
Adventure" (the "Program"). The Program shall be no less than eighty-five (85)
minutes in length and shall have an MPAA rating no more restrictive than "PG."
2. Rights Granted: Licensor hereby grants to CTHV the sole and exclusive
videogram distribution rights ("Videogram Rights"), in all language versions, to
the Program in the Territory throughout the Term ("Rights Granted"). Videogram
Rights shall be defined as the sole and exclusive right to manufacture,
advertise, promote and distribute on a sale, lease or rental basis on its own or
through licensees, videocassettes, cartridges, phonograms, tapes, videodiscs,
laserdiscs, digital videodiscs ("DVDs"), 8mm recordings (in whatever form), or
any other visual or optical recording (including, but not limited to, DVD-ROM,
CD-I and CD ROM that display the Program in a linear format as a continuous
Program) now known or hereafter discovered containing all language versions of
the Program for home use by consumers and the right to exploit the Program by
means of "Video-On-Demand" ("Videograms"). "Video-On-Demand" shall mean the
transmission of a selected video program from a central video library via a
television system where reception of said video program at a viewing time
selected by the viewer is available only upon payment of a charge therefor,
which charge is in addition to any
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charge for reception of the television service and/or programming channel. All
other rights not expressly granted to CTHV are hereby reserved to Licensor.
3. Territory: The "Territory" shall be United States, Canada, U.S. Virgin
Islands and Puerto Rico (and their respective territories, commonwealths and
possessions).
4. Term: The "Term" shall commence upon execution of this Agreement and shall
expire on December 31, 2007. CTHV shall have a first negotiation/last refusal to
extend the Term of this Agreement. Such right of first negotiation/last refusal
shall mean that within six (6) months prior to the end of the Term, the parties
agree to exclusively negotiate for a period of sixty (60) days to extend the
Term of this Agreement. In the event the parties fail to reach a mutually
satisfactory agreement with respect to such extension, Licensor may seek a third
party offer to distribute the Program ("Third Party Offer"); provided, however
before accepting the Third Party Offer, Licensor must notify CTHV in writing of
the terms thereof and CTHV shall have ten (10) business days after receipt of
such written notice within which to match such Third Party Offer.
5. Distribution Fees: CTHV shall retain the following distribution fees
("Distribution Fees") from Gross Receipts (defined in Paragraph 6, below).
(a) Fifteen percent (15%) of the Gross Receipts derived from the
exploitation of the Rights Granted in the Territory.
6. Gross Receipts: "Gross Receipts" shall mean all monies actually received by
CTHV or an Affiliated Entity (as defined below) from exploitation of the
Videograms in the Territory and any Video Levies (as defined below) collected by
CTHV less sales, withholding, remittance, use or value added taxes (but not
income or profit taxes) rebates, discounts, actual returns (CTHV shall establish
a reasonable reserve for returns not to exceed 20% and which shall be liquidated
within one (1) year from its establishment), actual bad debt (CTHV shall
establish a reasonable reserve for bad debt not to exceed 3% and which shall be
liquidated within one (1) year from its establishment), credit adjustment for
defective Videograms, custom duties and import charges. "Affiliated Entity"
shall mean any entity which CTHV controls, is controlled by or under common
control with CTHV. "Video Levies" shall mean levies or other charges collected
under operation of law with respect to the Program in the Territory on the sale
of video recorders, blank videocassettes or videodiscs or similar items or the
rental of Videograms which become payable to the copyright Licensor or the
distributor of the Program. CTHV shall be entitled to collect all revenue from
Video Levies.
7. Distribution Expenses: "Distribution Expenses" shall be defined in more
detail in the long form agreement, but shall mean all actual out-of-pocket
costs, charges and expenses actually incurred by CTHV or its Affiliated Entities
and/or incurred by Licensor
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and preapproved in writing by CTHV in connection with the manufacturing,
distribution, marketing, advertising and exploitation of the Program throughout
the Territory. CTHV acknowledges that it will pay third party vendors directly
for and recoup as a Distribution Expense the expenses incurred or to be incurred
by Licensor set forth on Schedule A.
8. Allocation of Gross Receipts: Gross Receipts shall be allocated as follows:
CTHV shall (i) first deduct and retain for itself its Distribution Fees; (ii)
next deduct and retain for itself, on an ongoing and continuing basis, an amount
equal to all unrecouped Distribution Expenses, and (iii) thereafter pay the
remaining amounts, if any, to Licensor.
9. Reconciliation:
9.1 If, within ten (10) months after the Program is initially released
by CTHV in the Territory, CTHV has not fully recouped the Distribution Expenses
pursuant to Paragraph 8, above ("First Reconciliation"), Licensor shall
reimburse CTHV the shortfall, if any, within twenty (20) days after Licensor
receives written notice by CTHV requesting such reimbursement; provided,
however, in connection with the First Reconciliation, Gross Receipts shall be
determined on an accrual basis, subject to actual returns (CTHV to reserve
twenty percent [20%]) and actual bad debt (CTHV to reserve three percent [3%]).
9.2 If, within three (3) years after the Program is initially released
by CTHV in the Territory, CTHV has not fully recouped the Distribution Expenses
pursuant to Paragraph 8, above ("Second Reconciliation"), Licensor shall
reimburse CTHV the shortfall, if any, within twenty (20) days after Licensor
receives written notice by CTHV requesting such reimbursement; provided,
however, in connection with the Second Reconciliation, Gross Receipts shall be
determined on an accrual basis, subject to actual returns (CTHV to reserve
twenty percent [20%]) and actual bad debt (CTHV to reserve three percent [3%]).
9.3 If, at the end of the Term, CTHV has not fully recouped the
Distribution Expenses pursuant to Paragraph 8, above, Licensor shall reimburse
CTHV the shortfall, if any, within twenty (20) days after Licensor receives
written notice by CTHV requesting such reimbursement. If, at the end of the Term
such shortfall, if any, is timely reimbursed to CTHV or if CTHV has fully
recouped the Distribution Expenses pursuant to paragraph 8, above, all existing
inventory shall be delivered to Licensor, at Licensor's cost. In connection with
any such inventory, Licensor agrees, at its cost, to repackage all such
inventory in new sleeves that do not contain the CTHV logo.
10. Recoupment/Cross Collateralization: CTHV shall cross collateralize Gross
Receipts (less Distribution Fees) amongst all countries of the Territory for
purposes of recouping the Distribution Expenses.
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11. Holdbacks:
(a) Licensor may not license or otherwise authorize the Program:
(i) to be exploited by means of Pay Per View Television (which
shall mean exhibition over a service for which subscribers pay a premium on a
per-program basis for each program which they choose to receive) from the date
hereof until the earlier of sixty (60) days from the date on which Videograms
are first sold or rented to the general public ("Videogram Release Date") or
twelve (12) months from the date the Videogram is available for distribution
("Videogram Availability Date") in the Territory;
(ii) to be exploited by means of Pay Television (which shall mean
exhibition over a service for which subscribers pay a premium for the
programming transmitted) from the date hereof, until the earlier of six (6)
months from the Videogram Release Date or twelve (12) months from the Videogram
Availability Date in the Territory;
(iii) to be exploited by means of Free Television (which shall
mean exhibition over television broadcast stations, whether network stations or
independent stations where no charge is made to the viewer and/or exhibition by
means of satellite or cable television for which subscribing members of the
public may pay for the transmission service provided by the satellite or cable
system, but do not otherwise pay a premium for the programming transmitted by
the satellite or cable system) from the date hereof until the earlier of twelve
(12) months from the Videogram Release Date or eighteen (18) months from the
Videogram Availability Date in the Territory.
(c) Licensor may not license or otherwise authorize the Program to be
advertised or promoted with regard to its broadcast or exhibition earlier than
thirty (30) days before the expiration of the respective holdbacks.
12. Approvals/Exploitation Decisions: Harvey shall have the following approval
rights (all such approvals shall be exercised in a reasonable manner and not so
as to frustrate CTHV's ability to release the Program and provided that CTHV
shall not be required to incur Distribution Expenses in the Territory in excess
of One Million Five Hundred Thousand Dollars ($1,500,000): (i) the right to
approve advertising, publicity, promotional materials, package design, and
point-of-purchase artwork ("Artwork"), and (ii) the right to consult in
connection with any edit or alteration of the Program except as may be required
for applicable censorship or governmental regulation; provided, however, that
CTHV may subtitle or dub the program without Licensor's prior approval. Licensor
shall have five (5) business days or earlier in the event CTHV, due to exigent
circumstances, as determined by CTHV in its sole discretion, requires less time,
from receipt of the above-mentioned materials in which to approve or to indicate
to CTHV the
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precise nature of Licensor's objection, if any, and CTHV shall resubmit the
revised material for Licensor's approval. If either (a) Licensor does not notify
CTHV of their objection within the applicable approval period set forth herein
or (b) Licensor has failed to approve the material in question after two (2)
resubmissions after CTHV has changed such material in accordance with Licensor's
requests, CTHV shall have the right to deem such material approved by Licensor.
Once Licensor has approved (or has been deemed to approve) the materials herein,
such material shall be automatically deemed approved by Licensor and CTHV may
use such materials in similar contexts and situations without having to consult
with or obtain Licensor's further approval.
12.1 All other exploitation decisions shall be subject to CTHV's
absolute discretion; provided, however, CTHV has agreed to a domestic release
date of approximately March 2, 1999 subject to Harvey's timely delivery as set
forth in paragraph 13, below, and CTHV agrees that the advertising and
marketing Budget for the Domestic Territory shall not be less than One Million
Five Hundred Thousand Dollars ($1,500,000). Licensor agrees that the good faith
judgment of CTHV and its Licensees regarding any matter affecting the
exploitation of the Program (including, but not limited to a determination of
the quantity, if any, of Videograms to be manufactured, and the title of the
Program in each country of the Territory) shall be binding and controlling upon
Licensor. Licensor acknowledges that CTHV shall have the right to use the names
and likenesses of all Artists who appear in or provide services in the Program
in connection with CTHV's advertising, promotion, packaging, and exploitation of
the Program, subject only to contractual restrictions in Artists' Agreements if,
and only if, CTHV has been given prior written notice of such restrictions on or
before November 2, 1998.
12.2 Inadvertent failure to provide Licensor with any of the approval
rights or consultation rights set forth in paragraph 12, above, shall not be
deemed a breach of this Agreement. In the event such inadvertent failure results
in Artwork that would not have otherwise been approved if submitted to Licensor
for approval, CTHV shall, upon receipt of written notice of such failure, use
reasonable efforts to correct such Artwork on a prospective basis only, i.e.
Artwork printed after CTHV's receipt of such notice (allowing for adequate time
after receipt of such notice to implement such correction).
13. Delivery/Materials: Licensor shall deliver the Program, at Licensor's cost,
to CTHV in accordance with the following schedule: (i) film for screener
packaging (slipsleeve) no later than October 29, 1998; (ii) one first generation
D-1 NTSC full frame digital videotape master of the Program no later than
October 30, 1998; (iii) film for packaging (clamshell and slipsleeve) no later
than December 8, 1998; and (iv) all other delivery materials listed on Schedule
B no later than January 5, 1999. If any of the delivery items are incomplete or
technically unacceptable, CTHV shall notify Licensor in writing specifying the
defects for the non-physical delivery items, or shall present a defect notice by
the laboratory for the physical delivery items ("Defect Notice"). Such Defect
Notices shall be delivered within thirty (30) days of receipt of the
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delivery items. If Licensor fails to cure the specified defects within ten (10)
business days of receipt of the Defect Notice, CTHV may secure acceptable
replacements, and shall treat such costs as a Distribution Expense or, if CTHV
is unable to secure acceptable replacements, or if CTHV determines that it is
economically unfeasible to secure acceptable replacements, then CTHV may, at its
option, terminate this Agreement upon written notice to Licensor, and upon such
termination, CTHV shall be (A) relieved of its obligations hereunder, and (B)
Licensor shall reimburse CTHV for all out-of-pocket expenses and costs therefore
incurred including, but not limited to, Licensor Distribution Expenses
previously paid to Licensor under this Agreement. If CTHV has not sent a Defect
Notice within thirty (30) days of receipt of a delivery item, then such delivery
item shall be deemed approved ("Approval").
(b) Failure to Timely Deliver: If Licensor shall fail to deliver
the required items by the aforesaid time (subject to force majeure), CTHV shall
have the right to (i) itself supply the items at Licensor's cost, or to require
Licensor to promptly supply such items, or (ii) terminate this Agreement upon
written notice to Licensor, and upon such termination, CTHV shall be (A)
relieved of all obligations to Licensor hereunder, and (B) Licensor shall
reimburse CTHV for all out-of-pocket expenses and costs theretofore incurred
including, but not limited to, Licensor Distribution Expenses previously paid to
Licensor under this Agreement.
14. Representations and Warranties: The representations and warranties shall be
fully set forth in the long form agreement and shall be consistent with CTHV's
standard long form agreements for other motion pictures. Among other things,
Licensor represents and warrants that it (a) has all rights necessary to grant
CTHV the Rights Granted herein, (b) the Program will be wholly original and is
not in the public domain, (c) the Program and the distribution by CTHV as
contemplated hereunder will not, and there have been no claims that the Program
does, infringe upon, violate or conflict with any rights whatsoever of any
person, corporation or other entity and (d) has not made and will not make any
grant or assignment that will conflict with or impair the complete enjoyment by
CTHV of the Rights Granted.
15. Residuals/Third Party Payments: Licensor acknowledges herein that any and
all profit participations, residuals, music synchronization, performance and
other mechanical fees, and any other license fees, if any, in connection with
the Program shall be the obligation of Licensor. In the event that any such
obligations or third party payments are not paid by Licensor, CTHV may pay such
obligations and/or third party payments and deduct such costs as a Distribution
Expense.
16. Accounting and Auditing: Accounting reports and any sums due with respect to
the Program shall be prepared in U.S. dollars and provided to Licensor on a
calendar quarter basis ninety (90) days after the first calendar quarter in
which the Program is initially released on Videogram and on a semi-annual basis
thereafter. Licensor may, at
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its own expense, but not more than once annually, audit the applicable records
to verify earnings statements rendered hereunder. Any such audit shall be
conducted within eighteen (18) months from and after the date of mailing of
such statement.
Licensor agrees to enter into a long form agreement with CTHV containing CTHV's
standard terms and conditions. Until such long form agreement is executed, this
document shall serve as a binding agreement between the parties. If the
foregoing is your understanding of our agreement, kindly so indicate by signing
in the space provided below.
Best regards,
/s/ MITCH SINGER
- ---------------------------
Mitch Singer
AGREED TO AND ACCEPTED:
HARVEY ENTERTAINMENT, INC.
By: /s/ LEONARD BREIJO
-------------------------
Title: V.P.
---------------------
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SCHEDULE B
Materials
The following shall be delivered, at Licensor's cost, to Columbia TriStar Home
Video, 10202 West Washington Blvd., Capra Building #205, Culver City, California
90232, Attention: Brad Word, unless specifically instructed by CTHV otherwise.
I. Reproduction Master:
(a) Program:
(i) One (1) NTSC full frame digital betacam highest quality
Stereo soundtrack containing composite stereo mix on
channels 1 & 2. Each videotape master shall contain,
after completion of program, silent textless backgrounds
for the main, end and insert titles with appropriate
identification on the label. Additionally, Licensor
shall deliver two (2) one-half inch (1/2) NTSC
videocassettes of the program directly to Peter
Schlessel, Senior Vice President of Production,
Acquisitions and Business Affairs at SPP 8206, 10202 W.
Washington Blvd., Culver City, CA 90232.
(ii) One (1) typewritten copy of a detailed dialogue and
action continuity and spotting list of the Program,
conforming in all respects to and with the dialogue and
action contained in the Program; to be delivered by
November 20, 1998; and
(iii) One (1) DA88, in perfect synchronization with the
program, with the following audio track configuration:
stereo printmaster on channels 1 & 2, mono dialogue on
channel 3, mono music on channel 4, mono effects on
channel 5, stereo music & effects on channels 7 & 8.
(b) Trailer:
(i) One (1) NTSC full frame betacam SP with highest quality
soundtrack containing composite stereo mix on channels 1
& 2. Each videotape master shall contain, after
completion of the trailer, textless backgrounds for any
insert titles.
(ii) One (1) typewritten copy of a detailed dialogue and
action continuity and potting list of the trailer,
conforming in all respects to and with the dialogue and
action contained in the trailer; and
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(iii) One (1) DA88, in perfect synchronization with the
program, with the following audio track configuration:
stereo printmaster on channels 1 & 2, mono dialogue on
channel 3, mono music on channel 4, mono effects on
channel 5, mono narration, if any, on channel 6, stereo
music & effects on channels 7 & 8.
(c) Access to the following:
(i) All 35mm Original Camera Negative for the Program;
(ii) All Video, Sound and film editorial material and
elements used to edit and complete the Picture and
Trailer; and
(iii) All 1/4 inch Production Audiotape recorded for the
Pictures.
II. The following shall be delivered, at Licensor's cost, to Columbia TriStar
Home Video, Inc., 10202 West Washington Blvd., 2nd Floor, Culver City,
California 90232, Attention: Stacey Parr, unless specifically instructed by CTHV
otherwise.
1. Advertising and Publicity Materials: For all programs copies of all
available and existing domestic advertising and publicity materials, and
manuals and other materials concerning the Program including, but not
limited to, first-generation textless 10 x 8 first generation key
artwork and separate line and title art PMT, one (1) set of all
available 35mm color slides and/or color transparencies containing a
minimum of 100 different shots, one (1) synopsis in all languages
available, and PMT print of Licensor's logo, that Licensor may have it
its possession or to which it has access and that CTHV desires to use
for or in connection with the exploitation of the rights Granted CTHV
hereunder.
The following shall be delivered, at Licensor's cost, to Columbia
TriStar Home Video, 10202 West Washington Blvd., 2nd Floor, Culver City, CA
90232, Attention: Stacey Sparks, unless specifically instructed by CTHV
otherwise:
2. Synchronization and Master Use Licenses: One (1) copy of any and all
music licenses permitting the reproduction on Videograms of each musical
composition and master recording embodied in the soundtrack of the
Picture and trailer, one (1) copy of a customary music cue sheet for the
Picture and trailer, and one (1) copy of all relevant contracts,
releases and agreements, including but not limited to composers
work-for-hire agreements and synchronization, performance and master use
licenses. All licenses shall be and remain in full force and effect, and
shall permit the reproduction and distribution of each such musical
composition and recording on Videograms throughout the Territory during
the Term at no additional cost to CTHV.
3. Licensor's Contractual Requirements for Paid Advertising, Etc.: A
detailed list of Licensor's third party contractual obligations to
accord paid advertising or other credits to persons and/or entities who
rendered services or furnished materials in
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connection with the Picture, including a specific description of any
restrictions concerning such contractual obligations. Such statement
shall also include any third party name and likeness and dubbing
obligations and restrictions, and shall be accompanied by copies of the
relevant portions of each third party agreement, setting forth the exact
nature and extent of any such restrictions and obligations, along with
proposed layouts of the credit billing block for both full- and
small-sized paid ads.
4. Chain of Title, U.S. (and, where applicable, Canadian) Certificates of
Copyright Registration: Detailed information with regard to the
copyright proprietor of the Picture, the precise copyright notice to be
affixed to all Videograms and packaging, and the accurate running time
of the Picture. Licensor shall provide CTHV with full chain of title to
all literary, dramatic and musical material upon which the Picture and
screenplay may be based, including without limitation, copies of the
U.S. Certificates of Copyright Registration for the screenplay and the
Picture and documentation sufficient to establish Licensor's chain of
title to the rights in the Picture and screenplay. (If the U.S.
copyright registration certificate for the Picture is not yet available
to Licensor at the time of delivery to CTHV, a copy of the Form PA
application therefor, together with evidence of submission and payment
of deposit fees, shall suffice until such time as the conformed
certificate becomes available.)
5. Agreements: Copies of all agreements with the key personnel and
principal cast of the Picture.
6. Errors and Omissions Certificate: A Certificate of Errors and Omissions
Insurance as provided in Paragraph 18 of the License Agreement.
7. Laboratory Access Letter(s) in the form attached to this Agreement
executed by both Licensor and the Laboratory(s), granting CTHV
irrevocable access during the Term to all necessary preprint materials
for the Picture and trailer (including sound elements).
8. MPAA Paid Rating Certificate evidencing that the Picture has not been
rated more restrictive than "PG."
9. Instrument of Transfer. At least four (4) originally signed, dated and
notarized short form Instruments of Transfer.
10. Screenplay: One (1) copy of the final screenplay or shooting script used
by Licensor in connection with the production of the Picture.
11. Other Instruments: Upon request, such instruments as CTHV may deem
necessary or proper to evidence, maintain or effectuate any or all of
the security or other rights granted to CTHV under any provision of this
Agreement.
Page 10
<PAGE> 11
If any of the foregoing documents are not provided in the English language, CTHV
shall have the right to obtain a translation and deduct any costs in connection
therewith from the Advance or any other moneys owned by CTHV to Licensor under
the Agreement.
Page 11
<PAGE> 12
LABORATORY AGREEMENT
Gentlemen and Ladies:
Reference is made to a certain feature length motion picture entitled "Baby
Huey's Great Easter Adventure" ("Program").
You ("Laboratory") acknowledge that you have in your possession free of any
liens, claims, charges or encumbrances, materials ("Preprint Materials") in
respect of the Program sufficient for the manufacture therefrom of release
prints, preprint and other duplicating material of commercially acceptable
quality, including, without limitation all materials listed in Schedule C-1
(attached).
Laboratory is hereby advised that Harvey Entertainment, Inc. ("Licensor") is
entering into a distribution agreement (the "Distribution Agreement") with
Columbia TriStar Home Video, Inc. ("CTHV") pursuant to which CTHV has been
granted certain sole and exclusive distribution rights in and to the Program in
all sizes, widths, and gauges of film for video distribution in the Territory
and Term specified in the Distribution Agreement. Accordingly, Laboratory is
hereby irrevocably authorized as of its receipt hereof to honor, subject to
Laboratory's normal terms of business (and subject to the making of credit
arrangements satisfactory to Laboratory), and Laboratory hereby agrees to honor
at prices not exceeding Laboratory's then prevailing rates for like work, all
orders of CTHV, its successors, licensees and assignees for positive prints and
other materials (including preprint and duplicating materials) of any and all
kinds and to deliver the same as instructed by CTHV, or its said successors,
licensees and assignees, upon the following understanding:
1. All laboratory services and materials ordered by CTHV or
Licensor, respectively, or their respective successors, licensees and assignees
shall be at the sole cost of the party which ordered such services and materials
and the Laboratory shall look solely to such party for payment of such charges
as may be incurred and neither CTHV, its successors, licensees or assignees, nor
Licensor, its successors, licensees or assignees shall be responsible for any
laboratory service or materials ordered by any other party with respect to the
Program.
2. Laboratory will neither assert against CTHV, its successors,
licensees or assignees nor Licensor, its successors, licensees or assignees any
lien against any of the Preprint Material by reason of any unpaid charges
incurred by the other of the said parties or by any other party.
Page 12
<PAGE> 13
3. Laboratory will not refuse to honor any of the orders of
CTHV, its successors, licensees or assignees or any of the orders of Licensor,
its successors, licensees or assignees, for positive prints or any pre-print
materials of the Program by reason of any unpaid charges incurred by any other
party.
4. None of the Preprint Material may be removed from the
Laboratory without the joint written consent of Licensor and CTHV or their
respective successors or assignees; provided however, that during the term of
the Distribution Agreement all positive prints and other materials (including
preprint and duplicating materials) that may be made by Laboratory for the
account of CTHV, Producer or their respective successors, licensees or assignees
may be removed from Laboratory at the request of the party ordering the same and
Laboratory shall deliver the same as instructed by such party.
5. The instructions contained herein are irrevocable and may not
be altered or modified except by a written instrument duly executed by CTHV and
by Licensor or CTHV's and Licensor's respective successors or assignees. By your
signature below, you acknowledge that you have in your possession or under your
control the above described Preprint Materials and that you consent and agree to
the foregoing.
Very truly yours,
/s/ LEONARD BREIJO
-----------------------------------
Licensor
Laboratory:
-------------------------
By:
---------------------------------
Title:
------------------------------
AGREED AND ACCEPTED:
COLUMBIA TRISTAR HOME VIDEO, INC.
By:
---------------------------------
Title:
------------------------------
Page 13
<PAGE> 1
Exhibit 10.58
[COLUMBIA TRISTAR HOME VIDEO LETTERHEAD]
10/30/98
Don Gold
Harvey Entertainment
1999 Avenue of the Stars
Suite 2050
Los Angeles, CA 90067
Fax #: 310-789-0046
Re: Baby Huey's Great Easter Adventure
Dear Don:
The following shall set forth the terms by which Columbia TriStar Home Video,
Inc. ("CTHV") has agreed to acquire video distribution rights from Harvey
Entertainment, Inc. ("Licensor") to the program currently entitled "Baby Huey's
Great Easter Adventure."
1. Program: A feature length motion picture entitled "Baby Huey's Great Easter
Adventure" (the "Program"). The Program shall be no less than eighty-five (85)
minutes in length and shall have an MPAA rating no more restrictive than "PG."
2. Rights Granted: Licensor hereby grants to CTHV the sole and exclusive
videogram distribution rights ("Videogram Rights"), in all language versions,
to the Program in the Territory throughout the Term ("Rights Granted").
Videogram Rights shall be defined as the sole and exclusive right to
manufacture, advertise, promote and distribute on a sale, lease or rental basis
on its own or through licensees, videocassettes, cartridges, phonograms, tapes,
videodiscs, laserdiscs, digital videodiscs ("DVDs"), 8mm recordings (in
whatever form), or any other visual or optical recording (including, but not
limited to, DVD-ROM, CD-I and CD ROM that display the Program in a linear
format as a continuous Program) now known or hereafter discovered containing
all language versions of the Program for home use by consumers and the right to
exploit the Program by means of "Video-On-Demand" ("Videograms").
"Video-On-Demand" shall mean the transmission of a selected video program from
a central video library via a television system where reception of said video
program at a viewing time selected by the viewer is available only upon payment
of a charge therefor, which charge is in addition to any
Page 1
<PAGE> 2
its own expense, but not more than once annually, audit the applicable records
to verify earnings statements rendered hereunder. Any such audit shall be
conducted within eighteen (18) months from and after the date of mailing of
such statement.
Licensor agrees to enter into a long form agreement with CTHV containing CTHV's
standard terms and conditions. Until such long form agreement is executed, this
document shall serve as a binding agreement between the parties. If the
foregoing is your understanding of our agreement, kindly so indicate by signing
in the space provided below.
Best regards,
/s/ MITCH SINGER
- ----------------------------
Mitch Singer
AGREED TO AND ACCEPTED:
HARVEY ENTERTAINMENT, INC.
By: LEONARD BREIJO
-------------------------
Title: Vice President
----------------------
Page 7
<PAGE> 1
Exhibit 10.59
MULTI-AGREEMENT AMENDMENT NO. 7
This Multi-Agreement Amendment, dated as of December 11, 1998, is
entered into by and among HARVEY COMICS, INC., a New York corporation
("BORROWER") and CITY NATIONAL BANK, N.A. ("BANK"). For good and valuable
consideration, receipt of which is hereby acknowledged, the parties hereto agree
as follows:
1. Recital of Certain Facts:
(a) Borrower and Batik are parties to that certain Revolving
Loan and Security Agreement, dated as of October 27, 1993 (the "ORIGINAL LOAN
AGREEMENT"), and as amended by that certain Multi-Agreement Amendment, dated
August 30, 1994 (the "FIRST AMENDMENT"), that certain Multi-Agreement Amendment
No. 2, dated as of November 1, 1994 (the "SECOND AMENDMENT"), that certain
Multi-Agreement Amendment No. 3, dated as of September 1, 1995 (the "THIRD
AMENDMENT"), that certain Multi-Agreement Amendment No. 4, dated as of June 1,
1996 (the "FOURTH AMENDMENT") that certain Multi-Agreement Amendment No. 5 dated
as of June 1, 1997 (the "FIFTH AMENDMENT") and that certain Multi-Agreement
Amendment No. 6 dated as of June 1, 1998 (the "SIXTH AMENDMENT"). The Original
Loan Agreement, the First Amendment, the Second Amendment, the Third Amendment,
the Fourth Amendment, the Fifth Amendment, and the Sixth Amendment are
hereinafter collectively referred to as the "LOAN AGREEMENT." Capitalized terms
not otherwise defined herein shall have the same meaning as set forth in the
Loan Agreement.
(b) Borrower has requested that the Commitment Termination Date
be extended.
(c) Bank has agreed to (i) amend the Loan Agreement and (ii)
extend the Commitment Termination Date to March 31, 1999 as herein provided,
subject to the terms of this Agreement.
2. Amendment to Loan Agreement and Revolving Note.
2.1 Extension of Commitment Termination Date. Bank and Borrower
agree that the Commitment Termination Date shall be extended to March 31, 1999.
The Revolving Note shall also be deemed amended so that the payment due date
contained in the fourth paragraph thereof shall be changed to March 31, 1999.
Except as specifically amended hereby, all other provisions of the Loan
Agreement and the Collateral Documents shall remain in full force and effect.
2.2 Decrease in Commitment Amount. The term "Commitment" is
hereby restated to mean the commitment of Lender to make Loans, on the terms and
conditions herein obtained from the date hereof through the Commitment
Termination Date in an aggregate principal amount at one time outstanding not in
excess of Two Million Five Hundred Thousand Dollars ($2,500,000.00).
1
<PAGE> 2
2.3 Elimination of Certain Precedents to Borrowing. Sections 2.4
and Section 2.5 of the Sixth Amendment are hereby deleted in their entirety.
2.4 Elimination of Borrowing Base. Section 2.3 of the Fifth
Amendment is hereby deleted in its entirety. Advances shall be extended up to
the Commitment Amount without regard to any Borrowing Base calculations.
2.5 Elimination of Certain Pre-payment Requirements. Section
3.1(c) and 3.5(a) of the Original Loan Agreement are eliminated in their
entirety.
2.6 Amendment to Covenants. Sections 6.2 (C), 6.5 and 6.6 of the
Loan Agreement are hereby restated in their entirety as follows:
"6.2(C) Declare or pay any dividend upon any of the
Borrower's capital stock or make any distributions of
Borrower's property, security or assets (other that the
MCA Agreement or distributions to Guarantor, to fund
Guarantor's overhead made in the ordinary course of
business)
"6.5 Net Worth. Borrower shall not permit its Net Worth
to fall below $17,000,000 as of December 31, 1998, or
below $14,500,000 as of March 31, 1999.
6.6 Current Ratio. There shall be no requirement as to
maintaining a Current Ratio.
3. Conditions Precedent
3.1 Additional Fees.
Borrower shall pay to Bank the sum of $125,000 as an extension fee, as
well as the of the fees and third party out of pocket expenses of Kelly Lytton
Mintz & Vann LLP, Bank's counsel.
3.2 Additional Documentation
This Amendment shall become effective upon the Bank's receipt
of all of the following documents:
(a) A signed copy of this Amendment, executed by a duly
authorized representative of the Borrower;
(b) A reaffirmation of the Guaranty, in substantially the form
attached as Exhibit A hereto, executed by a duly authorized representative of
the Guarantor;
2
<PAGE> 3
(c) A duly executed copy of a Pledge Agreement in the form
attached as Exhibit B, executed by a duly authorized representative of the
Guarantor, together with all of the share certificates referenced in the Pledge
Agreement, endorsed in blank;
(d) Bank shall have received an opinion of counsel from Kaye
Scholer Fierman, Hays & Handler LLP in substantially the form attached as
Exhibit C hereto; and
(e) An officer's certificate, in the form attached as Exhibit
D-1 and D-2 hereto, from each of the Borrower and Guarantor, as well as a
Secretary's Certificate in substantially the form of Exhibit D-3.
(f) A guaranty and security agreement from Baby Huey
Productions, Inc., in substantially the form of Exhibits E and F, respectively,
attached hereto.
(g) Laboratory pledgeholder agreements, from Production Centre
West and Laser Pacific Media-Corp, in substantially the form of Exhibits G-1 and
G-2, respectively, attached hereto.
(h) Such additional Collateral Documents as Bank may request in
its sole and absolute discretions, including without limitation UCC-1 financing
statements for California, New York and Delaware, Copyright Mortgages for all
Film Assets or other items of applicable Collateral and Trademark Assignments.
3.3 Borrower shall furnish to Bank such additional information as Bank
may request as to additional Film Assets which have been created or acquired
after January 1, 1994.
4. Consents. Each of the parties hereto consents to the foregoing
amendments to the extent the consent of any such party is required under the
Loan Agreement's current notice provisions.
5. Representations and Warranties of Borrower. In order to induce Bank
to enter into this Agreement, Borrower represents and warrants to Bank that:
(a) Borrower has the power and authority and has taken all
action necessary to execute, deliver and perform this Agreement and all other
agreements and instruments executed or delivered to be executed or delivered in
connection herewith and therewith and this Agreement and such other agreements
and instruments constitute the valid, binding and enforceable obligations of
Borrower.
(b) The representations and warranties contained in the Loan
Agreement are true and correct in all respects on and as of the date hereof as
though made on and as of the date hereof and no Event of Default (as said term
is defined in the Loan Agreement) or event which with the passage of time or the
giving or notice or both would constitute an Event of Default has occurred and
is continuing as of the date hereof.
3
<PAGE> 4
(c) Since the date of the most recent financial statements, if
any, furnished by Borrower to Bank, there has been no material adverse change in
the business or assets or in the financial condition of Borrower.
6. Acknowledgment of Borrower. Borrower acknowledges and agrees that as
of the date of this Agreement, it has no offsets, claims or defenses whatsoever
against any of its obligations under the Revolving Note, or its obligations
under the Loan Agreement, the Collateral Documents, or any other agreements,
documents or instruments securing or pertaining to the Revolving Note or the
Loan Agreement.
7. Full Force and Effect. Each of the Collateral Documents, and all
other documents, agreements and instruments relating to thereto remain in full
force and effect.
8. Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be governed by, construed and enforced in accordance
with the laws of the State of California applicable to agreements executed and
to be wholly performed therein.
9. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which when
taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers, all as of the date first above
written.
HARVEY COMICS, INC.
By: /s/ MICHAEL S. HOPE
---------------------------------------
Its: CFO
---------------------------------------
CITY NATIONAL BANK, N.A.
By: /s/ NORMAN STARR
---------------------------------------
Its: Vice President
---------------------------------------
4
<PAGE> 1
EXHIBIT 10.60
March 31, 1999
Harvey Comics, Inc.
1999 Avenue of the Stars
Suite 2050
Los Angeles, CA 90067
Attention: Michael Hope
Dear Mr. Hope:
We are pleased to advise you that City National Bank ("CNB") has approved the
credit accommodation ("Facility") described below.
This commitment letter is neither meant to be, nor shall it be construed as, an
attempt to define all of the terms and conditions involved in this financing.
Rather, it is intended only to outline certain of the basic points of our
understanding around which the final terms and documentation are to be
structured. CNB has not determined the entire range of provisions that may be
required in the final loan documentation, and therefore, further negotiations
adding to or modifying the general scope of these basic terms shall not be
precluded by the issuance of this commitment letter and its acceptance by
Borrower. CNB's commitment to make the Facility available is subject to the
execution of definitive loan documentation acceptable to CNB and its counsel.
The general terms and conditions of this commitment letter and around which the
Facility shall be structured are as set forth below.
BORROWER Harvey Comics, Inc.
AMOUNT AND TYPE OF FACILITY A Revolving Line of Credit up to a principal
amount of $2,500,000.00.
PURPOSE General working capital.
MATURITY April 30, 1999.
AVAILABILITY Borrowing and reborrowing up to a maximum at
any one time outstanding of $2,500,000.00
permitted from the date the Revolving Line of
Credit is extended to (but excluding)
April 30, 1999.
PRINCIPAL AND INTEREST REPAYMENT Interest only until maturity; entire
principal amount and interest due on
April 30, 1999. Interest shall be payable
monthly in arrears.
INTEREST RATE A fluctuating rate equal to CNB's Prime Rate
(as in effect from time to time) plus 1.00%.
<PAGE> 2
Mr. Michael Hope
Harvey Comics, Inc.
March 31, 1999
Page 2
COMMITMENT FEE A non-refundable fee equal to $25,000.00,
due and payable in full upon execution of
formal loan documentation.
GENERAL CONDITIONS
INTEREST CALCULATIONS Interest shall be calculated on a 360-day
year, actual days elapsed basis.
COLLATERAL A security interest of first priority on all
personal property, including without
limitation, inventory, equipment, accounts
receivable, trademarks, copyrights, other
rights to payment and general intangibles.
GUARANTOR All indebtedness of Borrower to CNB shall
be guaranteed by Harvey Comics
Entertainment, Inc., and shall be evidenced
by and subject to a Continuing Guaranty
agreement in form and substance satisfactory
to CNB. Guarantor shall supply quarterly and
yearly financial information in such form
as CNB shall request, as well as yearly
tax returns.
REPRESENTATIONS AND WARRANTIES, Such as are customary in CNB's documentation
COVENANTS, EVENTS OF DEFAULT for facilities and financings of this type.
AND MISCELLANEOUS PROVISIONS
FEES AND EXPENSES Whether or not loan documentation is agreed
to and whether or not any loan hereunder or
thereunder is made, Borrower will pay all
of CNB's expenses incurred in connection
with the negotiation and documentation of
this Facility and the preparation,
administration and enforcement of this
Commitment Letter, the loan documents and
the Facility (including all fees, expenses
and allocated expenses of CNB's in-house
or outside counsel).
FURTHER ASSURANCES Immediately following any request by CNB,
Borrower shall provide to CNB such further
documents, instruments, opinions and
assurances as may be requested from time to
time by CNB in connection with the Facility.
<PAGE> 3
Mr. Michael Hope
Harvey Comics, Inc.
March 31, 1999
Page 3
CNB reserves the right in its sole discretion to cancel its commitment to make
the Facility available and to terminate its obligations hereunder (a) upon the
occurrence of any material adverse change in the financial condition of
Borrower or any guarantor, including, without limitation, Borrower's or any
guarantor's default on any other obligation Borrower or any guarantor may have
to CNB unrelated to this Commitment Letter; or (b) in the event that loan
documentation for the Facility is not executed by Borrower and CNB by April 9,
1999.
This Commitment Letter is provided to you solely for the purpose described
herein and may not be disclosed to or relied upon by any other party without
CNB's prior written consent.
Kindly indicate your acceptance of this commitment by signing the enclosed copy
of this letter and returning it to us by 3:00 p.m. on April 2, 1999. This
commitment shall expire without further notice, unless we have received
Borrower's executed copy by that time.
Sincerely,
CITY NATIONAL BANK, a national
banking association
By: /s/ NORMAN B. STARR
-----------------------------------------
Norman B. Starr
Vice President
Accepted and Agreed this 2nd day of
April, 1999.
Harvey Comics, Inc.
By: /s/ M. S. Hope
-----------------------------------------
Title: Chief Financial Officer
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-81208 on Form S-8 and No. 33-86652 on Form S-3 of The Harvey Entertainment
Company of our report dated April 7, 1999, appearing in this Annual Report on
Form 10-K of The Harvey Entertainment Company for the year ended December 31,
1998.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 9, 1999
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 451
<SECURITIES> 0
<RECEIVABLES> 1,987
<ALLOWANCES> (298)
<INVENTORY> 10,873
<CURRENT-ASSETS> 0
<PP&E> 1,159
<DEPRECIATION> (658)
<TOTAL-ASSETS> 17,034
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 22,160
<OTHER-SE> (8,478)
<TOTAL-LIABILITY-AND-EQUITY> 17,034
<SALES> (1,569)
<TOTAL-REVENUES> (1,569)
<CGS> 1,056
<TOTAL-COSTS> 14,017
<OTHER-EXPENSES> 149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (15,437)
<INCOME-TAX> (4,199)
<INCOME-CONTINUING> 0
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<CHANGES> 0
<NET-INCOME> (11,238)
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