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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, 1999
[ ] 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 (IRS Employer Incorporation or
of Organization) Identification No.)
11835 W. OLYMPIC BLVD., SUITE 550,
LOS ANGELES, CALIFORNIA 90064
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: 310-444-4100
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]
State issuer's revenue for its most recent fiscal year: $1,538,000
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 31, 2000, a date within the past
60 days, is: $17,461,415.
State the number of shares outstanding of each of issuer's classes of common
equity, as of March 31, 2000: 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: None.
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FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements with-in the meaning of
Section 27A of the Securities Act (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We have based
these statements on our beliefs and assumptions, based on information currently
available to us. These forward-looking statements are subject to risks and
uncertainties. Forward-looking statements include the information concerning our
possible or assumed future results of operations set forth under the sections
entitled "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Forward-looking statements are not guarantees of performance. Our future
results and requirements may differ materially from those described in the
forward-looking statements. Many of the factors that will determine these
results and requirements are beyond our control. In addition to the risks and
uncertainties discussed in "Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," investors should consider
those discussed under "Risk Factors" and, among others, the following:
o our potential need for additional financing,
o our ability to successfully integrate the operations of PM Entertainment
Group with those of the Company,
o our ability to successfully implement our business strategy,
o our ability to increase the level of media exposure or popularity of our
characters, resulting in increased revenues from products based on those
characters,
o the lack of consumer acceptance of new product introductions,
o changing consumer preferences,
o the impact of competition and changes to the competitive environment on our
products and services, and
o other factors detailed from time to time in our filings with the Securities
and Exchange Commission.
These forward-looking statements speak only as of the date of this report.
We do not intend to update or revise any forward-looking statements to reflect
changes in our business strategy or planned capital expenditures, or to reflect
the occurrence of unanticipated events.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
GENERAL
The Harvey Entertainment Company, together with its subsidiaries Harvey
Comics, Inc., Baby Huey Productions, Inc. and Inferno Acquisition Corporation
(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, Bunny, 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.
Effective as of April 3, 2000, the Company completed the acquisition of PM
Entertainment Group Inc. ("PM Entertainment") to broaden the scope of the
Company's entertainment operations. PM Entertainment is a producer and
distributor of motion pictures in the United States home video, television and
Internet broadcasting markets as well as in all media in international markets.
The financial results of PM Entertainment will be consolidated with those of the
Company from the closing date of the acquisition forward. Unless expressly
stated herein, references to the Company do not include the operations or
financial results of PM Entertainment.
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 the popular Paramount Pictures cartoon stars 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
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and 1995, two motion pictures licensed by the Company were released by major
studios featuring Harvey Classic Characters - Richie Rich (Warner Brothers) 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 addition, in order to exert more direct control over its character
rights and merchandising activities, the Company reacquired from Universal
control of substantially all merchandising and film rights, except certain of
those relating to a Casper or Casper character motion picture produced or
released by Universal, as further described below. 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 merchandising related to any Casper film
produced by Universal.
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. From 1998 through August 1999, the Fox
Family Channel ran a daily program entitled "Harvey Toons." In 1999, the Company
also released its direct-to-video live action feature "Baby Huey's Great Easter
Adventure" through Columbia-TriStar Home Video.
RECENT DEVELOPMENTS
EQUITY INFUSION
In September 1998, the Company's board of directors engaged the
investment-banking firm of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") as a financial advisor to the Company. DLJ agreed to assist the Company
to evaluate and pursue strategic alternatives intended to maximize shareholder
value. Such alternatives included the sale, merger, consolidation or
recapitalization of the Company.
On April 7, 1999, the Company entered into a Stock Purchase Agreement
between the Company and Roger A. Burlage, Michael R. Burns, Ken Slutsky and The
Kushner-Locke Company ("Kushner-Locke") pursuant to which the Company received
approximately $11,644,000 in cash and approximately $6,226,000 in value of
common stock of Kushner-Locke for newly-issued shares of the Company's Series A
Convertible Preferred Stock (the "Series A Preferred Stock") and common stock
purchase warrants (the "1999 Refinancing"). As the 1999 Refinancing was
oversubscribed, the Company issued a subordinated convertible note in the amount
of approximately $2,049,000 which was converted into additional Series A
Preferred Stock and common stock purchase warrants on September 2, 1999. As part
of the 1999 Refinancing, a new permanent management team took control of the
Company. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
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CHANGE IN MANAGEMENT
From March 23, 1998 until April 26, 1999 the Company was managed by Global
Media Management Group, LLC ("Global Media"). Through a management services
agreement with Global Media, the Company's Board retained the non-exclusive
services of Anthony J. Scotti as the Company's Interim Chief Executive Officer
and Interim President, and Michael S. Hope as the Company's Interim Chief
Financial Officer. In April 1999, in connection with the 1999 Refinancing, Roger
A. Burlage became Chairman and Chief Executive Officer, Eric S. Mischel was
appointed President and Chief Operating Officer and Ronald B. Cushey was
appointed Executive Vice President, Chief Financial Officer and Secretary.
In April 1999, Roger A. Burlage and Michael R. Burns joined the Company's
Board. Meyer Gottlieb was named to the Board in June 1999.
STRATEGIC ACQUISITION
As noted above, on September 24, 1999, the Company signed a letter of
intent for the acquisition of PM Entertainment, a privately-owned producer and
distributor of motion pictures in the United States home video, television and
Internet broadcasting markets as well as all media in international markets. The
PM Entertainment acquisition closed effective as of April 3, 2000. The purchase
price consisted of $10,000,000, $6,500,000 of which was paid in cash at closing
and the balance provided through the issuance by the Company of: (1) $1,450,000
in shares of the Company's common stock and (2) a $2,050,000 subordinated note
to be paid over five future quarterly periods. The Company also assumed existing
bank debt in the amount of approximately $5,300,000. In connection with the
acquisition of PM Entertainment, the Company also purchased from Imperial Bank a
loan, secured by the motion picture "Inferno", by paying a down payment of
$2,000,000 and obtaining a loan in the amount of approximately $4,800,000. No
financial results from the operations of PM Entertainment are included in the
Company's accompanying Consolidated Financial Statements as of and for the years
ended December 31, 1999 and 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CREDIT FACILITY
Effective as of April 3, 2000 the Company entered into a new five year,
$25,000,000 revolving credit facility with The Chase Manhattan Bank ("Chase
Bank") to provide operating funds and a portion of the acquisition financing of
the PM Entertainment acquisition. The facility is secured by substantially all
of the assets of the Company (including PM Entertainment) and replaces a
$2,500,000 facility with City National Bank that expired in April 1999. 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 11835 W. Olympic
Blvd., Suite 550, Los Angeles, California 90064; its phone number is (310)
444-4100.
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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. The acquisition of PM Entertainment will allow the Company to broaden
its expansion into other entertainment industry markets. While the operations of
PM Entertainment are new to the Company, the new management team has significant
experience in the Company's expanded areas of entertainment activities.
FILMED ENTERTAINMENT
Filmed entertainment includes direct-to-video films, television series and
theatrical releases.
DIRECT-TO-VIDEO (HOME VIDEO)
Direct-to-video productions are 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's new business
plan is to produce and market direct-to-video products itself in order to
capture a greater share of the potential profits of such products. However, in
this regard, the Company is also assuming greater risk if the product ultimately
is unsuccessful.
"CASPER'S HAUNTED CHRISTMAS"
In December 1999, the Company began production of a new direct-to-video
animated computer generated full-length feature film featuring Casper. The
anticipated home video release date is presently scheduled for November 2000.
The Company is co-producing the film with Mainframe Entertainment Inc., a
Canadian animation production company. Universal is serving as the exclusive
domestic home video distributor and the Company is responsible for other
domestic ancillary sales such as television, cable, and pay-per-view, and
international licensing in all media.
"BABY HUEY'S GREAT EASTER ADVENTURE"
In November 1998, the Company's prior management 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 to disappointing results and, based on preliminary estimates
of the ultimate profitability of the title, the Company recorded losses of
$3,000,000 and $250,000 in the fourth quarter of 1998 and first quarter of 1999,
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respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
"RICHIE RICH'S CHRISTMAS WISH"
In November 1998 the Company released, through Warner Home Video, "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 Entertainment Inc. ("Saban"). Warner Home Video served 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 and 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. The
Company recognized a nonrefundable advance from Saban in 1997, but to date, the
Company has not received any revenues from it share of net profits.
"CASPER MEETS WENDY"
In September 1998, the Company released, through Twentieth Century Fox Home
Entertainment, "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, who licensed the
distribution rights for a fifteen year period. 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 share of net profits.
"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, and Saban obtained distribution rights in this
project for a seven year period.
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. This
agreement did not provide for Saban to receive any distribution fees. In 1997,
based on shipments of videocassettes 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 stated that
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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 has
exercised its right to audit the books and records of Saban to review the
accuracy of the reports which it has received. Pending the final outcome of the
audit, the Company will not recognize any additional revenues from this title
until such revenues appear certain.
FEATURE MOTION PICTURES
Through its newly acquired subsidiary PM Entertainment, the Company will be
expanding its operations into the lower budgeted feature film arena. The
predecessor of PM Entertainment was an independent entertainment company that
produced and distributed motion pictures into the domestic television and home
video markets and into the international markets for all media. PM
Entertainment's most valuable assets are its film library of approximately 150
motion picture titles and 74 episodes of television series, and its operating
facilities, which comprise post production and sound stage locations. Financing
of the productions will be done through the Company's new credit facility and
supported by presales of certain distribution rights in the international and
domestic markets.
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
"Harveytoons." In 1994 and 1996, the Company added 13 animated shorts to its
film library for each of the Baby Huey and Richie Rich characters. The Company
aired re-packaged 65 half hour episodes of "Harveytoons" 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
certain 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. When the Company created the
Harveytoons episodes, certain foreign musical scores were created for which the
Company owns all rights and interest.
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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. Currently, the Company is establishing an in-house foreign sales
staff to oversee the marketing and licensing of its product into the
international markets. The acquisition of PM Entertainment will also provide the
Company with an established international sales infrastructure that will be used
to distribute the Company's product in foreign markets.
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."
In February 2000, the Company entered into a licensing and co-production
agreement with Studio B Productions Inc. ("Studio B") for the worldwide
development, production and exploitation of an unlimited number of episodes of a
television series based on the Company's character "Wendy the Witch." The
Company and Studio B will share certain of the production costs, territorial
distribution, and net profits, as defined in the agreement.
THEATRICAL LICENSING
In November 1999, the Company entered negotiations on a development
agreement with Metro-Goldwyn-Mayer Pictures Inc. ("MGM"), whereby the Company is
licensing the theatrical and certain ancillary and movie merchandising rights to
MGM related to the Company's character "Bunny." Should MGM produce and release
the theatrical motion picture the Company will receive an advance license fee
and participate in certain profits of the motion picture and related revenues.
There can be no assurance that MGM will produce the motion picture or that the
Company will receive any future revenues from this agreement.
In 1994 and 1995, two motion pictures licensed by the Company were released
featuring Harvey Classic Characters -- Richie Rich (through Warner Brothers) 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. Theatrical motion pictures featuring Casper, the Friendly Ghost
and Richie Rich were released in May 1995 and December 1994, respectively.
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To date, "Casper" and "Richie Rich" have generated reported worldwide box
office gross receipts in excess of $307,000,000 and $80,000,000, 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 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, if Universal makes certain payments to the
Company, 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 has, to date, failed to make any such
payments and there are no assurances that Universal will make any such future
protection payments. 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 the unrecouped costs for its
restoration of 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
theatrical feature films. Universal is required to give the Company notice on
February 15 of the year before it wishes to release a Casper theatrical 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 in the future.
In January 2000, the theatrical sequel rights to the "Richie Rich"
character reverted back to the Company from Warner Brothers. The Company is
currently in development on a new feature film based on this character.
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MERCHANDISING
In March 2000, the Company appointed Felix the Cat Productions,
Inc.("FTCP"), as its exclusive licensing agent for Latin America. The agreement
covers all of the Company's characters and is for a term of seven and one-half
years. FTCP is a fully integrated family oriented entertainment company that
manages a roster of trademark characters in all areas of entertainment including
new technologies, television animation production and distribution, publishing,
licensing and merchandising worldwide.
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 for the merchandising use of the
Harvey Classic Characters (other than certain limited rights to Casper, Casper
characters and new characters appearing in the Casper movie) in partial
consideration 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 established an in-house consumer products
department to manage 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 and has, resultantly, been minimal for the 1998 and 1999 years as a
result of the lack of entertainment product. The Company cannot ascertain at
this time whether its merchandising strategy will ultimately be successful.
PUBLISHING
In November 1998, prior management 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. Warner Publisher Services and Diamond Comic
Distributors, Inc. domestically distributed the magazine. As a result of new
management's decision to focus on the Company's core entertainment business
operations, the publication of the magazine ceased with the July 1999 issue.
LOCATION-BASED FAMILY ENTERTAINMENT
In November 1999, the Company announced an agreement with Landmark
Entertainment Group ("Landmark"), whereby Landmark was granted certain exclusive
worldwide rights to develop themed attractions based on the characters in the
Company's classic character library. Initially, Landmark plans to develop a
mini-theme park concept that will incorporate the Company's characters and be
designed as location-based entertainment centers. This agreement excludes
certain theme park rights to the character "Casper", which are controlled by
Universal. Landmark will develop conceptual design and feasibility studies and
may seek financing and/or real estate development partners for theme parks
around the world. There can be no assurance
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that Landmark will develop the theme parks or that the Company will receive any
future revenues from this agreement.
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.
INTERNET ACTIVITIES
The Company has recently developed an online presence for the Company's
events, characters, products and strategic alliances through the Company's
"Harvey.com" website. In addition, as highlighted below, the Company is actively
pursuing increasing its exposure and operating opportunities through a variety
of Internet related activities.
The Company entered into an animation licensing agreement in March 2000
with LearningSoft Corporation ("LearningSoft") whereby the Company licensed the
rights to the Company's characters "Casper", "The Ghostly Trio", "Richie Rich"
and certain related characters to LearningSoft for a three year period.
LearningSoft provides state-of-the-art educational computer gaming experiences
to the Latin American market, with collateral opportunities in Spanish and
Portuguese-language markets worldwide. The Company received a license fee in
connection with the agreement in the form of a warrant to purchase certain
amounts of LearningSoft common stock at a stated price over a ten year period.
In February 2000, the Company entered into an animation licensing agreement
with Tutornet.com, Inc. ("Tutornet") whereby the Company licensed the rights to
the Company's character "Richie Rich" to Tutornet for a three year period.
Tutornet provides online, real-time tutoring services over the Internet. The
Company received a license fee in connection with the agreement and obtained an
option to purchase certain amounts of Tutornet common stock at a stated price
over a twenty four month period.
The Company announced in October 1999 that it had entered into an agreement
with Spumco Inc. ("Spumco") for the production of cartoons containing certain of
the Company's characters specifically for the Internet. Spumco, the creators of
"The Ren & Stimpy Show", will initially distribute the cartoons on their online
cartoon network, and subsequently over the Company's website.
There can be no assurance that the Tutornet, Spumco or any other Internet
agreements or activities will provide the Company with any future revenues other
than the initial license fees.
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FASHION ACTIVITIES
In February 2000, the Company announced the completion of a preliminary
joint venture agreement entered into in June 1999, to establish Harvey Fashion
LLC. The new company is responsible for manufacturing, selling and marketing a
complete apparel collection based on the Company's characters. The investment by
the Company is limited to an initial capital outlay and the contribution of its
characters for use by the joint venture, and will share in certain profits, as
defined, of the operations of the joint venture.
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 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.
In December 1999, the Company received a notice from the heirs of the
Oriolo family (the "Oriolo Heirs"), attempting to revoke the Company's rights in
the Casper character. The Company believed that the claim was without merit and
vigorously defended itself by filing a
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<PAGE> 15
counterclaim against the Oriolo Heirs. In March 2000, the parties to the dispute
entered into a settlement agreement whereby the Oriolo Heirs reaffirmed the
Company's exclusive ownership rights to the copyright and trademark to the
Casper character in perpetuity.
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, Henson Productions and
Nickelodeon, all of which have children's networks and far greater resources and
distribution capabilities than the Company.
EMPLOYEES
The Company and PM Entertainment employ approximately 25 and 37 persons,
respectively, on their full-time staffs. For the Company's and PM
Entertainment's filmed entertainment productions, the Company and PM
Entertainment have hired independent contractors or production facilities for
creative work on an as-needed basis. None of the Company's or PM Entertainment's
employees are represented by a union and the Company and PM Entertainment
believe relations with their employees are good.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution 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.
OPERATING LOSSES. For the fiscal years ended December 31, 1999 and 1998 the
Company experienced significant operating losses. Such losses are expected to
continue into the 2000 year as a result of the lack of product for release in
the entertainment media and minimal activity in the Company's licensing and
merchandising areas. There can be no assurance that the Company can achieve its
business plan, and operating losses may continue into the future. The inability
of the Company to generate operating profits will result in a material adverse
affect on the Company and may restrict its ability to continue as a going
concern.
ABSENCE OF PRODUCT SLATE. As a result of the operating inactivity of the
Company throughout the 1999 and 1998 periods during which the Company was
evaluating various strategic alternatives, exploring sources of capital
investment and seeking permanent management, the
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<PAGE> 16
Company currently has a minimal amount of new programs or products involving
Harvey Characters scheduled for release. This absence of product will have a
material adverse effect on the Company's results of operations for the
foreseeable future. In addition, management's 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.
RISKS RELATED TO THE FILMED ENTERTAINMENT INDUSTRY. The acquisition of PM
Entertainment provides the Company with additional risks not previously
encountered. Motion picture production and distribution is highly speculative
and inherently risky. The production, completion and distribution of motion
pictures are subject to numerous uncertainties, including financing
requirements, personnel availability and the release schedule of competitive
motion pictures. The Company and PM Entertainment can give no assurances that
their filmed entertainment production and release goals will be met in any
period or that completion of production will occur in accordance with the
anticipated budget or schedule. There is a risk that some or all of the
Company's and PM Entertainment's motion pictures will not be commercially
successful, resulting in costs not being recouped or anticipated profits not
being realized.
Motion picture production, acquisition and distribution are highly
competitive businesses. The Company and PM Entertainment compete with major
studios, other independent motion picture and television companies, large
diversified entertainment conglomerates and others. Some of the Company's and PM
Entertainment's competitors are entities that are part of larger, diversified
corporate groups with a variety of other operations, including television
networks and cable channels, which can provide means of distributing their
products and stable sources of earnings to offset fluctuations in the financial
performance of their motion picture and television operations.
The Company's and PM Entertainment's operations depend on its ability to
obtain sufficient financing. In particular, motion picture production and
distribution activities require the upfront expenditure of substantial funds,
while revenues relating to films and programs are typically not generated for
some period of time after these expenditures and may be received over an
extended period of time. The Company and PM Entertainment intend to finance
these expenditures through a combination of cash on hand, borrowings under the
new credit facility, presales of certain distribution rights in certain
territories and a variety of third party financing arrangements. Borrowings
under the Company's credit facility and other financing arrangements are subject
to continuing satisfaction of specific covenants and conditions. There can be no
assurance that the Company and PM Entertainment will be able to obtain the
required financing or that any financing obtained will be on terms satisfactory
to the Company.
The entertainment industry in general, and the motion picture industry in
particular, continues to undergo significant changes, primarily due to
technological developments, shifting consumer tastes and the popularity and
availability of other forms of entertainment. As a result, it is impossible to
predict the overall effect these factors will have on the operations of the
Company.
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<PAGE> 17
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 and hired
new personnel to handle such activities. 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 performs merchandising functions internally, there can be no
assurance that its merchandising revenues will increase 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 and success of filmed entertainment 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.
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<PAGE> 18
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 its 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. Such foreign consulting agreement
was not renewed upon its expiry in February 1999, and the Company is pursuing
establishing an in-house foreign sales division tied to the PM Entertainment
international sales infrastructure. With respect to its direct-to-video
productions, with certain exceptions, the Company is free to contract with any
distributor in connection with a given production. The Company's establishment
of internal sales and distribution operations and the nature of its
relationships with its distributors could adversely affect the Company's results
of operations, financial condition and cash flow.
ITEM 2. PROPERTIES
The principle offices of the Company consist of approximately 14,000 square
feet of general office space located in West Los Angeles, California. The
Company has entered into a seven-year lease for such office space with an option
to renew the facilities for a five-year period. Approximately 3,000 square feet
of the office space is being subleased to Harvey Fashions LLC. The Company also
leases approximately 3,000 square feet of office space in Century City (Los
Angeles), California pursuant to a five year lease entered into in August 1996,
and approximately 9,000 square feet of office space in Santa Monica pursuant to
a ten-year lease entered into in December 1993. The Company has subleased the
Century City office space to an unaffiliated third party through October 2000,
approximately 6,000 square feet of the Santa Monica space to an unaffiliated
person through January 31, 2001, and approximately 3,000 square feet of the
Santa Monica space to a subsidiary of Universal through September 30, 2001. The
Company's principal business address is 11835 W. Olympic Blvd., Suite 550, Los
Angeles, California 90064.
The principle offices of PM Entertainment consist of approximately 120,000
square feet of general office, post production and sound stage facilities
located in Sunland, California. In connection with the acquisition of PM
Entertainment, the Company entered into a two year lease
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<PAGE> 19
of the premises with an option to purchase the facility and surrounding
property. PM Entertainment's principle business address is 9545 Wentworth
Street, Sunland, California 91040.
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. On July 1, 1999, the parties to the above actions entered into a
Settlement Agreement and Mutual Release and executed a dismissal with prejudice
of the entire action. The Company's defense and prosecution costs of this matter
were covered in their entirety by its insurer.
In December 1999, the Company received a notice from the heirs of the
Oriolo family (the "Oriolo Heirs"), attempting to revoke the Company's rights in
the Casper character. The Company believed that the claim was without merit and
vigorously defended itself by filing a counterclaim against the Oriolo Heirs. In
March 2000, the parties to the dispute entered into a settlement agreement
whereby the Oriolo Heirs reaffirmed the Company's exclusive ownership rights to
the copyright and trademark to the Casper character in perpetuity.
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> 20
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 Stock Market, Inc. 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, 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........................................... 8.25 4.38
Second Quarter.......................................... 8.25 4.75
Third Quarter........................................... 6.38 2.88
Fourth Quarter.......................................... 7.14 3.63
Fiscal year ended December 31, 2000:
First Quarter .......................................... 6.00 3.13
Second Quarter (through April 5, 2000).................. 4.19 3.88
</TABLE>
HOLDERS
As of April 5, 2000, there were approximately 156 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 facilities have in the past, and
will continue in the future to, 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.
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<PAGE> 21
RECENT SALES OF UNREGISTERED SECURITIES
In January 1997, the Company issued two warrants to purchase Common Stock
at an exercise price of $10.00 per share 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
at an exercise price of $10.00 per share 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 Stock Market, Inc.
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 Stock Market, Inc. 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 Stock Market, Inc.
on the date the options were authorized).
The 1999 Refinancing and conversion of the convertible note resulted in the
issuance of a total of 190,488 shares of the Company's Series A Preferred Stock,
par value $100, and 2,689,236 Warrants to purchase shares of the Company's
common stock. Of the Warrants issued, 1,344,618 were Investor Warrants and
1,344,618 were Management Warrants. The Investor Warrants
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<PAGE> 22
granted are fully vested, non-forfeitable and are exercisable commencing six
months from their issuance date, at prices ranging from $9.00 to $12.00 per
share of common stock. Management Warrants granted vest and become exercisable
according to schedules set forth in their respective warrant agreements, and are
exercisable at prices ranging from $9.00 to $12.00 per share of common stock.
Terms of the Investor and Management Warrants provide for expiration dates from
2005 through 2007.
On April 26, 1999, the Company consummated the transactions contemplated by
the Stock Purchase Agreement and received gross proceeds of approximately
$17,900,000, of which approximately $6,226,000 represented value of
Kushner-Locke common stock. In connection with such transactions, the Company
incurred fees and expenses of approximately $1,900,000 and subsequently repaid
the outstanding balance of approximately $2,013,000 on the Company's then
existing credit facility. In addition, the Company received additional capital
of approximately $2,049,000 from the issuance of the note payable on June 30,
1999. The proceeds from the transactions will be used to fund the Company's
filmed production and acquisition activities and for general working capital
purposes.
The Series A Preferred Stock bears a dividend rate of 7% ($7 per share) per
annum, payable quarterly on March 31, June 30, September 30 and December 31 of
each year. At the Company's election, the quarterly dividend may be paid either
in cash or additional shares of Series A Preferred Stock. For the quarterly
dividends due on June 30, September 30 and December 30, 1999, the Company
elected to pay such dividends in additional shares of Series A Preferred Stock
resulting in an the accrual for the issuance of an additional 8,664 shares of
Series A Preferred Stock at December 31, 1999.
The Series A Preferred Stock ranks senior to all other classes of stock of
the Company. The Series A Preferred Stock is convertible into 2,950,370 shares
of Common Stock of the Company at December 31, 1999. The number of shares into
which the Series A Preferred Stock is convertible was determined by dividing the
approximate $19,048,000 liquidation preference plus accrued dividends of
approximately $866,000 of the Series A Preferred Stock by $6.75, which is the
Series A Preferred Stock's stated conversion price. Holders of the Series A
Preferred Stock are entitled to vote with the holders of Common Stock generally
with each share entitled to as many votes as the number of shares of Common
Stock into which it may be converted, and are entitled to elect two directors to
the Company's Board of Directors. The Series A Preferred Stock may be redeemed
by the Company at its liquidation amount (as defined) five years from the issue
date, and by the holders of the Series A Preferred Stock in certain
circumstances upon the event of a consolidation, merger or business combination
of the Company with another corporation, whereby the Company is not the
surviving entity.
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> 23
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,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Merchandising revenues $ 1,385,000 $ 2,183,000
Publishing revenues, net of returns 129,000 90,000
Filmed entertainment revenues 24,000 (3,842,000)
------------ ------------
Total operating revenues 1,538,000 (1,569,000)
Cost of sales 727,000 1,056,000
Selling, general &
administrative expenses 6,554,000 8,306,000
Depreciation and
amortization 2,655,000 3,868,000
Equity based charges 108,000 969,000
------------ ------------
Loss from operations (8,506,000) (15,768,000)
Other income/(loss) (48,000) 331,000
------------ ------------
Loss before income taxes (8,554,000) (15,437,000)
Income tax benefit/(provision) (3,000) 4,199,000
------------ ------------
Net loss (8,557,000) (11,238,000)
Preferred stock dividends and deduction
for beneficial conversion feature (3,029,000) -0-
------------ ------------
Net loss applicable to common stockholders $(11,586,000) $(11,238,000)
------------ ------------
Basic net loss per share $ (2.77) $ (2.77)
============ ============
Diluted net loss per share $ (2.77) $ (2.77)
============ ============
</TABLE>
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<PAGE> 24
RESULTS FROM OPERATIONS
Fiscal Year 1999 Compared to Fiscal Year 1998
The number of projects generating revenues in 1999 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 is in the process of being implemented. Thus any possible results will not
be realized until subsequent periods, if ever.
The Company is in production on one animated direct-to-video featuring the
Company's classic character Casper entitled "Casper's Haunted Christmas."
Development and production of all other new products of the Company are subject
to financing and distribution alternatives. The Company has continued to develop
and exploit its licensing and merchandise rights for the Company's portfolio of
classic characters.
REVENUES
Net merchandising revenues were $1,385,000 and $2,183,000 in 1999 and 1998,
respectively, a decrease of $798,000. The revenues in 1999 and 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 or the potential acquisition of new characters.
Net publishing revenues related to the Company's new monthly magazine were
$129,000 in 1999 and $90,000 1998. Publishing sales were on a fully returnable
basis recorded upon shipment, net of a reserve based on estimated returns.
Publishing revenues also included sales of advertising space and subscriptions
to the Company's new magazine. The publication of the magazine was ceased with
the July 1999 issue, resulting from management's decision to focus on the
Company's core entertainment business operations.
The Company's net filmed entertainment revenues were $24,000 in 1999
compared to a negative $3,842,000 in 1998. The 1998 revenues 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 1998 period. Based on the report by the video distributor, the
realization of overages beyond the original advance on this title would 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
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<PAGE> 25
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.
COST OF SALES
Merchandising costs of sales were $334,000 and $584,000 in 1999 and 1998,
respectively. The decrease in cost of sales is due to a decrease in
merchandising activity in 1999.
Publishing costs of sales were $384,000 in 1999 and $373,000 in 1998.
Costs of sales relating to filmed entertainment revenues were $9,000 and
$99,000 in 1999 and 1998, respectively. The decrease in cost of sales is due to
a decrease in filmed entertainment activity for the year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $6,554,000 and $8,306,000
for 1999 and 1998, respectively, a decrease of $1,752,000. The decrease in
selling, general and administrative expenses in 1999 is primarily due to lower
costs incurred for consulting services throughout the year and an overall
decrease in other overhead expenses.
DEPRECIATION AND AMORTIZATION
Depreciation expense was $187,000 and $161,000 in 1999 and 1998,
respectively. The increase in depreciation was due to additions of leasehold
improvements and furniture, fixtures and equipment in 1999. Amortization of the
film library was $2,232,000 and $3,516,000 in 1999 and 1998, respectively.
Included in the 1999 film amortization amount is approximately $2,000,000
related to additional amortization recorded to adjust the carrying book value of
certain film properties to their net realizable values as of December 31, 1999.
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 $106,000 in 1999 and
$61,000 in 1998. Amortization of goodwill was $130,000 in both 1999 and 1998.
EQUITY BASED CHARGES
Equity based charges were $108,000 and $969,000 in 1999 and 1998,
respectively, related to the issuance of warrants to consultants to the Company.
-25-
<PAGE> 26
OTHER INCOME
Other income/(loss) was $(48,000) and $331,000 in 1999 and 1998,
respectively. Other losses in 1999 resulted primarily from interest income of
$252,000, offset by interest expense of $81,000, and $219,000 in currency
exchange losses and costs related to the purchase of certain investment
securities. In 1998, other income resulted from the favorable settlement of
litigation involving the Company of $149,000 and interest income of $241,000,
offset by interest expense of $59,000. Interest expense in 1999 and 1998
represented annual loan fees and borrowings under the Company's line of credit.
See "Liquidity and Capital Resources."
INCOME TAXES
Income tax benefit/(provision) was $(3,000) and $4,199,000 in 1999 and
1998, respectively. The current tax expense was the result of an assessment of
additional income taxes for the 1997 tax year and current minimum state taxes
due. The income tax benefit for 1998 is due to the use of operating losses
generated in 1998 against the deferred income tax liabilities and prior year
operating income, and the tax effect of stock options exercised. A valuation
allowance was established in 1998 to reduce deferred income tax assets to the
amount expected to be realized. At the end of 1999, an additional valuation
allowance was established to offset the benefit generated by current year's
losses. Realizable income tax benefits from the Company's cumulative tax losses
have been reported as an income tax receivable of $540,000 at the end of the
current period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $6,469,000 and $8,469,000 in 1999
and 1998, respectively. The reduction in cash used in operating activities was
primarily due to the collection of accounts receivable balances and the
reduction of deferred tax liability balances from 1998.
Net cash used in investing activities was $522,000 and $684,000 in 1999 and
1998, respectively. The decrease in cash used for investing activities was
primarily due to less investment by the Company in its trademarks and copyrights
in 1999.
Net cash provided by financing activities was $12,365,000 and $3,288,000 in
1999 and 1998, respectively. The cash provided by financing activities in 1999
resulted from the cash proceeds from the 1999 Refinancing and the issuance of a
subordinated note payable as described below. The 1998 cash provided by
financing activities resulted primarily from the exercise of employee stock
options.
As a result of the 1999 Refinancing being oversubscribed, on June 30, 1999
the Company issued a subordinated convertible note (the "Note") in the amount of
approximately $2,049,000. The Note accrued interest at an annual rate of 7%,
payable quarterly on the last day of each March, June, September and December,
commencing on June 30, 1999. As a result of shareholder approval at the
Company's Annual Meeting of Shareholders' on August 17, 1999 of an increase in
the authorized shares of Series A Preferred Stock and the conversion of the
Note, the Company's Board of Directors approved the conversion of the Note on
September 2, 1999
-26-
<PAGE> 27
into 20,488 shares of Series A Preferred Stock (convertible into 303,518 shares
of Common Stock) and investor warrants to purchase 144,618 shares of Common
Stock.
The Company was party to a $2,500,000 revolving line of credit with City
National Bank ("Bank") to provide funds for operations. The facility originally
had a maturity date of March 31, 1999. On April 9, 1999, the Bank extended the
maturity of the debt to April 30, 1999 and amended the covenants such that the
Company was in compliance at that date. The facility was secured by
substantially all of the assets of the Company. On April 27, 1999 the entire
outstanding balance of $2,013,000, inclusive of accrued interest through the
date of payment, was paid off with the funds the Company received in connection
with the 1999 Refinancing. The Company was in discussions with the Bank to renew
or extend the credit facility, but such discussions were not pursued and the
facility expired.
Effective as of April 3, 2000 the Company entered into a new five year,
$25,000,000 revolving credit facility with The Chase Manhattan Bank (the "Chase
Credit Facility") to provide operating funds and a portion of the acquisition
financing of the PM Entertainment acquisition. Borrowings under the Chase Credit
Facility are limited to $15,000,000 until additional participant lenders are
added to the Chase Credit Facility, at which time the borrowings available will
be increased to a maximum of $25,000,000. Borrowings under the Chase Credit
Facility are determined under a borrowing base calculation, which includes
certain allowable accounts receivable, film and intellectual property rights,
and are secured by substantially all of the assets of the Company and PM
Entertainment. Outstanding borrowings under the Chase Credit Facility will bear
interest at the rate of either 1.5% per annum above the prime rate (as defined)
or 2.5% per annum above the London Interbank Offered Rate ("LIBOR"), at the
Company's election, payable monthly. The Chase Credit Facility requires the
Company to meet certain financial ratios.
On September 24, 1999, the Company signed a letter of intent for the
acquisition of all of the outstanding stock of PM Entertainment, a
privately-owned producer and distributor of motion pictures in the United States
home video, television and Internet broadcasting markets as well as all media in
international markets. The closing of the PM Entertainment acquisition occurred
effective as of April 3, 2000. The purchase price consisted of $10,000,000,
$6,500,000 of which was paid in cash at closing and the balance provided through
the issuance by the Company of: (1) $1,450,000 in shares of the Company's common
stock and (2) a $2,050,000 subordinated note to be paid over five future
quarterly periods. The Company also assumed existing bank debt in the amount of
approximately $5,300,000. In connection with the acquisition of PM
Entertainment, the Company also purchased from Imperial Bank a loan, secured by
the motion picture "Inferno", by paying a down payment of $2,000,000 and
obtaining a loan in the amount of approximately $4,800,000. PM Entertainment
operates out of a 120,000 square foot office, production and post-production
facility located just outside the Los Angeles area. As part of the PM
Entertainment acquisition, the Company has entered into a two-year lease
arrangement with a purchase option for the facilities. No financial results from
the operations of PM Entertainment are included in the Company's accompanying
Consolidated Financial Statements as of and for the years ended December 31,
1999 and 1998. In accordance with the Accounting Principles Board Opinion No. 16
("APB 16"), this acquisition will be accounted for under the purchase method of
accounting.
-27-
<PAGE> 28
On April 26, 1999, the Company consummated the transactions contemplated by
the Stock Purchase Agreement and received gross proceeds of approximately
$17,900,000. In connection with such transactions, the Company incurred fees and
expenses of approximately $1,905,000 and subsequently repaid the outstanding
balance of approximately $2,013,000 on the Company's credit facility. In
addition, the Company received additional capital of approximately $2,049,000
from the issuance of the Note on June 30, 1999.
Management believes that the Company's current and anticipated sources of
working capital will provide adequate liquidity for the Company's operating
financial needs for at least the next twelve months. In addition to the
acquisition of PM Entertainment noted above, from time to time the Company
considers acquisition and investment possibilities, including film libraries and
companies ancillary to the Company's business, subject to the availability of
financing as necessary. No assurance can be given that such financing will be
available or, if available, will be at costs comparable to current financings or
on terms acceptable to the Company.
INFLATION AND SEASONALITY
Inflation has not been material to the Company during the past five years.
YEAR 2000
The Company utilizes various computer software packages as tools in running
its operations, and would suffer material adverse consequences if those systems
malfunctioned due to year 2000 issues. Management believes it has implemented
any necessary vendor upgrades and modifications to ensure continued
functionality with respect to the software problems associated with the year
2000. Management did not incur material incremental costs, or dedicate
significant Company resources in 1999, to become year 2000 compliant and does
not believe any of the Company's internal systems suffered any material year
2000 compliance problems. The Company's customers and vendors, or potential
customers and vendors, may be affected by year 2000 issues that may, in part,
cause a delay, reduction or cancellation of vendor, retailer or customer
activities. The Company has not developed a contingency plan related to the
failure of its, or a third party's, year 2000 remediation efforts.
-28-
<PAGE> 29
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
ITEM 7. FINANCIAL STATEMENTS
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS F-2 to F-3
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
YEARS ENDED DECEMBER 31, 1999 AND 1998
Consolidated Balance Sheets F-4 to F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8 to F-9
Notes to Consolidated Financial Statements F-10 to F-21
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS F-22
</TABLE>
F-1
<PAGE> 30
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The Harvey Entertainment Company:
In our opinion, the accompanying consolidated balance sheet as of December 31,
1999 and the related consolidated statements of operations, of stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of The Harvey Entertainment Company and its subsidiaries at December
31, 1999, and the results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 7 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 30, 2000
F-2
<PAGE> 31
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Harvey Entertainment Company:
We have audited the accompanying consolidated balance sheet of The Harvey
Entertainment Company and subsidiaries (the "Company") as of December 31, 1998,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended. Our audit also included the financial
statement schedule listed in the index at Item 7. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.
We conducted our audit 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 audit provides 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 the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying financial statements as of December 31, 1998 have been prepared
assuming that the Company will continue as a going concern. 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.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 9, 1999
F-3
<PAGE> 32
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
Cash and cash equivalents $ 5,825,000 $ 451,000
Marketable securities 2,037,000 -
Accounts receivable, net of allowance for doubtful accounts
of $235,000 and $298,000 in 1999 and 1998, respectively 634,000 1,689,000
Prepaid expenses and other assets 907,000 505,000
Income tax receivable 540,000 567,000
Film inventory, net of accumulated amortization of $9,124,000
and $6,894,000 in 1999 and 1998, respectively 9,398,000 10,873,000
Fixed assets, net of accumulated depreciation of $755,000
and $658,000 in 1999 and 1998, respectively 432,000 501,000
Goodwill, net of accumulated amortization of $1,352,000
and $1,222,000 in 1999 and 1998, respectively 1,243,000 1,373,000
Trademarks, copyrights and other intangibles net of
accumulated amortization of $401,000 and $295,000 in 1999
and 1998, respectively 1,283,000 1,075,000
------------- -------------
TOTAL ASSETS $ 22,299,000 $ 17,034,000
============= =============
See accompanying notes to consolidated financial statements.
(Continued)
</TABLE>
F-4
<PAGE> 33
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 440,000 $ 871,000
Accrued marketing expenses 1,200,000 1,200,000
Participations payable 556,000 861,000
Accrued rent 37,000 170,000
Line of credit -- 250,000
------------ ------------
Total liabilities 2,233,000 3,352,000
------------ ------------
Series A convertible preferred stock, $100 stated value, 300,000
shares authorized, 199,000 shares issued and outstanding at
December 31, 1999, liquidation preference of $19,915,000 at
December 31, 1999 16,376,000 --
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,000,000 shares authorized (300,000 shares
have been designated as Series A convertible preferred stock) -- --
Common stock, no par value, 30,000,000 and 10,000,000 shares
authorized in 1999 and 1998, respectively, 4,187,000 issued and
outstanding at December 31, 1999 and 1998 22,268,000 22,160,000
Additional paid in capital 4,523,000 --
Accumulated other comprehensive income/(loss) (3,037,000) --
Accumulated deficit (20,064,000) (8,478,000)
------------ ------------
Total stockholders' equity 3,690,000 13,682,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,299,000 $ 17,034,000
============ ============
See accompanying notes to consolidated financial statements
</TABLE>
F-5
<PAGE> 34
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING REVENUES:
Merchandising $ 1,385,000 $ 2,183,000
Publishing 129,000 90,000
Filmed entertainment 24,000 (3,842,000)
------------ ------------
Net operating revenues 1,538,000 (1,569,000)
------------ ------------
OPERATING EXPENSES:
Cost of sales 727,000 1,056,000
Selling, general and administrative expenses
(exclusive of equity based charges) 6,554,000 8,306,000
Amortization of film inventory 2,232,000 3,516,000
Amortization of goodwill, trademarks, copyrights and other 236,000 191,000
Depreciation expense 187,000 161,000
Equity based charges 108,000 969,000
------------ ------------
Total operating expenses 10,044,000 14,199,000
------------ ------------
LOSS FROM OPERATIONS (8,506,000) (15,768,000)
OTHER INCOME/(EXPENSES) (219,000) 149,000
INTEREST INCOME, NET 171,000 182,000
------------ ------------
LOSS BEFORE INCOME TAXES (8,554,000) (15,437,000)
INCOME TAX BENEFIT/(PROVISION) (3,000) 4,199,000
------------ ------------
NET LOSS $ (8,557,000) $(11,238,000)
Preferred stock dividends and deduction for
beneficial conversion feature (3,029,000) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(11,586,000) $(11,238,000)
============ ============
NET LOSS PER SHARE OF COMMON STOCK:
Basic and Diluted $ (2.77) $ (2.77)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted 4,187,000 4,059,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 35
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL ACCUM. OTHER RETAINED
COMMON STOCK PAID IN COMPREHENSIVE EARNINGS/
SHARES AMOUNT CAPITAL INCOME/(LOSS) ACCUM. DEFICIT TOTAL
---------- ------------ ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 3,573,000 $ 18,153,000 $ 2,760,000 $ 20,913,000
Exercise of stock options 614,000 3,038,000 3,038,000
Equity based charges 969,000 969,000
Net Loss (11,238,000) (11,238,000)
--------- ------------ ---------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1998 4,187,000 22,160,000 0 0 (8,478,000) 13,682,000
Issuance of warrants $2,360,000 2,360,000
Beneficial conversion feature on
Convertible Preferred Stock 2,163,000 (2,163,000) 0
Equity based charges 108,000 108,000
Stock dividends declared (866,000) (866,000)
Components of comprehensive
income/(loss):
Unrealized holding loss
on equity securities $(4,189,000) (4,189,000)
Gain on derivative
financial instruments 1,152,000 1,152,000
Net loss (8,557,000) (8,557,000)
-----------
Total comprehensive income/(loss) (11,594,000)
--------- ------------ ---------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1999 4,187,000 $ 22,268,000 $4,523,000 $(3,037,000) $(20,064,000) $ 3,690,000
========= ============ ========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 36
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,557,000) $(11,238,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Write-off of accounts receivable -- 5,071,000
Depreciation 187,000 161,000
Loss on disposition of fixed assets 90,000 --
Amortization of film inventory 2,232,000 3,516,000
Amortization of goodwill, trademark, copyrights and other 236,000 191,000
Deferred income taxes -- (3,788,000)
Equity based charges 108,000 969,000
Premium on derivative financial instruments, net 181,000 --
Changes in operating assets and liabilities:
Accounts receivable, net 1,055,000 1,253,000
Prepaid expenses and other assets (402,000) (52,000)
Income taxes receivable, net of income taxes payable 27,000 (1,065,000)
Investment in film inventory (757,000) (2,958,000)
Accounts payable and accrued expenses (441,000) 15,000
Participations payable (305,000) (583,000)
Accrued rent and other liabilities (123,000) 39,000
------------ ------------
Net cash used in operating activities (6,469,000) (8,469,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (208,000) (179,000)
Investments in trademarks and copyrights (314,000) (505,000)
------------ ------------
Net cash used in investing activities (522,000) (684,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, net of tax effect -- 3,038,000
Repayment on line of credit, net (250,000) 250,000
Proceeds from issuance of convertible preferred stock, net 11,644,000 --
Proceeds from sale of derivative financial instruments, net 971,000 --
------------ ------------
Net cash provided by financing activities 12,365,000 3,288,000
------------ ------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 5,374,000 (5,865,000)
CASH AND CASH EQUIVALENTS, Beginning of period 451,000 6,316,000
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 5,825,000 $ 451,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
F-8
<PAGE> 37
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998
------------ ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION :
Cash received/(paid) during the year for:
Interest $ (81,000) $ 241,000
Income taxes $ (3,000) $(119,000)
</TABLE>
NON-CASH FINANCING ACTIVITY:
See Notes 2 and 8 for disclosure of non-cash financing activity.
F-9
<PAGE> 38
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
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.
BACKGROUND AND OPERATIONS - The Harvey Entertainment Company, together with
its wholly-owned subsidiaries Harvey Comics, Inc. and Baby Huey
Productions, Inc. (the "Company") owns and exploits a library of widely
recognized classic characters and other intellectual property assets,
including a related film inventory of animated short features. The Company
is the successor to Harvey Comics, Inc. which was founded in 1939 by the
Harvey family. In 1989, the Company's predecessor purchased Harvey Comics,
Inc. to exploit its intellectual property and in 1993 the Company completed
its initial public offering of common stock. The roster of the Company's
classic characters includes the well know characters Casper the Friendly
Ghost, Richie Rich, Baby Huey, Wendy the Good Little Witch, and Hot Stuff,
among many others.
BASIS OF PRESENTATION AND 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. 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.
FINANCIAL INSTRUMENTS - In the year ended December 31, 1999, the Company
entered into derivative financial instrument contracts for the purpose of
minimizing risk associated with changes in the market value of the
Company's investment in common stock of The Kushner-Locke Company
("Kushner-Locke") (the "Hedged Security") that could adversely affect its
results of operations and financial position if un-hedged. The Company does
not use derivative financial instruments for trading or speculative
purposes.
Gains or losses on these derivative financial instruments are offset
against the unrealized gains and losses associated with this Hedged
Security. At December 31, 1999, all derivative financial instrument
contracts entered into by the Company had expired.
The Company's other financial instruments consist of cash and cash
equivalents, marketable securities classified as available for sale, and
accounts receivable. The carrying values of cash and cash equivalents and
accounts receivable are representative of their fair values due to their
short-term maturities. Marketable securities classified as available for
sale are stated at fair value in accordance with the Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities."
F-10
<PAGE> 39
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CASH AND CASH EQUIVALENTS - The Company considers investments with original
maturities of 90 days or less to be cash equivalents.
FILM INVENTORY- Film inventory is stated at the lower of cost less
accumulated amortization or estimated net realizable value. Film inventory
consists of direct production costs, production overhead, and capitalized
interest and is amortized using the individual film forecast computation
method. The individual film forecast method amortizes costs in the ratio
that the current period's gross revenue bears 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.
FIXED ASSETS - Fixed assets are stated at cost and are depreciated using
the straight-line method over three to seven year estimated lives.
Leasehold improvements are amortized over the shorter of the lease term or
the estimated life of the improvement.
GOODWILL - Goodwill represents the excess of the consideration paid for
Harvey Comics, Inc. over the estimated fair value of its assets. Goodwill
is being amortized on a straight-line basis over twenty years.
TRADEMARKS AND COPYRIGHTS - Trademarks and copyrights represent cost
incurred to register intellectual property owned by the Company and are
amortized on a straight-line basis over twenty 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 had 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
F-11
<PAGE> 40
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
substantial portion of its debtor's ability to honor their contracts is
dependent upon the merchandising and filmed entertainment industries.
INCOME TAXES - The Company records income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." The standard
requires, among other provisions, an asset and liability approach to
recognize deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the financial statement
carrying amounts and tax basis of assets and liabilities.
EQUITY-BASED CHARGES - In fiscal 1997, the Company adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company continues to account for its stock compensation
arrangements using the intrinsic value method as defined by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees."
COMPREHENSIVE INCOME - Effective January 1, 1998, the Company adopted the
provisions SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and its components
in financial statements. Comprehensive income, as defined, includes all
changes in equity during a period from non-owner sources.
NET INCOME (LOSS) PER SHARE - Basic earnings per share is based upon the
net earnings applicable to common shares and upon the weighted average
number of shares outstanding during the period. Diluted earnings per share
reflects the effect of the assumed exercise of stock options and warrants
only in the periods in which such effect would be dilutive.
Stock option and warrants representing common shares of 620,150 and
3,140,236, respectively, were excluded from the average number of common
and common equivalent shares outstanding in the diluted EPS calculation for
the year then ended December 31, 1999 because they were anti-dilutive.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1998
consolidated financial statements to conform with the current year's
presentation.
NEW ACCOUNTING GUIDANCE
Financial Instruments - In June 1998, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." In June 1999, the FASB delayed the effective date
of the standard which will now be effective for the Company's fiscal year
beginning January 1, 2001. If the Company enters into derivative
transactions in the future, SFAS No. 133 will require the Company to record
all derivatives on the balance sheet at fair value. Changes in derivative
fair values will either be recognized in earnings as offsets to the changes
in fair value of related hedged assets, or deferred and recorded as a
component of accumulated other comprehensive income until the hedged
transactions occur and are recognized in earnings. The ineffective portion
of a hedging derivative's change in fair value will be immediately
recognized in earnings. The impact of SFAS No. 133 on the Company's
financial statements will depend on a variety of factors, including the
extent of the Company's future hedging activities, the types of hedging
instruments used and the effectiveness of such instruments. The Company is
currently evaluating the impact of adopting SFAS No. 133 on its financial
statements.
2. 1999 REFINANCING
On April 7, 1999 the Company entered into a Stock Purchase Agreement by and
among the Company, certain investors, and Kushner-Locke pursuant to which
the Company agreed to issue 170,000 shares of its Series A Convertible
Preferred Stock, stated value of $100 per share ("Series A Preferred
Stock"), and warrants to purchase 1,200,000 shares of the Company's common
stock ("Investor Warrants") in consideration of cash and common stock of
Kushner-Locke (the "1999 Refinancing"). In addition, as a result of the
1999 Refinancing being oversubscribed and the desire of the Company to
realize the potential benefits of additional capital, on June 30, 1999 the
Company issued a convertible subordinated note (the "Note") in the amount
of approximately $2,049,000. On September 2, 1999, the Note was converted
into 20,488 shares of Series A Preferred Stock. In connection with the
conversion of the Note, the Company granted the investor 144,618 warrants
to purchase Common Stock ("Investor Warrants"). The total cash
consideration received in the 1999 Refinancing and issuance of the Note was
approximately $11,644,000, net of transaction fees and expenses of
approximately $1,905,000.
F-12
<PAGE> 41
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
The Company recorded a deduction for the beneficial conversion feature
associated with the issuance of Series A Preferred Stock based on the
stock's deemed fair value at the date of issuance. The deduction was
recorded ratably over a six-month period from April 26, 1999 until the
convertibility provision of the Series A Preferred Stock became effective
on October 26, 1999.
The Series A Preferred Stock bears a dividend rate of 7% ($7 per share) per
annum, payable quarterly on March 31, June 30, September 30 and December 31
of each year. At the Company's election, the quarterly dividend may be paid
either in cash or additional shares of Series A Preferred Stock. For the
quarterly dividends due on June 30, September 30 and December 31, 1999, the
Company elected to pay such dividends in additional shares of Series A
Preferred Stock, resulting in the accrual for the issuance of an additional
8,664 shares of Series A Preferred Stock at December 31, 1999 for a total
value of approximately $866,000.
The Series A Preferred Stock ranks senior to all other classes of stock of
the Company. The Series A Preferred Stock is convertible into 2,950,000
shares of Common Stock of the Company at December 31, 1999. Holders of the
Series A Preferred Stock are entitled to elect two directors to the
Company's Board of Directors and to vote with the holders of common stock
with the number of votes determined on an as converted basis. The Series A
Preferred Stock may be redeemed by the Company at its liquidation amount
five years from the issue date, and by the holders of the Series A
Preferred Stock in certain circumstances upon the event of a consolidation,
merger or business combination of the Company with another corporation,
whereby the Company is not the surviving entity.
3. MARKETABLE SECURITIES
In connection with the 1999 Refinancing, the Company received approximately
470,000 common shares of Kushner-Locke with a fair value of $6,226,000. As
of December 31, 1999, the market value of such shares was approximately
$2,037,000. As the Company is currently holding the Kushner-Locke shares as
available-for-sale securities, in accordance with SFAS No. 115, the
unrealized loss from this investment is being recorded as a component of
accumulated comprehensive income.
During the year, the Company engaged in derivative transactions to hedge
changes in the market value of the Kushner-Locke stock. As a result of
these transactions, the Company recorded, as other comprehensive income, a
gain on derivatives instruments of $1,152,000 to partially offset the
unrealized holding losses incurred as of December 31, 1999.
F-13
<PAGE> 42
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
4. FILM INVENTORY
Film inventory consist of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Films released, net of accumulated amortization $ 8,641,000 $10,873,000
Development 757,000 --
----------- -----------
Total film inventory $ 9,398,000 $10,873,000
=========== ===========
</TABLE>
Based upon the Company's estimates of future gross revenues at December 31,
1999, approximately 15% of the unamortized released film inventory will be
amortized during the three-year period ending December 31, 2002. In
addition, the Company estimates that approximately 85% of the unamortized
released film inventory will be amortized over the next 10 years. Because
of 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.
Future commitments to the development of film inventory as of December 31,
1999 is $1,798,000.
5. INCOME TAX
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 had been
established, for the years ended December 31, 1999 and 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 the deferred income tax assets and
liabilities.
The provision for income taxes for the years ended December 31, 1999 and
1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current $ (3,000) $ (565,000)
Deferred 2,595,000 6,551,000
Valuation allowance (2,595,000) (1,787,000)
----------- -----------
Benefit / (provision) for income taxes $ (3,000) $ 4,199,000
=========== ===========
</TABLE>
F-14
<PAGE> 43
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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, 1999 and 1998 differ as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Provision computed at the statutory rate $ 2,909,000 $ 5,153,000
State income taxes, net of federal income tax benefit -- 351,000
Change in valuation allowance (2,595,000) (1,787,000)
Other (317,000) 482,000
----------- -----------
Benefit / (provision) for income taxes $ (3,000) $ 4,199,000
=========== ===========
</TABLE>
The following are the components of the Company's deferred tax assets and
(liabilities) at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Federal net operating loss carryforward $ 3,304,000 $ 1,922,000
State net operating loss carryforward 416,000 351,000
Accounts receivable 124,000 77,000
Equity based charges 427,000 294,000
Deferred revenue 169,000 --
Other 374,000 148,000
----------- -----------
Total deferred tax asset 4,814,000 2,792,000
----------- -----------
Film inventory (432,000) (395,000)
Trademarks and copyrights -- (304,000)
Deferred revenue -- (306,000)
----------- -----------
Total deferred tax liability (432,000) (1,005,000)
----------- -----------
Valuation allowance (4,382,000) (1,787,000)
----------- -----------
Net deferred tax asset/(liability) $ -- $ --
=========== ===========
</TABLE>
At December 31, 1999, the Company has a net operating loss carryforward of
$9,717,000 and $6,935,000 for federal and state income tax purposes,
respectively. These net operating loss carryforwards begin to expire in
2018 and 2003, respectively. The net operating losses can be carried
forward to offset future taxable income. Realization of the above
carryforwards may be subject to utilization limitations, which may inhibit
the Company's ability to use these carryforwards in the future. Realizable
income tax benefits from the Company's cumulative tax losses have been
reported as an income tax receivable of $540,000 as of year end.
6. DEBT
The Company's revolving loan and security agreement that allowed maximum
borrowings of up to $2,500,000 expired on April 30, 1999. Borrowings under
the line of credit were collateralized
F-15
<PAGE> 44
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
by substantially all of the assets of the Company and bore interest at the
lenders' prime rate (8.75% at December 31, 1998) plus 1% per annum. The
agreement was subject to certain requirements, including, but not limited
to, the maintenance of minimum net worth, and disallowed the payment of
dividends.
7. COMMITMENTS AND CONTINGENCIES
LEASES - The Company generally conducts its operations through leased
office facilities. The Company also leases automobiles and office
equipment. Most leases require that the Company perform all necessary
repairs and maintenance, provide insurance and pay taxes assessed against
the leased property. The remaining terms of leases range from
month-to-month to seven years, some of which have renewal options. Certain
rents are adjusted for increases in the Consumer Price Index or on
structured annual increases. The leases are classified as operating leases.
Future minimum operating lease payments for the Company, as of December 31,
1999 (exclusive of real estate taxes and maintenance expenses) are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING GROSS SUBLEASE
DECEMBER 31, RENTALS INCOME NET
------------- ------------ ---------- ---------
<S> <C> <C> <C>
2000 $ 781,000 $(425,000) $ 356,000
2001 731,000 (126,000) 605,000
2002 642,000 - 642,000
2003 653,000 - 653,000
2004 544,000 - 544,000
Thereafter 789,000 - 789,000
--------- --------- ----------
Totals $4,140,000 $(551,000) $3,589,000
========== ========= ==========
</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.
The Company has entered into certain sublease arrangements for leased
office space no longer occupied. The terms of the subleases range from
periods ending in October 2000 to January 2001.
Rent expense charged to operations was $433,000 and $439,000 for the years
ended December 31, 1999, and 1998, respectively. Rent expense is recognized
net of sublease income of $336,000 and $261,000 in 1999 and 1998,
respectively.
LITIGATION - The Company is party to legal proceedings which are routine
and incidental to the business. The Company believes the results of such
litigation will not have a material adverse effect on the Company's
financial condition or results of operations.
8. STOCK OPTIONS AND WARRANTS
1993 AND 1994 STOCK OPTION PLANS - Under the Company's 1993 Stock Option
Plan, the
F-16
<PAGE> 45
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
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, 1999, 200 options remained unissued
under these plans. The Company has the discretion, subject to the terms of
the plans, to select the person entitled to receive options, the terms and
conditions on which options are granted, the exercise price, the time
period of 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 also provided
options to other employees in similar circumstances. The exercise price for
the options was $4.40 per share, 100% 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 expired 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 and August 1999, the Board of
Directors approved an increase in the number of options that could be
granted under this plan to 450,000 and 850,000, respectively. As of
December 31, 1999, 190,000 options remained unissued under the plan.
Officer, directors, and other key employees are eligible to receive grants
of either incentive stock options or nonqualified stock options;
non-employees 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 the 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.
Under this plan, options to purchase 10,000 shares of common stock were
issued to key individuals in consideration for services as observers of the
Board of Directors as of December 31, 1999.
1999 REFINANCING - As a result of the 1999 Refinancing, the Company granted
warrants to purchase 1,344,618 shares of common stock ("Management
Warrants") to employees, officers and directors. These warrants vest on the
grant date or over three years from the date of grant. The warrants are
exercisable at prices ranging from $9.00 to $12.00 per share of common
stock.
Management Warrants in the amount of 15,000 were granted to a producer in
consideration of film and television production services.
F-17
<PAGE> 46
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
The following table summarizes option and Management Warrant transactions
during the two years ended December 31, 1999 and December 31, 1998 under
the aforementioned plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF PRICE
SHARES PER SHARE
---------- ----------------
<S> <C> <C>
Balance, December 31, 1997 821,000 $ 5.89
Granted 264,000 $11.11
Exercised (614,000) $ 5.21
Canceled (73,000) $ 7.08
--------
Balance, December 31, 1998 398,000 $10.00
Granted 1,590,000 $ 9.99
Canceled (38,000) $10.73
--------
Balance, December 31, 1999 1,950,000 $ 9.99
=========
Vested as of December 31, 1999 1,311,000 $10.33
=========
</TABLE>
The following summarizes pricing and term information for options and
Management Warrants issued to employees and directors and that are
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS/MANAGEMENT OPTIONS/MANAGEMENT
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
---------------------------------------------- -----------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at December Contractual Exercise at December Exercise
Prices 31, 1999 Life Price 31, 1999 Price
------------------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 4.31 - 5.00 20,000 9.82 $ 4.83 -- --
6.69 50,000 9.38 6.69 50,000 $ 6.69
6.75 - 7.25 276,000 7.93 6.91 85,000 7.25
8.81 - 9.00 463,000 5.22 8.99 315,000 8.99
9.50 - 9.63 120,000 3.58 9.61 120,000 9.61
10.50 30,000 5.61 10.50 30,000 10.50
11.00 - 12.69 991,000 6.98 11.62 711,000 11.66
--------- ---------
$4.31 - 12.69 1,950,000 6.56 $ 9.99 1,311,000 $ 10.33
========= =========
</TABLE>
The Company has adopted the disclosure-only provision of SFAS No. 123. The
estimated fair value of options and Management Warrants granted during 1999
and 1998 pursuant to SFAS No. 123 was approximately $6,560,000 and
$292,000, respectively. Had the Company adopted SFAS No. 123, pro forma net
loss would have been $(16,515,000) and $(11,530,000) and pro forma net loss
per share would have been $(3.21) and $(2.84) for 1999 and 1998,
respectively. The fair value of each option and Management Warrant grant
was estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions: dividend yield of zero, a
F-18
<PAGE> 47
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
risk-free interest rate of 5.16% to 6.11%, a volatility of 70% and expected
lives of four to eight years and three years for 1999 and 1998,
respectively.
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. The warrants expired in
June 1998 but were extended for an additional three years, until June 2001.
The Company recorded an expense of $225,000 related to the extension of
these warrants as of June 30, 1998. At December 31, 1999, warrants to
acquire 52,000 shares of common stock remained outstanding.
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 ten days preceding the agreement date) to a
producer of a motion picture featuring one of the Company's characters. The
warrants expired in fiscal 1999.
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 vested 50% upon date of grant and 50% one year from the date of
grant. The warrants expire six years from the date of grant. The Company
recorded an expense of $35,000 in the year ended December 31, 1997 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 in the year ended December
31, 1998
In connection with the 1999 Refinancing and conversion of the Note, the
Company issued a total of 1,344,618 Investor Warrants to purchase shares of
the Company's common stock. The Investor Warrants granted are fully vested,
non-forfeitable and are exercisable commencing six months from their
issuance date, at prices ranging from $9.00 to $12.00 per share of common
stock.
The Company accounts for options and warrants issued to non-employees in
accordance with SFAS No. 123, and Emerging Issues Task Force 96-18 ("EITF
96-18"). Management Warrants in the amount of 15,000, granted to a producer
in consideration of film and television production services have been
measured and recorded as equity based charges for a total amount of $76,000
as of December 31, 1999. The options issued to key individuals in
consideration for services as observers of the Board of Directors, under
the Stock Option Plan of 1997, resulted in $32,000 of equity based charges
as of December 31, 1999. Total equity based charges for the years ended
December 31, 1999 and 1998 are $108,000 and $969,000, respectively.
STOCK REPURCHASE PROGRAM - In January 1997 the Board of Directors
authorized 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 did not repurchase any such shares during the years
ended December 31, 1999 or 1998.
F-19
<PAGE> 48
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
9. EARNINGS PER SHARE
Basic Earnings Per Share ("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 earning of
the entity. Due to the loss incurred in 1999 and 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 1999 and 1998.
10. SEGMENT INFORMATION
The Company operates in one segment: the licensing of its intellectual
property. The Company enters into agreements relating to film production
and distribution, merchandising, and publishing.
Worldwide sales by geographic area for the years ended December 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
U.S./Canada $ 860,000 $ (1,014,000)
Asia 274,000 165,000
Europe 117,000 (543,000)
Other 287,000 (177,000)
----------- ------------
$ 1,538,000 $ (1,569,000)
=========== ============
</TABLE>
11. RELATED PARTIES
In connection with the 1999 Refinancing, Prudential Securities Inc.
received fees of approximately $450,000 for advisory services rendered. A
Director of the Company was a Managing Director of Prudential Securities
Inc. at the time of the 1999 Refinancing.
12. 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 Company made no contributions to
this plan in either 1999 or 1998.
F-20
<PAGE> 49
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
13. SUBSEQUENT EVENTS (UNAUDITED)
On September 24, 1999, the Company signed a letter of intent for the
acquisition of all of the outstanding stock of PM Entertainment Group, Inc.
("PM Entertainment"), a privately-owned producer and distributor of motion
pictures in the United States home video, television and Internet
broadcasting markets as well as all media in international markets. The
closing of the PM Entertainment acquisition occurred effective as of April
3, 2000. The purchase price consisted of $10,000,000, $6,500,000 of which
was paid in cash at Closing and the balance provided through the issuance
by the Company of (1) $1,450,000 in shares of the Company's common stock
and (2) a $2,050,000 subordinated note to be paid over five quarterly
periods. The Company also assumed existing bank debt of approximately
$5,300,000. In connection with the acquisition of PM Entertainment, the
Company also purchased from Imperial Bank a loan, secured by the motion
picture "Inferno," by paying a down payment of $2,000,000 and obtaining a
loan in the amount of approximately $4,800,000. In accordance with the APB
Opinion No. 16, this acquisition will be accounted for under the purchase
method of accounting.
Effective as of April 3, 2000, the Company entered into a new five year,
$25,000,000 revolving credit facility with The Chase Manhattan Bank (the
"Chase Credit Facility") to provide operating funds and a portion of the
acquisition financing of the PM Entertainment acquisition. Borrowings under
the Chase Credit Facility are limited to $15,000,000 until additional
participant lenders are added to the Chase Credit Facility, at which time
the borrowings available will be increased to a maximum of $25,000,000.
Borrowings under the Chase Credit Facility are determined under a borrowing
base calculation, which includes certain allowable accounts receivable,
film and intellectual property rights, and are secured by substantially all
of the assets of the Company and its subsidiaries. Outstanding borrowings
under the Chase Credit Facility will bear interest at the rate of either
1.5% per annum above the prime rate (as defined) or 2.5% per annum above
the London Interbank Offered Rate ("LIBOR"), at the Company's election,
payable monthly. The Chase Credit Facility requires the Company to meet
certain financial ratios.
F-21
<PAGE> 50
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------
Charged to
Balance at Charged to other Balance at
Beginning of Cost and Accounts - Deductions - End of
Description Period Expenses Describe Describe Period
- ------------------------------- -------------- ------------ ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1998 activity:
Allowance for doubtful accounts $ 606,000 $ 830,000 $(1,138,000)(1) $ 298,000
Deferred tax valuation allowance 1,787,000 1,787,000
1999 activity:
Allowance for doubtful accounts 298,000 860,000 (923,000)(1) 235,000
Deferred tax valuation allowance 1,787,000 2,595,000 4,382,000
</TABLE>
(1) Decrease to accounts receivable
(2) Decrease to revenues
F-22
<PAGE> 51
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 25, 1999, the Company selected PricewaterhouseCoopers ("PwC") to
audit its consolidated financial statements for the fiscal year ending December
31, 1999. Deloitte & Touche LLP ("D&T") served as the Company's independent
auditors for the fiscal years ended December 31, 1997 and 1998. The decision to
change auditors was recommended by the Audit Committee and approved by the
Company's entire Board of Directors.
During the two most recent fiscal years, and any subsequent interim period
prior to June 25, 1999, the Company believes that there were no disagreements
with D&T on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of D&T, would have caused them to make
reference to the subject matter of the disagreements in connection with their
reports.
D&T's report on the Company's financial statements for the fiscal year
ended December 31, 1998 contained a qualification as to the uncertainty of the
Company's ability to continue as a going concern. At the time of D&T's report,
the Company had not yet completed the 1999 Refinancing which was completed on
April 26, 1999 and, following its completion, the Company had sufficient
liquidity for at least the next twelve months. Other than the "going concern"
qualification, D&T's report for fiscal 1998 did not contain any adverse opinion
or disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principles. D&T's report on the Company's financial
statements for the fiscal year ended December 31, 1997 did not contain any
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.
The Company has provided D&T with a copy of the disclosures it is making in
response to Item 304(a) of Regulation S-B of the Securities Act of 1933, as
amended, and D&T furnished the Company with a letter addressed to the Securities
and Exchange Commission stating that it agreed with the statements made by the
Company. In addition, the Company authorized D&T to respond fully to the
inquiries of PwC concerning the subject matter described in the foregoing
paragraphs.
During the two most recent fiscal years prior to December 31, 1998, and the
period through June 25, 1999, neither the Company, nor anyone on the Company's
behalf, consulted PwC in connection with the Company's financial statements
regarding either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements or any matter that was
the subject of any potentially reportable event.
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<PAGE> 52
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
MANAGEMENT
Set forth below is certain information with respect to the directors and
executive officers of the Company as of the date of the filing of this report:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Roger A. Burlage.......................... 57 Chairman of the Board and Chief Executive Officer
Eric S. Mischel........................... 38 President and Chief Operating Officer
Ronald B. Cushey.......................... 43 Executive Vice President, Chief Financial Officer and
Secretary
Glenn R. Weisberger....................... 41 Senior Vice President and General Counsel
Michael R. Burns.......................... 41 Director
Michael S. Doherty........................ 46 Director
Meyer Gottlieb............................ 60 Director
Gary M. Gray.............................. 55 Director
</TABLE>
Each of the directors and executive officers serves in similar positions
for both the Company and its wholly owned subsidiary, Harvey Comics, Inc.
("Harvey"). Directors are currently elected for terms of one year each.
The Company's Bylaws allow the Board to fix the number of directors between
five and nine. The number of directors is currently fixed at five.
ROGER A. BURLAGE has served as Chairman and Chief Executive Officer of The
Harvey Entertainment Company since April 1999. Until he joined the Company, Mr.
Burlage was President of Burlage/Edell Productions Inc., a film and television
production company which he formed in February 1998 with his partner Elaine
Hastings-Edell, and Chief Executive Officer of Heartland Entertainment, Inc., an
independent film production entity. From March 1996 until July 1997, he served
as Chairman and Chief Executive Officer of LIVE Entertainment Inc. ("LIVE"), a
diversified independent entertainment company, after serving as President and
Chief Executive Officer since joining LIVE in January 1994. Mr. Burlage became a
Director of LIVE in December 1994, and after LIVE's sale to a private investor
group in July 1997 remained with LIVE until February 1998 on a significantly
full time basis as a transitional Chairman. From 1989
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<PAGE> 53
until joining LIVE, Mr. Burlage served as President and Chief Executive Officer
of Trimark Holdings, Inc. ("Trimark"), an independent entertainment entity, and
most recently was a member of Trimark's Board of Directors from April 1998 until
April 1999. Prior to joining Trimark, Mr. Burlage served in several other
capacities in the entertainment industry, including executive positions with New
World Pictures, Ltd. and with AVCO Corporation and AVCO Embassy Pictures.
ERIC S. MISCHEL has served as President and Chief Operating Officer of the
Company since April 1999. From October 1997 until April 1999 he served as
President of The Mischel Company, an entertainment company specializing in the
production of feature films, the representation of completed films in the
acquisition marketplace, and the advising of foreign-based companies on the
acquisitions and sales of feature films and animated product throughout the
world. Prior to establishing The Mischel Company, from May 1996 until August
1997, Mr. Mischel was a Senior Vice President of Acquisitions and Production at
LIVE, after serving since September 1994 as Vice President of LIVE's Family Home
Entertainment division. From August 1993 until July 1994 Mr. Mischel was a
Lecturer of Law at the University of California at Los Angeles' School of Law.
RONALD B. CUSHEY has served as Executive Vice President, Chief Financial
Officer and Secretary of the Company since April 1999. From January 1998 until
joining the Company, Mr. Cushey served as a Financial Consultant to several
entertainment entities, primarily working with Mr. Burlage to establish
Heartland Entertainment, Inc. and to establish a capital and management infusion
into the Company. Mr. Cushey was the Executive Vice President and Chief
Financial Officer of LIVE from January 1995 until December 1997, and served as a
Director of LIVE from November 1993 until July 1997. From April 1992 until
December 1994, Mr. Cushey was an Executive Consultant for Pioneer North America,
overseeing that company's entertainment related investments and activities. Mr.
Cushey served as Executive Vice President and Chief Financial Officer of Nelson
Holdings International Ltd. and Nelson Entertainment Group (collectively
"Nelson") from November 1987 until June 1991, after serving in various financial
management positions since joining Nelson as Controller in October 1995. Mr.
Cushey is a CPA in the state of California, beginning his career as a public
accountant with PricewaterhouseCoopers LLP from 1978 until 1981 and then joining
Ernst & Young LLP from 1981 until 1985.
GLENN R. WEISBERGER has been the Senior Vice President and General Counsel
of the Company since October 1999. Prior to joining the Company, Mr. Weisberger
worked for Universal Studios, Inc. from 1991 in various positions, most recently
as Vice President of Business and Legal Affairs for the Universal Television and
Networks Group. From 1994 to 1991 Mr. Weisberger was a partner in the law firm
of Dubin & Weisberger. Mr. Weisberger was admitted to the California bar in 1984
and is a CPA in the state of California.
MICHAEL R. BURNS has been a director of the Company since April 1999. In
March 2000, Mr. Burns was named Vice Chairman of Lions Gate Entertainment, an
independent entertainment production and distribution company. Mr. Burns served
as Managing Director and Head of Prudential Securities Incorporated Los Angeles'
Investment Banking office from 1991 until 2000, specializing in the media and
entertainment fields. Prior to joining Prudential Securities,
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<PAGE> 54
Mr. Burns spent nine years at Shearson Lehman Brothers Inc. (now Salomon Smith
Barney). Mr. Burns is the Co-Chairman and Co-Founder of the Hollywood Stock
Exchange, an Internet entertainment site, and is the Chairman of Ignite
Entertainment, a Los Angeles based entertainment content company. A graduate of
Arizona State University, Mr. Burns received his M.B.A. from The John E.
Anderson Graduate School of Management at the University of California at Los
Angeles.
MICHAEL S. DOHERTY has been a Director of the Company since December 1997.
Since November 1999, Mr. Doherty has been President of Doherty, Scotti &
Company, LLC, a firm specializing in venture capital and private equity funding
for development stage companies. From February 1999 to October 1999, Mr. Doherty
served as Senior Managing Director of Spencer Trask Securities Incorporated. Mr.
Doherty served as Managing Director and Director of Privae Equity at Cruttenden
Roth Incorporated from October 1996 to February 1999. From 1992 to October 1999,
he served as Vice President of Arnhold and S. Bleichroeder Inc, a New York-based
investment banking, brokerage and asset management firm. Mr. Doherty also serves
on the Boards of several public and private companies, including ACLN Ltd., a
marine transport company, IPAXS, a voice-over Internet Provider and Internet
telephony company, Xycom, Inc., an industrial automation company and Zyan
Communications, Inc., a provider of digital subscriber line services.
MEYER GOTTLIEB has been a Director of the Company since June 1999. Mr.
Gottlieb co-founded Samuel Goldwyn Films in 1998 and is its President and Chief
Operating Officer. Mr. Gottlieb became the Chief Operating Officer of The Samuel
Goldwyn Company in 1979 and its President in 1987, and assisted Mr. Goldwyn in
the founding of the company. Prior to its sale to Metromedia International
Group, Inc. in 1996 and its subsequent sale to Metro Goldwyn Mayer in 1997, The
Samuel Goldwyn Company was an independent, diversified entertainment company
engaged in the production and worldwide distribution of motion pictures and
television programming and in theatrical exhibition. From 1976 to 1978, Mr.
Gottlieb was associated with Mr. Goldwyn in various executive positions in the
motion picture production and distribution organization that was the predecessor
to The Samuel Goldwyn Company. Prior to 1976, Mr. Gottlieb was a senior manager
with PricewaterhouseCoopers LLP. Mr. Gottlieb is also President of his
wholly-owned feature film and television production services company, Night
Life, Inc.
GARY M. GRAY has been a Director of the Company since 1991 and served as
the Chairman of the Board from March 1998 to April 1999. Mr. Gray is a Managing
Director of Milestone Capital, Inc., a firm based in Houston, Texas which, in
concert with affiliated foreign entities, invests in or acquires control of
private companies with operations in the United States. Prior to locating in
Houston in 1997, from 1994 to 1997, Mr. Gray practiced law and provided business
consulting services to foreign clients from offices based in Oklahoma and, from
1991 to 1993, practiced law in New York. Prior to attending Harvard Law School
from 1987 to 1990, Mr. Gray was involved in various investment and banking
activities, principally in Oklahoma.
The Company has granted observer rights to The Kushner-Locke Company
("Kushner-Locke") which has the right to designate Donald Kushner,
Kushner-Locke's Co-Chairman of the Board, Co-Chief Executive Officer and
Secretary (or in his absence, Peter Locke, Kushner-Locke's Co-Chairman of the
Board and Co-Chief Executive Officer) to attend
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<PAGE> 55
and participate in all Board meetings as an observer without the right to vote
on any action taken by the Board. Such attendee shall be compensated in the same
amount of cash, options or other items and at the same times as the other
non-executive members of the Board; provided that Messrs. Kushner and Locke
shall be entitled to receive collectively only such amount as one Board member
would so be entitled to receive. See "Executive Compensation -- Director
Compensation." At April 1, 2000, Kushner-Locke owns 58,659 shares of the
Company's Series A Preferred Stock, including 3,659 shares in accrued dividends.
The Company owns 468,883 shares of common stock of Kushner-Locke. See "Security
Ownership of Certain Beneficial Owners and Management."
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission ("SEC") and the National Association of Securities
Dealers, Inc. initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Officers, directors
and greater than ten-percent shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and certain other representations that no other
reports were required, during the year ended December 31, 1999, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with.
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<PAGE> 56
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION AND OTHER REMUNERATION
The following table and related footnotes show the compensation paid during
the fiscal years ended December 31, 1999, 1998 and 1997 to the Company's Chief
Executive Officer, and its three other most highly compensated officers for
services rendered during such period to the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------
Annual Compensation Common Stock
Name And Principal ------------------------ Underlying All Other
Position Year Salary Bonus Options Compensation
------------------ ---- ------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Roger A. Burlage (1) 1999 $ 342,949 N/A 589,309 $ 2,500(2)
Chairman and Chief
Executive Officer
Eric S. Mischel (1) 1999 $ 171,474 N/A 260,000 $ 59,000(3)
President and Chief
Operating Officer
Ronald B. Cushey (6) 1999 $ 102,885 N/A 120,000 $ 10,000(4)
Executive Vice
President and Chief
Financial Officer
Anthony J. Scotti (1) 1998 (5) (5) 271,600 N/A
(Former) Interim Chief 1997 N/A N/A N/A N/A
Executive Officer and
(Former) Interim
President
Michael S. Hope (6) 1998 (7) (7) 67,900 N/A
(Former) Interim Chief 1997 N/A N/A N/A N/A
Financial Officer and
(Former) Interim
Secretary
Jeffrey A. Montgomery (8) 1998 $ 59,150 N/A N/A $3,012,379(9)
(Former) Chief 1997 $ 295,000 $275,000 50,000 $ 82,333(9)
Executive Officer,
(Former) President and
(Former) Chairman
</TABLE>
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<PAGE> 57
<TABLE>
<S> <C> <C> <C> <C> <C>
Charles Day 1999 $ 181,250 N/A N/A $ 15,922(11)
(Former) Senior Vice 1998 $ 147,255 N/A N/A $ 47,878(11)
President of Consumer 1997 $ 130,000 $ 50,000(10) 5,000 $ 80,270(11)
Products
Don Gold (12) 1998 $ 118,750 $ 20,000(13) 20,000 $ 6,650(14)
(Former) Senior 1997 N/A N/A N/A N/A
Vice President -
Harvey Home
Entertainment
</TABLE>
- ---------------
(1) On April 26, 1999 Mr. Scotti resigned as Interim Chief Executive Officer
and Interim President and Roger A. Burlage was appointed Chief Executive
Officer and shortly thereafter Eric S. Mischel was appointed President and
Chief Operating Officer.
(2) Represents benefits paid under Mr. Burlage's employment contract related to
country club dues.
(3) Represents amounts paid to The Mischel Company, of which Mr. Mischel was
previously President, related to the Company's acquisition of all right,
title and interest in certain film projects owned by The Mischel Company.
(4) Represents a consulting fee paid to Mr. Cushey for services related to the
1999 Refinancing prior to his employment by the Company.
(5) Mr. Scotti did not receive any salary directly from the Company. Instead,
Mr. Scotti served in his interim management positions pursuant to the
Company's management services agreement with Global Media Management, LLC.
See "Certain Relationships and Related Transactions--Global Media
Management Group, LLC".
(6) On April 26, 1999 Mr. Hope resigned as Interim Chief Financial Officer and
Interim Secretary. Shortly thereafter Ronald B. Cushey was appointed
Executive Vice President, Chief Financial Officer and Secretary.
(7) Mr. Hope did not receive any salary directly from the Company. Instead, Mr.
Hope served in his interim management positions pursuant to the Company's
management services agreement with Global Media Management, LLC. See
"Certain Relationships and Related Transactions-- Global Media Management
Group, LLC".
(8) Effective July 10, 1989, the Company entered into an employment agreement
with Mr. Montgomery, which agreement was amended in March 1993 and April
1995. On March 20, 1998, the Company's Board of Directors voted not to
renew the agreement with Mr. Montgomery. The agreement expired on April 17,
1998. Mr. Montgomery is no longer an officer of the Company.
(9) Represents net proceeds from the exercise of stock options, sums advanced
under the Company's defined contribution plan, which vest over a period of
five years, an unaccountable business expense allowance, benefits under
automobile and athletic club plans, and in 1995 the value of a whole life
insurance policy transferred to Mr. Montgomery in connection with his
employment agreement.
(10) Represents a bonus in connection with the divisional profit margin as
negotiated in Mr. Day's
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<PAGE> 58
employment agreement.
(11) Represents net proceeds from the exercise of stock options and benefits
under automobile, living and moving allowance plans.
(12) Mr. Gold's employment with the Company terminated at the end of February
1999.
(13) Represents a signing bonus.
(14) Represents benefits under an automobile allowance plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table and related footnotes set forth the number of
securities underlying options granted in the last fiscal year and held by each
person who served as the Company's Chief Executive Officer and its three other
most highly compensated officers and the value thereof.
<TABLE>
<CAPTION>
Number of
Securities Percent of Total
Underlying Options Granted to Exercise or
Options Employees in Base Price
Name Granted Fiscal Year ($/Share) Expiration Date
- ---- ------- ----------------- --------- ---------------
<S> <C> <C> <C> <C>
Roger A. Burlage................... 489,309 31% $9.00-$12.00 4/26/05-4/26/07
100,000 6% $6.75 10/12/09
Eric S. Mischel.................... 210,000 13% $9.00-$12.00 4/26/05-4/26/07
50,000 3% $6.75 10/12/09
Ronald B. Cushey................... 80,000 5% $9.00-$12.00 4/26/05-4/26/07
40,000 3% $6.75 10/12/09
Charles Day........................ 0 N/A N/A N/A
</TABLE>
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<PAGE> 59
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of Unexercised
Underlying In-the-Money Options at
Shares Unexercised 12/31/99 (1)
Acquired on Value Options at Exercisable (#)/
Name Exercise (#) Realized ($) 12/31/99 Unexercisable (#)
---- ------------ ------------ ----------- -----------------------
<S> <C> <C> <C> <C>
Roger A. Burlage.......... 0 N/A 589,309 0 / 0
Eric S. Mischel........... 0 N/A 260,000 0 / 0
Ronald B. Cushey.......... 0 N/A 120,000 0 / 0
Charles Day............... 0 N/A 12,500 0 / 0
</TABLE>
- --------------
(1) The Common Stock closed on The Nasdaq Stock Market, Inc. on December 31,
1999 at $3.813 per share.
DIRECTOR COMPENSATION
Directors of the Company who are neither employees of the Company nor of
the Company's affiliates receive $20,000 in cash each year for serving on the
Board. Such Directors also receive 10,000 stock options under the Company's 1997
Stock Option Plan on May 18 each year. In addition to such fees and options, as
compensation for services as Chairman of the Board, in April 1998 Mr. Gray
received a one-time grant of a fully-vested option under the Company's 1997
Stock Option Plan to purchase 50,000 shares of Common Stock at an exercise price
of $12.6875 per share (the closing price of a share of Common Stock on The
Nasdaq Stock Market's National Market on the grant date).
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
The Company entered into an employment agreement with Roger A. Burlage,
dated April 7, 1999 which provides that he will serve as the Company's Chairman
and Chief Executive for a term of four years. Mr. Burlage is entitled to an
annual salary of $500,000, with minimum annual increases of 7.5%. Mr. Burlage is
also eligible to receive a discretionary bonus as determined by the Board. As
part of the agreement, Mr. Burlage was granted warrants to purchase 400,000
shares of the Company's Common Stock at exercise prices ranging from $9.00 to
$12.00 per share, and may receive up to an additional 200,000 warrants at his
election under certain circumstances within one year of the effective date of
his employment agreement. One half of such warrants vested upon Mr. Burlage
signing the agreement and the balance vest over a three-year period, with 25%
vesting on the first anniversary, and 12.5% vesting on each of the second and
third anniversaries of the agreement. Mr. Burlage is also entitled to be
reimbursed for up to $7,500 per year for country club dues, and to receive all
other benefits generally available to the Company's other officers, including
participation in stock incentive, retirement, medical, dental
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<PAGE> 60
and accidental benefit plans, life and disability insurance and vacation. If Mr.
Burlage's position is eliminated as a result of a merger or consolidation of the
Company, Mr. Burlage will be entitled to terminate his employment withing three
months of such event and to receive all salary, benefits and emoluments in
effect as such date through the remainder of his four-year term.
The Company entered into an employment agreement with Eric S. Mischel,
dated April 26, 1999, which provides that he will serve as the Company's
President and Chief Operating Officer for a term of four years. Mr. Mischel is
entitled to an annual salary of $250,000 with minimum annual increases of
7-1/2%, and is also entitled to receive an annual discretionary bonus as
determined by the Board. As part of the agreement, Mr. Mischel was granted
warrants to purchase 210,000 shares of the Company's Common Stock at exercise
prices ranging from $9.00 to $12.00 per share, with one-half of such warrants
vesting on signing of the agreement, 25% vesting on the first anniversary of the
agreement and 12.5% vesting on each of the second and third anniversaries of the
agreement. The Company agreed to obtain certain film projects previously held by
Mr. Mischel in The Mischel Company, of which he was president prior to joining
the Company. Mr. Mischel was paid an amount of $65,000 by the Company for the
transfer of all title, rights and interest in these projects. He is entitled to
receive a profit participation of 60% on certain of the film projects
transferred to the Company, and if Mr. Mischel's employment is terminated other
than for cause, or in certain circumstances of a change in ownership control (as
defined in the agreement), he will be entitled to be paid the remaining balance
of his salary, in accordance with its terms until he shall become employed, in
which case in certain circumstances he shall be paid the difference (if less)
between his new salary and his compensation under his employment agreement with
the Company. Mr. Mischel is also entitled to receive all other benefits
generally available to the Company's other officers, including participation in
stock incentive, retirement, medical, dental and accidental benefit plans, life
and disability insurance and vacation.
The Company entered into an employment agreement with Ronald B. Cushey,
dated April 26, 1999, which provides that he will serve as the Company's
Executive Vice President and Chief Financial Officer and Corporate Secretary for
a term of three years. Mr. Cushey is entitled to annual salaries of $150,000,
$165,000 and $180,000, in the first, second and third years of the term,
respectively, and is also entitled to receive an annual discretionary bonus as
determined by the Board. Mr. Cushey's annual salary may be increased to $200,000
in certain circumstances if the Company's annual revenues exceed $20,000,000 or
if responsibilities related to additional corporate activity is obtained. As
part of the agreement, Mr. Cushey was granted warrants to purchase 80,000 shares
of the Company's Common Stock at exercise prices ranging from $9.00 to $12.00
per share, with one-half of such warrants vesting on signing of the agreement,
25% vesting on the first anniversary of the agreement and 12.5% vesting on each
of the second and third anniversaries of the agreement. If Mr. Cushey's
employment is terminated other than for cause, or in certain circumstances of a
change in ownership control (as defined in the agreement), he will be entitled
to be paid the remaining balance of his salary, in accordance with its terms
until he shall become employed, in which case in certain circumstances he shall
be paid the difference (if less) between his new salary and his compensation
under his employment agreement with the Company. Mr. Cushey is also entitled to
receive all other benefits generally available to the Company's other officers,
including participation in stock incentive, retirement, medical, dental and
accidental benefit plans, life and disability insurance and vacation.
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<PAGE> 61
On October 1, 1999, the Company entered into an employment agreement with
Glenn R. Weisberger, which provides that he will serve as the Company's Senior
Vice President and General Counsel for a term of three years. Mr. Weisberger is
entitled to annual salaries of $145,000, $155,000 and $165,000, in the first,
second and third years of the term, respectively, and is also entitled to
receive an annual discretionary bonus as determined by the Board. As part of the
agreement, Mr. Weisberger was granted warrants to purchase 40,000 shares of the
Company's Common Stock at exercise prices ranging from $9.00 to $12.00 per
share, with one-half of such warrants vesting on signing of the agreement, 25%
vesting on the first anniversary of the agreement and 12.5% vesting on each of
the second and third anniversaries of the agreement. If Mr. Weisberger's
employment is terminated other than for cause, or in certain circumstances of a
change in ownership control (as defined in the agreement), he will be entitled
to be paid the remaining balance of his salary, in accordance with its terms
until he shall become employed, in which case in certain circumstances he shall
be paid the difference (if less) between his new salary and his compensation
under his employment agreement with the Company. Mr. Weisberger is also entitled
to receive all other benefits generally available to the Company's other
officers, including participation in stock incentive, retirement, medical,
dental and accidental benefit plans, life and disability insurance and vacation.
The Company entered into an employment agreement with Charles Day,
effective October 16, 1996, as amended on December 19, 1997, which provides that
Mr. Day served as the Company's Senior Vice President of Consumer Products. In
September 1998, the agreement was extended through March 31, 2000 and it was not
renewed further upon its expiration. The agreement was amended on May 17, 1999
to increase Mr. Day's annual salary from $139,000 to $149,000 effective that
date. In addition to his annual salary, Mr. Day was entitled to certain other
benefits including a monthly living allowance of $3,000 during the term of his
employment agreement, insurance benefits, four weeks of paid vacation, use of an
automobile, reimbursement of automobile insurance expenses, reimbursement of
moving expenses at the beginning of the term and reimbursement of attorney's
fees incurred in connection with the negotiation of his employment agreement.
Mr. Day was also entitled to receive an annual bonus equal to a percentage of
pre-tax net profits from the Company's merchandising activities under Mr. Day's
supervision. In addition, Mr. Day received an option to purchase 15,000 shares
at $11.00 per share (adjusted to $7.25 per share in December 1996) vesting over
three years and an option to purchase 5,000 shares at $11.00 per share vesting
over two years. Mr. Day's employment agreement also provided that the Company
would indemnify Mr. Day for any loss he incurs by virtue of his position as an
employee of the Company.
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<PAGE> 62
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2000, certain information
regarding the beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock or Series A Preferred Stock, (ii) each of the
Company's directors, (iii) each person who served as the chief executive officer
of the Company during fiscal year 1999, (iv) the other executive officers of the
Company during fiscal year 1999, and (v) the Company's current directors and
executive officers as a group:
<TABLE>
<CAPTION>
Number of Shares
Name and Address of And Nature of
Beneficial Owners Title of Class (1) Beneficial Ownership (2) Percent of Class (3)
- ----------------------- ------------------ ------------------------ --------------------
<S> <C> <C> <C>
AKAUSA Holdings Limited (4)...... Common Stock 1,075,000 25.68%
Series A Preferred Stock -- --
Total Voting Power -- 14.95%
Ahmad Bin Khalid Al- Common Stock 1,075,000 25.68%
Saud (4)........................ Series A Preferred Stock -- --
Total Voting Power -- 14.95%
Roger A. Burlage (5)............ Common Stock 412,275 8.98%
Series A Preferred Stock 5,333 2.63%
Total Voting Power -- 6.47%
Anthony J. Scotti (6)........... Common Stock 271,600 6.09%
Series A Preferred Stock -- --
Total Voting Power -- 3.64%
Michael S. Hope (7)............. Common Stock 67,900 1.60%
Series A Preferred Stock -- --
Total Voting Power -- 0.94%
Eric S. Mischel (8)............. Common Stock 164,794 3.74%
Series A Preferred Stock 800 0.39%
Total Voting Power -- 2.40%
Ronald B. Cushey (9)....... Common Stock 62,980 1.39%
Series A Preferred Stock 853 0.42%
Total Voting Power -- 1.04%
Glenn R. Weisberger (10)........ Common Stock 21,000 0.48%
Series A Preferred Stock -- --
Total Voting Power -- 0.29%
Michael R. Burns (11)........... Common Stock 515,308 10.65%
Series A Preferred Stock -- --
Total Voting Power -- 6.70%
Michael S. Doherty (12)......... Common Stock 70,000 1.64%
Series A Preferred Stock -- --
Total Voting Power -- 0.96%
</TABLE>
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<PAGE> 63
<TABLE>
<S> <C> <C> <C>
Meyer Gottlieb (13)............. Common Stock 14,000 0.24%
Series A Preferred Stock -- --
Total Voting Power -- 0.19%
Gary M. Gray (14)............... Common Stock 117,500 2.73%
Series A Preferred Stock -- --
Total Voting Power -- 1.61%
Charles Day (15)................ Common Stock 12,500 0.30%
Series A Preferred Stock -- --
Total Voting Power -- 0.17%
Don Gold (16)................... Common Stock 1,000 0.02%
Series A Preferred Stock -- --
Total Voting Power -- 0.01%
Paul Guez (17).................. Common Stock 352,941 7.77%
Series A Preferred Stock 52,802 26.06%
Total Voting Power -- 15.05%
Universal Studios, Inc. (18).... Common Stock 374,500 8.94%
Series A Preferred Stock -- --
Total Voting Power -- 5.21%
Lord, Abbett & Co. (19)......... Common Stock 152,200 3.64%
Series A Preferred Stock -- --
Total Voting Power -- 2.12%
Dimension Fund Advisors Inc. Common Stock 296,900 7.09%
(20)............................ Series A Preferred Stock -- --
Total Voting Power -- 4.13%
The Kushner-Locke Company Common Stock -- --
(21).............................. Series A Preferred Stock 58,659 28.95%
Total Voting Power -- 12.09%
All Officers and Directors as a Commonr Stock 1,377,857 24.25%
group (8 persons)(22)......... Series A Preferred Stock 6,986 3.45%
Total Voting Power -- 17.36%
</TABLE>
- ---------------
(1) Each share of Series A Preferred Stock is entitled to a number of votes
equal to the number of shares of Common Stock into which it is convertible.
The Series A Preferred Stock voting as a separate class is entitled to
elect two of the Company's five directors and is otherwise entitled to vote
on all matters (including the election of remaining directors) together
with holders of Common Stock voting as a class.
(2) Shares underlying options or warrants to purchase Common Stock exercisable
within 60 days are deemed to be outstanding for purposes of calculating the
number of shares owned by the holders of such options or warrants.
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(3) The percent of Common Stock owned is calculated using the number of shares
of Common Stock beneficially owned as the numerator, and the sum of (A) the
total number of shares of Common Stock outstanding on March 31, 2000
(4,186,941) and (B) the total number of shares issuable upon conversion of
the beneficial owners convertible securities, as the denominator. The
percent of Series A Preferred Stock owned is calculated using the number of
shares of Series A Preferred Stock beneficially owned as the numerator and
the total number of shares of Series A Preferred Stock and accrued
dividends outstanding on March 31, 2000 (202,636) as the denominator. The
percent of Total Voting Power is calculated using the sum of (A) the number
of shares of Common Stock beneficially owned and (B) the number of shares
of Common Stock issuable upon conversion of the beneficial owner's Series A
Preferred Stock as the numerator, and the sum of (A) the total number of
shares of Common Stock outstanding (4,186,941), (B) the total number of
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock (3,002,022) at the initial conversion price of $6.75 per share of
Common Stock and (C) the total number of shares issuable upon conversion of
the beneficial owners convertible securities, as the denominator.
(4) Includes shares held by AKAUSA and Mr. Al-Saud. The United States mailing
address of AKAUSA and the United States address of Mr. Ahmad Bin Khalid
Al-Saud is 3535 N. W. 58th Street, Suite 950, Oklahoma City, Oklahoma
73112. AKAUSA is a Cayman Islands corporation, 100% of whose stock is owned
by Mr. Ahmad Bin Khalid Al-Saud, a citizen and resident of Saudi Arabia.
AKAUSA owns 475,000 shares; Mr. Al-Saud owns 600,000 shares directly.
(5) The address of Mr. Burlage is c/o the Company at 11835 W. Olympic Blvd.,
Suite 550, Los Angeles, California 90064. Includes warrants to purchase
402,275 shares of Common Stock at prices ranging from $9.00 to $12.00.
(6) The address of Mr. Scotti is c/o Doherty, Scotti & Company, LLC, 1999
Avenue of the Stars, 17th Floor, Los Angeles, California 90067. Mr. Scotti
resigned as Interim Chief Executive Officer and Interim President on April
26, 1999. Includes currently exercisable warrants to purchase 155,200
shares of Common Stock at an exercise price of $12.75 per share, vested
options to purchase 77,000 shares of Common Stock at an exercise price of
$9.63 per share and vested options to purchase 38,800 shares of Common
Stock at an exercise price of $12.69 per share.
(7) The address of Mr. Hope is 1079 Amalfi Drive, Pacific Palisades, California
90272. Mr. Hope resigned as Interim Chief Financial Officer and Interim
Secretary on April 26, 1999. Includes currently exercisable warrants to
purchase 38,800 shares of Common Stock at an exercise price of $12.75 per
share, vested options to purchase 19,400 shares of Common Stock at an
exercise price of $9.63 per share and vested options to purchase 9,700
shares of Common Stock at an exercise price of $12.67 per share.
(8) The address of Mr. Mischel is c/o the Company at 11835 W. Olympic Blvd.,
Suite 550, Los Angeles, California 90064. Includes warrants to purchase
162,794 shares of Common Stock at prices ranging from $9.00 to $12.00.
(9) The address of Mr. Cushey is c/o the Company at 11835 W. Olympic Blvd.,
Suite 550, Los Angeles, California 90064. Includes warrants to purchase
58,980 shares of Common Stock at prices ranging from $9.00 to $12.00.
(10) The address of Mr. Weisberger is c/o the Company at 11835 W. Olympic Blvd.,
Suite 550, Los Angeles, California 90064. Includes warrants to purchase
20,000 shares of Common Stock at prices ranging from $9.00 to $12.00.
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(11) The address of Mr. Burns is c/o the Company at 11835 W. Olympic Blvd.,
Suite 550, Los Angeles, California 90064. Includes options to purchase
10,000 shares which became exercisable in May 1999 and warrants to purchase
489,308 shares of Common Stock at prices ranging from $9.00 to $12.00.
(12) The address of Mr. Doherty is c/o Doherty, Scotti & Company, LLC, 1999
Avenue of the Stars, 17th Floor, Los Angeles, California 90067. Includes a
warrant to purchase 50,000 shares which became exercisable in January 1997
as to 25,000 shares and exercisable in March 1998 as to 25,000 shares.
Includes options to purchase 10,000 shares which became exercisable in May
1998 and 10,000 shares which became exercisable in May 1999.
(13) The address of Mr. Gottlieb is c/o the Company at 11835 W. Olympic Blvd.,
Suite 550, Los Angeles, California 90064. Includes options to purchase
10,000 shares of Common Stock which became exercisable in June 1999.
(14) The address of Mr. Gray is c/o Milestone Capital Inc., 1800 West Loop
South, Suite 1075, Houston, Texas 77027. Includes options to purchase 5,000
shares which became exercisable in May 1994, 2,500 shares which became
exercisable in each of May 1995 and 1996, 7,500 shares which became
exercisable in March 1996, 10,000 shares which became exercisable in May
1997 and May 1998, 20,000 shares which became exercisable in June 1997,
50,000 shares which became exercisable in April 1998 and 10,000 shares
which became exercisable in May 1999.
(15) The address of Mr. Day is c/o the Company at 11835 W. Olympic Blvd., Suite
550, Los Angeles, California 90064. Includes currently exercisable options
to purchase 12,500 shares of Common Stock.
(16) The address of Mr. Gold is c/o Itsy Bitsy Entertainment Company, 127 North
Robertson, Los Angeles, California 90048.
(17) The address of Mr. Guez is c/o Azteca Production International, Inc., 5804
Slauson Avenue, City of Commerce, California. Includes warrants to purchase
352,941 shares of Common Stock at prices ranging from $9.00 to $12.00.
(18) The address of Universal Studios, Inc. is 100 Universal City Plaza,
Universal City, California 91608. Universal Studios is controlled by the
Seagram Company Ltd., a Canadian Company. The address of the Seagram
Company Ltd. is 375 Park Avenue, New York, New York 10152.
(19) The address of Lord, Abbett & Co. is 90 Hudson Street, Jersey City, New
Jersey 07302. The number of shares beneficially owned is based on a
Schedule 13 G filed on January 19, 2000.
(20) The address of Dimension Fund Advisors is 1299 Ocean Avenue, 11th Floor,
Santa Monica, California 90401. The number of shares beneficially owned is
based on a Schedule 13 G filed on February 11, 2000.
(21) The address of The Kushner-Locke Company is 11601 Wilshire Boulevard, 21st
Floor, Los Angeles, California 95205.
(22) Includes the beneficial ownership of Messrs. Burlage, Burns, Gray, Doherty,
Gottlieb, Mischel, Cushey and Weisberger.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into certain relationships and transactions with
related parties. Such relationships and transactions include, without
limitation, the following:
UNIVERSAL STUDIOS
In December 1990, the Company sold Universal Studios a 20% equity interest
in the Company for $3,000,000 and entered into a Registration Agreement and
Memorandum of Distribution Agreement with Universal Studios. In September 1994,
the Company and Universal Studios entered into the television animation
agreement described below. In May 1997, the Company and Universal Studios
amended their relationship as described below.
Universal Studios Distribution Agreement And Animation Agreement/May 1997
Amendment/ Related Agreements. The Company and Universal Studios entered into a
Memorandum of Distribution Agreement dated as of December 7, 1990, as amended by
letters dated April 22, 1993 and September 28, 1993 (the "Universal Studios
Distribution Agreement"), pursuant to which Universal Studios was granted
certain limited rights, with no corresponding obligation, to exploit the
Company's characters and products in (i) theatrical motion pictures, (ii)
television, (iii) home video, (iv) merchandising, and (v) theme parks, and to
distribute new pictures in all media. Under the Universal Studios Distribution
Agreement, the Company retained the right to create and distribute existing and
new television, home video and new media products, subject to Universal Studios'
First Negotiation ("FN") rights and First Negotiation/First Refusal ("FNFR")
rights, and also retained certain limited rights to exploit the Company's
characters in theme parks.
In November 1999, the Company and Universal Studios entered into an Amended
and Restated Memorandum of Distribution Agreement which included alterations to
the obligations and rights of the parties with respect to merchandising (the
"Merchandising Amendment") in the form of a letter agreement executed
concurrently (collectively, the "Universal Settlement Agreement"). In summary,
pursuant to the Universal Settlement Agreement, the Company reacquired from
Universal Studios (i) control of all merchandising rights with respect to the
Company's characters (except those related to a Casper or Casper Character
motion pictures produced and/or released by Universal Studios, as further
described below), (ii) FNFR rights and FN rights in all of the Company's
characters other than certain FNFR rights and FN rights relating to Casper and
Casper Characters and (iii) theme park rights other than those relating to
Casper and the Casper Characters. In exchange for the reacquisition of these
rights, the Company provided Universal Studios with an exclusive release window
for the first sequel to the first Casper movie (and potentially other sequels),
a FNFR right with respect to the first direct-to-video production featuring
Casper after the release of the first Casper sequel and the right to exploit
movie merchandising related to Casper and Casper Characters appearing in
permitted feature pictures which feature or refer in to the title to Casper or
Casper Characters during merchandising windows associated with such picture
(such windows are exclusive except that, during a window,
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the Company may enter into new licenses with a term beginning after the window
and such pre-existing licenses between the Company and third parties are not
affected by a window).
Theatrical Motion Pictures. Under the Universal Studios Distribution
Agreement, Universal Studios had the sole and exclusive right and license to
develop, produce and distribute theatrical motion pictures based on the Casper,
the Friendly Ghost character. In May 1995, a theatrical motion picture featuring
Casper, the Friendly Ghost was released. To date, the first Casper movie has
grossed approximately $307,000,000 at the box office (of which the Company was
entitled to receive only its contractual share). The Company is entitled to
certain fees, which have already been paid, plus a percentage of gross profits,
if any, derived after initial actual breakeven, and a percentage of the gross
proceeds from merchandising in connection with the Casper Movie, less a
distribution fee and certain costs. Upon commencement of principal photography
of the first Casper movie, Universal Studios became vested with all theatrical
sequel and theatrical remake rights to Casper.
Pursuant to the Universal Settlement Agreement, Universal retains the
exclusive right to initiate, develop and produce further Casper theatrical
features. The rights fees for the second and subsequent sequels, if produced,
will be negotiated in good faith, and subject to resolution by "baseball"
arbitration. The Company agreed to a theatrical preclusion period ("TPP") around
the theatrical release of the first Casper sequel during which time the Company
may not permit the initial release of any Casper filmed entertainment product.
Universal also has certain rights with respect to non-features and other
pictures in which Casper may make a guest appearance.
In May 1997, the Company entered into an agreement with Universal Studios
to produce and distribute a motion picture sequel to the first Casper movie to
be produced by Universal Pictures and Amblin Entertainment. The Company received
an advance for the sequel rights and, if a sequel is produced, is contractually
entitled to receive additional advances against a percentage of gross receipts
from all sources of exploitation of the motion picture. As part of the Company's
agreement with Universal Studios, the Company was also paid a non-refundable
advance against the Company's share of its profit participation from the first
Casper movie.
On February 16, 1999, Universal Studios advised the Company that neither
Universal Studios nor Amblin Entertainment had approved a script or commenced
pre-production on a Casper sequel. Universal Studios indicated that script
approval was imminent and that it would advise the Company when script approval
was received and would formally request at that time an extension of the
February 15, 1999 initial notice date. To date, the Company has not received any
request regarding the February 15, 1999 initial notice date.
Although Universal Studios' rights to develop and produce theatrical motion
pictures featuring the Company's characters (other than Casper) expired in
December 1995, it has retained a FN right with respect to new pictures in which
the name of one or more Casper Characters (other than Casper) is to appear in
the title of the picture or in which one or more Casper Characters (other than
Casper) are featured which it may exercise should the Company attempt to license
or transfer theatrical motion picture rights or such characters to third
parties. The FN right expires on the earlier of (i) December 7, 2000, or (ii)
the date upon which Universal Studios ceases to own at least five percent (5%)
of the outstanding capital stock of the Company.
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Television. Under the Universal Settlement Agreement, Universal Studios has
FNFR rights for the exploitation of new television product and domestic
distribution of the Company's existing animated film library of product
featuring Casper or having Casper's name in the title. The FNFR rights expire on
December 7, 2003, but if Universal Studios fails to give the Company appropriate
notice of an anticipated release of the first Casper sequel by June 15, 2000 or
fails to release the first Casper sequel by Labor Day 2001, the FNFR rights will
expire on December 7, 2000. With respect to Universal Studios' rights to the
library of product featuring Casper or having the Casper name in the title only,
the expiration date of such rights also will be shortened to December 7, 2000 if
the domestic box office projection for the first Casper sequel does not exceed
$100,000,000.
Under the Universal Settlement Agreement, Universal Studios also has FNFR
rights for the exploitation of new television product and domestic distribution
of the Company's existing animated film library of product featuring Casper
Characters (other than Casper) or having a Casper Character name (other than
Casper) in the title. The FNFR rights with respect to the Casper Characters
(other than Casper) expire on June 30, 2001, but if Universal Studios fails to
give the Company appropriate notice of an anticipated release of the first
Casper sequel by June 2000 or fails to release the first Casper sequel by Labor
Day 2000, the FNFR rights will expire on December 7, 2000.
On September 22, 1994, Universal Studios and the Company formed an
animation productions services organization ("PSO"), known as the
Universal/Harvey Animation Studios, for the purpose of developing and producing
television motion pictures based on the Harvey Classic Characters or other
characters. In 1996, the venture produced 26 30-minute episodes of "Casper" for
the Fox Kid's Television Network. The venture completed production of another 26
episodes which were delivered to Fox in 1997 and 1998. Fox did not order
additional episodes and lost the right to order additional ones. Universal
Studios was granted merchandising and publishing (except for comic books) agency
rights limited to the animated entertainment produced by the venture. The
venture will not produce any additional animation based on Casper. Under the May
1997 Amendment, if Universal initiates production of a filmed entertainment to
which a TPP does not apply, the Company is precluded from releasing new animated
television product featuring Casper or the Casper Characters for a limited
period of time. Pursuant to the PSO Agreement (as amended by the Term Sheet),
Universal Studios has animated television sequel rights to any Casper Character
starring in television motion pictures produced under the PSO Agreement for a
period of 3 years from the completion of production of the last television
motion picture featuring such character. The PSO Agreement otherwise restricts
the Company's right to produce animated television sequels.
Home Video. Under the Universal Studios Distribution Agreement, Universal
Studios held certain FNFR rights with respect to the Company's worldwide
licensing of (i) home video rights in the Company's library existing on the date
of the Universal Studios Distribution Agreement, (ii) new television products
(subject to the Company's retaining the right under certain circumstances to
transfer home video rights in a new television product to a third party
concurrent with the transfer of television rights), and (iii) characters and
products which the Company intended to exploit initially in the home video
market. Pursuant to the Universal Settlement
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Agreement, Universal Studios released all such rights except a FNFR right to
produce and release the first feature length Casper direct-to-video after the
next Casper theatrical release. This right expires in December 2000.
In 1992, Universal Studios and the Company reached an agreement in the home
video market pursuant to which Universal Studios paid the Company an advance,
recoupable against the Company's royalty, for the right to package and
distribute one-half hour videos made from the Company's Classic Film Library.
Pursuant to the May 1997 Amendment, the Company repurchased these rights from
Universal.
In 1999 the Company commenced negotiations with Universal Studios relating
to an agreement for the distribution of certain of its Harveytoons episodes in
the domestic home video market, plus the release of certain other projects to be
produced for the domestic direct-to-video market. The agreement has not yet been
completed, but Universal Studios in 1999 released two of the Company's
Harveytoons episodes in the domestic video market and expects to release the new
Casper direct-to-video animated feature in the domestic market in the fall of
2000.
Merchandising. Pursuant to the Universal Studios Distribution Agreement,
Universal Studios had the right to act as the exclusive worldwide licensing
agent of the Company with respect to all merchandising exploitation of the
Company's characters. Most of these rights expired in April 1996. Pursuant to
the Universal Settlement Agreement, Universal Studios' only remaining
merchandising rights are certain rights to exploit movie merchandising related
to Casper and Casper Characters appearing in permitted feature pictures which
feature or refer in the title to Casper or Casper Characters during
merchandising windows associated with such pictures (such windows are exclusive
except that, during a window, the Company may enter into new licenses with a
term beginning after the window ends and pre-existing licenses between the
Company and third parties are not affected by a window).
Theme Parks. Under the Universal Settlement Agreement, Universal Studios
has the exclusive right to exploit Casper and the Casper Characters and products
in theme parks in the United States, provided, however, that in certain
circumstances the Company has limited rights to exploit Casper and the Casper
Characters and products in Harvey owned theme parks more than 150 miles away
from any Universal Studios' theme park. Harvey retains "special appearance"
rights for its characters in all locations outside California and Florida.
Additionally, if Universal Studios exploits Casper or the Casper Characters
and/or products in a major attraction in a theme park in the United Kingdom,
France and Japan, Universal Studios shall have exclusive theme park exploitation
rights in that country as long as the character or product is a principal
element in an attraction there; thereafter, Universal Studios shall have
non-exclusive rights. (Universal Studios is not currently exploiting Casper or
the Casper Characters in theme parks in the United Kingdom, France or Japan).
Universal Studios has non- exclusive rights to exploit Casper and the Casper
Characters and products in theme parks in the rest of the world. Prior to the
May 1997 Amendment, Universal Studios held these rights with respect to all of
the Company's characters. The Company is negotiating with Universal Studios with
respect to certain limited rights of the Company to use the Casper Characters to
stroll throughout theme parks in the United States.
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Security Interest. In order to secure Universal Studios' rights under the
Universal Studios Distribution Agreement, the Company granted to Universal
Studios security interests in the rights it acquired. After the May 1997
Amendment, this security interest continues with respect to the Casper
Characters only.
Lease. The Company entered into a short-term sublease with MCA Records (a
subsidiary of Universal Studios) on September 22, 1996 for 3,000 square feet of
space at its Santa Monica premises for a monthly rental of approximately $7,000
until October 1997 at which time it increased to $7,500 until September 1999.
The lease has been extended to October 2001 at a monthly lease rate of
approximately $12,000.
PRUDENTIAL SECURITIES INC.
On April 7, 1999 the Company entered into a Stock Purchase Agreement by and
among the Company and Michael R. Burns, Roger A. Burlage, Ken Slutsky and the
Kushner-Locke Company pursuant to which the Company issued and sold 170,000
shares of its Series A Preferred Stock and warrants to purchase up to 2,400,000
shares of the Company's Common Stock (the "1999 Refinancing"). In connection
with the 1999 Refinancing, Prudential Securities Inc. received fees of
approximately $450,000 for advisory services rendered. Michael R. Burns, a
Director of the Company, was a Managing Director of Prudential Securities Inc.
at the time of the transaction.
GLOBAL MEDIA MANAGEMENT GROUP, LLC
In March 1998, the Company entered into a management services agreement
(the "Management Agreement") with Global Media Management Group, LLC ("Global
Media"). Pursuant to the Management Agreement, the Company secured the
non-exclusive services of Anthony J. Scotti and Michael S. Hope, as the
Company's Interim Chief Executive Officer/Interim President and Interim Chief
Financial Officer/Interim Secretary, respectively, and Leonard Breijo, as the
head of the Company's business affairs. The Company agreed to pay Global Media a
fee of $75,000 per month for the services of Messrs. Scotti and Hope, and an
additional $10,000 per month for the services of Mr. Breijo.
In March 1998, in connection with their employment by the Company, the
Company granted Messrs. Scotti, Hope and Breijo five-year warrants to purchase,
in the aggregate, 200,000 shares of Common Stock. The warrants became
exercisable immediately and have an exercise price of $12.75 per share (the
closing price of a share of Common Stock on The Nasdaq Stock Market, Inc. on the
date the warrants were issued). In April 1998 the Company also granted Messrs.
Scotti, Hope and Breijo options under the Company's 1997 Stock Option Plan to
purchase, in the aggregate, 50,000 shares of Common Stock. The options became
exercisable immediately and have an exercise price of $12.6875 per share (the
closing price of a share of Common Stock on The Nasdaq Stock Market, Inc. on the
date the options were granted). Under the Management Agreement, the Company
agreed to indemnify Global Media against all losses except those occasioned by
Global Media's gross negligence or willful misconduct. The Management Agreement
had an initial term of six months. In July 1998, the Management Agreement was
extended for an additional six month term through December 23, 1998. At that
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time the Company granted to Messrs. Scotti, Hope and Breijo options under the
Company's 1997 Stock Option plan to purchase, in the aggregate 100,000 shares of
the Company's Common Stock. The options became exercisable immediately and have
an exercise price of $9.63 per share (the closing price of a share of Common
Stock on The Nasdaq Stock Market, Inc. on the date the options were granted).
From the expiration of the extension in December 1998 through April 1999,
Global Media provided services to the Company on a month-to-month basis on the
same terms and conditions as set forth in the Management Agreement, as extended.
In April 1999 Messrs. Scotti and Hope resigned from their Interim Management
positions.
REGISTRATION RIGHTS AGREEMENTS
The Company entered into a Registration Rights Agreement dated as of
December 7, 1990, as amended by letter dated as of April 22, 1993, with
Universal Studios and AKAUSA (the "Registration Agreement"). The Registration
Agreement provides that at any time after June 18, 1994, AKAUSA and/or Universal
Studios may request that the Company use its best efforts to register for sale
under the Securities Act their respective shares of the Common Stock. The
Registration Agreement also provides for a second demand registration and for
certain "piggy back" registration rights in the event the Company initiates
another registered stock offering under the Securities Act.
In October 1994, the Company sold 250,000 shares of Common Stock, AKAUSA
sold 200,000 shares of Common Stock and Mr. Montgomery sold 50,000 shares of
Common Stock in a private placement. Purchasers therein were granted
registration rights. The Company filed a registration statement on Form S-3 to
register the shares sold in the 1994 private placement. AKAUSA also exercised
its piggyback registration rights with respect to the Company's Form S-3 filing.
On April 26, 1999, in connection with the issuance and sale of the Series A
Preferred Stock and Warrants in the Stock Purchase, the Company entered into a
Registration Rights Agreement (the "1999 Agreement") with Michael R. Burns,
Roger A. Burlage, Al Checchi, Ken Slutsky and The Kushner-Locke Company (the
"Holders"). The 1999 Agreement gives the Holders certain demand and piggyback
registration rights commencing on the date that is 18-months following the
issuance and sale of the Series A Preferred Stock and the Warrants to register
the Common Stock issuable upon conversion of the Series A Preferred Stock and
the exercise of the Warrants.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 10-KSB
Exhibit Number Description
3.1 Second Amended and Restated Articles of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 of Company's
Registration Statement No. 33-63363-LA)
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3.2 First Amendment to Second Amended and Restated Articles of
Incorporation of the Company (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 Company (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 Company
(incorporated herein by reference to Exhibit 3.4 of Company's
Registration Statement No. 33-63363-LA)
3.5 Certificate of Determination filed with the California Secretary of
State of April 15, 1999 (incorporated by reference to Exhibit 3.1 of
the Company's Form 8-K dated April 26, 1999)
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)
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10.14 Office Lease between Company and 100 Wilshire Associates dated
December 8, 1993 (incorporated herein by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1993)
10.15 Revolving Loan and Security Agreement between Company 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 Company'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-QSB 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)
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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 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))
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)
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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)
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
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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. (incorporated herein by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1998)
10.56 Publishing Distribution Agreement dated June 23, 1998 between the
Company and Warner Publisher Services, Inc. (incorporated herein by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998)
10.57 Video Distribution Letter Agreement dated October 30, 1998 between the
Company and Columbia TriStar Home Video, Inc. (incorporated herein by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998)
10.58 Video Distribution Agreement dated October 30, 1998 between the
Company and Columbia TriStar Home Video, Inc. (incorporated herein by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998)
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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. (incorporated herein by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1998)
10.60 Extension Letter dated March 31, 1999 between the Company and City
National Bank. (incorporated herein by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998)
10.61 Stock Purchase Agreement dated as of April 7, 1999 by and among the
Company, Michael R. Burns, Roger A. Burlage, Ken Slutsky and The
Kushner-Locke Company (incorporated by reference to Exhibit 10.1 of
the Company's Form 8-K dated April 26, 1999)
10.62 Warrant Agreement dated as of April 26, 1999 among the Company, Roger
A. Burlage, Michael R. Burns, The Kushner-Locke Company, Al Checchi
and Ken Slutsky (incorporated by reference to Exhibit 10.2 of the
Company's Form 8-K dated April 26, 1999)
10.63 Registration Rights Agreement dated as of April 26, 1999 by and among
the Company, The Kushner-Locke Company, Roger A. Burlage, Michael R.
Burns, Al Checchi and Ken Slutsky (incorporated by reference to
Exhibit 10.3 of the Company's Form 8-K dated April 26, 1999)
10.64 Registration Rights Agreement dated as of April 26, 1999 by and
between The Kushner-Locke Company and the Company (incorporated by
reference to Exhibit 10.4 of the Company's Form 8-K dated April 26,
1999)
10.65 Employment Agreement dated as of April 5, 1999 by and between the
Company and Roger A. Burlage (incorporated by reference to Exhibit
10.5 of the Company's Form 8-K dated April 26, 1999)
10.66 Employment Agreement dated as of April 26, 1999 between the Company
and Ronald B. Cushey (incorporated by reference to Exhibit 10.61 of
the Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1999)
10.67 Employment Agreement dated as of April 26, 1999 between the Company
and Eric S. Mischel (incorporated by reference to Exhibit 10.62 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1999)
10.68 Note Payable Agreement dated as of June 30, 1999 between the Company
and Paul Guez (incorporated by reference to Exhibit 10.63 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended June
30, 1999)
10.69 Warrant Agreement dated as of June 30, 1999 between the Company and
Paul Guez
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(incorporated by reference to Exhibit 10.64 of the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1999)
10.70 Registration Rights Agreement dated as of June 30, 1999 by and between
the Company and Paul Guez (incorporated by reference to Exhibit 10.65
of the Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1999)
10.71 Employment Agreement dated as of October 4, 1999 between the Company
and Glenn Weisberger (incorporated by reference to Exhibit 10.66 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1999)
10.72 Acquisition letter if intent dated September 24, 1999 between the
Company and PM entertainment Group, Inc. (incorporated by reference to
Exhibit 10.66 of the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1999)
10.73 Settlement and Mutual Release Agreement dated as of March 13, 2000
among the Company and Dorothy Oriolo, Donald Oriolo, Joan Gersh and
Joseph Donald Oriolo*
10.74 Undated Amended and Restated Memorandum of Distribution Agreement by
and between the Company and Universal Studios (portions of which have
been filed under a confidentiality request)*
10.75 Undated Amendment to Merchandising Deal by and between the Company and
Universal Studios (portions of which have been filed under a
confidentiality request)*
10.76 Lease Agreement dated September 22, 1999 between the Company and
Douglas Emmett Realty Fund 1997, a California limited partnership*
16 Letter of Deloitte & Touche LLP re: change in certifying accountant
(incorporated by reference to Exhibit 16 of the Company's Form 8-K
dated June 25, 1999)
21 List of subsidiaries of Company (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 Schedules
99.1 Press release of the Company dated April 27, 1999 (incorporated by
reference to Exhibit 99.1 of the Company's Form 8-K dated April 26,
1999)
* Filed herewith
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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 12, 2000 By: /s/ Roger A. Burlage
---------------------------------------
Name: Roger A. Burlage
Title: Chairman and Chief Executive Officer
Date: April 12, 2000 By: /s/ Ronald B. Cushey
----------------------------------------
Name: Ronald B. Cushey
Title: Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael R. Burns Director April 12, 2000
- --------------------------
Michael R. Burns
/s/ Michael S. Doherty Director April 12, 2000
- --------------------------
Michael S. Doherty
/s/ Meyer Gottlieb Director April 12, 2000
- --------------------------
Meyer Gottlieb
/s/ Gary M. Gray Director April 12, 2000
- --------------------------
Gary M. Gray
</TABLE>
<PAGE> 1
EXHIBIT 10.73
SETTLEMENT & MUTUAL RELEASES
THIS SETTLEMENT & MUTUAL GENERAL RELEASES (hereinafter referred to as
the "Agreement") is entered into by the following parties: Dorothy Oriolo,
Donald Oriolo, Joan Gerish and Joseph Donald Oriolo (collectively hereinafter
referred to as the "Heirs", jointly and severally), The Harvey Entertainment
Company and Harvey Comics, Inc. (collectively hereinafter referred to as
"Harvey", jointly and severally), with reference to the following facts:
WHEREAS, the Heirs are the heirs of the late Joseph Oriolo (and
constitute all the heirs of Joseph Oriolo with the authority to grant the rights
and incur the obligations contained in this Agreement), the well known creator
of comic book characters and other intellectual property;
WHEREAS, in December 1999 and January 2000, the Heirs sent to Harvey
certain documents entitled Notices of Termination of Transfers and Licenses
("Notices") with respect to that certain intellectual property known as "Casper
The Friendly Ghost" (hereinafter referred to as "Casper");
WHEREAS, on or about February 11, 2000, Harvey filed a Complaint For
Declaratory Relief and Damages for Slander of Title against the Heirs in the
United States District Court for the Central District of California (the
"Lawsuit");
WHEREAS, the Heirs have not previously transferred any of the rights to
any third parties that the Heirs are transferring herein;
WHEREAS, the parties now wish to settle any and all disputes between
them and engage in certain business transactions, as more specifically set forth
in this Agreement;
NOW, THEREFORE, the parties hereby agree as follows, effective upon the
full execution of this Agreement by all the parties:
1. The parties will take no further actions in connection with the Lawsuit,
except that Harvey will promptly cause the Lawsuit to be dismissed with
prejudice and provide documentation of same to the Heirs.
2. The Heirs hereby irrevocably grant, sell, assign and transfer to Harvey,
forever and exclusively, any and all of their interests, rights, claims,
copyrights and trademarks in Casper, including all now or hereafter existing
rights of every kind in, to, and pertaining to Casper, whether or not such
rights are now known, recognized, contemplated, invented or discovered,
including but not limited to any and all interests of the Heirs in the title
in and to Casper, throughout the universe, for all uses and purposes
whatsoever, subject to the terms of this Agreement. The foregoing is
intended as and shall constitute a quitclaim of all of the Heirs interests,
rights, claims, copyrights and trademarks in Casper. Upon
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<PAGE> 2
request of Harvey, the Heirs will promptly withdraw the Notices.
3. Harvey will forever give credit to Joseph Oriolo as creator of Casper in all
motion pictures and other audio-visual productions featuring Casper, and
Harvey will forever give credit to Joseph Oriolo as creator of Casper in
other Harvey products where Harvey determines in good faith that giving
"creator" credit to anyone is appropriate. Harvey shall have the right but
not the obligation to give credit to Seymour Reit (and only to Seymour Reit)
as an additional creator of Casper, provided that such credit to Seymour
Reit is never more prominent (in size, style of type, etc.) than the credit
given to Joseph Oriolo and that the credit to Joseph Oriolo is in first
position no less than approximately half the time on an ongoing basis (with
Harvey taking into account in good faith the importance of Harvey's various
products that incorporate Casper, so that Joseph Oriolo's credit is in first
position at least approximately half the time on Harvey's most important and
prominent products, and so forth with Harvey's less important and less
prominent products), excluding theatrical motion pictures produced or
distributed or licensed by Universal Pictures or any related entity (parent,
subsidiary or affiliate) of Universal Pictures. In the case of theatrical
motion pictures produced or distributed or licensed by Universal Pictures or
any related entity of Universal Pictures, Joseph Oriolo's credit vis-a-vis
Seymour Reit's credit shall be no less prominent (including position) than
Joseph Oriolo's credit was in Universal Pictures' theatrical motion picture
known as Casper that was released in or about 1995. Without limiting the
generality of the foregoing, Harvey shall give such credit to Joseph Oriolo
as part of the main credits in all motion pictures and other audio-visual
productions featuring Casper where credits are given to any other persons
for creative services (including actors, writers, directors, producers,
etc.). Harvey shall also require all third parties that acquire rights in
Casper from Harvey to give the aforesaid credits to Joseph Oriolo.
4. Donald Oriolo shall have the right to sign the name "Oriolo" on all Casper
artwork (including cells) issued by Harvey or under Harvey's control where
Harvey determines in good faith that creator signatures are appropriate.
Subject to Donald Oriolo's availability, Donald Oriolo will physically
appear at places and times reasonably requested by Harvey to sign Casper
artwork for the public, provided that Harvey reimburses Donald Oriolo for
his reasonable expenses and for his services in accordance with industry
standards. As a general matter, Harvey in its sole good faith discretion
shall have the right to use the name and likeness of Joseph Oriolo and of
Donald Oriolo in connection with Casper in a reasonable manner not
inconsistent with industry standards.
5. The Heirs and Harvey each agree to execute all reasonable documents
requested by the other in connection with the subject matter of this
Agreement in order to effectuate the purposes and intents of this Agreement,
at the expense of the party making such request. Without limiting the
generality of the foregoing, the Heirs agree to assign to Harvey all of
their rights in any trademarks relating to Casper that may have been filed
by any of the Heirs or their representatives in Germany or any other country
and to execute all reasonable documents to effectuate such assignments,
provided that (if Harvey requests the Heirs to so assign and/or to execute)
Harvey will promptly reimburse the Heirs for the
2
<PAGE> 3
costs that they previously incurred in connection with such German trademark
filings, including but not limited to legal fees and filing fees, but not to
exceed US$2,900.00 per trademark.
6. Except as set forth in this Agreement, each Heir for him or herself and his
or her respective successors, affiliates, agents, employees and assigns
hereby relieves, covenants not to sue, releases and discharges Harvey, their
directors, officers, assigns, assures, successors, employees, agents,
attorneys, parent, subsidiaries, affiliates from any and all claims,
demands, actions or causes of action, debts, controversies and damages of
whatever kind or nature whether now known or unknown which such Heir might
have or claim to have or at any time heretofore had or claimed to have. Each
Heir acknowledges that he or she is aware that it may hereafter discover
facts different from or in addition to what he or she now knows or believes
to be true with respect to the matters herein released, and he or she agrees
that this release shall be and remain in effect in all respects as a
complete general release, notwithstanding any such different or additional
facts. Each Heir acknowledges that he or she has been informed of Section
1542 of the Civil Code of the State of California and does hereby expressly
waive and relinquish all rights and benefits that he or she has or may have
under said Section, which reads as follows:
a) "A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
7. Except as set forth in this Agreement, Harvey for itself and its respective
successors, affiliates, agents, employees and assigns hereby relieves,
covenants not to sue, releases and discharges the Heirs, their assigns,
assures, successors, employees, agents, attorneys, and affiliates from any
and all claims, demands, actions or causes of action, debts, controversies
and damages of whatever kind or nature whether now known or unknown which
Harvey might have or claim to have or at any time heretofore had or claimed
to have. Harvey acknowledges that it is aware that it may hereafter discover
facts different from or in addition to what it now knows or believes to be
true with respect to the matters herein released, and it agrees that this
release shall be and remain in effect in all respects as a complete general
release, notwithstanding any such different or additional facts. Harvey
acknowledges that it has been informed of Section 1542 of the Civil Code of
the State of California and does hereby expressly waive and relinquish all
rights and benefits that it has or may have under said Section, which reads
as follows:
a) "A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
8. Harvey and the Heirs each hereby represents and warrants to the other, and
agrees with the other party as follows:
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a) Each party has received legal advice from its attorneys with respect to
the advisability of making and executing this Agreement including,
without limitation, the release provided for above, and knows and
understands its legal effect.
b) No person, firm or corporation (whether or not a party hereto) has made
any statement, representation or promise regarding a fact relied upon by
either party in entering into this Agreement which is not set forth
herein.
c) Each party has made such investigation of the facts pertaining to the
disputes hereinabove described and of all matters pertaining thereto as
each party may deem necessary or desirable.
d) Each party has the full right, capacity and authority to enter into the
perform this Agreement.
9. The terms of this Agreement are contractual and not a mere recital.
10. Harvey and the Heirs also each represent and warrant to the other that such
party has not assigned or transferred to any person, firm, corporation or
other entity in any manner, including by way of subrogation or operation of
law, or otherwise, any claim, right, demand, action or cause of action that
the parties may have had, has or might have arising out of the matters
described herein, nor any portion thereof.
11. The validity, construction and enforceability of this Agreement shall be
governed in all respects by the laws of California applicable to agreements
negotiated, executed and performed in California by California parties. The
parties hereby confer upon the United States federal and state courts
located in the City and County of Los Angeles exclusive jurisdiction to hear
all disputes arising under the Agreement or by reason of its termination,
and agree that service of process may be served, in addition to any other
method permitted by law, by registered or certified mail sent return receipt
requested. In the event of any breach of this Agreement, the aggrieved party
may seek (and be entitled in appropriate circumstances to obtain) money
damages or specific performance, but no party shall seek or be entitled to
rescind or terminate this Agreement.
12. All representations and warranties contained herein shall survive the
execution of this Agreement.
13. This Agreement sets forth the entire understanding and supersedes all prior
and contemporaneous agreements between the parties relating to the subject
matter contained herein and merges all prior and contemporaneous discussions
between them. Neither party shall be bound by any definition, condition,
representation, warranty, covenant or provision other than as expressly
stated in or contemplated by this Agreement or as
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subsequently shall be set forth in writing and executed by an authorized
representative of the party to be bound. No modification or alteration of
this Agreement shall be binding or valid unless in writing and signed by the
party to be charged with such modification, alteration or agreement. No
waiver of any term, covenant or condition of this Agreement shall be
construed as a waiver of any other term, covenant or condition nor shall any
waiver of any default under this Agreement be construed as a continuing
waiver thereof or as a waiver of any other default.
14. The parties hereto acknowledge and agree that this is an agreement which is
not in any respect, nor for any purpose, to be deemed or construed to be an
admission or concession of any liability or wrongdoing by any party
whatsoever, and in connection therewith, neither this Agreement nor any
provision herein contained shall be deemed to be for the benefit of, or
confer any rights of any kind or nature whatsoever upon, any third party.
15. Any press releases or publicity in connection with the subject matter of
this Agreement shall require the approval of all parties, with the
understanding that Walter E. Calmette has the authority to convey approvals
the Heirs to Harvey.
16. Harvey's notices to the Heirs hereunder shall be sent to the attention of
Donald Oriolo at Felix The Cat Productions, Inc., 123 Route 23 South
Hamburg, NJ 07419, by mail or courier and by fax to (973) 209-8800; with a
copy to Walter E. Calmette at Felix The Cat Productions, Inc., 1811 Colina
Drive, Glendale, CA 91208, by mail or courier and by fax to (818) 956-7044,
with a copy to Peter Bierstedt, 2039 North Gramercy Place, Hollywood, CA
90068-3616, by mail or courier and by fax to (323) 465-3511. The Heirs
notices hereunder shall be sent to the attention of Glenn R. Weisberger,
Senior Vice President and General Counsel, The Harvey Entertainment
Corporation, 11835 West Olympic Boulevard, Suite 550E, Los Angeles, CA
90064, by mail or courier and by fax to (310) 444-4101. The foregoing
addresses and fax numbers may be changed any affected party by appropriate
notice.
17. This Agreement shall inure to the benefit of, and shall be binding upon,
each of the parties hereto, and their respective heirs, executors,
administrators, assigns, successors-in-interest, representatives, trustees
and beneficiaries. This Agreement may be executed in counterparts, and each
counterpart shall constitute an original instrument, but all such separate
counterparts shall constitute only one and the same instrument.
[This Agreement is signed on the next page.]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
date of the last party signing this Agreement as indicated below.
THE HARVEY ENTERTAINMENT COMPANY HARVEY COMICS, INC.
By______________________________ By______________________________
Its_____________________________ Its_____________________________
Signed: __________________, 2000 Signed:___________________, 2000
________________________________ ________________________________
Dorothy Oriolo Donald Oriolo
Signed: __________________, 2000 Signed:___________________, 2000
________________________________ ________________________________
Joan Gerish Joseph Donald Oriolo
Signed: __________________, 2000 Signed: __________________, 2000
6
<PAGE> 1
EXHIBIT 10.74
AMENDED AND RESTATED
MEMORANDUM OF DISTRIBUTION AGREEMENT
BY AND BETWEEN
UNIVERSAL STUDIOS, INC.
AND
THE HARVEY ENTERTAINMENT COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
RECITALS.....................................................................................1
AGREEMENT....................................................................................2
ARTICLE 1: EFFICACY AND DEFINITIONS.........................................................2
Section 1.1 Replacement of Original Form of Agreement; Changes to PSO Agreement....2
Section 1.2 Definitions............................................................3
Section 1.3 Certain Interpretive Matters...........................................6
ARTICLE 2: PICTURES.........................................................................7
Section 2.1 Casper Pictures........................................................7
(a) Universal Initiation Right.............................................7
(b) Features...............................................................7
(i) General.........................................................7
(ii) First Feature Casper Picture....................................7
(iii) Feature Casper Picture Sequel Rights............................8
(iv) Producer Credits................................................8
(c) Non-Features...........................................................9
(d) Other Pictures........................................................10
Section 2.2 Richie Rich...........................................................10
(a) Universal Acquisition Right...........................................10
(b) No Acquisition By Universal...........................................10
(c) Acquisition By Universal..............................................10
Section 2.3 Other Existing Characters Pictures....................................10
Section 2.4 New Character Pictures................................................10
Section 2.5 General Terms: All New Pictures......................................10
(a) Harvey Group Rights Regarding Production of Pictures..................10
(b) Credits...............................................................11
(c) Universal Production Rights...........................................11
(d) Universal Distribution Rights.........................................11
(e) First Negotiation Rights..............................................12
(f) Progress to Production................................................12
(g) Pay-or-Play Right.....................................................13
(h) Expiration of Initiation Term.........................................13
(i) Condition To Commencement.............................................13
Section 2.6 Theatrical Preclusion Period For Casper Picture Sequels...............14
(a) Periods of Time Encompassed...........................................14
(b) Notice of Effectiveness...............................................14
</TABLE>
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<TABLE>
<S> <C>
Section 2.7 Restrictions During Theatrical Preclusion Period......................15
(a) In General............................................................15
(b) Exceptions............................................................16
(c) Exercise of Retained Rights By Harvey.................................18
Section 2.8 Rights/Services Fee For First Sequel..................................18
(a) Fixed Fee.............................................................19
(b) Contingent Compensation...............................................19
(c) Merchandising Participation...........................................19
(d) Delay Amounts.........................................................19
Section 2.9 Rights/Services Fee For Additional Casper Pictures....................20
(a) Good Faith Negotiations...............................................20
(b) Baseball Arbitration..................................................21
(i) Selection of Panel.............................................21
(ii) Submissions....................................................21
(iii) Proceedings....................................................22
(iv) Decision.......................................................22
(v) Costs..........................................................23
(vi) Hold Harmless of Panel Members.................................23
(c) Coordination of Baseball Arbitration and Theatrical Preclusion
Period Procedures.....................................................23
(d) Ability to Proceed to Production......................................23
Section 2.10 Scope of Rights/Services Fees.........................................23
Section 2.11 Ghostly Trio Rights....................................................24
ARTICLE 3: TELEVISION......................................................................24
Section 3.1 Scope of Television Rights............................................24
Section 3.2 Term of Rights........................................................24
Section 3.3 Harvey Library........................................................25
(a) Domestic Territory....................................................25
(b) Foreign Territory.....................................................25
Section 3.4 New Television Products...............................................25
(a) General...............................................................25
(b) Made-for-Video Products...............................................26
(c) First-Run Primary License.............................................26
Section 3.5 Special Holdback on Animated New Television Products..................26
ARTICLE 4: HOME VIDEO......................................................................27
Section 4.1 Home Video............................................................27
Section 4.2 Harvey Library........................................................27
Section 4.3 New Television Products...............................................27
Section 4.4 Made-for-Video Products...............................................27
(a) Applicable Product....................................................27
(b) Certain Protective Provisions.........................................28
</TABLE>
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<TABLE>
<S> <C>
(c) Time for Exercise.....................................................28
Section 4.5 "Premiums."...........................................................28
Section 4.6 Certain Restrictions on Universal Catalog Activities..................29
ARTICLE 5: MERCHANDISING...................................................................29
Section 5.1 Efficacy..............................................................29
Section 5.2 Term..................................................................29
Section 5.3 Existing Licenses/Leisure Concepts Agreement..........................30
Section 5.4 New Licenses..........................................................31
(a) Universal Exclusive Agency............................................31
(b) Fees..................................................................31
(c) Harvey Group Direct Licensing.........................................32
Section 5.5 Marketing Plan........................................................33
Section 5.6 Style Book............................................................33
Section 5.7 Special Holdback on Harvey Group Licenses; Designation of
Merchandising Revenues................................................33
Section 5.8 Special Holdback on Universal Licenses................................33
Section 5.9 Merchandising Exploitation of Feature New Pictures....................33
ARTICLE 6: THEME PARKS.....................................................................33
Section 6.1 Scope of Article......................................................33
Section 6.2 Universal Exclusive Rights and Territories............................34
(a) Term..................................................................34
(b) United States/Initial Period..........................................34
(i) California and Florida.........................................34
(ii) All Other U.S. States..........................................34
(iii) Total United States Exclusivity................................35
(c) United States/Subsequent Period.......................................35
(d) Exception for Harvey Parks............................................35
(e) United Kingdom, France or Japan.......................................35
(f) All Other Territories.................................................36
Section 6.3 Harvey Group Merchandising Space......................................36
Section 6.4 Licensing Fees, Joint Logo Merchandise and Promotions.................36
(a) Licensing Fees........................................................36
(b) Joint Logo Merchandise................................................37
(c) Universal Distribution Company Catalog................................37
(d) Harvey Group Cartoon Films............................................37
(e) Corporate Sponsors....................................................37
Section 6.5 Harvey Approval Right.................................................38
ARTICLE 7: OTHER COVENANTS.................................................................38
Section 7.1 All Other Media.......................................................38
Section 7.2 Mutual Release........................................................38
</TABLE>
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<TABLE>
<S> <C>
(a) General...............................................................38
(b) Included Releasees....................................................38
(c) Scope of Release......................................................39
(d) Exclusions............................................................39
Section 7.3 Additional Consultation Rights........................................40
Section 7.4 Paramount Pictures Agreement..........................................40
Section 7.5 Additional Payments...................................................40
ARTICLE 8: GENERAL PROVISIONS..............................................................41
Section 8.1 New Universal Elements................................................41
Section 8.2 Certain Harvey Approval Rights........................................42
Section 8.3 Security Interest.....................................................42
Section 8.4 Other Documents and Instruments.......................................42
Section 8.5 Remedies..............................................................43
Section 8.6 Reports of Infringements..............................................43
Section 8.7 Notices...............................................................43
Section 8.8 Active Project Notification...........................................44
Section 8.9 Tax Treatment.........................................................44
Section 8.10 Trademark and Copyright...............................................44
Section 8.11 Accounting............................................................45
Section 8.12 Universal Added Attributes............................................45
Section 8.13 Recognition of Certain Third Person Rights............................46
Section 8.14 Publicity.............................................................46
Section 8.15 Confidentiality/Press Release.........................................46
Section 8.16 No Expansion/Limitation of Liability..................................47
Section 8.17 Rights Granted........................................................47
Section 8.18 Corporate Authorization...............................................47
Section 8.19 Miscellaneous.........................................................47
</TABLE>
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<TABLE>
<S> <C>
SIGNATURES..................................................................................48
SCHEDULE 1: ADDITIONAL DEFINITIONS ........................................................I-1
SCHEDULE 2: PRICING SCHEDULE..............................................................II-1
EXHIBIT 4.2: ASSIGNMENT AND ASSUMPTION AGREEMENT
EXHIBIT A: REVISED NET PROCEEDS DEFINITION
EXHIBIT A-1: REVISED GROSS PROCEEDS DEFINITION
EXHIBIT X: ORIGINAL GROSS PROCEEDS DEFINITION
EXHIBIT Y: ORIGINAL NET PROCEEDS DEFINITION
</TABLE>
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AMENDED AND RESTATED
MEMORANDUM OF DISTRIBUTION AGREEMENT
This Amended and Restated Memorandum of Distribution Agreement ("Amended
and Restated Agreement") was originally made and entered into in its unamended
form (the "Original Form of Agreement") as of the 7th day of December, 1990 (the
"Original Agreement Date") among MCA Inc., a Delaware corporation now known as
Universal Studios, Inc. (as further defined in Schedule 1, "Universal"), HMH
Communications, Inc., a California corporation now known as The Harvey
Entertainment Company ("Harvey"), and Harvey Comics Entertainment, Inc., a New
York corporation that is known as Harvey Comics, Inc. ("Harvey Comics"), and is
being amended and restated in its entirety as of May 15, 1997 (the "Settlement
Date") based on that certain "Term Sheet for Universal Harvey Restated
Agreement" (the "Term Sheet") entered into on the Settlement Date. Universal,
Harvey and Harvey Comics are the parties ("Parties") to this Amended and
Restated Agreement.
RECITALS
A. The Parties and others entered into that certain Stock Purchase
Agreement, dated as of November 13, 1990 (the "Stock Purchase Agreement").
B. The execution and performance of the Original Form of Agreement by
the Parties hereto were conditions to the execution and performance of the Stock
Purchase Agreement by the parties to the Stock Purchase Agreement. Accordingly,
the Parties hereto deemed it necessary and advisable and in their best
interests, and in the best interests of their respective shareholders, to enter
into the Original Form of Agreement.
C. Since the Original Agreement Date, the Parties amended the Original
Form of Agreement by letter agreements dated as of April 22, 1993 and September
28, 1993 (the "Letter Amendments"). The Parties have also entered into certain
other agreements pursuant to or in furtherance of the terms of the Original Form
of Agreement as previously amended, namely, that certain letter dated May 19,
1995 as amended by an agreement dated as of August 1, 1996 related to certain
Products featuring the Character known as "Baby Huey" (the "Baby Huey
Agreement"), that certain letter agreement dated as of September 22, 1994
related to the Universal/Harvey Animation Studio (the "PSO Agreement") that
certain agreement dated as of March 15, 1992 related to domestic distribution of
home video products from the Harvey Library (the "Distribution Acquisition
Agreement," which is no longer in force as of the date of actual execution of
this Amended and Restated Agreement) and that certain agreement dated as of
March 26, 1996 related to the distribution of certain television programs
featuring the Character known as "Casper" (the "Television Distribution
Agreement").
D. Concurrently with the execution of the Amended and Restated Agreement
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as of the Settlement Date, Universal and Harvey are also entering into a letter
agreement (the "Merchandising Amendment") regarding certain Merchandising rights
of the Parties, substantially in the form of the October 29, 1996 draft of that
agreement previously negotiated ( the "Merchandising Amendment Draft") and
incorporating a proposed side letter dated November 1996 (the "Merchandising
Side Letter") regarding foreign licensing agents and other matters as well as
changes to the Merchandising Agreement Draft reflected in the Term Sheet. As
used herein, the term "Merchandising" shall have the same meaning as such term
is given in the Merchandising Amendment.
E. In light of developments since the execution of the Original Form of
Agreement and the Letter Amendments, which developments include without
limitation the entry of Universal and Harvey into the Baby Huey Agreement, the
PSO Agreement, the Television Distribution Agreement, the Distribution
Acquisition Agreement and the Merchandising Amendment (such agreements and
instruments as well as this Amended and Restated Agreement, but excluding the
Original Form of Agreement and the Letter Amendments, being hereinafter
collectively referred to as the "Related Agreements" and individually as a
"Related Agreement"), the Parties deem it necessary and advisable and in their
respective best interests to enter into this Amended and Restated Agreement as
of the Settlement Date to replace the Original Form of Agreement as amended to
the Settlement Date.
AGREEMENT
NOW, THEREFORE, on the basis of the preceding facts, and in
consideration of the mutual covenants set forth below, the Parties to this
Amended and Restated Agreement agree as follows:
ARTICLE 1: EFFICACY AND DEFINITIONS
Section 1.1 Replacement of Original Form of Agreement; Changes to PSO
Agreement. This Amended and Restated Agreement hereby replaces in its entirety
the Original Form of Agreement as amended by the Letter Amendments and
supercedes the Term Sheet. The rights and obligations of the Parties set forth
in the Baby Huey Agreement, the PSO Agreement and the Television Distribution
Agreement shall continue, subject to the proviso that all references therein to
the rights of the Parties under the Original Form of Agreement shall be deemed
to refer to the rights of the Parties under this Amended and Restated Agreement.
Wherever a provision of this Amended and Restated Agreement or of the
Merchandising Amendment conflicts with a provision of the Baby Huey Agreement,
the PSO Agreement or the Television Distribution Agreement, the provisions of
this Amended and Restated Agreement or of
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the Merchandising Amendment, as the case may be, shall be deemed controlling
unless and to the extent the relevant provision of the Baby Huey Agreement, the
PSO Agreement or the Television Agreement expressly provides that it is to be
paramount to the provisions of the Original Form of Agreement, in which case
such relevant provision of the other Related Agreement shall be deemed
controlling. Notwithstanding the foregoing:
(a) The two-year holdback set forth in paragraph 6 of the PSO
Agreement is hereby increased to three years and is agreed to refer to Casper
Character animated television shows only; and
(b) To the extent the PSO Agreement contemplated the creation of
a separate PSO entity and the implementation of provisions of the PSO Agreement
through such separate entity, the Parties hereby agree that:
(i) The contemplation of a separate PSO entity by the PSO
Agreement is hereby stricken from such Agreement;
(ii) Such Agreement shall be implemented without regard to
a separate PSO entity;
(iii) The PSO Agreement is hereby amended to effectuate
the foregoing mutatis mutandis;
(iv) Universal shall be and hereby is authorized to
dissolve any PSO entity that was originally created for purposes of the
PSO Agreement; and
(v) The foregoing is not intended to, and shall not,
effect any material alteration of the parties' remaining underlying
substantive rights set forth in the PSO Agreement (including the
designation therein of parties therein with control over and rights to
participate in specified decisions).
Section 1.2 Definitions. For purposes of this Amended and Restated
Agreement, capitalized words shall have the meanings ascribed thereto in the
Sections and Schedules set forth below (which Schedules are attached hereto and
incorporated herein by this reference).
<TABLE>
<CAPTION>
Defined Term Section
------------ -------
<S> <C>
Active Development Schedule 1
Aggregate Delay Amount 2.8(d)
Amended and Restated Agreement Introduction
</TABLE>
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<TABLE>
<S> <C>
Applicable Country 6.2(e)
Attraction Schedule 1
Baby Huey Agreement Recital C
Baseball Arbitration 2.9(b)
Casper Appearance Picture 2.1(d)
Casper Character(s) Schedule 1
Casper Initiation Term Schedule 1
Casper Non-Feature Picture 2.1(c)
Casper Picture(s) Schedule 1
Casper Video 4.6
Characters Schedule 1
Claim(s) 7.2(a)
Closing Date Schedule 1
Continuing Third Party Theme Park Rights Schedule 1
Daily Delay Amount 2.8(d)
Domestic Territory Schedule 1
Exclusivity Zone 6.2(b)(ii)
Existing Characters Schedule 1
Existing Merchandising Licensees Schedule 1
Exploit or Exploitation Schedule 1
Feature Schedule 1
Film Advance Amount Section 7.5
Filmed Entertainment Product 2.7(a)
Final Notice 2.6(b)(ii)
First Negotiation/First Refusal Rights Schedule 1
First Negotiation Rights Schedule 1
First Sequel 2.6(a)
Fixed Sequel Fee 2.8(a)
Force Majeure Event Schedule 1
Foreign Territory Schedule 1
Green-Lighted 2.1(b)(ii)(A)
Harvey Introduction
Harvey Comics Introduction
Harvey Designees 2.1(b)(i)
Harvey Executive Producer 2.1(b)(i)
Harvey Group Schedule 1
Harvey Group Licenses 5.4(c)
Harvey Library Schedule 1
Harvey Parks 6.2(d)
Harvey Preclusion Period 5.7
Home Video Royalty 2.8(b)
Increased Percentage 2.8(b)
</TABLE>
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<TABLE>
<S> <C>
Initial Artificial Breakeven Schedule 1
Initial Notice 2.6(b)(i)
Initial Percentage 2.8(b)
Initial Period 6.2(a)
Letter Amendments Recital C
Made-for-Video Products 3.4(b)
Marketing Plan 5.5
Merchandising Recital D
Merchandising Amendment Recital D
Merchandising Amendment Date 5.1
Merchandising Amendment Draft Recital D
Merchandising Gross Receipts Schedule 1
Merchandising Letter Period 5.4(a)
Merchandising Side Letter Recital D
Montgomery 2.1(b)(i)
Network 3.4(c)
New Universal Elements 8.1
New Pictures Schedule 1
New Television Product Schedule 1
Original Agreement Date Introduction
Original Form of Agreement Introduction
Other Existing Characters Picture(s) Schedule 1
Other Media Rights Schedule 1
Other States 6.2(b)(ii)
Outside Attorney 2.1(b)(iv)
Panel 2.9(b)(i)
Parties Introduction
Person Schedule 1
Picture Schedule 1
Post-Sequel Casper Video 4.4(a)
Precluded Film Product 2.7(a)
Pricing Schedule 2.6(a)
Product Schedule 1
Promotions Schedule 1
PSO Agreement Recital C
Qualifying Attraction Schedule 1
Related Agreement(s) Recital E
Releasor 7.2(a)
Releasee 7.2(b)
Rights/Services Fee 2.1(b)(i)
Settlement Date Introduction
Silver/Davis Schedule 1
</TABLE>
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<TABLE>
<S> <C>
Special Appearances 6.2(b)(ii)
Stock Purchase Agreement Recital A
Stroller Agreement 6.1
Strollers Schedule 1
Subsequent Period 6.2(a)
Subsequent Sequel 2.9(a)
Target Date 2.6
Television Distribution Agreement Recital C
Theatrical Preclusion Period 2.6(a)
Theme Parks 6.1
Transfer Schedule 1
Universal Introduction
Universal Group Schedule 1
Universal Parks 6.1
Universal Preclusion Period 5.8(a)
Universal Restricted Period 5.8(b)
Video Restricted Period 4.6
Warner Rights Schedule 1
</TABLE>
Section 1.3 Certain Interpretive Matters. In this Amended and Restated
Agreement, unless the context otherwise requires, the singular shall include the
plural, the masculine shall include the feminine and neuter, and vice versa. The
terms "includes" or "including" shall mean "including, but not limited to."
References to a Section, Article, Exhibit or Schedule shall mean a Section,
Article, Exhibit or Schedule of this Amended and Restated Agreement. Where a
Party refers to a given agreement or instrument as it existed as of a certain
date, that reference shall mean that agreement or instrument as modified,
amended, supplemented and restated through such date. The headings of the
Articles, Sections, Subsections, Paragraphs and Subparagraphs of this Amended
and Restated Agreement are for convenience only, and they shall not be of any
effect in construing the contents of the provisions hereof. Each Party shall be
deemed to have participated equally in the drafting of this Amended and Restated
Agreement.
ARTICLE 2: PICTURES
Section 2.1 Casper Pictures.
(a) Universal Initiation Right. Subject to the terms and
conditions hereof, Universal shall have the sole and exclusive right and license
during the Casper Initiation Term to initiate and cause the development and
production of Casper Pictures.
(b) Features.
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(i) General. If Universal initiates development of a
Feature Casper Picture (which for this purpose shall be deemed to have occurred
when Universal engages the initial screenwriter for such Picture), Universal
shall engage Jeffrey Montgomery ("Montgomery") so long as he is employed by or
as a consultant to Harvey, or if Montgomery is not employed by or as a
consultant to Harvey, one person designated by Harvey to render executive
producer services (Montgomery or such person, the "Harvey Executive Producer").
Additionally, if Harvey so requests in connection with a Feature Casper Picture,
Universal shall engage up to two (2) additional individuals designated by Harvey
in writing ( the "Harvey Designees"), as executive producers or, in the case of
the first Feature Casper Picture, co-executive producers; provided that
Universal will engage the Harvey Executive Producer as an individual executive
producer for each Feature Casper Picture after the first. If Universal actually
initiates development and/or produces such a Picture, Universal shall pay Harvey
a rights/services fee for all services rendered by Montgomery, Harvey and the
Harvey Designees (if applicable) and for all rights and licenses granted by
Harvey ("Rights/Services Fee").
(ii) First Feature Casper Picture. The first Feature
Casper Picture was "Casper," released in May 1995. The Rights/Services Fee
payable to Harvey in connection with the first Feature Casper Picture was as
follows:
(A) Seven Hundred Fifty Thousand Dollars ($750,000)
payable one-third (1/3) upon Universal's engagement of the initial
screenwriter for the Picture, one-third (1/3) upon Universal's having
Green-Lighted production of the Picture and one-third (1/3) upon the
delivery to Universal of the completed Picture; Universal agrees,
however, to pay Harvey, no later than thirty (30) days following the
Original Agreement Date, One Hundred Thousand Dollars ($100,000) as an
advance against this Seven Hundred Fifty Thousand Dollar ($750,000) fee
(provided that payment of the advance will not constitute Universal's
initiation of the development of a Picture nor obligate Universal to
actually produce a Casper Picture); provided further, that if in
connection with such Picture, Universal elects to engage or accord
credit to Montgomery as a co-executive producer in lieu of engaging or
according credit to Montgomery as executive producer, without Harvey's
consent, this Seven Hundred Fifty Thousand Dollar ($750,000) fee shall
be increased to One Million Dollars ($1,000,000) (such increase in the
Rights/Services Fee to be paid ratably over the then remaining unpaid
installments of the Rights/Services Fee);
(B) Seven and One-Half percent (7 1/2%) of "Gross
Proceeds" (as defined in Exhibit "A" attached to the Original Form of
Agreement and attached hereto as Exhibit X) from and after Initial
Artificial Breakeven; it
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being agreed, however, that no sums received in connection with
Merchandising from the Picture will be included in such Gross Proceeds
in calculating Harvey's participation under this Subparagraph (but
rather shall be accounted to Harvey in a separate Merchandising
accounting pursuant to the provisions of Subparagraph (C) below); and
(C) Fifty percent (50%) of the Merchandising Gross
Receipts, calculated in a separate Merchandising accounting and not
included in such Gross Proceeds (as defined in Exhibit "A" attached to
the Original Form of Agreement and attached hereto as Exhibit X).
(iii) Feature Casper Picture Sequel Rights. During the
Casper Initiation Term, as part of Universal's perpetual and exclusive right and
license to initiate and cause the development and production of Casper Pictures,
Universal shall have all Feature Picture sequel and remake rights with respect
to the first Feature Casper Picture and with respect to Casper. In connection
with any such subsequent Feature Casper Picture, the Rights/Services Fee payable
to Harvey in connection therewith shall be as set forth in Sections 2.8 and 2.9
below.
(iv) Producer Credits. In connection with each Feature
Casper Picture, the Harvey Executive Producer and the Harvey Designees (if any)
shall be accorded credit as follows:
(A) On screen, in the main titles (if principal
credits appear in the main titles), in a size of type not less than the
size of type used to display any other Person's individual or executive
producing credit, the "Directed By" credit accorded to the director or
the writing credits accorded to the writers. If the Harvey Executive
Producer and the Harvey Designees are all accorded the same credit (as
either executive producers or co-executive producers), then all such
credits shall appear together on a shared card (but shared with no other
Person); if the Harvey Executive Producer is accorded executive producer
credit but the Harvey Designees are accorded co-executive producer
credit, the Harvey Executive Producer's credit shall appear on a
separate card, and the Harvey Designees' credits shall appear together
on a shared card (but shared with no other Person).
(B) In the billing block of any paid advertising
issued by or under the control of Universal (subject to Universal's
usual paid advertising exclusion), in a size of type not less than the
size of type used in such billing block to display any other Person's
individual or executive producing credit, the "Directed By" credit
accorded to the director or the writing credits accorded to the writers.
In addition, if any other Person's individual or executive producing
credit
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shall appear in the billing block of any so-called "excluded
advertising" (other than award, nomination or congratulatory type
advertising), then the Harvey Executive Producer's credit shall also
appear in such billing block in a size of type not less than the size of
type used to display such other Person's individual or executive
producing credit.
Harvey shall indemnify and hold harmless Universal, its parent and subsidiary
entities, and its and their respective past, present and future officers,
directors, employees and agents, from and against any and all losses, claims,
liabilities, judgments, fines, costs and expenses (including reasonable
attorneys' fees and costs, for attorneys not employees of Harvey or Universal,
respectively ("Outside Attorneys")), costs of witnesses and out-of-pocket costs
of investigation, all as incurred) arising from or related to the claim or
allegation of any third party that Harvey (either alone or together with any
other Person or entity, including Universal) directly or indirectly granted or
promised such third party an executive or co-executive producer credit in
connection with any Feature Casper Picture after the first one produced
hereunder, and Universal shall not accord credit to anyone because of his or her
claim to be a Harvey Designee without Harvey's express written consent.
(c) Non-Features. The Parties shall negotiate in good faith with
respect to the terms and conditions (including, without limitation, the
Rights/Service Fee (if any) payable to Harvey) applicable to the production of
any non-Feature Picture in which Casper is to appear ("Casper Non-Feature
Picture"). In the event the Parties cannot reach agreement with respect to the
terms and conditions of any such non-Feature, non-Feature Picture rights with
respect to Casper shall be frozen for the period commencing on the date the
Parties reach impasse and discontinue negotiations and continuing until the date
which is the earliest of the following: (i) one (1) year following the
conclusion of the Casper Initiation Term; or (ii) the later of (A) two (2) years
from the date upon which the Parties reach impasse and discontinue negotiations
or (B) the expiration of the Casper Initiation Term.
(d) Other Pictures. The Parties shall negotiate in good faith
with respect to the terms and conditions (including, without limitation, the
Rights/Services Fee (if any) payable to Harvey) applicable to the production of
a Feature Picture in which Casper is to appear, but which is not a Casper
Picture ("Casper Appearance Picture"). In the event the Parties cannot reach
agreement with respect to the terms and conditions of any such Casper Appearance
Picture, Picture rights with respect to Casper Appearance Pictures shall be
frozen for the period commencing on the date the Parties reach impasse and
discontinue negotiations and continuing until the date which is the earlier of:
(i) one (1) year following the conclusion of the Casper Initiation Term; or (ii)
the later of (A) two (2) years from the date upon which the Parties reach
impasse and discontinue negotiations or (B) the expiration of the Casper
Initiation Term.
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Section 2.2 Richie Rich.
(a) Universal Acquisition Right. This Subsection is hereby
deleted.
(b) No Acquisition By Universal. This Subsection is hereby
deleted.
(c) Acquisition By Universal. This Subsection is hereby deleted.
Section 2.3 Other Existing Characters Pictures. This Section is hereby
deleted.
Section 2.4 New Character Pictures. This Section is hereby deleted.
Section 2.5 General Terms: All New Pictures. All New Pictures the
development and/or production of which are initiated, caused or otherwise
undertaken by or under the auspices of Universal hereunder shall be subject to
the following additional provisions:
(a) Harvey Group Rights Regarding Production of Pictures. In
connection with the development and production of all such New Pictures
hereunder: (i) Harvey shall have full and complete consultation rights in
connection therewith; (ii) Harvey shall (without limiting Harvey's other rights)
have the right to approve Universal's election to produce any Feature New
Picture for which the final budgeted negative cost is less than $7.5 million
(such approval not to be unreasonably withheld); and (iii) Harvey shall have the
right to approve the character designs, attributes and characterization of
Characters to be included therein, as well as the story lines thereof, for the
purpose of ensuring that the Characters are depicted therein in a manner
consistent with the integrity and artistic representation of the Characters as
the same have been depicted heretofore (such approval not to be unreasonably
withheld).
(b) Credits. In connection with any such New Picture which is a
Feature New Picture hereunder, Universal will accord the following credits to
the Harvey Group: (i) appropriate credit to the Harvey Executive Producer and
the Harvey Designees (if any) involved in such Picture (which shall be accorded
in the manner provided in Paragraph 2.1(b)(iv), or as may otherwise be agreed to
after negotiation in good faith by the Parties with respect to other Feature New
Pictures); (ii) an "in association with" credit for one entity of the Harvey
Group designated by the Harvey Group, it being agreed that for Pictures produced
after the Settlement Date, such credit shall be a "Harvey Entertainment in
association with" credit, and shall appear (A) immediately following the
Universal Studios credit if there is no Amblin' Entertainment credit, (B)
immediately after the Amblin' Entertainment credit if there is an Amblin'
Entertainment credit and such credit appears above the title credit, or (C)
immediately
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prior to the Amblin' Entertainment credit if there is an Amblin' Entertainment
credit and such appears in the end titles; and (iii) the Harvey Group's
"jack-in-the-box" logo. The credits set forth in (ii) and (iii) shall appear on
screen and in the billing block of paid advertising relating to such Picture
issued by or under the control of Universal (subject to Universal's usual paid
advertising exclusions) and in so-called "excluded advertising" relating to such
Picture (other than award, nomination or congratulatory type advertising) where
the complete billing block appears and shall bear the same relative size
relationship to the Amblin' Entertainment credit, if any, and/or Universal
credit in all subsequent Features as did the Harvey Entertainment Company credit
to the Amblin' Entertainment and Universal credits in the first Feature Casper
Picture.
(c) Universal Production Rights. Subject to the rights of the
Harvey Group set forth herein and in the Merchandising Amendment and other
Related Agreements, Universal shall have the right to control all business and
creative decisions with respect to the development and production of all such
New Pictures hereunder.
(d) Universal Distribution Rights. With respect to Universal's
rights in all such New Pictures hereunder, Universal shall, subject to the other
terms and conditions hereof (including Harvey's rights set forth in Subsection
2.5(a) above), have all right, title and interest in and to such New Pictures,
including without limitation the copyright therein and the exclusive right to
distribute such New Pictures throughout the universe in perpetuity in all media
(whether now known or hereafter developed), as well as the right to advertise,
publicize and promote the same; provided, that the Parties' rights in connection
with "New Universal Elements" (as defined in Section 8.1 below) appearing in New
Pictures shall be subject to the provisions of Subsection 2.5(e) below and
Section 8.1 below; provided further, that the foregoing shall not affect the
Harvey Group's underlying rights with respect to the Characters (or the rights
in connection therewith, including Merchandising rights described in the
Merchandising Amendment and in this Agreement), except as otherwise herein
provided.
(e) First Negotiation Rights. From and after the Settlement Date,
Universal shall have First Negotiation Rights with respect to any Transfer of
rights by the Harvey Group in connection with the development, production,
financing and/or distribution of any New Pictures that are Other Existing
Characters Pictures in which the name of one or more Casper Characters is to
appear in the title of the Picture (as a reference to such Character or
Characters) or in which one or more Casper Characters are featured; provided
that the provisions of Section 2.1 shall continue to apply in perpetuity to
Casper Pictures, Casper Non-Feature Pictures and Casper Appearance Pictures; and
provided further that this Subsection shall not be construed so as to limit any
of Universal's or Harvey's rights with respect to New Universal Elements
described in Section 8.1 or Universal's rights to use such New Universal
Elements. Universal shall have the foregoing First Negotiation Rights for a
period expiring on the earlier to
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occur of (i) December 7, 2000, or (ii) the date upon which the Universal Group
ceases to own at least five percent (5%) of the outstanding capital stock of
Harvey, at which time such rights will revert back to Harvey.
(f) Progress to Production. With respect to each such New Picture
which is a Feature New Picture the development of which is initiated by
Universal hereunder, other than the initial Feature Casper Picture or any sequel
thereto or remake thereof, the following progress-to-production/abandonment
provision shall be applicable. Following Universal's receipt of the screenplay
determined or approved by Universal to be the final screenplay in connection
with the applicable Picture, if for any consecutive three month period (as such
period may be extended by an applicable default, disability or Force Majeure
Event, but not beyond an additional 6 months in the case of an extension for a
Force Majeure Event) there is no Active Development in connection with the
Picture, then the Harvey Group may give Universal a written request to resume
Active Development of the Picture and, if Universal fails to resume such Active
Development within thirty (30) days after receipt of such request, the Picture
shall be deemed abandoned by Universal and the Harvey Group shall have the right
for a two (2) year period to acquire Universal's rights in all materials
developed for such Picture pursuant to Universal's customary turnaround
provisions (subject to good faith negotiation, at the time the Parties negotiate
the other terms and conditions applicable to such Picture (i.e., prior to the
commencement of principal photography of such Picture) within customary
parameters); provided, that the aforesaid abandonment by Universal shall be
specific to the applicable Picture, and shall not in any way affect Universal's
rights hereunder (if any) with respect to sequels/remakes of such Picture or
other New Pictures. In connection with the foregoing turnaround right, if any,
which the Harvey Group may have in connection with a Feature New Picture, it is
understood that the Harvey Group's turnaround right shall have priority over any
turnaround right granted to any third Person, except that in connection with the
initial Feature Casper Picture, Universal may grant to Amblin' Entertainment (or
to another Person controlled by Steven Spielberg), a joint turnaround right
which shall be shared jointly, but not severally, with the Harvey Group.
(g) Pay-or-Play Right. In connection with each such New Picture,
Universal shall have the right to "pay-or-play" the services of the Harvey
Executive Producer (and/or the Harvey Designees) off such Picture. If Universal
exercises such right, it is understood that: (i) Harvey will continue to have
full and complete consultation rights in connection with the New Picture, in
Harvey's capacity as licensor of the Character(s) appearing in the Picture; and
(ii) Universal shall not have the right to delete the credit(s) to the Harvey
Executive Producer (and the other Harvey Designees), or the "in association
with" or logo credits to Harvey. In the event Universal exercises its
pay-or-play rights in connection with such a New Picture, Harvey shall remain
entitled to receive the entire applicable Rights/Services Fee in connection
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therewith at the times otherwise provided herein.
(h) Expiration of Initiation Term. This Subsection is hereby
deleted.
(i) Condition To Commencement. Universal agrees that it shall not
commence principal photography of such New Picture hereunder unless and until
the material terms and conditions of the agreement between Universal and the
Harvey Group in connection therewith (including the Rights/Services Fee and the
Merchandising participation payable to Harvey unless one of the Parties submits
the determination of such Rights/Services Fee and/or the Merchandising
participation to Baseball Arbitration) shall have been agreed to; the Parties
agree, however, to negotiate in good faith (and in a manner consistent with the
purposes and intents hereof) with respect to such material terms and conditions;
provided that notwithstanding the foregoing, the Parties' failure to reach
agreement prior to the commencement of principal photography of such New Picture
with respect to changes, if any, to Universal's definition of "Gross Proceeds"
(as defined in Exhibit "A-1" attached to this Amended and Restated Agreement) or
Universal's definition of "Net Proceeds" (as defined in Exhibit "A" attached to
this Amended and Restated Agreement), as and if applicable with respect to such
New Picture, shall not preclude Universal from commencing principal photography
of such a New Picture. Notwithstanding the foregoing, the Parties agree that (i)
the material terms and conditions of agreement between Universal and the Harvey
Group with respect to all Casper Pictures are set forth herein and in the
Merchandising Amendment, except for the Rights/Services Fee applicable to any
such Casper Picture other than the initial Feature Casper Picture and the First
Sequel; (ii) the Rights/Services Fee for the initial Feature Casper Picture and
the First Sequel are set forth herein and in the Merchandising Amendment; and
(iii) for purposes of this Subsection the Parties shall be deemed to have agreed
to the Rights/Services Fee in respect of any other Casper Picture as of the time
they agree thereon or as of the time that one of the Parties submits the
determination of such Rights/Services Fee to Baseball Arbitration, if earlier.
Section 2.6 Theatrical Preclusion Period For Casper Picture Sequels.
(a) Periods of Time Encompassed. Subject to the terms and
provisions set forth in this Section, Universal shall be entitled to a
preclusion period (a "Theatrical Preclusion Period") for each Casper Picture
sequel that is initially released after the Settlement Date in at least eight
hundred (800) theaters in the Domestic Territory, provided that Universal shall
not be entitled to more than one Theatrical Preclusion Period (and no more than
one such Casper Picture theatrical sequel shall qualify for a Theatrical
Preclusion Period) unless (i) the first Theatrical Preclusion Period commences
on one of the "Target Dates" set forth in Schedule 2 hereto and incorporated
herein by reference (the "Pricing Schedule"), (ii) "Final Notice" as defined
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in Subsection 2.6(b)(ii) below has been given by Universal in the year preceding
the applicable Target Date, and (iii) the first such Casper Picture theatrical
sequel initially released after the Settlement Date (the "First Sequel") is
released in at least eight hundred (800) theaters in the Domestic Territory
between and including the first Memorial Day weekend and the first Labor Day
weekend of the Theatrical Preclusion Period for the First Sequel (except to the
extent such release is delayed by a Force Majeure Event). Each Theatrical
Preclusion Period shall encompass the period set forth in the Pricing Schedule.
(b) Notice of Effectiveness. In order for a Theatrical Preclusion
Period to arise, Universal must provide Harvey with:
(i) Written notice by February 15 of the year preceding
the year the Casper Picture theatrical sequel in question is anticipated
to be released (the "Initial Notice") that either (A) Universal has
given initial approval in good faith to the screenplay for such Picture
(subject to customary changes), or (B) pre-production activity with
respect to such Picture has commenced in good faith, which Initial
Notice shall be accompanied by a Five Hundred Thousand Dollar ($500,000)
advance against the Rights/Services Fee for such Casper Picture
theatrical sequel (and which, except as provided in Subsection 2.9(c)
and Paragraph 2.7(b)(iii), shall be applied to the Rights/Services Fee
for the next Casper Picture thereafter produced and to the Initial
Notice (if any) for the first such Theatrical Preclusion Period
thereafter occurring if a Final Notice described in Paragraph (ii) below
is not given with respect to the originally contemplated Theatrical
Preclusion Period) ; and
(ii) Additional written notice by June 15 of the year
preceding the year the Casper Picture theatrical sequel in question is
anticipated to be released (the "Final Notice") stating that Universal
intends that a Theatrical Preclusion Period commence on the next
eligible date for the commencement of a Theatrical Preclusion Period and
that such Casper Picture will be produced with the good faith intention
of initial theatrical release between and including the first Memorial
Day weekend and the first Labor Day weekend of such Theatrical
Preclusion Period. Subject to the provisions of Subsection 2.9(d), such
Final Notice shall be accompanied by payment of fifty percent (50%) of
the balance of the guaranteed Rights/Services Fee related to such Casper
Picture (excluding any amounts payable with respect to Merchandising
participation which amounts shall be paid separately).
(c) Limits On Subsequent Theatrical Preclusion Periods. Without
limiting the generality of the proviso to the first sentence of Subsection
2.6(a), except for the first Theatrical Preclusion Period, a Theatrical
Preclusion Period may not
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commence earlier than the third (3rd) anniversary or later than the sixth (6th)
anniversary of the beginning of the immediately preceding Theatrical Preclusion
Period, and after the first Theatrical Preclusion Period, there will be no
subsequent Theatrical Preclusion Period unless there were an initial release of
a Casper Picture theatrical sequel in at least eight hundred (800) theaters in
the Domestic Territory at any time during such immediately preceding Theatrical
Preclusion Period.
Section 2.7 Restrictions During Theatrical Preclusion Period.
(a) In General. Except as set forth in this Section 2.7 or as may
be expressly permitted by the Merchandising Amendment, Harvey hereby agrees that
during a Theatrical Preclusion Period, no member of the Harvey Group, nor any of
their respective licensees, distributors, subdistributors and sublicensees
(other than members of the Universal Group), will directly or indirectly (i)
exploit, exhibit or re-release any Precluded Film Product in its initial medium
of exploitation, (ii) theatrically release, exhibit or re-release any Precluded
Film Product that is initially released in another medium, (iii) solicit or
fulfill orders for, or manufacture or ship, or cause to be manufactured or
shipped, any home video device that includes all or any portion of a Precluded
Film Product, (iv) otherwise promote, market, advertise or distribute any
Precluded Film Product, or (v) engage in activities precluded during the
Theatrical Preclusion Period under the terms of the Merchandising Amendment. As
used in this Amended and Restated Agreement, the term "Precluded Film Product"
shall mean any filmed or taped, or similar recorded visual or audio-visual
entertainment Product regardless of the medium of distribution, but excluding
interactive products or games, including those on CD-Rom or the Internet, and
other non-linear transmissions on the Internet (collectively, "Filmed
Entertainment Product"), that is first released, broadcast or exhibited after
January 1, 1998 and in which a Casper Character is featured. Notwithstanding the
foregoing, for purposes of this Section 2.7(a), the term "Precluded Film
Product" shall not include (x) after December 31, 2002, any Filmed Entertainment
Product that would be a Precluded Film Product solely because of the appearance
therein of the Characters Spooky, Poil, Nightmare and/or any of the Ghostly Trio
or the reference to any of them in the title thereof, or (y) on or before
December 31, 2002, one direct-to-video in which Wendy the Good Little Witch is
featured as the primary Character and that would be a Precluded Film Product
solely because of the "guest appearance" therein of the Character known as
Nightmare.
(b) Exceptions. Notwithstanding the foregoing, the restrictions
set forth in Subsection 2.7(a) will not apply to the following:
(i) Harvey's direct-to-video live action Product scheduled
for release in the last half of 1997 in which Casper is the most prominently
featured Character;
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(ii) Re-runs on television of television shows initially
released prior to the Theatrical Preclusion Period or during the Theatrical
Preclusion Period as permitted in Paragraph (iii) immediately below;
(iii) Episodes broadcast during the Theatrical Preclusion
Period of a television series for which Harvey accepts an order by a Network (as
defined in Subsection 3.4(c)) prior to the last date on which a Final Notice
respecting the Theatrical Preclusion Period in question could have been given,
which order is for broadcast during the Theatrical Preclusion Period, provided
that (A) the order that is accepted includes at least six episodes of a series,
(B) Harvey gives Universal prompt written notice of any such acceptance of an
order for a television series and the proposed period of broadcast, (C) such
acceptance is with respect to a series the pilot script for which was ordered
prior to the last date on which an Initial Notice respecting such Theatrical
Preclusion Period could have been given, and (D) any portion of the
Rights/Services Fee (and advances for Merchandising participation) paid to
Harvey shall be subject to prompt refund if Universal gives written notice of
cancellation of the Theatrical Preclusion Period within five (5) business days
of its receiving written notice of such acceptance by Harvey;
(iv) With respect to direct-to-video Products initially
released prior to the Theatrical Preclusion Period, the activities described in
clause (iii) of Subsection 2.7(a), provided that such activities shall not occur
with respect to any country in which less than six (6) months shall have passed
since the initial street release date in such country of the home video Product
that contains the Casper Picture that is the subject of the Theatrical
Preclusion Period in question (but such six months shall not extend beyond the
expiration of such Theatrical Preclusion Period), and provided further that all
such activities shall be generally consistent with either (A) the prior practice
of the member of the Harvey Group or the licensee, distributor, subdistributor
or sublicensee in question, or (B) industry practices generally followed for
direct-to-video products where there is no competitive prequel, sequel or
related video in the marketplace (including a video of a related theatrical
film);
(v) The release, other than theatrical release, of any
Filmed Entertainment Product in a medium now known or hereafter devised other
than the medium in which such Filmed Entertainment Product was initially
exploited, and the advertising, marketing and promoting of such Filmed
Entertainment Product in such secondary medium, provided that such Filmed
Entertainment Product was generally released in its medium of initial
exploitation prior to the commencement of the Theatrical Preclusion Period in
question, and provided further that such release, advertising, marketing and
promoting in another medium occur in a manner generally consistent with industry
practice absent the release of a related theatrical film (e.g., a fourth quarter
1998 Casper direct-to-video could be broadcast on television, cable,
pay-
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per-view, etc. during a subsequent Theatrical Preclusion Period);
(vi) With respect to direct-to-video and television
Products scheduled to be initially released after the conclusion of the
Theatrical Preclusion Period:
(A) trade advertising and general paid advertising
occurring after the second May 1st of the Theatrical Preclusion Period
with respect to such direct-to-video Products and occurring after the
second July 1st of the Theatrical Preclusion Period with respect to such
television Products; and
(B) soliciting orders for, and manufacturing of,
such direct-to-video Products;
Provided that the activities described in Subparagraphs (A) and (B) above which
are undertaken are not designed to take advantage of the marketing of the Casper
Picture or video containing the same that were released during the Theatrical
Preclusion Period, and are either (x) generally consistent with the prior
practices of the member of the Harvey Group or the licensee, distributor,
subdistributor or sublicensee in question, or (y) consistent with customary
industry practices generally followed for such products;
(vii) Press announcements and public filings required to
be made by Harvey in order to comply with the requirements of law, the rules of
a national securities exchange, or the rules of the National Association of
Securities Dealers Automated Quotation System; or
(viii) Subject to rights granted to Universal herein and
in any of the Related Agreements, Harvey's unrestricted right to develop,
finance and produce Casper Character Filmed Entertainment Products (other than
Casper Pictures) during a Theatrical Preclusion Period, or Harvey's entry into
contracts to be performed outside the Theatrical Preclusion Period in question,
it being acknowledged that the existence of the Theatrical Preclusion Period
shall not prevent Harvey from entering into promotional or commercial tie-in
agreements (subject to the further provisions of the Merchandising Amendment) or
into contractual arrangements for advertising so long as the performance of any
such agreement or arrangement does not occur during the Theatrical Preclusion
Period.
(c) Exercise of Retained Rights By Harvey. Harvey hereby agrees
that it and each member of the Harvey Group will refrain, and that it will make
reasonable efforts to ensure that each of their respective licensees,
distributors, subdistributors and sublicensees will refrain from exercising
rights they retain during the Theatrical Preclusion Period in a manner
intentionally to frustrate the purposes of the Theatrical
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Preclusion Period and Universal's rights with respect thereto.
Section 2.8 Rights/Services Fee For First Sequel. The Rights/Services
Fee payable to Harvey in connection with the First Sequel, if any, shall be as
set forth in this Section 2.8.
(a) Fixed Fee. Harvey shall be entitled to a fixed fee equal to
the "Fixed Sequel Fee" set forth in the Pricing Schedule attached to this
Amended and Restated Agreement and made a part hereof. Such fixed fee shall be
treated as a non-refundable advance against Harvey's contingent compensation set
forth in Subsection 2.8(b) below. The fixed fee shall be payable as follows: (i)
the non-refundable amount set forth in the Pricing Schedule as due upon the
Settlement Date, receipt of which is hereby acknowledged by Harvey, (ii) Five
Hundred Thousand Dollars ($500,000) upon the giving of the Initial Notice for a
Theatrical Preclusion Period applicable to such First Sequel, as provided in
Paragraph 2.6(b)(i), (iii) fifty percent (50%) of the balance upon giving the
Final Notice for such Theatrical Preclusion Period, as provided in Paragraph
2.6(b)(ii), and (iv) the balance upon commencement of principal photography but
no later than twelve (12) months after the Final Notice.
(b Contingent Compensation. Harvey shall be entitled to
contingent compensation equal to that percentage of Gross Proceeds (as defined
in Exhibit "A-1" attached to this Amended and Restated Agreement, except that
cooperative advertising will not be deducted from "accountable gross" in
arriving at "gross proceeds") from first dollar as is set forth as the "Initial
Percentage" in the Pricing Schedule, escalating to that percentage of such Gross
Proceeds from and after Initial Artificial Breakeven as is set forth in the
Pricing Schedule as the "Increased Percentage," provided that home video
receipts shall be included in such Gross Proceeds on a royalty basis calculated
in accordance with the "Home Video Royalty" specified in the Pricing Schedule,
and provided further that no sums received in connection with Merchandising from
the First Sequel will be included in such Gross Proceeds in calculating Harvey's
participation under this Subsection (but rather shall be accounted to Harvey in
a separate Merchandising accounting pursuant to the provisions of Subsection (c)
below).
(c Merchandising Participation. Harvey shall be entitled to
participate in sums received from Merchandising the First Sequel in accordance
with the provisions of the Merchandising Amendment (which sums are in addition
to the Rights/Services Fee components described in Subsections (a) and (b) of
this Section 2.8).
(d Delay Amounts. Except to the extent caused by a Force Majeure
Event, in the event that for any reason after Universal provides Harvey with the
Final Notice in respect of a Theatrical Preclusion Period applicable to the
First Sequel the initial United States street release date of the home video
containing the First Sequel
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does not occur by the second April 15th of the Theatrical Preclusion Period,
then Universal will pay to Harvey the "Daily Delay Amount" set forth in the
Pricing Schedule for each day during the period from and after such date to and
including the initial street release date of the home video, up to a maximum
aggregate amount equal to the "Aggregate Delay Amount" set forth in the Pricing
Schedule. If the initial United States street release date of such home video
occurs no later than one hundred twenty (120) days after the date of the general
United States theatrical release of the First Sequel, then the amounts payable
under this Subsection 2.8(d) shall increase only the fixed fee advance otherwise
payable under Subsection 2.8(a). If, on the other hand, the initial United
States street release date of such home video occurs more than one hundred
twenty (120) days after the date of the general United States theatrical release
of the First Sequel, then the amounts payable under this Subsection 2.8(d) shall
increase the fixed fee otherwise payable under Subsection 2.8(a) but such
increase shall not be treated as an advance against amounts due under Subsection
2.8(b). Except to the extent caused by a Force Majeure Event, the failure to
ever actually release the First Sequel theatrically on eight hundred (800) or
more screens following delivery of a Final Notice of a Theatrical Preclusion
Period related to such First Sequel shall be deemed to entitle Harvey to payment
of the Aggregate Delay Amount in accordance with the immediately preceding
sentence no later than the second July 15th of the Theatrical Preclusion Period,
and such Aggregate Delay Amount shall not be credited against any future
payments (for sequels or otherwise).
Section 2.9 Rights/Services Fee For Additional Casper Pictures.
(a Good Faith Negotiations. With respect to each Casper Picture
after the first Feature Casper Picture and the First Sequel (each such
subsequent Casper Picture being herein referred to as a "Subsequent Sequel"),
the Parties shall attempt to negotiate the Rights/Services Fee and the
Merchandising participation in respect thereof in good faith, provided that if
such Subsequent Sequel is subject to a Theatrical Preclusion Period, then:
(i The formula for determining the Rights/Services Fee
(both fixed and contingent), and the Merchandising participation, as
well as the advances payable with respect thereto, for such Subsequent
Sequel shall be no less favorable for Harvey than the immediately
preceding sequel to which a Theatrical Preclusion Period applied; and
(ii Amounts payable, if any, for delayed release shall be
controlled by Subsection 2.8(d) above.
Such good faith negotiations in respect of any Subsequent Sequel may be
initiated at any time by Universal's giving written notice to Harvey that it
desires to set such Rights/Services Fee and the Merchandising participation,
provided that such written
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notice may be given by Universal with respect to a Subsequent Sequel only after
the expiration of at least ninety (90) days from the initial theatrical release
in the Domestic Territory of all Casper Pictures for which the Rights/Services
Fee and the Merchandising participation have previously been determined, whether
by agreement (including this Amended and Restated Agreement with respect to the
first Feature Casper Picture and the First Sequel) or by the Baseball
Arbitration procedure described in Subsection (b) below.
(b Baseball Arbitration. After the giving of such written notice,
the Parties shall have thirty (30) days in which to reach agreement on the
Rights/Services Fee and Merchandising participation applicable to the Subsequent
Sequel in question. If the Parties fail to reach agreement within such thirty
(30) day period, then at any time thereafter and prior to executing an agreement
on such Rights/Services Fee and Merchandising participation, either Party may
initiate the procedure set forth in this Subsection ("Baseball Arbitration") by
giving written notice to the other of its desire to initiate such procedure.
Thereafter the Parties shall follow the following procedure to determine such
Rights/Services Fee and Merchandising participation:
(i Selection of Panel. No later than the close of business
on the tenth (10th) business day following such written notice, each Party shall
provide written notice to the other setting forth (A) the identity of an
individual with experience in the entertainment industry selected by such Party
(who shall not be a present or former officer, director or partner of such
Party, or a current employee or constituent partner of such Party, or of any of
its Affiliates or of any of its current investment bankers, accounting firms or
law firms) to resolve such disagreement, (B) such individual's consent to serve
for such individual's customary hourly fees, and (C) the identity of up to ten
(10) suggested neutral individuals to serve as a third mediator who would meet
the qualifications set forth in clause (A) above. The mediators originally
designated by each Party shall promptly confer about the selection of a third
mediator from such lists, and within fifteen (15) business days following the
original notice of arbitration shall agree upon and (subject to availability)
select the third mediator from the lists submitted by the Parties or, if they
cannot agree upon a third mediator from such lists, shall otherwise agree upon
and select a third mediator not on such lists who meets the qualifications set
forth in clause (A) above, provided that if the originally designated mediators
cannot agree upon a third mediator by such date, the third mediator shall be a
retired judge designated by Judicial and Arbitration Mediation Services, Inc.,
located in Los Angeles, California. The three mediators so selected are herein
referred to as the "Panel."
(ii Submissions. Within five (5) business days after the
designation of the third mediator, each Party shall submit to the Panel such
party's proposal in the form of an agreement regarding the Rights/Services Fee
and the
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Merchandising participation in respect of such Subsequent Sequel (other than
with respect to delay payments controlled by Subsection 2.8(d)). Each party's
respective proposal shall in substance be materially in accordance with the last
proposals made by such Party to the other Party during the course of the
aforementioned good faith negotiations between them.
(iii Proceedings Along with their proposals, the Parties
may submit such written memoranda, arguments, briefs and evidence in support of
their respective positions as they see fit and as a majority of the Panel may
permit or determine. Subject to the foregoing, no particular procedures are
intended to be imposed upon the Panel, it being the desire of the Parties that
any such disagreement shall be resolved as expeditiously and inexpensively as
reasonably practicable. In this regard, the Panel may follow such procedures,
consistent with the language of this Amended and Restated Agreement, as it deems
appropriate to the circumstances and with reference to the amounts in issue, and
may obtain testimonial evidence under oath from the Parties and their respective
witnesses as the Panel may determine.
(iv Decision. No later than sixty (60) calendar days
following the initial notice of arbitration described in Subsection 2.9(b) above
or, if Initial Notice for a Theatrical Preclusion Period has been given, no
later than the May 20th following such Initial Notice pursuant to Section 2.9(c)
below, the Panel shall, by majority vote, select one of the two proposals
submitted by the Parties as the form of agreement to be executed by the Parties
to evidence the Rights/Services Fee and/or Merchandising participation in
respect of such Subsequent Sequel, it being agreed that the Panel shall have no
authority to alter any such proposal in any way. Such selection shall be made by
the Panel on the basis of its determination that such proposal reflects
substantive terms that more closely reflect the market value of the rights
involved than the alternative proposal, taking into account the market values of
comparable rights, the financial performance of the immediately preceding
Sequel, and whether the Subsequent Sequel in question will be the subject of a
Theatrical Preclusion Period. Such determination by the Panel shall be final and
binding upon the Parties; and thereafter the Parties shall promptly execute the
form of agreement designated by the Panel, and their affairs (including, where
applicable, the floor for advances for a Subsequent Sequel set forth in Section
2.9(a)(i)) shall be governed accordingly. Notwithstanding the foregoing, the
Parties understand and agree that neither the commencement nor conclusion of any
Baseball Arbitration will obligate Universal to proceed to production with
respect to any Subsequent Sequel or to pay any Rights/Services Fee if it does
not proceed to production.
(v Costs. The Party whose proposal is not selected by the
Panel shall pay the costs of the arbitration, including the fees of each member
of the Panel, and shall additionally bear the reasonable fees and costs
(including reasonable
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attorney's fees for Outside Attorneys) of the other Party in connection with
such proceeding.
(vi Hold Harmless of Panel Members. No member of the Panel
shall have any liability to the Parties in connection with service on the Panel,
and the Parties shall provide such indemnities to the members of the Panel as
they shall request.
(c Coordination of Baseball Arbitration and Theatrical Preclusion
Period Procedures. If Universal gives Harvey an Initial Notice in respect of a
Theatrical Preclusion Period for a Subsequent Sequel and the Parties have not
yet agreed upon the Rights/Services Fee and/or Merchandising participation for
such Subsequent Sequel, then the Baseball Arbitration with respect to such
Subsequent Sequel shall commence within thirty (30) days following such Initial
Notice, and the Parties shall mutually instruct the Panel to render a decision
no later than the following May 20th. In the event that Universal timely
proceeds to Baseball Arbitration following its giving of Initial Notice and does
not give a Final Notice after the decision rendered therein, then and in such
event, up to Two Hundred Fifty Thousand Dollars ($250,000) of the amount paid
upon giving of the Initial Notice may be applied by Universal as an advance
against film payments due to Harvey for prior Casper Pictures and the balance
shall be treated as an advance against the Rights/Services Fee for the next
Casper Picture (and may be applied to amounts due upon the giving of an Initial
Notice with respect thereto, if applicable).
(d Ability to Proceed to Production. It is understood and agreed
that, subject to Subsection (c) above, no portion of the Rights/Services Fee
with respect to a Subsequent Sequel (other than the amount due upon the giving
of Initial Notice) shall be due until the entire Rights/Services Fee has been
resolved either through negotiation or through Baseball Arbitration and that
Universal may proceed to production pending Baseball Arbitration of such
Rights/Services Fee.
Section 2.10 Scope of Rights/Services Fees. It is understood and agreed
that Universal shall not be required to pay any other fees to members of the
Harvey Group, other than the Rights/Services Fees (and the Merchandising
participation) described herein and in the Merchandising Amendment, for
Universal's exclusive rights in respect of Casper Pictures and that such fees
(including Merchandising participation) are "all-in fees" for the pertinent
rights, including the rights to the use in any Casper Picture of the Character
Casper, the other Characters included in the first Feature Casper Picture and
the New Universal Elements, and for related ancillary rights including those in
the soundtrack of any such Casper Picture.
Section 2.11 Ghostly Trio Rights. Subject to other provisions of this
Amended
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and Restated Agreement and the Related Agreements, Harvey shall retain
non-exclusive theatrical motion picture rights to the Ghostly Trio, but will not
permit the release (except by a member of the Universal Group) of any theatrical
film that includes the Ghostly Trio or any of them prior to December 31, 2002.
ARTICLE 3: TELEVISION
Section 3.1 Scope of Television Rights. Subject to Section 1.1,
Universal shall have the rights set forth in this Article 3 with respect to:
(a All Characters and Products (other than New Pictures) which
the Harvey Group Exploited prior to the Settlement Date in the medium of
television. After the Settlement Date, Universal shall have no rights to such
Characters or Products under this Article other than those described in
Subsection 3.1(b) below.
(b All Products featuring a Casper Character or having a Casper
Character's name in the title thereof which the Harvey Group intends to Exploit
on or after the Settlement Date in the medium of television.
Section 3.2 Term of Rights. Universal shall have the rights set forth in
this Article 3 during the period commencing on the Original Agreement Date and
continuing until the applicable date set forth below:
(a December 7, 2003, for the rights set forth in Sections 3.4(a)
and 3.4(b) as applied to New Television Products (including live action
and animated) in which the Character Casper is the principal Character
or in the title for which Casper's name appears as a reference to such
Character;
(b June 30, 2001, for the rights set forth in Sections 3.4(a) and
3.4(b) as applied to New Television Products (including live action and
animated) in which another Casper Character (i.e., other than Casper) is
the principal Character or in the title of which Casper's name does not
appear but another Casper Character's name does as a reference to such
other Character;
(c December 7, 2003, for the rights described in Subsection
3.3(a);
(d The Settlement Date for the rights described in Section
3.3(b); and
(e December 7, 2000 for the rights described in Section 3.5.
Provided that, the expiry dates for the rights referred to in Subsections (a),
(b) and (c) above will be December 7, 2000, unless (x) on or before June 15,
2000, Universal has provided Harvey with a Final Notice of an anticipated
release of the First Sequel on or
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prior to Labor Day 2001, (y) such First Sequel is, in fact, initially released
in at least eight hundred (800) theaters in the Domestic Territory on or prior
to Labor Day 2001, and (z) with respect to Subsection (c) only, the projected
theatrical box office for such First Sequel in the Domestic Territory exceeds
One Hundred Million Dollars ($100,000,000).
Section 3.3 Harvey Library.
(a Domestic Territory. With respect to television Exploitation of
Harvey Library Products, the Harvey Group is free to enter into agreements with
third Persons with respect to the television Exploitation of Harvey Library
Product, provided that such agreement is entered into on or before December 31,
1990; provided, however, that the term of the television Exploitation of Harvey
Library Products by third Person(s) pursuant to any such agreement shall not
exceed six (6) years from the date of such agreement. With respect to all other
television Exploitation of Harvey Library Products in the Domestic Territory,
Universal shall have First Negotiation/First Refusal Rights, except that on and
after the Settlement Date such First Negotiation/First Refusal Rights shall be
applicable only to Characters and Products described in Subsection 3.1(b).
(b Foreign Territory. With respect to all television Exploitation
of Harvey Library Products in the Foreign Territory, subject only to licenses in
existence on the Original Agreement Date and listed or otherwise referred to on
the Schedules to the Stock Purchase Agreement, Universal's First
Negotiation/First Refusal Rights shall expire on the Settlement Date.
Section 3.4 New Television Products.
(a General. Subject to Subsections 3.4(b) and (c) below, with
respect to all New Television Products, Universal shall have First
Negotiation/First Refusal Rights, except that on and after the Settlement Date
such First Negotiation/First Refusal Rights shall be applicable only to
Characters and Products described in Subsections 3.2(a) and 3.2(b)).
(b Made-for-Video Products. In accordance with Subsection 3.4(a),
Universal shall have First Negotiation/First Refusal Rights with respect to the
Television Exploitation of Characters and Products which the Harvey Group
Exploits initially in the home video market ("Made-for-Video-Products");
provided, however, that the Harvey Group shall have the right to transfer
television rights in a Made-for-Video Product to a third Person in conjunction
with the concurrent transfer of home video rights therein to such third Person,
without according Universal First Negotiation/First Refusal Rights, if but only
if the Board of Directors of Harvey has determined in its good faith business
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judgment that such transfer of television rights to such third Person is
necessary so as not to frustrate Harvey's ability to conclude the agreement with
such third Person for the transfer of home video rights in the Made-for-Video
Product on acceptable terms.
(c First-Run Primary License. Harvey shall have the right to
directly license a first-run New Television Product to a Network, on a "primary
license" basis (i.e., for a limited number of runs over a limited number of
years within a single form of media within a distinct territory). For purposes
of this Subsection 3.4(c), a "Network" shall mean a nationally broadcast
network, such as ABC, CBS, NBC, FBC, UPN and WB, any integrated national pay
television service (such as HBO and Showtime) or any integrated national basic
television service (such as USA, Nickelodeon, Lifetime and the Family Channel),
but shall not mean a so-called "ad hoc" network or a so-called "superstation."
Section 3.5 Special Holdback on Animated New Television Products. If
Universal initiates the development and/or production of a Feature Casper
Picture to which a Theatrical Preclusion Period does not apply, the Harvey Group
shall not Exploit (other than in connection with any then existing licenses) any
animated New Television Product with respect to the Character(s) which is/are
featured in such Picture or upon which such Picture is based (nor renew or
extend any then existing licenses in connection therewith) for the period
commencing on the date which Universal notifies the Harvey Group that it has
Green-Lighted such Picture, and continuing until the date which is the earliest
of:
(a The earlier of:
(i Eighteen (18) months after the commencement of the
initial theatrical release of such Picture, or
(ii Except in the case of the first Feature Casper
Picture, thirty-six (36) months after the date of Universal's
"Green-Light" notice; or
(b The abandonment of such Picture by Universal; or
(c December 7, 2000;
Provided that Universal agrees in each instance to consider whether and to what
extent in Universal's good faith business judgment such a television "holdback"
is necessary for purposes of Universal's marketing plan for the applicable New
Picture; and provided further that the foregoing shall not preclude the
appearance of any such Character in an animated New Television Product in which
such Character is not a "series" regular, provided such Character appears only
incidentally in connection therewith.
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Section 3.6 Subagents. Universal shall not utilize any subagents in
connection with Universal's television distribution of New Television Products
without Harvey's approval (such approval not to be unreasonably withheld).
ARTICLE 4: HOME VIDEO
Section 4.1 Home Video. This Section is hereby deleted.
Section 4.2 Harvey Library. As of August 22, 1997, Universal and Harvey
entered into an Assignment and Assumption Agreement, attached hereto as Exhibit
4.2, pursuant to which Universal assigned back to Harvey all of Universal's then
existing rights in the home video exploitation of Harvey Library Products. Such
Assignment and Assumption Agreement is hereby incorporated by reference as
though set forth fully hereat.
Section 4.3 New Television Products. This Section is hereby deleted.
Section 4.4 Made-for-Video Products.
(a Applicable Product. Subject only to licenses in existence on
the Original Agreement Date and listed on or referenced in the Schedules to the
Stock Purchase Agreement, Universal shall have a First Negotiation/First Refusal
Right with respect to the production, distribution and other Exploitation in the
home video market of the first Post-Sequel Casper Video, which Right may be
exercised only once. For purposes hereof, the "Post-Sequel Casper Video" shall
be the first feature-length Made-for-Video Product (whether live action or
animation or a combination) that is initially released, by either Harvey or by
any of its direct or indirect licensees, sublicensees, distributors or
subdistributors, after the First Sequel's initial theatrical release in the
Domestic Territory and that (i) has the Character known as "Casper" as the most
prominently featured Character in the Made-for-Video Product, and/or (ii) has
the name "Casper" (as a reference to such Character) in the title of the
Made-for-Video Product.
(b Certain Protective Provisions. If Universal exercises such
First Negotiation/First Refusal Right, if the Parties agree to terms for
Universal's acquisition of rights in the Post-Sequel Casper Video, and if
Universal timely releases such Made-for-Video Product in accordance with such
terms of agreement, then Harvey will agree that there will be no initial release
by Harvey, or by any of its licensees, distributors or subdistributors, during
the six (6) months preceding and the nine (9) months following the initial
release of the Post-Sequel Casper Video, of any Made-for-Video Product that
includes a Casper Character, except for Made-for-Video Products of less than
thirty-five (35) minutes duration (exclusive of main and end titles).
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(c Time for Exercise. The First Negotiation/First Refusal Right
granted to Universal under Subsection 4.4(a) shall be in effect from the
Settlement Date through the close of business on December 7, 2000 and shall
apply to any proposal made on or before December 7, 2000, even if such proposal
relates to a Post-Sequel Casper Video that is to be released after December 7,
2000 because of the timing of the release of the First Sequel. Harvey agrees
that it will not make any such proposal related to a Post-Sequel Casper Video
which would require the exercise of such First Negotiation First Refusal Right
before the earlier of the following applicable dates, subject to the conditions
for applicability set forth below:
(i January 1, 1999, if Universal has provided a Final
Notice to Harvey of a Theatrical Preclusion Period commencing on April
15, 1999 or has otherwise notified Harvey by January 1, 1999 that the
First Sequel will be released during 1999; and
(ii January 1, 2000 if Universal has provided a Final
Notice to Harvey of a Theatrical Preclusion Period commencing on April
15, 2000 or has otherwise notified Harvey by January 1, 2000 that the
First Sequel will be released during 2000;
Section 4.5 "Premiums." The terms of this Article 4 shall not be
applicable with respect to any distribution of any Product by means of home
video devices which are distributed as "premiums" (i.e., which are sold or given
away as part of a package with other products or services which are not the
subject of this Amended and Restated Agreement, or which are sold at a reduced
price in conjunction with the sale of other products or services which are not
the subject of this Amended and Restated Agreement), and the same shall be
governed entirely by the provisions of Article 5 below, as modified by the
Merchandising Amendment.
Section 4.6 Certain Restrictions on Universal Catalog Activities. During
each Video Restricted Period, as defined below, Universal will Exploit its home
video Products in which the Character Casper is the most prominently featured
Character (or in which the name Casper appears in the title of the Product as a
reference to such Character) (a "Casper Video"), including home videos of
Universal's animated television shows featuring the Character Casper, only in a
manner generally consistent with Universal's or the home video industry's
historical practices respecting sales of such types of products without regard
to the concurrent initial release by Harvey (or by one of its licensees,
distributors, sublicensees or subdistributors) of a Made-for-Video Product which
is a Casper Video. For purposes of the foregoing, a "Video Restricted Period"
shall mean each of the following:
(a The last three calendar months of 1997;
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(b The last three calendar months of 1998; and
(c The ninety (90) day period following Harvey's initial release
of the first Casper Video that is initially released after each
Theatrical Preclusion Period.
ARTICLE 5: MERCHANDISING
Section 5.1 Efficacy. The provisions of this Article 5 shall be subject
to the further provisions of and shall be qualified in their entirety by the
Merchandising Amendment and the Merchandising Side Letter incorporated therein
from and after January 21, 1997 (the "Merchandising Amendment Date"). The
provisions of this Article 5 shall be effective without regard to the
Merchandising Amendment only for Merchandising licensing agreements which
commenced prior to the Merchandising Amendment Date.
Section 5.2 Term. With respect to the Merchandising Exploitation of all
Characters and Products, the Parties shall, for Merchandising licensing
agreements which commenced prior to the Merchandising Agreement Date (and no
others), have the respective rights and obligations set forth in this Article 5
during the period commencing on the Original Agreement Date and continuing until
the earlier of the expiration of the term of such Merchandising licensing
agreement or the date which is ten (10) years from the Original Agreement Date;
provided that such term shall be extended in the following instances:
(a In connection with any Characters featured in a Feature New
Picture with respect to which Universal has the right hereunder to
initiate and/or release after the expiration of such ten (10) year term,
Universal shall have the right to be the exclusive licensing agent of
the Harvey Group for such Character for Picture-related Merchandising
Exploitation during the period commencing upon the Harvey Group's
receipt of notice from Universal that such a New Picture featuring such
Character has been "Green-Lighted" and continuing until the date which
is the earlier of (i) Universal's abandonment of the New Picture; or
(ii) the date which is 3 years after the date of the commencement of the
initial theatrical release of the New Picture; or (iii) the date which
is thirty (30) months after the Harvey Group's receipt of notice from
Universal that such New Picture has been "Green-Lighted," if as of such
date the New Picture has not been released; and
(b In connection with any Character featured in a New Picture
which is theatrically reissued after the expiration of such ten (10)
year term, Universal
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shall have the right to be the exclusive licensing agent of the Harvey
Group for such Character for Picture-related Merchandising Exploitation
during the period commencing six (6) months prior to the scheduled
commencement of the initial theatrical reissue of the New Picture and
continuing until the date which is twelve (12) months after the date of
the commencement of the initial theatrical re-issue of the New Picture
(provided, that the Harvey Group agrees to consider in good faith, and
upon Universal's request, extending the aforesaid twelve (12) month
period on a case-by-case basis (for example, if the New Picture
originally performed exceptionally well at the box-office or acquired
seasonal significance (as a Christmas Picture, for example) there may be
a greater market for Picture-related Merchandising).
In any event, any approved licenses granted by Universal hereunder to third
Persons prior to the expiration of the foregoing periods shall remain in force
following such expiration, and the respective rights and obligations of the
Parties hereto shall similarly remain in force with respect to such licenses
until such licenses expire by their terms.
Section 5.3 Existing Licenses/Leisure Concepts Agreement. Following the
Original Agreement Date, with respect to all Existing Merchandising Licenses,
Universal shall, for the benefit of the Harvey Group, fulfill the servicing
obligations of the Harvey Group pursuant to such Existing Merchandising
Licenses, and remit all sums so collected to the Harvey Group, free of any
charge or fee by Universal other than the deduction of Universal's direct
out-of-pocket costs (but not to exceed, in the aggregate, the lesser of (i)
Twenty-Five Thousand Dollars ($25,000) per year, or (ii) five percent (5%) of
the sums so collected). In the event that the agreement between Harvey
Publications, Inc. and Leisure Concepts, Inc. dated May 19, 1987 has not been
terminated prior to the Original Agreement Date, the Harvey Group shall exercise
its rights pursuant to Paragraph 8 of said agreement to cause the termination of
the agreement effective December 31, 1990.
Section 5.4 New Licenses. With respect to all Merchandising Exploitation
of Characters and Products (other than Merchandising of New Pictures, and
Merchandising pursuant to Existing Merchandising Licenses):
(a Universal Exclusive Agency. Universal shall have the right to
be the exclusive licensing agent of the Harvey Group for Merchandising
Exploitation and, subject to the other terms and conditions hereof, the Harvey
Group shall not itself nor permit third Persons to Exploit or grant licenses for
the Exploitation of Merchandising rights in Characters and Products. Harvey
shall have the right to approve Universal's use of sub-agents and Universal's
business and creative decisions (including without limitation the duration of
any such license or commitment) with respect to Universal's exercise of
Merchandising licensing rights. Such approvals by Harvey shall not be
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unreasonably withheld, but may be unreasonably withheld during the period from
and after April 22, 1993 to the Merchandising Amendment Date (the "Merchandising
Letter Period").
(b Fees. In connection with Universal's exercise of the
Merchandising licensing rights granted hereby:
(i Universal shall have the right to retain a fee of
twenty percent (20%) of all revenues from Merchandising pursuant to its
Merchandising licenses hereunder including without limitation revenues from
Merchandising royalties pursuant to its Merchandising licenses for New Pictures;
provided that during the Merchandising Letter Period, Universal shall have the
right to retain a fee of thirty percent (30%) of all revenues received by
Universal from Merchandising royalties pursuant to its Merchandising licenses
for all Characters and Products other than from its Merchandising licenses for
New Pictures.
(ii In the event Universal uses a third Person as a
sub-agent in connection with the grant of Merchandising licenses, the combined
fees of such sub-agent and Universal shall not exceed forty percent (40%) of all
revenues from Merchandising pursuant to the applicable licenses; provided that
during the Merchandising Letter Period such third party agent fees or
commissions shall not exceed twenty percent (20%) and shall be deducted from
revenues received from Merchandising royalties (with Universal's fees being owed
on such net revenues from such third parties).
(iii During the Merchandising Letter Period:
(A) Costs up to ten percent (10%) that are incurred
by Universal in exercise of the Merchandising rights hereunder shall be
deducted from Merchandising revenues prior to calculating Universal's
Merchandising fee, it being agreed that "costs" shall be defined as all
out of pocket direct expenses paid by Universal in good faith to third
parties in connection with the exercise of Merchandising rights herein,
including without limitation artwork and licensing kit development and
reproduction costs, freight, travel and entertainment directly related
to the specific property, trade show expenses related to the Characters
and Products, and promotional, marketing and advertising expense, but
excluding "overhead" which is defined as employees' salaries, occupancy
costs, office supplies, equipment rental and corporate overhead; and
(B) Copyright and trademark expenses and litigation
or other legal expenses related to the specific property shall also be
deducted from Merchandising revenue prior to calculating Universal's
Merchandising fee.
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(iv During the Merchandising Letter Period, Harvey will
pay Universal an additional four percent (4%) of gross revenue from printing
premium comics in connection with a Promotion negotiated by Universal.
(c Harvey Group Direct Licensing. Except during the Merchandising
Letter Period, the Harvey Group shall have the right, pursuant to the Marketing
Plan prepared under Section 5.5 below, to grant certain Merchandising licenses
directly to licensees without having Universal as the licensing agent, including
the right to enter into agreements for so-called "master toy licenses" and
"premiums" ("Harvey Group Licenses"); provided that any "master toy license"
must contain a so-called "bump-up" provision providing for increased royalties
in the event a New Picture is released which features or is based on the
Character(s) which are the subject of such license. With respect to the Harvey
Group's exercise of direct Merchandising licensing rights hereunder:
(i The Harvey Group shall pay Universal a fee of seven and
one-half percent (7 1/2%) of all revenues from "master toy licenses" and
five percent (5%) of all revenues from Merchandising pursuant to any
other Harvey Group Licenses; and
(ii Universal shall have the right to approve the Harvey
Group's business decisions with respect thereto, which approval shall
not be unreasonably withheld; provided however, that Universal's right
to approve the Harvey Group's business decisions with respect to the
"master toy licenses" shall be limited to approval (not to be
unreasonably withheld) of the "bump-up" provision and any other aspects
of the master toy license directly relating to or directly affected by
the release of a New Picture which features or is based on the
Character(s) which are the subject of such license.
Section 5.5 Marketing Plan. Following the Original Agreement Date, it is
the intention of Universal and the Harvey Group to create an overall marketing
plan for Merchandising Exploitation of all Characters and Products (other than
New Pictures) ("Marketing Plan"), which Marketing Plan shall include, inter
alia, a breakdown of those areas of Merchandising Exploitation with respect to
which the Harvey Group shall have the right to grant Harvey Group Licenses
directly to third Persons; provided that Harvey shall not have any such right
during the Merchandising Letter Period.
Section 5.6 Style Book. This Section is hereby deleted.
Section 5.7 Special Holdback on Harvey Group Licenses; Designation of
Merchandising Revenues. This Section is hereby deleted.
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Section 5.8 Special Holdback on Universal Licenses. This Section is
hereby deleted.
Section 5.9 Merchandising Exploitation of Feature New Pictures. This
Section is hereby deleted.
ARTICLE 6: THEME PARKS
Section 6.1 Scope of Article. With respect to all Exploitation of
Characters and Products in connection with Theme Parks owned, controlled or
operated by Universal ("Universal Parks"), the respective rights and obligations
of the Parties shall be as is set forth in this Article 6, provided that from
and after the Settlement Date, except as may be set forth in and subject to the
Parties' agreement upon and, if such agreement is reached, execution of a
Stroller Agreement that was under negotiation by the Parties as of the
Settlement Date (the "Stroller Agreement"). Universal's rights under this
Article 6 and any reference to "Characters" and/or "Products" in connection with
such rights shall be limited to the Exploitation in connection with Universal
Parks of Casper Characters and Products. For purposes of clarification,
Universal's Theme Park Exploitation of Characters or Products may only be of
Casper Characters or Products except for the limited exploitation which may be
permitted by a Stroller Agreement (if any) of Characters or Products other than
Casper Characters or Products. When the term "Theme Parks" is used in this
Amended and Restated Agreement, it shall mean any physical setting and its
related (including adjacent) facilities, not necessarily requiring admission
fees or tickets, (a) that was constructed primarily for the amusement,
entertainment or recreation of patrons, (b) that contains plantings, delineated
or separated areas of amusement, recreation and entertainment, and multiple
permanent attractions, and (c) that contains or is based on one or more thematic
presentations, provided that such physical setting is comprised, together with
its related facilities, of at least fifty (50) acres and such physical setting,
together with improvements thereon and its related or adjacent facilities, has a
current replacement value of at least One Hundred Million Dollars
($100,000,000).
Section 6.2 Universal Exclusive Rights and Territories. Except as may be
otherwise set forth in the Stroller Agreement, Universal shall have the
following rights with respect to Theme Park Exploitation of Characters and
Products (whether in the form of Strollers, Attractions, Promotions or
otherwise):
(a Term. As used herein, the term "Initial Period" shall refer to
the period commencing on the Original Agreement Date and continuing until the
latest to occur of the following applicable dates: (i) the date which is fifteen
(15) years from the date Universal closes the Qualifying Attraction in question
(provided Universal has not
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permanently re-opened the Qualifying Attraction in the interim), in connection
with any Character(s) which is/are a principal element in a Qualifying
Attraction; or (ii) the date which is twenty (20) years from the Original
Agreement Date, in connection with any Character(s) featured in or based on
which Universal causes the production of a Feature New Picture; or (iii) the
date which is ten (10) years from the Original Agreement Date in connection with
any other Character(s); and the term "Subsequent Period" shall refer to the
period commencing on expiration of the Initial Period and continuing thereafter
for a period of ninety-nine (99) years.
(b United States/Initial Period. During the Initial Period:
(i California and Florida. Universal shall have the
exclusive right of Theme Park Exploitation for all Theme Parks within the states
of California and Florida.
(ii All Other U.S. States. Universal shall have the
exclusive right of Theme Park Exploitation for all Theme Parks in all states and
possessions of the United States other than California and Florida ("Other
States"); provided however, that the Harvey Group shall have the limited right
to use the Characters as Strollers in connection with special entertainment
events at Theme Parks in Other States for not more than six days per year in any
single Theme Park ("Special Appearances"), provided that the Harvey Group shall
not directly advertise or permit the direct advertisement of the same within the
states of California and Florida. Notwithstanding the foregoing, if Universal
uses any Character as a Stroller or uses any Character or Product as a principal
element in a Qualifying Attraction in any Universal Park in an Other State, then
for as long as any Characters and/or Products are so used at such Universal
Park, Universal shall have the exclusive right of Theme Park Exploitation within
such Other State and in areas within other states and possessions beyond such
Other State within a one hundred fifty (150)-mile radius of such Universal Park
("Exclusivity Zone"), and the Harvey Group shall not use or permit the use of
Characters for Special Appearances, or directly advertise or permit any direct
advertising regarding such Special Appearances, within the Exclusivity Zone;
provided, however, that the foregoing shall not preclude any Continuing Third
Party Theme Park Rights.
(iii Total United States Exclusivity. Notwithstanding
anything to the contrary contained in Paragraph (ii) above, in the event that
Universal uses any Character or Product as the principal element of a Qualifying
Attraction at an Universal Park anywhere in the United States, then for as long
as any Character or Product is so used at such Universal Park and for a period
of fifteen (15) years thereafter, Universal shall have the exclusive right of
Theme Park Exploitation for the entire United States; provided however that the
foregoing shall not preclude any Continuing Third Party Theme Park Rights.
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(c United States/Subsequent Period. During the Subsequent Period,
Universal shall have non-exclusive Theme Park Exploitation rights in the United
States.
(d Exception for Harvey Parks. Notwithstanding the exclusivity
provisions set forth in this Section 6.2, Harvey shall have the right to utilize
Characters and Products in and in connection with Theme Parks owned or
controlled by the Harvey Group ("Harvey Parks"), but only if the particular
Harvey Park is more than one hundred fifty (150)-miles from any Universal Park
which Universal owned, controlled or operated prior to Harvey's taking ownership
or control of such Harvey Park.
(e United Kingdom, France or Japan. During the Initial Period, if
Universal uses any Character as a Stroller or uses any Character or Product as a
principal element in a Qualifying Attraction in an Universal Park in the United
Kingdom, France and/or Japan (whichever country is applicable shall be referred
to as the "Applicable Country"), then for as long as any Character or Product is
so used at an Universal Park in the Applicable Country, Universal shall have the
exclusive right of Theme Park Exploitation in such Applicable Country; provided
that the foregoing shall not preclude any Continuing Third Party Theme Park
Rights. During the Subsequent Period, Universal shall have non-exclusive Theme
Park Exploitation rights in the Applicable Country.
(f All Other Territories. With respect to all territories of the
universe other than the United States, the United Kingdom, France and Japan,
Universal shall have non-exclusive rights of Theme Park Exploitation during the
Initial Period only; provided that Universal shall retain non-exclusive Theme
Park Exploitation rights during the Subsequent Period with respect to any
country within such other territories in which Universal is using a Character as
a Stroller or is using a Character or Product as a principal element in a
Qualifying Attraction at an Universal Park at the time of expiration of the
Initial Period.
Section 6.3 Harvey Group Merchandising Space. Within a reasonable period
of time following the Original Agreement Date, Universal shall dedicate not less
than one hundred fifty (150) square feet of merchandise space at each of the
Universal Studios-Hollywood Theme Park and the Universal Studios-Florida Theme
Park for the sale of Harvey Group Merchandise and publications. In the event any
other Universal Park actually uses any Characters as Strollers, such Universal
Park shall dedicate not less than one hundred fifty (150) square feet of
Merchandise space at such Universal Park for the sale of Harvey Group
merchandise and publications. Notwithstanding the foregoing, from and after the
Settlement Date, the amount of merchandise space dedicated to Harvey Group
merchandise and publications shall be equitably reduced in
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light of the reduction in the number of Characters subject to this Article 6.
Such equitable reduction will be based on actual historical usage, but the
amount of merchandise space so committed at any relevant Theme Park shall be no
less than one hundred (100) square feet. In the event any Universal Park
actually uses any Characters as part of a Qualifying Attraction, then in lieu of
the foregoing provisions, Universal shall dedicate an aggregate total of not
less than three hundred (300) square feet of merchandise space at such Universal
Park for the sale of Harvey Group merchandise and publications.
Section 6.4 Licensing Fees, Joint Logo Merchandise and Promotions. With
respect to any Universal Park which actually uses the Characters and/or Products
as Strollers, Attractions and/or Promotions, the following shall apply to such
Universal Park, subject to the terms of the Stroller Agreement if such Agreement
is entered into:
(a Licensing Fees. Universal shall pay the Harvey Group a
licensing fee of ten percent (10%) of Universal's wholesale cost of purchasing
the Harvey Group merchandise and publications to be sold at such Universal Park,
provided that if wholesale shipments to Universal of such merchandise and
publications include so-called "free goods" as well as paid-for merchandise and
publications, Universal shall account to the Harvey Group on the basis of all
such merchandise and publications received (i.e., paid-for merchandise and
publications plus free goods); provided however, that the licensing fee payable
to the Harvey Group in connection with any Universal Park to which this Article
6 is applicable shall not be less than twenty-five thousand dollars ($25,000)
for each year in which this Article 6 is applicable. For each year in which this
Article 6 is applicable to an Universal Park, if the amount otherwise payable to
the Harvey Group pursuant to this Subsection 6.4(a) with respect to such
Universal Park is less than the amount which would have been payable if the
licensing fee were five percent (5%) of Universal's retail sales of Harvey Group
merchandise and publications at such Universal Park, Universal shall pay the
amount of the difference to the Harvey Group as a non-returnable advance against
the twenty-five thousand dollar ($25,000) minimum amount payable to the Harvey
Group for the following year(s) in connection with such Universal Park. If
Universal constructs a Qualifying Attraction at an Universal Park in California
or Florida, wherein any Character or Product is the principal element of such
Attraction, then Universal and the Harvey Group shall renegotiate in good faith
the licensing fees payable pursuant to this Subsection 6.4(a).
(b) Joint Logo Merchandise. Provided that the Harvey Group is not
precluded from doing so by any existing exclusive licensing agreements, the
Harvey Group and Universal shall cooperate in the development of so-called
"joint logo merchandise" (i.e., merchandise which features the logo of or
reference to a Harvey Character and/or Product and the applicable Universal
Park) for sale at such Universal Park.
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(c) Universal Distribution Company Catalog. Universal shall
include descriptions of Harvey Group merchandise sold in any applicable
Universal Park, in the catalog marketed by Universal Distribution Company which
contains descriptions of other merchandise sold at such Universal Park.
(d) Harvey Group Cartoon Films. Universal shall, in such
instances as Universal and Harvey mutually deem appropriate, use Harvey Library
and new Harvey cartoon films on so-called "cue line" videos within the
applicable Universal Park.
(e) Corporate Sponsors. Universal and the Harvey Group shall
endeavor to develop, both jointly and with corporate sponsors, joint promotions,
distributions of "premiums," so-called "bounce-backs" and related forms of
Promotions with respect to the applicable Universal Park.
Section 6.5 Harvey Approval Right. Harvey shall have the right to
approve the character designs, attributes and characterizations of the
Characters to be utilized by Universal as Strollers or in Attractions, as well
as the story line, if any, for an Attraction, for the purpose of ensuring that
the Characters are depicted in this regard in a manner consistent with the
integrity and artistic representation of the Characters as the same have been
depicted prior to the Original Agreement Date (such approval not to be
unreasonably withheld).
ARTICLE 7: OTHER COVENANTS
Section 7.1 All Other Media. This Article is hereby deleted, and
Universal acknowledges that it has no rights under this Amended and Restated
Agreement to exploit Characters and/or Products in any medium other than the
rights specifically granted under this Amended and Restated Agreement, including
the rights specifically granted under Subsection 2.5(d).
Section 7.2 Mutual Release.
(a) General. Except as expressly set forth below, Harvey, on
behalf of itself and each of its direct and indirect subsidiaries, hereby
releases, remises, acquits and forever discharges each member of the Universal
Group, and Universal, on behalf of itself and each of its direct and indirect
subsidiaries, hereby releases, remises, acquits and forever discharges each
member of the Harvey Group, from any and all charges, complaints, claims,
liabilities, obligations, promises, agreements, controversies, damages, actions,
causes of action, suits, rights, demands, costs, losses, debts and expenses
(including attorneys' fees and costs actually incurred) of any nature
whatsoever, known or unknown, suspected or unsuspected, that the releasing Party
and its direct and indirect subsidiaries (collectively, the "Releasor") ever
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had prior to the Settlement Date which arises from or relates to the existence,
performance or non-performance of any of the Related Agreements, the Original
Form of Agreement or the Letter Amendments, including, but not limited to,
rights arising out of alleged violations of any contracts, express or implied
(including without limitation claims relating to Merchandising, television,
Harvey's 1997 Casper Made-for-Video, and other filmed Products), any covenant of
good faith and fair dealing, express or implied, or any tort (each of the
foregoing being referred to individually as a "Claim" and collectively as
"Claims").
(b) Included Releasees. The releases of each member of the Harvey
Group and of the Universal Group set forth in Subsection 7.2(a) above shall be
deemed to include a release of (a) each such Group member's parents,
subsidiaries, affiliated companies, divisions, predecessors, successors and
assigns, and (b) each such Group member's and each of the foregoing's officers,
directors, representatives, employees and agents in their respective capacities
as such (all of the persons and entities referred to above, including each such
Group member, in their capacities as releasees being collectively referred to as
the "Releasees"),
(c) Scope of Release. With respect to those matters that are the
subject of the releases given in this Section 7.2, each Releasor expressly
waives and relinquishes all rights and benefits afforded by California Civil
Code Section 1542, to the extent, if any, that the same is applicable, and does
so understanding and acknowledging the significance of such specific waiver of
Section 1542. Section 1542 states as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
Thus, notwithstanding the provisions of Section 1542, and for the purposes of
implementing a full and complete release and discharge of the Releasees with
respect to those matters that are the subject of the releases given in Section
7.2, each Releasor expressly acknowledges that this Release is intended to
include in its effect, without limitation, Claims within the scope of the
releases given in Section 7.2 that Releasor does not know or suspect to exist in
Releasor's favor at the time of execution hereof.
(d) Exclusions. Notwithstanding the foregoing, nothing in this
Section 7.2 shall operate, or shall be construed or interpreted, as a release,
acquittal, discharge or waiver of any of the following, and none of the
following shall be included in the Claims that are the subject of the releases
contained in Section 7.2:
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(i) Any rights to payments in the ordinary course between
the Parties arising under any of the Related Agreements, including without
limitation rights to payment first arising on and after the Settlement Date;
(ii) Any rights to an accounting or audit rights arising
under any of the Related Agreements, including without limitation the rights set
forth in Section 8.11 and under analogous provisions or rights of the other
Related Agreements; and
(iii) Claims against Jeffrey Franklin and/or Steve
Waterman, each such Person's affiliated companies, successors and assigns (other
than Universal, Harvey and their affiliated companies), and each of the
foregoing Person's officers, directors, representatives, employees and agents in
their respective capacities as such.
Section 7.3 Additional Consultation Rights. In addition to, and not in
lieu of, any approval and/or consultation rights that such Party may have under
the other provisions of this Amended and Restated Agreement or any other Related
Agreement:
(a) Universal shall have the right to be kept reasonably informed
of creative and business matters and to consult with Harvey with respect
to Harvey's Exploitation of Casper Characters and Products in which a
Casper Character is featured or the title of which refers to the name of
a Casper Character as a reference to such Character, including without
limitation Merchandising activities; and
(b) Harvey shall have the right to be kept reasonably informed of
creative and business matters and to consult with Universal with respect
to Universal's Exploitation of the rights granted to it hereunder.
Such consultation rights will, subject to legal restrictions and requirements,
include the right of each Party to be reasonably and timely informed about
anticipated video release dates of the other.
Section 7.4 Paramount Pictures Agreement. Universal agrees not to assert
any rights against Harvey that Universal may have under its agreement with
Paramount Pictures dated September 2, 1994, so as to limit Harvey's rights
hereunder with respect to any Characters other than Casper.
Section 7.5 Additional Payments. In connection with the negotiation and
execution of this Amended and Restated Agreement and in addition to the other
payments called for hereby, (a) Universal paid to Harvey on or about the
Settlement Date, and Harvey hereby acknowledges receipt of, the "Film Advance
Amount" set forth in the Pricing Schedule, which amount was paid as a
nonrefundable advance against
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future payments that may become due from Universal to Harvey under the
Rights/Services Fee for the first Feature Casper Picture (other than amounts due
for Harvey's Merchandising participation therein); and (b) on the Library
Closing Date, Universal will pay to Harvey the amounts called for under the
Merchandising Amendment to be paid upon such date.
ARTICLE 8: GENERAL PROVISIONS
Section 8.1 New Universal Elements. In connection with any fanciful or
literary and/or artistic character which is after the Original Agreement Date
created by Universal in connection with any Filmed Entertainment Product (or is
after the Original Agreement Date acquired by Universal but has not been
previously Exploited by any Persons prior to being included in such Filmed
Entertainment Product) and which either (x) constitutes a major story element
within such Product (and is shown as interacting with the Characters therein) or
(y) is otherwise derivative of (or shown as having a family relationship with)
the Characters in such Product ("New Universal Element"), the Parties shall have
the following rights in connection with the further Exploitation of such New
Universal Element:
(a) Universal and the Harvey Group shall each own and control
fifty percent (50%) of all rights in and to such New Universal Element and shall
split fifty-fifty (50-50) any revenues derived in connection with the sale or
license of rights in and to the New Universal Element.
(b) As between Universal and the Harvey Group, Harvey shall be
entitled to administer the rights in and to such New Universal Element; provided
however, that Universal shall have the exclusive right to initiate the
development, production and/or creation of any Filmed Entertainment Products
based on or featuring such New Universal Element for a period concurrent with
the duration of the Casper Initiation Term.
The Parties shall negotiate in good faith with respect to the terms and
conditions applicable to any Filmed Entertainment Products using such New
Universal Element (including the Rights/Services Fee (if any) payable to Harvey
in connection therewith). Subject to the provisions of Subsections 2.5(i) and
2.9(c), in the event that the Parties cannot reach agreement with respect to any
such Filmed Entertainment Product, rights to exploit Products
made-for-the-medium in question (i.e., made-for-television, made-for-video,
made-for-theatrical exhibition, etc.) with respect to the New Universal Element
which would have been featured in the Filmed Entertainment Product shall be
frozen for the period commencing on the date the Parties reach impasse and
discontinue negotiations and continuing until the date which is the earlier of:
(y) one (1) year following the conclusion of Universal's Picture Initiation Term
with respect to such
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<PAGE> 46
New Universal Element; or (z) the later of (i) two (2) years from the date upon
which the Parties reach impasse and discontinue negotiation or (ii) the
expiration of the applicable Picture Initiation Term with respect to such New
Universal Element.
Section 8.2 Certain Harvey Approval Rights. Harvey shall have the right
to approve the business terms (in addition to having its creative approval
rights elsewhere set forth herein) of (a) any agreement pertaining solely to
Products Exploited by Universal hereunder or (b) any agreement pertaining to
Products Exploited by Universal hereunder and other unrelated goods, but only to
the extent the business terms of such agreement relate to Products Exploited by
Universal hereunder, which in either instance Universal proposes to enter into
with another member of the Universal Group; provided however, that Harvey shall
not have the right to approve any such agreement which is entered into in
connection with the Exploitation by Universal of a New Picture hereunder,
including without limitation, any agreement for the Exploitation of motion
picture, television, home-video and other allied and ancillary rights in
connection with such New Picture (excluding Picture-related Merchandising in
connection therewith for which Harvey otherwise has approval rights hereunder or
under the Merchandising Amendment). In any event, Harvey's approval shall not be
unreasonably withheld.
Section 8.3 Security Interest. In order to secure the Universal
Exploitation rights provided in this Amended and Restated Agreement, in
connection with any Product produced or otherwise funded and distributed
(directly or indirectly) by Universal hereunder, the Harvey Group shall and
hereby does grant Universal a security interest in the rights therein being
acquired by Universal (for example, if Universal elects to produce a Casper
Picture, Universal shall have a security interest in all rights in and to such
Picture, to the extent such rights are not otherwise vested in Universal). Such
security interest shall be evidenced by such security documents (including
without limitation UCC-1 financing statements and Mortgages of Copyright) as
Universal may from time-to-time reasonably deem necessary or desirable to
evidence its security interest, all of which the Harvey Group shall execute and
deliver promptly upon Universal's request therefor. Universal shall subordinate
its security interest to those security interests which institutional lenders
require the Harvey Group to grant to such institutional lenders in connection
with Harvey Group financing transactions permitted pursuant to that Certain
Shareholders Agreement between Universal and Harvey dated as of
________________, provided that such institutional lenders enter into
appropriate non-disturbance agreements with Universal with respect to
Universal's distribution rights in such Products.
Section 8.4 Other Documents and Instruments. Universal and the Harvey
Group each agree to execute such documents and instruments as may be required by
the other Party to further evidence or effectuate such other party's rights
hereunder or the purposes of this Amended and Restated Agreement.
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Section 8.5 Remedies. Neither the Harvey Group or Universal shall have
the right to enjoin the Exploitation by the other of any Filmed Entertainment
Products hereunder. All disputes hereunder between the Parties shall be
submitted to binding arbitration consistent with the arbitration provisions of
the Stock Purchase Agreement. In the event any Party hereto shall institute
arbitration proceedings seeking to terminate this Amended and Restated Agreement
by reason of the breach hereof by the other Parties hereto, the Parties hereto
agree to jointly instruct the arbitrator, if possible, to render a decision
within forty-five (45) days of the commencement (i.e. from the date the
initiating Party first delivers written notice to the other Party of the
initiation of such arbitration) of the arbitration proceeding.
Section 8.6 Reports of Infringements. Promptly following the receipt by
a Party hereto of information that a third Person is infringing upon a
Merchandising license hereunder or otherwise upon a right, copyright or
trademark of the other Parties hereto in connection with any Character or
Product, such Party shall report the same to the other Parties hereto and the
Parties shall cooperate with each other regarding such infringement.
Section 8.7 Notices. Any notices which the Harvey Group desires or is
required to give to Universal shall be given to Universal at the address
indicated below, and any notice which Universal desires or is required to give
to the Harvey Group shall be given to Harvey at the address indicated below;
provided, that each Party shall have the right to notify the other Parties of a
change in such party's address in the manner provided in this Section 8.7. Such
notices shall be given by personal delivery, or by telecopy, or by depositing
the same in the United States mail, postage prepaid.
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To Universal or any member of the To Harvey or to any member of the
Universal Group: Harvey Group:
- --------------------------------- ---------------------------------
Universal Studios, Inc. The Harvey Entertainment Company
100 Universal City Plaza 1999 Avenue of the Stars, Suite 2050
Universal City, CA 91608 Los Angeles, CA 90401
Attn: Mr. Mark Wooster Attn: Mr. Michael Hope
Telecopy No.: (818) 866-1507 Telecopy No.: (310) 458-6995
with a courtesy copy to: with a courtesy copy to:
Munger, Tolles & Olson Ziffren, Brittenham, Branca & Fischer
355 S. Grand Avenue 1801 Century Park West
35th Floor Los Angeles, CA 90067
Los Angeles, CA 90071 Attn: Samuel N. Fischer, Esq.
Attn: Robert L. Adler, Esq. Telecopy No.: (310)553-7068
Telecopy No.: (213)687-3702
Any notice delivered as aforesaid shall be deemed to have been given on the date
of personal delivery or telecopying, or on the date which is four days following
the deposit of such notice in the U.S. mail.
Section 8.8 Active Project Notification. Universal agrees, as a courtesy
to Harvey, to keep Harvey informed, on a periodic and confidential basis, of
feature theatrical motion picture projects which Universal has put into Active
Development, for the purpose of allowing Harvey an opportunity to attempt to
secure comic book publishing rights in connection therewith from the underlying
rights holder; provided that Universal's inadvertent failure to provide such
information shall not constitute a breach hereof by Universal.
Section 8.9 Tax Treatment. The Parties hereto agree that, in the
preparation and filing of their state and federal income tax returns, they shall
report income and expenses, etc. from their activities hereunder in a manner
consistent with the characterization hereunder.
Section 8.10 Trademark and Copyright. In connection with Universal's
Exploitation of the Characters, Universal agrees to comply with the notice
provisions of copyright and trademark law of the United States (and of each
specific country within which Universal Exploits Products hereunder). Universal
further agrees: (a) that trademarks, copyrights and notices pertaining to
Characters shall be displayed only in
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such form and manner as shall be required by applicable law and/or specifically
approved in advance by Harvey; and (b) to regularly inform Persons to whom
Universal licenses or distributes Product hereunder as to the appropriate
notices and markings required to be used in connection with the advertising,
promotion and other Exploitation of such Product. The Harvey Group's sole remedy
in the event of Universal's inadvertent failure to comply with the provisions of
this Section 8.10 shall be a claim for actual damages.
Section 8.11 Accounting. Universal agrees to provide Harvey with
quarterly accounting statements. Such statements shall conform with the end of
Universal's corresponding accounting periods and be given within ninety (90)
days thereafter and shall be accompanied with payment of the amount, if any,
shown to be due. Harvey shall have the right to audit Universal's books of
account, only as they relate to the Exploitation of Products hereunder or under
the other Related Agreements, not more frequently than once annually, and the
right to audit the Library Recoupment Amount for ninety (90) days after the
Library Closing Date, by either (a) a national firm of certified public
accountants of a stature equal to Price Waterhouse LLP or Deloitte & Touche, or
(b) such other first-class reputable firm of certified public accountants as
Universal in its good faith discretion may approve. No audit may (c) go into
transactions reported in any statement period rendered prior to the commencement
of any earlier audit, or (d) continue for longer than forty-five (45)
consecutive business days. Each statement shall be deemed correct and conclusive
and binding on the Harvey Group on the expiration of twenty-four (24) months
after it is given, and the inclusion in any statement of information or items
which appeared in a previous statement shall not render any such information or
terms contestable or recommence the running of such twenty-four (24) month
period with respect thereto; however, if the Harvey Group delivers a written
notice to Universal objecting to any such statement or item within such
twenty-four (24) month period, and if such notice specified in detail the
particular items to which the Harvey Group objects and the nature of the Harvey
Group's objections thereto, then insofar as such particular items are concerned,
such statements shall not be deemed correct or conclusive or binding on the
Harvey Group hereunder. Any objection to any statement given to the Harvey Group
shall be deemed to have been waived unless an action based thereon is instituted
by the Harvey Group against Universal within six (6) months following the
expiration of such twenty-four (24) month period. The balance of the accounting
and audit terms shall be subject to good faith negotiation within customary
parameters. Members of the Universal Group shall have the same audit rights with
respect to payments due them hereunder or under the Related Agreements as are
accorded to members of the Harvey Group hereinabove for payments due members of
the Harvey Group, mutatis mutandis,
Section 8.12 Universal Added Attributes. If, in connection with
Universal's Exploitation of any Character, Universal shall create new or expand
on the existing
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attributes or characteristics of such Character, it is acknowledged and agreed
by Universal that such new attributes or characteristics shall thereafter be
deemed to be a part of the Character, which can be freely used by Harvey in
connection with Harvey's continuing Exploitation of such Character.
Section 8.13 Recognition of Certain Third Person Rights. Universal
recognizes that in connection with any permitted transfer by Harvey of Feature
Picture rights to a New Picture to a third Person, Harvey may be required to
concurrently grant to such third Person Exploitation rights in connection with
such New Picture as are customarily granted to motion picture distributors (e.g.
rights to Exploit the New Picture on television, home video, etc.). Universal
hereby acknowledges and agrees that Harvey shall have the right, if Harvey in
its good faith business judgment deems it necessary so as to not frustrate
Harvey's ability to conclude the agreement with a third Person for the transfer
of Feature Picture rights in a New Picture, to concurrently transfer to the
third Person acquiring the Feature Picture rights therein such allied and
ancillary rights (subject to the limitations herein set forth, including without
limitation, the limitations on Merchandising, Theme Park and sequel and remake
rights) as Harvey may deem necessary.
Section 8.14 Publicity. Universal agrees to include the name of the
Harvey Group (or a Person which is a member thereof) in publicity issued by or
under the control of Universal (subject to Universal's usual exclusions, and
excluding incidental publicity) in connection with Universal's Exploitation of
Product hereunder which features one or more Characters. The Harvey Group's sole
remedy in the event of Universal's inadvertent failure to comply with the
provisions of this Section 8.14 shall be a claim for actual damages.
Section 8.15 Confidentiality/Press Release. Except as may be required by
law or judicial process, including legally required public reporting obligations
of the Parties, and except for disclosures by Universal to Amblin'
Entertainment, or by either Party to potential investors and/or in the course of
other financing activities if the recipient involved executes a customary
confidentiality agreement in favor of both Parties, the Parties hereto agree to
not disclose the material terms and provisions hereof to third Persons nor to
make any written or scripted public statements or interviews regarding this
Amended and Restated Agreement without the written consent of the other Parties
hereto (which written consent will not be unreasonably withheld or delayed). The
Parties will mutually agree upon the form of any press release to be issued in
connection with the public announcement, if any, of this Amended and Restated
Agreement (and the Merchandising Amendment) and will reasonably cooperate in
seeking confidential treatment in their respective public filings of any
financial terms requested by either to be kept confidential, and each of the
Parties will reasonably cooperate with the other in providing the others with
information required for their respective public filings related to this Amended
and Restated Agreement.
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Section 8.16 No Expansion/Limitation of Liability. Nothing contained in
this Amended and Restated Agreement shall be deemed to expand nor further limit
the representations and warranties in the Stock Purchase Agreement made by the
Harvey Group with respect to the Harvey Group's ownership and control of the
Existing Characters. The Harvey Group shall not be deemed in breach of this
Amended and Restated Agreement if, in connection with any Existing Character or
any Product in existence as of the Original Agreement Date, the Harvey Group
does not own or control as of the Original Agreement Date all of the rights in
connection therewith purported to be granted to Universal hereunder, but only if
such defect in title does not constitute a breach of any representation or
warranty made by the Harvey Group in the Stock Purchase Agreement.
Section 8.17 Rights Granted. This Section is hereby deleted.
Section 8.18 Corporate Authorization. Each of the Parties hereto hereby
represents and warrants that the execution, delivery or performance hereof and
hereunder by such Party (i) has been authorized by all necessary corporate
action on its part, and (ii) is within the ordinary course of business by such
Party.
Section 8.19 Miscellaneous. This Amended and Restated Agreement,
together with the Merchandising Amendment and the other Related Agreements, sets
forth the entire agreement and understanding of the Parties with respect to the
subject thereof, is binding upon each of the Parties hereto and their respective
successors and assigns, and may not be modified or amended except in a writing
signed by the Party to be charged with such modification or amendment. This
Amended and Restated Agreement, the Merchandising Amendment and the other
Related Agreements shall be governed and construed pursuant to the laws of the
State of California applicable to agreements entered into and wholly to be
performed within the State of California.
IN WITNESS WHEREOF, the Parties executed this Amended and Restated
Memorandum of Distribution Agreement in its unamended form (i.e., the Original
Form of Agreement) as of the Original Agreement Date and have executed it in its
current form as of the Settlement Date.
UNIVERSAL STUDIOS, INC.
By: _______________________________
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THE HARVEY ENTERTAINMENT COMPANY
By: _______________________________
HARVEY COMICS, INC.
By: _______________________________
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SCHEDULE 1
TO
MEMORANDUM OF DISTRIBUTION AGREEMENT
ADDITIONAL DEFINITIONS
For purposes of the Amended and Restated Agreement to which this
Schedule is attached, and as the same may appear in this Schedule, the following
words shall have the meanings set forth below.
1. "Active Development". A Feature Picture project shall be deemed in "Active
Development" if, at the relevant times (i) a writer has been engaged to render
and has not completed all writing services in connection therewith (and
Universal retains the contractual right to require such Person to perform such
services); or (ii) Universal has engaged a director or principal cast member in
connection therewith (and Universal retains the contractual right to require
such Person to perform such services); or (iii) Universal has entered into an
agreement with a third party financier or a third party co-producer; or (iv)
good faith negotiations with a writer, director, principal cast member,
financier or co-producer are ongoing; or (v) bona fide budgeting activities are
ongoing.
2. "Attractions". The use of Characters and Products in connection with Theme
Park rides, shows, and similar physical settings within Theme Parks.
3. "Casper Initiation Term". The period commencing on the Original Agreement
Date and continuing until the date which is five (5) years therefrom; provided
that the Casper Initiation Term shall be deemed perpetual if prior to the date
which is five (5) years from the Original Agreement Date, Universal either
commences principal photography of a Feature Casper Picture or pays Harvey the
cash fee set forth in Section 2.1(b)(ii)(A) of the Amended and Restated
Agreement. Harvey acknowledges that for purposes of the foregoing, Universal
commenced principal photography of a Feature Casper Picture prior to the date
which was five (5) years from the Original Agreement Date.
4. "Casper Character(s)". Any or all of the following fanciful characters:
Casper, each of the Ghostly Trio, Kat Harvey, Dr. Harvey, Spooky, Poil,
Nightmare, and each New Universal Element that is a fanciful character.
5. "Casper Picture(s)". Any Feature New Picture (A) in which the Character known
as "Casper" is the most prominently featured Character in the Picture, and/or
(B) which contains the name "Casper" (as a reference to such Character) in the
title of the Picture.
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6. "Characters". All of those fanciful or human literary and/or artistic
characters which are, as of the Original Agreement Date or at any time
thereafter, owned or controlled by the Harvey Group. Without limiting the
foregoing, the term "Characters" shall include those fanciful literary and/or
artistic characters set forth on Schedule 1(a) to the Stock Purchase Agreement.
7. "Closing Date". The date of Closing, as that term is defined in the Stock
Purchase Agreement.
8. "Continuing Third Party Theme Park Rights". Universal shall give the Harvey
Group written notice ("Commencement Notice") of Universal's intention to take
any action which pursuant to the applicable provisions of Article 6 of the
Amended and Restated Agreement will give rise to Universal's exclusive rights of
Theme Park Exploitation with respect to any Casper Character(s) or Products, or
other Characters or Products as may be set forth in the Stroller Agreement,
within a designated territory. Such Commencement Notice shall indicate whether
the intended action is the use of any particular Character(s) as Strollers or as
a principal element in connection with a Qualifying Attraction and the then
scheduled commencement date for such action ("Scheduled Commencement Date"). If,
as of the date which is the later of the date of such Commencement Notice or 6
months prior to the Scheduled Commencement Date specified in a Commencement
Notice regarding the use of any particular Character(s) as Strollers (or twelve
(12) months prior to the Commencement Date specified in a Commencement Notice
regarding the use of any Casper Character(s) as a principal element in a
Qualifying Attraction), there are outstanding binding commitments between the
Harvey Group and third Persons with respect to the use of Character(s) in Theme
Parks in the subject territory, the Harvey Group shall be permitted to honor
such binding commitments for the then remaining balance of the then existing
fixed term of such commitment (it being agreed that in such instance the Harvey
Group shall not, either affirmatively or by failing to give a non-renewal
notice, agree to extend the then existing fixed term of such commitment); the
limited continuing third party rights so permitted shall be referred to as
"Continuing Third Party Theme Park Rights".
9. "Domestic Territory". The United States and Canada and their respective
territories and possessions.
10. "Existing Characters". All Characters which, as of the Original Agreement
Date, are owned or controlled (or purported in the Stock Purchase Agreement to
be owned or controlled) by the Harvey Group.
11. "Existing Merchandising Licenses". All Merchandising licenses in existence
as of
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the Original Agreement Date wherein the Harvey Group or any entity licensed by
the Harvey Group is the licensor of Merchandising rights in Characters and/or
Products.
12. "Exploit or Exploitation". The turning to account of any Character or
Product hereunder by any means, including without limitation the development,
production, distribution, financing, Merchandising, advertising, option,
license, sale, grant or other use or transfer of any kind whatsoever of such
Character or Product or any interest therein, throughout the universe.
13. "Feature". A Picture (i) of at least eighty (80) minutes duration (inclusive
of main and end titles), in the case of a Picture which is predominantly
composed of live-action (as opposed to animation); or (ii) at least seventy (70)
minutes duration (inclusive of main and end titles), in the case of a Picture
which is predominantly composed of animation (as opposed to live-action); it
being agreed, however, that if a so-called motion picture "short" is packaged
with any animated Picture of less than eighty (80) minutes in connection with
the initial general theatrical release of such Picture, such Picture shall be
deemed to be a Feature hereunder only if Universal, in connection with its
accounting to Harvey, does not allocate any portion of the box office rentals
received by Universal in connection therewith to such "short".
14. "First Negotiation Rights". If the Harvey Group desires to Transfer (as
defined in this Schedule 1, Paragraph 35 below) any rights in any Character or
Product described in Section 2.5(e), during the time periods set forth therein,
then Universal shall have the rights hereinafter set forth ("First Negotiation
Right"); Harvey Group shall give Universal written notice of such desired
Transfer ("Negotiation Notice"), which Negotiation Notice shall set forth the
essential terms pursuant to which the Harvey Group desires to effect such
Transfer. Universal shall respond to such Negotiation Notice within 5 business
days following Universal's receipt thereof ("Response Period"). If Universal
fails to respond within such Response Period, or if Universal notifies the
Harvey Group during such Response Period that Universal does not desire to
negotiate with respect to such Transfer, then the Harvey Group shall be free to
negotiate and conclude agreements with third Persons regarding such Transfer
without further obligation to Universal in connection therewith. If Universal
notifies the Harvey Group during such Response Period that Universal desires to
negotiate with respect to such Transfer, then upon such notice the Harvey Group
shall be obligated to negotiate in good faith with Universal for a period of ten
(10) business days ("Negotiation Period") for an agreement with respect to such
Transfer. If an agreement is not reached prior to the expiration of the
Negotiation Period, then upon such expiration the Harvey Group shall be free to
negotiate and conclude agreements with third Persons regarding such Transfer
without further obligations to Universal in connection therewith.
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15. "First Negotiation/First Refusal Rights". If the Harvey Group desires to
Transfer (as defined in this Schedule I, Paragraph 35 below) any rights in any
Character or Product described in Sections 3.3(a), 3.4, or 4.4(a) of the Amended
and Restated Agreement, during the time periods set forth therein, then
Universal shall have the rights hereinafter set forth ("First Negotiation/First
Refusal Rights"); Harvey Group shall give Universal written notice of such
desired Transfer ("Negotiation Notice"), which Negotiation Notice shall set
forth the essential terms pursuant to which the Harvey Group desires to effect
such Transfer. Universal shall respond to such Negotiation Notice within five
(5) business days following Universal's receipt thereof ("Response Period"). If
Universal fails to respond within such Response Period, or if Universal notifies
the Harvey Group during such Response Period that Universal does not desire to
negotiate with respect to such Transfer, then the Harvey Group shall be free to
negotiate and conclude agreements with third Persons regarding such Transfer
without further obligation to Universal in connection therewith. If Universal
notifies the Harvey Group during such Response Period that Universal desires to
negotiate with respect to such Transfer, then upon such notice the Harvey Group
shall be obligated to negotiate in good faith with Universal for a period of ten
(10) business days (except that with respect to Transfers of rights described in
Sections 3.3(a) and 3.4, the applicable period shall be seven (7) business days)
("Negotiation Period") for an agreement with respect to such Transfer. If an
agreement is not reached prior to the expiration of the Negotiation Period, then
upon said expiration Harvey will provide to Universal a written statement of the
terms least favorable to the Harvey Group that the Harvey Group would be willing
to accept in connection with the Transfer ("Bottom Line Terms"), and Universal
shall have the right to accept such Bottom Line Terms by the close of business
two (2) business days following the day Universal receives such Bottom Line
Terms ("First Acceptance Period"). If Universal does not accept such Bottom Line
Terms by the end of the First Acceptance Period, the Harvey Group shall be free
to negotiate with third Persons with respect to the Transfer and to conclude an
agreement following the First Acceptance Period with third Persons on terms as
favorable, but only if At Least As Favorable, to the Harvey Group as such Bottom
Line Terms; provided, that if the terms of a proposed agreement with third
Persons ("Proposed Terms") are not At Least As Favorable to the Harvey Group as
the Bottom Line Terms, the Harvey Group shall not have the right to enter into
such third Person agreement until the Harvey Group notifies Universal in writing
of such Proposed Terms, and gives Universal a period of two (2) business days
following receipt of such notice within which to accept such Proposed Terms
("Second Acceptance Period"). If Universal does not accept such Proposed Terms
by the end of the Second Acceptance Period, the Harvey Group shall have the
right to enter into the proposed third Person agreement on such Proposed Terms
with the particular third Person. If, at any time after the Harvey Group is
permitted to negotiate with third Persons regarding a Transfer (but prior to the
Harvey Group actually entering into an agreement with a third Person regarding
such Transfer), there are any changed, new or additional elements (which for
purposes of this Amended and Restated Agreement shall be limited to principal
cast, principal
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Characters, director or sequel/remake rights with respect to a New Picture;
principal cast, principal Characters, writers, producer/executive producer, or
deficit with respect to a New Television Product; and (to the extent and only to
the extent the following elements are determined in advance) principal cast,
principal Characters, director, writers, producer, budget range for production
and distribution, release dates, and extent of distribution rights in home video
and in other media with respect to a Made-For-Video Product), then the Harvey
Group shall notify Universal thereof in writing, and Universal shall have five
(5) business days in which to accept said changed, new or additional elements.
At all times with respect to the exercise of Universal's rights described
herein, the Harvey Group shall not propose to Universal, and Universal shall not
be obligated to accept, any terms which cannot be met as easily by one Person as
by another, or which cannot be reduced to a determinable sum of money. An
agreement with a third Person shall be deemed "At Least As Favorable" to the
Harvey Group as such Bottom Line Term if: (i) the fixed compensation/ license
fee offered by such third Person equals or exceeds the corresponding fixed
compensation/license fee contained in Harvey's Bottom Line Terms; and (ii) each
other financial or other material term offered by such third Person (other than
terms which cannot be met as easily by one Person as by another) corresponds to
a financial or other material term in Harvey's Bottom Line Terms and is no less
favorable to the Harvey Group than the corresponding term of the Bottom Line
Terms. The fixed compensation/license fee in connection with a so-called "pilot"
for a series shall be deemed to be the aggregate of the fixed
compensation/license fee payable in connection with such "pilot" and the
aggregate fixed compensation/license fee which would be payable in connection
with the initial committed order of episodes if the "pilot" were "picked up";
the fixed compensation/license fee in connection with a series for which there
is no "pilot" shall be deemed to be the aggregate of the fixed
compensation/license fee which would be payable in connection with the initial
committed order of episodes. If the Harvey Group enters into an agreement with a
third Person which Universal alleges to have been entered into in violation of
these provisions or the Harvey Group desires to enter into an agreement with a
third Person which Universal alleges will be in violation of these provisions if
entered into by the Harvey Group, the Parties mutually agree to submit the
matter to binding arbitration (consistent with the arbitration provisions of the
Stock Purchase Agreement), and to jointly instruct the arbitrators, if possible,
to render a decision within forty-five (45) days of the commencement (i.e., from
the date the initiating Party first delivers written notice to the other Party
of the initiation of such arbitration) of the arbitration proceedings.
16. "Force Majeure Event". Any act of God, or any event that cannot be
reasonably anticipated or controlled, including, but not limited to fire;
earthquake; strike or other work stoppage or labor disruption; war or other
outbreak of hostilities; the death, incapacity or illness of the director of any
Filmed Entertainment Product; or the death, incapacity, illness or failure to
perform of a principal member of the cast or the principal
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writer, principal animator, or principal composer of any Filmed Entertainment
Product.
17. "Foreign Territory". The universe excluding the Domestic Territory.
18. "Green-Lighted". A Picture shall be deemed to have been "green-lighted" when
the director and two (2) principal cast members have been made "pay-or-play" for
their full fixed compensation and the director has commenced rendering
pre-production services.
19. "Harvey Group". Harvey, Harvey Comics and any other entity (whether a
corporation, partnership or otherwise) which directly or indirectly controls, is
controlled by or is under common control with Harvey or Harvey Comics and
whether presently in existence or created hereafter); where rights (or
obligations) with respect to a Character or Product are held by or Exploited by
only one of the entities comprising the Harvey Group, reference to the Harvey
Group shall be deemed to refer only to the applicable member thereof. Except
where specifically stated otherwise, all rights of approval held by the Harvey
Group hereunder shall be exercised by Harvey.
20. "Harvey Library". All film and/or tape Products in existence as of the
Original Agreement Date.
21. "Initial Artificial Breakeven". The point at which "net proceeds" from a
Picture would first become payable (x) with respect to any Picture produced
prior to the Settlement Date, pursuant to Exhibit "B" attached to the Original
Form of Agreement (and attached hereto as Exhibit Y), and (y) with respect to
any Picture (including the First Sequel) produced after the Settlement Date,
pursuant to Exhibit "A" attached to this Amended and Restated Agreement;
provided, that, for purposes of calculating Initial Artificial Breakeven, for
the first Casper Picture and the First Sequel, the aggregate distribution fees
shall be deemed to be twenty percent (20%) and fifteen percent (15%),
respectively, in lieu of the distribution fees set forth in such Exhibits. The
following shall apply to the calculation of Initial Artificial Breakeven:
(a) The computation of Initial Artificial Breakeven shall be
subject to the "Amblin Charge" (as defined below) for supplying the production
and/or producing and/or executive producing services of Amblin' Entertainment
("Amblin") and/or Steven Spielberg, or in the alternative, for supplying the
directing services of Steven Spielberg (as the case may be ), which Amblin
Charge is:
(i) For such production and/or producing and/or executive
producing services, any fixed compensation attributable to Amblin
specified in the budget of the Casper Picture shall be an advance
against a sum equal to five percent (5%) of the Accountable Gross (as
defined in Exhibit "B" to the Original
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<PAGE> 59
Form of Agreement with respect to the first Casper Picture (and attached
hereto as Exhibit Y), and as defined in Exhibit "A" attached to this
Amended and Restated Agreement with respect to the First Sequel) up to
and including the first point at which "net proceeds" are payable
pursuant to such Exhibits; or, in the alternative;
(ii) For such directing services, any fixed compensation
attributable to Amblin specified in the budget of the Feature Casper
Picture shall be an advance against a sum equal to fifteen percent (15%)
of such Accountable Gross up to and including the first point at which
"net proceeds" are payable pursuant to such Exhibits.
The foregoing respective contingent consideration paid to Amblin shall be
considered a "gross" participation and treated as such in accordance with the
provisions of such Exhibits. The consideration deemed paid to Amblin herein
above shall be conclusive for all purposes hereunder, irrespective of the
consideration, if any, actually so paid or payable. Thus, the Harvey Group shall
not need, and, notwithstanding any other provision of the Amended and Restated
Agreement, accordingly waives any right to inspect and all rights of discovery
of (X) any records concerning or related to any payment or obligation to Amblin
or any other company owned or controlled by Steven Spielberg; and (Y) the
agreement(s) between Amblin or any other company owned or controlled by Steven
Spielberg and any member of the Universal Group.
(b) For purposes of clarification, any reference to distribution
fees for purposes of calculating Initial Artificial Breakeven in lieu of
distribution fees set forth in such Exhibits, applies to reduce any greater
distribution fees specified in such Exhibits, but does not increase any lesser
distribution fees specified in such Exhibits or impose any distribution fee
where none is specified in such Exhibits.
22. "Merchandising Gross Receipts". Subject to the provisions of the
Merchandising Amendment for periods following the Merchandising Amendment Date,
with respect to the first Feature Casper Picture, the "gross proceeds" derived
from Merchandising in connection with such Picture, less a distribution fee
equal to twenty-percent (20%) of such gross proceeds; provided that in the event
Universal uses a third Person as a sub-agent (with Harvey's approval) in
connection with the grant of a Merchandising license, the combined fees of such
sub-agent and Universal shall not exceed forty percent (40%) of all revenues
from Merchandising pursuant to the applicable license.
23. Deleted Intentionally.
24. "New Picture(s)". All Picture(s) featuring a Casper Character or having a
Casper Character's name in the title as a reference to such Character other than
those in the
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Harvey Library.
25. "New Television Product". All Casper Character Products and Casper
Characters which the Harvey Group desires to Exploit in the medium of
television, other than Harvey Library Products.
26. "Other Existing Character Picture(s)". Any new Picture (A) in which neither
the Character known as "Casper" nor the Character known as "Richie Rich" is the
most prominently featured Character in the Picture, and (B) which does not
contain the name of either "Casper" nor "Richie Rich" in the title of the
Picture, and (C) which does not include one or more New Character(s) in the
Picture, provided that after the Settlement Date the term "Other Existing
Character Picture(s)" shall exclude any Picture which does not meet one of the
following criteria: (x) a Casper Character is featured in the Picture, or (y)
the title of the Picture includes the name of a Casper Character (as a reference
to such Character).
27. "Person". Any individual, corporation, partnership, joint venture, or other
entity of any kind.
28. "Picture". Any Product which is a motion picture (whether a feature motion
picture or non-feature motion picture) intended to be Exploited by distribution
for exhibition to paying audiences in one or more motion picture theaters.
29. "Product". Any (i) feature or non-feature motion picture (including without
limitation any Picture), or any television, home video, non-theatrical, music,
stage or radio production, in each case whether live, animated or recorded by
any means now known or hereafter developed, (ii) book, magazine, comic book or
other written publication, (iii) merchandise, apparel, toys, games, figures,
dolls, novelties or other comparable physical property, and (iv) attraction,
ride, show, venue or strolling or performing entertainer located in any theme or
amusement park; whether such Product is in existence as of the Original
Agreement Date or is thereafter proposed or created, and which is based upon,
features or otherwise includes one or more Characters or other material which
the Harvey Group owns, acquires, controls or develops.
30. "Promotions". Any use of Characters and Products in connection with
advertising, publicity, promotion (including without limitation promotions
involving the Theme Parks by third Persons) and corporate sponsorship
relationships for those Theme Parks in which Characters and/or Products are
used.
31. "Qualifying Attraction". An Attraction which costs at least Three Million
Dollars ($3,000,000) to design, construct and make fully operational (exclusive
of any internally allocated labor, materials or overhead costs of the Universal
Group).
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32. Deleted Intentionally.
33. "Silver/Davis". The Silver/Davis Company.
34. "Strollers". Any Characters and Products in the form of costumed characters
meeting and greeting Theme Park visitors and others, strolling the grounds of
Theme Parks, and performing on stages or other entertainment venues within Theme
Parks.
35. "Transfer". For purposes of Universal's exercise of First Negotiation Rights
or First Negotiation/First Refusal Rights (and such purposes only), a direct or
indirect, option, license, sale, grant or other disposition of or transfer to
any third Person by any member of the Harvey Group of any rights in any
Character or Product. For purposes of Universal's exercise of First Negotiation
Rights or First Negotiation/First Refusal Rights with respect to a proposed
Transfer, Product in a proposal for Transfer shall be sufficiently defined if it
includes at least a one page story idea, a description of a proposed principal
Characters, a proposed budget range, and a proposed process for deciding other
principal elements.
36. "Universal". Universal Studios, Inc. and/or any Universal Studios, Inc.
subsidiary or other affiliate which Universal Studios, Inc. designates in its
sole discretion to exercise rights and/or fulfill obligations hereunder.
37. "Universal Group". Universal (and any other corporation, partnership or
otherwise) which directly or indirectly controls, is controlled by or is under
common control with Universal and whether presently in existence or created
hereunder.
38. "Warner Rights". The motion picture production and distribution rights with
respect to the Character known as "Richie Rich" previously licensed to Warner
Bros. (as the successor-in-interest to the rights of Jon Shapiro and Joe Binella
under the agreement among Harvey Publications, Inc., Jon Shapiro and Joe Binella
dated September 16, 1987, as amended from time-to-time); it being acknowledged
and agreed that the Warner Rights do not include television or Merchandising
rights with respect to "Richie Rich" or with respect to motion pictures produced
pursuant to the Warner License, such rights having been retained by the Harvey
Group; it being further acknowledged that Silver/Davis currently has the Warner
Rights in turnaround from Warner Bros. for a period expiring _______________,
19___.
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SCHEDULE 2
PRICING SCHEDULE
ATTACHED TO AMENDED AND RESTATED
MEMORANDUM OF DISTRIBUTION AGREEMENT
<TABLE>
<S> <C>
Target Dates April 15, 1999, or April 15, 2000
Period Encompassed By Each For activities within the Domestic Territory,
Theatrical Preclusion Period from and including April 15 of the year of
proposed initial release of the Casper Picture
in question through July 31 of the following
year; and for activities in the Foreign
Territory, from and including May 15 of the
year of proposed initial release of the Casper
Picture in question through August 31 of the
following year.*
Fixed Sequel Fee $XXXXXX
Non-Refundable Advance Due $XXXXXX
On Or About Settlement Date
Against First Sequel Fixed Fee
Initial Percentage XXX%
Increased Percentage XXX%
Home Video Royalty XXX% for rental and XXX% for sell-through as
determined in accordance with Exhibits A and
A-1 attached to the Amended and Restated Agreement
Daily Delay Amount $XXXXXX
Aggregate Delay Amount $XXXXXX
Film Advance Amount $XXXXXX
</TABLE>
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*For example, if Universal gave an Initial Notice on or before February 15, 1998
and a Final Notice on or before June 15, 1998, then the corresponding Theatrical
Preclusion Period would run in the Domestic Territory from April 15, 1999
through July 31, 2000, whether or not the Casper Picture planned to be released
during such Theatrical Preclusion Period is actually released during such time.
By way of example of the limits on subsequent TPPs set forth in Subsection
2.6(c), assume that a Theatrical Preclusion Period commences April 15, 2000 and
that a Casper Picture is initially released during such Theatrical Preclusion
Period. Universal would be entitled to a subsequent Theatrical Preclusion Period
commencing on April 15 of either 2003, 2004, 2005 or 2006. However, if such
subsequent Theatrical Preclusion Period does not commence by April 15, 2006,
Universal would forever lose the right to a subsequent Theatrical Preclusion
Period because such subsequent Theatrical Preclusion Period could not commence
by the sixth anniversary of the beginning of the immediately preceding
Theatrical Preclusion Period (i.e., the one that began April 15, 2000).
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<PAGE> 1
EXHIBIT 10.75
The Harvey Entertainment Company
1999 Avenue of the Stars
Suite 2050
Los Angeles, CA 90067
Re: AMENDMENT TO MERCHANDISING DEAL
Gentlemen:
The Harvey Entertainment Company, through its predecessors Harvey
Comics Entertainment, Inc., Harvey Comics, Inc. and HMH Communications, Inc.
(the Harvey Entertainment Company and its predecessors hereinafter "Harvey") has
granted to Universal Studios, Inc. through its predecessor MCA, Inc. (Universal
Studios, Inc. and its predecessor hereinafter "Universal" and Harvey and
Universal each a "Party" and together "Parties") certain merchandising rights
with respect to Harvey's Characters and Products featuring those Characters
pursuant to a Memorandum of Distribution Agreement (in its unamended form the
"Original Form of Agreement") dated as of December 7, 1990 (the "Original
Agreement Date").
Since the Original Agreement Date, the Parties amended the
Original Form of Agreement by letter agreements dated as of April 22, 1993 and
September 28, 1993 (the "Letter Amendments"). The Parties have also entered into
certain other agreements pursuant to or in furtherance of the terms of the
Original Form of Agreement as previously amended, namely, that certain letter
dated May 19, 1995 as amended by an agreement dated as of August 1, 1996 related
to certain Products featuring the Character known as "Baby Huey" (the "Baby Huey
Agreement"), that certain letter agreement dated as of September 22, 1994
related to the Universal/Harvey Animation Studio (the "PSO Agreement"), that
certain agreement dated as of March 15, 1992 related to domestic distribution of
home video product from the Harvey Library (the "Distribution Acquisition
Agreement"(no longer in force)), and that certain agreement dated as of March
26, 1996 related to the distribution of certain television programs featuring
the Character known as "Casper" (the "Television Distribution Agreement"). The
Parties have also entered into an Amended and Restated Memorandum of
Distribution Agreement (the "Amended and Restated Agreement") amending the
Original Form of the Agreement based on that certain "Term Sheet for
Universal/Harvey Restated Agreement" (the "Term Sheet") entered into on May 15,
1997 (the "Settlement Date"), and effective as of the Settlement Date.
After the Original Form of Agreement was entered into certain
disputes arose between us over the scope of the Parties' merchandising rights
under the agreements referenced hereinabove. Consequently, a letter agreement
was negotiated between the Parties and a draft dated October 29, 1996 (the
"Merchandising Amendment Draft") was created by Universal but not executed. The
Term Sheet includes changes to the Merchandising Amendment Draft which are
incorporated in this letter, which is substantially in the form of the
Merchandising Amendment Draft. Also incorporated in this letter is a proposed
side letter regarding foreign licensing agents and other matters (the
"Merchandising Side Letter") dated November 1966.
<PAGE> 2
This letter (the "Merchandising Amendment") memorializes our agreement to amend
and restate our respective rights and obligations regarding Merchandising rights
under all prior agreements.
Except as otherwise provided in this Merchandising Amendment,
this Merchandising Amendment therefore replaces and supersedes, effective as of
January 21, 1997 (the "Merchandising Amendment Date") all prior agreements
(including the Baby Huey Agreement, the PSO Agreement, the Television
Distribution Agreement, the Distribution Acquisition Agreement (no longer in
force), the Letter Amendment, and Article 5 of the Original Form of Agreement
and of the Amended and Restated Agreement) made and entered into prior to the
Settlement Date insofar as they concern or relate to Merchandising rights and
settles any and all existing disputes between Universal and Harvey related to
such rights pursuant to Paragraph 7.2 of the Amended and Restated Agreement. For
Merchandising licensing agreements which commenced prior to the Merchandising
Amendment Date, the provisions of such agreements shall be effective. Such
Merchandising licensing agreements written by Universal prior to the
Merchandising Amendment Date shall remain in full force, and the respective
rights and obligations of the Parties under the provisions of Article 5 of the
Amended and Restated Agreement or Paragraph 14 of the PSO Agreement, as the case
may be, shall remain in force with respect to such licenses until such licenses
expire by their terms without regard to this Merchandising Amendment.
Capitalized terms not otherwise defined herein shall have the meanings given to
them in the Amended and Restated Agreement. The Parties hereby agree as follows:
1. DEFINITIONS:
a. MERCHANDISING: For the purposes of this Merchandising
Amendment, Merchandising shall mean Exploitation through merchandising,
including Promotional Tie-Ups as defined below, and publishing, and shall
include without limitation, direct response Merchandising licensing and/or
sales, Merchandising sales over the internet, and licensing interactive games
and software, but shall exclude Exploitation of comic books in any format and
Filmed Entertainment Products (including but not limited to videos).
b. REVENUES FROM FILMED ENTERTAINMENT PRODUCTS: For purposes of
clarification, Universal shall not be entitled under this Merchandising
Amendment to share, in any form, revenues from any filmed entertainment Product
(including without limitation video) sold in connection with a Promotional
Tie-Up or other Merchandising activity for a Product which is not produced or
released by Universal. Nor shall Universal be entitled under this agreement to
share in any non-Merchandising revenues received by Harvey for any filmed
entertainment Product not produced or released by Universal, including without
limitation any direct-to-video not produced or released by Universal or any
work-for-hire done by Universal for Harvey.
c. CASPER CHARACTERS: For the purposes of this Merchandising
Amendment, Casper Characters shall have the same definition as that stated in
Schedule 1 of the Amended and Restated Agreement.
d. CASPER FEATURE NEW PICTURE: For purposes of this Merchandising
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<PAGE> 3
Amendment, Casper Feature New Picture shall mean a Filmed Entertainment Product
constituting a Feature New Picture, other than the original release of the 1995
Casper Feature (including home video devices that include such Picture)
featuring a Casper Character or in the title for which there is included the
name of a Casper Character as a reference to such Character, which is produced
or released by Universal (or the rights to the production or distribution of
which are otherwise acquired by Universal in connection with the exercise of its
First Negotiation Right under the Amended and Restated Agreement).
e. HARVEY FAMILY ENTERTAINMENT CENTER: For purposes of this
Merchandising Amendment, Harvey Family Entertainment Center shall mean an
entertainment facility which does not constitute a Theme Park within the meaning
of the Amended and Restated Agreement.
f. HARVEY RETAIL STORES: For purposes of this Merchandising
Agreement, Harvey Retail Stores shall be (x) free standing stores that have
either the Casper or Harvey name in the name of the store and that carry
merchandise that is primarily based on Harvey Characters, and (y) clearly
distinguishable stores-within-stores meeting the following criteria:
(A) The store within-a-store must be comprised of a
least 1,000 contiguous square feet of space that is a permanent installation
(i.e., not transitory or tied to any event or season);
(B) The store-within-a-store must be in place prior
to the giving of the Initial Notice with respect to the Theatrical Preclusion
Period in question (or Non-TPP Preclusion Notice with respect to a Harvey
Preclusion Period when there is no Theatrical Preclusion Period);
(C) The store-within-a-store may not be installed
within the stores of more than one major retailer per region (in addition to a
national retailer in the U.S.); and
(D) Each store-within-a-store must carry
merchandise exclusively (except for de minimis items) based on Harvey Characters
and must have either the Casper or Harvey name in the title of the
distinguishable store-within-a-store area.
g. PROMOTIONAL TIE-UPS: For the purposes of this Merchandising
Amendment, Promotional Tie-Ups shall refer to a type of advertising, marketing
or Exploitation in which some product, service or commodity (in addition to a
particular Product) is advertised, marketed or sold in conjunction with such
particular Product. Promotional Tie-Ups shall include promotions, premium items,
commercial tie-ins and tie-ups and sponsorships.
2. HARVEY'S MERCHANDISING RIGHTS FOR CHARACTERS OTHER THAN CASPER
CHARACTERS:
Except as otherwise provided in this Merchandising Amendment for
Merchandising licensing agreements which commenced prior to the Merchandising
Amendment
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<PAGE> 4
Date, the Parties hereby agree to terminate the provisions of Section V of the
Amended and Restated Agreement. The Parties further agree that Merchandising
rights for (x) all Characters other than the Casper Characters, and for (y) all
Products other than those Products featuring the Casper Characters, shall revert
to Harvey. Harvey's Merchandising rights and obligations in the Casper
Characters and Products featuring the Casper Characters are set forth in
Paragraph 4 below. During periods beginning with and following the Merchandising
Amendment Date, Harvey shall not be required to share any Merchandising revenues
with Universal, except as provided in Paragraph 4 below which applies solely to
the Casper Characters and Products featuring the Casper Characters.
Notwithstanding anything in this Merchandising Amendment to the contrary, the
terms of the Baby Huey Agreement with respect to Merchandising revenues for the
"Baby Huey" character shall remain in force and unmodified.
3. MERCHANDISING RIGHTS FOR NEW CHARACTERS WHICH ARE NOT UNIVERSAL NEW
ELEMENTS:
For purposes of clarification, all New Characters which are not
Universal New Elements, even if such New Character is created for or first
appears in a non-Universal produced Casper Product (such as a non-Universal
produced Casper direct-to-video), are governed by the terms of Paragraph 2;
i.e., Merchandising rights for such New Characters shall revert to Harvey, and
during periods beginning with and following the Merchandising Amendment Date,
Harvey shall not be required to share any Merchandising revenues for such New
Characters with Universal. Thus, for example, if any New Characters are created
in the first live action Casper direct-to-video produced by Saban-Fox, all such
characters shall be governed by Paragraph 2 (and this paragraph), and shall not
be considered Casper Characters as defined herein.
4. HARVEY'S MERCHANDISING RIGHTS FOR THE CASPER CHARACTERS AND PRODUCTS:
a. MERCHANDISING LICENSING AGENT: Harvey shall, subject to the
terms of this Merchandising Amendment, be the exclusive Merchandising licensing
agent for the Casper Characters and Products featuring the Casper Characters,
except as provided in Paragraph 6 below. Harvey shall pay to Universal (in lieu
of any Merchandising participation to Universal under any other agreements with
Harvey with respect to the Casper Characters) an amount equal to one-half of all
Merchandising gross revenues received by Harvey in connection with the Casper
Characters and Products featuring the Casper Characters in all media, including
without limitation any "Casper" direct-to-video (live action or animated),
whether or not produced by Universal, during the term hereof, specifically
excluding any revenues received by Harvey (x) directly from Universal Theme
Parks (as defined in Schedule 1 of the Amended and Restated Agreement), (y) in
connection with any Harvey Family Entertainment Center, and (z) in connection
with a Feature New Picture not produced by Universal featuring Spooky, Poil or
Nightmare (and no other Casper Characters), after deducting only the following
amounts:
(A) Costs of up to 10% of gross revenues incurred by
Harvey in the exercise of its Merchandising rights under this paragraph, not
including amounts otherwise deducted under paragraphs (C) and (D) below;
(B) Actual out-of-pocket third party foreign agent fees,
or commissions
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<PAGE> 5
paid to foreign agents, of up to 25% of gross revenues attributable to such
foreign agent paid in connection with the Merchandising rights under this
paragraph;
(C) Overhead amounts under Paragraph 9, if applicable; and
(D) Merchandising-related copyright and trademark expenses
and litigation to protect or enforce merchandising-related copyright or
trademark rights in the Casper Characters or related to the specific Product
featuring the Casper Characters.
b. MERCHANDISING GROSS REVENUES: For purposes of this
Merchandising Amendment, gross revenues received by Harvey shall mean (x) for
Merchandising Exploitation by licensees, and all amounts received by Harvey from
such licensees (including all revenues from Promotional Tie-Ups, other than
revenues received by Harvey from the sale of Filmed Entertainment Products sold
in connection with a Promotional Tie-Up), and (y) for Merchandising Exploitation
by Harvey, an amount equal to 10% of the costs incurred by Harvey in connection
with such Merchandising.
c. COSTS: For purposes of this paragraph, costs shall be defined
as all out-of-pocket direct expenses paid by or on behalf of Harvey in good
faith to third parties in connection with the exercise of Merchandising rights
under this paragraph, including without limitation artwork and licensing kit
development and reproduction costs, freight, travel and entertainment directly
related to the Casper Characters, tradeshow expenses directly related to the
Casper Characters and Products featuring the Casper Characters, and directly
related promotional, marketing and advertising expenses. Costs shall also
include overhead, which is defined as employees' salaries and occupancy costs,
as well as appropriately allocated office supplies, equipment rental and
corporate overhead.
d. ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS: Harvey shall,
within 90 days after the Merchandising Amendment Date, be responsible for
handling all Merchandising-related copyright and trademark expenses and
litigation to protect or enforce Merchandising-related copyright or trademark
rights in the Casper Characters or related to the specific Product featuring the
Casper Characters, and shall use its best efforts to protect and enforce the
Merchandising-related copyrights and trademarks in the Casper Characters and
Products featuring the Casper Characters. Universal, however, shall provide
reasonable cooperation and assistance to Harvey in protecting and enforcing the
Merchandising-related copyrights and trademarks in the Casper Characters and
Products featuring the Casper Characters. Universal shall cooperate and assist
Harvey in transitioning any Merchandising-related copyright or trademark matters
currently pending so that all such matters may be transferred, where deemed
appropriate by both Universal and Harvey, to Harvey with a minimum of
disruption.
5. PAYMENTS BY HARVEY:
a. ACCOUNTING STATEMENTS AND REPORTS: Harvey agrees to provide
Universal with quarterly accounting statements with respect to amounts due to
Universal under Paragraph 4 above. Such statements shall conform to the end of
Harvey's corresponding accounting periods, shall be delivered within 90 days
thereafter, and shall be accompanied with
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<PAGE> 6
payment of the amount, if any, shown to be due. In addition, Harvey shall remit
to Universal a projected Merchandise royalty report approximately thirty (30)
days after the end of each quarter, and will request licensees to remit to
Universal a copy of the Merchandise royalty report which relates to Universal
only. Nothing contained in this Paragraph 5 shall affect the Parties audit
rights under any other agreement.
b. AUDIT RIGHTS: Universal shall have the right to audit Harvey's
books of account, but only as they relate to the Exploitation of rights under
Paragraph 4, not more frequently than once annually, by either (x) a national
firm of certified public accountants of a stature equal to Price Waterhouse LLP
or Deloitte and Touche, or (y) such other first-class reputable firm of
certified public accountants as Harvey in its good faith discretion may approve.
No audit may (x) go into transactions reported in any statement period rendered
prior to the commencement of any earlier audit, or (y) continue for longer than
45 consecutive business days. Harvey will use its good faith efforts to
cooperate with Universal in the conduct of any audit.
c. DISPUTES: Each quarterly accounting statement shall be deemed
correct and conclusive and binding on Universal on the expiration of 12 months
after it is given, and the inclusion in any statement of information or items
which appeared in a previous statement shall not render any such information or
terms contestable or recommence the running of such 12 month period with respect
thereto; provided that if Universal delivers a written notice to Harvey
objecting to any such statement or item within such 12 month period and if such
notice specifies in detail the particular items to which Universal objects and
the nature of Universal's objections thereto, then insofar as such particular
items are concerned, such statements shall not be deemed correct or binding on
Universal hereunder. Any objection to any statement given to Universal shall be
deemed to have been waived unless an arbitration based thereon has been
instituted by Universal against Harvey within 6 months following the expiration
of such 12 month period. The arbitration pursuant to this provision shall be
conducted in accordance with the Amended and Restated Agreement, and shall be
binding on and non-appealable by both Parties.
6. UNIVERSAL MERCHANDISING RIGHTS FOR CASPER FEATURE NEW PICTURES:
Notwithstanding the provisions of Paragraph 4 above, in
connection with a Casper Feature New Picture, Universal shall have the exclusive
right to initiate and control the Merchandising Exploitation of the Casper
Feature New Picture and the Casper Characters appearing in such Casper Feature
New Picture, but (with respect to Merchandising Exploitation of such Casper
Characters) only in connection with Merchandising related to or derived from
such Casper Feature New Picture and only during the Harvey Preclusion Period (as
defined in Paragraph 7 below) which has application to such Casper Feature New
Picture. Universal shall be entitled to retain certain fees from the revenues
from such Merchandising activities, and shall share the remaining revenues with
Harvey as follows: (x) the Parties shall share Merchandising revenues from the
First Sequel per the Pricing Schedule attached hereto; and (y) the Parties shall
share Merchandising revenues for each other Casper Feature New Picture in
accordance with Sections 2.9 and 2.10 of the Amended and Restated Agreement.
7. MERCHANDISING PRECLUSION FOR THE CASPER CHARACTERS:
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<PAGE> 7
a. Harvey Preclusion Period:
Subject to the terms and provisions set forth in this Paragraph
7, Universal shall be entitled to a preclusion period for Merchandising (the
"Harvey Preclusion Period") as described below. The Harvey Preclusion Period
will mirror the Theatrical Preclusion Period (as described in Paragraphs 2.6 and
2.7 of the Amended and Restated Agreement and the Pricing Schedule attached
thereto as Schedule 2) as to timing, scope, restrictions, frequency, exceptions
and all other respective rights and obligations of the Parties when a Theatrical
Preclusion Period is in effect. In addition, the Harvey Preclusion Period
Merchandising restrictions, exceptions and coordination requirements (described
in Paragraphs 7b, 7c and 7d, respectively, below) which apply during a Harvey
Preclusion Period shall apply during a Theatrical Preclusion Period. When a
Theatrical Preclusion Period with respect to such Casper Feature New Picture is
not in effect, the Harvey Preclusion Period shall be the period commencing upon
Harvey's receipt of written notice from Universal (the "Non-TPP Preclusion
Notice") that Universal intends in good faith to: (x) theatrically release and
distribute a Casper Feature New Picture in at least 800 movie theaters
domestically within the next twelve (12) months, and continuing until the date
which is the earlier of (i) 12 months after the initial theatrical release of
the Casper Feature New Picture, or (ii) 16 months after Harvey's receipt of such
Non-TPP Preclusion Notice if, as of such date, the Casper Feature New Picture
has not been initially released theatrically in at least 800 movie theaters
domestically, provided that in no event shall any Harvey Preclusion Period for
any initial theatrical release exceed 28 months; or (y) theatrically reissue and
distribute a Casper Feature New Picture in at least 800 movie theaters
domestically within the next six (6) months, and continuing until the date which
is the earlier of (i) 12 months after the initial theatrical reissue of the
Casper Feature New Picture, or (ii) 10 months after Harvey's receipt of the
Non-TPP Preclusion Notice if, as of such date, the Casper Feature New Picture
has not been initially reissued theatrically in at least 800 movie theaters,
provided that in no event shall any Harvey Preclusion Period for any theatrical
reissue exceed 22 months. Except for the first Harvey Preclusion Period, a
Harvey Preclusion Period may not commence earlier than the third anniversary or
later than the sixth anniversary of the beginning of the immediately preceding
Harvey Preclusion Period, and then only if there were an initial release or a
re-release of a Casper Feature New Picture theatrical sequel in at least 800
theaters in the Domestic Territory at any time during such immediately preceding
Harvey Preclusion Period. Universal shall only be entitled to send a Non-TPP
Preclusion Notice to Harvey if (x) there is no Initial Notice or Final Notice
then in effect, (y) if Universal has a good faith intent to release (or reissue)
the Casper Feature New Picture and (z) after a director and (if the Casper
Feature New Picture is live action) two principal cast members for the Casper
Feature New Picture have been made pay or play for such Casper Feature New
Picture. Except when an Initial Notice has been given for a Theatrical
Preclusion Period, Universal will use its best efforts in good faith to provide
Harvey with written notice of the initial theatrical release (or reissue) date
of a Casper Feature New Picture 18 months before the anticipated initial
theatrical release (or reissue) date.
b. SCOPE OF PRECLUSION:
During a Harvey Preclusion Period, neither Harvey nor its film or
television licensees, distributors, sublicensees and subdistributors (other than
members of the Universal
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<PAGE> 8
Group and its Existing Licensees as provided in this paragraph below) shall
engage in Merchandising activities, including without limitation Merchandising
through Promotional Tie-Ups, with respect to the Casper Characters appearing in
the Casper Feature New Picture that is the subject of such Harvey Preclusion
Period or with respect to Products featuring such Casper Characters, except as
set forth in this subsection (b) or subsection (c). Following the commencement
of the Harvey Preclusion Period, Harvey (and its agents and licensees) shall be
permitted to negotiate and enter into new Merchandising licenses, or renew or
extend any existing Merchandising licenses (together, "New Licensee") for the
Casper Characters featured in a Casper Feature New Picture to which the Harvey
Preclusion Period applies, provided however, that neither Harvey (nor its agents
or licensees) will grant to any New Licensee the right to (x) release (and
Harvey will not itself release) Merchandise featuring such Casper Characters
into the marketplace; or (y) market or advertise (and Harvey will not itself
market or advertise) such Merchandise, in each case during the Harvey Preclusion
Period. If, however, at the time the Harvey Preclusion Period commences, Harvey
(or any of its licensees or agents) has already granted a Merchandising license
to a licensee ("Existing Licensee") which license runs into the Harvey
Preclusion Period, said Existing Licensee shall not be precluded from releasing
Merchandise into the marketplace during the Harvey Preclusion Period, provided
that Harvey shall use its best efforts as described more particularly in
Paragraph 7d below to facilitate coordination between the Existing Licensees and
Universal's marketing and Merchandising efforts in connection with the Casper
Feature New Picture. For example, if an Existing Licensee wishes to release
Casper Merchandise into the marketplace during the Harvey Preclusion Period,
Harvey shall use its best efforts to coordinate such release so that it does not
interfere with or undermine Universal's Merchandising efforts in connection with
a Casper Feature New Picture. Each license with a New Licensee shall prohibit
the New Licensee from releasing Merchandise into the marketplace during the
Harvey Preclusion Period and require the New Licensee to indemnify Harvey with
respect to any breach of the license, including any release of Merchandise into
the marketplace during the Harvey Preclusion Period, and each license with an
Existing Licensee shall require the Existing Licensee to coordinate with Harvey
with respect to the Merchandising Exploitation of the Casper Characters and the
Exploitation of other Products. Harvey shall use its best efforts to ensure that
each New Licensee and Existing Licensee complies with the terms of its
Merchandising license.
c. EXCEPTIONS:
Notwithstanding the foregoing:
(i) The Harvey Preclusion Period shall not apply to
Harvey's Merchandising Exploitation through Promotional Tie-Ups, including fast
food promotions, in connection with Harvey's "Casper, A Spirited Beginning"
scheduled for release in 1997. Universal shall be given prompt written notice of
any such permitted Promotional Tie-Ups.
(ii) The Harvey Preclusion Period shall not apply to the
Merchandising, manufacturing and sale of Merchandise at any Harvey Family
Entertainment Center or Harvey Retail Store. During a Harvey Preclusion Period,
Harvey will not sell from any Harvey Retail Store which is a
store-within-a-store any Casper related merchandise that has not
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<PAGE> 9
been purchased at arm's length from a third party licensee, and if Universal
does not financially participate in Harvey's arm's length purchase from a
licensee with respect to any such merchandise, then Harvey will pay Universal
the royalty described in the Merchandising Pricing Schedule attached hereto upon
the sale of such merchandise designed to place Universal and Harvey in roughly
the same position as the Parties believe they would have been in had such
article of merchandise been acquired by Harvey during the Harvey Preclusion
Period from a Universal licensee.
(iii) During a Harvey Preclusion Period, Harvey will not
be prohibited from purchasing Merchandise for its Family Entertainment Centers
or Harvey Retail Stores from Merchandising licensees.
d. Coordination of Merchandising Activities:
The Parties are not required to coordinate competing promotional
activities. However, the Parties recognize the significant value of the "Casper"
rights Harvey and Universal both possess. More specifically, Universal
recognizes that the "Casper" direct-to-video rights are tremendously valuable to
Harvey and Harvey recognizes that the "Casper" theatrical motion picture rights
are tremendously valuable to Universal. In an effort to avoid conflicts in the
enjoyment of their respective rights, the Parties agree, subject to legal
constraints, to meet and confer from time-to-time to consider the proposals of
one another concerning the adoption of cooperative strategies and coordination
of licenses during a Harvey Preclusion Period.
8. PAYMENT OF ADVANCE TO HARVEY:
Universal shall pay to Harvey, upon commencement of each 12 month
period of the Harvey Preclusion Period after the Merchandising Amendment Date,
an advance against the Merchandising revenues payable by Universal under
Paragraph 6 as indicated in the Pricing Schedule attached hereto. Universal
shall retain all Merchandising revenues otherwise payable to Harvey as
contemplated under Paragraph 6 until it has recouped amounts advanced. Amounts
advanced to Harvey with respect to a Harvey Preclusion Period which is a
Theatrical Preclusion Period shall be subject to refund in the circumstances
(and only in the circumstances) contemplated under Section 2.7(b)(iii) of the
Amended and Restated Agreement. Once the Merchandising restrictions are in
effect during a Theatrical Preclusion Period, Harvey will be guaranteed the
merchandising advance.
9. HARVEY OVERHEAD RECOUPMENT:
Upon commencement of a Harvey Preclusion Period after the
Merchandising Amendment Date, and continuing throughout the term of such Harvey
Preclusion Period, Harvey shall be entitled to deduct from the gross revenues it
receives from Merchandising the Casper Characters 50% of that portion of
Harvey's overhead directly related to Harvey's Merchandising of the Casper
Characters featured in the Casper Feature New Picture related to such Harvey
Preclusion Period (and no other Characters), which shall be computed as follows:
Total Merchandising revenues for the Casper Characters featured
in the Casper
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<PAGE> 10
Feature New Picture related to the Harvey Preclusion Period for the 12-month
period immediately preceding the commencement of the Harvey Preclusion Period,
excluding (x) any revenues from such Casper Characters received by Harvey from
Universal Theme Parks or in connection with any Harvey Family Entertainment
Center or Retail Store, and (y) any payment made by Universal hereunder ("Casper
Base Year Revenues"), divided by the total Harvey Merchandising revenues from
such Casper Characters for such 12-month period ("Harvey Base Year Revenues"),
times Harvey's direct overhead costs associated with Merchandising (calculated
in accordance with generally accepted accounting principles) for such 12-month
period, provided that for purposes of calculation, Harvey's aggregate direct
overhead costs associated with Merchandising shall not exceed its directly
related costs for the four employees Harvey is required to hire under Paragraph
14. For example, if Harvey Base Year Revenues were $3,000,000, and Casper Base
Year Revenues were $1,000,000 of the total, and Harvey's overhead costs for such
period associated with the Merchandising were $600,000, then Harvey would be
entitled to recoup, before Universal's or Harvey's participation, $8,333 for
each month that the Harvey Preclusion Period is in effect, provided that in no
event shall the amount of Merchandising revenues payable to Universal pursuant
to Paragraph 4 after deducting such overhead costs be less than zero.
10. UNIVERSAL THEME PARK RIGHTS:
Notwithstanding the provisions of Paragraphs 2 and 4 of this
Merchandising Amendment, Universal shall continue to have all existing rights
set forth in the Amended and Restated Agreement and the Stroller Agreement (if
executed) with respect to the Exploitation of Characters and Products in Theme
Parks, including without limitation the right to conduct Merchandising
activities in its Theme Parks under the terms of existing agreements between the
Parties. Harvey will act as the agent for Universal and agrees to continue to
instruct licensees under licenses assumed by Harvey pursuant to this
Merchandising Amendment to charge Universal only the amount of royalties
currently paid by Universal under existing Universal Merchandising licenses for
Merchandise sold in Universal Theme Parks, so long as Universal Theme Parks
continue to remit royalty payments to Harvey, which payments shall not be
included in Universal's Merchandising revenues.
11. RIGHTS GRANTED TO FOX CHILDREN'S NETWORK:
Nothing contained in this Merchandising Amendment shall modify
any rights previously granted to Fox Children's Network, Inc. ("Fox") pursuant
to that certain letter agreement between Fox and Universal dated as of October
26, 1994.
12. UNIVERSAL'S AND HARVEY'S APPROVAL RIGHTS RELATING TO CASPER
CHARACTERS:
a. UNIVERSAL'S APPROVAL RIGHTS. Universal shall have the right
during the term of this Merchandising Amendment (Paragraph 15 hereunder) to
approve Harvey's choice of Merchandising agents, and Harvey's business decisions
in connection with Harvey's (or any agent's) grant of Merchandising licenses to
third parties for (x) the Casper character and New Universal Elements (and
Products based on or featuring the Casper Character and any New Universal
Elements) in all media, and (y) the other Casper Characters (and Products based
on or
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featuring the Casper Characters) in all media produced or released by Universal,
and any direct-to-video (live action or animation) whether or not produced by
Universal (e.g., initial deal approval, the duration and other terms of any
license or commitment in connection therewith), including the grant of
Promotional Tie-Up rights, provided, however, that Universal understands that
with respect to approvals related to Promotional Tie-Up rights for any
direct-to-video produced by Harvey or its licensees, in the event of a
disagreement Harvey's decision shall be final. Universal shall have mutual
approval over Products and style guides with respect to Merchandising for the
Casper Characters and Products featuring the Casper Characters by Harvey or its
licensees, provided, however, that in the event of a disagreement, Harvey's
decision shall be final. Harvey shall, regardless of whether Universal has
approval rights for a license under this paragraph, use its best efforts to
ensure that all of its licensees maintain the integrity of the Casper Characters
and produce high-quality Products so as not to diminish the value of the Casper
Characters.
Universal's approval rights for Merchandising licenses and
Products and style guides covering New Universal Elements as defined in the
Amended and Restated Agreement (e.g. Kat, Whipstaff Manor) will continue in
perpetuity, whether or not for media produced, released or distributed by
Universal, such approval not to be unreasonably withheld.
b. HARVEY APPROVAL RIGHTS. In connection with Universal's
Merchandising rights under Paragraph 6 of this Merchandising Amendment, Harvey
shall have the right to approve Universal's choice of Merchandising agents, and
Universal's business decisions in connection with Universal's (or any agent's)
grant of Merchandising licenses to third parties, including without limitation
the grant of Promotional Tie-Up rights, provided that Harvey shall have no such
right of approval with respect to the grant of Promotional Tie-Up rights related
to the initial theatrical and home video release of the First Casper Sequel
except for the limited purpose of ensuring that the Casper Characters are
depicted in a manner consistent with the artistic representation of the
Characters as the same have been depicted heretofore. Harvey shall similarly
have approval rights over Products and style guides developed or used by
Universal and its licensees and agents in connection with Casper
Character-related Merchandising, it being understood that in the event of a
disagreement, Harvey's decision shall be final.
c. STANDARDS AND PROCEDURES FOR APPROVALS. Neither Party shall
unreasonably withhold any of its approvals requested hereunder and a Party from
whom approval is sought shall use its best efforts to respond in writing to the
Party seeking approval within 5 business days of the initial request for
approval. In the event a Party reasonably requests the other Party's expedited
approval, the Party whose approval has been sought shall use its best efforts to
respond to the requesting Party within 3 business days. If the Party whose
approval has been sought fails to respond within the allotted time periods set
forth herein, such Party whose approval has been requested will be deemed to
have approved of the requesting Party's request. The requesting Party's request
for approval of any Merchandising license shall be accompanied by such
information as the other Party shall reasonably request. Any request for
approval of a Product or style guide shall be accompanied by a prototype,
artist's rendition or sample that is sufficiently detailed to permit the
reasonable exercise of the approval rights granted hereby. For purposes of this
paragraph, approval of a license will not be deemed unreasonably withheld if the
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<PAGE> 12
terms of the license are inconsistent with industry standards.
13. ASSUMPTION OF EXISTING MERCHANDISING LICENSE AGREEMENTS:
Universal hereby assigns to Harvey, and Harvey assumes and agrees
to perform, Universal's product review and approval obligations under all of
Universal's existing Merchandising licensing agreements for the Casper
Characters.
14. HARVEY'S MERCHANDISING EFFORTS:
Harvey has hired and agrees to maintain during the term of
Universal's financial participation under Paragraph 4 of this Merchandising
Amendment (pursuant to the first sentence of Paragraph 15) at least four
additional employees to handle merchandising of Characters and Products, and to
use throughout such term its best efforts in the exploitation of rights under
Paragraph 4 above to maximize quality, exposure and revenues.
15. TERM; OTHER AGREEMENTS:
a. TERMINATION OF UNIVERSAL'S FINANCIAL PARTICIPATION. This
Merchandising Amendment shall become effective as of the Merchandising Amendment
Date, and Universal's Merchandising financial participation under Paragraph 4
and this Merchandising Amendment shall expire on the earlier of (i) two and
one-half years after the completion of the last television motion picture
produced under the PSO Agreement, or (ii) December 7, 2000, provided that
Universal's participation in Merchandising from Universal's Casper animated
television series will expire on the later of December 7, 2000 or 30 months
after the completion of production of the last television series episode
produced under the PSO Agreement. Additionally, Universal's Merchandising
financial participation for New Universal Elements only (e.g. Kat, Whipstaff
Manor, as defined in the Amended and Restated Agreement) will survive until
termination of this Merchandising Amendment.
b. OTHER AGREEMENTS. Except as specifically set forth in this
Merchandising Amendment, nothing contained herein is intended to affect the
Parties' respective rights and obligations under the Related Agreements, and
each Party hereby reserves all of its rights under such agreements other than as
specifically modified by the Amended and Restated Agreement and this
Merchandising Amendment.
c. SURVIVAL OF CERTAIN PROVISIONS. Paragraphs 1, 4d, 5, 6, 7, 8,
9, 15, 17, 18, and 21 shall survive expiration of this Merchandising Amendment,
but shall be effective after such expiration only so long as Universal (or any
of its direct or indirect transferees, assignees or successors in interest)
retains Casper motion picture rights. In addition, Paragraphs 10 and 11 shall
survive termination of this Agreement, provided that the foregoing shall not
extend the terms of the agreements described in those paragraphs.
16. INTERACTIVE BONUS:
Universal shall pay Harvey a non-refundable interactive bonus of
$250,000 for the
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<PAGE> 13
period ended September 30, 1996. The bonus was paid in full on August 27, 1997.
17. REPRESENTATION BY COUNSEL:
Each Party hereto has been represented or has had the opportunity
to be represented by counsel of its own selection and shall be deemed to have
participated equally in the drafting of this Merchandising Amendment. Each Party
has reviewed this Merchandising Amendment with such counsel and understands its
terms.
18. UNIVERSAL AND HARVEY PROMOTIONAL RIGHTS:
Notwithstanding the provisions of Paragraph 4 and subject to the
terms of this Merchandising Amendment, Universal shall continue to have the
right to advertise, market, exploit and publicize all Products released by
Universal. Subject to the terms of this Merchandising Amendment, Harvey shall
continue to have the right to advertise, market, exploit and publicize all
Products released by Harvey.
19. PROMOTIONAL TIE-UP LICENSES:
Promotional Tie-Up arrangements entered into by either Harvey or
Universal or their respective licensees with third parties will be entered into
on an arm's length basis, and Harvey or Universal, as the case may be, will
provide the other with copies of all such agreements promptly after they are
executed provided, however, that when Universal's financial participation under
Paragraph 4 herein terminates (pursuant to the first sentence of Paragraph 15),
Harvey's obligations under this paragraph shall also terminate.
20. INTENTIONALLY OMITTED
21. RIGHTS UPON BREACH:
No material or non-material breach of this Merchandising
Amendment by Harvey shall affect Harvey's rights under Paragraphs 2 and 3 of
this Merchandising Amendment. All disputes hereunder between the Parties shall
be submitted to binding arbitration consistent with the arbitration provisions
of the Stock Purchase Agreement.
Please acknowledge your acceptance of the foregoing which shall
be effective as of the Merchandising Amendment Date by countersigning a copy of
this letter below.
Sincerely,
Universal Studios, Inc.
Accepted and Agreed to:
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<PAGE> 14
The Harvey Entertainment Company
By:_____________________________
Date:
Universal Consumer Products
By:_____________________________
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<PAGE> 15
PRICING SCHEDULE
FINANCIAL TERMS
1. Sharing of Merchandising Revenues from the First Sequel (Paragraph 6):
Universal shall pay to Harvey XXXXXX (XXX%) of all Casper
Picture-related Merchandising of the First Sequel, after deducting only
the following amounts in the following order:
- Costs of up to XXX% of gross revenues incurred by Universal in
the exercise of its Merchandising rights under Paragraph 6.
- A distribution fee of XXX% on the gross revenues after the XXX%
cost allowance (i.e. XXX% x XXX%)
For example: If Universal's Casper Picture-related Merchandising revenue
for the First Sequel is $1,000,000, Universal may take up to XXX%
($XXXXXX) off the top, leaving $XXXXXX on which a XXX% distribution fee
will be computed ($XXXXXX). Universal would then pay Harvey XXX% of the
net amount remaining ($XXXXXX), or $XXXXXX.
2. Harvey Retail Stores merchandise royalty (Paragraph 7.c(ii)): XXX% of
gross revenues.
3. Minimum Advance (Paragraph 8): The greater of the (x) XXXXXX dollars or
(y) the revenues retained by Harvey from Merchandising activities under
Paragraph 4 above for the twelve (12) months preceding the commencement
of the Harvey Preclusion Period. Upon commencement of any period of the
Harvey Preclusion Period which is less than 12 months, Universal shall
pay to Harvey a prorated portion of such advance.
4. Example of Minimum Advance Amounts Payable During Merchandising
Preclusion Period (Paragraph 8):
If the Harvey Preclusion Period is 24 months, Universal must pay to
Harvey a minimum of $XXXXXX (i.e., $XXXXXX at the beginning of such
Preclusion Period and the second $XXXXX on the beginning of the 13th
month of such Preclusion Period. If the Harvey Preclusion Period is 28
months, Universal must pay to Harvey a minimum of $XXXXXX (i.e., $XXXXXX
at the beginning of such Preclusion Period, $XXXXXX on the beginning of
the 13th month of such Preclusion Period, and $XXXXXX on the beginning
of the 25th month of such Preclusion Period).
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<PAGE> 1
EXHIBIT 10.76
OFFICE LEASE
BETWEEN
DOUGLAS EMMETT REALTY FUND 1997, A CALIFORNIA LIMITED PARTNERSHIP
AS LANDLORD
AND
THE HARVEY ENTERTAINMENT COMPANY, A CALIFORNIA CORPORATION
AS TENANT
DATED
SEPTEMBER 22, 1999
<PAGE> 2
OFFICE LEASE
BASIC LEASE INFORMATION
<TABLE>
<S> <C> <C>
Date: September 22, 1999
Landlord: DOUGLAS EMMETT REALTY FUND 1997,
a California limited partnership
Tenant: THE HARVEY ENTERTAINMENT COMPANY,
a California corporation
- ----------------------------------------------------------------------------------------------------------------------------------
SECTION
1.1 Premises: 11835 West Olympic Boulevard, Suite 550E
Los Angeles, California 90064
1.4 Rentable Area of Premises: approximately 13,973 square feet
1.4 Usable Area of Premises: approximately 11,849 square feet
2.1 Term: Seven (7) Years and One-Half (1/2) Month
Anticipated Commencement Date: December 15, 1999 (as modified by Section 2.1 and Exhibit B)
Anticipated Expiration: December 31, 2006 (as modified by Section 2.1)
3.1 Fixed Monthly Rent: $27,946.00
3.3 Fixed Monthly Rent Increase 3% per annum, pursuant to Section 3.3
Date of First Increase: January 1, 2001
Frequency of Increase: Annually thereafter
3.7 Security Deposit: $400,000.00 (as modified by Section 3.7)
4.1 Tenant's Share: 3.40 %
4.2 Base Year for Operating Expenses: 2000
6.1 Use of Premises: General business offices for entertainment/media company
16.1 Tenant's Address for Notices:
Before the Commencement Date: The Harvey Entertainment Company
1999 Avenue of the Stars, Suite 2050
Los Angeles, California 90067
After the Commencement Date: The Harvey Entertainment Company
11835 West Olympic Boulevard, Suite 550E
Los Angeles, California 90064
Contact: Mr. Ron Cushey
Landlord's Address for Notices: Douglas Emmett Realty Fund 1997
C/o Douglas, Emmett & Co.
12121 Wilshire Boulevard, Suite 600
Los Angeles, California 90025
20.5 Brokers: Douglas, Emmett & Company
12121 Wilshire Boulevard, Suite 600
Los Angeles, California 90025 AND
CRESA Partners, LLC
11726 San Vicente Boulevard, Suite 500
Los Angeles, California 90049
21.1 Parking Permits: Forty-two (42) permits for unreserved spaces; however, up to six (6)
of such permits may be converted to permits for reserved spaces
</TABLE>
Except as noted hereinbelow, the foregoing Basic Lease Information is hereby
incorporated into and made a part of the Lease. The Section reference in the
left margin of the Basic Lease Information exists solely to indicate where such
reference initially appears in the Lease document. Except as specified
hereinbelow, each such reference shall in the Lease document shall incorporate
the applicable Basic Lease Information. However, in the event of any conflict
between any reference contained in the Basic Lease Information and the specific
information wording of the Lease, the wording of the Lease shall control.
ii
<PAGE> 3
OFFICE LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
<S> <C> <C>
1 Demise of Premises...................................................................................1
2 Commencement Date and Term...........................................................................2
3 Payment of Rent, Late Charge and Security Deposit....................................................3
4 Additional Rent .....................................................................................6
5 Ethics ..............................................................................................8
6 Use of Premises .....................................................................................9
7 Condition Upon Vacating and Removal of Personal Property ............................................9
8 Utilities and Services .............................................................................10
9 Tenant's Indemnification and Limitation on Landlord's Liability.....................................12
10 Compliance with Laws ...............................................................................13
11 Assignment and Subletting ..........................................................................13
12 Maintenance, Repairs, Damage, Destruction, Renovation and/or Alteration.............................16
13 Condemnation .......................................................................................20
14 Mortgage Subordination and Attornment ..............................................................21
15 Estoppel Certificates ..............................................................................21
16 Notices ............................................................................................21
17 Default and Landlord's Option to Cure...............................................................22
18 Damages; Remedies; Re-Entry by Landlord; Etc. ......................................................24
19 Insurance ..........................................................................................25
20 Miscellaneous ......................................................................................27
21 Parking ............................................................................................29
22 Concierge Services..................................................................................30
23 Option............................................................................................. 30
Signatures ..................................................................................................32
</TABLE>
Exhibits
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A -- Suite Plan
B -- Improvement Construction Agreement
B-1 -- Construction by Tenant During Term
C -- Rules and Regulations
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OFFICE LEASE
THIS OFFICE LEASE, dated September 22, 1999, is by and between DOUGLAS
EMMETT REALTY FUND 1997, a California limited partnership ("Landlord"), with an
office at 12121 Wilshire Boulevard, Suite 600, Los Angeles, California 90025,
and THE HARVEY ENTERTAINMENT COMPANY, a California corporation ("Tenant"), with
an office at 1999 Avenue of the Stars, Suite 2050, Los Angeles, California
90067.
ARTICLE 1
DEMISE OF PREMISES
SECTION 1.1. DEMISE. Subject to the covenants and agreements contained in this
Lease, Landlord leases to Tenant and Tenant hires from Landlord, Suite Number
550E (the "Premises") on the 5th floor, in the building located at 11835 West
Olympic Boulevard, Los Angeles, California 90064 (the "Building"). The
configuration of the Premises is highlighted on Exhibit A, attached hereto and
made a part hereof by reference, and Landlord and Tenant acknowledge and agree
that the intent of both parties hereto is that said configuration shall not be
materially altered by construction of the demising walls separating the same
from the balance of the space from which it is being demised.
Tenant acknowledges that it has made its own inspection of and inquiries
regarding the Premises, which are already improved. Therefore, except for the
improvements to be completed pursuant to Exhibit B, attached hereto and made a
part hereof by reference, Tenant accepts the Premises in their "as-is"
condition. Tenant further acknowledges that Landlord has made no representation
or warranty, express or implied, except as are contained in this Lease and its
Exhibits, regarding the condition, suitability or usability of the Premises or
the Building for the purposes intended by Tenant.
The Building, the Building's parking facilities, any outside plaza areas,
land and other improvements surrounding the Building which are designated from
time to time by Landlord as common areas appurtenant to or servicing the
Building, and the land upon which any of the foregoing are situated, are herein
sometimes collectively referred to as the "Real Property."
SECTION 1.2. TENANT'S NON-EXCLUSIVE USE. Subject to the contingencies contained
herein, Tenant is granted the nonexclusive use of the common corridors and
hallways, stairwells, elevators, restrooms, parking facilities, lobbies and
other public or common areas located on the Real Property. However, the manner
in which such public and common areas are maintained and operated shall be at
the sole discretion of Landlord, and Tenant's use thereof shall be subject to
such reasonable and non-discriminatory rules, regulations and restrictions as
Landlord may make from time to time.
SECTION 1.3. LANDLORD'S RESERVATION OF RIGHTS. Landlord specifically reserves to
itself use, control and repair of the structural portions of all perimeter walls
of the Premises, any balconies, terraces or roofs adjacent to the Premises
(including any flagpoles or other installations on said walls, balconies,
terraces or roofs) and any space in and/or adjacent to the Premises used for
shafts, stairways, pipes, conduits, ducts, mail chutes, conveyors, pneumatic
tubes, electric or other utilities, sinks, fan rooms or other Building
facilities, and the use thereof, as well as access thereto through the Premises.
Landlord also specifically reserves to itself the following rights:
A) To designate all sources furnishing sign painting or lettering;
B) To constantly have pass keys to the Premises;
C) To grant to anyone the exclusive right to conduct any particular business
or undertaking in the Building, so long as Landlord's granting of the same
does not prohibit Tenant's use of the Premises for Tenant's Specified Use,
as defined in Article 6;
D) To enter the Premises at any reasonable time with reasonable notice (except
for emergencies) to inspect, repair, alter, improve, update or make
additions to the Premises or the Building;
E) During the last six (6) months of the Term, to exhibit the Premises to
prospective future tenants;
F) Subject to the provisions of Article 12, to, at any time, and from time to
time, whether at Tenant's request or pursuant to governmental requirement,
repair, alter, make additions to, improve, or decorate all or any portion
of the real property, Building or Premises. In connection therewith, and
without limiting the generality of the foregoing rights, Landlord shall
specifically have the right to remove, alter, improve or rebuild all or any
part of the lobby of the Building as the same is presently or shall
hereafter be constituted;
G) Subject to the provisions of Article 12, Landlord reserves the right to
make alterations or additions to or change the location of elements of the
Real Property and any common areas appurtenant thereto; and/or
H) To take such other actions as may reasonably be necessary when the same are
required to preserve, protect or improve the Premises, the Building, or
Landlord's interest therein.
SECTION 1.4. AREA. Landlord and Tenant agree that the Usable Area of the
Premises has been measured according to the June, 1996 standards published by
the Building Owners' and Managers' Association ("BOMA"), and that Landlord is
utilizing a deemed add-on factor of 17.93% to compute the Rentable Area of the
Premises. Rentable Area herein is calculated as 1.1793 times the estimated
Usable Area, regardless of what the actual square footage of the common areas of
the Building may be, and whether or not they are more or less than 17.93% of the
total estimated Usable Area of the Building. The purpose of this calculation is
solely to provide a general basis for comparison and pricing of this space in
relation to other spaces in the market area.
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Landlord and Tenant further agree that even if the Rentable or Usable Area
of the Premises and/or the total Building Area are later determined to be more
or less than the figures stated herein, for all purposes of the Lease, the
figures stated herein shall be conclusively deemed to be the actual Rentable or
Usable Area of the Premises, as the case may be.
SECTION 1.5. QUIET ENJOYMENT. Contingent upon Tenant keeping, observing and
performing all of the covenants, agreements, terms, provisions and conditions of
this Lease on its part to be kept, observed and performed, and subject to the
limitations imposed under Article 14 of this Lease, Tenant shall lawfully and
quietly hold, occupy and enjoy the Premises during the Term.
SECTION 1.6. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of
light, air or view by any structure which is now or may hereafter be erected on
lands adjacent to the Building shall in no way affect this Lease or impose any
liability on Landlord. Noise, dust or vibration or other ordinary incidents to
new construction of improvements on lands adjacent to the Building, whether or
not by Landlord, shall in no way affect this Lease or impose any liability on
Landlord.
SECTION 1.7. RELOCATION. Landlord shall have the right at any time, except
during the last six (6) months, of the Term, and after giving Tenant a minimum
of sixty (60) days prior written notice, to:
A) provide and furnish Tenant with space containing a substantially similar
level of improvements elsewhere in the Building (but only on the sixth (6th)
floor or higher) of approximately the same size and configuration (including
number and size of window offices) as the Premises (the "Substitute
Premises") and
B) relocate Tenant to such space.
Landlord shall pay all reasonable costs and expenses incurred as a result
of such relocation. If Landlord moves Tenant to the Substitute Premises, each
and every term, covenant and condition of this Lease shall remain in full force
and effect and be deemed applicable to the Substitute Premises, as though
Landlord and Tenant had entered into an express written amendment of this Lease
with respect thereto, except that if the approximate Rentable square footage of
the Substitute Premises is less than that of the Premises, the Fixed Monthly
Rent and Tenant's Proportionate Share of Operating Expense increases shall be
appropriately reduced.
If Tenant refuses to permit Landlord to relocate Tenant as specified above,
Landlord shall have the right to terminate this Lease effective ninety (90) days
from the date Landlord provided Tenant with the original notification of intent
to relocate.
ARTICLE 2
COMMENCEMENT DATE AND TERM
SECTION 2.1. COMMENCEMENT DATE AND TERM. This Lease shall commence five (5) days
after the date Landlord substantially completes the Improvements contemplated
under Exhibit B (the "Commencement Date"), and shall end, unless sooner
terminated as otherwise provided herein, at midnight on the last calendar day of
the calendar month which occurs seven (7) years and one (1) month (the "Term")
after the Commencement Date (the "Termination Date"). The anticipated
Commencement Date is December 15, 1999. Landlord and Tenant shall promptly
execute an amendment to this Lease (the "First Amendment"), confirming the
finalized Commencement Date and Term as soon as they are ascertained.
For purposes of establishing the Commencement Date, substantial completion
shall be defined as that point in the construction process when all of the
structural, mechanical, plumbing and electrical work specified herein has been
performed; the paint, carpet, hard flooring materials, base moldings, and
millwork, if any, have been installed, and a majority of the other finish work
specified in Tenant's plans has been completed in such a manner that Tenant
could, if it took possession of the Premises, enjoy beneficial occupancy
thereof, and further provided that Tenant is not prevented from lawfully taking
possession of the Premises due to any failure by Landlord to obtain a required
governmental permit.
Tenant's taking possession of the Premises (other than for installation of
Tenant's equipment and trade fixtures as hereinafter provided) and/or commencing
Tenant's normal business operations in the Premises shall be deemed conclusive
evidence that, as of the Commencement Date:
A) Landlord has substantially completed the Tenant Improvements contemplated
hereunder, except for any minor punchlist items to be completed; and
B) the Premises are in good order and repair.
Provided that Tenant does not delay Landlord's completion of the
Improvements that Landlord is required to complete, Tenant may take possession
of the Premises up to two (2) calendar weeks prior to the anticipated
Commencement Date, solely for the purpose of installing Tenant's furniture,
fixtures and equipment, computer and telephone cabling. Said early possession
shall be subject to Tenant complying with all of the provisions and covenants
contained herein, except that Tenant shall not be obligated to pay Fixed Monthly
Rent or Additional Rent until the Commencement Date. If Tenant's early
possession does so delay completion of the Improvements, then from the date of
notice by Landlord to Tenant of such delay until the cessation by Tenant of the
action causing the delay, such delay shall be chargeable to Tenant by:
C) reducing the Allowance by an amount equal to the per-diem Fixed Monthly Rent
payable hereunder, multiplied by the total number of days Landlord was so
delayed; and
D) extending the anticipated Commencement Date by an equal number of days as the
total number of days Landlord was so delayed.
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If for any reason (including Landlord's inability to complete the
Improvements called for hereunder) Landlord is unable to deliver possession of
the Premises to Tenant on the anticipated Commencement Date, this Lease shall
not be void or voidable, nor shall Landlord be liable to Tenant for any damage
resulting from Landlord's inability to deliver such possession. However, Tenant
shall not be obligated to pay the Fixed Monthly Rent or Additional Rent that
Tenant is required to pay pursuant to Section 3.1 until such possession of the
Premises has been delivered to Tenant by Landlord. Except for such delay in the
commencement of Rent, Landlord's failure to give possession on the anticipated
Commencement Date shall in no way affect Tenant's obligations hereunder.
If possession of the Premises is not tendered by Landlord within one
hundred twenty (120) days after the anticipated Commencement Date, then Landlord
and Tenant shall each have the right, provided such party is not in default of
its obligations hereunder, to terminate this Lease by giving written notice, one
to the other, within ten (10) days after such failure. If such notice of
termination is not given by either Landlord or Tenant within said ten (10) day
time period, then this Lease shall continue in full force and effect.
If, due to Force Majeure, Landlord is unable to tender possession of the
Premises within one hundred eighty (180) days after the anticipated Commencement
Date, then this Lease, and the rights and obligations of Landlord and Tenant
hereunder, shall terminate automatically, without further liability by either
party to the other, and without further documentation being required.
SECTION 2.2. HOLDING OVER. If Tenant fails to deliver possession of the Premises
on the Termination Date, but holds over after the expiration or earlier
termination of this Lease without the express prior written consent of Landlord,
such tenancy shall be construed as a tenancy from month-to-month on the same
terms and conditions as are contained herein, except that the Fixed Monthly Rent
payable by Tenant during such period of holding over shall automatically
increase as of the Termination Date to an amount equal to one hundred fifty
percent (150%) for the initial sixty (60) days and two hundred percent (200%)
thereafter of the Fixed Monthly Rent payable by Tenant the calendar month
immediately prior to the date when Tenant commences such holding over (the
"Holdover Rent"). Such Holdover Rent shall be paid during such period as Tenant
retains possession of the Premises. However, Tenant's payment of such Holdover
Rent, and Landlord's acceptance thereof, shall not constitute a waiver by
Landlord of any of Landlord's rights or remedies with respect to such holding
over, nor shall it be deemed to be a consent by Landlord to Tenant's continued
occupancy or possession of the Premises past the time period covered Tenant's
payment of the Holdover Rent.
Furthermore, if Tenant fails to deliver possession of the Premises to
Landlord upon the expiration or earlier termination of this Lease, then, in
addition to any other liabilities to Landlord accruing therefrom, Tenant shall
protect, defend, indemnify and hold Landlord harmless from all loss, costs
(including reasonable attorneys' fees and expenses) and liability resulting from
such failure, including without limiting the foregoing, any claims made by any
succeeding tenant arising out of Tenant's failure to so surrender, and any lost
profits to Landlord resulting therefrom.
Notwithstanding the provisions contained hereinabove regarding Tenant's
liability for a continuing holdover, Landlord agrees to use commercially
reasonable efforts to insert into any future lease of another tenant proposing
to occupy the Premises provisions similar to those contained in Section 2.1,
permitting mitigation of Tenant's damages arising out of Tenant's temporary
holdover.
ARTICLE 3
PAYMENT OF RENT, LATE CHARGE
SECTION 3.1. PAYMENT OF FIXED MONTHLY RENT AND ADDITIONAL RENT. "Rent" shall
mean: all payments of monies in any form whatsoever required under the terms and
provisions of this Lease, and shall consist of:
A) "Fixed Monthly Rent," which shall be payable in equal monthly installments of
$27,946.00; plus
B) Additional Rent as provided in Article 4 and elsewhere in this Lease.
Provided that Tenant is not in default (after the expiration of time and
the opportunity to cure) on or at any time prior to the Commencement Date, one
hundred percent (100%) of the Fixed Monthly Rent due for the second (2nd) full
calendar month of the Term (the "Rent Deferral") shall be deferred until the end
of the Term.
Further provided that no event has occurred which, with the giving of
notice or the passage of time or both would be a material default by Tenant
under this Lease, and Tenant has remained in full compliance of the material
provisions contained herein throughout the Term, Landlord shall, on the last
calendar day of the Term, waive its right to collect the Rent Deferral.
If Tenant does enter into an uncured default at any time after the date of
said Rent Deferral, the full amount so deferred, including interest thereon at
the rate of ten percent (10%) per annum, computed from the date of such
deferral, shall be immediately due and payable, as if the same had been due if
the Rent Deferral had not occurred.
Except as otherwise stated, the entire Fixed Monthly Rent shall be due and
payable, in advance, on or before the first day of each and every calendar month
until the end of the Term, pursuant to this Section 3.1.
SECTION 3.2. MANNER OF PAYMENT. Tenant shall pay Fixed Monthly Rent and
Additional Rent immediately upon the same becoming due and payable, without
demand therefor, and without any abatement, set off or deduction whatsoever,
except as may be expressly provided in this Lease. Landlord's failure to submit
statements to Tenant stating the amount of Fixed Monthly Rent or Additional Rent
then due, including Landlord's failure to provide to Tenant a calculation of the
adjustment as required in Section 3.3 or the Escalation Statement referred to in
Article 4, shall not
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constitute Landlord's waiver of Tenant's requirement to pay the Rent called for
herein. Tenant's failure to pay Additional Rent as provided herein shall
constitute a material default equal to Tenant's failure to pay Fixed Monthly
Rent when due.
Rent shall be payable in advance on the first day of each and every
calendar month throughout the Term, in lawful money of the United States of
America, to Landlord at 11845 West Olympic Boulevard, Suite 1260, Los Angeles,
California 90064, or at such other place(s) as Landlord designates in writing to
Tenant. Tenant's obligation to pay Rent shall begin on the Commencement Date and
continue throughout the Term, without abatement, setoff or deduction, except as
otherwise specified hereinbelow.
Concurrent with Tenant's execution and delivery to Landlord of this Lease,
Tenant shall pay to Landlord the Fixed Monthly Rent due for the first month of
the Term.
SECTION 3.3. FIXED MONTHLY RENT INCREASE. Commencing the first calendar day of
the thirteenth (13th) calendar month of the Term, and continuing through the
last calendar day of the twenty-fourth (24th) calendar month of the Term, the
Fixed Monthly Rent payable by Tenant shall increase from $27,946.00 per month to
$28,784.38 per month.
Commencing the first calendar day of the twenty-fifth (25th) calendar month
of the Term, and continuing through the last calendar day of the thirty-sixth
(36th) calendar month of the Term, the Fixed Monthly Rent payable by Tenant
shall increase from $28,784.38 per month to $29,647.91 per month.
Commencing the first calendar day of the thirty-seventh (37th) calendar
month of the Term, and continuing through the last calendar day of the
forty-eighth (48th) calendar month of the Term, the Fixed Monthly Rent payable
by Tenant shall increase from $29,647.91 per month to $30,537.35 per month.
Commencing the first calendar day of the forth-ninth (49th) calendar month
of the Term, and continuing through the last calendar day of the sixtieth (60th)
calendar month of the Term, the Fixed Monthly Rent payable by Tenant shall
increase from $30,537.35 per month to $31,453.47 per month.
Commencing the first calendar day of the sixty-first (61st) calendar month
of the Term, and continuing through the last calendar day of the seventy-second
(72nd) calendar month of the Term, the Fixed Monthly Rent payable by Tenant
shall increase from $31.453.47 per month to $32,397.07 per month.
Commencing the first calendar day of the seventy-third (73rd) calendar
month of the Term, and continuing throughout the remainder of the initial Term,
the Fixed Monthly Rent payable by Tenant shall increase from $32,397.07 per
month to $33,368.98 per month.
Landlord and Tenant shall, in the First Amendment, confirm the actual dates
upon which the changes in Fixed Monthly Rent specified above shall occur.
SECTION 3.4. TENANT'S PAYMENT OF CERTAIN TAXES. Tenant shall, concurrent with
Tenant's next scheduled payment of Fixed Monthly Rent, reimburse Landlord, as
Additional Rent, for any and all taxes, surcharges, levies, assessments, fees
and charges payable by Landlord when:
A) assessed on, measured by, or reasonably attributable to:
I) the cost or value of Tenant's equipment, furniture, fixtures and other
personal property located in the Premises, or
II) the cost or value of any leasehold improvements in or to the Premises
in excess of $35.00 per square foot, provided the same have been made
in connection with Tenant's execution of this Lease, and without
regard to whether title to or payment for such improvements vests with
Tenant or Landlord;
B) on or measured by any rent payable hereunder, including, without
limitation, any gross income tax, gross receipts tax, or excise tax levied
by the City or County of Los Angeles or any other governmental body with
respect to the receipt of such rent (computed as if such rent were the only
income of Landlord), but solely when levied by the appropriate City or
County agency in lieu of, or as an adjunct to, such business license(s),
fees or taxes as would otherwise have been payable by Tenant directly to
such taxing authority;
C) upon or with respect to the possession, leasing, operating, management,
maintenance, alteration, repair, use or occupancy by Tenant of the Premises
or any portion thereof; or
D) solely because Landlord and Tenant entered into this transaction or
executed any document transferring an interest in the Premises to Tenant.
If it becomes unlawful for Tenant so to reimburse Landlord, the rent
payable to Landlord under this Lease shall be revised to net Landlord the
same rent after imposition of any such tax as would have been payable to
Landlord prior to the imposition of any such tax.
Said taxes shall be due and payable whether or not now customary or within
the contemplation of Landlord and Tenant. Notwithstanding the above, in no event
shall the provisions of this Section 3.4 serve to entitle Landlord to
reimbursement from Tenant for any federal, state, county or city income tax or
business license fee payable by Landlord or the managing agent of Landlord.
SECTION 3.5. CERTAIN ADJUSTMENTS. If:
A) the Commencement Date occurs on other than January 1st of a calendar year,
or the Lease expires or terminates on other than December 31st of a
calendar year;
B) the size of the Premises changes during a calendar year;
C) or any abatement of Fixed Monthly Rent or Additional Rent occurs during a
calendar year, then
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the amount payable by Tenant or reimbursable by Landlord during such year shall
be adjusted proportionately on a daily basis, and the obligation to pay such
amount shall survive the expiration or earlier termination of this Lease.
If the Commencement Date occurs on other than the first day of a calendar
month, or the Lease expires on a day other than the last day of a calendar
month, then the Fixed Monthly Rent and Additional Rent payable by Tenant shall
be appropriately apportioned on a prorata basis for the number of days remaining
in the month of the Term for which such proration is calculated.
If the amount of Fixed Monthly Rent or Additional Rent due is modified
pursuant to the Terms of this Lease, such modification shall take effect the
first day of the calendar month immediately following the date such modification
would have been scheduled.
SECTION 3.6. LATE CHARGE AND INTEREST. Tenant acknowledges that late payment by
Tenant to Landlord of Fixed Monthly Rent or Additional Rent will cause Landlord
to incur costs not contemplated by this Lease, the exact amount of which are
extremely difficult and impracticable to fix. Such costs include, without
limitation, processing and accounting charges and late charges that may be
imposed on Landlord by the terms of any encumbrance and note secured by any
encumbrance covering the Premises. Therefore, if any installment of Fixed
Monthly Rent or Additional Rent and other payment due from Tenant hereunder is
not received by Landlord within five (5) days of the date on which Landlord
delivers notice to Tenant that such amount is past due , Tenant shall pay to
Landlord on demand an additional sum equal to five percent (5%) of the overdue
amount as a late charge; provided however, Landlord shall not be required to
deliver such notice more than one (1) time in any twelve (12) month period (i.e.
- - the five percent (5%) late charge shall apply to any subsequent failure during
such twelve (12) month period to pay an amount within five (5) days of the date
due, without the requirement of additional notice to Tenant). The parties agree
that this late charge represents a fair and reasonable settlement against the
costs that Landlord will incur by reason of Tenant's late payment. Acceptance of
any late charge shall not constitute a waiver of Tenant's default with respect
to the overdue amount, or prevent Landlord from exercising any of the other
rights and remedies available to Landlord.
Every installment of Fixed Monthly Rent and Additional Rent and any other
payment due hereunder from Tenant to Landlord which is not paid within twelve
(12) days after the same becomes due and payable shall, in addition to any Late
Charge already paid by Tenant, bear interest at the rate of ten percent (10%)
per annum from the date that the same originally became due and payable until
the date it is paid. Landlord shall bill Tenant for said interest, and Tenant
shall pay the same within five (5) days of receipt of Landlord's billing.
SECTION 3.7. SECURITY DEPOSIT. Concurrent with Tenant's execution and tendering
of this Lease to Landlord, Tenant shall deposit the sum of $400,000.00 (the
"Security Deposit"), which amount Tenant shall thereafter at all times maintain
on deposit with Landlord (subject to the reduction provisions set forth below in
this Section 3.7), as security for Tenant's full and faithful observance and
performance of its obligations under this Lease (expressly including, without
limitation, the payment as and when due of the Fixed Monthly Rent, Additional
Rent and any other sums or damages payable by Tenant hereunder and the payment
of any and all other damages for which Tenant shall be liable by reason of any
act or omission contrary to any of said covenants or agreements). Landlord shall
hold such Security Deposit separate and apart from other funds held by Landlord,
in an interest-bearing account ("Interest Account"). However, within thirty (30)
days of the occurrence of each anniversary of the Commencement Date, Tenant
shall have the right to submit a written request ("Reduction Request") to
Landlord, requesting that the Security Deposit be reduced by an amount up to but
not exceeding $60,000.00 ("Reduction Amount"), plus all interest accrued in the
Interest Account during such year. Provided Tenant is not in default of its
obligations pursuant to this Lease beyond any applicable notice and cure period
upon either (i) the date of Tenant's submission of the Reduction Request or (ii)
the date of Landlord's payment to Tenant of the Reduction Amount, then Landlord
shall, within thirty (30) days of its receipt of the Reduction Request, pay to
Tenant the Reduction Amount. However, any contrary provision of this Section 3.7
notwithstanding, the Security Deposit held by Landlord shall not be reduced to
less than $33,000.00.
If at any time Tenant defaults in the performance of any of its obligations
under this Lease, after the expiration of notice and the opportunity to cure,
then, Landlord may:
A) apply as much of the Security Deposit as may be necessary cure Tenant's
non-payment of the Fixed Monthly Rent, Additional Rent and/or other sums or
damages due from Tenant; and/or;
B) if Tenant is in default of any of the covenants or agreements of this
Lease; apply so much of the Security Deposit as may be necessary to
reimburse all expenses incurred by Landlord in curing such default; or
C) if the Security Deposit is insufficient to pay the sums specified in
Section 3.7 (a) or (b), elect to apply the entire Security Deposit in
partial payment thereof, and proceed against Tenant pursuant to the
provisions of Article 17 and Article 18 herein.
If, as a result of Landlord's application of any portion or all of the
Security Deposit, the amount held by Landlord is reduced, Tenant shall, within
ten (10) days after demand therefor, deposit with Landlord additional cash
sufficient to bring the then-existing balance held as the Security Deposit to
the amount immediately prior to such reduction. Tenant's failure to deposit said
amount shall constitute a material breach of this Lease.
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At the expiration or earlier termination of this Lease, Landlord shall
deduct from the Security Deposit being held on behalf of Tenant any unpaid sums,
costs, expenses or damages payable by Tenant pursuant to the provisions of this
Lease; and/or any costs required to cure Tenant's default or performance of any
other covenant or agreement of this Lease, and shall, within thirty (30) days
after the expiration or earlier termination of this Lease, return to Tenant,
with all interest earned from the Interest Account, all or such part of the
Security Deposit as then remains on deposit with Landlord, except that in the
event of a Default Termination pursuant to the provisions of Section 18.1 of
this Lease, Tenant shall not be entitled to any undisbursed interest earned from
the Interest Account.
ARTICLE 4
ADDITIONAL RENT
SECTION 4.1. CERTAIN DEFINITIONS. As used in this Lease:
A) "ESCALATION STATEMENT" means a statement by Landlord, setting forth the
amount payable by Tenant or by Landlord, as the case may be, for a
specified calendar year pursuant to this Article 4.
B) "OPERATING EXPENSES" means the following in a referenced calendar year,
including the Base Year as hereinafter defined, calculated assuming the
Building is at least ninety-five percent (95%) occupied: all costs of
management, operation, maintenance, and repair of the Building.
By way of illustration only, Operating Expenses shall include, but not
be limited to: management fees paid by Landlord to any third-party, which
shall not exceed those reasonable and customary in the geographic area in
which the Building is located; water and sewer charges; any and all
insurance premiums not otherwise directly payable by Tenant; license,
permit and inspection fees; air conditioning (including repair of same);
heat; light; power and other utilities; steam; labor; cleaning and
janitorial services; guard services; supplies; materials; equipment and
tools.
Operating Expenses shall also include the cost or portion thereof of
those capital improvements made to the Building by Landlord during the
Term:
I) to the extent that such capital improvements reduce other direct
expenses, when the same were made to the Building by Landlord after
the Commencement Date, or
II) that are required under any governmental law or regulation that was
not applicable to the Building as of the Commencement Date.
Said capital improvement costs, or the allocable portion thereof (as
referred to in clauses (i) and (ii) above), shall be amortized over the
anticipated useful life of such capital improvement(s) pursuant to
generally-accepted accounting principles, together with interest on the
unamortized balance at the rate of eight percent (8%) per annum.
Operating Expenses shall also include all general and special real
estate taxes, increases in assessments or special assessments and any other
ad valorem taxes, rates, levies and assessments paid during a calendar year
(or portion thereof) upon or with respect to the Building and the personal
property used by Landlord to operate the Building, whether paid to any
governmental or quasi-governmental authority, and all taxes specifically
imposed in lieu of any such taxes (but excluding taxes referred to in
Section 3.4 for which Tenant or other tenants in the Building are liable)
including fees of counsel and experts, reasonably incurred by, or
reimbursable by Landlord in connection with any application for a reduction
in the assessed valuation of the Building and/or the land thereunder or for
a judicial review thereof, (collectively "Appeal Fees"), but solely to the
extent that the Appeal Fees result directly in a reduction of taxes
otherwise payable by Tenant. However, in no event shall the portion of
Operating Expenses used to calculate any billing to Tenant attributable to
real estate taxes and assessments for any expense year be less than the
billing for real estate taxes and assessments during the Base Year.
Operating Expenses shall also include, but not be limited to, the
premiums for the following insurance coverage: all-risk, structural, fire,
boiler and machinery, liability, earthquake and for replacement of tenant
improvements to a maximum of $35.00 per usable square foot, and for such
other coverage(s), and at such policy limit(s) as Landlord deems reasonably
prudent and/or are required by any lender or ground lessor, which coverage
and limits Landlord may, in Landlord's reasonable discretion, change from
time to time.
If, in any calendar year following the Base Year, as defined
hereinbelow (a "Subsequent Year"), a new expense item (e.g. earthquake
insurance, concierge services; entry card systems), is included in
Operating Expenses which was not included in the Base Year Operating
Expenses, then the cost of such new item shall be added to the Base Year
Operating Expenses for purposes of determining the Additional Rent payable
under this Article 4 for such Subsequent Year. During each Subsequent Year,
the same amount shall continue to be included in the computation of
Operating Expenses for the Base Year, resulting in each such Subsequent
Year Operating Expenses only including the increase in the cost of such new
item over the Base Year, as so adjusted. However, if in any Subsequent Year
thereafter, such new item is not included in Operating Expenses, no such
addition shall be made to Base Year Operating Expenses.
Conversely, as reasonably determined by Landlord, when an expense item
that was originally included in the Base Year Operating Expenses is, in any
Subsequent Year, no longer included in Operating Expenses, then the cost of
such item shall be deleted from the Base Year Operating Expenses for
purposes of determining the Additional Rent payable under this Article 4
for such Subsequent Year. The same amount shall continue to be deleted from
the Base Year Operating Expenses for each Subsequent Year thereafter that
the item is not included. However, if such expense item is again included
in the Operating Expenses for any Subsequent Year, then the
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amount of said expense item originally included in the Base Year Operating
Expenses shall again be added back to the Base Year Operating Expenses.
Notwithstanding anything in this Section 4.1(b) to the contrary; for purposes of
this Lease, Operating Expenses shall not include the following:
(a) costs incurred in connection with the repair of any defective elements
in the original construction of the Building, or in connection with any major
change in the Building such as adding or deleting floors, or due to any failure
to complete the Improvements contemplated by Exhibit B attached hereto in full
compliance with all currently effective governmental requirements;
(b) depreciation, interest and principal payments on mortgages and other
debt costs, if any;
(c) marketing costs, legal fees, space planners' fees, amounts contributed
toward the construction of tenant improvements, advertising and promotional
expenses, and brokerage fees incurred in connection with the original
development, subsequent improvement, or future leasing of the Building;
(d) costs for which the Landlord is reimbursed, or would have been
reimbursed if Landlord had carried the insurance Landlord is required to carry
pursuant to this Lease, or would have been reimbursed if Landlord had used
commercially reasonable efforts to collect such amounts, by any tenant or
occupant of the Building or by insurance from its carrier or any tenant's
carrier;
(e) costs incurred to comply with any governmental or quasi-governmental
rule, regulation or requirement now in force or which may hereafter be enacted
or promulgated ("Applicable Law") as such Applicable Law may apply to hazardous
materials ("Hazardous Material") as defined by such Applicable Law, which
Hazardous Material was in existence in the Building prior to the Commencement
Date, and was of such a nature that a federal, state or municipal government or
quasi-government authority, if it had then had knowledge of the presence of such
Hazardous Material, in the state, and under the conditions that it then existed
in the Building or on the Real Property would have then required the removal,
remediation or other action with respect to such Hazardous Material; and costs
incurred with respect to Hazardous Material, which Hazardous Material is brought
into the Building or on the Real Property after the date hereof by Landlord and
is of such a nature, at that time, that a federal, state or municipal
governmental or quasi-governmental authority, if it had then had knowledge of
the presence of such Hazardous Material, in the state, and under the conditions,
that it then exists in the Building or on the Real Property, would have then
required the removal, remediation or other action with respect to such Hazardous
Material;
(f) Tenant's Share, if any, of deductible amounts on Landlord's insurance
coverages to the extent such amount exceeds $10,000.00 in any calendar year,
recognizing that in computing Tenant's Share, Landlord shall first amortize the
amount Landlord pays to cover the total policy deductible over the useful life
of the improvements being restored or repaired by Landlord; and
(g) Tenant's Share, if any, of increases in real property taxes to the
extent such increase is attributable to a restoration of an assessment which was
reduced as a result of a Proposition 8 appeal, unless the taxes for the Base
Year were or are also adjusted to remove the effect of such Proposition 8
appeal.
C) "TENANT'S SHARE" means 3.40%.
SECTION 4.2. CALCULATION OF TENANT'S SHARE OF INCREASES IN OPERATING EXPENSES.
If, commencing with the calendar year 2001, the Operating Expenses for any
calendar year during the Term, or portion thereof, (including the last calendar
year of the Term), have increased over the Operating Expenses for the calendar
year 2000 (the "Base Year"), then within thirty (30) days after Tenant's receipt
of Landlord's computation of such increase (an "Escalation Statement"), Tenant
shall pay to Landlord, as Additional Rent, an amount equal to the product
obtained by multiplying such increase by Tenant's Share.
Landlord may, at or after the start of any calendar year, subsequent to the
calendar year 2000, notify Tenant of the amount which Landlord estimates will be
Tenant's monthly share of any such increase in Operating Expenses for such
calendar year over the Base Year and the amount thereof shall be added to the
Fixed Monthly Rent payments required to be made by Tenant in such year. If
Tenant's Share of any such increase in rent payable hereunder as shown on the
Escalation Statement is greater or less than the total amounts actually billed
to and paid by Tenant during the year covered by such statement, then within
thirty (30) days thereafter, Tenant shall pay in cash any sums owed Landlord or,
if applicable, Tenant shall either receive a credit against any Fixed Monthly
Rent and/or Additional Rent next accruing for any sum owed Tenant, or if
Landlord's Escalation Statement is rendered after the expiration or earlier
termination of this Lease and indicates that Tenant's estimated payments have
exceeded the total amount to which Tenant was obligated, then provided that
Landlord is not owed any other sum by Tenant, Landlord shall issue a cash refund
to Tenant within thirty (30) days after Landlord's completion of such Escalation
Statement.
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SECTION 4.3. TENANT'S PAYMENT OF DIRECT CHARGES AS ADDITIONAL RENT. Tenant shall
promptly and duly pay all costs and expenses incurred for or in connection with
any Tenant Change or Tenant Service, and discharge any mechanic's or other lien
created against the Premises, Building or the Real Property arising as a result
of or in connection with any Tenant Change or Tenant Service as Additional Rent
by paying the same, bonding or manner otherwise provided by law.
Any other cost, expense, charge, amount or sum (other than Fixed Monthly
Rent) payable by Tenant as provided in this Lease shall also be considered
Additional Rent.
Certain individual items of cost or expense may, in the reasonable
determination of Landlord, be separately charged and billed to Tenant by
Landlord, either alone or in conjunction with another party or parties, if they
are deemed in good faith by Landlord to apply solely to Tenant and/or such other
party or parties and are not otherwise normally recaptured by Landlord as part
of normal operating expenses. Insofar as is reasonable, Landlord shall attempt
to give Tenant prior notice and the opportunity to cure any circumstance that
would give rise to such separate and direct billing.
Said separate billing shall be paid as Additional Rent, regardless of
Tenant's Share. Such allocations by Landlord shall be binding on Tenant unless
patently unreasonable, and shall be payable within ten (10) days after receipt
of Landlord's billing therefor.
SECTION 4.4. LANDLORD'S BOOKS AND RECORDS. Within one hundred eighty (180) days
after receipt of an Escalation Statement by Tenant, if Tenant disputes the
amount of Additional Rent set forth in the Escalation Statement, an employee of
Tenant or an independent certified public accountant (which accountant is a
member of a regionally recognized accounting firm and is not working on a
contingency fee basis), designated and paid for by Tenant, may, after reasonable
notice to Landlord and at reasonable times, provided Landlord shall reasonably
cooperate to expeditiously conclude such inspection (including Landlord's
obligation to provide, at Tenant's expense, copies of applicable supporting
materials), and shall allow Tenant to inspect Landlord's records with respect to
the Escalation Statement at Landlord's offices, provided that Tenant is not then
in default under this Lease and further provided Tenant has paid all amounts
required to be paid under the applicable Escalation Statement. In connection
with such inspection, Tenant and Tenant's agent must agree in advance to follow
Landlord's reasonable rules and procedures regarding inspections of Landlord's
records, and shall execute a commercially reasonable confidentiality agreement
regarding such inspection. Tenant's failure to dispute the amount of Additional
Rent set forth in any Escalation Statement within one hundred eighty (180) days
of Tenant's receipt of such Escalation Statement shall be deemed to be Tenant's
approval of such Escalation Statement, and Tenant thereafter waives the right or
ability to dispute the amounts set forth in such Escalation Statement. If after
such inspection, Tenant still disputes such Additional Rent (as evidenced by
Tenant's written notice to Landlord, describing any remaining disputed items,
within thirty (30) days of Tenant's conclusion of its inspection), then a
determination as to the proper amount shall be made, at Tenant's expense, by an
independent certified public accountant (the "Accountant") selected by Landlord
and subject to Tenant's reasonable approval; provided that if such determination
by the Accountant determines that Operating Expenses were overstated by more
than five percent (5%), then the cost of the Accountant and the cost of such
determination shall be paid for by Landlord. Tenant hereby acknowledges that
Tenant's sole right to inspect Landlord's books and records and to contest the
amount of Operating Expenses payable by Tenant shall be as set forth in this
Section 4.4, and Tenant hereby waives any and all other rights pursuant to
applicable law to inspect such books and records and/or to contest the amount of
Operating Expenses payable by Tenant. Any contrary provision of this Section 4.4
notwithstanding, (i) Tenant does not waive its right, at any time, to fully
prosecute an action against Landlord or its affiliates based on any alleged
fraudulent actions or intentional misrepresentations of Landlord and/or its
affiliates, (ii) the exercise by Tenant of its rights pursuant this Section 4.4
shall not preclude the reconciliation of any material error which is
subsequently discovered by Landlord (which error shall be reconciled by Landlord
with Tenant whether or not such discovery is prompted by Tenant's inquiry or
that of any other tenant of the Building), and (iii) the request by an employee
of Tenant to receive, in the normal course of business, back-up or supporting
invoices or other statements, shall not be construed as an exercise of Tenant's
rights pursuant to this Section 4.4.
ARTICLE 5
ETHICS
SECTION 5.1. ETHICS. Landlord and Tenant agree to conduct their business or
practice in compliance with any appropriate and applicable codes of professional
or business practice.
ARTICLE 6
USE OF PREMISES
SECTION 6.1. USE. The Premises shall only be used as general business offices
for an entertainment/media company (the "Specified Use") and for no other
purposes, without Landlord's prior written consent, which consent shall be in
Landlord's reasonable discretion. Any proposed revision of the Specified Use by
Tenant shall be for a use consistent with those customarily found in first-class
office buildings. Reasonable grounds for Landlord withholding its consent shall
include, but not be limited to:
A) the proposed use will place a disproportionate burden on the Building
systems;
B) the proposed use is for governmental or medical purposes or for a company
whose primary business is that of conducting boiler-room type transactions
or sales;
C) the proposed use would generate excessive foot traffic to the Premises
and/or Building.
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So long as Tenant is in control of the Premises, Tenant covenants and
agrees that it shall not use, suffer or permit any person(s) to use all or any
portion of the Premises for any purpose in violation of the laws of the United
States of America, the State of California, or the ordinances, regulations or
requirements of the City of Los Angeles or County of Los Angeles, or other
lawful authorities having jurisdiction over the Building.
Tenant shall not do or permit anything to be done in or about the Premises
which will in any way obstruct or unreasonably interfere with the rights of
other tenants or occupants of the Building, or injure or annoy them. Tenant
shall not use or allow the Premises to be used for any pornographic or violent
purposes, nor shall Tenant cause, commit, maintain or permit the continuance of
any nuisance or waste in, on or about the Premises. Tenant shall not use the
Premises in any manner that in Landlord's reasonable judgment would adversely
affect or interfere with any services Landlord is required to furnish to Tenant
or to any other tenant or occupant of the Building, or that would interfere with
or obstruct the proper and economical rendition of any such service.
SECTION 6.2. EXCLUSIVE USE. Landlord represents that Tenant's Specified Use of
the Premises does not conflict with exclusive use provisions granted by Landlord
in other leases for the Building. Landlord further agrees that it shall, in the
future, not grant an exclusive use privilege to any other tenant in the Building
that will prevent Tenant from continuing to use the Premises for its Specified
Use.
Tenant acknowledges and agrees that it shall not engage in any of the uses
specified hereinbelow, for which Landlord has already granted exclusive rights:
A) for any purposes customarily associated with a commercial banking
institution;
B) for a beauty salon;
C) for a quick copying and printing facility;
D) for a sundry shop; and/or
E) for a retail, sit-down style restaurant, serving BBQ-style food.
Provided that Tenant has received written notice of the same from Landlord,
and further provided that Landlord does not grant a future exclusive use right
that prohibits Tenant from engaging in the Specified Use, then Tenant agrees
that it shall not violate any exclusive use provision(s) granted by Landlord to
other tenants in the Building.
SECTION 6.3. RULES AND REGULATIONS. Tenant shall observe and comply with the
rules and regulations set forth in Exhibit C, and such other and further
reasonable and non-discriminatory rules and regulations as Landlord may make or
adopt and communicate to Tenant at any time or from time to time, when said
rules, in the reasonable judgment of Landlord, may be necessary or desirable to
ensure the first-class operation, maintenance, reputation or appearance of the
Building. However, if any conflict arises between the provisions of this Lease
and any such rule or regulation, the provisions of this Lease shall control.
Provided Landlord makes commercially reasonable efforts to seek compliance
by all occupants of the Building with the rules and regulations adopted by
Landlord, Landlord shall not be responsible to Tenant for the failure of any
other tenants or occupants of the Building to comply with said rules and
regulations.
ARTICLE 7
CONDITION UPON VACATING & REMOVAL OF PROPERTY
SECTION 7.1. CONDITION UPON VACATING. At the expiration or earlier termination
of this Lease, Tenant shall:
A) terminate its occupancy of, quit and surrender to Landlord, all or such
portion of the Premises upon which this Lease has so terminated,
broom-clean and in the same condition as received except for:
I) ordinary wear and tear, or
II) loss or damage by fire or other casualty;
B) surrender the Premises free of any and all debris and trash and any of
Tenant's personal property, furniture, fixtures and equipment that do not
otherwise become a part of the Real Property, pursuant to the provisions
contained in Section 7.2 hereinbelow; and
C) at Tenant's sole expense, forthwith and with all due diligence remove any
Tenant Change made by Tenant and restore the Premises to their original
condition, reasonable wear and tear excepted. However, Tenant shall only be
obligated to remove said Tenant Change if it was made without Landlord's
approval and/or if Landlord notified Tenant of its obligation to do so at
the time Landlord approved Tenant's request for a Tenant Change. If Tenant
fails to complete such removal and/or to repair any damage caused by the
removal of any Tenant Change, Landlord may do so and may charge the cost
thereof to Tenant.
SECTION 7.2. TENANT'S PROPERTY. All fixtures, equipment, improvements and
installations attached or built into the Premises at any time during the Term
shall, at the expiration or earlier termination of this Lease, be deemed the
property of Landlord; become a permanent part of the Premises and remain
therein. However, if said equipment improvements and/or installations can be
removed without causing any structural damage to the Premises, then, provided
after such removal Tenant restores the Premises to the condition existing prior
to installation of Tenant's trade fixtures or equipment, Tenant shall be
permitted, at Tenant's sole expense, to remove said trade fixtures and
equipment.
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ARTICLE 8
UTILITIES AND SERVICES
SECTION 8.1. NORMAL BUILDING HOURS / HOLIDAYS. The "Normal Business Hours" of
the Building, during which Landlord shall furnish the services specified in this
Article 8 are defined as 8:00 A.M. to 6:00 P.M., Monday through Friday, and 9:00
A.M. to 1:00 P.M. on Saturday, any one or more Holiday(s) excepted.
The "Holidays" which shall be observed by Landlord in the Building are
defined as any federally-recognized holiday and any other holiday specified
enumerated herein, which are: New Years Day, Presidents' Day, Memorial Day, the
4th of July, Labor Day, Thanksgiving Day, the day after Thanksgiving, and
Christmas Day (each individually a "Holiday"). Tenant acknowledges that the
Building shall be closed on each and every such Holiday, and Tenant shall not be
guaranteed access to Landlord or Landlord's managing agent(s) on each such
Holiday.
SECTION 8.2. ACCESS TO THE BUILDING AND GENERAL SERVICES. Subject to Force
Majeure and any power outage(s) which may occur in the Building when the same
are out of Landlord's reasonable control, Landlord shall furnish the following
services to the Premises twenty-four (24) hours per day, seven days per week:
A) During Normal Business Hours, bulb replacement for building standard
lights;
B) access to and use of the parking facilities for persons holding valid
parking permits;
C) access to and use of the elevators and Premises,
D) use of electrical lighting on an as-needed basis within the Premises; and
E) use of a reasonable level of water for kitchen and toilet facilities in the
Premises and common area bathrooms.
SECTION 8.3. JANITORIAL SERVICES. Landlord shall furnish the Premises with
reasonable and customary janitorial services five (5) days per business week,
except when the Building is closed on any Holiday. Landlord shall retain the
sole discretion to choose and/or revise the janitorial company providing said
services to the Premises and/or Building.
SECTION 8.4. SECURITY SERVICES. Tenant acknowledges that Landlord currently
provides uniformed guard service to the Building from 5 p.m. to 11 p.m., Monday
through Friday, and 8:00 a.m. to 1:00 p.m. on Saturdays, solely for the purposes
of providing surveillance of, information and directional assistance to persons
entering the Building.
Tenant acknowledges that such guard service shall not provide any measure
of security or safety to the Building or the Premises, and that Tenant shall
take such actions as it may deem necessary and reasonable to ensure the safety
and security of Tenant's property or person or the property or persons of
Tenant's agents, clients, contractors, directors, employees, invitees,
licensees, officers, partners or shareholders. Tenant agrees and acknowledges
that, except in the case of the gross negligence or willful misconduct of
Landlord or its directors, employees, officers, partners or shareholders,
Landlord shall not be liable to Tenant in any manner whatsoever arising out of
the failure of Landlord's guard service to secure any person or property from
harm.
Tenant agrees and acknowledges that Landlord, in Landlord's sole
discretion, shall have the option, but not the obligation to add, decrease,
revise the hours of and/or change the level of services being provided by any
guard company serving the Building. Tenant further agrees that Tenant shall not
engage or hire any outside guard or security company without Landlord's prior
written consent, which shall be in Landlord's reasonable discretion.
SECTION 8.5. UTILITIES. During Normal Business Hours Landlord shall furnish a
reasonable level of water, heat, ventilation and air conditioning ("HVAC"), and
a sufficient amount of electric current to provide customary business lighting
and to operate ordinary office business machines, such as a single personal
computer and ancillary printer per one hundred and twenty (120) Rentable square
feet contained in the Premises, facsimile machines, small copiers customarily
used for general office purposes, and such other equipment and office machines
as do not result in above-standard use of the existing electrical system. So
long as the same remain reasonably cost competitive, Landlord shall retain the
sole discretion to choose the utility vendor(s) to supply such services to the
Premises and the Building.
Except with the prior written consent of Landlord, which shall not be
unreasonably withheld, conditioned and/or delayed, Tenant shall not install or
use any equipment, apparatus or device in the Premises that requires the
installation of a 220 voltage circuit; consumes more than five (5) kilowatts per
hour per item; or the aggregate use of which will in any way increase the
connected load to more than 5 Watts per square foot, or cause the amount of
electricity to be furnished or supplied for use in the Premises to more than 1.2
kWh per usable square foot, per month.
Except with the prior written consent of Landlord, Tenant shall not connect
any electrical equipment to the electrical system of the Building, except
through electrical outlets already existing in the Premises, nor shall Tenant
pierce, revise, delete or add to the electrical, plumbing, mechanical or HVAC
systems in the Premises.
SECTION 8.6. AFTER HOURS HVAC AND/OR EXCESS UTILITY USAGE. If Tenant requires
HVAC service during other than Normal Business Hours ("Excess HVAC"), Tenant
shall make its request at least one (1) hour before the close of the normal
business day. Otherwise, Landlord shall have no obligation to provide Excess
HVAC. Tenant's request shall be deemed conclusive evidence of its willingness to
pay the costs specified herein.
If Tenant requires electric current in excess of the amounts specified
hereinabove, water or gas in excess of that customarily furnished to the
Premises as office space ("Excess Utility Use"), Tenant
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shall first procure Landlord's prior written consent to such Excess Utility Use,
which Landlord may reasonably refuse.
In lieu of Landlord's refusal, Landlord may cause a meter or sub-meter to
be installed to measure the amount of water, gas and/or electric current
consumed by Tenant in the Premises. The cost of any such meter(s), and the
installation, maintenance, and repair thereof, shall be paid by Tenant as
Additional Rent.
After completing installation of said meter(s), and/or if Tenant requests
Excess HVAC, then Tenant shall pay, as Additional Rent, within thirty (30)
calendar days after Tenant's receipt of Landlord's billing, for the actual
amounts of all water, steam, compressed air, electric current and/or Excess HVAC
consumed beyond the normal levels Landlord is required herein to provide. Said
billing shall be calculated on the usage indicated by such meter(s),
sub-meter(s), or Tenant's written request therefor, and shall be issued by
Landlord at the rates charged for such services by the local public utility
furnishing the same, plus any additional expense reasonably incurred by Landlord
in providing said Excess Utility Use and/or in keeping account of the water,
steam, compressed air and electric current so consumed, plus an administrative
and billing fee equal to twenty-five percent (25%) of the costs so billed.
SECTION 8.7. CHANGES AFFECTING HVAC. Tenant shall also pay as Additional Rent
for any additional costs Landlord incurs to repair any failure of the HVAC
equipment and systems to perform their function when said failure arises out of
or in connection with any change in, or alterations to, the arrangement of
partitioning in the Premises after the Commencement Date, or from occupancy by,
on average, more than one person for every one hundred and twenty-five (125)
usable square feet of the Premises, or from Tenant's failure to keep all HVAC
vents within the Premises free of obstruction.
SECTION 8.8. DAMAGED OR DEFECTIVE SYSTEMS. Tenant shall give written notice to
Landlord within twenty-four (24) hours of any alleged damage to, or defective
condition in any part or appurtenance of the Building's sanitary, electrical,
HVAC or other systems serving, located in, or passing through, the Premises.
Provided that the repair or remedy of said damage or defective condition is
within the reasonable control of Landlord, it shall be remedied by Landlord with
reasonable diligence. Otherwise, Landlord shall make such commercially
reasonable efforts as may be available to Landlord to effect such remedy or
repair, but except in the case of Landlord's gross negligence and/or willful
misconduct or the gross negligence and/or willful misconduct of Landlord's
agents, contractors, directors, employees, officers, partners, and/or
shareholders, Landlord shall not be liable to Tenant for any failure thereof.
Tenant shall not be entitled to claim any damages arising from any such
damage or defective condition nor shall Tenant be entitled to claim any eviction
by reason of any such damage or defective condition unless:
A) the same was caused by Landlord's gross negligence or willful misconduct
while operating or maintaining the Premises or the Building;
B) the damage or defective condition has substantially prevented Tenant from
conducting its normal business operations or obtaining access to at least
seventy-five percent (75%) of the Premises; and
C) Landlord shall have failed to commence the remedy thereof and proceeded
with reasonable diligence to complete the same after Landlord's receipt of
notice thereof from Tenant.
Furthermore, if such damage or defective condition was caused by, or is
attributed to, a Tenant Change or the unreasonable or improper use of such
system(s) by Tenant or its employees, licensees or invitees:
D) the cost of the remedy thereof shall be paid by Tenant as Additional Rent
pursuant to the provisions of Section 4.3;
E) in no event shall Tenant be entitled to any abatement of rent as specified
above; and
F) Tenant shall be estopped from making any claim for damages arising out of
Landlord's repair thereof.
SECTION 8.9. LIMITATION ON LANDLORD'S LIABILITY FOR FAILURE TO PROVIDE UTILITIES
AND/OR SERVICES. Except in the case of Landlord's gross negligence or willful
misconduct or the gross negligence or willful misconduct of Landlord's agents,
contractors, directors, employees, licensees, officers, partners or
shareholders, Tenant hereby releases Landlord from any liability for damages, by
abatement of rent or otherwise, for any failure or delay in furnishing any of
the services or utilities specified in this Article 8, (including, but not
limited to telephone and telecommunication services), or for any diminution in
the quality or quantity thereof.
Tenant's release of Landlord's liability shall be applicable when such
failure, delay or diminution is occasioned, in whole or in part, by repairs,
replacements, or improvements, by any strike, lockout or other labor trouble, by
Landlord's inability to secure electricity, gas, water or other fuel at the
Building after Landlord's reasonable effort to do so, by accident or casualty
whatsoever, by act or default of Tenant or parties other than Landlord, or by
any other cause beyond Landlord's reasonable control. Such failures, delays or
diminution shall never be deemed to constitute a constructive eviction or
disturbance of Tenant's use and possession of the Premises, or serve to relieve
Tenant from paying Rent or performing any of its obligations under the Lease.
Furthermore, Landlord shall not be liable under any circumstances for a
loss of, injury to, or interference with, Tenant's business, including, without
limitation, any loss of profits occurring or arising through or in connection
with or incidental to Landlord's failure to furnish any of the services or
utilities required by this Article 8.
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Notwithstanding the above, Landlord shall use commercially reasonable
efforts to remedy any delay, defect or insufficiency in providing the services
and or utilities required hereunder.
SECTION 8.10. TENANT PROVIDED SERVICES. Tenant shall make no contract or employ
any labor in connection with the maintenance, cleaning or other servicing of the
physical structures of the Premises or for installation of any computer,
telephone or other cabling, equipment or materials provided in or to the
Premises (collectively and individually a "Tenant Service") without the prior
consent of Landlord, which consent shall not be unreasonably withheld. Tenant
shall not permit the use of any labor, material or equipment in the performance
of any Tenant Service if the use thereof, in Landlord's reasonable judgment,
would violate the provisions of any agreement between Landlord and any union
providing work, labor or services in or about the Premises, Building and/or
create labor disharmony in the Building.
SECTION 8.11. RENT ABATEMENT. Notwithstanding the foregoing, if:
A) Tenant is substantially prevented from using the Premises as a result of
Landlord's failure to provide the utilities and services called for
hereunder;
B) The remedy of such failure is reasonably within the control of Landlord;
C) Tenant has promptly notified Landlord in writing of such interruption;
D) Such interruption of services was not caused by or materially contributed
to by Tenant; and
E) Such interruption continues for more than six (6) consecutive business days
(the "Interruption Period") after Tenant has given Landlord written notice;
then Tenant's Fixed Monthly Rent and Additional Rent shall be abated from and
after the last day of the Interruption Period until such time as Landlord
restores the utilities or service so interrupted. However, in any event,
Landlord shall promptly cure or commence to cure such interruption and
diligently prosecute same to completion.
ARTICLE 9
TENANT'S INDEMNIFICATION AND LIMITATION ON LANDLORD'S LIABILITY
SECTION 9.1. TENANT'S INDEMNIFICATION AND HOLD HARMLESS. For the purposes of
this Section 9.1, "Indemnitee(s)" shall jointly and severally refer to Landlord
and Landlord's agents, clients, contractors, directors, employees, officers,
partners, and/or shareholders.
Tenant shall indemnify and hold Indemnitees harmless from and against all
claims, suits, demands, damages, judgments, costs, interest and expenses
(including attorneys fees and costs incurred in the defense thereof) to which
any Indemnitee may be subject or suffer when the same arise out of the
negligence or willful misconduct of Tenant or the negligence or willful
misconduct of Tenant's agents, contractors, directors, employees, licensees,
officers, partners or shareholders in connection with the use of, work in,
construction to, or actions in, on, upon or about the Premises, including any
actions relating to the installation, placement, removal or financing of any
Tenant Change, improvements, fixtures and/or equipment in, on, upon or about the
Premises.
Tenant's indemnification shall extend to any and all claims and
occurrences, whether for injury to or death of any person or persons, or for
damage to property (including any loss of use thereof), or otherwise, occurring
during the Term or prior to the Commencement Date (if Tenant has been given
early access to the Premises for whatever purpose), and to all claims arising
from any condition of the Premises due to or resulting from any default by
Tenant in the keeping, observance or performance of any covenant or provision of
this Lease, or from the negligence or willful misconduct of Tenant or the
negligence or willful misconduct of Tenant's agents, contractors, directors,
employees, licensees, officers, partners or shareholders.
SECTION 9.2. NULLITY OF TENANT'S INDEMNIFICATION IN EVENT OF GROSS NEGLIGENCE.
Notwithstanding anything to the contrary contained in this Lease, Tenant's
indemnification shall not extend to the gross negligence or willful misconduct
of Landlord or the gross negligence or willful misconduct of Landlord's agents,
contractors, directors, employees, officers, partners or shareholders, nor to
such events and occurrences for which Landlord otherwise carries insurance
coverage.
SECTION 9.3. TENANT'S WAIVER OF LIABILITY. Provided that any injury or damage
suffered by Tenant or Tenant's agents, clients, contractors, directors,
employees, invitees, officers, partners, and/or shareholders did not arise out
of the gross negligence or willful misconduct of Landlord or the gross
negligence or willful misconduct of Landlord's agents, contractors, employees,
officers, partners or shareholders, Tenant shall make no claim against Landlord
and Landlord shall not be liable or responsible in any way for, and Tenant
hereby waives all claims against Landlord with respect to or arising out of:
injury or damage to any person or property in or about the Premises by or from
any cause whatsoever under the reasonable control or management of Tenant.
SECTION 9.4. LIMITATION OF LANDLORD'S LIABILITY. Tenant expressly agrees that,
notwithstanding anything in this Lease and/or any applicable law to the
contrary, the liability of Landlord and Landlord's agents, contractors,
directors, employees, licensees, officers, partners or shareholders, including
any successor in interest thereto (collectively and individually the "Landlord
Parties"), and any recourse by Tenant against Landlord or the Landlord Parties
shall be limited solely and exclusively to an amount which is equal to the
interest of Landlord in the Building.
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SECTION 9.5. TRANSFER OF LANDLORD'S LIABILITY. Tenant expressly agrees that, to
the extent that any transferee assumes the obligations of Landlord hereunder,
and provided Landlord has either transferred the complete Security Deposit held
pursuant to this Lease or refunded the same to Tenant as of the date of such
transfer, then the covenants and agreements on the part of Landlord to be
performed under this Lease which arise and/or accrue after the date of such
transfer shall not be binding upon Landlord herein named from and after the date
of transfer of its interest in the Building.
SECTION 9.6. LANDLORD'S INDEMNIFICATION. Landlord shall indemnify, and hold
Tenant and Tenant's agents, contractors, directors, employees, officers,
partners or shareholders harmless from and against any and all claims, causes of
action, liabilities, losses, reasonable costs and expenses, including reasonable
attorneys' fees and court costs, arising from or in connection with:
A) any activity occurring, or condition existing, at or in the Building (other
than in the Premises) when such activity or condition is under the
reasonable control of Landlord, except when the same is caused in whole or
in part by the negligence or willful misconduct of Tenant or Tenant's
employees, agents, or contractors, or by Tenant's breach or default in the
performance of any obligation under this Lease; or
B) any activity occurring, or condition existing in the Premises when solely
caused by the negligence or willful misconduct of Landlord or Landlord's
employees, agents, or contractors.
ARTICLE 10
COMPLIANCE WITH LAWS
SECTION 10.1. TENANT'S COMPLIANCE WITH LAWS. Tenant shall not use, permit to be
used, or permit anything to be done in or about all or any portion of the
Premises which will in any way violate any laws, statutes, ordinances, rules,
orders or regulations duly issued by any governmental authority having
jurisdiction over the Premises, or by the Board of Fire Underwriters (or any
successor thereto) (collectively "Codes").
SECTION 10.2. TENANT TO COMPLY AT SOLE EXPENSE. Tenant shall, at its sole
expense, promptly remedy any violation of such Codes, provided, however, that
nothing contained in this Section 10.2 shall require Tenant to make any
structural changes to the Premises, unless such changes are required due to
either Tenant or Tenant's agents, clients, contractors, directors, employees,
invitees, licensees, officers, partners or shareholders use of the Premises for
purposes other than general office purposes consistent with a Class A office
building.
SECTION 10.3. CONCLUSIVE EVIDENCE OF VIOLATION. The judgment of any court of
competent jurisdiction; Tenant's admission; or the admission of any one or more
of Tenant's agents, contractors, directors, employees, officers, partners or
shareholders in any action against Tenant, whether or not Landlord is a party
thereto, that Tenant has so violated any one or more Codes shall be conclusive
evidence of such violation as between Landlord and Tenant.
ARTICLE 11
ASSIGNMENT AND SUBLETTING
SECTION 11.1. PERMISSION REQUIRED FOR ASSIGNMENT OR SUBLET. Unless Landlord's
prior written consent has been given, which consent shall not be unreasonably
withheld, conditioned and/or delayed, this Lease shall not, nor shall any
interest herein, be assignable as to the interest of Tenant by operation of law;
nor shall Tenant:
A) assign, mortgage, pledge, encumber or otherwise transfer this Lease, the
Term and estate hereby granted or any interest hereunder;
B) permit the Premises or any part thereof to be utilized by anyone other than
Tenant (whether as by a concessionaire, franchisee, licensee, permittee or
otherwise); or
C) except as hereinafter provided, sublet the Premises or any part thereof
(collectively with the items contained in this Section 11.1, a "Transfer").
Any assignment, mortgage, pledge, encumbrance, transfer or sublease without
Landlord's prior written consent shall be voidable, and, in Landlord's sole
election, shall constitute a material default under this Lease.
SECTION 11.2. VOLUNTARY ASSIGNMENT DUE TO CHANGES IN STRUCTURE OF TENANT. Any
dissolution, merger, consolidation, or other reorganization of Tenant, or the
single sale or other transfer of a controlling percentage of the capital stock
of Tenant (other than the sale of such stock pursuant to a public offering that
results in a majority of the same members of the Board and executive officers
remaining in control of said corporation) and or the single sale of fifty
percent (50%) or more of the value of the assets of Tenant, shall be deemed a
voluntary assignment. The phrase "controlling percentage" means the ownership
of, and the right to vote stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of Tenant's capital stock issued,
outstanding, and entitled to vote for the election of directors. Notwithstanding
anything to the contrary contained herein, the preceding paragraph shall not
apply to corporations whose stock is traded through a recognized United States
exchange or over the counter.
Any withdrawal or change (whether voluntary, involuntary, or by operation
of law) in the partnership by one or more partners who own, in the aggregate
fifty percent (50%) or more of the partnership, or the dissolution of the
partnership, shall be deemed a voluntary assignment.
If Tenant is comprised of more than one individual, a purported assignment
(whether voluntary, involuntary, or by operation of law), by any one of the
persons executing this Lease shall be deemed a voluntary assignment.
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SECTION 11.3. REQUEST TO ASSIGN OR SUBLEASE. If at any time during the Term,
Tenant wishes to assign this Lease or any interest therein, or to sublet all or
any portion of the Premises, then at least thirty (30) days prior to the date
when Tenant desires the assignment or sublease to be effective, Tenant shall
give written notice to Landlord setting forth the name, address, and business of
the proposed assignee or sublessee, business and personal credit applications
completed on Landlord's standard application forms, and information (including
references and such financial documentation as Landlord shall reasonably
prescribe) concerning the character and financial condition of the proposed
assignee or sublessee, the effective date of the assignment or sublease, and all
the material terms and conditions of the proposed assignment, and with reference
solely to a sublease: a detailed description of the space proposed to be sublet,
together with any rights of the proposed sublessee to use Tenant's improvements
and/or ancillary services with the Premises.
SECTION 11.4. LANDLORD'S CONSENT. Landlord shall have twenty (20) days after
Tenant's notice of assignment and/or sublease is received with the financial
information reasonably requested by Landlord to advise Tenant of Landlord's
consent to or disapproval of such proposed assignment or sublease, which consent
shall not be unreasonably withheld, conditioned and/or delayed. Any disapproval
by Landlord shall contain Landlord's detailed reasons for such disapproval.
Tenant acknowledges that Landlord's consent shall be based upon the
criteria listed in Sections 11.4 (a) through (e) below, and subject to
Landlord's right to disapprove of any proposed assignment and/or sublease, based
on the existence of any condition contained within Section 11.5 hereinbelow. If
Landlord provides its consent or fails to provide its disapproval within the
time period specified, Tenant shall be free to complete the assignment and/or
sublet such space to the party contained in Tenant's notice, subject to the
following conditions:
A) The assignment and/or sublease shall be on the same terms as were set forth
in the notice given to Landlord;
B) The assignment and/or sublease shall be documented in a written format that
is reasonably acceptable to Landlord, which form shall specifically include
the assignee's and/or sublessee's acknowledgement and acceptance of the
obligation contained in this Lease, in so far as applicable;
C) The assignment and/or sublease shall not be valid, nor shall the assignee
or sublessee take possession of the Premises, or subleased portion thereof,
until an executed duplicate original of such sublease and/or assignment has
been delivered to Landlord;
D) The assignee and/or sublessee shall have no further right to assign this
Lease and/or sublease the Premises;
E) Tenant shall pay monthly to Landlord one-half (1/2) of the "Net Rental
Profit" per square foot actually received by Tenant. Such Net Rental Profit
shall be payable to Landlord as Additional Rental under this Lease without
affecting or reducing any other obligation of Tenant hereunder.
Net Rental Profit shall be calculated by subtracting the Rent and
Additional Rent paid to Landlord by Tenant, as well as Tenant's reasonable
costs of subletting such space (such as rent abatement, fair market leasing
commissions, reasonable marketing expenses, new leasehold improvements, and
reasonable attorney fees and expenses, as well as any economic
consideration received by Tenant arising out of the sale of Tenant's
business, or because Tenant provides ancillary business services to the
sublessee, such as reception or secretarial services, or office furnishings
or equipment, from the average rent per square foot that Tenant is to be
paid by any sublessee or assignee over the term of the Transfer, which
shall only be payable as received by Tenant.
Tenant shall deliver to Landlord a statement within thirty (30) days
after the end of each calendar year and/or within thirty (30) days after
the expiration or earlier termination of the Term of this Lease in which
any sublease of the Premises has occurred, specifying for each such
sublease:
I) the date of its execution and delivery, the number of square feet of
the Rentable Area demised thereby and the Term thereof, and
II) a computation in reasonable detail showing
1) the amounts (if any) paid and payable by Tenant to Landlord
pursuant to this Section 11.4 with respect to such sublease for
the period covered by such statement and
2) the amounts (if any) paid and payable by Tenant to Landlord
pursuant to this Section 11.4 with respect to any payments
received from a sublessee during such period but which relate to
an earlier period.
SECTION 11.5. REASONABLE GROUNDS FOR DENIAL OF ASSIGNMENT AND/OR SUBLEASE.
Landlord and Tenant agree that, in addition to such other reasonable grounds as
Landlord may assert for withholding its consent, it shall be reasonable under
this Lease and any applicable law for Landlord to withhold its consent to any
proposed Transfer, where any one or more of the following conditions exists:
A) The proposed sublessee or assignee (a "Transferee") is, in Landlord's
reasonable judgment, of a character or reputation which is not consistent
with those businesses customarily found in a Class A office building;
B) The Transferee is engaged in a business or intends to use all or any
portion of the Premises for purposes which are not consistent with those
generally found in the Building or other Class A office buildings in the
vicinity of the Building, provided, however, that in no event shall
Landlord be permitted to decline Tenant's request for a Transfer solely on
the basis of said Transferee's intent to change the Specified Use from that
of Tenant, unless such proposed change shall violate any Exclusive Use
provision already granted by Landlord;
C) The Transferee is either a governmental agency or instrumentality thereof;
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D) The Transfer will result in more than a reasonable and safe number of
occupants within the Premises;
E) The Transferee is not a party of reasonable financial worth and/or
financial stability in light of the responsibilities involved under the
sublease, if a sublessee, or the Lease, if an assignee, on the date consent
is requested, or has demonstrated a prior history of credit instability or
unworthiness;
F) The Transfer will cause Landlord to be in violation of another lease or
agreement to which Landlord is a party, or would give another occupant of
the Building a right to cancel its lease;
G) The Transferee will retain any right originally granted to Tenant to
exercise a right of renewal, right of expansion, right of first offer or
other similar right held by Tenant. However, nothing contained herein shall
prevent Tenant from exercising any Option to Extend the Term hereof it may
have early, concurrent with Tenant's request for such transfer;
H) The proposed Transferee:
I) is a tenant in the Building at the time Tenant requests approval of the
proposed Transfer (and Landlord has space available in the Building of
a similar size and for a similar term as that proposed to be assigned
or sublet by Tenant), or
II) is engaged in on-going negotiations with Landlord to lease space in the
Building at the time Tenant requests approval of the proposed Transfer;
III) The Transferee intends to use all or a portion of the Premises for
medical procedures or for a primary business which is as a boiler-room
type sales or marketing organization.
Tenant hereby waives all other remedies(and to the extent permitted by
applicable law, on behalf of the proposed Transferee, as well), with regard to
any claim that Landlord has acted improperly by withholding, delaying or
conditioning its consent to a proposed Transfer, except that Tenant (i) shall
retain the right to sue Landlord for any actual damages suffered by Tenant
(other than damages or injury to, or interference with, Tenant's business,
including without limitation, loss of profits), and (ii) shall retain the right
to prosecute an action for declaratory relief.
SECTION 11.6. TENANT'S CONTINUED OBLIGATION. Any consent by Landlord to an
assignment of this Lease and/or sublease of the Premises shall not release
Tenant from any of Tenant's obligations hereunder or be deemed to be a consent
by Landlord to any subsequent hypothecation, assignment, subletting, occupation
or use by another person, and Tenant shall remain liable to pay the Rent and/or
perform all other obligations to be performed by Tenant hereunder. Landlord's
acceptance of Rent or Additional Rent from any other person shall not be deemed
to be a waiver by Landlord of any provision of this Lease. Landlord's consent to
one assignment or subletting shall not be deemed consent to any subsequent
assignment or subletting.
If any assignee or sublessee of Tenant or any successor of Tenant defaults
in the performance of any of the provisions of this Lease, whether or not
Landlord has collected Rent directly from said assignee or sublessee, Landlord
may proceed directly against Tenant without the necessity of exhausting remedies
against such assignee, sublessee or other successor-in-interest.
Provided that in no event shall any further assignment, sublease, amendment
or modification to this Lease serve to either increase Tenant's liability or
expand Tenant's duties or obligations hereunder, or relieve Tenant of its
liability under this Lease, then Landlord may consent to subsequent assignments
or subletting of this Lease or amendments or modifications to this Lease with
any assignee, without notifying Tenant or any successor of Tenant, and without
obtaining their consent thereto.
SECTION 11.7. TENANT TO PAY LANDLORD'S COSTS. If Tenant assigns or sublets the
Premises or requests the consent of Landlord to any assignment, subletting or
other modification of this Lease, or if Tenant requests the consent of Landlord
for any act that Tenant proposes to do, whether or not Landlord shall grant
consent thereto, then Tenant shall, concurrent with Tenant's submission of any
written request therefor, pay Landlord's reasonably anticipated costs for review
of Tenant's documentation, credit check and processing fees, as well as any
reasonable legal fees incurred by Landlord in connection therewith.
SECTION 11.8. SUCCESSORS AND ASSIGNS. Subject to the provisions contained
herein, the covenants and agreements contained in this Lease shall bind and
inure to the benefit of Landlord and Tenant, their respective successors and
assigns and all persons claiming by, through or under them.
SECTION 11.9 AFFILIATED COMPANIES/RESTRUCTURING OF BUSINESS ORGANIZATION. Any
contrary provision of this Article 11 notwithstanding, the assignment or
subletting by Tenant of all or any portion of this Lease or the Premises to (i)
a parent or subsidiary of Tenant, or (ii) any person or entity which controls,
is controlled by or under common control with Tenant, or (iii) any entity which
purchases all or substantially all of the assets of Tenant, or (iv) any entity
into which Tenant is merged or consolidated (all such persons or entities
described in (i), (ii), (iii) and (iv) being sometimes hereinafter referred to
as "Affiliates") shall not be deemed a Transfer under this Article 11 and thus
shall not be subject to Landlord's prior consent, and Landlord shall not be
entitled to any Net Rental Profit resulting therefrom, provided that:
a) any such Affiliate was not formed as a subterfuge to avoid the
obligations of this Article 11;
b) Tenant gives Landlord at least ten (10) days' prior notice of any such
assignment or sublease to an Affiliate;
c) the successor of Tenant and Tenant have as of the effective date of any
such assignment or sublease a tangible net worth, in the aggregate, computed in
accordance with generally accepted accounting principles (but excluding good
will as an asset), which is sufficient to meet the obligations of Tenant under
this Lease and is equal to or greater than the net worth of Tenant as of the
date of execution of this Lease;
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d) any such assignment or sublease shall be subject and subordinate to all
of the terms and provisions of this Lease, and such assignee or sublessee shall
assume, in a written document reasonably satisfactory to Landlord and delivered
to Landlord upon or prior to the effective date of such assignment or sublease,
all the obligations of Tenant under this Lease with respect to that portion of
the Premises which is the subject of such Transfer (other than the amount of
Fixed Monthly Rent payable by Tenant with respect to a sublease); and
e) Tenant and any guarantor shall remain fully liable for all obligations
to be performed by Tenant under this Lease.
ARTICLE 12
MAINTENANCE, REPAIRS, DAMAGE, DESTRUCTION, RENOVATION AND/OR ALTERATION
SECTION 12.1. TENANT'S OBLIGATION TO MAINTAIN. Tenant shall, at Tenant's sole
expense, maintain the Premises in good order and repair, and shall also keep
clean any portion of the Premises which Landlord is not obligated to clean. Such
obligation shall include the clean-out; repair and/or replacement of Tenant's
garbage disposal(s), Instant-Heat or other hot water producing equipment, if
any, and the cleaning and removal of any dishes and/or food prior to the same
becoming unsanitary. If Tenant becomes obligated to repair anything within the
Premises, Tenant shall advise Landlord's managing agent of such need, which
request shall be presumed conclusive evidence of Tenant's obligation and
willingness to reimburse Landlord for such repair(s).
Further, Tenant shall pay the cost of any injury, damage or breakage in,
upon or to the Premises created by Tenant's gross negligence or willful
misconduct or the gross negligence or willful misconduct of Tenant's agents,
clients, contractors, directors, employees, invitees, licensees, officers,
partners or shareholders.
Subject to Tenant's obligation for reimbursement to Landlord, as specified
herein, Landlord shall make all repairs to the Premises and the exterior walls,
foundation and roof of the Building, the structural portions of the floors of
the Building, the systems and equipment of the Building and the Tenant
Improvements installed in the Premises. However, if such repairs, maintenance or
cleaning are required due to Tenant's gross negligence or willful misconduct or
the gross negligence or willful misconduct of Tenant's agents, clients,
contractors, directors, employees, invitees, licensees, officers, partners or
shareholders, then, Tenant shall, within ten (10) days after receipt of
Landlord's billing therefor, reimburse Landlord, as Additional Rent, for any
expense of such repairs, cleaning and/or maintenance in excess of any insurance
proceeds available for reimbursement thereof, including for any deductible
anticipated in connection therewith.
Tenant hereby waives all right to make repairs at Landlord's expense under
the provisions of Section 1932(1), 1941 and 1942 of the Civil Code of
California.
SECTION 12.2. REPAIR PERIOD NOTICE. Tenant shall give prompt notice
to Landlord of Tenant's actual knowledge of any damage or destruction to all or
any part of the Premises or Building resulting from or arising out of any fire,
earthquake, or other identifiable event of a sudden, unexpected or unusual
nature (individually or collectively a "Casualty"). The time periods specified
in this Section 12.2. shall commence after Landlord receives said written notice
from Tenant of the occurrence of a Casualty. After receipt of Tenant's written
notice that a Casualty has occurred, Landlord shall, within the later of:
A) forty-five (45) days after the date on which Landlord determines the full
extent of the damage caused by the Casualty; or
B) thirty (30) days after Landlord has determined the extent of the insurance
proceeds available to effectuate repairs, but
C) in no event more than ninety (90) after the Casualty,
provide written notice to Tenant indicating the anticipated time period for
repairing the Casualty (the "Repair Period Notice"). The Repair Period Notice
shall also state, if applicable, Landlord's election either to repair the
Premises, or to terminate this Lease, pursuant to the provisions of Section
12.3, and if Landlord elects to terminate this Lease, Landlord shall use
commercially reasonable efforts to provide Tenant with a minimum period of
ninety (90) days within which to fully vacate the Premises.
SECTION 12.3. LANDLORD'S OPTION TO TERMINATE OR REPAIR. Notwithstanding anything
to the contrary contained herein, Landlord shall have the option, but not the
obligation to elect not to rebuild or restore the Premises and/or the Building
if one or more of the following conditions is present:
A) repairs to the Premises cannot reasonably be completed within one hundred
and eighty (180) days after the date of the Casualty (when such repairs are
made without the payment of overtime or other premiums);
B) repairs required cannot be made pursuant to the then-existing laws or
regulations affecting the Premises or Building, or the Building cannot be
restored except in a substantially different structural or architectural
form than existed before the Casualty;
C) the holder of any mortgage on the Building or ground or underlying lessor
with respect to the Real Property and/or the Building shall require that
all or such large a portion of the insurance proceeds be used to retire the
mortgage debt, so that the balance of insurance proceeds remaining
available to Landlord for completion of repairs shall be insufficient to
repair said damage or destruction;
D) the holder of any mortgage on the Building or ground or underlying lessor
with respect to the Real Property and/or the Building shall terminate the
mortgage, ground or underlying lease, as the case may be (and Landlord or
an affiliate does not continue to maintain an interest in the Real
Property);
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E) provided Landlord has carried the coverage Landlord is required to obtain
under Section 19.1 of this Lease, the damage is not fully covered, except
for deductible amounts, by Landlord's insurance policies;
F) more than fifty percent (50%) of the Building is damaged or destroyed,
whether or not the Premises is affected, provided that Landlord elects to
terminate all other leases for offices of a similar size in the Building.
If Landlord elects not to complete repairs to the Building or Premises,
pursuant to this Section 12.3, Landlord's election to terminate this Lease shall
be stated in the Repair Period Notice, in which event this Lease shall cease and
terminate as of the date contained in Landlord's Repair Period Notice.
If one hundred percent of the Building is damaged or destroyed, as
certified by an independent building inspector, this Lease shall automatically
terminate after Tenant's receipt of written notice of such termination from
Landlord, and without action beyond the giving of such notice being required by
either Landlord or Tenant.
Upon any termination of this Lease pursuant to this Section 12.3, Tenant
shall pay its prorata share of Fixed Monthly Rent and Additional Rent, properly
apportioned up to the date of such termination, reduced by any abatement of Rent
to which Tenant is entitled under Section 12.5; after which both Landlord and
Tenant shall thereafter be freed and discharged of all further obligations under
the Lease, except for those obligations which by their provisions specifically
survive the expiration or earlier termination of the Term.
SECTION 12.4. TENANT'S OPTION TO TERMINATE. If
A) the Repair Period Notice provided by Landlord indicates that the
anticipated period for repairing the Casualty exceeds one hundred and
eighty (180) days after the Casualty (the "Repair Period"), or
B) The Casualty to the Premises occurs during the last twelve (12) months of
the Term; then
Tenant shall have the option, but not the obligation, to terminate this
Lease by providing written notice ("Tenant's Termination Notice") to Landlord
within thirty (30) days after receiving the Repair Period Notice in the case of
12.4 (a); or within thirty (30) days after the Casualty, in the case of Section
12.4 (b). Furthermore, if:
C) Landlord does not complete the repairs required hereinabove within the
Repair Period, and
D) further provided Landlord has not diligently commenced and continued to
prosecute to completion repair of the damage and/or destruction caused by
the Casualty, and
E) Landlord has not completed the repairs thereafter on or before thirty (30)
days after the expiration of the Repair Period,
then Tenant shall also have the option, but not the obligation, to
terminate this Lease by giving Landlord written notice of its intention to so
terminate, which notice shall be given not more than forty-five (45) days after
expiration of the Repair Period.
Tenant's failure to provide Landlord with Tenant's Termination Notice
within the time periods specified hereinabove shall be deemed conclusive
evidence that Tenant has waived its option to terminate this Lease.
SECTION 12.5. TEMPORARY SPACE AND/OR RENT ABATEMENT DURING REPAIRS OR
RENOVATION. During the Repair Period or during any such period that Landlord
completes Work (as defined hereinbelow) or Renovations (as defined hereinbelow),
if available, and if requested by Tenant, Landlord shall make available to
Tenant other space in the Building which, in Tenant's reasonable opinion, is
suitable for the temporary conduct of Tenant's business. However, if such
temporary space is smaller than the Premises, Tenant shall pay Fixed Monthly
Rent and Additional Rent for the temporary space based upon the calculated rate
per Rentable square foot payable hereunder for the Premises, times the number of
Rentable square feet available for Tenant's use in the temporary space.
If no temporary space is available that is reasonably satisfactory to
Tenant, and any part of the Premises is rendered untenantable by reason of such
Casualty, Work or optional renovation, then to the extent that all or said
portion of the usable area of the Premises is so rendered untenantable by reason
of such Casualty, Work or optional renovation, Tenant shall be provided with a
proportionate abatement of Fixed Monthly Rent and Additional Rent. Said
proportional abatement shall be based on the Usable Square Footage of the
Premises that cannot and is not actually used by Tenant, divided by the total
Usable square feet contained in the Premises. That proportional abatement, if
any, shall be provided during the period beginning on the later of:
A) the date of the Casualty; or
B) the actual date on which Tenant ceases to conduct Tenant's normal business
operations in all or any portion of the Premises, and
shall end on the date Landlord achieves substantial completion of
restoration of the Premises. Tenant's acceptance of said abatement of Rent shall
be deemed conclusive evidence of Tenant's waiver of any further claim or right
of future claim for any loss or damage asserted by Tenant arising out of the
Casualty Repair, Work or Renovation, as the case may be.
SECTION 12.6. TENANT'S WAIVER OF CONSEQUENTIAL DAMAGES. Subject to Sections 12.4
and 12.7, the provisions contained in Section 12.5 are Tenant's sole remedy
arising out of any Casualty. Landlord shall not be liable to Tenant or any other
person or entity for any direct, indirect, or consequential damage (including
but not limited to lost profits of Tenant or loss of or interference with
Tenant's business).
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SECTION 12.7. REPAIR OF THE PREMISES. If the cost of repair of any Casualty is
covered under one or more of the insurance policies Landlord is required herein
to provide, then, Landlord shall restore the base core and shell of the Premises
to its condition prior to the Casualty and repair and/or replace the
Improvements previously installed in the Premises, to a maximum of $35.00 per
usable square foot. Tenant shall have the option to either, at Tenant's sole
expense, complete the balance of repairs needed to restore the Improvements
contained in the Premises to their condition prior to the Casualty or to
continue Tenant's normal business operations in the Premises in the condition to
which Landlord has so restored the Improvements.
If Landlord has elected to complete repairs to the Premises, and has not
elected to terminate this Lease, as specified in Section 12.3, then Landlord
shall complete such repairs within the Repair Period, in a manner, and at times,
which do not unreasonably interfere with Tenant's use of that portion of the
Premises remaining unaffected by the Casualty. Provided Landlord has elected to
make the repairs required hereunder, this Lease shall not be void or voidable
during the Repair Period, nor shall Landlord be deemed to have constructively
evicted Tenant thereby, nor shall Landlord be liable for any inconvenience or
annoyance to Tenant or Tenant's agents, clients, contractors, directors,
employees, invitees, licensees, officers, partners or shareholders, or for
injury to the business of Tenant resulting in any way from such Casualty, or
from Landlord's undertaking of such repairs in accordance with the terms of this
Lease.
SECTION 12.8. Intentionally Omitted.
SECTION 12.9. REPAIR OF THE BUILDING. Except as specified hereinabove. unless
Landlord terminates this Lease as permitted hereinabove, Landlord shall repair
the Building, parking structure or other supporting structures and facilities
within two hundred and seventy (270) days after Landlord becomes aware of such
damage and/or destruction.
SECTION 12.10. GOVERNMENT-REQUIRED REPAIRS. If, during the Term, additional
inspections other than those standard annual or biannual inspections to which
the Building may generally be subject; testing, repairs and/or reconstruction
(collectively the "Work") are required by any governmental authority, or if,
upon the recommendation of its engineers, Landlord independently elects to
undertake all or any portion of the Work prior to being required to do so by
such governmental authority, Landlord shall give notice thereof to Tenant and
shall use its best efforts not to unreasonably interfere with Tenant's use of
the Premises while completing the Work. Tenant shall cooperate fully with
Landlord in connection with the Work and, upon the prior written request of
Landlord, shall make the Premises available for completion of the Work. Tenant
agrees that Landlord shall allocate all costs associated with completion of the
Work to the Building's Operating Expenses, when permitted under to the
provisions of Section 4.1 of this Lease.
If Landlord elects to undertake the Work during the Term, then Tenant shall
be entitled to an abatement of rent, pursuant to the provisions of Section 12.5
hereinabove, and Landlord shall be completely responsible for repair of any
damage to the Premises and all costs associated with the removal, moving and/or
storage of Tenant's furniture, artwork, office equipment and files. Landlord
will restore any and all areas damaged by completion of the Work to their
previous quality and pay all clean-up costs. Landlord further agrees that it
shall use commercially reasonable efforts to see that all construction, such as
coring or power nailing that could be disruptive to Tenant's normal business
operations shall, in so far as is reasonably possible, be performed between the
hours of 7:00 p.m. to 7:00 a.m. Monday through Friday; after 1:00 p.m. on
Saturdays and/or at any time on Sundays.
Except in the case of Landlord's gross negligence and/or willful misconduct
or the gross negligence and/or willful misconduct of Landlord's agents,
contractors, directors, employees, officers, partners, and/or shareholders,
Tenant shall not have the right to terminate this Lease as a result of Landlord
undertaking the Work, nor shall Tenant or any third party claiming under Tenant
be entitled to make any claim against Landlord for any interruption,
interference or disruption of Tenant's business or loss of profits therefrom as
a result of the Work, and Tenant hereby releases Landlord from any claim which
Tenant may have against Landlord arising from or relating to, directly or
indirectly, the performance of the Work by Landlord.
SECTION 12.11. OPTIONAL LANDLORD RENOVATION. It is specifically understood and
agreed that Landlord has no obligation and has made no promises to alter,
remodel, improve, renovate or decorate the Premises, Building, or any part
thereof and that, except as set forth herein, no representations respecting the
condition of the Premises or the Building have been made by Landlord to Tenant.
However, Tenant acknowledges that, at any time and from time to time during
the Term, Landlord may elect, in Landlord's sole discretion, to renovate,
improve, alter or modify the Building and/or Premises including without
limitation, the parking facilities, common areas, systems, equipment, roof, and
structural portion of the same, which Renovations may include, without
limitation:
A) modifying the common areas and tenant spaces to comply with applicable laws
and regulations, including regulations relating to the physically disabled,
seismic conditions and building safety and security and
B) installing new carpeting, lighting and wall covering in the Building common
areas,
which Sections 12.11 (a) and 12.11 (b) shall hereinafter collectively be
known as "the "Renovations".
In connection with such Renovations, Landlord may, among other things,
erect scaffolding or other necessary structures in the Building, limit or
eliminate access to portions of the Building, common areas or parking facilities
serving the Building, or perform other work in the Building, which work may
create noise, dust or debris that remains in the Building.
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Landlord shall have the right to access through the Premises as well as the
right to take into and upon and through all or any part of the Premises, or any
other part of the Building, all materials that may reasonably be required to
make such repairs, alterations, decorating, additions or improvements pursuant
to the provisions of this Section 12.11. So long as Tenant shall maintain
reasonable access to the Premises, Building and parking facilities, Landlord
shall also have the right, in the course of the Renovations, to close entrances,
doors, corridors, elevators, or other building facilities, or temporarily to
abate the operation of such facilities.
So long as Tenant is not required to vacate the Premises for any reason
arising out of the Renovations, and maintains reasonable access to the Premises,
Tenant shall permit all of the Renovations to be done, and except in the case of
Landlord's gross negligence or willful misconduct or the gross negligence or
willful misconduct of Landlord's contractors, directors, employees, officers,
partners or shareholders, without claiming Landlord is guilty of the
constructive eviction or disturbance of Tenant's use and possession.
Further, except in the case of Landlord's gross negligence or willful
misconduct, or that of its agents, contractors, employees, officers, partners or
shareholders, Landlord shall not be liable to Tenant in any manner, whether for
reimbursement of any expense, injury, loss or damage to Tenant's property,
business, or any person claiming by or under Tenant, and whether by reason of
interference with the business of Tenant or inconvenience or annoyance to Tenant
or the customers of Tenant resulting from any work done in or about the Premises
or the Building or to any adjacent or nearby building, land, street or alley.
However, Landlord agrees that the Renovations shall be scheduled insofar as is
commercially reasonable to permit Tenant to continue its normal business
operations, with advance notice thereof, and in such commercially reasonable
manner so as to minimize Tenant's inconvenience.
SECTION 12.12. OPTIONAL TENANT CHANGES DURING THE TERM. After completion of the
initial Improvements contemplated hereunder, if any, Tenant shall make no
alteration, change, addition, removal, demolition, improvement, repair or
replacement in, on, upon, to or about the Premises, or at any time to any
portion of the Building (collectively or individually a "Tenant Change"),
without the prior written consent of Landlord, which consent shall be in
Landlord's reasonable discretion. Except as otherwise specified in Article 7,
any Tenant Change shall, at the termination of this Lease, become a part of the
Building and belong to Landlord, pursuant to the provisions of Article 7. Any
application for Landlord's consent to a Tenant Change, and the completion
thereof, shall be in conformance with the provisions of Exhibit B-1, attached
hereto and made a part hereof by reference.
Tenant shall not knowingly permit Tenant's agents, clients, contractors,
directors, employees, invitees, licensees, officers, partners or shareholders to
deface the walls, floors and/or ceilings of the Premises, nor mark, drive nails,
screws or drill holes into, paint, or in any way mar any surface in the
Building. Notwithstanding the above, Tenant is hereby permitted to install such
pictures, certificates, licenses, artwork, bulletin boards and similar items as
are normally used in Tenant's business, so long as such installation is
carefully attached to the walls by Tenant in a manner reasonably prescribed by
Landlord.
If Tenant desires, as a part of any Tenant Change, to make any revisions
whatsoever to the electrical, HVAC, mechanical, plumbing, or structural systems
of the Building or Premises, such revisions must be completed by subcontractors
specified by Landlord and in the manner and location(s) reasonably prescribed by
Landlord. If Tenant desires to install any telephone outlets, the same shall be
installed in the manner and location(s) reasonably prescribed by Landlord.
If Landlord consents to any requested Tenant Change, Tenant shall give
Landlord a minimum of fifteen (15) days written notice prior to commencement
thereof. Landlord reserves the option, but not the obligation, to enter upon the
Premises for the purpose of posting and maintaining such notices on the Premises
as may be reasonably necessary to protect Landlord against mechanic's liens,
material man's liens or other liens, and/or for posting any other notices that
may be proper and necessary in connection with Tenant's completion of the Tenant
Change.
If any alterations, additions or improvements made by Tenant result in
Landlord being required to make any alterations to other portions of the
Building in order to comply with any applicable statutes, ordinances or
regulations (e.g., "handicap ordinances") then Tenant shall reimburse Landlord
upon demand for all costs and expenses incurred by Landlord in making such
alterations.
Notwithstanding anything to the contrary contained in this Article 12, Tenant
may make non-structural alterations, additions or improvements to the interior
of the Premises (collectively, the "Acceptable Changes") without Landlord's
consent, provided that (i) Tenant delivers to Landlord reasonable prior notice
(given the scope of the work to be undertaken) of such Acceptable Changes prior
to the commencement thereof, (ii) the aggregate cost of all such Acceptable
Changes during any twelve (12) consecutive month period does not exceed fifteen
thousand dollars ($15,000.00), (iii) such Acceptable Changes shall be performed
by or on behalf of Tenant in compliance with the other provisions of this
Article 12, (iv) such Acceptable Changes do not require the issuance of a
building permit or other governmental approval, (v) such Acceptable Changes do
not affect any mechanical, electrical or plumbing systems of the Building and
cannot be seen from outside the Premises, and (vi) such Acceptable Changes shall
be performed by qualified contractors and subcontractors which normally and
regularly perform similar work in comparable buildings.
SECTION 12.13. EXPRESS AGREEMENT. The provisions of this Lease, including those
contained in this Article 12, constitute an express agreement between Landlord
and Tenant that applies in the event of any Casualty to the Premises, Building
or Real Property. Tenant, therefore, fully waives the provisions of any statute
or regulations, including California Civil Code Sections 1932(2) and 1933(4),
and any other law or statute which purports to govern the rights or obligations
of Landlord and Tenant
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concerning a Casualty in the absence of express agreement. Tenant and Landlord
expressly agree and accept that any successor or other law of like import shall
have no application hereunder.
ARTICLE 13
CONDEMNATION
SECTION 13.1. CONDEMNATION OF THE PREMISES. If more than twenty five percent
(25%) of the Premises is lawfully condemned or taken in any manner for any
public or quasi-public use, or if any portion of the Building is condemned or
taken in such a manner that Tenant is reasonably prevented from obtaining access
to the Building or the Premises, this Lease may be terminated at the option of
either Landlord or Tenant by one party giving the other thirty (30) days written
notice of its intent to do so. If either Landlord or Tenant provide the other
party written notice of termination, the Term and estate hereby granted shall
forthwith cease and terminate as of the earlier of the date of vesting of title
in such condemnation or taking or the date of taking of possession by the
condemning authority.
If less than twenty-five percent (25%) of the Premises is so condemned or
taken, then the term and estate hereby granted with respect to such part shall
forthwith cease and terminate as of the earlier of the date of vesting of title
in such condemnation or taking or the date of taking of possession by the
condemning authority, and the Fixed Monthly Rent payable hereunder (and
Additional Rent payable pursuant to Articles 3 or 4) shall be abated on a
prorated basis, by dividing the total number of Usable square feet so taken by
the total number of Usable square feet contained in the Premises, then
multiplying said percentage on a monthly basis, continuing from the date of such
vesting of title to the date specified in this Lease for the expiration of the
Term hereof.
Notwithstanding the above, if any vacant space remains in the Building,
Landlord shall provide Tenant a first right of offer to lease such vacant space
on the same terms and conditions as are contained in this Lease, in which case
this Lease shall be amended to replace the Premises with such vacant space.
SECTION 13.2. CONDEMNATION OF THE BUILDING. If less than twenty-five percent
(25%) of the Building is so condemned or taken, then Landlord shall, to the
extent of the proceeds of the condemnation payable to Landlord and with
reasonable diligence, restore the remaining portion of the Building as nearly as
practicable to its condition prior to such condemnation or taking; except that,
if such proceeds constitute less than ninety percent (90%) of Landlord's
estimate of the cost of rebuilding or restoration, then Landlord may terminate
this Lease on thirty (30) days prior written notice to Tenant.
If more than twenty-five percent (25%) of the Building is so condemned or
taken, but the Premises are unaffected thereby, then Landlord shall have the
option but not the obligation, which election shall be in Landlord's sole
discretion, to terminate this Lease, effective the earlier of the date of
vesting of title in such condemnation or the date Landlord delivers actual
possession of the Building and Premises to the condemning authority, which
election by Landlord shall be provided to Tenant in writing.
SECTION 13.3. AWARD. If any condemnation or taking of all or a part of the
Building takes place, Tenant shall be entitled to join in any action claiming
compensation therefore, and Landlord shall be entitled to receive that portion
of the award made for the value of the Building, Premises, leasehold
improvements made or reimbursed by Landlord, or bonus value of the Lease, and
Tenant shall only be entitled to receive any award made for the value of the
estate vested by this Lease in Tenant and the unamortized cost of any
improvements to the Premises to the extent paid for by Tenant, including
Tenant's proximate damages to Tenant's business and reasonable relocation
expenses. Nothing shall preclude Tenant from intervening in any such
condemnation proceeding to claim or receive from the condemning authority any
compensation to which Tenant may otherwise lawfully be entitled in such case in
respect of Tenant's property or for moving to a new location.
SECTION 13.4. CONDEMNATION FOR A LIMITED PERIOD. Notwithstanding the provisions
of Section 13.1, 13.2 or 13.3, except during the final twelve (12) months of the
Term, if all or any portion of the Premises are condemned or taken for
governmental occupancy for a limited period, anticipated to be no longer than
sixty (60) days then this Lease shall not terminate; there shall be no abatement
of Fixed Monthly Rent or Additional Rent payable hereunder; and Tenant shall be
entitled to receive the entire award therefor (whether paid as damages, rent or
otherwise).
If, during the final twelve (12) months of the Term, all or any portion of
the Premises are condemned or taken for governmental occupancy for a limited
period anticipated to be in excess of sixty (60) days, or for a period extended
after the expiration of the initial Term, Tenant shall have the option, but not
the obligation, to terminate this Lease, in which case, Landlord shall be
entitled to such part of such award as shall be properly allocable to the cost
of restoration of the Premises, and the balance of such award shall be
apportioned between Landlord and Tenant as of the date of such termination.
If the termination of such governmental occupancy is prior to expiration of
this Lease, and Tenant has not elected to terminate this Lease, Tenant shall,
upon receipt thereof and to the extent an award has been made, restore the
Premises as nearly as possible to the condition in which they were prior to the
condemnation or taking.
ARTICLE 14
MORTGAGE SUBORDINATION; ATTORNMENT AND MODIFICATION OF LEASE
SECTION 14.1. SUBORDINATION. Subject to Tenant's receipt of an appropriate
non-disturbance agreement(s) as set forth below, this Lease shall be subject and
subordinate to all present and future ground or underlying leases of the
Building and to the lien of any mortgage, trust deed or other encumbrances now
or hereafter in force against the Building, if any, and to all renewals,
extensions, modifications, consolidations and replacements thereof, and to all
advances made or hereafter to be made upon the security of such mortgages or
trust deeds, unless the holders of such mortgages, trust
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deeds or other encumbrances, or the lessors under such ground lease or
underlying leases, require in writing that this Lease be superior thereto.
Landlord's delivery to Tenant of commercially reasonable non-disturbance
agreement(s) (the "Nondisturbance Agreement") in favor of Tenant from any ground
lessors, mortgage holders or lien holders of Landlord who come into existence
following the date hereof but prior to the expiration of the Lease Term shall be
in consideration of and a condition precedent to, Tenant's agreement to be bound
by the provisions of this Article 14. Such commercially reasonable
non-disturbance agreement(s) shall include the obligation of any such successor
ground lessor, mortgage holder or lien holder to recognize Tenant's rights
specifically set forth in this Lease and Landlord's obligations to comply with
the provisions of this Lease. Subject to Tenant's receipt of the non-disturbance
agreement(s) described above, Tenant covenants and agrees in the event any
proceedings are brought for the foreclosure of any such mortgage or deed in lieu
thereof (or if any ground lease is terminated), to attorn to the lienholder or
purchaser or any successors thereto upon any such foreclosure sale or deed in
lieu thereof (or to the ground lessor), to recognize such purchaser or
lienholder or ground lessor as the lessor under this Lease, provided such
lienholder or purchaser or ground lessor shall agree to accept this Lease and
not disturb Tenant's occupancy, so long as Tenant is not in default of its
obligations pursuant to this Lease. Landlord's interest herein may be assigned
as security at any time to any lienholder. Tenant shall, within ten (10)
business days of request by Landlord, execute such further instruments or
assurances as Landlord may reasonably deem necessary to evidence or confirm the
subordination or superiority of this Lease to any such mortgages, trust deeds,
ground leases or underlying leases in accordance with the provisions of this
Article 14. Subject to Tenant's receipt of the Nondisturbance Agreement
described herein, Tenant waives the provisions of any current or future laws
which may give or purport to give Tenant any right or election to terminate or
otherwise adversely affect this Lease and the obligations of the Tenant
hereunder in the event of any foreclosure proceeding or sale.
SECTION 14.2. ATTORNMENT. Tenant confirms that if by reason of a default under
an underlying mortgage the interest of Landlord in the Premises is terminated,
provided Tenant is granted in writing continued quiet enjoyment of the Premises
pursuant to the terms and provisions of this Lease, Tenant shall attorn to the
holder of the reversionary interest in the Premises and shall recognize such
holder as Tenant's landlord under this Lease. Tenant shall, within ten (10)
calendar days after request therefor, execute and deliver, at any time and from
time to time, upon the request of Landlord or of the holder of an underlying
mortgage any instrument which may be necessary or appropriate to evidence such
attornment. If Tenant fails to so execute and deliver any such instrument, then
Tenant hereby irrevocably appoints Landlord or such holder as its
attorney-in-fact to execute and deliver for and on behalf of Tenant any such
instrument.
SECTION 14.3. MODIFICATION OF LEASE. If any current or prospective mortgagee or
ground lessor for the Building requires a modification or modifications of this
Lease, which modification or modifications will not cause an increased cost or
expense to Tenant or in any other way materially and adversely change the rights
and obligations of Tenant hereunder, then in such event, Tenant agrees that this
Lease may be so modified. Tenant agrees to execute and deliver to Landlord
within ten (10) calendar days following the request therefor whatever documents
are required to effectuate said modification. Should Landlord or any such
current or prospective mortgagee or ground lessor require execution of a short
form of Lease for recording, containing, among other customary provisions, the
names of the parties, a description of the Premises and the Term, Tenant agrees
to execute and deliver to Landlord such short form of Lease within ten (10)
calendar days following the request therefor.
ARTICLE 15
ESTOPPEL CERTIFICATES
SECTION 15.1. ESTOPPEL CERTIFICATES. Tenant shall, within ten (10) business days
after receipt of Landlord's written request therefor, execute, acknowledge and
deliver to Landlord an Estoppel Certificate, which may be conclusively relied
upon by any prospective purchaser, mortgagee or beneficiary under any deed of
trust covering the Building or any part thereof. Said Estoppel Certificate shall
certify the following:
A) that this Lease is unmodified and in full force and effect (or, if there
have been modifications, that this Lease is in full force and effect, as
modified, and stating the date and nature of each modification);
B) the date, if any, to which rental and other sums payable hereunder have
been paid;
C) that no notice has been received by Tenant of any default which has not
been cured, except as to defaults specified in the certificate;
D) that Landlord is not in default under this Lease or, if so, specifying such
default; and
E) such other factual matters as may be reasonably requested by Landlord.
Tenant's failure to deliver the Estoppel Certificate within the time period
specified above shall constitute a material default under the Lease, and
Landlord shall have the option, but not the obligation, to enforce the remedies
contained in Article 18.
ARTICLE 16
NOTICES
SECTION 16.1. NOTICES. Any notice, consent, approval, agreement, certification,
request, bill, demand, statement, acceptance or other communication hereunder (a
"notice") shall be in writing and shall be considered duly given or furnished
when:
A) delivered personally or by messenger or overnight delivery service, with
signature evidencing such delivery;
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B) upon the date of delivery, after being mailed in a postpaid envelope, sent
certified mail, return receipt requested, when addressed to Landlord as set
forth in the Basic Lease Information and to Tenant at the Premises and any
other address for Tenant specified in the Basic Lease Information; or to
such other address or addressee as either party may designate by a written
notice given pursuant hereto; or
C) upon confirmation of good transmission if sent via facsimile machine to
such phone number as shall have been provided in writing by Landlord or
Tenant, one to the other.
If Tenant fails to provide another valid address, other than the Premises,
upon which service to Tenant can be perfected, then Tenant hereby appoints as
its agent to receive the service of all dispossessory or distraint proceedings
and notices thereunder the person in charge of or occupying the Premises at the
time, and if no person shall be in charge of or occupy the same, then such
service may be made by attaching the same to the main entrance of the Premises.
ARTICLE 17
DEFAULT AND LANDLORD'S OPTION TO CURE
SECTION 17.1. TENANT'S DEFAULT. For the purposes of this Section 17.1, if the
term "Tenant", as used in this Lease, refers to more than one person, then, such
term shall be deemed to include all of such persons or any one of them; if any
of the obligations of Tenant under this Lease are guaranteed, the term "Tenant,"
as used in Section 17.1(e) and Section 17.1(f), shall be deemed to also include
the guarantor or, if there is more than one guarantor, all or any one of them;
and if this Lease has been assigned, the term "Tenant," as used in Sections 17.1
(a) through (h), inclusive, shall be deemed to include the assignee and
assignor, jointly and severally, unless Landlord shall have, in connection with
such assignment, previously released the assignor from any further liability
under this Lease, in which event the term "Tenant," as used in said
subparagraphs, shall not include the assignor that was previously released.
Tenant's continued occupancy and quiet enjoyment of the Premises and this
Lease and the covenants and estate hereby granted are subject to the limitation
that:
A) if Tenant defaults in the payment of any Fixed Monthly Rent or Additional
Rent on any date upon which the same becomes due and fails thereafter to
make such payment within five (5) days of its receipt of notice that such
amount is past due; or
B) if Tenant abandons or vacates the Premises, or
C) if Tenant defaults in the keeping, observance or performance of any
covenant or agreement set forth in Sections 6.1, 6.2, or 19.3, and if such
default continues and is not cured by Tenant before the expiration of
Landlord's written 3-Day Notice to Cure or Quit; or
D) if Tenant defaults in the keeping, observance or performance of any
covenant or agreement including any provisions of the rules and regulations
established by Landlord (other than a default of the character referred to
in Sections 17.1 (a), (b) or (c), and if such default continues and is not
cured by Tenant within fifteen (15) days after Landlord has given to Tenant
a notice specifying the same, or, in the case of such a default which for
causes beyond Tenant's reasonable control (including occupancy of a
sublessee) cannot with due diligence be cured within such period of fifteen
(15) days, if Tenant:
I) does not, promptly upon Tenant's receipt of such notice, advise
Landlord of Tenant's intention duly to institute all steps necessary
to cure such default or
II) does not duly institute and thereafter diligently prosecute to
completion all steps (including, if appropriate, legal proceedings
against a defaulting sublessee) necessary to cure the same, or
E) INTENTIONALLY OMITTED.
F) if Tenant:
I) applies for or consents to the appointment of, or the taking of
possession by a receiver, custodian, trustee or liquidator of itself
or of all or a substantial part of its property;
II) admits in writing its inability, or is generally unable, to pay its
debts as such debts become due;
III) makes a general assignment for the benefit of its creditors;
IV) commences a voluntary case under federal bankruptcy laws (as now or
hereafter in effect);
V) files a petition seeking to take advantage of any other law relating
to bankruptcy, insolvency, reorganization, winding up, or composition
or adjustment of debts;
VI) fails to controvert in a timely or appropriate manner, or acquiesces
in writing to, any petition filed against it in an involuntary case
under such bankruptcy laws;
VII) take any action for the purpose of effecting any of the foregoing, or
G) if a proceeding or case is commenced, without the application or consent of
Tenant, in any court of competent jurisdiction, seeking:
I) the liquidation, reorganization, dissolution, winding up, or
composition or readjustment of debts, of Tenant; or
II) the appointment of a trustee, receiver, custodian, liquidator or the
like of Tenant or of all or a substantial part of its assets; or
III) similar relief with respect of Tenant under any law relating to
bankruptcy, insolvency, reorganization, winding up, or composition or
adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any
of the foregoing shall be entered and continue unstayed and in effect,
for a period of sixty (60) days, or an order for relief against Tenant
shall be entered in an involuntary case under such bankruptcy laws, or
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H) if Tenant fails to take possession of and move into the Premises within
fifteen (15) calendar days after Landlord tenders the same in writing to
Tenant, unless Tenant acknowledges and accepts the Commencement Date as
occurring within such fifteen-day time period, and pays Rent thereon from
such Commencement Date;
then, in any or each such event, Tenant shall be deemed to have committed a
material default under this Lease.
SECTION 17.2. LANDLORD'S OPTION TO CURE TENANT'S DEFAULT. If Tenant enters into
a default under this Lease, in lieu of Landlord's issuance of a written notice,
as specified hereinbelow, Landlord may cure the same at the sole expense of
Tenant:
A) immediately and without notice in the case of emergency; if said default is
specified in Sections 17.1 (a), (b) or (c), or if such default unreasonably
interferes with the use by any other tenant of the Building; with the
efficient operation of the Building; or will result in a violation of law
or in a cancellation of any insurance policy maintained by Landlord, and
B) after the expiration of Landlord's 3-Day Notice of Intent to Cure, in the
case of any default other than those specified in Section 17.2 (a)
hereinabove.
SECTION 17.3. LANDLORD'S OPTION TO TERMINATE THIS LEASE. Provided all applicable
cure periods have expired, then In addition to any other remedies Landlord may
have at law or in equity, Landlord shall be entitled to give to Tenant a written
notice of intention to terminate this Lease at the expiration of three (3) days
from the date of the giving of such notice, and if such notice is given by
Landlord, and Tenant fails to timely cure the defaults specified therein, then
this Lease and the Term and estate hereby granted (whether or not the
Commencement Date has already occurred) shall terminate upon the expiration of
such three (3) day period (a "Default Termination"), with the same effect as if
the last of such three (3) days were the Termination Date, except that Tenant
shall remain liable for damages as provided hereinbelow or pursuant to law.
SECTION 17.4. CERTAIN PAYMENTS. Bills for all reasonable costs and expenses
incurred by Landlord in connection with any performance by it under Section 17.2
shall be payable, as Additional Rent, pursuant to the provisions of Section 4.3.
SECTION 17.5. CERTAIN WAIVERS. Unless Tenant has submitted documentation that it
validly disputes Landlord's billing for Fixed Monthly Rent hereunder, or is
completing an audit of Landlord's Operating Expense Statement, if Tenant is in
default in payment of Fixed Monthly Rent or Additional Rent hereunder, Tenant
waives the right to designate the items against which any payments made by
Tenant are to be credited. In lieu thereof, Landlord may apply any payments
received from Tenant to the then-oldest billing remaining unpaid on Tenant's
rental account or to any other payment due from Tenant, as Landlord sees fit.
SECTION 17.6. LANDLORD DEFAULT. Notwithstanding anything to the contrary set
forth in this Lease, Landlord shall not be in default in the performance of any
obligation required to be performed by Landlord pursuant to this Lease unless:
A) in the event such default is with respect to the payment of money, Landlord
fails to pay such unpaid amounts within five (5) business days of written
notice from Tenant that the same was not paid when due, or
B) in the event such default is other than the obligation to pay money,
Landlord fails to perform such obligation within thirty (30) days after the
receipt of notice from Tenant specifying in detail Landlord's failure to
perform; provided, however, if the nature of Landlord's obligation is such
that more than thirty (30) days are required for its performance, then
Landlord shall not be in default under this Lease if it shall commence such
performance within such thirty (30) days period and thereafter diligently
pursue the same to completion within a reasonable time period.
Upon any such default by Landlord under this Lease, Tenant may, except as
otherwise specifically provided in this Lease to the contrary, exercise any of
its rights provided at law or in equity.
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SECTION 17.7 TENANT'S SELF-HELP RIGHTS. Notwithstanding anything to the contrary
set forth in this Lease, if Tenant provides written notice to Landlord of the
need for repairs and/or maintenance which are Landlord's obligations to perform
under this Lease, and Landlord fails to undertake such repairs and/or
maintenance within a reasonable period of time, given the circumstances, after
receipt of such notice (but in no event earlier than ten (10) days after receipt
of such notice), then Tenant may proceed to undertake such repairs and/or
maintenance upon delivery of an additional three (3) business day notice to
Landlord specifically referencing Tenant's right pursuant to this Section 17.7
and stating that Tenant intends to take such required action. If such repairs
and /or maintenance were required under the terms of this Lease to be performed
by Landlord, then Tenant shall be entitled to reimbursement by Landlord of
Tenant's reasonable costs and expenses in performing such maintenance and/or
repairs. Such reimbursement shall be made within thirty (30) days after
Landlord's receipt of invoice of such costs and expenses, and if Landlord fails
to so reimburse Tenant within such 30-day period, then Tenant shall be entitled
to deduct from Rent payable by Tenant under this Lease the amount of such
invoice; provided, however, that notwithstanding the foregoing to the contrary,
if (i) Landlord delivers to Tenant within such three (3) business day period
described above, a written objection to Tenant's right to receive any such
reimbursement based upon Landlord's claim that such action did not have to be
taken by Landlord pursuant to the terms of this Lease, or (ii) Landlord delivers
to Tenant, within thirty (30) days after receipt of Tenant's invoice, a written
objection to the payment of such invoice based upon Landlord's claim that such
charges are excessive (in which case, Landlord shall reimburse Tenant, within
such 30-day period, the amount Landlord contends would not be excessive), then
Tenant shall not be entitled to such reimbursement or deduction from Rent, but
Tenant, as its sole remedy, may proceed to institute legal proceedings to
determine and collect the amount, if any, of such reimbursement. In the event
Tenant prevails in such legal proceedings and receives a monetary judgment
against Landlord, then Landlord shall play such judgment to Tenant within thirty
(30) days of date such monetary judgment is entered. If such monetary judgment
is not so paid, then, notwithstanding any contrary provision of this Lease,
Tenant shall be entitled to deduct from Rent payable under this Lease the amount
of such monetary judgment. In the event Tenant undertakes such repairs and/or
maintenance, and such work will affect the mechanical, electrical or plumbing
systems, any structural portions of the Buildings, and/or the exterior
appearance of the Building, then Tenant shall use only those unrelated third
party contractors used by Landlord in the Buildings for such work unless such
contractors are unwilling or unable to perform such work at competitive prices,
in which event Tenant may utilize the services of any other qualified contractor
which normally and regularly performs similar work in comparable buildings.
ARTICLE 18
DAMAGES; REMEDIES; RE-ENTRY BY LANDLORD; ETC.
SECTION 18.1. DAMAGES. If Landlord terminates this Lease, pursuant to the
provisions of Section 17.3 (a "Default Termination"), then Landlord may recover
from Tenant the total of:
A) the worth at the time of award of the unpaid Fixed Monthly Rent and
Additional Rent earned to the date of such Default Termination; and
B) the worth at the time of award of the amount by which the unpaid Fixed
Monthly Rent and Additional Rent which would have been earned after the
date of such Default Termination until the time of award exceeds the amount
of such rental loss that Tenant proves could have been reasonably avoided;
and
C) the worth at the time of award of the amount by which the unpaid Fixed
Monthly Rent and Additional Rent which would have been earned for the
balance of the Term after the time of award exceeds the amount of such
rental loss that Tenant proves could have been reasonably avoided; and
D) any other amount reasonably necessary to compensate Landlord for all of the
detriment proximately caused by Tenant's failure to observe or perform any
of its covenants and agreements under this Lease or which in the ordinary
course of events would be likely to result therefrom, including, without
limitation, the payment of the reasonable expenses incurred or paid by
Landlord in re-entering and securing possession of the Premises and in the
reletting thereof (including, without limitation, altering and preparing
the Premises for new tenants and brokers' commission); and
E) at Landlord's sole election, such other amounts in addition to or in lieu
of the foregoing as may be permitted from time to time under applicable
California laws.
SECTION 18.2. COMPUTATIONS: The "worth at the time of award" is computed:
A) in paragraphs (a) and (b) above, by allowing interest at the rate of ten
percent (10%) per annum (but in no event in excess of the maximum rate
permitted by law); and
B) in paragraph (c) above, by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%).
C) For purposes of computing unpaid rental which would have accrued and become
payable under this Lease, unpaid rental shall consist of the sum of:
I) the total Fixed Monthly Rent for the balance of the Term, plus
II) a computation of Tenant's Share of Additional Rent due under the Lease
including, without limitation, Tenant's Proportionate Share of any
increase in Operating Expenses (including real estate taxes) for the
balance of the Term. For purposes of computing any increases due
Landlord hereunder, Additional Rent for the calendar year of the
default and for each future calendar year in the Term shall be assumed
to be equal to the Additional Rent for the calendar year prior to the
year in which default occurs, compounded at a rate equal to the mean
average
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rate of inflation for the preceding five calendar years as determined
by the United States Department of Labor, Bureau of Labor Statistics
Consumer Price Index (All Urban Consumers, all items, 1982-84 equals
100) for the metropolitan area or region of which Los Angeles,
California is a part. If such index is discontinued or revised, the
average rate of inflation shall be determined by reference to the
index designated as the successor or substitute index by the
government of the United States.
SECTION 18.3. RE-ENTRY BY LANDLORD.
A) If a Default Termination occurs or any default specified in Sections 17.1
(a) through (g) occurs and continues beyond the period of grace (if any)
therefor, Landlord or Landlord's authorized representatives may re-enter
the Premises and remove all persons and all property therefrom, either by
summary dispossession proceedings or by any suitable action or proceeding
at law, without being liable to indictment, prosecution or damages
therefor, and may repossess and enjoy the Premises. No re-entry or
repossession of the Premises by Landlord or its representatives under this
Section 18.3 shall be construed as an election to terminate this Lease
unless a notice of such election is given to Tenant or unless the
termination thereof is decreed by a court of competent jurisdiction. The
words "re-enter", "re-entry" and "re-entering" as used herein are not
restricted to their technical legal meanings.
B) If any default specified in Sections 17.1 (a) through (g) occurs and
continues beyond the period of grace (if any) therefor, then if Landlord
does not elect to terminate this Lease Landlord may, from time to time and
without terminating this Lease, enforce all its rights and remedies under
this Lease, including the right to recover the Fixed Monthly Rent and
Additional Rent as the same becomes payable by Tenant hereunder.
If Landlord consents thereto, Tenant may sublet the Premises or any
part thereof (which consent Landlord agrees will not be unreasonably
withheld), subject to Tenant's compliance with the requirements of Article
11 of this Lease. So long as Landlord is exercising this remedy it will not
terminate Tenant's right to possession of the Premises, but it may engage
in the acts permitted by Section 1951.4(c) of the California Civil Code.
C) If Tenant abandons the Premises in breach of this Lease, Landlord shall
have the right to relet the Premises or any part thereof on such terms and
conditions and at such rentals as Landlord in its sole discretion may deem
advisable, with the right to make alterations and repairs in and to the
Premises necessary to reletting. If Landlord so elects to relet, then gross
rentals received by Landlord from the reletting shall be applied:
I) FIRST, to the payment of the reasonable expenses incurred or paid by
Landlord in re-entering and securing possession of the Premises and in
the reletting thereof (including, without limitation, altering and
preparing the Premises for new tenants and brokers' commissions);
II) SECOND, to the payment of the Fixed Monthly Rent and Additional Rent
payable by Tenant hereunder; and
III) THIRD, the remainder, if any, to be retained by Landlord and applied
to the payment of future Fixed Monthly Rent and Additional Rent as the
same become due.
Should the gross rentals received by Landlord from the reletting be
insufficient to pay in full the sums stated in Section 18.3 (a) and (b)
hereinabove, Tenant shall, upon demand, pay the deficiency to Landlord.
SECTION 18.4. CERTAIN WAIVERS. After Landlord has actually obtained possession
of the Premises pursuant to any lawful order of possession granted in a valid
court of law, Tenant thereafter waives and surrenders for Tenant, and for all
claiming under Tenant, all rights and privileges now or hereafter existing to
redeem the Premises (whether by order or judgment of any court or by any legal
process or writ); to assert Tenant's continued right to occupancy of the
Premises; or to have a continuance of this Lease for the Term hereof. Tenant
also waives the provisions of any law relating to notice and/or delay in levy of
execution in case of an eviction or dispossession for nonpayment of rent, and of
any successor or other law of like import.
SECTION 18.5. CUMULATIVE REMEDIES. The remedies of Landlord provided for in this
Lease are cumulative and are not intended to be exclusive of any other remedies
to which Landlord may be lawfully entitled. The exercise by Landlord of any
remedy to which it is entitled shall not preclude or hinder the exercise of any
other such remedy.
ARTICLE 19
INSURANCE
SECTION 19.1. LANDLORD OBLIGATIONS: Landlord agrees to at all times secure from
a company holding a Best's rating of A-7 or better and admitted to do business
in the State of California, and maintain during the entire Term of this Lease
the following coverage:
A) A Commercial General Liability policy with extended Risk endorsements and a
combined single limit of Two Million Dollars ($2,000,000).
B) An All Risk policy of standard fire and extended coverage, with vandalism
and malicious mischief endorsements, covering full replacement value of the
Building, the parking facilities, common area improvements and any and all
improvements installed in, on or upon the Premises and affixed thereto,
provided that the premium cost for coverage of the Improvements to the
Premises in excess of a total value equal to thirty-five Dollars ($35.00)
per usable square foot of the Premises shall, at the sole option of Tenant
be directly reimbursed from Tenant to Landlord, pursuant to the provisions
of Article 4 of this Lease, or be covered by Tenant's self-insurance, at
Tenant's sole risk.
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Tenant acknowledges and agrees that Landlord shall have no obligation and
shall not carry insurance of any kind on Tenant's goods, furniture or
furnishings or on Tenant's Property, nor shall Landlord be obligated to repair
any damage thereto or to replace the same.
SECTION 19.2. TENANT OBLIGATIONS. Within ten (10) days prior to the earlier of
the Commencement Date or Tenant's anticipated early possession date of the
Premises, Tenant shall secure and maintain during the entire Term insurance
coverage from a company holding a Best's rating of A-7 or better, and admitted
to do business in the State of California, as follows:
A) A Commercial General Liability policy, with extended Risk endorsements and
a Combined Single Limit of Two Million Dollars ($2,000,000).
B) An All Risk policy of standard fire and extended coverage, with vandalism
and malicious mischief endorsements, covering the full replacement value of
its personal property, for losses occurring in, on, or about the Premises.
The proceeds from any such policy shall first be used by Tenant for the
replacement of the personal property so damaged or destroyed;
C) Workmen's Compensation insurance in a minimum amount of $500,000, and in
full compliance with the requirements of the State of California; and
D) A policy of insurance covering Tenant's losses from interruption of
Tenant's normal business activities.
Each and every policy which Tenant is to provide hereunder shall
specifically include the liability assumed by Tenant pursuant to the provisions
of this Lease (provided that the amount of such insurance shall not serve to
limit the liability of Tenant hereunder), and shall be primary insurance for
such liability, and not excess over or contributory with any other existing or
new insurance in force for or on behalf of Landlord. Each policy shall not
eliminate cross-liability and shall contain a severability of interest clause.
SECTION 19.3. COMPLIANCE WITH BUILDING INSURANCE REQUIREMENTS. After Tenant
takes occupancy of the Premises, Tenant shall not violate or knowingly permit
in, on or upon the Premises the violation of any condition imposed by such
standard fire insurance policies as are normally issued for office buildings in
the City or County in which the Building is located. Tenant shall not do, suffer
or permit anything to be done, or keep, suffer or permit anything to be kept, in
the Premises which would increase the risk ratings or premium calculation
factors on the Building or property therein (collectively an "Increased Risk"),
or which would result in insurance companies of good standing refusing to insure
the Building or any property appurtenant thereto in such amounts and against
such risks as Landlord may reasonably determine from time to time are
appropriate.
Notwithstanding the above, if additional insurance is available to cover
such Increased Risk, Tenant shall not be in default hereunder if:
A) Tenant authorizes Landlord in writing to obtain such additional insurance;
and
B) prepays the annual cost thereof to Landlord for such additional coverage,
as well as the additional costs, if any, of any increase in Landlord's
other insurance premiums resulting from the existence or continuance of
such Increased Risk;
SECTION 19.4. ADDITIONAL INSUREDS. Tenant agrees that Landlord shall be named as
an additional insured or loss payee on the aforementioned policies of insurance,
as appropriate in the insurance industry.
SECTION 19.5. WAIVER OF SUBROGATION. Landlord and Tenant intend that their
respective property loss risks shall be borne by reasonable insurance carriers
to the extent above provided, and Landlord and Tenant hereby agree to look
solely to, and seek recovery only from, their respective insurance carriers in
the event of a property loss to the extent that such coverage is agreed to be
provided hereunder or if higher, to the extent such insurance has been obtained.
The parties each hereby waive all rights and claims against each other for such
losses, and waive all rights of subrogation of their respective insurers,
provided such waiver of subrogation shall not affect the right of the insured to
recover thereunder. The parties agree that their respective insurance policies
are now, or shall be, endorsed such that the waiver of subrogation shall not
affect the right of the insured to recover thereunder. If Landlord or Tenant
shall fail to carry the amounts and types of insurance required to be carried
pursuant to this Article 19, in addition to any remedies Landlord or Tenant may
have under this Lease, such failure shall be deemed to be a covenant and
agreement by the party failing to carry such insurance to self-insure with
respect to the type and amount of insurance such party so failed to carry, with
full waiver of subrogation with respect thereto.
SECTION 19.6. PROOF OF COVERAGE. Upon written request from one to the other, the
parties hereto shall each provide the other a certified copy or copies of the
certificate(s) of insurance evidencing the existence of the coverage required
hereunder. SECTION 19.7. PROTECTION AGAINST CANCELLATION. Upon written request,
proof must also be given by each party to the other, that each of the policies
required pursuant to this Article 19 expressly provides that the policy shall
not be canceled until the expiration of thirty (30) days' prior written notice
to the other party.
SECTION 19.8. FAILURE TO SECURE. If at any time during the Term, and after
expiration of ten(10) business days prior written demand therefore from
Landlord, Tenant fails to:
A) Provide Landlord with access to a registered insurance broker of record
that can verify Tenant's compliance with the requirement contained in this
Article 19; or
B) provide documentation reasonably acceptable to Landlord that Tenant has
secured and maintained the insurance coverage required hereunder, then
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such failure shall be considered a material default under the Lease, and
Landlord shall have the option, but not the obligation, without further notice
or demand to obtain such insurance on behalf of or as the agent of Tenant and in
Tenant's name.
Tenant shall pay Landlord's billing for the premiums associated with such
insurance policy or policies within five (5) days after receipt of Landlord's
billing, as well as such other reasonable costs and fees arising out of such
default, together with interest on the entire amount so advanced by Landlord, at
the rate of ten percent (10%) per annum, computed from the date of such advance.
Such advances, if made by Landlord, shall be construed as and considered
Additional Rent under this Lease.
SECTIONS 19.9. PROCEEDS. Proceeds from any such policy or policies shall be
payable to both Landlord and Tenant as their respective interests may appear.
ARTICLE 20
MISCELLANEOUS
SECTION 20.1. ENTIRE AGREEMENT. This Lease, including the exhibits and guaranty
of lease, if any, annexed hereto, contains all of the agreements and
understandings relating to the leasing of the Premises and the obligations of
Landlord and Tenant in connection therewith and neither party and no agent or
representative thereof has made or is making, and neither party in executing and
delivering this Lease is relying upon, any warranties or representations, except
to the extent set forth in this Lease. All understandings and agreements
heretofore had between Landlord and Tenant relating to the leasing of the
Premises are merged in this Lease, which alone fully and completely expresses
their agreement. The Riders (if any) and Exhibits annexed to this Lease and the
Construction Agreement are hereby incorporated herein and made a part hereof.
SECTION 20.2. NO WAIVER OR MODIFICATION. The failure of Landlord or Tenant to
insist in any instance upon the strict keeping, observance or performance of any
covenant or agreement contained in this Lease or to exercise any election herein
contained shall not be construed as a waiver or relinquishment for the future of
such covenant or agreement, but the same shall continue and remain in full force
and effect. No waiver or modification by either Landlord or Tenant of any
covenant or agreement contained in this Lease shall be deemed to have been made
unless the same is in writing executed by the party whose rights are being
waived or modified. No surrender of possession of any part of the Premises shall
release Tenant from any of its obligations hereunder unless accepted in writing
by Landlord. The receipt and retention by Landlord, and the payment by Tenant,
of Fixed Monthly Rent or Additional Rent with knowledge of the breach of any
covenant or agreement contained in this Lease shall not be deemed a waiver of
such breach by either Landlord or Tenant.
SECTION 20.3. TIME OF THE ESSENCE. Time is of the essence of this Lease and of
all provisions hereof, except in respect to the delivery of possession of the
Premises at the Commencement Date.
SECTION 20.4. FORCE MAJEURE. For the purposes of this Lease, "Force Majeure"
shall be defined as any or all prevention, delays or stoppages and/or the
inability to obtain services, labor, materials or reasonable substitutes
therefor, when such prevention, delay, stoppage or failure is due to strikes,
lockouts, labor disputes, acts of God, governmental actions, civil commotion,
fire or other casualty, and/or other causes beyond the reasonable control of the
party obligated to perform, except that Force Majeure may not be raised as a
defense for Tenant's non-performance of any obligations imposed by the Lease
with regard to the payment of Fixed Monthly Rent and/or Additional Rent.
Notwithstanding anything to the contrary contained in this Lease, Force
Majeure shall excuse the performance of such party for a period equal to any
such prevention, delay, stoppage or inability. Therefore, if this Lease
specifies a time period for performance of an obligation by either party, that
time period shall be extended by the period of any delay in such party's
performance caused by a Force Majeure.
SECTION 20.5. BROKER. Landlord and Tenant represent to one another that each has
dealt with no broker in connection with this Lease other than DOUGLAS, EMMETT &
COMPANY and CRESA PARTNERS, LLC. Landlord and Tenant shall hold one another
harmless from and against any and all liability, loss, damage, expense, claim,
action, demand, suit or obligation arising out of or relating to a breach by the
indemnifying party of such representation. Landlord agrees to pay all
commissions due to the brokers listed above created by Tenant's execution of
this Lease.
SECTION 20.6. GOVERNING LAW. This Lease shall be governed by and construed in
accordance with the laws of the State of California.
SECTION 20.7. SUBMISSION OF LEASE. Whether or not rental deposits have been
received by Landlord from Tenant, and whether or not Landlord has delivered to
Tenant an unexecuted draft version of this Lease for Tenant's review and/or
signature, no contractual or other rights shall exist between Landlord and
Tenant with respect to the Premises, nor shall this Lease be valid and/or in
effect until this Lease has been fully executed and a duplicate original of said
fully-executed Lease has been delivered to both Landlord and Tenant.
The submission of this Lease to Tenant shall be for examination purposes
only, and does not and shall not constitute a reservation of or an option for
Tenant to lease, or otherwise create any interest by Tenant in the Premises or
any other offices or space situated in the Building. Execution of this Lease by
Tenant and its return to Landlord shall not be binding upon Landlord,
notwithstanding any time interval, until Landlord has in fact executed and
delivered a fully-executed duplicate original of this Lease to Tenant. Landlord
and Tenant agree hereby to authorize transmission of all or portions of
documents, including signature lines thereon, by facsimile machines, and further
authorize the other party to rely conclusively upon such facsimile transmissions
as if the original had been received.
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SECTION 20.8. CAPTIONS. The captions in this Lease are for convenience only and
shall not in any way limit or be deemed to construe or interpret the terms and
provisions hereof.
SECTION 20.9. SINGULAR AND PLURAL, ETC. The words "Landlord" and "Tenant", as
used herein, shall include the plural as well as the singular. Words used in the
masculine gender include the feminine and neuter. If there be more than one
Landlord or Tenant the obligations hereunder imposed upon Landlord and Tenant
shall be joint and several.
SECTION 20.10. INDEPENDENT COVENANTS. Except where the covenants contained in
one Article of this Lease are clearly affected by or contingent upon fulfillment
by either party of another Article or paragraph of this Lease, this Lease shall
be construed as though the covenants herein between Landlord and Tenant are
independent and not dependent and Tenant hereby expressly waives the benefit of
any statute to the contrary and agrees that if Landlord fails to perform its
obligations set forth herein, Tenant shall not be entitled to make any repairs
or perform any actions hereunder at Landlord's expense or to any set-off of the
Rent or other amounts owing hereunder against Landlord; provided, however, that
the foregoing shall in no way impair the right of Tenant to commence a separate
action against Landlord for the violation by Landlord of the provisions hereof
so long as notice is first given to Landlord and any holder of a mortgage or
deed of trust covering the Building, Real Property or any portion thereof, of
whose address Tenant has theretofore been notified, and an opportunity is
granted to Landlord and such holder to correct such violations as provided
above.
SECTION 20.11. SEVERABILITY. If any covenant or agreement of this Lease or the
application thereof to any person or circumstance shall be held to be invalid or
unenforceable, then and in each such event the remainder of this Lease or the
application of such covenant or agreement to any other person or any other
circumstance shall not be thereby affected, and each covenant and agreement
hereof shall remain valid and enforceable to the fullest extent permitted by
law.
SECTION 20.12. WARRANTY OF AUTHORITY. If Landlord or Tenant signs as a
corporation or a partnership, each of the persons executing this Lease on behalf
of Landlord or Tenant hereby covenant and warrant that each is a duly authorized
and existing entity, that each has and is qualified to do business in
California, that the persons signing on behalf of Landlord or Tenant have full
right and authority to enter into this Lease, and that each and every person
signing on behalf of either Landlord or Tenant are authorized to do so. If
either party hereto is a corporation, said party shall affix the appropriate
corporate seal to each area on the document where request therefore is noted,
and the other party shall be entitled to conclusively presume that by doing so
the party so affixing said seal is attesting to and ratifying this Lease.
SECTION 20.13. NO REPRESENTATIONS OR WARRANTIES. Neither Landlord nor Landlord's
agents or attorneys have made any representations or warranties with respect to
the Premises, the Building or this Lease, except as expressly set forth herein,
and no rights, easements or licenses are or shall be acquired by Tenant by
implication or otherwise.
SECTION 20.14. NO JOINT VENTURE OR PARTNERSHIP. This Lease shall not be deemed
or construed to create or establish any relationship of partnership or joint
venture or similar relationship or arrangement between Landlord and Tenant
hereunder.
SECTION 20.15. TENANT'S OBLIGATIONS AT ITS SOLE EXPENSE.
Notwithstanding the fact that certain references in this Lease to acts required
to be performed by Tenant hereunder, or to breaches or defaults of this Lease by
Tenant, omit to state that such acts shall be performed at Tenant's sole
expense, or omit to state that such breaches or defaults by Tenant are material,
unless the context clearly implies to the contrary each and every act to be
performed or obligation to be fulfilled by Tenant pursuant to this Lease shall
be performed or fulfilled at Tenant's sole expense, and all breaches or defaults
by Tenant hereunder shall be deemed material.
SECTION 20.16. ATTORNEYS' FEES. If litigation is instituted between Landlord and
Tenant, the cause for which arises out of or in relation to this Agreement, the
prevailing party in such litigation shall be entitled to receive its costs (not
limited to court costs), expenses and reasonable attorneys' fees from the
non-prevailing party as the same may be awarded by the court.
SECTION 20.17. WAIVER OF TRIAL BY JURY. IN THE INTEREST OF SAVING TIME AND
EXPENSE, LANDLORD AND TENANT HEREBY CONSENT TO TRIAL WITHOUT A JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO
AGAINST THE OTHER OR THEIR SUCCESSOR-IN-INTEREST IN RESPECT TO ANY MATTERS
ARISING OUT OF OR RELATING TO THIS LEASE.
SECTION 20.18. NO MERGER. The voluntary or other surrender of this Lease by
Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at
the option of Landlord terminate all or any existing subleases or subtenancies,
or may, at the option of Landlord, operate as an assignment to it of any or all
such subleases or subtenancies.
SECTION 20.19. PROHIBITION AGAINST RECORDING. Except as provided in Section 14.3
of this Lease, neither this Lease, nor any memorandum, affidavit or other
writing with respect thereto, shall be recorded by Tenant or by anyone acting
through, under or on behalf of Tenant, and the recording thereof in violation of
this provision shall make this Lease null and void at Landlord's election.
SECTION 20.20. HAZARDOUS WASTE. Tenant specifically agrees that, except for such
limited quantities of office materials and supplies as are customarily used in
Tenant's normal business operations, Tenant shall not engage or permit at any
time, any operations or activities upon, or any use or occupancy of the
Premises, or any portion thereof, for the purpose of or in any way involving the
handling, manufacturing, treatment, storage, use, transportation, spillage,
leakage, dumping, discharge or disposal (whether legal or illegal, accidental or
intentional) of any hazardous substances, materials or wastes, or any wastes
regulated under any local, state or federal law.
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Tenant shall, during the Term, remain in full compliance with all
applicable laws governing its use and occupancy of the Premises, including,
without limitation, the handling, manufacturing, treatment, storage, disposal,
discharge, use, and transportation of hazardous substances, materials or wastes,
and any wastes regulated under any local, state or federal law. Tenant will
remain in full compliance with the terms and conditions of all permits and
licenses issued to it by any governmental authority on account of any or all of
its activities on the Premises.
SECTION 20.21. TRANSPORTATION MANAGEMENT. Tenant shall, at Tenant's sole
expense, fully comply with all present or future programs intended to manage
parking, transportation or traffic in and around the Building, when the same
have been mandated by an outside governmental authority having jurisdiction
therefor and not when required for the convenience of Landlord.
In connection therewith, Tenant shall be responsible for the transportation
planning and management for all of Tenant's employees while located at the
Premises, by working directly with Landlord, any governmental transportation
management organization or any other transportation-related committees or
entities reasonably designated by Landlord. Such programs may include, without
limitation:
A) restrictions on the number of peak-hour vehicle trips generated by Tenant;
B) requirements for increased vehicle occupancy;
C) implementing an in-house ride-sharing program and/or appointing an employee
transportation coordinator;
D) working with employees of any Building (or area-wide) ridesharing program
manager;
E) instituting employer-sponsored incentives (financial or in-kind) to
encourage employees to ridesharing; and
F) utilizing flexible work shifts for employees.
SECTION 20.22. SIGNAGE. Tenant may not install, inscribe, paint or affix any
awning, shade, sign, advertisement or notice on or to any part of the outside or
inside of the Building, or in any portion of the Premises visible to the outside
of the Building or common areas without Landlord's prior written consent, which
shall not be unreasonably withheld, conditioned or delayed.
All signage and/or directory listings installed on behalf of Tenant,
whether installed in, on or upon the public corridors, doorways, Building
directory and/or parking directory (if any), or in any other location whatsoever
visible outside of the Premises, shall be installed by Landlord, at Tenant's
sole expense.
Tenant's identification on or in any common area of the Building shall be
limited to Tenant's name and suite designation, and in no event shall Tenant be
entitled to the installation of Tenant's logo in any portion of the Building or
common areas. Furthermore, the size, style, and placement of letters to be used
in any of Tenant's signage shall be determined by Landlord, in Landlord's sole
discretion, in full conformance with previously-established signage program for
the Building.
Except as specified hereinbelow, Tenant shall only be entitled to one (1)
listing on the Building directory, or any parking directory ancillary thereto,
which shall only show Tenant's business name and suite designation. Tenant shall
also be entitled to a maximum of twenty-four (24) additional listings on said
Building and/or parking directory, which listings shall be limited solely to
Tenant's officers, employees, subsidiaries, affiliates and/or sublessees, if
any. All of said listings shall be subject to Landlord's prior written approval,
which shall not be unreasonably withheld, conditioned or delayed.
SECTION 20.23. DISCLOSURE. Landlord and Tenant acknowledge that principals of
Landlord have a financial interest in Douglas Emmett Realty Advisors and P.L.E.
Builders.
SECTION 20.24. CONFIDENTIALITY. Landlord and Tenant agree that the covenants and
provisions of this Lease shall not be divulged to anyone not directly involved
in the management, administration, ownership, lending against, or subleasing of
the Premises, which permitted disclosure shall include, but not be limited to,
the board members, legal counsel and/or accountants of either Landlord or
Tenant.
ARTICLE 21
PARKING
SECTION 21.1. PARKING. Throughout the Term, Tenant shall purchase and assign to
its employees monthly parking permits up to the maximum number of permits set
forth in Section 21.1 of the Basic Lease Information ("BLI"). Except as
otherwise permitted by Landlord's management agent in its reasonable discretion,
and based on the availability thereof, in no event shall Tenant be entitled to
purchase more than forty-two (42)nor less than twenty-four (24) parking permits,
subject to the last paragraph of this Section 21.1. However, to the minimum
limit specified hereinabove, Tenant may decrease the total number of parking
permits purchased pursuant to this Article 21 at any time during the Term after
Tenant has given Landlord at least thirty (30) days prior written notice of such
reduction.
Furthermore, if additional parking permits are available on a
month-to-month basis, which determination shall be in the sole discretion of
Landlord's parking agent, Tenant shall be permitted to purchase one or more of
said permits on a first-come, first-served basis.
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<PAGE> 33
At any time that Tenant either elects to purchase less than the total
number of permits to which Tenant is entitled, or fails to pay for the total
number of parking permits to which Tenant is entitled, Tenant shall lose the
right to purchase any additional parking permits beyond those that had been
purchased and/or paid for by Tenant the calendar month immediately preceding the
date of such loss, until the expiration of thirty (30) days prior written notice
given from Tenant to Landlord, indicating Tenant's intention to reclaim one or
more of said lost parking permits, at which time, to the extent that Landlord
has not already leased one or more of the parking permits Tenant had previously
surrendered to another occupant of the Building on a long-term basis, Landlord
shall restore the total number of parking permits contained in Tenant's written
notice to Landlord. The above provision notwithstanding however, so long as
Tenant has complied with its rental obligations pursuant to this Section 21.1,
Landlord shall conduct its long-term rental of parking spaces such that a
minimum total of thirty-three (33) permits shall remain available to Tenant on
thirty (30) days written notice.
The initial rates to be paid by Tenant for such permits shall be: $93.50
per single unreserved permit; and $159.50 per single reserved permit per month,
including the ten percent (10%) tax currently charged by the City of Los
Angeles.
Said parking permits shall allow Tenant to park in the Building parking
facility at the prevailing monthly parking rate then in effect, which rate may
be thereafter changed from time to time, in Landlord's sole discretion. Landlord
shall retain sole discretion to designate the location of each parking space,
and whether it shall be assigned, or unassigned, unless specifically agreed to
otherwise in writing between Landlord and Tenant.
Guests and invitees of Tenant shall have the right to use, in common with
guests and invitees of other tenants of the Building, the transient parking
facilities of the Building at the then-posted parking rates and charges, or at
such other rate or rates and charges as may be agreed upon from time to time
between Landlord and Tenant in writing. Such rate(s) or charges may be changed
by Landlord from time to time in Landlord's sole discretion to reflect
Landlord's good faith determination of applicable market conditions, and shall
include, without limitation, any and all fees or taxes relating to parking
assessed to Landlord for such parking facilities.
Tenant or Tenant's agents, clients, contractors, directors, employees,
invitees, licensees, officers, partners or shareholders continued use of said
transient, as well as monthly parking, shall be contingent upon Tenant and
Tenant's agents, clients, contractors, directors, employees, invitees,
licensees, officers, partners or shareholders continued compliance with the
reasonable and non-discriminatory rules and regulations adopted by Landlord,
which rules and regulations may change at any time or from time to time during
the Term hereof in Landlord's sole discretion.
Any contrary provision of this Section 21.1 notwithstanding, in the event
that Tenant has entirely and permanently vacated the Premises but otherwise is
not in material default of its obligations pursuant to this Lease, Tenant shall
not be required to lease parking spaces.
ARTICLE 22
CONCIERGE SERVICES
SECTION 22.1. PROVISION OF SERVICES. Landlord and Tenant acknowledge and
understand that Landlord may, from time to time, make it possible for Tenant to
use or purchase a variety of personal services which may include, but not be
limited to, personal shopping, assistance with choosing or obtaining travel
reservations, accommodations and/or tickets; tickets to performances,
recommendations to eating establishments; and the like (collectively "Concierge
Services").
Tenant acknowledges that said Concierge Services are provided by Landlord
solely as an accommodation to and for the convenience of Tenant and Tenant's
agents, contractors, directors, employees, licensees, officers, partners or
shareholders, and Landlord does not make any representation, warranty or
guarantee, express or implied, as to the quality, value, accuracy, or
completeness of said Concierge Services, or whether or not Tenant shall be
satisfied with the services and/or goods so provided and/or recommended.
Landlord hereby disclaims any control over the variety or sufficiency of such
services to be provided.
Tenant acknowledges that Tenant is not required to use such Concierge
Services as a condition precedent to compliance with the Lease; that Tenant's
use of such Concierge Services is strictly voluntary, and at the sole discretion
and control of Tenant. Tenant shall independently make such financial
arrangements for payment of the services provided as Tenant deems reasonable and
of value.
SECTION 22.2. INDEMNIFICATION AND RELEASE BY TENANT. Notwithstanding anything to
the contrary contained in the Lease, any city, county, state or federal
ordinance, statute, regulation or law, Tenant's signature hereon indicates
Tenant's agreement that solely as it relates to the purchase or use of Concierge
Services by Tenant or the agents, contractors, employees, officers, partners,
and/or shareholders of Tenant, Tenant, on behalf of itself and its agents,
contractors, directors, employees, licensees, officers, partners or
shareholders, does and shall hereby forever hold Landlord and Landlord's
affiliates, agents, assigns, contractors, directors, employees, officers, parent
organization, partners, representatives, shareholders, and subsidiaries
(collectively the "Indemnitees") harmless from and forever release, remise,
discharge, acquit and relieve the Indemnitees from and against any and all
claims, demands, causes of action, obligations, liabilities, agreements,
damages, cost (including, without limitation, reasonable attorneys' fees), loss,
or liability of any kind or nature, whether asserted, known or unknown,
suspected or unsuspected, in any way connected with, which any one or more of
the Indemnitees may sustain or incur by reason of, related to, associated with,
or arising out of the provision, use or the rendering of any such Concierge
Services or the delivery of such Concierge Services to Tenant or Tenant's
agents, clients, contractors, directors, employees, invitees, licensees,
officers, partners or shareholders.
30
<PAGE> 34
Solely as it relates to the purchase or use of Concierge Services by Tenant
or the agents, contractors, employees, officers, partners, and/or shareholders
of Tenant, Tenant hereby expressly waives all rights and benefits conferred by
the provisions of Section 1542 of the Civil Code of the State of California,
which reads as follows:
" A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE
AND WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT
WITH THE DEBTOR."
In so doing, Tenant acknowledges that it will be unable to make any claim
against Landlord or any other Indemnitees for damages that may exist as of the
date or after the date of this release, but which Tenant does not know to exist,
and which, if known, would materially have affected Tenant's decision to execute
this document, regardless of whether Tenant's lack of knowledge, if any, is the
result of ignorance, oversight, error, negligence or other cause.
ARTICLE 23
OPTION TO EXTEND TERM
SECTION 23.1. OPTION TO EXTEND TERM. Provided Tenant is not in material default
after the expiration of notice and the opportunity to cure on the date or at any
time during the remainder of the Term after Tenant gives notice to Landlord of
Tenant's intent to exercise its rights pursuant to this Article 23, Tenant is
given the option to extend the term for an additional Five (5) year period (the
"Extended Term"), commencing the next calendar day after the expiration of the
Term (the "Option"). The Option shall apply only to the entirety of the
Premises, and Tenant shall have no right to exercise the Option as to only a
portion of the Premises.
Tenant's exercise of this Option is contingent upon Tenant giving written
notice to Landlord (the "Option Notice") of Tenant's election to exercise its
rights pursuant to this Option by Certified Mail, Return Receipt Requested, no
more than twelve (12) and no less than nine (9) months prior to the Termination
Date.
SECTION 23.2. MONTHLY FIXED RENT PAYABLE. As Monthly Fixed Rent during the
Extended Term, Tenant shall pay Landlord the Fair Market Value of the Premises
for the Extended Term. The term "Fair Market Value" shall be defined as the
effective rent reasonably achievable by Landlord, and shall include but not be
limited to, all economic benefits obtainable by Landlord, such as Monthly Fixed
Rent, periodic Fixed Rent adjustments, Additional Rent in the form of Operating
Expense reimbursements, and any and all other monetary or non-monetary
consideration that may be given in the market place to a non-renewal tenant, as
is chargeable for a similar use of comparable space in the geographic area of
the Premises.
Said computation shall specifically be based on the Premises in its "as-is"
condition, without payment of any brokerage commission to any broker. If either
Landlord or Tenant elect to have a broker represent them during negotiations for
extension of the Term, and/or Tenant requests the installation of any further
improvements into the Premises, the cost of such improvements to be made and/or
commissions to be paid shall be amortized over the Extended Term on a
straight-line basis, with interest thereon at ten percent (10%), by
appropriately increasing the Fair Market Value previously determined.
Landlord and Tenant shall have 30 days (the "Negotiation Period") after
Landlord receives the Option Notice in which to agree on the Fair Market Value.
If Landlord and Tenant agree on the Fair Market Value during the Negotiation
Period, they shall immediately execute an amendment to the Lease extending the
Term and stating the Fair Market Value.
SECTION 23.3 APPRAISERS TO SET FIXED RENT. If Landlord and Tenant are unable to
agree on the Fair Market Value during the Negotiation Period, then:
A) Within five (5) days after the expiration of the Negotiation Period, Tenant
shall have the right to void the Option Notice by hand delivery of written
notice (the "Termination Notice") to Landlord within such five (5) days
period, and the Lease shall expire on the Termination Date; or
B) If the Termination Notice is not timely delivered by Tenant, Landlord and
Tenant, each at its own cost, shall select an independent real estate
appraiser with at least ten (10) years full-time commercial appraisal
experience in the area in which the Premises are located, and shall provide
written notice to the other party of the identity and address of the
appraiser so appointed. Landlord and Tenant shall make such selection
within ten (10) days after the expiration of the Negotiation Period.
C) Within thirty (30) days of having been appointed to do so (the "Appraisal
Period"), the two (2) appraisers so appointed shall meet and set the Fair
Market Value for the Extended Term. In setting the Fair Market Value, the
appraisers shall solely consider the use of the Premises for general office
purposes.
SECTION 23.4 FAILURE BY APPRAISERS TO SET FAIR MARKET VALUE. If the two (2)
appointed appraisers are unable to agree on the Fair Market Value within ten
(10) days after expiration of the Appraisal Period, they shall elect a third
appraiser of like or better qualifications, and who has not previously acted in
any capacity for either Landlord or Tenant. Landlord and Tenant shall each bear
one half of the costs of the third appraiser's fee.
Within 30 days after the selection of the third appraiser (the "Second
Appraisal Period") the Fair Market Value for the Extended Term shall be set by a
majority of the appraisers now appointed.
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If a majority of the appraisers are unable to set the Fair Market Value
within the Second Appraisal Period, the three (3) appraisers shall individually
render separate appraisals of the Fair Market Value, and their three (3)
appraisals shall be added together, then divided by three (3); resulting in an
average of the appraisals, which shall be the Fair Market Value during the
Extended Term.
However, if the low appraisal or high appraisal, or both, varies by more
than Ten Percent (10%) from the middle appraisal, then such appraisal(s) shall
be disregarded. If only one (1) appraisal is disregarded, the remaining two (2)
appraisals shall be added together and their total divided by two (2), and the
resulting average shall be the Fair Market Value. If both the low and high
appraisal are disregarded, the middle appraisal shall be the Fair Market Value
for the Premises during the Extended Term. The appraisers shall immediately
notify Landlord and Tenant of the Fair Market Value so established, and Landlord
and Tenant shall immediately execute an amendment to the Lease, extending the
Term and revising the Fixed Rent payable pursuant to the Fair Market Value so
established.
Landlord or Tenant's failure to execute such amendment establishing the
Fair Market Value within fifteen (15) days after the other party's request
therefor shall constitute a material default under the Lease. and if Tenant is
the party failing to so execute, this Option shall become null and void and of
no further force or effect.
SECTION 23.5. NO RIGHT OF REINSTATEMENT OR FURTHER EXTENSION. Once Tenant has
either failed to exercise its rights to extend the term pursuant to this Article
23 or failed to execute the amendment called for hereunder, it shall have no
right of reinstatement of its Option to Extend the Term, nor shall Tenant have
any right to a further or second extension of the Term beyond the period stated
in Section 23.1 hereinabove.
SECTION 23.6. NO ASSIGNMENT OF OPTION. This Option is personal to the original
Tenant signing the Lease, and shall be null, void and of no further force or
effect as of the date that Tenant assigns the Lease to an unaffiliated entity
and/or subleases more than forty-nine percent (49%) of the total Rentable Area
of the Premises.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease,
effective the day and year first above written.
<TABLE>
<S> <C>
LANDLORD: TENANT:
DOUGLAS EMMETT REALTY FUND 1997, THE HARVEY ENTERTAINMENT COMPANY,
a California limited partnership a California corporation
By: DOUGLAS, EMMETT & COMPANY, By:
its agent ------------------------------------------------------------------
Signer's Name:
---------------------------------------------------
By: [ ] President [ ] Vice President or [ ] Chief Executive Officer
-------------------------
Kenneth Panzer (Check Title Above)
AND
Dated: By:
---------------------- -----------------------------------------------------------------
Signer's Name:
---------------------------------------------------
[ ] Secretary [ ] Treasurer or [ ] Chief Financial Officer
(Check Title Above)
AFFIX CORPORATE SEAL HERE
Dated:
-------------------------------------------------------------
</TABLE>
32
<PAGE> 36
EXHIBIT B-1
CONSTRUCTION BY TENANT DURING TERM
1. If Tenant wishes to make a Tenant Change, as specified in Section 12.12 of
the Lease, such Tenant Change shall be completed pursuant to the provisions of
Section 12.12. of the Lease and this Exhibit B-1. Tenant shall bear all costs of
said Tenant Change, which shall be paid directly to Tenant's general contractor
("Contractor").
Contractor shall complete construction to the Premises pursuant to the
final Plans and Specifications approved in writing by Landlord and Tenant (the
"Tenant Change"), in compliance with all applicable codes and regulations.
Tenant's selections of finishes and materials shall be indicated on the Plans
and Specifications, and shall be equal to or better than the minimum Building
standards and specifications. All work not shown on the final Plans and
Specifications, but which is to be included in the Tenant Change, including but
not limited to, telephone service installation, furnishings or cabinetry, shall
be installed pursuant to Landlord's reasonable directives.
2. Prior to commencing any work:
A) Tenant's proposed Contractor and the Contractor's proposed subcontractors
and suppliers shall be approved in writing by Landlord, which approval
shall not be unreasonably withheld, conditioned or delayed. As a condition
of such approval, so long as the same are reasonably cost competitive, then
Contractor shall use Landlord's Heating, Venting, and Air-conditioning,
plumbing, and electrical subcontractors for such work.
During completion of any Tenant Change, neither Tenant or Contractor
shall permit any sub-contractors, workmen, laborers, material or equipment
to come into or upon the Building if the use thereof, in Landlord's
reasonable judgment, would violate Landlord's agreement with any union
providing work, labor or services in or about the Building.
B) Contractor shall submit to Landlord and Tenant a written bid for completion
of the Tenant Change. Said bid shall include Contractor's overhead, profit,
and fees, and, if the proposed Tenant Change is for cosmetic work in excess
of $5,000 in aggregate value per occurrence or for structural work of any
kind, Contractor shall:
I) pre-pay to Landlord's managing agent $250.00 as partial payment of said
managing agent's construction administration fee, as specified
hereinbelow, and
II) upon completion of said Tenant Change, pay an administration fee for
supervision of said Tenant Change equal to fifty dollars ($50.00) per
hour, to a maximum of four percent ( 4%) of the total cost of the
Tenant Change, to defray said agent's costs for supervision of the
construction;
C) Tenant or Contractor shall submit all Plans and Specifications to Landlord,
and no work on the Premises shall be commenced before Tenant has received
Landlord's final written approval thereof, which shall not be unreasonably
withheld, delayed or conditioned;.
D) Contractor shall complete all architectural and planning review and obtain
all permits, including signage, required by the city, state or county in
which the Premises are located; and
E) Contractor shall submit to Landlord verification of public liability and
workmen's compensation insurance adequate to fully protect Landlord and
Tenant from and against any and all liability for death or injury to
persons or damage to property caused in or about or by reason of the
construction of any work done by Contractor or Contractor's subcontractors
or suppliers.
F) Unless otherwise waived in writing by Landlord, which waiver shall be in
Landlord's sole discretion, Contractor shall provide payment and
performance bonds in an amount equal to 100% of the estimated amount of
Tenant Change, as specified to Landlord pursuant to Paragraph 2 (b).
3. Contractor and Contractor's subcontractors and suppliers shall be subject to
Landlord's reasonable administrative control and supervision. Landlord shall
provide Contractor and Contractor's subcontractors and suppliers with reasonable
access to the Premises.
4. During construction of the Tenant Change, Contractor shall adhere to the
procedures contained hereinbelow, which represent Landlord's minimum
requirements for completion of the Tenant Change.
5. Upon completion of the Tenant Change, Tenant shall provide Landlord with such
evidence as Landlord may reasonably request that the Contractor has been paid in
full, and Contractor shall provide Landlord with lien releases as requested by
Landlord, confirmation that no liens have been filed against the Premises or the
Building. If any liens arise against the Premises or the Building as a result of
the Tenant Change, Tenant shall immediately, at Tenant's sole expense, remove
such liens and provide Landlord evidence that the title to the Building and
Premises have been cleared of such liens.
6. Whether or not Tenant or Contractor timely complete the Tenant Change, unless
the Lease is otherwise terminated pursuant to the provisions contained therein,
Tenant acknowledges and agrees that Tenant's obligations under the Lease to pay
Fixed Monthly Rent and/or Additional Rent shall continue unabated.
CONSTRUCTION POLICY
The following policies outlined are the construction procedures for the
Building. As a material consideration to Landlord for granting Landlord's
permission to Tenant to complete the construction contemplated hereunder, Tenant
agrees to be bound by and follow the provisions contained hereinbelow:
1. ADMINISTRATION
A) Contractors to notify the management office for the Building prior to
starting any work. NO EXCEPTIONS. All jobs must be scheduled by the general
contractor or sub-contractor when no general contractor is being used.
B1-1
<PAGE> 37
EXHIBIT B-1 (continued)
CONSTRUCTION BY TENANT DURING TERM
B) The general contractor is to provide the Building Manager with a copy of
the projected work schedule for the suite, prior to the start of
construction.
C) Contractor will make sure that at least one set of drawings will have the
Building Manager's initials approving the plans and a copy delivered to the
Building Office.
D) As-built construction, including mechanical drawings and air balancing
reports will be submitted at the end of each project.
E) The HVAC contractor is to provide the following items to the Building
Manager upon being awarded the contract from the general contractor:
I) A plan showing the new ducting layout, all supply and return air grille
locations and all thermostat locations. The plan sheet should also
include the location of any fire dampers.
II) An Air Balance Report reflecting the supply air capacity throughout the
suite, which is to be given to the Chief Building Engineer at the
finish of the HVAC installation.
F) All paint bids should reflect a one-time touch-up paint on all suites. This
is to be completed approximately five (5) days after move-in date.
G) The general contractor must provide for the removal of all trash and debris
arising during the course of construction. At no time are the building's
trash compactors and/or dumpsters to be used by the general contractor's
clean-up crews for the disposal of ANY trash or debris accumulated during
construction. The Building Office assumes no responsibility for bins.
Contractor is to monitor and resolve any problems with bin usage without
involving the Building Office. Bins are to be emptied on a regular basis
and NEVER allowed to overflow. Trash is to be placed IN the bin.
H) Contractors will include in their proposals all costs to include: parking,
elevator service, additional security (if required), restoration of
carpets, etc. Parking will be validated only if contractor is working
directly for the Building Office.
I) Any problems with construction per the plan, will be brought to the
attention of and documented to the Building Manager. Any changes that need
additional work not described in the bid will be approved in writing by the
Building Manager. All contractors doing work on this project should first
verify the scope of work (as stated on the plans) before submitting bids;
not after the job has started.
2. BUILDING FACILITIES COORDINATION
A) All deliveries of material will be made through the parking lot entrance.
B) Construction materials and equipment will not be stored in any area without
prior approval of the Building Manager.
C) Only the freight elevator is to be used by construction personnel and
equipment. Under no circumstances are construction personnel with materials
and/or tools to use the "passenger" elevators.
3. HOUSEKEEPING
A) Suite entrance doors are to remain closed at all times, except when hauling
or delivering construction materials.
B) All construction done on the property that requires the use of lobbies or
common area corridors will have carpet or other floor protection. The
following are the only prescribed methods allowed:
I) Mylar: Extra heavy-duty to be taped from the freight elevator to the
suite under construction.
II) Masonite: 1/4 inch Panel, Taped to floor and adjoining areas. All
corners, edges and joints to have adequate anchoring to provide safe
and "trip-free" transitions. Materials to be extra heavy-duty and
installed from freight elevator to the suite under construction.
C) Restroom wash basins will not be used to fill buckets, make pastes, wash
brushes, etc. If facilities are required, arrangements for utility closets
will be made with the Building Office.
D) Food and related lunch debris are NOT to be left in the suite under
construction.
E) All areas the general contractor or their sub-contractors work in must be
kept clean. All suites the general contractor works in will have
construction debris removed PRIOR to completion inspection. This includes
dusting of all window sills, light diffusers, cleaning of cabinets and
sinks. All common areas are to be kept clean of building materials at all
times so as to allow tenants access to their suites or the building.
4. CONSTRUCTION REQUIREMENTS
A) All Life and Safety and applicable Building Codes will be strictly enforced
(i.e. tempered glass, fire dampers, exit signs, smoke detectors, alarms,
etc.). Prior coordination with the Building Manager is required.
B) Electric panel schedules must be brought up to date identifying all new
circuits added.
C) All electrical outlets and lighting circuits are to be properly identified.
Outlets will be labeled on back side of each cover plate.
B1-2
<PAGE> 38
EXHIBIT B-1 (continued)
CONSTRUCTION BY TENANT DURING TERM
D) All electrical and phone closets being used must have panels replaced and
doors shut at the end of each day's work. Any electrical closet that is
opened with the panel exposed must have a work person present.
E) All electricians, telephone personnel, etc. will, upon completion of their
respective projects, pick up and discard their trash leaving the telephone
and electrical rooms clean. If this is not complied with, a clean-up will
be conducted by the building janitors and the general contractor will be
back-charged for this service.
F) Welding or burning with an open flame will NOT be done without prior
approval of the Building Manager. Fire extinguishers must be on hand at all
times.
G) All "anchoring" of walls or supports to the concrete are NOT to be done
during normal working hours (7:30 AM - 6:00 PM, Monday through Friday).
This work must be scheduled before or after these hours during the week or
on the weekend.
H) All core drilling is NOT to be done during normal working hours (7:30 AM -
6:00 PM, Monday through Friday). This work must be scheduled before or
after these hours during the week or on the weekend.
I) All HVAC work must be inspected by the Building Engineer. The following
procedures will be followed by the general contractor:
I) A preliminary inspection of the HVAC work in progress will be scheduled
through the Building Office prior to the reinstallation of the ceiling
grid.
II) A second inspection of the HVAC operation will also be scheduled
through the Building Office and will take place with the attendance of
the HVAC contractor's Air Balance Engineer. This inspection will take
place when the suite in question is ready to be air-balanced.
III) The Building Engineer will inspect the construction on a periodic
basis as well.
J) All existing thermostats, ceiling tiles, lighting fixtures and air
conditioning grilles shall be saved and turned over to the Building
Engineer.
GOOD HOUSEKEEPING RULES AND REGULATIONS WILL BE STRICTLY ENFORCED. THE
BUILDING OFFICE AND ENGINEERING DEPARTMENT WILL DO EVERYTHING POSSIBLE TO MAKE
YOUR JOB EASIER. HOWEVER, CONTRACTORS WHO DO NOT OBSERVE THE CONSTRUCTION POLICY
WILL NOT BE ALLOWED TO PERFORM WITHIN THIS BUILDING. THE COST OF REPAIRING ANY
DAMAGES THAT ARE CAUSED BY TENANT OR TENANT'S CONTRACTOR DURING THE COURSE OF
CONSTRUCTION SHALL BE DEDUCTED FROM TENANT'S ALLOWANCE OR TENANT'S SECURITY
DEPOSIT, AS APPROPRIATE.
<TABLE>
<S> <C>
LANDLORD: TENANT:
DOUGLAS EMMETT REALTY FUND 1997, THE HARVEY ENTERTAINMENT COMPANY,
a California limited partnership a California corporation
By: DOUGLAS, EMMETT & COMPANY, By:
its agent ------------------------------------------------------------------
Signer's Name:
---------------------------------------------------
By: [ ] President [ ] Vice President or [ ] Chief Executive Officer
-------------------------
Kenneth Panzer (Check Title Above)
AND
Dated: By:
--------------------- -----------------------------------------------------------------
Signer's Name:
---------------------------------------------------
[ ] Secretary [ ] Treasurer or [ ] Chief Financial Officer
(Check Title Above)
AFFIX CORPORATE SEAL HERE
Dated:
-------------------------------------------------------------
</TABLE>
B1-3
<PAGE> 39
EXHIBIT C
RULES AND REGULATIONS
EXHIBIT C (CONTINUED)
RULES AND REGULATIONS
BUILDING RULES AND REGULATIONS
1. ACCESS. Tenant and/or Tenant's agents, clients, contractors, directors,
employees, invitees, licensees, officers, partners or shareholders shall only
use the sidewalks, entrances, lobby(ies), garage(s), elevators, stairways, and
public corridors as a means of ingress and egress, and shall take such actions
as may reasonably be necessary to ensure that the same remain unobstructed at
all times.
The entrance and exit doors to the Premises are to be kept closed at all
times except as required for orderly passage to and from the Premises. Except on
balconies available for the joint or exclusive use of Tenant as otherwise
specified hereinabove, Tenant shall not permit its agents, clients, contractors,
directors, employees, invitees, licensees, officers, partners or shareholders to
loiter in any part of the Building or obstruct any means of ingress or egress.
Tenant shall not cover any doors, and shall not cover any window, other than
with vertical or mini-blinds pre-approved in writing by Landlord. Landlord
specifically disapproves the installation of any film or foil covering
whatsoever on the windows of the Premises.
Neither Tenant, nor its agents, clients, contractors, directors, employees,
invitees, licensees, officers, partners or shareholders shall go up on the roof
or onto any balcony serving the Building, except upon such roof, portion
thereof, or balcony as may be contiguous to the Premises and is designated in
writing by Landlord as a roof-deck, roof-garden area, or exclusive use balcony
area.
2. RESTROOM FACILITIES. The toilet rooms, toilets, urinals, wash bowls and other
apparatus (the "Restroom Facilities"), whether contained in the common areas of
the Building and/or the interior of the Premises, shall not be used for any
purpose other than that for which they were designed. Tenant shall not permit
its agents, clients, contractors, directors, employees, invitees, licensees,
officers, partners or shareholders to throw foreign substances of any kind
whatsoever or papers not specifically designated for use in the Restroom
facilities down any toilet, or to dispose of the same in any way not in keeping
with the instructions provided to Tenant by the management of the Building
regarding same, and Tenant hereby specifically agrees to reimburse Landlord
directly for the expense of any breakage, stoppage or damage resulting from
Tenant's violation of this rule.
3. HEAVY EQUIPMENT. Landlord reserves the right, in Landlord's sole discretion,
to decline, limit or designate the location for installation of any safes, other
unusually heavy, or unusually large objects to be used or brought into the
Premises the Building. In each case where Tenant requests installation of one or
more such unusually heavy item(s), which request shall be conclusively evidenced
by Tenant's effort to bring such item(s) into the Building or Premises, Tenant
shall reimburse Landlord for the costs of any engineering or structural analysis
required by Landlord in connection therewith. In all cases, each such heavy
object shall be placed on a metal stand or metal plates or such other mounting
detail of such size as shall be prescribed by Landlord.
Tenant hereby indemnifies Landlord against any damage or injury done to
persons, places, things or the Building or its common areas when such damage or
injury primarily arises out of Tenant's installation or use of one or more
unusually heavy objects. Tenant further agrees to reimburse Landlord for the
costs of repair of any damage done to the Building or property therein by
putting in, taking out, or maintaining such safes or other unusually heavy
objects.
4. TRANSPORTATION OF FREIGHT. Except as otherwise agreed to by Landlord in
writing, Tenant or Tenant's agents, clients, contractors, directors, employees,
invitees, licensees, officers, partners or shareholders shall only carry
freight, furniture or bulky materials in or out of the Building before or after
Normal Business Hours, as specified in Section 15 of these rules. Tenant may
only install and/or move such freight, furniture or bulky material after
previous written notice of its intention to complete such a move, given to the
Office of the Building. The persons and/or company employed by Tenant for such
work must be professional movers, reasonably acceptable to Landlord, and said
movers must provide Landlord with a certificate of insurance evidencing the
existence of workmen's compensation and all risk liability coverage in a minimum
amount of $2,000,000.
Tenant may, subject to the provisions of the immediately preceding
paragraph, move freight, furniture, bulky matter and other material in or out of
the Premises on Saturdays between the hours of 8:00 A.M. and 6:00 P.M., provided
that Tenant pays in advance for Landlord's reasonably anticipated additional
costs, if any, for elevator operators, security guards and other expenses
arising by reason of such move by Tenant.
5. FLAMMABLE MATERIALS. Except for such limited quantities of office materials
and supplies as are customarily utilized in Tenant's normal business operations,
Tenant shall not use or keep in the Premises or the Building any kerosene,
gasoline, flammable or combustible fluid or material, other than those limited
quantities of normal business operating materials as may reasonably be necessary
for the operation or maintenance of office equipment. Nor shall Tenant keep or
bring into the Premises or the Building any other toxic or hazardous material
specifically disallowed pursuant to California state law.
6. COOKING / ODORS / NUISANCES. Tenant shall not permit its agents, clients,
contractors, directors, employees, invitees, licensees, officers, partners or
shareholders to engage in the preparation and/or serving of foods unless the
Premises includes a self-contained kitchen area. Nor shall Tenant permit
<PAGE> 40
EXHIBIT C (CONTINUED)
RULES AND REGULATIONS
the odors arising from such cooking, or any other improper noises, vibrations,
or odors to be emanate from the Premises. Tenant shall not obtain for use in the
Premises, ice, drinking water, food, beverage, towel or other similar services
except at such reasonable hours and under such reasonable regulations as may be
specified by Landlord.
Tenant hereby agrees to instruct all persons entering the Premises to
comply with the requirements of the Building, by advising all persons entering
the Premises that smoking of any tobacco or other substance is prohibited at all
times, except in such common areas located outside the Building as may be
designated by the Building management.
Tenant shall not permit Tenant's agents, clients, contractors, directors,
employees, invitees, licensees, officers, partners or shareholders to interfere
in any way with other tenants of the Building or with those having business with
them.
Tenant shall not permit its agents, clients, contractors, directors,
employees, invitees, licensees, officers, partners or shareholders to bring or
keep within the Building any animal, bird or bicycle, except such seeing-eye dog
or other disability assistance type animal as may comply with the requirements
of any handicapped ordinances having jurisdiction therefor.
Tenant shall store its trash and garbage within the Premises. No material
shall be placed in the trash boxes or receptacles if such material is a
hazardous waste or toxic substance or is of such a nature that its disposal in
Landlord's ordinary and customary manner of removing and disposing of trash and
garbage would be a violation of any law, ordinance or company regulation
governing such disposal. All garbage and refuse disposal shall be made only
through entry ways and elevators provided for such purposes and at such times as
Landlord shall designate. As and when directed by Landlord and/or if required by
any governmental agency having jurisdiction therefor, Tenant shall comply with
all directives for recycling and separation of trash.
Tenant shall not employ any person to do janitorial work in any part of the
Premises without the prior written consent of Landlord, which consent may be
withheld in Landlord's sole discretion.
Landlord reserves the right to exclude or expel from the Building any
person who in Landlord's sole discretion is intoxicated or under the influence
of liquor or drugs or who, in any manner, engages in any act in violation of the
Rules and Regulations of the Building.
Tenant shall not conduct any public or private auction, fire sale or other
sale of Tenant's personal property, furniture, fixtures or equipment or any
other property located in or upon the Premises, without Landlord's prior written
consent, which consent shall be in Landlord's sole discretion.
7. STORAGE. Tenant may only store goods, wares, or merchandise on or in the
Premises in areas specifically designated by Landlord for such storage.
8. DIRECTIVES TO MANAGEMENT. Tenant's requirements, other than those Landlord
specifically agrees to perform elsewhere in this Lease, shall only be attended
to upon the Building management's receipt of Tenant's written request therefor.
Landlord's employees shall not perform any work or do anything outside of their
regular duties unless under special instruction from the Building management. No
security guard, janitor or engineer or other employee of the Building management
shall admit any person (Tenant or otherwise) to the Premises without specific
instructions from the Office of the Building and written authorization for such
admittance from Tenant.
9. KEYS AND LOCKS. Landlord shall furnish Tenant with two keys to each door lock
existing in the Premises. Tenant shall reimburse Landlord a reasonable charge
for these and any additional keys. Tenant shall not be permitted to have keys
made, nor shall Tenant alter any lock or install a new or additional lock or
bolts on any door of the Premises without Landlord's prior written consent.
Tenant shall, in each case, furnish Landlord with a key for any additional lock
installed or changed by Tenant or Tenant's agent(s). Tenant, upon the expiration
or earlier termination of this Lease, shall deliver to Landlord all keys in the
possession of Tenant or Tenant's agents, clients, contractors, directors,
employees, invitees, licensees, officers, partners or shareholders for doors in
the Building, whether or not furnished to Tenant by Landlord. If Tenant, or
Tenant's agents, clients, contractors, directors, employees, invitees,
licensees, officers, partners or shareholders, lose or misplace any key(s) to
the Building, Landlord shall, in Landlord's sole discretion, either replace said
key(s) or re-key such locks as may be affected thereby, and Tenant shall
reimburse Landlord for all such costs of such re-keying and/or replacement.
10. SOLICITATION. Tenant and/or its agents, clients, contractors, directors,
employees, invitees, licensees, officers, partners or shareholders shall not
permit any canvassing, peddling, soliciting and/or distribution of handbills or
any other written materials to occur in the Premises and/or the Building, nor
shall Tenant or Tenant's agents, clients, contractors, directors, employees,
invitees, licensees, officers, partners or shareholders engage in such
solicitation or distribution activities.
C-2
<PAGE> 41
EXHIBIT C (CONTINUED)
RULES AND REGULATIONS
11. RETAIL SALES, SERVICES AND MANUFACTURING PROHIBITED. Except with the prior
written consent of Landlord, Tenant shall not sell, or permit the retail sale
of, newspapers, magazines, periodicals, theater tickets or any other goods or
merchandise to the general public in or on the Premises, nor shall Tenant carry
on or permit or allow any employee or other person to carry on the independent
business of stenography, typewriting or any similar business in or from the
Premises for the service or accommodation of other occupants of any other
portion of the Building. Tenant shall not permit the Premises to be used for
manufacturing or for any illegal activity of any kind, or for any business or
activity other than for Tenant's specific use.
12. CHANGE IN NAME OR ADDRESS. Landlord shall have the right, exercisable
without notice and without liability to Tenant, to change the name and street
address of the Building.
13. PROJECTIONS FROM PREMISES. Tenant shall not install any radio or television
antenna, loudspeaker or other device on the roof or the exterior walls of the
Building or in any area projecting outside the interior walls of the Premises.
Tenant shall not install or permit to be installed any awnings, air conditioning
units or other projections, without the prior written consent of Landlord.
14. SUPERIORITY OF LEASE. These Rules and Regulations are in addition to, and
shall not be construed to in any way modify or amend, in whole or in part, the
covenants, agreements or provisions of this Lease. If a conflict or disagreement
between the Lease and these Rules becomes apparent, this Lease shall prevail.
15. CHANGES TO RULES AND REGULATIONS. Provided such changes do not materially
harm Tenant's ability to conduct its normal business operations, Landlord shall
retain the right to change, add or rescind any rule or regulation contained
herein, or to make such other and further reasonable and non-discriminatory
Rules and Regulations as in Landlord's sole judgment may, from time to time,
become necessary for the management, safety, care and cleanliness of the
Premises, the Building or the Parking Facilities, or for the preservation of
good order therein, or for the convenience of other occupants and tenants
therein, so long as such recision, addition, deletion or change is thereafter
reasonably applied to all occupants of the Building affected thereby.
PARKING RULES AND REGULATIONS
A. Tenant shall strictly comply with all posted speed limits, directional
signs, yield signs, stops signs and all other signs within or about the
parking facilities.
B. Tenant shall register all vehicle license plate numbers with the Building
management.
C. Tenant shall be responsible for the cost of repairing any damage to the
parking facilities or cleaning any debris create or left by Tenant,
including, without limitation, oil leakage from motor vehicles parked in
the parking facilities under its auspices.
D. Landlord, in addition to reserving the right to designate one or more areas
solely for visitor parking, which areas may be changed by Landlord from
time to time with or without prior notice to Tenant, reserves the right to
allocate additional visitor spaces on any floor of the parking facilities.
Tenant shall not park any vehicles in any spaces designated as visitor only
spaces or customer spaces within the parking facilities.
E. Tenant shall strictly comply with all rules, regulations, ordinances, speed
limits, and statutes affecting handicapped parking and/or access, and shall
not park any vehicles within the fire lanes, along parking curbs or in
striped areas.
F. Tenant shall only use the number of parking permits allocated to it and
shall not permit more than one of its employees to utilize the same parking
permit. Landlord reserves the right to assign or re-assign parking spaces
within the Parking facilities to Tenant from time to time, and provided
Landlord is required to do so by reason of any action arising out of a
governmental mandate imposed on Landlord, Landlord further reserves the
right at any time to substitute an equivalent number of parking spaces in a
parking facilities or subterranean or surface parking facility within a
reasonable distance of the Premises.
G. Except with Landlord's managing agent(s)' prior written consent, Tenant
shall not leave vehicles in the parking facilities overnight, nor park any
vehicles in the parking facilities other than automobiles, motorcycles,
motor-driven or non-motor-driven bicycles or four-wheeled trucks or vans.
Landlord may, in its sole discretion, designate separate areas for bicycles
and motorcycles. Tenant shall ensure that vehicles parking in the parking
facilities by using the parking permits assigned to Tenant shall be parked
entirely within the striped lines designating a single space and are not so
situated or of such a width or length as to impede access to or egress from
vehicles parked in adjacent areas or doors or loading docks. Further, all
vehicles utilizing Tenant's parking permits shall not be higher than any
height limitation that may be posted, or of such a size, weight or
dimension so that entry of such vehicle into the parking facilities would
cause any damage or injury thereto.
C-3
<PAGE> 42
EXHIBIT C (CONTINUED)
RULES AND REGULATIONS
H. Tenant shall not allow any of the vehicles parked using Tenant's permits,
or the vehicles of any of Tenant's suppliers, shippers, customers or
invitees to be loaded or unloaded in any area other than those specifically
designated by Landlord for loading.
I. Tenant shall not use or occupy the parking facilities in any manner which
will unreasonably interfere with the use of the parking facilities by other
tenants or occupants of the Building. Without limitation, Tenant agrees to
promptly turn off any vehicle alarm system activated and sounding an alarm
in the parking facilities. In the event said alarm system fails to turn off
and no longer sound an intruder alert fifteen (15) minutes after commencing
such an alarm, Landlord shall reserve the right to remove the vehicle from
the parking facilities at Tenant's sole expense.
J. Tenant acknowledges that the Rules and Regulations as posted herein shall
be in effect twenty-four hours per day, seven days per week, without
exception.
K. Tenant acknowledges that the uniformed guard officers and parking
attendants serving the parking facilities are authorized to issue verbal
and written warnings of Tenant's violations of any of the rules and
regulations contained herein. Except in the case of a car alarm continuing
to sound in excess of a maximum of fifteen minutes, in which case no
further notice by Landlord shall be required. If Tenant or Tenant's agents,
contractors, directors, employees, officers, partners or shareholders
continue to materially breach these rules and regulations after expiration
of written notice and the opportunity to cure has been given to Tenant,
then in addition to such other remedies and request for injunctive relief
it may have, Landlord shall have the right, without additional notice, to
remove or tow away the vehicle involved and store the same, all costs of
which shall be borne exclusively by Tenant and/or revoke Tenant's parking
privileges and rights under the Lease.
<TABLE>
<S> <C>
LANDLORD: TENANT:
DOUGLAS EMMETT REALTY FUND 1997, THE HARVEY ENTERTAINMENT COMPANY,
a California limited partnership a California corporation
By: DOUGLAS, EMMETT & COMPANY, By:
its agent ------------------------------------------------------------------
Signer's Name:
---------------------------------------------------
By: [ ] President [ ] Vice President or [ ] Chief Executive Officer
-------------------------
Kenneth Panzer (Check Title Above)
AND
Dated: By:
--------------------- ------------------------------------------------------------------
Signer's Name:
---------------------------------------------------
[ ] Secretary [ ] Treasurer or [ ] Chief Financial Officer
(Check Title Above)
AFFIX CORPORATE SEAL HERE
Dated:
-------------------------------------------------------------
</TABLE>
C-4
<PAGE> 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-KSB of The Harvey Entertainment Company for the year ended December 31,
1999.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
April 12, 2000
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