<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-23000
The Harvey Entertainment Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-4217605
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's phone number, including area code (310) 789-1990
---------------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 11, 1999
- ------------ ---------------------------
Common 4,186,941 (6,705,459 shares,
inclusive of the 2,518,518
shares into which the Series
A Preferred Stock could be
converted)
<PAGE> 2
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
FINANCIAL INFORMATION
Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 1-2
Consolidated Statements of Operations - Three Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998 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 9-10
</TABLE>
<PAGE> 3
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ - $ 451,000
Accounts receivable, net of allowance for doubtful accounts
of $432,000 and $298,000 in 1999 and 1998, respectively 1,361,000 1,689,000
Prepaid expenses and other assets 535,000 541,000
Income tax receivable 543,000 567,000
Film library, net of accumulated amortization of $7,144,000
and $6,894,000 in 1999 and 1998, respectively 10,519,000 10,873,000
Furniture and equipment, net of accumulated
depreciation of $711,000 and $658,000 in 1999 and 1998,
respectively 454,000 501,000
Goodwill, net of accumulated amortization of $1,254,000
and $1,222,000 in 1999 and 1998, respectively 1,341,000 1,373,000
Trademarks and copyrights, net of accumulated
amortization of $291,000 and $266,000 in 1999 and 1998,
respectively 1,159,000 1,039,000
------------- -------------
TOTAL $ 15,912,000 $ 17,034,000
============= =============
</TABLE>
See notes to consolidated financial statements.
-1-
<PAGE> 4
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
(UNAUDITED)
<S> <C> <C>
LIABILITIES:
Bank overdraft $ 56,000 $ -
Accounts payable and accrued expenses 708,000 871,000
Participations payable 759,000 861,000
Accrued marketing expenses 1,200,000 1,200,000
Line of credit 1,750,000 250,000
Accrued rent and other liabilities 166,000 170,000
------------- -------------
Total liabilities 4,639,000 3,352,000
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,000,000 shares authorized, none issued
Common stock, no par value, 10,000,000 shares authorized,
4,187,000 issued and outstanding at March 31, 1999
and at December 31, 1998 22,160,000 22,160,000
Accumulated deficit (10,887,000) (8,478,000)
------------- -------------
Total stockholders' equity 11,273,000 13,682,000
------------- -------------
TOTAL $ 15,912,000 $ 17,034,000
============= =============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE> 5
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
1999 1998
<S> <C> <C>
OPERATING REVENUES:
Filmed entertainment $ - $ 85,000
Merchandising 430,000 775,000
Publishing 132,000 -
--------------- --------------
Net operating revenues 562,000 860,000
--------------- --------------
OPERATING EXPENSES:
Cost of sales 303,000 311,000
Selling, general and administrative expenses 2,311,000 3,399,000
Amortization of film library, goodwill,
trademarks, copyrights and other 307,000 580,000
Depreciation expense 53,000 34,000
--------------- --------------
Total operating expenses 2,974,000 4,324,000
--------------- --------------
LOSS FROM OPERATIONS (2,412,000) (3,464,000)
OTHER INCOME 22,000 34,000
INTEREST EXPENSE (19,000) -
--------------- --------------
LOSS BEFORE INCOME TAX BENEFIT (2,409,000) (3,430,000)
INCOME TAX BENEFIT - 1,371,000
--------------- --------------
NET LOSS $ (2,409,000) $ (2,059,000)
=============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted 4,187,000 3,585,000
=============== ==============
NET LOSS PER SHARE:
Basic and Diluted $ (0.58) $ (0.57)
=============== ==============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 6
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,409,000) $ (2,059,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Write-off of accounts receivable 200,000 950,000
Depreciation 53,000 34,000
Amortization of film library, goodwill, trademarks and copyrights
and other 307,000 580,000
Deferred income taxes - (732,000)
Warrant and option expense - 433,000
Video inventory write-off - 154,000
Changes in operating assets and liabilities:
Accounts receivable, net 128,000 348,000
Income taxes receivable 24,000 (819,000)
Prepaid expenses and other assets 6,000 (27,000)
Accounts payable and accrued expenses (163,000) 111,000
Participations payable (102,000) -
Income taxes payable - (498,000)
Accrued rent and other liabilities (4,000) 81,000
------------------ ----------------
Net cash used in operating activities (1,960,000) (1,444,000)
------------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (6,000) (94,000)
Investments in trademarks, copyrights and film library (41,000) (83,000)
------------------ ----------------
Net cash used in investing activities (47,000) (177,000)
------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft 56,000 -
Proceeds from exercise of stock options - 2,556,000
Borrowings on line of credit 1,500,000 -
------------------ ----------------
Net cash provided by financing activities 1,556,000 2,556,000
------------------ ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (451,000) 935,000
CASH AND CASH EQUIVALENTS, Beginning of period 451,000 6,316,000
------------------ ----------------
CASH AND CASH EQUIVALENTS, End of period $ - $ 7,251,000
================== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid (received) during the year for:
Interest $ 19,000 $ -
Income taxes $ (18,000) $ 775,000
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE> 7
THE HARVEY ENTERTAINMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements of The Harvey Entertainment Company and
Subsidiaries (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. Certain
reclassifications have been made to the March 31, 1998 consolidated financial
statements to conform with current quarter's presentation. The accompanying
financial statements should be read in conjunction with the more detailed 1998
financial statements and related footnotes included in the Company's Form 10-KSB
filed with the Securities and Exchange Commission on April 13, 1999.
In the opinion of the Company, the accompanying unaudited financial statements
as of March 31, 1999 and for the three months ended March 31, 1999 and 1998
contain all adjustments, which include normal recurring accruals, necessary to
present fairly the financial position of the Company as of March 31, 1999 and
the results of operations and cash flows for the three months ended March 31,
1999 and 1998.
The results of operations for the interim periods of the Company's fiscal year
are not necessarily indicative of the results to be expected for the entire
year.
* * * * * *
-5-
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS FOR THE COMPANY
On September 21, 1998, the Board of Directors announced that it had engaged the
investment banking firm of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") as a financial advisor to the Company. Under the terms of the
engagement, DLJ agreed to assist the Company to evaluate and pursue strategic
alternatives intended to maximize shareholder value. Such alternatives included,
but were not limited to the sale, merger, consolidation or recapitalization of
the business, securities or assets of the Company.
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 agreed to issue and sell
170,000 shares of its Series A Preferred Stock ("Series A Preferred Stock") and
warrants ("Warrants") to purchase up to 2,400,000 shares of the Company's Common
Stock in consideration of $11.5 million in cash and $5.5 million in common stock
of the Kushner-Locke Company. On April 26, 1999, in connection with the issuance
and sale of the Series A Preferred Stock and Warrants, the Company entered into
a Registration Rights Agreement (the "1999 Agreement") with Michael R. Burns,
Roger A. Burlage, Al Checchi, Ken Slutsky and The Kushner-Locke Company (the
"Shareholders"). The 1999 Agreement gives the Shareholders certain demand and
piggyback registration rights during the 18-month period following the issuance
and sale of the Series A Preferred Stock and the Warrants to register the Common
Stock issuable upon conversion of the Series A Preferred Stock and the exercise
of the Warrants. The transactions contemplated by the Stock Purchase Agreement
were consummated on April 26, 1999.
From March 23, 1998 until April 26, 1999 the Company had been under the
management services of Global Media Management Group, LLC ("Global Media").
Through a management services agreement with Global Media, the Board of
Directors retained the non-exclusive services of Anthony J. Scotti as the
Company's Interim Chief Executive Officer and Michael S. Hope as the Company's
Interim Chief Financial Officer. On April 26, 1999 Mr. Scotti resigned as
Interim Chief Executive Officer and Interim President and Roger A. Burlage was
appointed Chairman and Chief Executive Officer and shortly thereafter Eric S.
Mischel was appointed President and Chief Operating Officer. On April 26, 1999,
Mr. Hope resigned as Interim Financial Officer and Interim Secretary. Shortly
thereafter Ronald B. Cushey was appointed Executive Vice President, Chief
Financial Officer and Secretary.
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Results of Operations - During the first quarter of 1998, the Company was in the
early stages of formulating a new business plan under the interim management of
Global Media. The Board of Directors adopted a business plan midway through
interim management's tenure, which required entering into long-term video
distribution agreements and obtaining a financing package to fund production
activities. This business plan was never fully implemented in light of capital
constraints and the need for permanent management. Thus any possible results
contemplated were not realized in 1998 nor in the first quarter of 1999.
Revenues - Net filmed entertainment revenues were $0 and $85,000 in 1999 and
1998. The 1998 revenues consisted of license fee revenues received from
Universal Cartoon Studios for the thirty-minute animated episodes of "Casper"
aired on Fox Kid's Network through April 1998, and foreign broadcast license
revenues from the Harvey Classic Film Library.
There were no such comparable revenues for 1999.
Net merchandising revenues were $430,000 and $775,000 in 1999 and 1998,
respectively, a decrease of $345,000. The revenues in 1999 and 1998 consist of
new licenses for the worldwide merchandising of the
-6-
<PAGE> 9
Harvey Classic Characters and the licensing revenues from the Company's
direct-to-video features entered into by the Company's in-house licensing
division. Although merchandising licenses are generally granted for a period of
one to three years, the majority of the minimum guaranteed license revenues are
recognized when the license period begins, provided certain conditions have been
met. Due to this accounting treatment, revenue fluctuations from the Company's
merchandising activities will likely recur in the future on a quarterly and
annual basis. The ongoing success of the merchandising program is in part
dependent upon the attractiveness and future exploitation of the Harvey Classic
Characters.
Net publishing revenues related to the Company's monthly magazine, approved for
publishing by the Board of Directors in July 1998, were an aggregate of $132,000
for the February, March and April issues published in the first quarter of 1999.
Publishing sales were on a fully returnable basis recorded upon shipment, net of
a reserve based on estimated returns. Publishing revenues also include sales of
advertising space and subscriptions to the magazine. This monthly magazine was
distributed throughout the United States and Canada by Warner Publisher Services
and Diamond Comic Distributors, Inc. during the first quarter of 1999. There
were no comparable sales in 1998.
Cost of Sales - Costs of sales related to filmed entertainment revenues were $0
and $198,000 in 1999 and 1998, respectively. There were no cost of sales related
to filmed entertainment for 1999 as activity was non-existent.
Merchandising costs of sales were $170,000 and $113,000 in 1999 and 1998,
respectively. The increase in cost of sales is due to higher third party
participants' share in the merchandising activity for the current quarter.
Publishing costs of sales were $133,000 in 1999.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses (SG&A) were $2,311,000 and $3,399,000 for 1999 and 1998,
respectively, a decrease of $1,088,000. The decrease in SG&A is primarily the
result of an approximate $500,000 provision relating to doubtful accounts from
previously recognized guarantees from agents and licensees operating in the
Pacific Rim territories and a $450,000 provision relating to the Company's prior
participation interest in Universal Studios, Inc.'s Harvey-related merchandising
business recognized in first quarter of 1998. Additionally, the Company incurred
an expense of $433,000 related to the issuance of warrants to Global Media
during the three-month period ended March 31, 1998.
Depreciation and Amortization - Depreciation expense was $53,000 and $34,000 in
1999 and 1998. Amortization of the film library was $250,000 and $515,000 in
1999 and 1998, respectively. The amortization amount in the current quarter
reflects an additional estimated loss related to "Baby Huey's Great Easter
Adventure", the live-action, direct-to-video produced in 1998, featuring the
Company's classic character Baby Huey, and released in March 1999. Amortization
expense for the comparable quarter in 1998 includes the write-off of $500,000 of
previously capitalized product development costs due to uncertainties concerning
the recoverability of such costs. Amortization of trademarks and copyrights was
$25,000 in 1999 and $33,000 in 1998. Amortization of goodwill was $32,000 in
both 1999 and 1998.
Other Income - Other income was $22,000 in 1999 which was comparable to $34,000
in 1998.
Income Taxes - Income tax benefit was $0 and $1,371,000 in 1999 and 1998,
respectively. The income tax benefit for 1998 is due to the use of operating
losses generated in 1998 against the deferred income tax liabilities and prior
year operating income. A valuation allowance was established at the 1998 year
end to reduce deferred income tax assets to the amount expected to be realized.
At the end of the current quarter, an additional valuation allowance was
established to offset the benefit generated by current quarter's losses.
-7-
<PAGE> 10
Realizable income tax benefits from the Company's cumulative tax losses have
been reported as an income tax receivable of $543,000 at the end of the current
quarter.
Liquidity and Capital Resources - Net cash used in operating activities was
$1,960,000 and $1,444,000 in the first quarter periods in 1999 and 1998,
respectively. The increase in cash used in operations was primarily due to a
decrease in collections of receivables and the payments made on accrued payables
in the current quarter.
Net cash used in investing activities was $47,000 and $177,000 in the first
quarter periods in 1999 and 1998, respectively. The decrease in cash used in
investing activities is primarily due to less investment by the Company in its
trademarks and copyrights and purchase of less furniture and equipment in 1999.
Net cash provided by financing activities was $1,556,000 and $2,556,000 in the
first quarter periods in 1999 and 1998, respectively. The 1999 cash flow
represents borrowings from the Company's line of credit as compared to the
exercise of employee stock options in 1998.
The Company has 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. Interest on advances made under the facility accrues at
1% above the prime rate as reported by the lender. The facility is secured by
substantially all of the assets of the Company. As of March 31, 1999, the
Company had $1,750,000 outstanding under this line of credit and interest
expense of $19,000 was paid during the current quarter. 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 Stock Purchase Agreement entered into by and among the
Company and Michael R. Burns, Roger A. Burlage, Ken Slutsky and the
Kushner-Locke Company on April 7, 1999. The Company is currently in negotiations
with the Bank to extend the credit facility for an additional six month term.
Although, the Company has received a commitment from the Bank for the extension
of the credit facility and an agreement has been reached in principle, the
completion of such an extension is not assured.
On April 26, 1999, the Company consummated the transactions contemplated by the
Stock Purchase Agreement and received gross proceeds of $11.5 million in cash
and $5.5 million in common stock of the Kushner-Locke Company. In connection
with such transactions, the Company incurred fees and expenses of approximately
$2.300,000. Management believes that the Company's current and additional
sources of working capital will provide adequate liquidity for the Company's
financial needs for at least the next twelve months.
-8-
<PAGE> 11
OTHER INFORMATION
Item 1 - 1. Realty Trust Advisors, Inc. On December 31, 1997, Realty Trust
Advisors, Inc. ("RTA") filed suit against the Company in Los
Angeles Superior Court seeking damages arising out of the alleged
failure of the Company to pay certain commissions. On May 11,
1998, the Company filed a dermurrer and a motion to strike the
fraud and punitive damage portions of the first amended
complaint, which were granted. In August 1998, RTA unsuccessfully
sought relief from that order in the Court of Appeal. On or about
July 9, 1998, the Company filed an answer to the first amended
complaint and a cross-complaint against RTA and its principal,
Anne Keshen, for fraud and declaratory relief. RTA filed a
demurrer and a motion to strike the fraud and punitive damage
portions of the Company's cross-complaint, which were denied. RTA
and Keshen filed an answer in November 1998. RTA and Keshen have
moved for summary adjudication on the Company's cross-complaint.
That motion is scheduled to be heard on June 11, 1999. Trial of
this action is scheduled for December 1999. The Company's defense
and prosecution of this matter are being covered by its insurer
under a reservation of rights.
Items 2 through 4 are omitted as not applicable.
Item 5 - Other Information
None
Item 6 (a) - Exhibits
None
Item 6 (b) - Reports on Form 8-K
None
-9-
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
THE HARVEY ENTERTAINMENT COMPANY
AND SUBSIDIARIES (Registrant)
May 14, 1999 /s/Ronald B. Cushey
--------------------------------
Name: Ronald B. Cushey
Title: Chief Financial Officer
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,793
<ALLOWANCES> (432)
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,165
<DEPRECIATION> (711)
<TOTAL-ASSETS> 15,912
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 22,160
<OTHER-SE> (10,887)
<TOTAL-LIABILITY-AND-EQUITY> 15,912
<SALES> 562
<TOTAL-REVENUES> 562
<CGS> 303
<TOTAL-COSTS> 303
<OTHER-EXPENSES> 1,961
<LOSS-PROVISION> 350
<INTEREST-EXPENSE> 19,000
<INCOME-PRETAX> (2,409)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,409)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
<FN>
<F1>Unclassified Balance Sheet
</FN>
</TABLE>
