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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 1997
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number 0-23000
The Harvey Entertainment Company
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(Exact name of registrant as specified in its charter)
California 95-4217605
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1999 Avenue of the Stars, Suite 2050, Los Angeles, California 90067-6055
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(Address of principal executive offices)
Registrant's phone number, including area code (310) 789-1990
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 8, 1997
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Common 3,593,900
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
INDEX
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<TABLE>
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PAGE
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PART I
FINANCIAL INFORMATION
Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 1-2
Consolidated Statements of Operations- Three Months Ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows - Three Months Ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition and Results of Operations 6-8
PART II
OTHER INFORMATION 8-10
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1997 1996
(UNAUDITED)
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CURRENT ASSETS:
Cash and cash equivalents $ 4,554,000 $ 6,057,000
Accounts receivable, net of allowance for doubtful accounts
of $648,000 and $573,000 in 1997 and 1996, respectively 3,012,000 2,342,000
Prepaid expenses and other current assets 220,000 226,000
Prepaid income taxes 620,000 620,000
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Total current assets 8,406,000 9,245,000
LONG-TERM ACCOUNTS RECEIVABLE 410,000 410,000
FILM LIBRARY, Net of accumulated amortization of $2,895,000
and $2,853,000 in 1997 and 1996, respectively 10,205,000 10,106,000
GOODWILL, Net of accumulated amortization of $995,000
and $963,000 in 1997 and 1996, respectively 1,600,000 1,633,000
TRADEMARKS AND COPYRIGHTS, Net of accumulated
amortization of $172,000 and $160,000 in 1997 and 1996,
respectively 552,000 503,000
FURNITURE AND EQUIPMENT, Net of accumulated
depreciation of $387,000 and $345,000 in 1997 and 1996,
respectively 337,000 277,000
OTHER ASSETS 108,000 130,000
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TOTAL $21,618,000 $22,304,000
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</TABLE>
See notes to consolidated financial statements.
(Continued)
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
(UNAUDITED)
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CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 928,000 $ 1,075,000
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Total current liabilities 928,000 1,075,000
DEFERRED INCOME TAXES 2,505,000 2,610,000
ACCRUED RENT AND OTHER 209,000 137,000
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Total liabilities 3,642,000 3,822,000
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STOCKHOLDERS' EQUITY:
Preferred stock $1 par value, authorized 3,000,000, none issued
Common stock, no par value, 10,000,000 shares authorized,
3,593,900 issued and outstanding at March 31, 1997 and
3,641,600 at December 31, 1996 18,936,000 18,900,000
Treasury stock, at cost (357,000)
Accumulated deficit (603,000) (418,000)
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Total stockholders' equity 17,976,000 18,482,000
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TOTAL $ 21,618,000 $ 22,304,000
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</TABLE>
See notes to consolidated financial statements. (Concluded)
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1997 1996
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OPERATING REVENUES:
Merchandising $ 1,018,000 $ 825,000
Filmed entertainment 763,000 1,434,000
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Net operating revenues 1,781,000 2,259,000
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OPERATING EXPENSES:
Cost of sales 632,000 446,000
Selling, general and administrative expenses 1,383,000 714,000
Amortization of film library, goodwill,
trademarks, copyrights and other 88,000 336,000
Depreciation expense 22,000 10,000
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Total operating expenses 2,125,000 1,506,000
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(LOSS) INCOME FROM OPERATIONS (344,000) 753,000
OTHER INCOME 56,000 72,000
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(LOSS) INCOME BEFORE BENEFIT (PROVISION)
FOR INCOME TAXES (288,000) 825,000
BENEFIT (PROVISION) FOR INCOME TAXES 105,000 (352,000)
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NET (LOSS) INCOME $ (183,000) $ 473,000
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WEIGHTED AVERAGE SHARES
OUTSTANDING 3,594,000 3,865,000
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NET (LOSS) INCOME PER SHARE $ (0.05) $ 0.12
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</TABLE>
See notes to consolidated financial statements.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (183,000) $ 473,000
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation 22,000 10,000
Amortization of film library, goodwill, trademarks and copyrights
and other 88,000 336,000
Deferred income taxes (105,000) 330,000
Warrant expense 35,000
Write-off of leasehold improvements 20,000
Changes in operating assets and liabilities:
Accounts receivable (670,000) 875,000
Prepaid expenses and other assets 28,000 (19,000)
Accounts payable and accrued expenses (147,000) 10,000
Accrued rent and other 72,000
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Net cash (used in) provided by operating activities (840,000) 2,015,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (102,000) (23,000)
Investments in trademarks and copyrights and film library (204,000) (66,000)
Purchase of treasury stock (357,000)
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Net cash used in investing activities (663,000) (89,000)
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,503,000) 1,926,000
CASH AND CASH EQUIVALENTS, Beginning of period 6,057,000 4,367,000
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CASH AND CASH EQUIVALENTS, End of period $ 4,554,000 $ 6,293,000
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</TABLE>
See notes to consolidated financial statements.
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THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements of The Harvey Entertainment Company and
Subsidiary (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
accompanying financial statements should be read in conjunction with the more
detailed 1996 financial statements and related footnotes included in the
Company's Form 10-KSB filed with the Securities and Exchange Commission on March
31, 1997.
In the opinion of the Company, the accompanying unaudited financial statements
as of March 31, 1997 and for the three months ended March 31, 1997 and 1996
contain all adjustments, which include normal recurring accruals, necessary to
present fairly the financial position of the Company as of March 31, 1997 and
the results of operations and cash flows for the three months ended March 31,
1997 and 1996.
The results of operations for the interim periods of the Company's fiscal year
are not necessarily indicative of the results to be expected for the entire
year.
* * * * * *
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Results of Operations - The Company's net operating revenues in the 1997 and
1996 three month periods were $1,781,000 and $2,259,000 respectively, a decrease
of $478,000. The decrease in revenues from 1996 to 1997 includes a decrease of
$671,000 in filmed entertainment revenues which is offset by an increase of
$193,000 in merchandising revenues.
Revenues - Net merchandising revenues were $1,018,000 and $825,000 in 1997 and
1996, respectively, an increase of $193,000. The increase in merchandising
revenue was due to the efforts of the Company's newly formed, in-house licensing
division, Harvey Consumer Products. The revenues generated by the new licensees
for the worldwide merchandising of the Harvey Classic Characters entered into
this quarter by the Company's new in-house licensing division were partly offset
by a decline in licensing revenues from the "Casper" theatrical feature released
in 1995. Although merchandising licenses are generally granted for a period of
one to three years, all minimum guaranteed license revenues are recognized when
the license period begins, provided certain conditions have been met. Due to
this accounting treatment, revenue fluctuations from the Company's merchandising
activities will likely recur in the future on a quarterly and annual basis. A
number of the licensees participating in the Company's worldwide Casper
merchandising program have generated revenues which exceed minimum guaranteed
amounts, resulting in additional revenue to the Company. The Company cannot
accurately project future revenues derived from Casper or merchandising revenues
from any of the other Harvey Classic Characters because the ongoing success of
the merchandising program is in part dependent upon the attractiveness and
marketability of the Harvey Classic Characters. In addition, there can be no
assurance that merchandising revenues will increase or continue at the same
level in the future because many of the "Casper" movie licenses have expired,
and it is not known whether or how many of such licenses will be renewed.
Net filmed entertainment revenues were $763,000 and $1,434,000 in 1997 and 1996,
respectively, a decrease of $671,000. Revenues associated with the domestic
barter sales of the "Richie Rich" animated series accounted for $122,000.
"Richie Rich" premiered in September 1996 and airs weekly in syndication
throughout the country. There were no such revenues in the first quarter of
1996. In February 1997, the Company and Universal Cartoon Studios received an
order from Fox Kid's Network for an additional 26 thirty-minute episodes of
"Casper" for a total of 52 animated episodes resulting in license fee revenues
of $303,000 for 1997. Such revenues accounted for only $25,000 in the first
quarter of 1996. The increase is due to more episodes being produced in the
first quarter of 1997 than in the first quarter of 1996. All 52 animated
episodes have or will be 100% financed by Universal Studios, Inc. Foreign
broadcast license revenues from the Harvey Classic Film Library and "The Baby
Huey Show" accounted for $38,000 in 1997 and $304,000 in 1996, a decrease of
$266,000. The decrease is due to fewer licenses being sold to third parties in
1997 versus 1996. Although foreign broadcasting licenses are generally granted
for a period of one to five years, all revenues are recognized when the license
period begins, provided certain conditions have been met. Due to this accounting
treatment, revenue fluctuations will likely recur in the future on a quarterly
and annual basis. The remaining balance of 1997 revenues, or $300,000, consist
of residuals from the Richie Rich cartoon series. In 1996, the Company entered
into a television distribution agreement with MCA Television Ltd. for the
exclusive right to broadcast 56 episodes of "Casper and Friends" in the United
States for a period of two years and three months. The Company was paid a
non-refundable guarantee of $840,000
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in 1996 for the license. There were no such revenues for 1997. In January 1996
Warner Bros., which produced the "Richie Rich" motion picture, exercised its
rights for the theatrical motion picture sequel to "Richie Rich" and paid the
Company $200,000. There were no comparable revenues in 1997. Revenues associated
with the domestic barter sales of "The Baby Huey Show" accounted for $65,000 in
1996. There were no such revenues in 1997.
Cost of Sales - Merchandising costs of sales were $445,000 and $240,000 in 1997
and 1996, respectively. The increase in cost of sales is due to an increase in
merchandising activity for the period and royalty accruals for the Casper
participation due to Universal Studios, Inc. As a percentage of merchandising
revenues, cost of sales were 44% and 29% in 1997 and 1996, respectively. The
increase in cost of sales percentage is due to Universal Studios, Inc.'s
participation in Casper merchandise.
Costs of sales relating to filmed entertainment revenues were $187,000 and
$206,000 in 1997 and 1996, respectively. The decrease in cost of sales is due to
a decrease in filmed entertainment activity for the period. As a percentage of
filmed entertainment revenues, cost of sales were 25% and 14% in 1997 and 1996,
respectively. The increase in the cost of sales percentage is due to the low
gross profit margin associated with the "Richie Rich" syndicated show and no
costs associated with certain 1996 distribution agreements.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses (SG&A) were $1,383,000 and $714,000 for 1997 and 1996,
respectively, an increase of $669,000 or 94%. As a percentage of net operating
revenues, SG&A were 78% and 32% for 1997 and 1996, respectively. The increase in
SG&A is due to the additional overhead expenses related to the Company's two new
divisions, Harvey Consumer Products and Creative Affairs.
Depreciation and Amortization - Depreciation expense was $22,000 and $10,000 in
1997 and 1996. Amortization of the film library was $43,000 and $293,000 in 1997
and 1996, respectively. The decrease in amortization is due to the decrease in
revenue derived from the film library, which is being amortized in accordance
with the individual film forecast method. Amortization of trademarks, copyrights
and other was $13,000 in 1997 and $11,000 in 1996. Amortization of goodwill was
$32,000 in both 1997 and 1996.
Other Income - Other income, primarily interest income, was $56,000 and $72,000
in 1997 and 1996, respectively. The decrease in other income was due to lower
cash balances for the period, which generated decreased interest income.
Income Taxes - Benefit (Provision) for income taxes was $105,000 and $(352,000)
in 1997 and 1996, respectively. The benefit for income taxes is due to the
pretax loss in the current period.
Liquidity and Capital Resources - Net cash (used in) provided by operating
activities was $(840,000) and $2,015,000 in 1997 and 1996, respectively. The
decrease in cash flows from operations was primarily due to the Company's net
loss for the current period and the increase in receivables.
The Company's long-term accounts receivable are attributable to the portion of
merchandising and comic book publishing activities with payment terms greater
than one year. The Company believes that obligors liable on all receivables are
of good quality and that the allowance for doubtful accounts at March 31, 1997
in the amount of $648,000 is adequate. The Company continually reevaluates its
receivables to reassess its allowance for bad debts.
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Net cash used in investing activities was $663,000 and $89,000 in 1997 and 1996,
respectively. The increase in cash used in investing activities is primarily due
to the Company's repurchase of 47,700 shares of its common stock for $357,000.
The Company has a $2,500,000 revolving credit facility (the "Revolving
Facility") with City National Bank, which expires on June 1, 1997. Interest on
advances made under the Revolving Facility accrues at 1% above the prime rate as
reported by the lender. The Company has not drawn on this facility. The
Revolving Facility is secured by substantially all of the assets of the Company.
OTHER INFORMATION
Item 1 - 1. Franklin Litigation. On September 30, 1994, the Company filed
suit in the Superior Court of the State of California for the
County of Los Angeles against Jeffrey Franklin, Jeffrey Franklin
d/b/a ATI Enterprises, and Franklin/Waterman Entertainment, Inc.
for breach of fiduciary duty, intentional interference with
prospective economic advantage, breach of contract, breach of the
implied covenant of good faith and fair dealing, tortious breach
of the implied covenant of good faith and fair dealing, fraud,
intentional misrepresentation, unfair competition and
constructive trust. The Company filed a related claim against
Franklin's business partner Stephen Waterman in May, 1996.
Jeffrey Franklin is a former member of the Company's Board of
Directors who, along with his company ATI Equities and his
partner Steve Waterman (collectively "ATI"), entered into an
agreement (the "Contract") requiring ATI to act as the Company's
exclusive agent with regard to the presentation of motion
picture, television, video and music projects by the Company to
potential buyers, distributors, financiers, investors and other
parties. Pursuant to the Contract, ATI was to consult with the
Company regarding the negotiation of any agreements in the
above-mentioned areas. Franklin/Waterman Entertainment, Inc. is a
corporation closely related to Franklin and Waterman. In this
action, the Company has alleged, among other things, that
Franklin (while acting as a director and agent of the Company)
and ATI wrongfully usurped corporate business opportunities for
Franklin and for Franklin/Waterman which rightfully belonged to
the Company, and misrepresented to the Company the facts
surrounding the transactions. The Company has sued for
constructive trust to recover the profits the defendants made
from those wrongful acts, and for compensatory and punitive
damages in an amount exceeding $1,000,000. On December 13, 1994,
several months after a $50 million fraud judgment (including
punitive damages) was awarded against Franklin and his
codefendants in Los Angeles Superior Court, Franklin filed for
bankruptcy pursuant to Chapter 11 of the United States Bankruptcy
Code in the United States District Court for the Central District
of California, Northern Division, Case No. 94- 15283. The
automatic stay has been lifted pursuant to a stipulated order of
the Bankruptcy Court. Discovery has recently been completed and
trial is set to begin on May 14, 1997. The Company believes that
the eventual outcome of the Franklin and Waterman actions will
not have a material effect on the financial position of the
Company. However, given the uncertainties of litigation, no
assurances can be given as to the final outcome of this action or
its effect.
Items 2 through 4 are omitted as not applicable.
Item 5 - 1. Merchandising. In April 1996, Universal Studios, Inc.'s
exclusive agency with the Company
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terminated. Since April 1996, the Company and Universal Studios,
Inc. have been negotiating terms of a continuing merchandising
relationship. In January 1997, the Company and Universal Studios,
Inc. tentatively agreed to a new short-term merchandising
relationship wherein the Company will serve as the exclusive
merchandising agent for all of its characters, including Casper
(except with respect to certain future theatrical releases). The
Company anticipates investing a material portion of its available
capital in this merchandising division, although no assurances
can be given the Company will be successful or profitable in
merchandising of its Characters. The Company and Universal
Studios, Inc. are currently negotiating a permanent merchandising
relationship in the context of a more global agreement between
them.
If Universal Studios, Inc. and the Company do no enter into a
permanent merchandising relationship, the Company believes
Universal Studios, Inc.'s only remaining merchandising rights
will be to Casper and will be limited to: (i) the right to
merchandise products associated with the "Casper" animated series
for two and one-half years after the last animated "Casper"
episode is produced by Universal Studios, Inc., and (ii) certain
rights to merchandise products in connection with any "Casper"
sequel theatrical feature, if one is ever produced.
Item 5 - 2. Stock Repurchase Program. In January 1997, the Company
announced that its Board of Directors had authorized a stock
repurchase program under Rule 10b-18 of the Securities Exchange
Act of 1934. The Company may, from time to time, in market
transactions, purchase up to 10% of its outstanding Common Stock
(approximately 380,000 shares). Through March 31, 1997, the
Company has repurchased 47,700 shares at an average price of
$7.49 per share. There is no assurance that a material number of
shares will be purchased pursuant to the repurchase program.
Item 6 (a)- Exhibits
None
Item 6 (b)- Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE HARVEY ENTERTAINMENT COMPANY
AND SUBSIDIARY (Registrant)
May 8, 1997 /s/ JEFFREY A. MONTGOMERY
-------------------------------------
Jeffrey A. Montgomery
President and Chief Executive Officer
May 8, 1997 /s/ GREGORY M. YULISH
-------------------------------------
Gregory M. Yulish
Executive Vice President and
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,554
<SECURITIES> 0
<RECEIVABLES> 3,660
<ALLOWANCES> 648
<INVENTORY> 0
<CURRENT-ASSETS> 8,406
<PP&E> 724
<DEPRECIATION> 387
<TOTAL-ASSETS> 21,618
<CURRENT-LIABILITIES> 928
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,976
<TOTAL-LIABILITY-AND-EQUITY> 21,618
<SALES> 1,781
<TOTAL-REVENUES> 1,781
<CGS> 632
<TOTAL-COSTS> 632
<OTHER-EXPENSES> 1,308
<LOSS-PROVISION> 75,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (288)
<INCOME-TAX> 105
<INCOME-CONTINUING> (183)
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<NET-INCOME> (183)
<EPS-PRIMARY> $(0.05)
<EPS-DILUTED> $(0.05)
</TABLE>
